PRIVATIZATION IN HUNGARY
PRIVATIZATION PROCESS IN HUNGARY
Hungary has started privatization in 1989. The main principle of privatization in Hungary is that the properties can not be given away freely but they have to be purchased on the market economy conditions. Hungarian government has chosen a slower way of privatization instead of privatizing all at once. Hungary aproach towards privatization has been the transformation of companies into legal and viable economic entities and the sale of these companies. Privatization in Hungary shows a change both in the ownership of the companies and the management of the companies. Changing the management of most of the the companies that are being privatized is a different aproach than some of the other EE countries where only the ownership was changed but the operational control has stayed the same eg. Czech. Hungary has stepped ahead of neighboring countries in involving foreign companies in the privatization and attracting their capital. Hungary is facing a small problem because of the foreign capital input in the economy that a large % of the companies has been sold to foreign capitals because of the lack of cash in Hungary, but the government is awere that the Hungarian participation should increase inorder to be succesfull.
There are two state institutions that are commisioned with Privatization in Hungary. These are : The State Property Agency ( SPA ) and the State Holding Agency (AV Rt). SPA established centralized institutionaloversight of the privatizational process. SPA`s duty is to organise the sale of the state owned companies both to domestic and foreign investors. In1990the SPA was authorized to to privatize 1844 companies.
In the last four years 500 firms are fully privatized and 700 of them are partly privatized and also 477 of them are under liquidation. The SPA is full charge of the state property and supervised only by the government.
The process of privatization in Hungary is composed of two stages.
The companies which has a threshold value above the stipulated threshold value has to get approval from the SPA and the good thing about this is that the only responsibility of the SPA is to guard the states interest. So SPA helps the companies to negotiate while taking the companies concerns in consideration. Most of the time companies lack the legal expertise to negotiate the transactions.
SPA initiated privatizations must be conducted through a tendering process. SPA advertises open tender invitations in two national newspapers at least 7 days before the deadline. In the tender invitation the number of shares for sale, conditions of management, requirements of business policy and the place and deadline for submitting the bid is included. There is one thing that neither the government nor the SPA has issued guidelines on how they judge the bids.
One of the major problem that Hungary is facing in privatization is that the inability to obtain affordable financing of the domestic investers.
Now foreigners are interested in investing inHungary but when the time for privatization of the less important companies comes than privatization would come to a stop because foreigners would not be as interested to invest anymore. Hungarian goverment has new plans in order to overcome this problem Their new options for stumilating the domestic participation are:
Hungary seems to be succeeding so far but the government should be aware that inorder to be successfull they need domestic investor more than the foreign investors. The new government is awere that they need to speed up the privatization process and they are planning to make changes in their way of privatilization.
PRIVATIZATION IN HUNGARY
Hungary's experimentation with limited privatization, began as early as 1968. "Goulash Communism" as it was called, introduced some minor market principles under the guise of the New Economic Mechanism (NEM). Throughout the 70's and 80's, the economy stagnated and Hungary was forced to borrow considerably from the West. The reason being, that the Hungarian industry was characterized by low productivity, declining output, high costs of production and low quality goods. Eventually the government began to take a serious look at privatization when the newly installed liberal communists began to take charge in the mid 80's.
Certain laws were inacted in an attempt to institute some measure of market reform. These included the Enterprise law in the mid 80's, the Company act in 1988, and the Transformation act in 1989. Despite the implementation of these laws, Hungary's economy continued to deteriorate and more drastic reforms were needed. Following the political upheaval in 1990, Hungary was in a position to begin facing these challenges and proceed with large scale privatization.
Initially, Hungary was successful in attracting foreign companies and capital in its privatization process. From the start however, there was a lot of political bickering on the pace of this process. Expectations, both domestically and internationally, were very high regarding the time frame to complete economic transition. While encountering many stops and starts in its efforts, the government has proven somewhat adept at initiating new techniques and approaches. A very important factor is in the governments' realization that in order for privatization to be completed successfully, Hungarian participation is vital. Once the most profitable companies are sold off, foreign interest will decline, and privatization will grind to a halt unless Hungarians themselves participate.
In 1990, the State Property Agency (SPA) was established, and was concerned with the centralized institutional overseeing of the privatization process. Its main concern was the organization and execution of sale of state -owned firms to domestic and foreign buyers. The main problem with the SPA was that it often lacked legal expertise in the negotiation of contracts and also the interests of the state sometimes collided with those of individual firms. Under the auspices of the SPA, a number of programs were implemented. In brief these programs were;
In October 1991, the SPA, began to move away from these strict programs and began to adopt a decentralized privatization model. This program relinquished direct control of the privatization process and advisers were hired to oversee the tendering stage through to the settlement stage.
The actual privatization process itself, consists of two stages. First the company would clarify its legal position by undergoing transformations approved by the SPA. Secondly, tendering was approved and instituted accordingly; tender invites issued, bids submitted and evaluated, SPA settles contract.
In early 1992, the government convened to discuss the pace and direction of privatization. State control over certain companies was discussed and a portfolio of 164 such companies was prepared. It was decided that the state maintain a degree of control of such companies and an organization be created to oversee their sale. State Asset Handling Company was therefore created. The SAHC as it was called, was quite successful, and recently concluded its biggest sale to date; a 30% sale of the Hungarian Telecommunications Company's shares to Deutsche Telekom and Ameritech for $875 million.
To combat the poor participation of Hungarians in the privatization process (80% of transactions to date are from foreign companies), the government has begun to formulate certain schemes to assist the Hungarian population in obtaining finance. These are: leasing certain companies, utilizing existing credit, purchase of assets through an installment plan, small investor share-purchase program. The government will also compensate individuals for the nationalization of property under the communist governments.
To conclude, despite the unwarranted and sometimes unproductive intervention of the government, privatization in Hungary has moved forward. In 1993, investment by US firms alone, surpassed $3 billion. This represented almost 43% of total direct foreign investment. There have however been many instances where government intervention has stymied and frustrated potential investors; privatization of CAOLA by Colgate Palmolive, is a prime example.
Katalina Barazda (American Embassy- Budapest): 1994 National Trade Data Bank Market Report, March 17, 1994
Privatization in Hungary: Privatization of IBUSZ
Private enterprise began to re-emerge in Hungary in 1968, with the introduction of the "New Economic Mechanism"(NEM). This laid the foundation for the increase in private enterprise in 1982, the year the government legalized new quasi-private enterprise forms designed for industrial production. Through these reforms, the government's goal was to mobilize private investment, maintain the standard of living and reduce the shortage of consumer goods. The 1982 reform encouraged many industrial workers to engage in various forms of private industrial enterprises. The capital assets and professional experience gained since 1982, set the stage for the private industrial sector of today.
The Act of Economic Associations of January 1, 1989, introduced the specifications for establishing and operating Hungarian commercial companies. The May 1989 "Law of Transformation" laid out how the existing enterprises, including state-owned enterprises, could be transformed or corporatized. Limited liability companies could be established by one or more people and the capital required to start was around $13,500(minimum) in cash or in kind. The enterprises in Hungary were classified in three categories. The first was mainly made up of large and small state-owned cooperatives and enterprises. The second category of registered or legal entities, included joint-stock companies, limited liability companies, domestic plus foreign firms and joint stock companies. The last category included non-legal entities like sale proprietorships, business work partnerships(VGMKs) and other partnerships(PTTs and BTs).
Through the privatization process, the Hungarian economy has clearly grown. Commercial companies have increased from around 5,000 in 1989 to over 40,000 by the end of 1991, the number of joint ventures rose from 1,350 in 1989 to around 11,000 by the end of 1991 and non-registered enterprises almost doubled from 186,000 in 1989 to 300,000 in 1991. Sole proprietors have largely increased in the industrial sector but not in the trade sector(only by 70% in comparison to the 750% increase in Poland). This was because of the limited access to foreign exchange for self-employed Hungarians and the slow pace the small retail sector was being privatized.
In mid 1990 the State Property Agency (SPA) was established due to public outcry against spontaneous privatization where the managers of state enterprises moved assets into their own private companies. The SPA centralized the privatization process thus the industrial sector largely remained in state hands. Private individuals could purchase state property but the process was slow due to the necessity of SPA approval. In 1992 firms amounted to 1500-1600 billion forints but only 600 billion forints were planned to be sent on privatization.
In the 1994 economic plans of Hungary's new governing coalition, the system of privatization will be transformed and a supervisory committee will be set up to accelerate the process. The new practice will mainly terminate the tender system and will prefer cash to other means of future payments.
In conclusion, the failure to bring about effective privatization of the state sector negatively influenced the entire domestic business environment. The product markets in Hungary were weaker than anticipated, but rapid privatization of Hungary's small-scale sector will improve product markets. Speedy privatization will encourage the restructure of businesses along new, competitive lines. The loosening of credit for private produces can greatly facilitate private sector growth.
IBUSZ, Hungary's leading travel agency, was responsible for organizing sales of tours within Hungary and abroad. It was also a highly diversified financial services group and emerged in real estate intermediation and book publishing. This travel agent had a significant share in the domestic market for tourism, which an important source of hard currency. Until 1968, IBUSZ was the only significant travel agency in the country and had a had a virtual monopoly in the Hungarian travel business. The 1968 reforms, though, abolished the monopolies, and thus as a result the Cooptainst was founded in the same year. The number of travel agencies increased steadily, reaching the number of 500 in 1990 and 1000 by 1993. In spite of this change, IBUSZ still shared about 40-50 percent of the market in the second half of the 1980's.
IBUSZ was founded as a joint stock company in 1902 and was transformed into a state owned company upon nationalization in 1950. This firm was one of the very few enterprises whose legal structure was re-established after one year, as a joint stock company with the shares owned by different branch ministries. The Commercial Law of 1875 was the legal basis for the existence of the joint stock companies and was effective until 1988 when it was replaced by the Company Act. In this way, IBUSZ did not have to change its legal structure when the transformation of Hungarian companies started in 1989. As its ownership rights were exercised by the ministries the firm was still under direct state control.
The transformation of the firm was initiated by its management. In 1989, IBUSZ had an outstanding financial performance and thus the management started to work on a long term strategy in order to ensure future success. To create better conditions for future privatization, "the general assembly of shareholders decided to raise the capital from Fts 798.8 million retained earnings in November 1989" (OECD, p.145). Simultaneously, the organizational form of the company was modernized and the scope of the authorized activities expanded. Company's planned projects were the development of a high quality internal computer system and the participation in the building of a hotel belonging to the worldwide hotel chain Kempinsky. In order to engage in these developments, the company had to raise the capital by issuing shares, however, the managers wanted to avoid selling the shares only to one or two foreign investors. The best solution was to attract small investors through a public offering of shares at the relatively low face value. Employees were also encouraged to become shareholders of the company.
On March 1,1990, most of the ownership rights of IBUSZ were transferred to the newly created State Property Agency (SPA). In this way, the ownership transactions of the company were supervised by the representatives of SPA.
The Agency supported the parallel issue of shares in both Budapest and Vienna. This was because, the Act of Securities of the Stock Exchange allowed the quoting of Hungarian shares in a foreign stock exchange only if they were listed also in the Budapest Stock Exchange (OECD, p.153). The offering of the IBUSZ shares was the first after a long period of planned economy. The success that was expected brought in a considerable amount of foreign capital together with encouraging Hungarian citizens to buy shares on the newly opened stock exchange. Later the SPA planned to sell the shares that would have remained in its hands.
The net receipts of the first issue of shares was Fts 2070 million of which Fts 190 million was held by the SPA. At the end of 1990 the capital structure of IBUSZ showed the following figures (Ibid):
The second share issue took place in July 1991 and the shares were sold by means of a private placement directed at foreign investors. Since the value of the shares was much lower than in 1990, a public offering did not seem desirable. Only twelve investors participated in the transaction and bought shares at the price of Fts 4150, generating a net income of Fts500 million for IBUSZ. The SPA still held a strategic position in this company even when its shareholding was reduced.
"IBUSZ suffered an Fts1.745 billion (US$20 million) consolidated loss in 1992 after breaking even the year before" (Financial Times, April 30). The fall in the stock price of the company was explained by Eric Bebo, financial director, to have been due to the high expectations of the IBUSZ shares at the time of the floating in 1990. Due to this fall, most of the investment of the western institutions was wiped out. At the same time, the company suffered a decline in the tourist business due to the war in the former Yugoslavia. On April 1, 1992, IBUSZ was sold to a state owned bank and a state owned insurance company. In effect, the state sold to the state under the guise of privatization.
In 1994 it was reported from the MTI Hungarian News Agency, that a consortium headed by an Austrian investor purchased 27.8 percent of the IBUSZ shares. With this action the stake of foreign institutional and private investors in IBUSZ had grown to over 79 percent, improving the company's profitability, but the company still made losses of Fts30 million.
Report on the Article: Hungary's Haphazard Privatization by Tim Stuart Results
Hungary has maintained the longest privatization program of any of the East European countries. Hungary began its tendency toward reform in the New Economic Mechanism of 1968. Janusz Jankowlak describes the privatization process prior to 1989 as "wildcat privatization," with limited state control. According to Jankowlak, the privatization under the communist regime did not result in more effective capital investment or the creation of a market infrastructure. However, he stresses that the program produced extensive corruption. The communists allowed for "spontaneous privatization," whereby the company directors negotiated the sale of the company to domestic or foreign buyers. The post-communists apparently shifted their policy and focus.
The first regime after the communists fell from power began its privatization process as a "piecemeal approach." It privatized companies on a methodical, case-by-case basis. The regime recognized the need to form the State Property Agency (SPA), which provided a more structured approach. Seventeen-hundred enterprises immediately fell under the agency's control. The agency forced enterprises to gain approval before the sale of any state assets over a pre-designated value. The government ordered the agency to reduce the state ownership of enterprises from ninety percent in 1990 to fifty percent by the end of 1994. In addition to the duties mentioned above, the SPA's also keeps records of all state property, exercises managerial rights over companies, and analyzes the results of the companies under it.
Hungary's privatization program occurs in two stages. First, state-owned enterprises are transformed into legal companies, limited by liability (Kft) or limited by shares(Rft). Later, the SPA sells the companies using one of several methods. However, the position of the SPA enables it to take other aspects of the economy into account. According to Tibor Pongracz, outgoing state secretary for privatization: "Price is not the only aspect we take into consideration. We look at the development project and the modernization project. We need to get technology and management know-how into this country." (1)
At the end of 1992, the Hungarian government established the Hungarian State Holding Company (AV) to become the owner of over one-hundred-sixty Hungarian "strategic" industries. These strategic industries include: power, steel, railroads, and telecommunications. Apparently, the government want to keep some control over those industries that it considers to be important.
Although the government established the company, it remains controversial. "The company's first chairman and chief executive was Pal Teleki, an Hungarian-American. He resigned in June 1993 after it was made public that Teleki's $ 130,000 salary was paid by the Hungarian-American Enterprise Fund, a US government-funded body set up to encourage privatization in Hungary...Szabolcs Szekeres, another American-Hungarian, raised the company's profile and oversaw the privatization of Hungary's telecommunications company, Matav...His criticism of the government's bank consolidation scheme was particularly galling."(2)
In 1993, Hungarians received 65% of state assets (versus 40% in 1992.) The government worked out a series of payment schemes to produce these results. It offered Existence (E) loans at a low interest rate, payable in fifteen years. It issued compensation coupons to those who had suffered or lost extensively under the former communist regime. It even established a secondary market for these compensation coupons. Although rare, the government privatized two leading companies under an employee share ownership program, which offered preferential prices to employees. The government leased six companies.
Finally, the government established a small investor's share program. Under this program, all Hungarians over eighteen years old could purchase shares with a Ft100,000 ($1125) interest-free credit facility. Each person must register for a small fee. Each company offered already has a strategic investor to stabilize and provide confidence for the company investment.
Hungary's success can be considered confusing. "The privatization statistics give a conflicting picture of privatization's success. Of the 1,800 companies assigned to the privatization agency on its formation, only 500 have been sold. Another 480 have been liquidated or are in liquidation procedures. In terms of revenue privatization brought in Ft170.4 billion ($173.8 million) in cash in 1993, Ft95.84 billion more than in 1992. The major difference was that AV was inactive in 1992, preparing companies for privatization. The privatization agency accounted for Ft77.9 billion of this. AV's contribution of Ft92.5 billion comprised mostly the $875 million brought in by the Matav sale."(3)
Hungarian Privatization Destroys its Clothing Industry
The privatization process in Hungary has especially hurt the textile and clothing industry. Of the nine hundred textile companies, 60-70% have declared bankruptcy or have begun the process of liquidation. The Hungarians estimate the amount required for reorganization at Ft1.2 billion. Foreigners own approximately 15% of the clothing industry in Hungary in comparison to 8.3% in Hungary as a whole. 1991 marked the industry's major downturn with the collapse of the former COMECON markets. Hungarian manufacturers exported a good deal of their products to the former Soviet Union, but they now experience great difficulties in accessing western markets due to trade barriers and inferior quality. Some western manufacturers, such as Hugo Boss, have contracted with local contractors to produce some specialized garments.
In addition to the problems with exports, Hungarian textile manufacturers must now compete with western imports. Hungarians view western clothes as a novelty and consider them trendy. Levi's, Nike, Lee, LAGear, and Adidas are among the busiest shops on Vaci utca, Budapest's main shopping street. Hungarian manufacturers can no longer rely on subsidies from the government to bail them out of quality shortfalls or financial losses. They must compete with western manufacturers on western-style, capital markets, a process to which they are totally foreign. The huge, central commanded manufacturers cannot compete with specialized, stylized clothing. For example, Hungarotex, formerly designated as the foremost manufacturer for the textile/apparel sector in Hungary, lost its monopoly power. It continues to lose market share to small, specialized importers.
Although the Hungarians have privatized a good deal of their textile industry in the hopes that it would become more efficient and it would stabilize other aspects of their transformation to capitalism, it has really destroyed the old apparel manufacturers there. They cannot compete without subsidies, against trade barriers, and against western imports. Unfortunately, the government did not successfully restructure those large conglomerations to produce better products on a smaller scale. I feel that this is not the end for the industry, however. The textile enterprises of old may become extinct, but others will rise in their place. Once Hungarians become more accustomed to market forces and learn some difficult lessons about those forces, the textile industry, and most other industries in Eastern Europe, will be forced to become more efficient. They will improve their quality and vary style.
"Manufacturing Output Increases in Hungary." The Hungarian News Agency. December 2, 1993.
"SPA to Speed Up Privatization of Textile Industry." The Hungarian News Agency. July 29, 1993.