Transition   Privatization   

 

PRIVATIZATION IN BULGARIA

by MIKE NACHSHEN

by Angela Buck

PRIVATIZATION IN BULGARIA

by MIKE NACHSHEN

The Bulgarian privatization process got off to a slow start. In 1992, the initial plan was to privatize through "classic market privatization." [1] This attempt at privatization failed in every sense of the word. It was opposed by the Bulgarian Socialist party, who believed that it ignored the worker's rights. It was rejected by foreign investors because "Three quarters of [Bulgarian state owned industry] are losing money and industrial production has plummeted by 50 percent since 1989." [2]

The system was also rife with corruption. Members of the `nomenklatura' - ex-communist officials and managers, along with a growing `mafia' are responsible for this. "One kind of corruption is `wild-privatization'- the grabbing of property under the table." [3] The bottom line is that ordinary people didn't benefit under the original mode of privatization.

On June 16, 1994, the Bulgarian parliament amended the original privatization act, and adopted a voucher system of privatization. This amendment was "fully supported" by the socialist party. [4]

Instead of trying to sell of the industry, each adult citizen is able to purchase a voucher book worth 25,000 leva (about $500 USD) for 500 leva (about $10). They can use the vouchers in this booklet to purchase shares in one of 500 state industries.

However, this system has many weaknesses, much like the initial Czech voucher scheme. Citizens are not allowed to re-sell their coupon books on the open market. This means that citizens may sell their coupon books for less than they are really worth on the black market.

Parliament sought to alleviate this problem by requiring Bulgarians to document the source of the 500 leva they used to purchase the book, Obviously, there are many loopholes in this plan which an enterprising ex-party official could exploit.

Another shortcoming is that citizens can only choose from 500 enterprises to purchase. "370 of them are money losers and deep in debt, and only the lack of a bankruptcy act saves them from liquidation." [5]

It is still to early to tell whether the new style of privatization will succeed in Bulgaria, but if it remains on its present course, it seems highly unlikely.

REFERENCES

  • [1] Tsekova, Tanya "Parliamnet adopts amendment to privatization bill." BBC summary of world broadcasts, June 16, 1994.

  • [2] Zhelyazkov, Vladimir "World Bank backs privatization in Bulgaria." BC cycle, June 16, 1994.

  • [3] Staff "Bulgaria" The Chicago Tribune, October 10, 1994

  • [4] Tsekova

  • [5] Tsekova

All sources are available through NEXIS by typing the following: "Bulgaria and privatization"

 

PRIVATIZATION IN BULGARIA: 
AN ECONOMIC AND PSYCHOLOGICAL CHALLENGE

By Angela Buck

The privatization process in Bulgaria is considered to be one of gradualism—the private sector went from making up 6.4% of Bulgaria’s GDP in 1991, to 50% in 1997. Yet, in order to truly examine privatization in Eastern Europe, it is necessary to also know what type of privatization was implemented since 1989 and which type is currently being practiced. In Bulgaria, three methods have been used: cash privatization, insider privatization, and mass privatization. It is in the understanding of each of these methods that one can see where the problems of privatization exist. But besides these institutional problems, there is a problem of a psychological nature. The people of Bulgaria have been so conditioned to separate themselves from the responsibility and activity of the economy, that it has been difficult to get the citizens to not only participate, but to be enthusiastic about it. They are also paranoid about a new system of ownership, seeing a lot of foreign involvement and job loss, under the new program. These issues are spilling over to their work ethic, as employees under new ownership. In the cases where the new owner is a westerner, the lack of ingenuity and understanding of marketing is astonishing.

The process of privatization is not unregulated, in fact, it is highly subject to laws and the authority of governmental organizations. The Privatization Law (the Transformation and Privatization of State and Municipal Enterprises Act) was enacted in 1992. The National Privatization Agency is the overseer of the organization and regulation of the annual privatization plan and the annual report. There are also many other branches of governmental control. "Six ministries and five committees with ministerial status have the right to privatize smaller enterprises. The Center for Mass Privatization, together with the Council of Ministers, handles privatization through investment bonds. The government and the Parliament approve the programs for cash and mass privatization" (Michailova, 80). Currently, the biggest areas undergoing privatization are agriculture, construction, and the food-processing industry, while the industries of water supply, sea ports, railway transport, extraction of minerals, and mining are not subject to privatization. (Michailova).

Another factor in the privatization process is the concept of financial intermediaries. This has been cited to be a unique characteristic of the Bulgarian process. In an article by Gabor Hunya, Large privatization, restructuring and foreign direct investment, this aspect is discussed. We read, "Citizens can paricipate in the voucher scheme either personally, or through an agent, or through a privatization fund, . . . Foreigners can take part through investment funds provided they are registered as a financial institution and have been engaged in similar activities in their home country for at least five years. Privatization funds and foreign capital may ensure better results for the Bulgarian privatization than for the Romanian progarmme, which excludes finanacial intermediaries" (Hunya, 284). There were 120 privatization funds set up to act as such financial intermediaries, in which "small shareholders can invest their shares" (Michailova, 80). As mentioned above, foreigners must meet all criteria to participate, the same criteria exist for public organizations, state and private companies, unions, and political parties. The issuing of licenses for these funds is handled by the Commission on Securities and Stock Exchanges.

THE TYPES OF PRIVATIZATION

In 1993, cash privatization was the main type of privatization implemented in Bulgaria. In this type, 20% of the government owned assets of a company are issued to the employees, by purchasing shares at 50% of the set price of value. Another type of privatization which occurred along side this initial phase of cash privatization was insider privatization, This has continued along side the other type of privatization as well, mass privatization. Insider privatization, also known as management-employee buyouts, entails the transfer of shares to workers and managers. But, the catch with this type is that the managers are the true winners. And it is also important to note that managers started to obtain more independent control of their companies before the fall, and this power has continued in the current process of privatization. Not only are the workers used to the mangers having all the control, but they more or less do not fight for more control. "By September 1996, a total of 203 deal were concluded as worker-manager buyouts. About 200 enterprises are envisaged for management buyouts for 1997" (Michailova, 85).

Another type of privatization became more popular in 1996--mass privatization. Mass privatization is considered to be less expensive, because it does not "require legal analysis and evaluation based on current market prices" (82). But a noted criticism of mass privatization is its potential to not give the workers enough control in their companies. Therefore, it has been less popular in countries where unions have greater influence. In this type, vouchers are the main sources of shareholding. Ten percent of the assets are designated for the employees and are given freely. All shares, except for municipal enterprises, are able to be bought with Brady bonds. Brady bonds mature in 25 years and are the main source of payment for foreign buyers, who can purchase shares at half of the set price. Another form of payment are through the ZUNK bonds. These are government debt bonds. All of these forms of payment are more conducive to paying off Bulgaria’s huge foreign debt. It seems as though there exists a downfall for each type of privatization: for cash privatization, and insider privatization, a general trend for the shares intended for the workers to be given to the managers, and if they are given to the workers, a lack of initiative on their part; and as for mass privatization, a chance for a huge influx of foreigner buyers or crime to gain ultimate control of the country’s industries.

Foreigners are attracted to buying into Bulgaria because of set incentives by the National Privatization Agency. These include tax holidays, "100% relief for the first 3 years . . .and 50% relief for the subsequent two years" (79). Discounts also exist, ranging up to 30% off the original price.

The psychological reasons behind this slow and relatively disastrous should be nothing short of expected. In her article, The Bulgarian Experience in the Privatization Process, Snejina Michailova explains the low level of participation in mass privatization to be credited to "the general attitude of many Bulgarians that the state is using the mass privatization program as a way of getting rid of unprofitable enterprises" (88). The public also remembers the large amount of money they lost in 1995, with the huge bank losses that occurred. In an article by Carter Henderson, Free Enterprise Moves East, Doing Business from Prague to Vladivostok, In this cites an old expression that was commonly used under the old system and has continued article, the biggest problem cited in the slow development of capitalism in Bulgaria is marketing and lack of incentive to work. In an interview with a entrepreneur who has companies set up in Bulgaria, we see the fears and complaints of foreign investors. " ‘Instead of actively promoting sales and then making deliveries to its customers,’ . . . ‘Gamakabel relied on its customers to place orders themselves and then drive to Smolyan to pick them up’" (119). He also goes on to talk with a Bulgarian employee who under the new system. " ‘they pay me enough not to die, and I work enough not to fall asleep’" (122). The worker cites how privatization is planned out, but not really much has happened. There was never any incentive to work for quality and no real need to "sell".

The situation of privatization in Bulgaria is one of gradualism, but in order to move forward at all, Bulgaria needs to work on the mentality of its workers, the support of its government in moving towards capitalism, and the decreasing the low morale of its country, in general.

BIBLIOGRAPHY

  • Henderson, Carter. "Free Enterprise Moves East, Doing Business from Prague to Vladivostok." A Publication of the International Center for Economic Growth. ICS Press. San Francisco, California. 1996.

  • Hunya, Gabor. "Large privatization, restructuring and foreign direct investment."LESSONS FROM THE ECONOMIC TRANSITION. Central and Eastern

  • Europe in the 1990’s. Ed. Salvatore Zecchini. Kluwer Academic Publishers. Boston.1997

  • Michailova, Snejina. "The Bulgarian Experience in the Privatization Process." EASTERN EUROPEAN economics, vol. 35, no. 3, May-June 1997. pp. 75-92. M.E. Sharpe, Inc. 1997.

 

 

 

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