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Czech Republic: Election Slows Privatization Effort Even Further

Prague, 18 June 1998 (RFE/RL) -- This weekend's parliamentary election in the Czech Republic seems unlikely to bring any immediate improvement in the country's struggling privatization process.

The elections (June 19/20) are not expected to produce a clear winner, with the result that there will probably be protracted bargaining between the political parties, leading eventually to the formation of another weak coalition.

The party expected to gain the most votes, and the one considered likely to lead a new cabinet, are the Social Democrats (CSSD). The CSSD has always been cool towards continued privatization. Analysts say that a leftist coalition led by that party and supported informally in parliament by the Communists could be the worst scenario for privatization as well as for foreign investment and business generally.

On the right, the Civic Democratic Party (ODS) of former Prime Minister Vaclav Klaus is the focus of the main political constellation. It is clearly pro-privatization, but Klaus' record of achieving that is not as good as his constant free-market rhetoric would suggest.

Privatization of the banking sector for instance proceeded painfully slowly under Klaus' government, and the three major banks which account for a majority of banking business in the Czech Republic are still in state hands. Successful privatization of the big three -- Komercni Banka, Ceska Sporitelna and Ceskoslovenska Obchodni Banka -- is considered a key to revitalization of the Czech economy.

The Komercni and Sporitelna in particular have so many bad debts that bank industry analysts suggest their net worth may be zero. Others say that position is exaggerated, and in a signal meant to boost confidence in the banking sector, the London-based European Bank for Reconstruction and Development (EBRD) has recently moved to take an 11.8 percent stake in the Sporitelna. Of the three, only the Obchodni Banka is relatively sound.

The current interim government of Prime Minister Josef Tosovsky approved a fast-track plan to privatize them quickly by public tender, but final decisions on sell-offs will now be delayed until after the elections. Outside advisers want the state to absorb bad loans from the big three to boost their sale price, but Czech Finance Minister Ivan Pilip is not keen on that idea, saying the process would only delay the privatization effort.

Despite the pessimism in some quarters about how much the bank sales would raise, Dr Ivan Angelis, former secretary general of the Prague Association of Banks, says Czech banks are actually in a good position for privatization.

"The standard indicators of attractivity of Czech banks are not bad. If you are looking at the standard indicators like return on equity and return on all these technical indicators which certainly are considered, they are relatively good."

Some of the smaller banks have already been sold. The Japanese investment bank Nomura and the U.S.-based General Electric Capital Services have bought the Czech banks Investicni a Postovni Banka and Agrobanka, respectively, for drastically reduced prices.

The tardiness of the Czech Republic in bank privatization contrasts with the more decisive policies of Hungary, another of the major transition economies. No big Hungarian banks remain in state hands. Former Hungarian Finance Minister Lajos Bukros recently urged the Czech Republic to push ahead quickly. He recalled that In the mid-1990's, Hungary had taken a loss on the sale of its banks. The state had spent considerable resources propping them up until then, and to hold on to them longer would have just caused still greater losses to the national economy.

Banks apart, the Czech effort to privatize large and medium-size industrial enterprises has also lost momentum long ago. The Klaus government instituted a voucher scheme whereby ordinary citizens could hold vouchers for stakes in enterprises. This led to many deformations, including "asset stripping" -- meaning the sale of a company's assets and equipment -- by unscrupulous elements who gained control of enterprises. In many cases, investment funds controlled by the banks bought up the vouchers. This "inside interest" of the banks prevented the emergence of healthy companies, because the banks tended to support enterprises financially whether they were viable on the market or not.

Czech banking adviser Angelis says the Hungarian method of privatization -- selling industry at fair market value to wealthy investors -- is preferable to the Czech Republic's voucher privatization system.

"But still I can compare Hungary and the Czech Republic. By voucher privatization we reached only some fiction of capitalist structure. One of the main objectives of the privatization was to create responsible and really interested owner of industry. We still do not have that. We did not create them by distributing millions of shares to the public. We only created the opportunity for speculators and investors who are not interested in long term performance in long term building of economy or business."

Despite these problems, the Czech model of privatization still appears attractive to some. Officials from Bosnia-Herzegovina have made fact-finding missions to the Czech Republic to study the privatization process. Representatives from Bosnia's privatization agency say they'll look at the Czech Republic's voucher privatization system as an initial model to follow as they put the war-torn country's economy back together.