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Central/Eastern Europe: Privatization Deals Hit Snags

  • Kathleen Moore

Two major privatization deals have fallen through in the Czech Republic in recent months. In Bulgaria, two key state property sell-offs were suspended last year due to alleged irregularities. Another sale of state assets has run into trouble in Romania. What's going on? Prague, 9 January 2003 (RFE/RL) -- It has happened with varying degrees of speed and been done in different ways: Privatization is meant to fill state coffers with cash and transform lumbering state monoliths into sleek, competitive companies, banks, or factories. It's a win-win situation, that is, as long as you're not a worker laid off as part of downsizing.

All over Central and Eastern Europe, privatization has been a key pillar of the postcommunist economic transition. But recent months have seen several major sell-offs in the region stall or fall through.

Long-running Czech plans to sell the government's stake in telecom giant Cesky Telecom collapsed at the end of November amid a price dispute between bidders and minority shareholders.

That followed the collapsed privatization of Unipetrol, a large Czech petrochemical group, after the local buyer couldn't come up with the money and backed out. And earlier plans to sell the power sector in one vast chunk fell through when the prospective French buyer refused to raise its bid.

In Bulgaria, the government found buyers for stakes in the Bulgarian Telecommunications Company and tobacco giant Bulgartabac. But late last year both sales were suspended amid corruption charges.

And Romania in December couldn't find any bidders for the country's largest bank, BCR, a sale that is a key part of an agreement between Romania and the International Monetary Fund.

So what's going on? Is the region losing its allure, or is it a temporary glitch? Analysts say there's one factor affecting all countries in the region: the slowdown in the world economy, particularly in Western Europe.

Western firms now have less money to spend, and governments in the region simply took too long to put some of their property up for sale.

Gabor Hunya is a regional expert at the Vienna Institute for International Economic Studies. "Mergers and acquisitions -- those kind of business takeovers that privatizations are -- in fact...declined [by] one-half last year worldwide, compared to the peak two years ago. So it is a worldwide tendency that international mergers are not taking place as frequently as before, and it's also about the tendency that companies in difficulties are more cautious in expanding to new territories," Hunya said.

Another factor is that many of these countries are reaching the tail end of privatization. What is left is now proving tougher to sell, or was expected to take a long time to privatize, like countries' energy sectors. Hunya said that, to put it simply, there aren't enough buyers around. "It's a matter of supply and demand, so for the time being it seems that certain facilities, like telecom companies, second-rate commercial banks, like steel plants, are in oversupply in comparison with the demand for such companies. Because, what is the demand side? The demand side is the major telecom companies in the world. Just think of Deutsche Telecom, of the worldwide problems of this branch, of overcapacities in the steel sector, and so on," Hunya said.

But there's good news, too. Perhaps the surprise is that Central and Eastern Europe did so well last year under tough conditions.

Michael Marrese is vice president and head of economic research for emerging Europe at JPMorganChase bank in London. He estimated that governments in the region managed to privatize around two-thirds of what they had planned. "There's no doubt that the slowdown in Europe and the slowdown in equity markets and in company evaluations worldwide hits Central and Eastern Europe, there's no doubt about that -- 100 percent. Now, in that very negative environment, did we see still bidders for a number of companies -- In Romania and Bulgaria? The answer's 'yes.' In the Czech Republic and Slovakia, something like natural-gas [companies were] sold at very high prices, higher than expected," Marrese said.

So, there's no danger the region is losing its allure, analysts say.

There were concerns late last year that rising wages might prompt some foreign manufacturers to move away from the Czech Republic in search of cheaper labor costs. But there's no sign yet of a mass exodus. And in any case, Hunya said, rising prosperity can only increase the allure for investors interested in privatization deals. "Most of the privatization deals refer to the consumer-market-oriented companies, like banks or telecoms, and so on, and in case of higher purchasing power, actually, the demand for the products of these companies is actually on the increase rather than the decrease," Hunya said.

Despite the setbacks, some privatizations are being relaunched and others are going ahead. The Czech government is currently reinviting bids for Unipetrol. Bulgaria hopes to sell DSK, the last bank in state hands, by March. And at least two major foreign investors are vying for a stake in the Polish steel group PHS, which is slated for privatization this year.

Tomos Packer, a regional analyst with the London-based World Markets Research Centre, said the Bulgarian government will be keen to press ahead in privatizing Bulgartabac, particularly as it harshly criticized its predecessor for failing to do so. "I think in 2003, as a matter of credibility, the Bulgarian government will have to get this sale of Bulgartabac on track. They've pretty much staked their reputation on the fact that they could sort it out," Packer said.

Analysts say other governments, particularly the Czechs, are likely to take more time, perhaps waiting for economic conditions to pick up.