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 ---------------------------------------------------------- PRIVATIZATION GERMAN STYLE A LOOK INSIDE THE PRACTICES AND POLICIES OF THE TREUHANDANSTALT Wolfgang Vehse Privatization is much more than selling companies to the highest bidder, says Wolfgang Vehse. Before choosing the ideal buyers for former-East German state-owned companies, Germany's Treuhandanstalt evaluates potential buyers following several criteria: the amount and targets of planned investment; ability to provide job guarantees; environmental clean-up policy; market analysis; turnaround strategy; future product strategy, and purchase price. After three years of existence and some 35,000 privatizations, the Treuhand's objectives are nearing completion. Dr. Wolfgang Vehse is Director of the Treuhandanstalt, the German organisation responsible for the privatization of East Germany's state-owned enterprises. The economic - and of course political - changes in central and eastern Europe present a new challenge to all of us and will form the central focus of our future work. In pursuing this task, I would like to contribute my experiences with the political and economic transformations in East Germany that I have gained during the past three years. We have noticed in Berlin that the work of the Treuhandanstalt is receiving increasing international recognition. Interest in how the Treuhand operates, what it has achieved so far and whether its experience can be applied to the reform process in Eastern Europe is growing. With this in mind, here are some basic comments about the objectives and the experiences of the Treuhand. The Treuhandanstalt's legal mandate ----------------------------------- * Transform the command economy of the former German Democratic Republic into a private market economy based on private enterprise in harmony with the tenets of a socially - oriented free market economy. * Refashion - through privatization - former state-owned enterprises into companies competitive on the international market. * Remove such companies that could not make the transition from command to private economy from the market. * Ensure that as many jobs as possible were preserved and/or created. These tasks cannot be approached without the appropriate preparation. The foundations must first be laid. The Parliament and the Government of the Federal Republic of Germany needed to create the necessary preconditions to tackle a task of which the scope and inherent problems could not be preconceived and had never before been confronted. * The Treuhand was made the sole owner of all former state-owned companies which were transformed into joint-stock companies. The Treuhand holds all shares of these companies. It is important to note that the firms are not yet privatized. This helped us avoid an ideological conflict by ensuring that the Treuhand was selling property that it owned and NOT selling the "property of the people" (Volksvermogen). * The Treuhandanstalt as a more or less independent agency - and not the political system - was given by legal mandate the responsibility for the privatization, restructuring and turnaround of the East German economy. The agency functions like a private enterprise - for most decisions, business considerations take precedence. Political compromises, which can be meaningful in many cases but were not desirable in the Treuhand's work, took a back seat in decisions. * Governmental credits and guarantees totalling 30 Billion DM a year provide a comprehensive basis for financing the privatization, restructuring, and turn-around as well as the closure of companies. * The decision to improve the transportation and communication networks was made early in the process and is well underway. * The Western German legal system was applied to the new German states. Administrative organs and the justice system of East Germany received a face-lift. They were improved step-by-step with the help of West German personnel. * Macro-economic issues (regional and structural policies, for example are decided by the federal and state governments. Issues that overlap with the work of the Treuhand are discussed in joint committees. The political responsibilities between the Treuhand and the government are not allowed to become blurred. * The responsibilities in the area of social policy resulting from the privatization process were settled as early as Spring 1991 in an agreement reached among the federal government, state governments, employer associations, trade unions, and the Treuhand. The Solidarity Pact of 1993 confirms this commitment. * The personnel necessary to tackle the tasks of the Treuhand came from both the political and economic sectors. Four thousand specialists with experience in business, law, technical matters and administration work in the central Treuhand agency as well as fifteen decentralized offices. Eastern Germans comprise two-thirds of the agency's workforce. Employees from many different countries provide international expertise. Members of the executive boards and the supervisory boards as well as the managers of Treuhand companies provide additional management experience in both national and international business. Independent but controlled Operation ------------------------------------ The Treuhand may operate independently but it does not operate without controls: * The Treuhand's Supervisory Board- which has more representatives of the national and international business communities than politicians - oversees general operations. * Germany's Minister of Finance oversees the legal and substantive work of the agency. * The parliament's "Treuhand Committee" is the control instrument of the Parliament. * The Federal Audit Office oversees the budget. * The Federal Cartel Office as well as the European Community keep track of merger and competition issues. The parliament (and not the federal government or the Treuhand) has determined that the economic perspectives of the company and the financial and social security of the employees of the company should be the deciding factors in the privatization of a company. The fulfilment of these conditions cannot be determined merely from the (possibly highest) purchase price. A reliable prognosis is possible only with a detailed privatization and turnaround concept which potential investors must present at the beginning of the negotiations with the Treuhand. In that concept, investors must deal with planned investment, job guarantees, a future product line, market analysis, cost and revenue calculations, and the financing of environmental clean-up, among other things. These considerations are the main reason why the purchase price is only one of many deciding factors. Investment and job guarantees are as important - and sometimes even more important. We aim for a complete privatization and turn-around of a company by the investor. We do not deal in coupons or vouchers. The Treuhand after three years of operation ------------------------------------------- The Treuhand is now approaching the end of its operational work. We assume that - as long as the economy does not decline any further - our operations will cease at the end of 1994. By that time we will have found solutions for all companies owned by the Treuhand. In October 1990 the Treuhand began with 22,000 companies in the service sector (retail, wholesale, restaurants, hotels, travel agencies, pharmacies, bookstores, movie theaters, etc.) and approximately 8,500 industrial companies (often in the form of conglomerates). We knew nothing about these companies. After three years our results are: * All service sector industries have been privatized. More than 70% of these companies went into the hands of eastern Germans. * By breaking up the industrial conglomerates, the original 8,500 industries became 13,640 companies. Of those 13,640 we have privatized 14,079 companies and/or divisions. The majority of these were sold to small and medium-sized investors as small and medium-sized companies. The Treuhand has realised over 2,65,200 Management-Buy-Outs/Management Buy-Ins. * In 1992 the Treuhand privatized 500 to 600 companies or company divisions a month at a rate of 25 to 30 privatizations a day. * 43,200 Hectares of farmland, 6,660 Hectares of forest, 31,800 real estate properties. * 198.2 Billion DM in investment guarantees from investors, 1.5 Million guaranteed jobs, 52.7 Billion DM in privatization revenues. * 190 companies are still available for privatization. But we have not had only positive experiences. The Treuhandanstalt, politicians, West German industry, economics institutes as well as intelligence agencies had overestimated the value, the productivity and the efficiency of the East German economy and, as a result, underestimated the task lying before us. Some typical estimates : Modrow - the last communist Minister President of the former GDR - in February 1990: 1.3 trillion DM Rohwedder - the first President of the THA - at the end of October 1990 in Vienna: 600 billion DM The total opening balance of Treuhand companies on July 1, 1990 - from the standpoint of January 1993 - was minus 270 billion DM. The result of this experience is the recognition that the process of transformation from a decimated command economy to a free market economy with the privatization, turn-around and closure of companies is a time-consuming and very expensive undertaking. We have spent 150 billion DM alone on turning-around companies. At this point we foresee a final balance of minus 275 billion DM. Specific aspects of Germany privatization ----------------------------------------- There are special aspects to the lengthy and expensive transformation of the economic system in Germany. Namely, that the Treuhand must privatize in a competitive, open, international market. On the one hand, this presents the eastern German economy with a large drawback in comparison to other Eastern European economies. On the other hand, it is also an advantage because of the resultant pressure to modernize and to increase productivity. As a result of economic and monetary union on July 1, 1990, East German companies were confronted with international competition from one day to the next. The companies were not prepared for such a change in terms of their operational and cost structure or their products. They no longer received any price subsidies, any help from advantageous exchange rates, nor benefits from artificially low wages; they received no protection from imports and no special export promotion; and for political reasons were not granted any structural adjustment measures in order to ease the transition into the Common Market, as Great Britain, Denmark, Spain, Greece and Portugal had previously received. The East German economy was left without any markets. Even its domestic market had disappeared. Eastern European markets provided no hope and western markets were beyond reach. Even though it recognized the problem, the Treuhand could not and cannot help. We cannot provide our companies with markets. We can only - at great expense - help them develop new products and raise productivity in order to improve their chances of privatization. The quickest route to markets is through a private investor. This is an additional reason for rapid privatization. The transformation of an unproductive centrally-planned economy to an economy based on private enterprise and determined by the laws of the free market unavoidably results in temporary upheavals in the workforce structure. Many people have lost jobs they held for years for several reasons: * Unprofitable companies not capable of being turned-around had to be closed (we have had to shut down 3,270 companies up to now, while managing to preserve some parts of the companies through creative solutions). * Companies received better technical equipment, a more efficient infrastructure and a better trained workforce. Some workers became "redundant employees" and were no longer needed. * It will take some time before new business structures (industries, services handicraft) can absorb the temporarily unemployed workers. This has deeply affected the well-trained, highly involved and motivated worker in eastern German and has produced some sceptics of the free market. We had to recognize that our success was more dependent on "management-transfer than we had first realized. It is easier to get financial assistance than to find internationally recognized managers experienced in turning around companies to work for a short while in eastern Germany. Privatization in eastern Germany cannot be a solely German endeavor. We are interested in international investors, because we believe that they bring not only know-how and good-will-transfer but also lead to a more rapid integration of our companies into the world market. One must make an effort to attract international investors. There can be no categorical reservations against foreign investment. Foreigners need and expect equal opportunities in relation to domestic investors. This means receiving comprehensive information, attentive care at home as well as in Germany, attractive incentives and our willingness to allow them 100%-ownership in the company and permanent ownership of land. The high level of participation by international investors in the restructuring process has validated our efforts. We have sold 840 companies to international investors, who have, for their part, provided over 10% of all investment and job guarantees. The Treuhand intends to share its impressions and experiences. We know that because of structural differences the privatization of the East German economy cannot be directly compared with the privatization efforts of the central and eastern European states. Our privatization philosophy cannot be simply transferred; our "management-transfer" and transfer of capital cannot be repeatedly copied. But the problems that we were, and still are, confronted with also exist in these countries. When our expertise is requested, we are prepared to share it. A successful transformation of a command economy into a market economy based on private enterprises cannot, however, be forced. Such a transformation necessitates the same basic conditions in every country: * A stable political system. * A common fundamental acceptance of the economic policy to be followed. * A proven and uncomplicated legal system. * Competent and loyal administrations in the states and communities. * An efficient and flexible social welfare system that - within a free market system - can absorb and moderate structural unemployment. * A well-organized and trustworthy financial system and currency. This framework and these conditions, which exist in Germany today, were a major reason for our successes in the privatization process. We must work together in Central and Eastern Europe to ensure that these conditions are established as soon as possible. ---------------------------------------------------------- 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.