Colloquium 1995 Panel III : Privatisation and Industrial Restructuring

Privatising the Slovak Economy: Legislative Framework and Development Anna Zatkalíková There was a lack of theoretical preparedness for the huge privatisation effort in post-socialist countries and Slovakia is no exception. In the beginning these processes were in many case implemented "campaign-style" as in the old days, says Anna Zatkalíková, from the Slovak Republic's National Council. Privatisation is seen as the key to helping the economy, and to cementing political reform in place. There is a spirited debate about how to privatise. The voucher method was popular at first, but the people, and successive governments, are ambivalent about it now. This approach spreads share ownership, but it also hinders the growth of strategic owners who can invest in their enterprise and bring about expansion. Other methods, such as management buy-outs, or selling shares to employees, are under consideration. The debate continues... Mrs. Zatkalíková is working at the Department of Information and Analysis of the National Council of the Slovak Republic, Bratislava.

Background of the Process of Privatisation Privatisation and restructuring of industry are the main pillars of economic transformation in the post-socialist countries, and an unprecedented process in Europe's economies in transformation. One of the greatest concerns is the minimal, in fact absence of, theoretical preparedness for this process. As a result of this, the process was in many cases implemented like a campaign - just as the important economic and political decisions were carried out in the former regime - backed by very little scientific theory or elaboration. The emphasis put on privatisation as a basic pillar of economic transition was based predominantly on economic goals. It was hoped that it would guarantee an increase in production and at the same time cause the entire economy to grow. In the former socialist countries, state-owned property had proved to be unproductive mainly as a result of the fact that it was not aimed at profit, and political and social goals had prevailed over economic aims. Management was not stimulated to attain profit and was not interested in lowering the costs of production. The biggest priority in choosing methods and forms of privatisation was the rapidity that might guarantee the change from state to private ownership in a relatively short time and simultaneously promote an increase in economic effectiveness. It would at the same time irreversibly fix the desired ongoing social-political changes in the country. The experiences of privatisation of state property in market economies are rather different from our own, primarily because of differences of scale. That is why they could be used as a model and exemplified only to a very limited extent. Besides the requirement for speed, one of the greatest obstacles in the choice of standard privatisation methods, was the non-existence of powerful domestic capital interested in the privatisation of larger enterprises. Other difficulties were an undeveloped banking system, an almost non-existent capital market and an absence of competition and relevant legislation. Hence the reason why the novel "coupon" (or voucher) method of privatisation was chosen in the former Czechoslovakia as the preferred method. This was an unprecedented experiment in the process of privatisation. This form of a "nation-wide lottery", as it was popularly called, succeeded in a short time to "denationalise" a great amount of state property. As for its character, besides economic goals, there were, without any doubt, certain social and political goals which were very important, especially before the crucial elections in 1992. Coupon privatisation is, and obviously will be, an object of various economic and political analyses for some time to come. As for its success in the privatisation and transition process, opinions are divided. Besides the speed of privatisation its supporters agree with its fairness in enabling the participation of all citizens without discrimination as to job or position. They can decide voluntarily how to manage their shares. The social aspect is stressed, as a compensation for low financial reward for work done in previous years. Critics and opponents of coupon privatisation state that the biggest shortcoming of this form is that it has not brought about the rise of so called "strategic" owners who are able to effectively manage former national property, invest in it and ensure its productivity. A great number of individual owners were created but most of these have not been able to recognise the value of their shares and cannot use them effectively. They are not able to orient themselves in the slowly developing capital market. As a rule these owners often try to get rid of their acquired shares very quickly, and below their value, thereby depressing the price of shares on the stock market. According to estimates in Slovakia about one-third of them already have sold their shares and no longer have any portion of the property. While coupon privatisation was the dominant privatisation form, and several enterprises were privatised entirely by the coupon method, the property remained ownerless, but under the control of management whose behaviour was not very different from that in the previous era. It is obvious that in the case of such property dispersal this is only a preliminary phase of privatisation, the denationalisation, which will continue by a gradual merging in the hands of an increasingly small number of owners who will begin to behave as understanding and skilled market operators. Such a process will continue more slowly than the proponents of this method of privatisation could have imagined. The position of investment privatisation funds needs an analysis at this stage. The funds could play the role of the strategic owners of privatised enterprise. The fact that they concentrate the shares of individual shareholders gives them the opportunity to launch a comparatively extensive portfolio. But the insufficient experience of managing investment funds, the obscurity of the entire process of privatisation and insufficient legislation causes the government to see the funds as suspect, and so to regulate and strictly limit their entrepreneurial opportunities. Obviously there is also a fear of the possibility that a small group of proprietors and fund managers, managing the affairs of a large number of investors, could gain a significant amount of both economic and political power.

Legislative Development and the Privatisation Process The need to transfer ownership of almost the entire state property required large-scale legislative measures, which started to be implemented at a federal level from 1990. The first Act which set up the conditions for the transfer of the state property to private persons was Act No 427/90, the so-called Small Privatisation Act, several times amended, followed by the widely discussed Act No 92/91, which legislatively set up the process of the so called Large Privatisation. One of the forms of privatisation and a difficult point of parliamentary decision-making at the time was the restitution of property, implemented in several rounds. The first stage - the so-called small restitution - was enabled by Act No 403/90 and was aimed at moderating the consequences of some property injustices; citizens could require the return of property nationalised without compensation in and after 1952. In 1991 Act 87/91 widened the scope of restitution also for larger property nationalised between 1948 and 1952. The privatisation process started to be implemented in 1991 - then in the same way as in the Czech Republic as it existed in Czechoslovakia. The privatisation process was divided into two phases - small - scale and large-scale privatisation. The small-scale privatisation began in February 1991 and was completed in the first half of 1993. The programme dealt with more than 9,500 enterprises, the majority of them belonging to the small business sector. From the five thousand restitution claims made, about 2.7 thousand were accepted. The remaining small enterprises were sold at public auction for more than 14 billion Crowns which the National Property Fund acquired. These sales only comprised fixed assets such as real estate and equipment. The sale was only permitted to Slovak citizens. The so-called large-scale privatisation started with the first wave of coupon privatisation in 1991. It was completed in 1993 when the Federation was already split. Though there were already some different opinions on the privatisation methods among Slovak economic leaders, the first wave was completed in the originally determined way in October 1993. It included 751 of 1,668 Slovakian state-owned enterprises with a total book value of about SK 176 billion - nearly $6 billion. After the reduction of nominal share capital by 31 billion, and transfer to equity reserves, some 80 billion was sold by coupon privatisation, 48 billion held by National Proper Fund, 10 billion sold by standard methods and the rest transferred to the restituees and the restitution investment fund. A special problem was posed by the re-privatisation of agriculture. From the very beginning, in 1990, owners' rights to the land were gradually re-introduced. Legislative, organisational and other measures were directed towards the reparation of existing shortcomings and eliminating their consequences. Legislative measures involved specifically the Act on regulation of land and other agricultural property ownership, the Act on land arrangements and Act on the register of real estate assessment. At present all these Acts are to be amended. The re-establishment of land ownership and its re-activation is based mainly on restitution of original legal relations, in establishing simplified methods in the proving of ownership and its registration in the register of real estate, in the establishment of a state information system on real estate and in the introduction of land arrangements. The biggest problem of the transition was in the proof of property and land ownership. This was caused by shortcomings in the evidence of ownership in the land register and also by uncertain inheritance provisions. The transition in agricultural cooperatives was performed in accordance with a special Act. In fact, by the end of 1992, 909 agricultural cooperatives had been transformed. Some 986 succeeding entities have subsequently applied for registration. The first wave of privatisation involved 269 state enterprises in the food and agriculture sector. Some 180 of this number belonged to the food industry and 43 to agricultural purchase enterprises. The transformation of cooperatives in the sense of the Act above-mentioned is now finished. We can judge from the transition process that many cooperatives followed the law only in a formal sense, without any real internal transition, and the transition in agriculture has not been a big success up to now.

The newly-transformed cooperatives, had, in fact, previously consisted of bodies without land ownership. They now own property shares from the transition, originating from their previous labour. A large part of property shares - about 41 percent - is owned by non-members of cooperatives. Members with land ownership comprise 37.8 percent and members with work participation only comprise 15.3 percent. An investigation performed by the Statistical Office of the Slovak Republic shows that of the whole amount of cultivated land, coops share nearly 3/4, state bodies share a fifth and the rest is shared by private enterprise. Most of the restitution process took place during 1991 and 1992. With reference to the data mentioned above, 132,692 ha of land were returned to 935,775 applicants. After the elections in 1992, the Slovak government modified the rapid strategy of the former federal government and decided to slow down the privatisation process. The government doubted the acceptability of coupon privatisation and began to search for other forms. It was motivated by the need to increase the transparency of privatisation, and tried to attain this aim by stressing standard privatisation methods. In the first half of 1993, the process of privatisation was almost halted. The government aimed at public auctions. Just before it lost the vote of confidence the second government of Vladimir Meciar approved a few score direct sales. In the era of the so-called big coalition formed by Premier Moravcík (March to December 1994) the government inclined again to a quick implementation of the second wave, with a stress on coupon privatisation. The government was preparing property to the value of nearly 100 billion Slovak Crowns for coupon privatisation, later lowered to 70 billion. But in the time at its disposal the government was not able to take more relevant steps as to its implementation, in spite of the fact that 3.5 million Slovak citizens expressed agreement with coupon privatisation by buying the coupon booklet and registering it. It is obvious that this government had no unified attitude towards the apportioning of privatisation methods or to the privatisation process as a whole. However, there is a paradoxical situation. In spite of the fact that the citizens have unambiguously manifested a positive attitude to coupon privatisation - the number of owners registered in the second wave exceeded those in the first wave by practically one million - in the elections which were held nearly simultaneously with the second wave of privatisation citizens voted for the parties which were critical towards voucher privatisation, and today they continue to neglect it. After the re-establishment of Meciar's government in December 1994, the government continued in its criticism of coupon privatisation and declared its support of standard methods - direct sale and public auction. However, in the government programme of December 1994, coupon privatisation was not rejected. It was stated to be a fundamental method and it was promised quick implementation dependent on the preparedness of enterprise privatisation projects. In the Memorandum of Economic Policy of the government (April 1995) addressed to the IMF, the government manifested its willingness to speed up the transition process. The main stress is on direct sale, sale on the capital market or on public auction, and also on the second wave of coupon privatisation. The aim was to sell the major share of every enterprise to "strategic" investors. According to this document, coupon privatisation had to have company shares valued at roughly 50 billion Slovak Crowns. The whole action, commencing with the pre-run, began on 1 July, and will finish in June 1996. Privatisation by standard methods was planned to finish at the end of September 1995. These days, however, the government announced a modification of the governmental privatisation strategy. The government intends to implement privatisation by means of standard methods and employees' shares and particularly through management ownership of the enterprises. The government is of the opinion that management has the best pre-conditions for restructuring enterprises and accelerating their development. The role of workers' participation in privatised enterprise is also being stressed. The government wants, therefore, to give management and workers the chance to privatise business by paying in installments, from the profit of the enterprise. A list of so-called strategic enterprises has been approved by the government. These enterprises should stay in the hands of government for the time being and will not be privatised for reasons of strategic importance for the country's economy. The full abolition of coupon privatisation is a very important announcement. However, there is the promise of compensation by state bonds for the nominal value of 10,000 SK, for those registered for the second wave of privatisation. There are some indications as to how these bonds are to be used - to buy shares on the stock market, for the purchase of appartments, etc. But because this matter is still quite new and unofficial, it is very difficult to analyse.

As a conclusion here are some data on the economic performance of the Slovak Republic in 1994: GDP growth reached 4.8 percent. Inflation abated to 11.7 percent by December 1994. Unemployment had stabilised at 14.4 percent (and it was down to 13.3 percent in May 1995). Exchange rate stability has been maintained, the Slovak koruna is convertible for current account purposes. The proportion as a percentage of private sector: 1992 1993 1994 GDP 32.4 39.0 58.2 Industrial production 11.0 20.5 56.3 Construction industry 35.0 58.2 79.3 Retail 73.1 81.5 89.4 Transport 39.0 51.7 57.3