History development HISTORY DEVELOPMENT PRIVATIZATION PROCESS Introduction nAt the beginning of the 1990’s the Czechoslovak economic structure was unitary qAlmost all property existed in the form of state ownership nSuitable for central planners nUnsuitable for market oriented economy qTill the end of 1994 80 % of the state property was transferred in private ownership Organizační diagram Structure of privatization process Restitution since 1990 Small privatization 1991 - 1993 Large privatization 1st wave 2nd wave Restitution nIt is process of confiscate property reversion to former owners. nDiscussion about size of restitution qSeveral strong pressure groups against restitutions nAdvocate of former political regime nManagers of companies that were a subject of restitution process nEconomists qSlow down and postpone of privatization process qDoubts about social acceptability of property reversion qVery strong public support of restitution process Problems with restitution nDate of setting restitution claims nIf restitution in the forms qMoney compensation qPhysical compensation nHow evaluate the property nIdentification of former owners with claims for restitution n q n nIn Czechoslovakia was decided that i the restitution process there qwill be returned the property confiscated after communist coup in Feb 1948 qWill be returned the property only of Czechoslovakia citizens and qIn specific cases will be returned the property of the Church q q nWhole restitution process started at the end of 1990 nDate about total value of restituted property are different qAccording to Official Report of the Czech government total value of restituted property was from 70 to 130 billion CZK. q In first phase nRestitution of confiscated property from 1955-1959 n70 000 civil buildings and office buildings nLater extended in farmlands, woods, etc. Returned 50 % of state ownership of farmlands and woods nCzechoslovakia had the second largest re-privatization program of any of the former socialist European countries, with the exception of the former East Germany n n nBeside the physical restitution there existed also financial compensation if the physical restitution was impossible nMain financial resources came from Restitution Privatization Fund qIn this fund there was concentrated financial resources from privatization process n3 % stocks from companies that were submitted in voucher privatization nOwners of confiscated property got stocks from this fund in the case if they could not get back property physically and in advance they got 30.000 CSK in cash. History development PRIVATIZATION PROCESS n nPrivatization process had 3 principal elements: n nWide-ranging restitution process n nA small-scale privatization programme n nA large-scale privatization programme n History development HISTORY DEVELOPMENT OVERVIEW OF PRIVATIZATION PROGRAMS History development OVERVIEW OF PRIVATIZATION PROGRAMS SMALL PRIVATIZATION n qSmall privatization process was launched in January 1991 nIt began with an amount of 120 thousand restaurants, shops, and small business, designated for selling nIt was base on selling of small retail business units by public auctions. nPublic auctions were directed by local privatization committee qA committee announced 30 days before auction detailed information about business that come into auction qIf there was no interest about privatized business was applied so called Holland auction nDecreasing in initial price from the extreme high price to lower qDecreasing about 50% in 1st and about 20% in 2nd auction round q n q History development OVERVIEW OF PRIVATIZATION PROGRAMS SMALL PRIVATIZATION n nUnsold firms from the first round were re-auctioned later in the second round, in which foreign participation was allowed to participate nThe first auction took place in 1991 and last in 1993 qThe most auctions took place in 1991 and 1992 nBy the end of the year over 22.000 enterprises had been sold for 30 billion CSK nThe total value of call price was 21 billion CSK nIt means that total value of earnings were about 50% higher than total value of initial call price. nThose enterprises that remained unsold had to be moved into the large privatization program nEarnings from the auctions were deposited in the National Property Fund National Property Fund (NPF) nOne of the important transformational institution nIt was established in 1991 and its initial function was execution of privatization decision of the government. nAll state owned companies designed in privatization were transferred under control of National Property Fund. nIt executed privatization and got in earnings. nFund did not take care of transferred property. qIt was criticized because company in control of NPF was paralyzed and not able to decide about long-term investment or restructuralization. qOn the other hand NPF did not hampered cost wasting of state owned company management and forbidden dividing of companies. National Property Fund nEarnings from privatization of state property did not pass in state budget but became property of NPF and was used as settlements for several actions qEcological accident costs qDischarge from debts of privatized companies qCapital support of companies designed for privatization qTransformation and stabilization of banking sectors qAs a resources for the support of social, health and retain insurance funds. Problems of small privatization n75 % 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 nIf the subject of privatization was some public utility business this business had to be provided for 10 years nWith the most problems were related financing of small privatization qThe most of households disposed only by limited number of savings and all privatization was financing by debts qThere were established conditions for the future problems in banking sector. nIn 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 nEstablished small business sector nAt the end of 1991 small private companies provided 41 % of all retail sales. nBut small privatization was financed with debts and thus determined future development in companies nA lot of companies had problems with debt settlements qWere not able to get next credits and had to used supplier credit that were not able to settle. Large privatization nThe transformation of significant number of state-owned companies in private hands. nBecause of new economic clime direct control of state owned companies was unexecutable. nGovernment decided about quick privatization because a lot of companies needed restructure that became the task for new private holders. nLarge privatization took place from 1991 to 1994 in two waves nMain aims qIntensify effectiveness of the Czech economy as a whole qBrake up monopoly structures in the market q Dispute about pace of privatization nReasons for quick privatization qNegative experience in Hungary – privatization of state-ownership in hands of former management qAfraid of “pre-privatization” nCompany existed without management till finishing of privatization process and was getting worthless n tunneling of company by management qCheap selling of company assets in the hands of management qThis occurred in every transformation economies because state failed as the owner and supervisor. q Privatization projects nSpecific of the Czechoslovakia privatization was qCompetition between submitter of privatization projects qIn Czechoslovakia anybody had a right to submit privatization project for property designed for privatization programme n5 projects for one company in average, some companies 20-30 competitive project, maximum Lacrum Brno – 126 projects qSubmitter could use several privatization methods or combination of methods nIn July 1991 was introduced list of companies designed for the first wave of privatization nManagement of companies submitted privatization project till Nov 1991 nCompetition projects could be submitted till February 1992 nManagement project had to introduces project for company as a whole qCompetitive projects introduced plans only for specific part of company n nThen particular Ministry was decided about projects and suggested the best one nFinal decision was done by Ministry of National Property qOnly in specific cases by government (only 5 % of all privatization projects) nAfter approval of privatization project company property was transferred in NPF that qCarried out privatization qControl un-sold property qGet in earnings nIn reality almost all projects were submitted by former company managers or its employees Privatization methods nVoucher privatization nPublic auctions qWon the highest offer nPublic tender qMulti-criterion decision qNot only price nDirect selling without public tender qApproved by government qHigher probability of corruption nTransformation of company in joint-stock company and then sale of company stocks qIn stock exchange, voucher privatization or OTC nFree transfer of state property in municipial units, funds of social insurance, etc. qBuildings, kindergartens, etc nTemporary transfer in NPF n nThe most of companies transferred from state-ownership to joint stock company nThen was applied combination of privatization methods qPart of stock was sold in voucher privatization qRest was sold by auction or by other method nMethod of direct selling was used in the case of large state companies qE.g. car company - Skoda nIn all privatization methods were obvious one government effort qPrivatization into the arms of Czech citizens – known as a “the Czech way” qForeign capital was disadvantaged by several barriers nSmall privatization was open for foreign investors only for property that was not asked by Czech investors nForeign investors get property for market value (Czech for lower book value if market value was lower then could apply market value as well) nOn the other hand foreign investors did not interested in a company as a whole but only for profitable part q Voucher Privatization nDominant privatization method was voucher privatization qAbout 50 % of all joint stock companies were offered for vouchers nThe aim of voucher privatization was quick transfer of property rights into private hands nOther aims qEstablishment of positive relation of Czech citizens to market economy qQuick transfer of property and limitation of pre-privatization tunneling qEquitably of private property Mechanism of voucher privatization nVoucher privatization was proceeding in several phases qFirst phase nRegistration of Investment Privatization Funds qSecond phase nRegistration of privatization participants nVoucher privatization was open for all Czechoslovak citizens 18 years old nIn price of 1035 CSK got voucher booklets with 1000 points that were divided in 10 lots with 100 points qThird phase nList of companies designed for voucher privatization with basic information about a company (revenues, number of employees, number of share, value of basic capital, etc.) qFourth phase nZero round qVoucher participants could invest voucher points via Investment Privatization Fund nVoucher participants invested their voucher points on their own qFifth phase nSeveral rounds of voucher privatization n q nFifth phase qAnnouncement of number of shares designed for particular voucher round sale nAnnouncement of price of this shares §How many cost one share: §In first round all shares had same price 3 shares cost 100 voucher points nVoucher participants and investment privatization funds ordered shares. Investment funds could hold at most 20 % of company nThis orders was collected and processed in Center for voucher privatization nIt led to several situations qSupply and demand were same or supply was higher then demand §All orders were executed qDemand was higher than supply but not more than about 25 % §Demand of privatization funds were limited to balance demand and supply qDemand was significantly higher than supply §Investments were cancelled and investors got back their voucher points qAll companies that were not sold moved in next privatization round with new price of shares. nIn next round price was determined by level of demand and supply in previous round nNext privatization round started 1st wave nStarted in Nov 1991 finished in Jan 1993 nParticipate 5,95 million of Czech citizens (from 7,4 million available) nThere were offered 1491 joint stock companies n 72 % voucher booklets were investment via investment funds nTotal revenues 6 billion CSK 2nd Wave nStarted in September 1993 nParticipate 6,169 million of Czech citizens n63,5 % voucher booklets were investment via investment funds qBad experiences with Investment Funds from 1st wave nDelay of shares transfer from Investment Funds qTotal revenues 4,4 billion CSK n n n n History development OVERVIEW OF PRIVATIZATION PROGRAMS VAUCHER PRIVATIZATION n nThe advertising campaign and promises to economize 1,000 crowns attracted many citizens to take part in the privatization process n nThere were more people involved than had been expected n nThe turning point in voucher privatization came with the aggressive campaign of the Harvard Investment and Consulting Funds n History development OVERVIEW OF PRIVATIZATION PROGRAMS VAUCHER PRIVATIZATION n nTheir founder Viktor Kozeny was the first to take a bet on a general assumption that privatization vouchers identified with cash profit nHe was the first to guarantee buying the coupons back within one year for a value ten times higher than the initial investment of one thousand crowns nOrdinary participants were attracted more by an expectation of making a quick profit than the idea of ownership or responsibility History development OVERVIEW OF PRIVATIZATION PROGRAMS VAUCHER PRIVATIZATION n nUnfortunately, until establishing and implementing of the Law on Fund Regulation, there were very limited codes n nThe only rules were for fund establishments such as joint-stock corporations n nFrom time to time there were implemented ad hoc governmental decrees, which provided only weak regulation and the problem was criticized History development OVERVIEW OF PRIVATIZATION PROGRAMS VAUCHER PRIVATIZATION n nThe principles in the Law on Regulation were not applied in time n nSome principles were: diversification requirements and prevention of the conflict of interests n nIn fact, many funds nominated governmental officials to their director boards, so that politicians sometimes played very important roles in the voucher privatization procedure History development OVERVIEW OF PRIVATIZATION PROGRAMS VOUCHER PRIVATIZATION – THE SECOND WAVE n nVoucher privatization helped to establish a capital market and the RM-System as well n nThat was a special system of securities trading with the great advantage of a simple shareholder approach n nIn the 1st wave only Czech and Slovak Federal Republic citizens were eligible, in the 2nd wave, after the separation of the two republics, only Czech citizens were allowed to participate in the Czech Voucher Privatization process Privatization after 1995 nPrivatization process was continuing after 1995 nBut the pace of privatization was decreasing because a lot of property was transferred in private sector nThe most usage privatization method was direct sale. nRevival of privatization with left oriented government of Milos Zeman qPrivatization of banks Total value of property nBook value of property designed for privatization and transferred q780 billion CSK nSmall privatization – 45 billion CSK nFree transfer in voucher privatization – 333 billion CSK nFree transfer in municipal units – 121 billion CSK nRestitution – 25 billion CSK nPrivatized by standard privatization method– 121 billion CSK n Thank you for your attention!