Privatization methods used: figures and reasons

IV. PRIVATIZATION IN ACTION: METHODS, PRICING,

• The condition relative to “addressing the sale to strategic investors” is linked to the percentage of shares still held by SOF. The prevailing assumption of this explanation is that majority stakes trigger almost automatically the appeal to “strategic investors.”

The relative weight between companies in SOF’s portfolio where majority stakes are held, as opposed to companies where only minority stakes were left under SOF’s control, has been severely affected by the architecture of the MPP. Since the content of the “MPP list” was such that 83 percent of enterprises were open for the free distribution of up to 60 percent of their share capital (as opposed to just 17 percent of companies where SOF was to retain majority stakes), and since the degree of under-subscription was broadly similar in both cases, it would appear that that SOF should have been left with more companies a priori destined for auctions than for direct negotiation. This, however, seems not to have been the case, because of the large number of companies left out of MPP’s coverage as well as of the subsequent “regularization” with SIFs, as a result of which SOF ended up with majority stakes even in companies offered for 60 percent subscription in the MPP, but not actually subscribed to that degree.

The other legal condition, relative to the lack of competition in the auctions attempted, is effectively a “fall-back” one. Normally, all other things being equal, it should increase the share of privatization deals carried out by direct negotiation, to the detriment of auctions.

• A third possible explanation, based on the size of companies slated for privatization, would presume that the percentage of direct negotiations should be positively correlated with the size of the companies privatized. The actual data, however, lead to counter-intuitive conclusions. Since - in the recent period - the average state-owned share capital divested is increasing, one would have expected to see an increase of the share of deals carried out by direct negotiation relative to the proportion held by auctions. Probably, such a situation will prevail in the subsequent period, because the number of small companies left for privatization is declining much faster than that of large companies.

• A final explanation for the observed state of play with respect to the privatization methods used, one which is favored by most Romanian-originating comments about this issue, assumes that direct negotiations had been privileged over auctions because of the higher discretion they gave to the seller in terms of attributing the privatization contract. The same explanation has been offered, moreover, for the scant recourse to capital market-mediated privatization transactions, the reasoning being the same: the more transparent a privatization method is, the more likely it was that the

“privatizer” will deliberately shun it.

Such line of reasoning cannot be confirmed by the developments recorded in the last two years. It could, perhaps, explain why the recourse to direct negotiations has been so widespread in 1996, although the legal framework was pointing in the opposite direction. Yet, such a thesis is invalidated by the subsequent developments: there was

still a strong propensity for direct negotiations in 1997, that is, after a wholesale change of SOF’s management has been operated and, moreover, with the very same management team at the level of the SOF, a dramatic “U-turn” occurred since 1998.

It thus appears that none of the conventional reasons which can be offered for the break-down of privatization methods carried out by SOF yields satisfactory explanations.

This may be attributed to several factors, in particular to the inherent “learning curve” which SOF has followed since the cash sales have been generalized. This, coupled with the evolution of the legal framework (not in terms of prescriptions of methods used, but rather with respect to issues such as pricing and the procedural requirements attached to the recourse to each privatization method available), has helped crystallize in practice (by a “trial and error” process) a certain pattern for the recourse to various privatization methods, which is not necessarily identical to what theoretical assumptions would predict. Extremely important for explaining this relative “hiatus” between practice and theory is the fact that, as already mentioned above, SOF is operating under the pressure of different goals, which it is supposed to achieve although some of them are mutually contradicting themselves.

Under such circumstances, the extensive recourse to auctions is the reflection of the desire to conclude a large number of privatization deals without mobilizing too large resources to this end. According to the same logic, the appeal to direct negotiations occurs in cases where the nature and state of the companies offered for sale anticipates the need (legally stipulated or not) for other aspects to be addressed as part of the privatization deal (investment commitments, assumption of past debts, protection of workforce employed).

There are also spill-overs from one method to another. Broadly speaking, because rather stringent pricing provisions apply to sales through auctions (partly because of legal requirements, partly as a result of over-cautious attitudes by SOF’s staff), some of the companies which could be privatized via this method - if more flexibility would be accepted concerning the issue of the price - end up by being offered for sale via direct negotiation, because the simultaneous application of the element “investment commitments” helps reduce the pressure on the element “price per share.”

And, ultimately, whatever could not have been privatized by any of the two methods mentioned above ends up as earmarked for sales on the capital market, where neither the price conditions, nor the side-elements of the privatization transaction are deemed to be as stringent. This is probably the aspect of SOF’s strategy for the use of the privatization methods that is most open to criticism. Instead of using the capital market for the privatization of companies whose characteristics are appropriate for this kind of sales (and whose number is, at the end of the day, very limited), this venue, to a growing extent, has started to be used as a “dustbin,” collecting the failures recorded by the recourse to other methods, which could have been far less numerous if all the possibilities of those other methods had been thoroughly explored.