Economic Policy Review ISSN 1313 - 0544

The "Bulgartabac"'s Saga - the Beginning of the End, or Is It?

Author: Veliko Dimitrov / 29.01.2007
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Better 17 years late than never.

“Bulgartabac” was established in 1951 as part of the universal nationalization of 1947, and the introduction of state monopoly over the tobacco industry by the Communist Party. The status of Bulgartabac was changed only with the formation of a holding with 22 subsidiary companies in 1993 . (It stayed so until the changes or more exactly until 1993(1), when a holding was formed with 22 subsidiary companies, 70 % of which are still state-owned at present. In 1995 the subsidiaries were included in the mass privatization.)

The primary attempts for full privatization of the tobacco monopolist were made in 2002 when the National Assembly accepted a privatization strategy, envisioning a package sale of the holding. With a huge delay, the primary attempts for full privatization of the tobacco monopolist were made in 2002 – The National Assembly accepted a privatization strategy, envisioning a package sale of the holding. Next year (2003) a public competition for the sale was announced, but no agreement was reached.

The next mediocre attempt for full privatization was made in 2004, when again a public competition for sale was announced. The result was unconvincing with only three sales achieved out of twelve offered for tobacco processing companies, and absolutely none for the four cigarette factories.

At first glance the two unsuccessful attempts suggest that there isn’t enough investment interest towards the tobacco sector in Bulgaria, and the subsidiary companies in the holding cannot be sold. However, a more profound look at the unsuccessful privatization shows that it is due rather to unwillingness of certain political clique to finish the privatization than to lack of investor’s interest. This statement might be supported by the fact that each time when the privatization of Bulgartabac is undertaken “someone” draws the attention from the privatization deal as a whole to particular insignificant milieu within it (i.e. price not high enough, conditions not satisfying enough, etc.).

The consequences (however) are not positive. The long standing state guardianship created an industry which, as it turned out to be in the last weeks, functions quite ineffectively compared to its future European competitors. The companies did not go bankrupt because, first of all they were state-owned, and second, the government, through its direct interference in setting the prices(2) guaranteed their sustainability during the whole period. With the following small exception: in the beginning of 2005 the cigarette market was liberalized – the prices of tobacco products could then be freely determined, by producers as well as by importers(3) . (as it was only necessary to inform the Ministry of Finance). Thus, a big step forward was made and the conditions for the normal development of the sector were created. The registration regime did not last long though– in less than three months from the decision for liberalization of the market, representatives of Bulgartabac petitioned to the Ministry of Finance for the prices of cigarettes to be again determined on administrative grounds. (Through), It was tacitly admitted that the holding is not competitive when prices are freely determined, which, as it can be expected, do not always under all circumstances guarantee fixed and pre-planned profit. The result was that the price fixing practices were (control over the prices) restored.

Ineffective production is however only part of the bigger problems of cross-subsidizing of activities within the holding.

Ineffective production is however only a part of the problem, an effect stemming from what is may be the basic obstacle to better development of the holding – the cross-subsidizing of activities within it. The two relatively most profitable factories are those for cigarette production in Sofia and Blagoevgrad. Their profits, instead of being reinvested in improvement of the technical and technological parameters, advertising and achieving a more sustainable production, are poured into the tobacco-processing factories which incur losses and which continue to buy and overstock tobacco. As it is clear, there are no economic, but only political grounds for this.

And all that lasted for years. However, reality has been changed.

Excise rates on tobacco products were sharply increased at the beginning of the year, which, according to representatives of the holding will reduce the annual profit with about 50-60%. A new increase is expected from next year. Our forthcoming membership in the EU necessitated a repeated liberalization of prices, which became a fact several days ago(4) and can be expected to be final. In other words, there can be price competition as well.

Taking into account these changes in the situation, the holding was quick to react: it became clear that one employee in the Bulgarian cigarette factories produces a much lower amount than in the analogical factories in Western Europe and not with a lower wage. In the words of the managing director of the holding Mr. Hristo Lachev the average salary in “Blagoevgrad BT” AD for example is 1 500 levs. At first glance this might seem lower than its equivalent in the EU, but if the difference in the purchasing power parity is taken into account, which is roughly 1:3, it is probably even higher. If the effectiveness is also taken into account, than for a final production unit in Bulgaria the employee is paid manifold more than in Western Europe. In other words, the reform and the complete privatization of the holding cannot be delayed.

What is about to happen with the tobacco holding?

At the beginning of the year, at meetings of Supervisory and Management Board a decision was made for restructuring of the holding and selling the stakes in the following companies:

“Plovdiv Yurii Gagarin BT” AD (already a fact); (sold)
“Asenovgrad BT” AD – by a public offering of shares on the Bulgarian Stock Market - Sofia;
“Shumen BT” AD – by a public offering of shares;
“Pazardzhik BT” AD – by a public offering of shares;
“Dupnitza BT” AD – by a publicly announced competition;
“Sandanski BT” AD – by a publicly announced competition;
“Yambol BT” AD – by a publicly announced competition;
“Smolyan BT” AD – by a publicly announced competition;

No privatization is envisioned or there is no clarity regarding the following companies from the holding:

“Blagoevgrad BT” AD (not to be privatized);
“Sofia BT” AD (not to be privatized);
“Plovdiv BT” AD (not to be privatized);
“Slantze Stara Zagora BT” AD (not to be privatized);
“Pleven BT” AD (not to be privatized);
“Dulovo BT” AD (there is a process going on and the outcome is not clear);
“Gotze Delchev BT” AD (not decided);
“Kardzhali BT” AD (not decided);
“Haskovo BT” AD (in liquidation);
“Vidin BT” AD (in liquidation);
“Harmanli BT” AD (not clear);
“Topolovgrad BT” AD (not clear);
“Purvomai BT” AD (not clear);
“Isperih BT” AD (not clear).

In quintessence, the changes are partial and no privatization is envisioned for the major tobacco companies (the tobacco plants). The restructuring of the subsidiaries is justified only for the purpose of their future selling, but for many of them it is not at stake at the near future (on the agenda). There is a great probability for the financial indicators of the holding to worsen sharply and in about a year they might be at much lower price than at present. Thus, since full privatization will be fulfilled anyway, any postponement will be a mistake. In this sense any postponing of the full privatization is a mistake, which will however probably be a fact.

 

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(1) 70% of these subsidiaries are still state-owned at the present moment – October, 2006
(2) it determines the prices, including those of the importer
(3) The only requirement for the importer was to inform the Ministry of Finance for the decided price.
(4) On October 13, 2006 the order which enacts it will become effective.