Transcript Private

Privatization in Eastern Europe
and the EU Enlargement
Dr. Evgeni Peev
University of Vienna
April 2008
Issues:
Transition in Central and Eastern Europe
(CEE)
Privatization Policy in CEE
Effects of Privatization on the EU
Enlargement
Table of Contents
1. Transition from Totalitarian Socialism to Market Economy in
Central and Eastern Europe (CEE)
1.1. Why Privatization is So Important to the EU Enlargement Process?
1.2. What Does Privatization Mean in Poland and in the United
Kingdom?
1.3. The State Ownership
2. Privatisation policy in Central and Eastern Europe (CEE)
2.1. Why to Privatize?
2.2. How to Privatize? Privatization Methods
2.3. Why to Privatize to Foreigners?
3. Effects of Privatization
3.1. Which Are The Effects on Firm’ Performance?
3.2. Which Are The Effects on Corporate Governance and Economic
Growth?
3.3. Which Are The Effects on Convergence of CEE and The EU
Enlargement?
1.Transition from Totalitarian Socialism to Market
Economy in Central and Eastern Europe (CEE)
1.1. Why Privatization is So Important to the EU Enlargement
Process?
EU Enlargement in CEE:
2004
Hungary, Poland, Czech Republic, Slovak Republic,
Slovenia,
Estonia, Latvia, Lithuania
2007
Bulgaria, Romania
1.1. Why Privatization is So Important to the EU Enlargement Process?
Privatization – a key part of reforms to a functioning market economy
‘Conventional wisdom’ to reforms in transition countries (World Bank,
1991; 1996; EBRD, 1995)
(1) privatisation and deregulation,
(2)macro stabilization by low inflation and fiscal deficits,
(3) liberalization through opening of economy to the rest of the world,
and a domestic prices control release.
1.1. Why Privatization is So Important to the EU Enlargement Process?
A functioning market economy - precondition to become member
of the EU
Privatization is a major path to establish:
Competitive enterprise sector in CEE
Competitive financial sector in CEE
Micro-convergence between ownership and control strictures,
corporate governance and financial structures in CEE and Old EU
Member states
1.2. What Does Privatization Mean in Poland and in
the United Kingdom?
What is privatization?
Privatization is the deliberate sale by a government of state-owned
enterprises (SOEs) or assets to private economic agents
Privatization is a political process with economic consequences.
M. Thatcher adopted the label “privatization,” which was originally
coined by Peter Drucker and which replaced the term
“denationalization” (Yergin and Stanislaw 1998, p. 114).
1.2. What Does Privatization Mean in Poland and in the United Kingdom?
The objectives set for the British privatization program by the
Conservatives since 1979 are the same as those described by many
governments in CEE countries (e.g. Poland). These goals as
described in Price Waterhouse (1989 a,b), are to:
(1) raise revenue for the state,
(2) promote economic efficiency,
(3) reduce government interference in the economy,
(4) promote wider share ownership,
(5) provide the opportunity to introduce competition
(6) subject SOEs to market discipline.
(7) develop the national capital market.
These goals can be conflicting.
1.3. The State Ownership
Why do state-owned firms must be transformed
during post-communist transition?
• Model of socialist and capitalist systems
• State ownership in capitalist economies
• State ownership in socialist economies
• Soft-budget constraint syndrome
1.3. The State Ownership
1.3. The State Ownership
State ownership in market economies
Triple agency problems of state-owned firms:
Principal-agent structure
Firm’ Managers – Owner-government
Government – Politicians (Members of Parliament)
Politicians – Population (Voters)
Agency problems of private corporations:
Principal-agent structure
Managers - shareholders
1.3. The State Ownership
State ownership in planned economies
Communist party- state
Prevailing state-owned firms and state-owned banks
State-firms political connections
State – the main regulator of economic transactions
Soft budget constraint
1.3. The State Ownership
Soft-budget constraint syndrome
( Kornai, Maskin, and Roland, 2003)
The contention that softness of the budget constraint was a cause of inefficiency of
socialist economies has gained wide acceptance.
SBC syndrome
An organization (e.g. state-owned firm) has a budget constraint (call this a BCorganization): it must cover its expenditures out of its initial endowment and
revenue.
If it fails to do so, deficit arises.
BC organization faces HBC as long as it does not receive support from other
organizations to cover its deficit.
The SBC occurs if one or more supporting organizations (S-organizations) are ready to
cover all or part of the deficit.
1.3. The State Ownership
Means of softening
Fiscal means – budget subsidies, tax concessions
(reduction, postponement of tax obligations), tolerance of
tax arrears
Soft credit – soft loans by state-owned banks, excess
trade credit
Indirect methods of support – administrative restrictions on
import, deterrent tariff barrier to ease pressure from
foreign competitors
1.3. The State Ownership
Primary consequences of the SBC:
A key measure of the SBC is the degree to which firms are
permitted to fail – overall frequency of bankruptcy and
liquidation
(1) Distortions of the survival and exit of firms
(2) Distortions of the profit-maximization motives of managers of
state-owned firms
(3) Distortions of the motives for innovation
(4) Winning the favor of potential S-organizations (i.e. rent-seeking)
becomes more important than market-oriented behavior.
(5) Overinvestment by loss-makers and underinvestment by profitmakers
1.3. The State Ownership
Which crucial elements of the institutional environment
of the capitalist economy generate HBC?
Well functioning markets for liquidated assets
Competition across enterprises
Decentralization of credit
Hardening the budget constraint means creating institutional conditions in
which the government can credibly commit not to refinance enterprises.
According to the conventional wisdom how to transform the enterprise sector in
post-communist transition - privatization is the major tool for hardening of
budget constraint.
2. Privatisation policy in Central and Eastern Europe
(CEE)
2.1. Why to Privatize?
2.2. How to Privatize? Privatization Methods
2.3. Why to Privatize to Foreigners?
2.1. Why to Privatize?
Privatization is a response to the failings of state ownership.
(1) The impact of privatization depends on the degree of market failure.
Privatization has the greatest positive impact in competitive markets. In
contrast, the justification for privatization is less compelling in markets for
public goods and natural monopolies where competitive considerations are
weaker
(2) Contracting ability impacts the efficiency of state and private ownership.
Governments have other objectives than profit or shareholder-wealth
maximization – various social goals such as maximizing social welfare,
keeping employment, etc.
The owners of public firms (the nation’s citizens) are less able to write
complete contracts with their managers because of diffuse ownership,
making it difficult to tie the managers’ incentives to the returns from their
decisions.
(3) Ownership structure affects the ease with which government can intervene
in firm operations. Governments can intervene in the operations of any
firm, either public or private. The government’s transaction costs of
intervening in production arrangements are greater when firms are privately
owned.
2.1. Why to Privatize?
(4) Less-prosperous state-owned firms being allowed to rely on the government
for funding, leading to “soft” budget constraints. The state is unlikely to
allow a large SOE to face bankruptcy. Thus the discipline enforced on
private firms by capital markets and the threat of financial distress is less
important for state-owned firms.
(5) Privatization can impact efficiency through its effect on government fiscal
conditions. Government may raise huge amounts of money by selling
SOEs. Such sales have helped reduce the fiscal deficit in many countries.
(6) Privatization can help develop product and security markets and
institutions. One important motivation for privatization is to help develop
factor and product markets, as well as security markets.
Many of the theoretical arguments for privatization are based on the
premise that the harmful effects of state intervention have a
greater impact under state ownership than under state regulation,
not that the harmful effects can be eliminated through privatization.
2.2. How to Privatize? Privatization Methods
Factors that influence the privatization methods:
(1) the history of the asset’s ownership,
(2) the financial and competitive position of the SOE,
(3) the government’s ideological view of markets and regulation,
(4) the past, present, and potential future regulatory structure in the
country,
(5) the need to pay off important interest groups in the privatization,
(6) the government’s ability to credibly commit itself to respect
investors’ property rights after divestiture,
(7) the capital market conditions and existing institutional
framework for corporate governance in the country,
(8) the sophistication of potential investors,
(9) the government’s willingness to let foreigners own divested assets.
2.2. How to Privatize? Privatization Methods
• Privatization methods in CEE
Different privatization methods have created different profitable
investment opportunities for the penetration of foreign firms. Studies
present various major types of privatization methods like:
(i) employee ownership programmes and management buy-outs (insiders
privatisation);
(ii) voucher (mass) privatization;
(iii) sales to local and foreign strategic investors;
(iv) privatization initial public offerings (PIPOs);
(v) restitution (return of assets to either the original owners or their heirs).
2.2. How to Privatize? Privatization Methods
Mass or voucher privatization. Eligible citizens can use vouchers that are
distributed free or at nominal cost to bid for stakes in SOEs or other
assets. This method has been used only in the transition economies of
CEE. Problems: establishment of irresponsible quasishareholders and
transfer of state assets to few political “cronies” without entrepreneurial and
managerial skills, lack of finance resources.
Privatization through sale of state property. Government trades its
ownership claim for an explicit cash payment through direct sales (or
asset sales) of state-owned enterprises (or some parts thereof) to an
individual, an existing corporation, or a group of investors.
Privatization initial public offerings (PIPOs). Some or a government’s entire
stake in an SOE is sold to investors through a public share offering. PIPOs
are structured to raise money and to respond to some of the political
factors mentioned earlier.
Privatization through restitution. This method is appropriate when land or
other easily identifiable property that was expropriated in years past can be
returned to either the original owners or to their heirs. The major difficulty
with this method is that the records needed to prove ownership are often
inadequate or conflicting.
2.2. How to Privatize? Privatization Methods
•
Table 1. Privatization Methods by Country
Country
(1)
(2)
(3)
(4)
Classification of
Privatization
Year of
Privatization
Primary
Method
Secondary
Method
1995
1994
1997
1994
1993
1992
1992
1993
1993
1995
1990
1994
1996
1992
1991
1995
1990
1992
1993
1995
1998
1994
1996
MEBO
vouchers
vouchers
MEBO
direct sales
MEBO
vouchers
direct sales
MEBO
vouchers
direct sales
direct sales
vouchers
direct sales
vouchers
vouchers
direct sales
MEBO
vouchers
direct sales
MEBO
vouchers
MEBO
vouchers
MEBO
direct sales
vouchers
vouchers
vouchers
direct sales
vouchers
direct sales
direct sales
MEBO
vouchers
MEBO
vouchers
direct sales
direct sales
MEBO
direct sales
direct sales
vouchers
vouchers
MEBO
direct sales
Albania
Mixed
Armenia Mass
Azerbaijan Mass
Belarus
Mixed
Bulgaria Full
Croatia
Mixed
Czech
Mass
Estonia Full
Macedonia Mixed
Georgia
Mass
Hungary Full
Kazakhstan Full
Kyrgyzstan Mass
Latvia
Full
Lithuania Mass
Moldova
Mass
Poland
Full
Romania Mixed
Russia
Mass
Slovak
Full
Slovenia Mixed
Ukraine
Mass
Uzbekistan Mixed
Note: Year of privatization was established based on EBRD information on Primary Method
of privatization and its privatization chronicle. Date of privatization is consistent with primary
method of privatization. Source: Bennet et al, 2004.
2.3. Why to Privatize to Foreigners?
The potential beneficial effects of FDI in transition economies were
seen in various directions.
First, foreign firms have access to investment finance, managerial
and technical know-how, new markets and can reply to the need for
restructuring and improving the long-term performance of former
socialist state-owned firms.
Second, domestic savings in transition economies cannot absorb
the huge amount of privatized equity and government may sell stateowned firms to foreign investors as strategic owners.
Third, the penetration of FDI into local markets can generate positive
spill-over effects to domestic firms through technology transfer.
2.3. Why to Privatize to Foreigners?
Fourth, FDI can impose more efficient corporate
governance in privatized firms than insiders, who
frequently impede restructuring (Blanchard, 1997).
Fifth, foreign investors can lead to hardening budget
constraints and “depolitization” through cutting the link
between the government and firms.
Sixth, FDI can make a major contribution to economic
growth and development in post-communist countries.
3. Effects of Privatization
3.1. Which Are the Effects on Firm’s
Performance?
3.2. Which Are the Effects on Economic Growth?
3.3. Which Are the Effects on Convergence of
CEE and the EU Enlargement?
3.1. Which Are the Effects on Firm’ Performance?
There are many methodological problems with research on privatization:
Data availability and consistency.
Sample selection bias - governments’ desire to make privatization “look
good” by privatizing the healthiest firms first.
Accounting information - the problems include determining the correct
measure of operating performance, selecting an appropriate benchmark
with which to compare performance, and determining the appropriate
statistical tests to use
Studies of post-performance rarely examine the welfare effects on
consumers.
Most important, few studies control for the possible use of market power
by the privatized firms; that is, performance improvements could be due
to greater exploitation of monopoly power, which has harmful effects on
allocative efficiency, rather than productive efficiency.
3.1. Which Are the Effects on Firm’ Performance?
Summary of Results (Megginson and Netter, 2000):
1) Private ownership is associated with better firm-level performance than
is continued state ownership.
(2) Concentrated private ownership is associated with greater
improvement than is diffuse ownership.
(3) Foreign ownership is associated with greater post-privatization
performance improvement than is purely domestic ownership.
(4) Majority ownership by outside (non-employee) investors is associated
with significantly greater improvement than is any form of insider control.
(5) Firm-level restructuring is associated with significant postprivatization performance improvements, and this is a key advantage of
outsider control— firms controlled by non-employee investors are much
more likely to restructure.
3.1. Which Are the Effects on Firm’ Performance?
Summary of Results (Megginson and Netter, 2000):
(6) Most studies document that performance improves more when new
managers are brought in to run a firm after it is privatized than when the
original managers are retained.
(7) The role of investment funds in promoting efficiency improvements in
privatized Czech firms is ambiguous.
(8) The impact of privatization on employment is also ambiguous,
primarily because employment falls for virtually all firms in transition
economies after reforms are initiated.
(9) There is little evidence that governments have been able to impose
hard budget constraints on firms that remain state-owned after reforms
begin.
3.1. Which Are the Effects on Firm’ Performance?
Summary of Results (Djankov and Murrell, 2002)
(1) Privatization is strongly associated with more enterprise
restructuring.
(2) State ownership within traditional state firms is less
effective than all other ownership types, except for worker
owners who have a negative effect.
(3) Privatization to outsiders is associated with 50% more
restructuring than privatization to insiders (managers and
workers).
(4) Investment funds, foreigners, and other blockholders
produce more than ten times as much restructuring as diffuse
individual ownership.
3.2. Which Are The Effects on Corporate Governance and
Economic Growth?
Privatization and growth (Sachs, Zinnes, and Eilat (2000):
(1) Change in ownership is not enough to improve macroeconomic
performance.
(2) The gains from privatization come from change in ownership
combined with other reforms such as institutions to address
incentive and contracting issues, hardened budget constraints,
removal of barriers to entry, and an effective legal and regulatory
framework.
3.3. Which Are The Effects on Convergence of CEE and
The EU Enlargement?
Convergence of financial institutions
Convergence of ownership structures
Functional convergence
3.3. Which Are The Effects on Convergence of CEE and The EU
Enlargement?
Table 2. Index of Banking Reform (1991-1999)
Country
1991 1992 1993 1994 1995 1996 1997 1998 1999
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Slovenia
Slovak Republic
Bulgaria
Romania
Russia
Ukraine
2
1
2
1
1
2
1
2
1
1
1
1
3
2
2
2
1
2
2
321
1
1
3
3
3
2
2
3
3
32
1
1
1
Source: Various EBRD Transition Reports.
3
3
3
3
2
3
3
32
2
2
1
3
3
3
3
3
3
3
32
3
2
2
3
3
3
3
3
3
3
32
3
2
2
3
3+
4
3
3
3
3
3332+
2
3
3+
4
23
3+
3
332+
2
2
3+
44
3
3
3+
3+
33322
3.3. Which Are The Effects on Convergence of CEE and The EU
Enlargement?
Table 3. Index of Reforms of Non-Banking Financial Institutions (19911999)
Country
1991 1992 1993 1994 1995 1996 1997 1998 1999
Czech Republic
1
1
2
Estonia
1
1
2Hungary
2
2
2
Latvia
1
1
1
Lithuania
1
1
2Poland
2
2
2
Slovenia
2
2
2
Slovak Republic
1
1
2
Bulgaria
1
1
1
Romania
1
1
1
Russia
1
1
2Ukraine
1
22Source: Various EBRD Transition Reports.
322
2
2
2
331
2
22-
323
2
2
3
332
2
2
2
32
3
2
2
3
332
2
3
2
33
3+
2+
2+
3+
32+
2
2
3
2
3
3
3+
2+
2+
3+
32+
2
2
22
3
3
3+
2+
33+
32+
2
2
22
3.3. Which Are The Effects on Convergence of CEE and The EU Enlargement?
Convergence of financial institutions:
(1) Bank-based financial system has emerged like in the
Continental Western Europe
(2) Prevailing foreign owned commercial banks with
headquarters in EU countries (e.g. Italy, Germany, Austria)
(3) Most stock exchanges are very illiquid and only a small
number of firms are actively traded like in the Continental
Western Europe
3.3. Which Are The Effects on Convergence of CEE and The EU
Enlargement?
Table 4. Top 100 largest non-financial firms in transition economies by type of owner
and stock exchange participation (ranked by revenues in 2002, 2003)
State
Family
Nonfinancial
Financial
Foreign
Dispersed
Country
No.
firms
Listed
firms
Bulgaria
94
30
16
15
1
32
0
10
Czech Rep
66
2
1
16
13
34
0
20
Hungary
92
3
11
15
1
59
3
15
Poland
83
28
5
10
0
36
4
11
Romania
95
24
7
6
1
53
4
9
Croatia
93
16
27
15
3
23
9
27
3.3. Which Are The Effects on Convergence of CEE and The EU
Enlargement?
Table 5. Top 100 largest non-financial firms in developed economies by type of owner
and stock exchange participation (ranked by revenues in 2002, 2003)
Country
No.
firms
State
Family
Nonfinancial
Financial
Foreign
Dispersed
Listed
firms
Austria
90
13
1
46
3
26
4
16
Belgium
89
3
2
22
4
48
10
19
Germany
92
2
11
35
13
19
12
37
Greece
91
9
16
21
4
35
6
39
France
95
9
12
28
0
16
30
54
Ireland
74
2
2
15
4
39
12
19
Italy
66
17
12
19
2
12
4
22
Netherl.
96
6
3
14
8
44
21
31
Portugal
94
9
3
40
8
28
6
23
UK
97
1
6
24
4
26
36
44
3.3. Which Are The Effects on Convergence of CEE and The EU Enlargement?
Emerging ownership structures after privatization
Convergence to the Western ownership structures:
Individuals (families)
Non-financial firms
Financial institutions
State
Foreigners
Specific private owners:
‘Oligarchs’ (World Bank, 2002);
‘Captor’ firms (Hellman et al, 2000; Hellman and Schankerman,
2000);
Firms affiliated to interest groups (Koford, 2000)
3.3. Which Are The Effects on Convergence of CEE and The EU Enlargement?
Convergence of ownership structures:
(1) Ownership structures of non-financial firms measured by the
share of the direct largest owner have become concentrated like in
the Continental Western Europe.
(2) The private owners are prevailing.
(3) Major corporate governance conflict is between controlling
shareholder and minority shareholders like in the Continental
Western Europe.
3.3. Which Are The Effects on Convergence of CEE and The EU Enlargement?
Functional convergence
Recent study presents an empirical evidence.
Ownership Structures and Investment Performance in Central and
Eastern Europe (Mueller and Peev, 2007)
3.3. Which Are The Effects on Convergence of CEE and The EU Enlargement?
3.3. Which Are The Effects on Convergence of CEE and The EU Enlargement?
Mueller and Peev (2007) found that:
(1) The investment performance (qm) of the average public nonfinancial firm in CEE is fairly similar to the corresponding estimates
for countries with Germanic and Scandinavian legal systems.
(2) The investment performance of CEE companies was better than
that of the average firm in EU countries with French origin legal
systems (e.g. France, Greece, Italy, Portugal, Spain), but worse
than in the Anglo-Saxon countries.
(3) Thus, this paper provides evidence for a functional convergence
of public non-financial companies in CEE countries to those in the
West.
Conclusion
Convergence of ownership and financial structures of CEE countries
to the structures in the Continental Western Europe
Convergence in performance (functional convergence)
Selected Readings:
• Kornai, Janos, Eric Maskin, and Gerard Roland, Understanding the
Soft Budget Constraint, Journal of Economic Literature, Vol. 41, No.
4, Dec., 2003, 1095-1136.
• Megginson, W. & Netter, J.M. "From State to Market: A Survey of
Empirical Studies on Privatization." Journal of Economic Literature,
39, (2001), pp. 321-389.
• Mueller Dennis and Evgeni Peev, Corporate Governance and
Investment in Central and Eastern Europe, Journal of Comparative
Economics, 2007, 35, pp. 414-437.