Individual Democratic Institutions Research Fellowships 1994-1996

The research reports reproduced here are the responsibility of the individual authors. Their reproduction does not imply any form of official or unofficial endorsement by NATO. The reports are offered in unedited form, as presented by their authors, with a view to make their findings available to a wide audience. La protection juridique de la propriété privée dans le nouveau contexte social et économique de la Roumanie Simona Iliescu Nastase [Back to Index] Chapter 4 -The passing from state property to private property. The privatisation process. Although the notion of "privatisation" and the operation it defines are known both in the Western Europe states and in the Eastern Europe ones, there are several important differences between the processes of organised privatisation that take place in the two parts of Europe. Of course, the source of these difference is on the one hand the difference between the two kinds of economies in which the privatisation process takes place and, on the other hand, the different purposes, Within the limits of a general definition, privatisation would represent the total or partial transfer of property, of the control over resources or of the public services to the private sector, a process contrary to nationalisation. According to Recommendation no.. R(93)7 of October 18, 1993 of the Ministers' Committee, which establishes the principles the member states have to follow in organising a privatisation process, this term means: a) the total or partial transfer of the property or control over a public enterprise to private property or control, in a manner which makes this enterprise stop being "public". b) the transfer to a private person of an activity carried on before by a public enterprise or by the public authorities, irrespective of the fact that the transfer is accompanied or not by a property transfer as well. As far as the East European states are concerned, the privatisation process was defined as a process by which the assets belonging to the state in a planned economy become private assets. Considering the fact that in a planned economy the state property prevailed (as property of the" whole people"), and the private property was limited only to the basic things necessary to the individual's existence (in Romania: personal things, the house - only one, the lot - only in the non-cooperativized mountain areas, but with the interdiction to transfer it, and others like it), privatisation requires, above all, a reform of the ownership rights.. This is why one of the most important missions of the new Constitution was to define and make a clear difference between private and public property. Once the matrix of the two fundamental forms of property was established, there was possible to create a framework for the transfer of assets from one form of property to another, first regulating the privatisation process. Privatisation in the East European countries has other features as well: The first difference is brought by the purpose of privatisation. Thus, while the West European countries choose the privatisation of the public enterprises with the purpose to increase efficiency and reduce the public budget costs, in the East European countries, the privatisation is a way of reorganising the entire economy, in fact the only way to establish a market economy out of the centralised economy structures. From this derives a difference in the scope of the privatisation process; in Eastern Europe about 360 million people give up the centralised economy to experience the rules of market economy. As a consequence of the different purposes, the rhythm of privatisation will be different as well. The Eastern European countries have adopted the idea of a rapid privatisation, while in France and Great Britain the privatisation term is 15 years, which can be accepted neither by the people, nor by governments. An important difference between the two systems of privatisation is the lack of a financial and capital market in the East European countries. In France, for instance, privatisation was carried on in most of the cases through the agency of the stock exchange, while in the East, although the Stock Exchanges were set up (in Romania, by law no.. 57 / 1994, in Poland in 1991) their activity is not highly significant yet, the volume of transactions is still low, although promising. Recently established, these stock exchanges are not liable to be, at least for the time being, a powerful financial market able to play an important role in the success of the privatisation process in the East. Another difference consists in the quasi-general choice of the East European countries to accomplish privatisation by of vouchers, with the exception of Hungary (possibly provisional). These vouchers (having different names in each country) mean a quasi-free distribution to the population of the capital of the state-owned enterprises, and they are to be transformed into shares of the respective enterprises. There is no doubt, such a choice for mass privatisation by vouchers has its social reasons rather than economic ones, as it is conceived to be a repairing measure for the difficult economic situation of the people during the communist period, when the wages established by the state paid little of the actual work done. From an economic point of view, this mass privatisation was justified by the difficulty of finding the necessary capital by selling assets on such a large scale, at the level of a whole economy. There was also a psychological reason, induced by a political view to a large extent, a view according to which privatisation by selling would be a selling of the country. In the Western countries, the distribution of shares to the people as a means of privatisation was an isolated case and a failure, if it were only to remember the case of France. Hence, the law of January 3, 1983, named "Delors law", created two new categories of real estate values: the participative titles and the investment certificates. The aim was to give the nationalised enterprises the opportunity to resort to public subscription in order to get financing. In the privatisation process, these titles were turned into common shares. But because the shares were underestimated, their owners preferred to sell them and thus obtained an immediate profit. The privatisation process in Romania In 1989, all the economic sectors were under state control and the economic activity took place in state-owned enterprises, with the exception of agriculture, where the working of lots was carried on within the co-operatives. After the co-operatives were dissolved and the lots were given back to private property by law no. 18/1991 of the land fund, the next problem was that of passing the other economic activities from the state control to the private one. This process required first a reform of the right to ownership. By Law no.. 15 / 1990, the state enterprises were reorganised as autonomous administrations (in the strategic economic domains) and state capital companies (either joint-stock companies or as limited liability companies). Both the autonomous administrations and the state capital companies thus established were acknowledged by law the right of ownership overall the goods in their patrimony. This law brought about not only a structural and functional change in the former state-owned enterprises, but it was also a first step in the privatisation process. Thus, in the case of the autonomous administrations, the goods in their patrimony are part of the private state domain, so they are out the generalising scope of the public property which existed in the former regime. As concerning the companies, the state is only the holder of the shares. Once defined this starting point, the privatisation operation was organised, in a first stage, on the basis of Law no.. 58 / 1991, excluding the goods from the public domain of the state or of the territorial administrative units and of those owned by autonomous administrations. According to this law, regarding the privatisation of the companies, 30% of the shares held by the state in them is freely transferred to the citizens by means of the distribution of vouchers, and the rest of 70% is sold to physical and juridical persons, Romanian or foreign. Another way of privatising the 70% of the capital is the direct selling of assets from the patrimony of the companies. The 30% of the social capital owned by the state is administered by five Private Property Funds organised in the form of stock companies, one for each geographical region of Romania. The vouchers in the form of which this quota is privatised represents, at the same time, shares of the Private Property Funds. This 30% quota is administered by PPF in its capacity of stock-holder of the companies. PPFs are an intermediary link between the citizens benefiting from the transfer of 30% of the state-owned shares ant the commercial agents being privatised. In this direction, one of the unfortunately unsupplied functions of the PPFs is to distribute dividends out of the profit made by the commercial agents to the ownership certificate owners. Free of charge ownership certificate holders are all Romanian citizens living in Romania, aged 18 by December 1990. The nominal value of such a certificate was determined by the ratio between the capital of each PPF (namely the sum of assets the Fund holds in the commercial companies under its jurisdiction) and the number of people entitled to receive ownership certificates. In fact, every entitled citizen received a 5 ownership certificate book, each issued by one of the 5 PPFs. The PPFs should have operated under the same status for five years, after which they were to reorganise as joint stock companies, of the same type as mutual funds. The provision of Law 58/1991 mandating this measure was not enforced, although, especially in 1994 and 1995, mutual funds witnessed rapid growth and development in Romania, turning into an alternative option to the banking system in that they guaranteed citizen savings security in the presence of a high inflation rate. Apart from the 5 PPFs, a State Property Fund was created as a public institution with commercial and financial character. Its main attribution is to administer the 70% state owned share of the commercial companies that will be subject to privatisation approaches other than free distribution of ownership certificates. The SPF, like The PPFs, is a shareholder in the state-owned commercial companies. Its shareholder status is limited though by the purpose of its creation, so that one of the main liabilities of the Fund is to act toward reducing state participation in the company social capital, until total privatisation is achieved. (Law 58/1991, art. 25, par. 2, let. a) In order to meet this objective, SPF is legally bound to develop an annual privatisation report for the following year and a report on its activity during the previous 12 months. The program will include proposals to privatise at least 10% of the initial shares, so that the maximum operating period of the SPF is of seven years. The law provides that on the date of achieving total privatisation of the state-owned commercial companies, SPF shall cease its activity by right, the capital owned by the date of its termination becoming revenue in the state budget. The budget shall also assume the liabilities that may occur. The annual privatisation program is presented to the Government as information and to the Parliament for approval. Several privatisation efforts were made before the funds were created, by another agency with the same responsibilities, namely the National Privatisation Agency. Yet, the law restricted such efforts to a maximum of 0.5% of all the state-owned commercial companies. 70% of the sums obtained from the sale go to the SPF and 30% to the PPFs. Following the creation of the SPF and of the 5 PPFs, they took over the privatisation process at the national level. The change of ownership of the shares in the commercial companies from state (even if it is private state property) to private property is achieved, according to Law 58/1991, in the following ways: distribution of ownership certificates to be exchanged for shares sale of shares or assets (goods) of the commercial companies to their employees sale of shares and assets to persons other than employees or legal Romanian or foreign persons In 1995 it was found that at least 900 000 ownership certificates had been sold by their holders, who had not waited to exchange them for shares, thus obtaining immediate profit, all the more so as the economic and financial situation of the state-owned commercial companies was not encouraging. To save the mass privatisation efforts from failure, Law 55/1995 was adopted to accelerate privatisation processes. According to this law, privatisation is sped up by the actual free transfer toward the eligible Romanian citizens of shares corresponding to the 30% share of the capital in state owned commercial companies. The transfer to the citizens is done by exchange. To restore the principles of social justice, in spite of the concentration of certificates due to the sale thereof, nominal privatisation vouchers were issued. The vouchers are of small value and are issued by the National Privatisation Agency and may not be transacted between living persons, under penalty of becoming void by right. The persons entitled to receive nominal privatisation vouchers were Romanian citizens living in Romania, aged 18 by December 31, 1990, and, in case of death, the heirs thereof, as well as persons aged 18 by December 31, 1995. People who, by the day Law 55/1995 came into force, had used up the whole ownership certificate book issued under Law 58/1991 in the privatisation process, were not entitled to receive the vouchers. In practice, under the two successive regulations for the privatisation process, in Romania privatisation started in three ways: free distribution of 30% of the state-owned capital in the commercial companies, by transferring shares corresponding to this ratio to the entitled citizens in exchange for ownership certificates and nominal privatisation vouchers. direct sale of capital and assets to the employees of state-owned companies direct sale of capital or assets to natural or legal persons. A. As a first step in this privatisation approach, the Government approves, on joint proposal from the NPA, SPF, and the PPFs, the list of commercial companies subject to mass privatisation, including indices referring to the activity of the respective company, actually its profitability (Law 55/1995, art. 1, par. 3) The list was published in the Official Records and in the largest issue newspapers. The shares in such companies subject to mass privatisation shall be distributed free of charge, as shown below: in exchange for the ownership certificate book, for the single exchange value of 25.000 lei per certificate in exchange for the nominal privatisation vouchers for a single exchange value. The value is calculated as the difference between the value equivalent of the 30% share of the commercial companies capital divided by the number of people entitled to receive vouchers on the one hand, and the single exchange value of the privatisation certificate book, on the other hand. Thus, to determine the number of shares that shall be obtained through the exchange by each person, a single exchange value for the two title categories was established: each ownership certificate has a value of 25 000 lei, therefore the five certificate book amounts to 125.000 lei. the value of the nominal privatisation voucher was established at 875 000 lei. Both with certificate books, and privatisation vouchers, exchange for shares in a commercial company may only be made up to 60% of its capital, depending on the demand. In case the demand for shares in a company exceeds the company offer, (that is, 60% of the capital) the value of each share shall be accordingly reduced. The exchange of certificates and/ or vouchers for shares can be requested by the holders thereof within a certain time frame, namely till March 31, 1996 (the initial deadline had been initially set for December 31, 1995, but was postponed eventually). Holders of certificates and/ or vouchers may also submit them to the PPFs, thus becoming shareholders in the funds, which shall subsequently turn into financial investment companies. The option may be chosen before April 1996. After this date, the certificates and vouchers that have not been used become void. After the exchange, the shareholders are issued shareholder certificates free of charge. As the list of commercial companies subject to privatisation in this way included several thousand entries, a very difficult problem was for the holders to choose the one to go to for the exchange. Exceptionally, this privatisation method included companies not mentioned on the list, but the persons who could perform the exchange in this case were exclusively: employees of the company executive members of the company that filled the office on a management contract or as representatives of SPF or PPF unemployed whose last job was with the respective company pensioners retired from the respective company farmers who had worked on contract with the company, if the company is an agricultural, agricultural produce processing one, or an agricultural service provider. Actually, this privatisation method is now concluded and we are now at the stage of issuing shareholder certificates. The ownership certificates and nominal vouchers are bonds(24) that may be used only in the exchange for shares, either directly in the companies under privatisation, or in the PPF (future investment companies). B. Sale of shares Shares in the state-owned commercial companies are held 30% by PPF and 70% by SPF. Without difference from who holds the shares, they can be sold to Romanian or foreign natural or legal persons, in one of the following ways: public offer open auction or auction with pre-selected bidders direct negotiation any combination of the above The law does not restrict the number of shares that a person can own, so that one person may hold all the shares in a company. In the case of companies included on the mass privatisation list, taking into account the fact that 60% equivalent shares of their capital can be exchanged for certificates and/ or vouchers, the remaining 40% shall be sold. In the case of sale, as in the other instances, the law provides a number of facilities for the employees and executive board members, who are granted preferential status in acquiring the shares. if the sale is through public offer, the employees and executive board shall benefit from a 10 percent reduction in the solicited price, but only for 10% of the shares on sale. if there is an auction, the employees and executive board may buy the shares on offer at a price 10% lower at most than the highest price offered in the bidding, if they observe the other conditions in the offer. in direct negotiation with SPF, under similar conditions with the other potential buyers, the shares will preferentially go to the employees and executive board. SPF may also provide payment facilities, such as credit, instalments, etc., which shall also be granted to pensioners of the company. C. Assets sale Law 5/1995 defines assets as a sum of goods representing units that may be organised and function independently. Such functionally autonomous units within a company may be sold to Romanian or foreign, natural or legal persons. Identification of the assets to be sold was made by including them on a list developed by NPA. This method of privatisation is different in many respects from the sale of shares. First, in the sale of assets, the contract is between the owner commercial company and the buyer, as the object of the sale is a part of the company property, goods over which it exerts ownership rights (cf. Law 15/1990 on turning the former state enterprises "the goods owned by a company are company property") In the case of share sale, the contract shall be between PPF or SPF, as share holders and the buyer, as the shares are part of the state private property. Another difference lies in the ways they are achieved. Asset sale is done by public auction, or sealed bidding auction, the goods going to the highest bidder. The regulations for such auctions are provided in Government Decision no.634/1991, altered by GD no.758/1991 and GD no. 545/1992. Yet another difference lies in the limitations set to the buyers. Public institutions, autonomous units and commercial companies owned solely by the state do not have the right to participate. The interdiction appears justified if we consider that this is a privatisation process. Also excluded from the bidding, but on wholly different grounds, to avoid possible excesses, are the members of the selling company The law mandates limitations on the buyers, forbidding them to sell, rent or transfer in any other way the use of the assets thus bought, during the first year following acquisition. The employees of the selling company and, in addition pensioners retired from the same, are preferred under similar conditions, to the other bidders in the auction. Romanian natural and legal persons (although the law only refers to citizens) who have the use of the assets on sale on a lease contract, are also preferred. The employees and pensioners may have payment facilities as well. As regards the selling company, it is also restricted in using the money obtained through the sale. It may not use the money freely, the law (Law 58/1991) providing that such sums may only be used for two purposes: new investments repayment of medium and long term debt incurred in investing The company shall pay a 20% tax on the sums obtained through assets sale, as provided by Law 54/1992. The after tax sums retained by the company may not in any case be lower than the accounting value of the assets. Therefore, to ensure the retention of at least this amount by the company, the tax may be reduced or even an exemption granted. In choosing privatisation approaches, the Central and East European countries faced a number of difficult problems, all the more so as their companies were not only undergoing transition from command and control to market economies, but also from a totalitarian to a democratic system. Or, the right to private property was one of the fiercest enemies of the totalitarian system, being perceived as a premise and guarantee of individualism - which is exactly what, for 50 years, communist collectivist strove to accomplish. Let us not forget that one of the first measures of the totalitarian regime after its establishment in the Central and East European countries was to suppress private property, by massive waves of nationalisation, that turned land, buildings, factories, into state property. All sectors of the economy, industry, agriculture, trade, services, were taken over by the state. The magnitude of nationalisation was different in all these states, from general control, as in Czechoslovakia, to leaving some areas to private initiative (crafts, services, small trade, even agriculture) as in Poland or Hungary. One of the biggest problems posed by privatisation was to determine the relationship between the restitution to, or compensation of former owners whose goods were abusively nationalised or collectivised, and privatisation. Each state had its own policy of reparations, and subsequently had to deal with the consequences. Thus, East Germany and Czechoslovakia had a very comprehensive law regarding restitution in kind, including that of nationalised enterprises, and therefore had difficulties in privatising. On the other hand, Hungary and Slovenia only awarded financial compensation to the former owners and their inheritors. Romania proceeded to restitution in kind only of the collectivised land, with some limitations, and to a limited extent, of the nationalised houses. For all the other state goods transition to private property was provided through privatisation. Another big problem of privatisation is to determine the methods to be used. With the exception of Hungary, all the states chose, among other things, for a voucher privatisation, out of social considerations, such bonds having a more or less important role to play in the privatisation process. Another method was to sell state owned companies through a diversity of means. In all these states, administration of the state capital before its turning into private property, and the organisation of the privatisation process were entrusted to state agencies created on purpose. (Treuhandanstalt in East Germany, the State Property Agency in Hungary, the National Privatisation Agency in Romania, etc.) Some states conceived of a different privatisation strategy for small trade or service agents, therefore in such states we talk about "small scale" and large scale" privatisation (e.g. Poland, the Check Republic, Slovakia, Hungary). The other states regulated a single privatisation procedure for all the state enterprises.