PRIVATIZATION IN NACC COUNTRIES Defence Industry Experiences and Policies and Related Experiences in Other Fields COLLOQUIUM 1994 ********* COLLOQUE 1994 PRIVATISATION DANS LES PAYS DU CCNA Experiences et politiques des industries de defense et experiences comparables dans d'autres secteurs Colloquium 29-30 June, 1 July 1994 Brussels ---------------------------------------------------------- CONVERSION AND PRIVATIZATION IN THE CZECH REPUBLIC Radomir Sabela The political changes in Europe have led to substantial cutbacks in arms production. In the Czech Republic, the sheer size of the defence sector meant that the government had to run a massive conversion programme alongside its privatisation programme. The government set up a special fund in 1991 to make this conversion as painless as possible. Some companies quietly ceased their activities; others were retooled to produce consumer goods. Radomir Sabela reports on how his country has gone about transforming its swords into ploughshares. Radomir Sabela is the Deputy Minister for Industry and Construction in the Ministry of Industry and Trade of the Czech Republic. With the changes in the internal situation of Central and East European States and the reduction in European conventional weapons, a significant cut in military production, development and deliveries has occurred, even in the Czech republic. As a consequence of this process, conversion has become a crucial issue. The decline in armament production within the Czech republic industries profile, during the years of 1987 - 1992, is documented by the following table (billions of Czech crowns, in current prices): -------------------------------------------------------- | | 1987 |1988 |1989 |1990 |1991 |1992 | | Czech republic | - | - | - | - | - | - | | arms production | 11.5 |12.3 |10.5 | 7.5 | 4.5 | 2.4 | -------------------------------------------------------- Between 1989 and 1990 the problems related to unused armament capacities were solved by Federation State Budget allocations: - in 1989 - 68 millions of Kf, on the stocks cover, - in 1990 - 388 millions of Kf, onto 25 organisations profit. The State's response met the immediate problems, and in certain organisations were possible negative economic consequences prevented. However, this approach has been unsystematic. 1991 was a turning point for the State's role in armament industry conversion. Important measures were enacted to help the most affected organisations. A "Special Technology Extra Fund" was set up for the year 1991. Organizations with unusable stock or fixed assets were given assistance. And there was State Budget support for new civilian production projects. The Fund was designed to cover those armament productions with no guaranteed outlet ensured,such as those with a single-purpose nature, the conversion of which has a fixed feature (ammunition plants). Where this production output has not been exported during the following years it has been, gradually, purchased by the Czech republic Army. Companies with unusable stocks were allowed to liquidate up to 40 per cent of the price based basic assets. They have been compensated for the remaining 60 per cent from State Financial Assets. Where there was no investment credit, the unusable fixed assets were liquidated and depreciation was calculated according to the basic assets. Those with an unpaid credit were liquidated to meet the unsettled credit balance owed to the State, reduced by the liquidation yield. Support has been provided for 30 per cent of the Project machinery investments, for 100 per cent of interest on the credits for the Project machinery purchase, for a new product licence purchase, or for a new technology. Between 1991 and 1993, State Budget support amounted to about 510 millions of Kf, disbursed to 35 organisations for 60 projects. Those Projects may be described as follows: - Projects towards extending and improving existing Civilian Programs which had been, in addition to the arms manufacturing, part of the organisationÕs production profile. - Projects towards implementing new production programs designed for the home market gaps, or for export. - Projects towards the manufacturing of purchased products for final production assembling purposes. The above mentioned system of state assistance to the organisations affected by conversion has, without any doubt enabled some of them to launch new production Programs. Owing to the high number and variety of conversion projects, however, they have not produced marked structural changes in Czech industry. Conversion has been carried out during the transition towards the market economy and this is of crucial significance. In this connection an important role has been played by the Economic Reform Macroeconomic Frame set-up, particularly by the policy of currency stabilization and finance restrictions, prices liberalization, but, mainly, by the change in ownership relations - privatization. Privatization has been, of course, dealing even with the arms industry. Despite some considerations concerning the specific features of the armament industry, no special legal provisions have been made for them. They have been subject to all privatization legislation. Armament enterprises have been included in both privatization waves. Privatization ------------- In the starting year of 1989, the Net Product Breakdown was as follows: - Nationalized sector (State enterprises and cooperatives) - 97.4 per cent of Net Product, - Private sector (approx. 2 per cent of over-all assets) - 3.6 per cent of Net Product. Most organisations formerly under the authority of the Ministry for Industry and Trade were privatized within the framework of the so called ÒBig PrivatizationÓ during the course of two waves. The First Wave has been concluded, and the Second is still in progress. The procedure has comprised: - A privatization project (legal entity or individual) evaluation at the Founding Ministry level (in our case on the Ministry for Industry and Trade level), and - The decision on the National property and Privatization Ministry level, or by the Government. The National Property Fund has been established and authorized to administer the assets until the decision on its Privatization. The principal methods of privatization have been: - Public tender. - Direct sale. - Coupon privatization. - Assets free transfer on municipalities. - Auction. The Ministry for Industry and Trade has played a founding role in case of 1,712 enterprises and limited companies, of which 220 have been proposed for liquidation (as of December 31, 1993, 62 of them have been liquidated). In the privatization First and Second Wave, the assets have been included in the total value of 683.5 billions of Kf, of which 225 billions of KÄ went on the coupons (33 per cent); the number of subjects amounted to 1,335 and of Projects to 9,117. During December, 1993, State ownership still amounted to 32.1 per cent of the assets, while private property represented 67.9 per cent (of which the coupon method represented - 28.8 per cent and others - 39.1 per cent). The arms industry's key enterprises have been privatized, mostly into limited companies with a certain coupon privatization share (e.g. AERO Prague, Czech Armoury at Cesky Brod, Meopta at Prerov, Engineering works at Policka, Sellier and Bellot at Vlasim, Tesla Prague, Synthesia at Pardubice), one by a direct sale (Vlarske Engineering works at Slavicin), and one by public tender (Tesla at Pardubice). The State has preserved its influence in some of them by holding a certain share package, or through a "golden share" (e.g. Czech Armoury, Sellier and Bellot, Engineering works at Policka). Evaluating the privatisation of the arms industry, executed without exemption within the whole Czech Economy Transformation, has been up to now impossible. Regardless of the privatization method and of the preservation of State influence or not, there remain some organisations within the Czech Republic industrial base with interests in certain armaments production, wich are trying to suceed with their deliveries to the Czech Republic or other armies, even in co-operation with foreign partners. ---------------------------------------------------------- Copyright 1994 NATO All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic tape, mechanical, photocopying, recording or otherwise, without permission in writing from the copyright holders. Authorization may be requested for redistribution of the text on a non commercial base by research and educational services. Requests should be addressed to the Economics Directorate, NATO, via e-mail 'scheurweghs@hq.nato.int'. First edition 1994 ISBN 92-845-0079-6 This is the latest in a series bringing together papers presented at the NATO colloquia organised by the NATO Economics Directorate and Office of Information and Press on economic issues in the former USSR and Central and East European countries. For further information please write to the Director, Office of Information and Press, 1110 Brussels, Belgium. The articles contained in this volume represent the views of the authors and do not necessarily reflect the official opinion or policy of member governments or NATO.