Transition   Privatization   

Case studies of Privatization.

Airlines in East Germany and Czechoslovakia by Nicoline Blom

Privatization of Jutrzenka by Richard J. Stendardo

 US-Bulgarian joint venture “SYSTEMATICS”
by Natasha Guidicelli

Hungarian Enterprise - SZIM  by Michael Dean


Privatization of Gedeon Richter by Andreas Marathovouniotis


Privatization of Airlines

in East Germany and Czechoslovakia

by Nicoline Blom

Certain sectors are usually the first to become privatized. The international airline industry falls among them. This is so because of the hard foreign currency that is accumulated through this industry that is gravely needed by governments. Two airlines will be examined here: Interflug, previously owned by East Germany, and CSA, previously owned by Czechoslovakia.

Interflug, based in East Germany, offered flight service in East Germany but mainly Berlin. When German reunification was evident in the late 80’s the interest in a single national carrier was sparked. However, foreign airlines wished to service this area as well, but the German government asked all foreign airlines out of the East by 1993. Hence, purchasing Interflug would enable a foreign airline to continue servicing the area. Lufthansa, the West German national airline, wanted to dominate the area. This company tried to purchase twenty six percent of the shares, in hopes of a merger, but this was objected to by the Federal Cartel Office. Interflug was also appearing to be less profitable by foreign airlines because the airports that Interflug owned were now being sold separately. With dying interest Interflug lost more money. Therefore, in 1991, it was decided to liquidate Interflug. All the airplanes were sold to different airlines over the world. Interflug ceased to exist.

CSA, the Czechoslovak national carrier, had a completely different experience in comparison to Interflug. When the government discontinued subsidizing this airline, CSA searched fervently for a partner. The airline hired J.P. Morgan & Co. as a financial advisor. In 1992, Air France was chosen to be CSA’s partner. Shares were distributed to many different entities, with sixty eight percent of the shares remaining in the Czech and Slovak funds of National Property. in a second stage of assistance Air France and EBRD, an international organization, acquired 38.2 percent of the shares leaving the Czech and Slovak Funds of National Property with 49.28 percent. Air France assisted CSA with the purchase of many vital airplanes. CSA is now in great debt with a quarter of its revenues going to debt service, but it has remained a ‘viable and prosperous company.

LOOKING AT GIFT HORSES. The Economist, Vol.332, No.788 1, Sept. 17, 1994, p. 59 POLAND YOUR BUSINESS PARTNER. Foreign Trade Research Institute, Warsaw, 1992 & 1993.

 THE PRI\’ATIZATION PROCESS IN CENTRAL EUROPE. Frydman, Rapaczynski, Earle.CEU Pnvatization E~eports, Vol.1, New York, p. 176-203.

VORLD AIRLINE FLEETS. Air Transport World, June 1993, p.142-161. @NEXIS


Privatization of Jutrzenka

by Richard J. Stendardo

The transition from a command economy to the free market system has gone especially well for Jutrzenka, one of the larger chocolate and confectionery producers in Poland. The sector’s well being is partially attributable to the stable domestic demand and good export performance. The biggest decline in sales (24°/o in 1990) was almost completely made up the following year and profits have maintained their relatively low level, even under the pressures of stabilization.

About 75% of Jutrzenka’s 760 employees at the end of 1992 were women, indicating the low wage rate that is prevalent throughout the food processing industry, but the gap between their wages and the national average is decreasing. Material costs have fallen in relation to output costs, even under the Balcerowicz Plan of 1990. And the firms employees are generally pleased. They note that the transition has eliminated rationing of inputs, export subsidies, and foreign-currency retention accounts for exporters, which “distorted supplier-customer relations”. Finally, 50% of net profits are being invested in computerization, upgrading of packaging, and increased production capability.

The future looks good for Jutrzenka. The investment program is stabilizing the firm’s situation and it has a reserve production capacity of 20%. Management hopes these additional production factors can be used to exploit export markets to the east, increasing sales in the short run and profits over the long haul. Jutrzenka is truly a model of what the privatization of a firm ought to be like.

Belka, Marek. Food Processing Industry-Chocolate and Confectionery. Eastern European economics. Fall 1993: p.63-78


Case Study of the US-Bulgarian joint venture


by Natasha Guidicelli

SYSTEMATICS is a joint venture developed by the US company Honeywell, Inc. and the Bulgarian Ministry of Chemical Industry. Initially, Honeywell was interested in expanding its sales in Bulgaria. They felt they had two alternatives to achieve it. First, they tried just to increase their sales force. This did not appear successful so they turned to the other alternative. Honeywell decided to obtain a local partner in Bulgaria who bad the necessary knowledge and contacts. At that time the Bulgarian Ministry of Chemical Industry was interested in upgrading its facilities with new high-tech systems. The Ministry began a study of feasible partners and Honeywell was among them. Thus, it was both sides that were interested in working together.

The first step was to update the facilities in a large synthetic fiber plant in town called Yambol. It involved the training of local engineers and extensive technical consultations by Honeywell. It was a success so in 1980 the technical office and training center for Bulgarian engineers was established. Eventually, in 1983, the two companies decided to create SYSTEMATICS.

The partnership is between Honeywell Inc. and three Bulgarian companies SYSTEMCHIM, CFIIMIMPORT and CHIMCOMPLECT. The capital of the venture was $264,000. Honeywell and SYSTEMCHIM were to contribute 40% each with CHIMIMPORT and CHIMCOMPLECT to contribute 10% each. In 1985, CHIMCOMPLECT also joined the venture. The joint venture officially began operation in March 1984. The goal of SYSTEMATICS was to provide engineering and marketing services for Honeywell control systems and products used in Bulgaria and other countries. It wanted to become the backbone of automation for industries in Bulgaria.

At the onset, the joint venture had only two full-time employees, one director, and one marketing expert. Today, the number of employees increased to 25 in the sales engineering group and the administration support group. Since 1986, SYSTEMATICS has expanded from its original field to other areas. Now they build automation control systems, information systems and sell field instruments, components and OEM products. With the help of contacts established over the years, SYSTEMATICS was successful in these new markets.

SYSTEMATICS is now an important part of the Bulgarian economy. It is an efficient company which provides high quality products and services. The economy has benefited from the control systems operating in Bulgaria’s largest factories. In addition, SYSTEMATICS has over 100 users of its information systems and software. In 1989 alone, SYSTEMATICS had 200 projects in operation in Bulgaria and abroad. It has trained engineers in the use of its systems. Until 1991, SYSTEMATICS has sold over $10 million of Honeywell equipment.

SYSTEMATICS remains a leader in its field. In the future they plan to continue to strengthen their position in Bulgaria. Also, they want to develop further trading partners and credit capabilities. They would also like to expand from engineering into manufacturing and assembly of products in Bulgaria. SYSTEMATICS is the most successful joint venture in Bulgaria and remains a model for future joint ventures.

V. Kotchev: Systematics, in EAST-WEST JOINT VENTURES, Basil Blackwell, Inc. 1991, p. 298-304


Hungarian Enterprise - SZIM

by Michael Dean:

 Hungarian state owned company in the machine-tool industry. Szim was established in 1963 when the government combined a number of machine tool enterprises into one large multiplant concern. Changes in the tax, fiscal and monetary policies in the late 80's, led to re-organization of the firm. Individual establishments were set up as independent firms, wholly owned by the central administration. 

During the early 80's, the then Soviet Union, accounted for more than 40% of Szim's sales. However, due to the imminent collapse of the USSR, coupled with the decline in demand from the rest of the CMEA, production was slashed by as much as 38% in 1990. Szim was suffering extensive losses as it tried to adapt to the idea of privatization. Products were fast becoming non-competitive and outdated. Its management realizing the predicament they faced, tried to engage in some sort of restructuring. The problem they faced, was in attempting to downsize the industry so that they may concentrate on a narrow range of products. The plants themselves also needed major structural revisions. To make matters worse, past debt from the former CMEA markets, were still not accounted for.

 In 1988, Szim used the spontaneous privatization scheme to transform itself into a holding- based industrial conglomerate. Ten different subsidiaries were created around this holding. During the economic transition period, Szim conducted a search for potential partners  to provide the capital needed for restructuring. Two such partners presented themselves as having interest in two of the subsidiaries. These companies were Knorr Bremze and Maho AG, both of German origin. Knorr Bremze engaged in a cooperative arrangement with the Kecskemet factory  for the manufacture of spare parts. While Maho AG, established a joint venture in the production of certain machine tools. Maho would hold a 68% share in this venture. Accordingly, Maho initiated a major restructuring of its plant facilities in Hungary in 1990. Unfortunately, the demand for machine tools in the Western markets, soon began to shrink. In 1992, Maho began to wind up its operations in Hungary following final settlement. At this stage, Maho held a 30% share of the JV's assets; the remaining 70% was made available to open tender in April 1993. As a result almost 50% of equipment was sold, as the JV was liquidated.

 All along the management's' strategy was to create strong joint ventures between Szim and potential investors. The logic being that if all the assets of the group could be transferred to these ventures, the holding could liquidate itself. The SPA, who played a major role in any sale of a once state owned firm, had certain stipulations. It was agreed that half of state revenue from the sale of the groups' assets, could be used to prepare different subsidiaries for privatization. The "spanner in the works" came when the SPA saw that Szim's subsidiaries were all in serious trouble and facing liquidation. The original deal that was struck with the SPA and upon which the venture idea depended thereby came to nought. The SPA declared that any privatization attempt of Szim's subsidiaries would be far to complicated. It was felt that the problem could much simply be resolved by selling off the groups assets once liquidation was achieved. The end result was that after more than thirty years of production and at one stage employing close to 20000 people; Szim became yet another "mammoth" forced to face extinction.


1. Josef C. Brada: Firms Adrift and Firms Afloat, East European economics, M. Sharpe Inc. 1994, Jan-Febr '94, pages 65-97

2. NEXIS: National Trade Data Bank, Market Reports, Heti Vilaggasdasag, American Embassy, Budapest, September 15, 1993



by Robert Soule:

Poland is now leaning towards the mass privatization method, in which there is a centrally planned system to give away state-owned enterprises to the public.  Although mutual funds will play a key part in this new system, they will be created by the government, unlike the Czech model, where private individuals formed them in order to meet the needs of Czechs interested in putting their books to better use.

Poland originally did not want to engage in a giveaway, however. Once legislation was passed in 1990 to make privatization possible, the intent was to sell the state-enterprises, with the hopes of generating funds which could lower the national debt and also result in owners with a greater stake in seeing that the firms were a success.

 One interesting example of how the government organized such a sale is  the case of the Swarzedz Furniture Company, which in 1991 became one of eight pilot candidates to go through the process of privatization.  The Swarzedz Company was formed as a state-owned enterprise in 1952, combining two well-known Polish furniture makers located near the town of Swarzedz, which for centuries has been known in Poland as a center for quality furniture-making.  However, it largely ignored the Polish market and instead chose to export most of its production to Germany and Sweden.  According to the government it was chosen for privatization because it had a strong record of exporting and a manager who was anxious to see his company moved to the private sector.

In 1991 the Polish government had no intention of simply giving the enterprise to the public, and instead followed about the same procedures that a independently-owned company in the US would follow if it decided to become a corporation.  The company was estimated to be worth about 125 billion Polish zlotys (around $11 million), so 2,500,000 shares were created worth 50,000 zlotys each (about $4.44).

  An interesting system was used for distributing these.  The government wanted to have a large number of small investors have some stake in the company, but not so many that, for example, everyone in the country held exactly one share.  That would be a problem, since no one would have a big enough stake in the company to have much interest in how it was run, and there would also be no one with enough voting power to actually make some changes.

What they wanted to see, then, was a large number of small investors, but also a core group of large investors who would take a more active role in their dealings with the company.

So, two separate systems were used for selling the shares.  Nine hundred thousand shares (about 1/3 of the total) were made available to small investors, who could buy them on a first-come, first serve basis.  Apparently there was more interest in the shares than the government expected, and the shares sold out on first day of issue (May 20, 1991.)

Another system was used for large investors, who sent in an application to the government sometime during the last two weeks of May, which stated how many shares they were interested in buying.  At the end of this two week period, the government would look at all of the applications and decide which investors they wanted to sell the shares to, with the hope of having a diverse group of owners, some of whom would be foreign.

After all of this, there were still about 600,000 shares which had not been included in either of these offers.  Of these, 400,000 were offered to the employees of the Swaredz Furniture Company, 100,000 were given to the financial advisors involved in organizing the sale, and 100,000 were given to the State Treasury, giving the government a 4% share of the company.

What's perhaps surprising about the privatization of this company is that it did not bring about any quick restructuring, which it certainly needed.  In 1990, the year before it was privatized, it showed a net loss of sales of 10%.  This was largely because the company was doing some very strange things.  The Swarzedz name was well-known at home, but almost unknown outside of Poland, and yet it chose to export most of its product.  After privatization it began selling more at home, and discovered that it actually could get higher prices for its products in Poland.  Also, the company was making many products which cost more to make than they were being sold for. 

The most serious problem, however, was that many of the managers in the company simply did not have the skills to run the company successfully in a market economy.  Said the authors of a study of the company, "What was lacking was not just an understanding of how certain functions, such as marketing, should be performed, but why they should be performed and how they should be integrated."  Still, being privatized does create great incentive for the managers to pick up these skills, so this will probably change over time.

 What's unique about the Swarzedz Furniture Company experience is the way in which it was privatized.  While Poland's current mass-privatization program takes the form of a giveaway, not charging anything for shares in the nation's enterprise, this was very definitely a sale, one of only 38 which have taken place in Poland.  It does, however, seem to have been a success, since all of the shares quickly sold out and the company is slowly, but surely, making the right kind of changes towards a market-driven organization. 

 So why isn't Poland still following this method today?  For one thing, many might see it as less fair than mass-privatization, for it requires Poles to pay market value for shares in something which for 40 years they had been told was theirs.  And it certainly favors those who have large sums of money, including foreigners, in choosing the new owners of the company.  Still, this is how things work in any market economy, so maybe those arguments aren't quite valid.  Probably the most important factor, then, is the fact that there was a reason why this company was chosen for quick privatization- it was healthy.  While there were some problems with it, it was one of the more successful state enterprises and it produced something which people wanted to buy, as well as having a manager who was enthusiastic about the idea of privatizing. 

  Many state-owned enterprises in Poland do not have these advantages, instead having vast overheads while producing products which few would want to buy at any price.  Any sale of these would probably come at ridiculously low share prices, so it may make more sense to simply give these away.  Also, the giveaway methods have generally been more politically popular, since they don't give people the impression that their country is being auctioned off to the higher bidder.  Rather, the industries are being given to the people, so that, in theory at least, it is the people who can decide the companies' future.

        That having been said, the Swaredz Furniture sale does seem to have been a success, and since 1992 the firm has produced profits.



Wilson, Gavin, "The privatization of Swarzedz Furniture Company", Columbia Journal of World Business (Spring 1993, p. 19-34)


Hunya, Gabor, "Frictions in the Economic Transformation of Czechoslovakia, Hungary, and Poland", WIIW (The Vienna Institute for Comparative Economic Studies, February 1993, No. 190)


Radio Free Europe-Radio Liberty, Oct. 20, 1994.


 Privatization of Gedeon Richter

by Andreas Marathovouniotis

 Gedeon Richter Joint Stock Company was in great financial trouble after the collapse of the COMECON trading bloc, and was placed on the Hungarian government's "Dirty 17" list. The company's bad debts and losses were draining the budget and lunged the profits in the early 1990's. Richter has turned around after the new management team of 1992, reduced costs and increased sales in the former markets of Central Europe, the Commonwealth of Independent States and Japan. Production concentrated on Richter's best products, thus generating a 2.3 billion forints pretax profit for 1993 (report form Dunn & Bradstreet Hungaria).

In 1994, Richter's management eagerly anticipated privatization that was predicted to generate $52 million from the stock issue. The profits were to be used to modernize factories, develop new products and reduce the short-term debt of $67 million. Richter was to be majority owned, 65.2%, by the State Asset Holding Agency or AVRT (government agencies that sell state companies). Foreign investors would hold 26% of the company and the Hungarian Credit Bank 5.2%.

On September 29th, 1994, Richter launched a $62 million stock offering to be conducted in London, Vienna and Budapest. This action was expected to make the company "the biggest issue -- by market capitalization -- traded on the Budapest Stock Exchange" (The Budapest Sun, 09/29/94). London-based Schoders predicted success and said that the companywould have a market capitalization of about $283 million.

The Budapest Sun reported, on October 13th 1994, that the issue of half a million Richter shares, "has resulted in a flood of complaints and the suspension of their allocation". The regulators reported that the people who were waiting to secure a share in Richter argued that "preferential treatment was given to VIP's and ownership rights were improperly awarded" (Budapest Sun 10/13/94). The 464,000 shares issue, offered on October 3rd, had an increase from the face value of 1000 forints to 1330 forints a share. Janos Toth, an Exchange Supervision spokesman, explained that the allocation of  shares through mail or lottery would have been considered only if time allowed it. He further added, "in the case of stocks, like Richter Gedeon, the allocation takes a day, or two or four. That is not enough time for the mail system to work"(Budapest Sun 10/13/94). 


(1) Beck Ernest, Richter may enliven the Budapest Bourse, The Wall Street Journal Europe 10/03/94.

(2) Comerford Mike, Investigation halts Ritcher stock issue, The Budapest Sun, volume 2, issue 84, 1994.

(3) Comerford Mike, Ritcher deal makes firm largest stock, The Budapest Sun, volume 2, issue 82, 1994.



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