HISTORY DEVELOPMENT PRIVATIZATION PROCESS Introduction n At the beginning of the 1990’s the Czechoslovak economic structure was unitary q Almost all property existed in the form of state ownership n Suitable for central planners n Unsuitable for market oriented economy q Till the end of 1994 80 % of the state property was transferred in private ownership n The process of the property transformation ran in several ways q Re-privatization q Small privatization q Large privatization q Privatization after 1995 Structure of privatization process Restitution n It is process of confiscate property reversion to former owners. n In the Czechoslovakia several disputes against restitutions q Several strong pressure groups against restitutions n Advocate of former political regime n Managers of companies that were a subject of restitution process n Economists q Slow down and postpone of privatization process q Doubts about social acceptability of property reversion q Very strong public support of restitution process Problems with restitution n Date of setting restitution claims n If restitution in the forms q Money compensation q Physical compensation n How evaluate the property n Identification of former owners with claims for restitution Restitutions n In Czechoslovakia was decided that during the restitution process there q will be returned the property confiscated after communist coup in Feb 1948 q Will be returned the property only of Czechoslovakia citizens (Czechoslovak citizens in 1948) and q In specific cases will be returned the property of the Church q Restitution did not concern n Corporations, associations, clubs and foreigners Restitutions n Whole restitution process started at the end of 1990 and continues till now n Date about total value of restituted property are different q According to Official Report of the Czech government total value of restituted property was from 70 to 130 billion CZK. q The main source of restitutions financing was The Restitution Privatization Fund n Concentrated of financial resources from the privatization q In first phase n Restitution of confiscated property from 1955-1959 n 70 000 civil buildings and office buildings n Later extended in farmlands, woods, etc. Returned 50 % of state ownership of farmlands and woods n Czechoslovakia had the second largest re-privatization program of any of the former socialist European countries, with the exception of the former East Germany Restitutions n Beside the physical restitution there existed also financial compensation if the physical restitution was impossible n Main financial resources came from Restitution Privatization Fund q In this fund there was concentrated financial resources from privatization process – 3 % of company stocks designed for privatization n Owners of confiscated property got stocks from this fund in the case if they could not get back their property physically and besides they got 30.000 CSK in cash. n Restitution had the significant impact in some branches q Retail sale q About 15 % of population profited from the restitution OVERVIEW OF PRIVATIZATION PROGRAMS SMALL PRIVATIZATION q Small privatization process was launched in January 1991 q The background was the sale of small units in public auctions q There was no limit for the value of property designed in small privatization q The largest unit Stama Bzenec in the price 305 million CSK q It began with an amount of 120 thousand restaurants, shops, and small business, designated for selling q Public auctions were directed by local privatization q Listed privatized units at least 30 days before the auction q If there was no interest about privatized business was applied so called the Dutch auction q Decreasing in the initial price from the extreme high price to lower q Decreasing about 50% in 1^st and about 20% in 2^nd auction round n In the first round of the small privatization was opened only for Czechoslovak citizens OVERVIEW OF PRIVATIZATION PROGRAMS SMALL PRIVATIZATION n Unsold firms from the first round were re-auctioned later in the second round, in which foreign participation was allowed to participate n The first auction took place in 1991 and last in 1993 q The most auctions took place in 1991 and 1992 n By the end of the year over 22.000 enterprises had been sold for 30 billion CSK n The total value of call price was 21 billion CSK n It means that total value of earnings were about 50% higher than total value of initial call price. n Those enterprises that remained unsold had to be moved into the large privatization program n Earnings from the auctions were deposited in the National Property Fund National Property Fund (NPF) n One of the important transformational institution n It was established in 1991 and its initial function was execution of privatization decision of the government. n All state owned companies designed in privatization were transferred under control of National Property Fund. n It executed privatization and got in earnings. n Fund did not take care of transferred property. q It was criticized because company in control of NPF was paralyzed and not able to decide about long-term investment or restructuralization. q On the other hand NPF did not hampered cost wasting of state owned company management and forbidden dividing of companies. National Property Fund n Earnings from privatization of state property did not pass in state budget but became property of NPF and was used as settlements for several actions q Ecological accident costs q Discharge from debts of privatized companies q Capital support of companies designed for privatization q Transformation and stabilization of banking sectors q As a resources for the support of social, health and retain insurance funds. Problems of small privatization n 75 % buildings were auctioned without property right to building it means that the subject of privatization was only occupational lease for 2 and later for 5 years n If the subject of privatization was some public utility business this business had to be provided for 10 years (right of user) n The largest problem was related with financing of small privatization q The most of households disposed only by limited number of savings and all privatization was financing by debts n The National Property Fund, banks q There were established roots for the future problems in banking sector. n In 1990 total value of property designed for privatization was 1400 billion CSK but total value of households savings and cash was only 323 billion CSK. Advantages of small privatization n Established small business sector n At the end of 1991 small private companies provided 41 % of all retail sales. n But small privatization was financed with debts and thus determined future development in companies n A lot of companies had problems with debt settlements q Were not able to get next credits and had to used supplier credit that were not able to settle. Large privatization n Form of the quick privatization q No will of the government to restructure companies designed for the large privatization q The task for new owners n The aim q Growing in the effectiveness of the Czech economy as a whole q Brake up monopoly structures in the market n Brake up monopoly structures in the market Dispute about pace of privatization n Reasons for quick privatization q Negative experience in Hungary – privatization of state-ownership in hands of former management q Afraid of “pre-privatization” n Company existed without management till finishing of privatization process and was getting worthless n tunneling of company by management q Cheap selling of company assets in the hands of management q This occurred in every transformation economies because state failed as the owner and supervisor. Privatization projects n Specific of the Czechoslovakia privatization was q Competition between submitter of privatization projects q In Czechoslovakia anybody had a right to submit privatization project for property designed for privatization programme n 5 projects for one company in average, some companies 20-30 competitive project, maximum Lacrum Brno – 126 projects q Submitter could use several privatization methods or combination of methods Privatization projects n In July 1991 was introduced the list of companies designed for the first wave of privatization n Management of companies submitted privatization project till Nov 1991 n Competition projects could be submitted till February 1992 n Management project had to introduces project for company as a whole n Competitive projects could introduce plans only for specific part of company Privatization projects n Then particular Ministry was decided about projects and suggested the best one n Final decision was done by Ministry of National Property q Only in specific cases by government (only 5 % of all privatization projects) n After approval of privatization project company property was transferred in NPF that q Carried out privatization q Control un-sold property q Get in earnings Privatization projects n In reality almost all projects were submitted by former company managers or its employees n Management applied several methods q To buy whole company q To get a company share q To get the most profitable parts of a company q To delay privatization and use an absence of the shareholder’s control Small Privatization- n The privatization process reflected the government effort to privatize to Czech citizens q Called as the “Czech Way” n It reflects the moods of the Czech representattives q Against the sale of the „family silver“ q Aginst „German collonisation“ n Barriers over the flowing of foreign capital q In small privatization n Attendance after the lack of interest the Czech citizens q Privatization proposal submited with auditor’s report q Asset pricing based on market value n Czech citizens – book value if BV > MV then MV Privatization methods n Voucher privatization n Public auction q Won the highest offer n Public tender q Multi-criterion decision q Not only price n Direct selling without public tender q Approved by government q Higher probability of corruption n Transformation of a company in joint-stock company and then sale of company stocks q In stock exchange, voucher privatization or OTC n Free transfer of state property in municipal units, funds of social insurance, etc. q Public buildings, kindergartens, etc n Temporary transfer in NPF Privatization methods n The most of companies transferred from state-ownership to joint stock company n Then was applied combination of privatization methods q Part of stock was sold in voucher privatization q Rest was sold by auctions or by other methods n E.g. Jitex Pisek q 69 % of asset – voucher privatization q 10 % of asset – direct sale q 5 % of asset - employee shares q The rest The Restitution Fund n Method of direct selling was used in the case of large state companies q E.g. car company - Skoda Small Privatization n In the first wave q 198 billion – 42 % voucher privatization q 10 billion – transfer to municipals q 40 billion – auctions, tenders and direct sale Voucher Privatization n Dominant privatization method was voucher privatization q About 50 % of all joint stock companies were offered for vouchers n Authors Dusan Triska, Tomas Jezek, Vaclav Klaus n The aim of voucher privatization was quick transfer of property rights into private hands n Other aims q Establishment of positive relation of Czech citizens to market economy q Quick transfer of property and limitation of pre-privatization tunneling q Equitably of private property Mechanism of voucher privatization n Voucher privatization was proceeding in several phases q First phase n Registration of Investment Privatization Funds q Second phase n Registration of privatization participants n Voucher privatization was open for all Czechoslovak citizens 18 years old n In price of 1035 CSK got voucher booklets with 1000 points that were divided in 10 lots with 100 points q Third phase n List of companies designed for voucher privatization with basic information about a company (revenues, number of employees, number of share, value of basic capital, existence of a golden share etc.) n Golden share – the possibility of the government intervene in company business activitis although the government is not majority shareholder q Fourth phase n Zero round q Voucher participants could invest voucher points via Investment Privatization Fund n Voucher participants invested their voucher points on their own q Fifth phase n Several rounds of voucher privatization Mechanism of voucher privatization n Fifth phase q Announcement of number of shares designed for particular voucher round sale n Announcement of price of this shares § How many cost one share, how many points § In first round all shares had same price 3 shares cost 100 voucher points § In next rounds the price determined by previous rounds n Voucher participants and investment privatization funds ordered shares. Investment funds could hold at most 20 % of company n This orders was collected and processed in The Center for Voucher Privatization n It could lead to several situations q Supply and demand were same or supply was higher then demand § All orders were executed q Demand was higher than supply but not more than about 25 % § Demand of privatization funds was limited to balance demand and supply q Demand was significantly higher than supply § The orders were cancelled and investors got back their voucher points q All companies that were not sold moved in next privatization round with new price of shares. n In next round price was determined by level of demand and supply in previous round n Next privatization round started 1^st wave n Started in Nov 1991 finished in Jan 1993 n Participate 5,95 million of Czech citizens (from 7,4 million available) n There were offered 1491 joint stock companies n 72 % voucher booklets were investment via investment funds n Total revenues 6 billion CSK 2^nd Wave n Started in September 1993 n Only in the Czech Republic n Participate 6,169 million of Czech citizens n 63,5 % voucher booklets were investment via investment funds q Bad experiences with Investment Funds from 1^st wave n Delays of shares transfer from Investment Funds to investors q Total revenues 4,4 billion CSK Privatization after 1995 n Privatization process was continuing after 1995 n But the pace of privatization was decreasing because a lot of property was transferred in private sector and the public support of privatization was decreasing n The most usage privatization method was direct sale. q Government retain majority share in banks, telecommunications, gas and electricity companies q The role of foreign capital was increasing n Revival of privatization with left oriented government of Milos Zeman q Privatization of banks Total value of property n Book value of property designed for privatization and transferred q 780 billion CSK n Small privatization – 45 billion CSK n Free transfer in voucher privatization – 333 billion CSK n Free transfer in municipal units – 121 billion CSK n Restitution – 25 billion CSK n Privatized by standard privatization method– 121 billion CSK Thank you for your attention