Introduction and Background
Key institutions in the privatization process.
With the adoption of the Privatization Law in June 1993, the State Property Department and the Privatization Enterprises were united and the Estonian Privatization (EPA) was founded. The EPA is a government institution that administers the privatization process. The EPA privatization process has adopted a range of divestiture methods aimed at putting assets into the hands of those with the incentives and skills to use them wisely. I will focus on the
The Estonian Privatization Agency describe, that the tender process is based on the privatization of medium-size and large firms thought to be of interest to foreign and domestic investors. A tender is public and any one may bid. However the conditions for bidding are based on an evaluation criteria: First, a bidder is expected to present a concise and realistic business plan with a projected proposal for at least three years. The plan must include the type of product or service, the goals of the business and the ways of achieving them. Second the investor must have employment guarantees, promising to maintain employment for a minimum of three years or to create jobs for workers in downsized enterprises. Finally, a investor must guarantee a maintain a significant level of investment in purchased enterprises for a minimum of three years (Vaino p.6).
Tender success and enterprise debt.
There have been four tenders conducted by May of 1994, two of the four are large textile and furniture producing companies. The four tenders have generated 63.4 million in sales proceeds. Buyers have contracted to invest more than
The government has begun to clear some inter enterprise debt by introducing improved accounting methods. However other options are under discussion for example the creation of a consolidation bank based on the Czech model to excise much of the bad enterprise debt of the banking system and replace it with government bonds. Nellis describes at this point bankruptcy laws in
The voucher program and problems.
Vouchers are exchangeable for shares in privatized firms, in investment fund companies, residential housing and land. Nellis suggests, that there is a growing concern that the total supply of assets tradable for privatization securities will be insufficient to meet the demand. The supply will be insufficient even if the EPA intends to expand the sales of shares for vouchers. He writes that "the conventional wisdom on vouchers is that the value should be the same for all recipients and that they should be exchangeable only for shares in companies or in investment funds. The Estonian scheme deviates from both suggestions"(p.8). Each resident over the age of 18 receives national capital vouchers, with each voucher denomination at 300 kroons. The number of vouchers obtained varies. One voucher is gained for every year spent in school or work between
Factors contributing to Success.
The success of the privatization process in Estonia is a based on four main factors: First good policy, by the termination of soft credits to enterprises, active implementation of the bankruptcy law (an estimated 300 bankruptcy proceedings dealing with state firms have taken place), a currency board system that links money creation to hard currency reserves and keeps inflation at modest levels, liberalized prices, and open trade regime, and the encouragement of foreign investment. Second good politics, leaders in have so far persuaded the public to tolerate the painful, temporary adjustments. Third good history,
Hansson, Ardo., "The Impact of Recent Developments in
Nellis, John., "Successful Privatization in
· World Bank July-August 1994. P7-10.
Sarnet, Vaiio., "Estonian Privatization Agency".
by Erin Hubbard
Upon regaining independence from the
The next law, adopted one year after the Property Law, was the Law on Principles of Property Reform. The intent of this law was “the restructuring of property relationships in order to guarantee the inviolability of property and free enterprise, to make good the injustices carried out the violation of property rights, and to create conditions for the transition into market economy.” The main issues under this law was the returning of property illegally confiscated by the Soviets to their legal owners or heirs and the transformation of currently state-held properties to local or municipal governments.
The third law aiding property transformation was the Land Reform Act. The intent of this law was “the rearrangement of property relationships related with land so that they will be based primarily on private ownership, honoring the continuing rights of former owners and the legally protected interests of the current land users.” This law included returning both urban and rural lands to their previous owners and dividing rural lands among competing claims. In addition, it required the privatization of land that was neither claimed by individuals nor retained by the government.
With these laws in place,
An additional, and perhaps more fair way of privatization was through the use of international tenders beginning in 1992. This method can be described as “offering state-owned enterprises to private sector investors through the use of advertised international tenders.” Because these tenders comprised of a large block of shares, this method greatly contributed to large-scale privatization, which was actually not started until August 1992. The first international tender, comprising of 38 enterprises, was offered on
Although privatization was slow at first, it has been relatively successful since about the time that large-scale privatization started. The best indicator of privatization efforts can be seen by
Kolodko, Grzegorz W. “Ten Years of Postsocialist Transition: The Lessons for Policy Reforms.”
Shen, Raphael, Restructuring the Baltic Economies: Disengaging Fifty Years of Integration with the
Wolfe, James W. “Privatization in the Former Soviet Union: The use of International Tenders.”
Investment Opportunities, Economic Management, and Privatization in
by John Koetzle
The highest priority of the government is overseeing the sale of publicly controlled assets. Privatization The government agency that controls the process of privatization is the Estonian Privatization agency. The privatization process is considered a gradual one since in 1993 and 1994 only 54% of major retail stores were privately run. Thirty percent were jointly owned by the government and private owners and sixteen percent were still run by the state. This contrasts the big bang theory or approach towards privatization that had been advocated by
The privatization of publicly owned assets is sold through three different methods. The methods are tender with preliminary negotiations, public auction, and public offering of shares. "The preliminary negotiations for tender are required in situations where complex due diligence is required and disputes about lost property rights and assets ownership occur." (Estonian Privatization Agency website) There the price is pre negotiated with these parties that claim right to publicly owned assets or property.
The second method is public auction, which involves the sale of large enterprises that would not benefit by voucher sale of shares to Estonian citizens. These are typically firms that do not create public interest. If there is no public interest for these securities then there is no market for these securities and consequently no vouchers would be used. Typically foreigners buy these firms. "In 1994 alone these types of sales totaled upwards of 390 million croons."[Estonian Privatization Agency)
The last method of privatization is through public sales of shares via a voucher system. The government distributes the vouchers in equal amounts to each citizen. The controlling interest held by majority shareholders is protected. The majority shareholders are usually management or an outside party and these shares are negotiated prior to the release of them publicly through the voucher system. Shares that can be allocated to the public are dispersed through vouchers. There is an auction to determine the final price of the securities. There are two types of bidders in voucher system of privatization. The two types are type 1 and type 2 bidders. Type 1 bidder doesn't have option to not buy shares if the price goes over the highest price he is willing to bid. For example if the bid goes way above what is willing to pay for a share of that enterprise he is still obligated to purchase some amount of shares at the equilibrium price. The equilibrium price is the price of the share when the bidding stops in the auction. In contrast to type 1 bidders type 2 bidders are required to disclose the highest price that he or she is willing to pay for that share and if the price goes above her ceiling price then she is not allowed to participate further in the bidding process.
Economic Institutions and Economic Management
There are three main institutions that have influence on macroeconomic policies and management of the economy. The first institution is the Bank of Estonia. This is the central bank of
The ministry of Finance is the next institution that influences macroeconomic policy. This institution acts conjointly with the Bank of Estonia and drafts the fiscal and foreign economic policies. "The reforms that are drafted are mainly budgetary expenditures and tax reforms. The agency also is in charge of formulating the credit policies and helps shape the regulatory system for economic activity." (Investment Opportunities in
The Ministry of Economic affairs is the agency that manages the economy. This agency has the least influence and just acts as a support function in drafting fiscal and regional economic policies. The agency acts similarly to beareau of labor and statistics and releases forecasts for economic performance and produces analysis on current economic conditions. The agency is also in charge of facilitating capital investment into the country through economic development programs and subsidization policies. The Ministry of economic affairs also coordinates tourism and consumer protection statutes. The last responsibility that the agency has is that there are in charge of intellectual property rights and patents. All patents in
Monetary Policy and Fiscal Policy Like any economy that is in transition between a command economy and a free market economy the main concern of the Central Bank is inflation. Governments fear that with flexible prices because of previous market imperfections that prices will skyrocket. To stem this fear of inflation the Bank of Estonia has set up a currency board. The currency board has pegged the Croon to the Deutsche Mark at a rate of 8:1. The only concern that if the Croon is pegged to the Deutsche Mark there will be a run on the currency and people will trade their croons for Deutsche Marks which will lead to hyperinflation and devaluation. This has not happened because of consumer confidence in the Croon due to rapid expansion in GDP and a balanced budget that occurred in 1994. In 2000 GDP grew 6.5%. Another reason for not having a run on the currency is the sufficient reserves totaling 680 million Deutsche Marks. Inflation was only 3.1% in 1999. The currency board has proven to be very successful in stemming inflation.
The recent fiscal policies are regarded as very conservative. The reason that they are conservative is to achieve their main objective of joining the European Union in 2003. They need to prove to the union that they have a stable currency, stable GDP growth and stable interest rates. The personal and corporate income tax rate was lowered in 1993 to 26%. This is well below the average of the tax rate of
In the past five years 20 billion Kroons have been invested in the form of direct investment. In the last five years existing enterprises have invested 83 billion croons in the form of capital expenditures. Overall the economy is doing very well in
The government unlike
Estonian Privatization Agency Investment Opportunities in
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