The Process of Privatisation
2. The first phase
Privatisation in Croatia started while the country was still part of the former Yugoslavia. The ideas of orthodox socialist economics were finally overcome in the second half of the 1980s, and some legislative activities were undertaken: private companies were allowed, also a combination of social and private ownership, and particular forms of foreign investment (Uvalic 1992, p. 176). Finally, in the twilight of Yugoslavia (and in the dawn of an independent Croatia) the Law on Privatisation (LSC 1990)6 was adopted. Companies were allowed to issue internal
shares, initially not tradable on the stock exchange (which at that time didn’t even exist). Trade concerning those shares was restricted to transactions between employees of the companies in question, but under some conditions shares were convertible for debt. Internal shares gave the right to participate in after-tax profit and in management. The federal units of Slovenia and Croatia suspended the Law on their territories even before their independence. Problems with the implementation of the program were noted; Croatian economists complained that the federal program retained too much self-management (PPED 1991, p. 77). Slovenian economists concluded that the process opened the opportunity for pulling assets out from the companies (see chapter V on tunnelling). In fact, both countries wanted to control privatisation on their own territories, believing that the process must be adjusted to the specificities of their economies. However, some Croatian companies, following the Law, speedily issued internal shares, a process that was later subject to verification by the responsible governmental agency. The Croatian law on privatisation (LTSO 1991), which referred exclusively to companies with headquarters in Croatia, passed legislative procedures in the Parliament of the Republic of Croatia on April 22, 1991.
In the first phase of privatisation the Government selected 3619 companies for transformation of their ownership regime. The total value of those companies was assessed7 to be more than 30 billion Deutsch Marks (at that
6 The Law on Social Capital, Yugoslav Official Gazette No. 46, 1990
7 This assessment was made by a licensed accounting office on the basis of the book value of
companies’ assets. Nobody regarded these assessments as relevant market information; quite the contrary, it was often and rightly despised as a bureaucratic endeavour. However, this doesn’t imply that privatisation should have been conducted without the transparent assessment of assets (see chapter V, sections 4.2 and 4.3).
time around 15 billion euros, and today, due to inflation, certainly much more). Excluded from the Law were Croatian ports and marinas, agricultural companies, the oil industry, banking, insurance, shipbuilding companies, the health industry, education, housing, road and railway transport, the telecommunication industry, the energy sector, the water industry and communal services (Cuckovic 1998). The explanation for the exclusion of these industries from the first wave of privatisation was their strategic importance and the high uncertainty of the effects of their privatisation. Some of these industries and utility companies were privatised later, following the passage of laws designed particularly for these companies or industries.
2.1 The design
The management of each company was ordered to prepare a program of transformation before the end of June 1992 (14 months), following the requirements stipulated by the Law. The program was represented as “controlled, decentralised privatisation”. A state agency was the controlling institution.
The process was designed to work as follows: the company issues shares; employees had priority in the purchase of these shares, being granted a basic discount of 20 percent plus 1 percent for every year they had worked in the company. This implied that the rights of employees from the period of workers’ ownership were recognised; also the discount was designed to attract employees and accelerate the process. The opportunity qualified to buy shares at a discount was given also to former employees. Every employee and former employee was limited in the purchase of discounted shares to the amount of a maximum of 20 000 Deutsch Marks. After the employees’ shares had been allocated, all other citizens, employed in companies that were not selected for privatisation and in the state administration, were given the chance to choose a company from the list and to subscribe for its shares at a discount. The explanation was that otherwise they would be deprived of the privileges given to employees of companies selected for privatisation. This was explained by the idea that all citizens participated in the creation of socially owned assets. The most important rationale was the belief that if all citizens were given the opportunity to subscribe to shares, this would accelerate
privatisation.8 Employees of the company and other employed citizens were
given the possibility to pay for their shares over five years (later this period was extended to twenty years).
The proportion of shares sold at a discount (to employees and other citizens) was limited to 50 percent. The idea was to leave a controlling percentage of shares to a possible strategic investor. This stipulation was the first official signal that an ownership structure with a dominant shareholder was favoured. Management was allowed to include in the program of privatisation of a company an outside strategic investor, whether by selling the remainder of shares or by accepting further investment and an increase in capital. The Law opened the possibility that companies, with the agreement of banks and other creditors, could re-organize their debt as equity.
The process was strictly controlled by the Agency, which was also responsible for selling the remainder of the shares. Management was obliged to include an evaluation of assets in the program (it was usually made by a qualified/licensed accounting office) and also a program for further development. The unsold shares were transferred to the pension funds and the Agency for the Development of Croatia (later, the Privatisation Agency), which was controlled by the Government. Privatisation was conceptualised as an autonomous process, controlled by a responsible public institution. Very small companies, where capital was estimated to amount to less than 5 million Deutsche Marks, weren’t obliged to wait until the Agency had certified their program. Employees had priority in the process of subscription and in buying shares. The discount was interpreted as a form of distribution of shares. The average discount was 35 percent.
Management was obliged to prepare a business plan, a program of development and to reach an agreement with creditors or potential investors. The design of
8 At the end of the 1990s a scandal erupted when it was found that about 9000 citizens (government
officials among them and a number of members of the ruling party) used the privilege of deferred payment and discount and subscribed for more than one package of shares of an amount of 20 000 DM. This was not explicitly forbidden. Those who subscribed explained that they were even encouraged to do this and accelerate privatisation. The opposing side argued that the reason for the discount was the recognition of earlier contributions in the creation of social capital. Consequently, one employee/citizen has a right to one discount. It was a conflict between the principle of equality and the effort to accelerate privatisation, but I think it was more a political battle against the ruling party. Some officials subscribed for several packages and presumably they had access to banking loans to finance their investment, while other citizens didn’t. The practice of banking in privatisation will be explained later. The reference for this theme is Cengić (2001)
the process was a kind of compromise between the two methods of privatisation that were described in the previous chapter: distribution and the sale of socially owned assets. It was also an initial compromise between the interest groups: workers, management and political institutions. Citizens got the opportunity to participate. Sensitive assets were excluded from privatisation during the first period, while different discounts and privileges were employed to attract as large a segment of the population as possible. The management was given reasonable autonomy in taking part in the process. A significant percentage of assets was in fact distributed.
2.2 The results
Let us immediately look at the results of the first phase of privatisation. The Agency certified the programs of privatisation of more than 2.5 thousand companies (of the 3.6 thousand candidates for privatisation) in a very short period and their transformation was completed swiftly: 1,120 companies were privatised completely, 1315 companies ended up with majority private owners and 108 companies finished in the hands of state owned funds. Almost 600,000 individuals subscribed for shares at a discount.9 This at first sight
looks impressive, concludes Nevenka Cuckovic (1998, p. 190) in her doctoral thesis.
Cuckovic, together with other analysts (Rohatinski and Santini, 1994, p. 23), criticised the process and outcomes of the beginning phase. The essence of their criticism was that the process of privatisation was slow. Instead of a maximisation of the percentage of privatised social equity, which was recommended by a majority of Croatian economists (CSEDRC 1992), commentators concluded that the hidden goal of the process was to collect money for the central budget. This implies that the change of property regime wasn’t a priority. Critics claimed that it actually amounted to the nationalisation of social ownership and that it signified a regression in comparison with the previous decentralised property regime.
Some figures, supportive of this criticism, were offered. The nominal value of the 1120 completely privatised companies was only 9 percent of the total
9 For 90 percent of people privatisation was a method to protect their employment. So they
expressed their loyalty to companies by subscribing for shares. Also, they were persuaded that companies that were privatised and not any more under the influence of political decisions, would have better performance, so their jobs would be better protected. (Cuckovic 1999)
capital ordered to be privatised. Of the remaining 91 percent of the capital, the Government retained majority or minority ownership. It was claimed that in both cases the Government significantly affected business behaviour. At the end of 1992, the Government controlled 60 percent of the capital of companies selected for privatisation, subsequently that fraction decreased to 45 percent. According to the Transition Report published in 1997 (most of figures were collected in 1996), the fraction of the private sector to GDP was in Croatia around 55 percent, while in other relevant countries it was usually much higher: Czech Republic – 75 percent; Hungary – 75 percent; Poland 65 – percent; Slovakia 75 percent, Romania – 60 percent, but Slovenia only 50 percent (TR 1997).
Cuckovic (1998) concludes that the goal of raising money for the treasury also wasn’t fulfilled, because employees (and not outside strategic investors) showed the strongest interest in shares; at the same time, employees received a significant discount and made their purchases in instalments. However, the claim that not enough money was collected was an attempt to force the Government to privatise the assets remaining under its control. Unlike other countries in transition, especially the Czech Republic and Hungary, foreigners from the West failed to invest in Croatia, presumably because of the war. In the first five years, only two percent of the central budget cash income came from privatisation proceeds. Later amendments opened the possibility that shares could be purchased using state bonds, and proceeds from this source were three times higher. This repurchasing of state bonds decreased the financial obligations on government to service its debt. Calculating this into government income, about 8 percent of central budget revenues was collected from privatisation in the period 1991-1996 (Cuckovic 1998, p. 191).
In fact, it was always possible to confront the figures that were provided by the critics of the process with the interpretation that the results weren’t so bad. Slovenia was usually assessed the best transitional performer, but the percentage of private ownership in its economy in the middle of 1990s was even lower than in Croatia. The fact that 15 percent of the total Croatian population took part in privatisation might be interpreted as impressive. Also, when individual shareholders, mostly employees, stopped paying their instalments before they had fully paid for their shares, the term was extended to 20 years (from 5). This decision was explained by saying that its purpose was to make shareholding more attractive to employees. The Government was very strongly devoted to retaining
as many individual shareholders as possible and to creating further shareholders of this kind.10
The thrust of criticism like that made by Cuckovic was to emphasise the point that the process of privatisation was actually nationalisation, and that the formerly self-managed companies finished up in the hands of the state. I think that it is not possible to support this conclusion by providing purely economic figures, though that was a common approach adopted by various international institutions that assessed the progress of transition. The reason is that economic figures don’t express comprehensively the character of the new property regime. It will be explained in the concluding section that even companies that were formally privatised were under the strong influence of the political authorities. In the 1990s Croatia was actually an authoritarian state and this was reflected in economic relationships and in the character of economic property rights over companies. I will now provide a brief description of the nature of the political regime in Croatia; I will also explain how the character of the political regime was reflected in the process of privatisation.