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 -------------------------------------------------------- THE POLICY FOR PRIVATIZATION AND RESTRUCTURING OF THE ARMAMENTS INDUSTRY IN ROMANIA Mircea Cosea "Social engineering", not industrial re-engineering, is the first and most important step toward successful defence privatization, says Professor Mircea Cosea. In September 1994, the Romanian government launched its fast- track privatization programme of some 3000 state-owned enterprises, but none of these were in the state armements sector. Because defence conversion is a very sensitive demographic, labour-related and political issue, careful social planning is required to ensure a smooth and successful transition. Romania begins its defence conversion process in mid-1995. Professor Mircea Cosea is Deputy Prime Minister of Romania and President of the Council for Coordination Strategy and Economic Reforms. Analysts have the tendency to grant Romania a special place within the process of transition and reform which is carried out in Central and Eastern Europe. In many cases it is considered that Romania has a certain delay as compared to to its neighbours Hungary, Poland or the Czech Republic; due to the fact that it has chosen a type of gradual reform which, in their opinion, has resulted in a much too slow staging of some basic elements of transition such as privatisation and restructuring. Irrespective of the more or less accepted schemes of the theories of shock therapy, one must highlight the fact that at the beginning of 1990 Romania embarked upon its way towards reform in totally different conditions, as compared to all the other countries in transition. These special conditions resulted in a great lag for Romania, as compared to the other countries. The starting conditions for transition are due either to the heritage of the former communist regime or the special manner through which Romania has done away with it. Therefore, one must be aware that the communist regime was, until its last moments, totally different from those that the neighbouring countries were stil having. It was only in Romania where a totalitarism, unipersonal, despotic and absurd communist regime still existed, which was trying to establish a society meant to be a copy of the communism of North Korea. The totalitarism based on the principle of excessive centralism and on the political and cultural insulation of the country was the reason for which at that time, Romania was not prepared to confront transition, both from the point of view of the mentalities and the managerial behaviour. As a matter of fact, in Romania, until the very last day of the regime of Ceausescu there had been no concern to prepare for a change, the conceptual immobility of the communist leadership forced the entire population to live not only in economic autarchy, but also in educational autarchy. Another reason which contributed to Romania's initial lag in embarking upon transition was the fact that the removal of the communism regime was made in a violent manner, not by means of "velvet revolution",as in the other countries. The violent revolution meant not only human victims but also the disintegration, in a few days only, of the whole political, economic and administrative system, of the hierarchal structures and of the balance of values which, altogether, led to a total political and social void. That is why Romania started to move towards transition with a considerable lag, over two years being necessary for the settling and stabilising of society and economy within a structure able to be reformed. Under these circumstances the macrostabilisation effect of the reform were felt in early 1993, when the subsidies were completely eliminated, the Value Added Tax was introduced and a financial and monetary policy was introduced, which aimed at cutting off inflation and at achieving a positive economic trend. In the first half of 1994 Romania succeeded in signing a standby agreement with the International Monetary Fund and the World Bank. The exchange rate was stabilised and a serious reduction of inflation was achieved. The privatization process cannot be considered separately from the general economic and social context. That is why the dynamism and size of this process have followed closely the general evolution of the transition. The process of privatising the companies constituted by enforcement of Law 15/1990 began in 1991 with the promulgation of Law 58. The State Ownership Fund and five Private Ownership Funds have thus been set up. All the citizens of Romania - being entitled to - received ownership certificates representing, in fact, titles on 30% of the authorised capital of the companies administered by the Private Ownership Funds. The rest, of 70%, has been turned over to the State Ownership Fund. The major goal of the privatisation process is the actual transfer of property, capable of generating a responsible behaviour in the new shareholders and having, as a result, efficient, competitive and more dynamic economic units with an increased capacity of adjustment to domestic and international competition. The actual development of the reform process has up to now emphasized a persistence, if not a deepening of the economic imbalances, should they be with respect to raw materials, finance and currency, labour market, etc. These have been in themselves a result of the changes occurring in the structure of domestic consumption as well as in that of the export market, in most unfavourable conditions, largely due to recession and to protectionist policies. In this wide framework, the complex and time-consuming processes of privatisation and restructuring have been, and continue to be, influenced by a series of constraining elements, such as: * the financial blockage due to the fact that unprofitable companies are still maintained in the economic circuit, and due to some monopolistic tendencies; * the absence of domestic capital for investments, both from the point of view of its volume and of its qualitative structure - institutional investors, financial markets; * the absence of an organised market of capital (Stock Exchange), to have a multiple role, the educational and informational sides included; * the state budget deficit which does not allow the financial support of the restructuring and privatisation process; * the interest of investors, the foreign ones in particular, in buying shares from the state-owned companies had been relatively low, as a result of their perception regarding the lack of political and economic stability in Romania after December 1989; * a certain policy of restrictive crediting, with negative impact, under the circumstances of the macro economic stabilisation and of a still insufficient reorientation of the banking activity; * the privatisation process has been marked by the lack of development/restructuring studies on the respective domains/sub-domains of activity to be elaborated by ministries and departments. In their absence, there was no clear image - both at the macro- and micro-economic levels - of the domains considered strategic for privatisation, from the viewpoint of dimensions and perspectives - to be attractive for the foreign investors; * obtaining of property titles on the land, an essential condition for privatising a company, is a relatively slow process, all along the chain of approvals. Nevertheless, as the organisational and preparation process of privatisation,in all its aspects have been achieved, the process itself has been started. in the first trimester of 1993, and up to the end of that year 270 companies were privatised (out of which 250 are small companies), their authorised capital being over 64 billion lei and having 76,000 employees. Up to now, 450 small companies (out of a total of 3,100 small companies) of a total of 6,200 commercial companies, 36 (out of 2,500) medium-sized companies and 3 (out of 700) large companies have been privatised. Consequently, about 8% of the commercial companies have been privatised, with a capital which represents 3% of the total capital; by carrying out the Privatisation Programme approved for 1994, the social capital of the privatised companies will not exceed 10% - although the number of the privatised companies may rise to 38%. Due to the fact that the privatisation process has been carried out much too slowly so far, the Government of Romania has decided to embark upon a rapid mass privatisation plan, starting from September 1994, which includes over 3,000 enterprises. The industry of armament is not included in the plan for mass privatisation, none of the 3,000 enterprises being armament producers or a producer of materials which could be considered as armament (we are referring here strictly to the production for defence purposes without including the enterprises from the civilian industry which are able to supply goods to be used in equipping the army). The privatisation of the industry of armament in Romania is a process which is still in the field of action of some restrictive factors, such as: a. The fact that several persons in the leading circles of the industry of armament think that privatisation of this industry would be a threat to national security and to the confidentiality which is specific to the activities of endowing and supplying of the army. b. The present situation of the armament industry is characterised by a severe decrease in its production and a partial use of its productive resources, which are due to the loss of certain traditional markets (the former members of the Council for Mutual Economic Advantage or Countries which are under embargo) and also to an important decrease in the internal demand. c. The reduced span of the programmes for reconverting and restructuring the military production. d. The absence of foreign capital and a certain lack of interest of the foreign investors for the privatisation of any military production units. e. Difficulties in finding foreign partners in order to cooperate with them in producing military technology or equipment. f. The existence of an extremely well trained labour force, which is also extremely specialised, which leads to great difficulties in restructuring or in re-orientating the labour force. g. The existence of such a type of management at the level of the productive units which combines - in most cases - civilian staff and military staff, which calls for management methods and techniques of a military type. Although all the above-mentioned elements result in a difficult privatisation process, the Government intends to pay special attention to this industrial sector, starting from the idea that the privatisation of the armament industry is necessary both because of the necessity to make it efficient and to the necessity to consolidate macroeconomic stability. It has been agreed that the first elements of privatisation of the armament industry are to be included in the second stage of the mass privatisation programme, which will start in the second half of 1995. In order to prepare for this moment, the Government has started restructuring activities, trying to adapt armament production to the actual demand of the market. Consequently, starting from January 1, 1994, the Inter-Ministerial Council for the restructuring of the defence industry has already undertaken feasibility studies and has adopted a short- and medium-term strategy for the restructuring and the reorientation towards an activity of turning a military industry into a civilian one. Romania considers the Partnership for Peace as highly important. Romania was the first country to sign the partnership agreement, therefore it hopes that the economic component of this partnership will improve. It is in this way that Romania understands the activity of privatisation and restructuring the defence industry. At present Romania needs the assistance of the countries which are members of NATO in order to find some economic solutions for the military system. Therefore, the economic component of the partnership for peace could be sensed, at the level of the needs of Romania, at least by the following issues: a. The countries members of NATO could provide Romania with technical and financial assistance for the speeding-up of the restructuring process and of the reconversion of the defence industry. b. The countries members of NATO could produce, in co-operation with defence Romania industry some equipment or elements of military technique. c. Romania might be appointed as the exclusive centre for producing certain equipments or elements of military technique. d. The countries members of NATO might provide technical assistance for elaborating some reconversion programmes for the labour force used in the military industries. ---------------------------------------------------------- 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.