Colloquium 1995 Summary of Discussions

Panel III Privatisation and Industrial Restructuring Inherited Burdens Investment Crime, Fraud and Corruption Quality of Management Underestimation of Company Values Budgetary Interests During this discussion the main focus was on the identification of the major problems facing Cooperation Partner countries during their privatisation and restructuring process. The numerous points raised by the participants highlighted the complexity and diversity of problems occurring during this important step of economic reform. All problems seem to be, in one way or the other, linked to each other, which made it even harder to concentrate on the most important issues. Inherited Burdens Many speakers mentioned this problem. In some extremely severe cases, such as Albania, inherited obsolete structures and technologies date back to the Stalin period. Whereas technology progressed in other CEE countries from 1960 to 1990, no development could be noticed in Albania. Inherited foreign debts also constitute a huge burden for privatised companies. In some countries, the governments and commercial banks just do not have the means to provide necessary financial means needed for efficient restructuring. Institutional changes also prove to be problematic, as inherited structures, strengthened through almost 50 years of communism, are not easy to dismantle. Speakers made clear that the current process is unprecedented, and therefore no unified rules exist on the modalities of privatisation. Different situations in the various countries make it even difficult to draw comparisons between one state and the other. Successful policies implemented by one government might be inadequate for others. It was also pointed out that authorities have major difficulties finding a just and efficient way to deal with restitution of property, with claims that sometimes date back to before the Second World War. Investment All participants agreed that lack of investment, foreign and national, and financial resources was one of, if not the major obstacles to successful privatisation. In some cases, such as Albania, this was due to overall instability and the fear of a spill-over of the conflict in the neighbouring region. In many countries the stock exchange markets, as well as transaction facilities and capital markets, are still in a poor state. Though slowly developing this still makes it very difficult and uncertain for foreign investors to invest in portfolios in the emerging markets. Despite this sceptical overall impression, successful examples of privatised companies were given, where comparatively fewer debts and innovative products attracted considerable investment. Positive results were also seen in joint ventures with foreign corporations. In Russia strategic investor activity did not change much or even deteriorated with the beginning of the second phase of privatisation. The recent proposal of some Russian commercial banks to give loans to the government in exchange for public company shares, in case the government cannot pay back these loans, was viewed as unlikely to have any positive impact, as most banks involved are owned by industrial companies, which invest their operational profits through the banks instead of paying the salaries of their employees. Crime, Fraud and Corruption Due to the lack of a centralised registration agency for property in the CIS and other CEE states, crime, fraud and corruption often interfere or even dominate in the privatisation process. Consensus between the major interest groups, that is the federal and local authorities, labour, foreign investors and organised crime was therefore believed to be indispensable. Only strict regulation would enable state authorities to effectively deal with this problem.

Quality of Management The quality of management was widely thought to be more important than any other factor for successful privatisation. This argument was underlined by the results of a study of Russian middle and large size privatised firms from different regions. Despite negative examples, foreign advisors and investors were reported to often be surprised by the abilities and skills of the new managers. The problem was rather lack of interest in change than the incapacity to adapt to the changes. Privatisation being often not much more than a symbolic act without real changes in leadership, the more decisive process of restructuring - in terms of efficiency, competitiveness and profitability - totally depends on the ability of the new management. As we can also observe in the West success greatly depends on the skill of the managers. In Russia, for example only 10 percent of the managers were replaced in the first phase of privatisation. Underestimation of Company Values Underevaluation of many former state companies is due to different reasons. Without elaborating on that question, participants cited not only the inherited lack of accounting measures, but also the sharp Rouble depreciation in relation to the dollar. In the example of Russia, this and other reasons led to a total value of all Russian enterprises of $50 billion. In comparison to the New Stock Exchange with a total market value of company shares of $3 trillion, this appears rather small and underestimated. Budgetary Interests The question was raised whether privatisation was just abused as a tool to equalise budget deficits. Speakers, though, denied these allegations for most of the states, saying that, as in the case of Slovakia, most direct sales were financed through loans. It is correct that some privatisation money is used to finance subsidies, but only in very few cases for the budget deficit.