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EARLY PRIVATISATION METHOD INTENDED TO PUT BILLIONS OF CROWNS IN THE HANDS OF THE PEOPLE, BUT WOUND UP ENRICHING NEW CLASS OF FINANCIAL WIZARDS

The coupon experiment gone wrong

VEN CASUAL Slovakia watchers are familiar with the country's most infamous direct-sale privatisation scandals - the case of gas storage firm Nafta Gbely, sold in 1996 for one-seventh its market value, or of the Piešťany spa, given away the same year for less than one-fifth of its worth.
But hardly anyone besides economic historians knows the related story of coupon privatisation - the well-intentioned plan to put billions of crowns in public property in private hands that went horribly awry.
The reasons the coupon plan remains obscure may be several: the strategy, while simple, is less readily grasped than the naked fraud of direct sales; the economic and social results, while clear, are less easily gauged than those of outright privatisation theft; and the inheritors of the wealth are still active, even leading, members of the Slovak business community.

VEN CASUAL Slovakia watchers are familiar with the country's most infamous direct-sale privatisation scandals - the case of gas storage firm Nafta Gbely, sold in 1996 for one-seventh its market value, or of the Piešťany spa, given away the same year for less than one-fifth of its worth.

But hardly anyone besides economic historians knows the related story of coupon privatisation - the well-intentioned plan to put billions of crowns in public property in private hands that went horribly awry.

The reasons the coupon plan remains obscure may be several: the strategy, while simple, is less readily grasped than the naked fraud of direct sales; the economic and social results, while clear, are less easily gauged than those of outright privatisation theft; and the inheritors of the wealth are still active, even leading, members of the Slovak business community.

It's because these firms are so important, however, that their history remains relevant. While names such as J&T, Istrokapitál and Penta Group make the headlines every day, the great majority of citizens and investors are oblivious to the nature of the power they wield.

Road to riches paved with good intentions

Between the 1989 revolution and the 1993 separation of Czechoslovakia, leaders of the federal state settled on the term 'large-scale privatisation' to describe the task of taking major state-owned companies and giving them private owners. It was a 'large' project in every way, involving not only massive enterprises, but also correspondingly large amounts of money, and a pressing need to ensure competent management and new production methods.

Much thought went into deciding what method of sale to use. 'Standard methods' such as direct sale to a pre-selected buyer, public auction or public tender, had the advantage of being proven. The problem was, however, that they required investors with sufficient money - which Czechs and Slovaks mostly lacked - as well as sensible business development plans and efficient anti-corruption machinery.

In the end, the government of Ján Čarnogurský (1991 to 1992) settled on an experimental method known as coupon privatisation. This involved turning a substantial proportion of state-owned firms into joint-stock companies, and then handing over their property to citizens for a small fee on the basis of 'investment vouchers'.

Each book of vouchers had 1,000 'points' that could be purchased for Sk1,000 plus a Sk35 handling charge, and then 'invested' either directly into chosen firms, or indirectly into investment funds. An 'exchange rate' between individual firms' assets and privatisation voucher points was established, orders received and tabulated, and the results announced.

Coupon privatisation was based on the principal of equality, with no one knowing how much demand there would be for each stock, or even what its market value would be, and everyone getting an equal chance with the same number of points.

The advantage of this method was that it was quick, that it did not require much money, that it would aid the emergence of a capital market, and prevent corruption or privatisation along party lines.

The weaknesses of voucher privatisation, on the other hand, were that it was an experiment, that property was highly fragmented, that ownership was basically nameless because of the high number of owners, and that it was abused by investment 'privatisation funds'.

The first wave of sales was done mainly through voucher privatisation, beginning in May 1992 and finishing by the end of the year. In Slovakia, the assets of 484 joint stock companies worth 90 billion Czechoslovak crowns (then about $3.4 billion) were marked for coupon privatisation, while 2,579,327 people registered and bought coupon books. While the nominal value of assets per coupon sale participant was over 34,000 crowns, the market value was 18,400 crowns per owner of the 1,000 crown coupon book.

However, following June 1992 elections that brought Vladimír Mečiar back to power as prime minister, the principle of speed - one of the main advantages of the coupon method - was disregarded. Instead, from 1992-1994, sales stagnated as the government moved towards direct sales to chosen buyers.

At issue was neither speed nor fairness, but power. In 1992, 169 'investment funds' had been established for the first wave of voucher privatisation. These funds gained 55 billion crowns in assets, or about 70 per cent of the assets privatised, giving them "significant economic power within the distribution of ownership rights among scores of small shareholders," according to a study by the Mesa 10 think tank.

"Accordingly, there was a relatively high risk of abuse on the part of investment funds, which could be set up for the purpose of speculation or fraud."

But for Mečiar and the communist-era interests he represented, the funds spelt another danger. The economic power concentrated in the investment funds as a result of voucher privatisation was wielded mainly by young people unburdened by the old regime. Against them stood the older class of state company managers, who hated to see their power and influence slip away. Vladimír Mečiar came to represent this group.

After the second Mečiar government fell in March 1994, the short-lived Moravčík cabinet prepared another round of voucher privatisation and opened it in September 1994, with 3,428,419 citizens registering. That round was cancelled by the third Mečiar government in December 1994, however, spelling the end of voucher privatisation.

It did not, however, spell the end of the investment funds, which had already begun to either accumulate stakes in private companies and take them over, or to quietly shift the most lucrative assets from their funds' accounts to those of unknown companies, leaving thousands of small fund shareholders in the lurch.

Mečiar took aim at the funds in 1995, first by stripping the license of one of the largest, whose owners supported media hostile to the government, and then by amending the law to restrict the stake of investment funds to 10 per cent in single firms, thus limiting their ability to accumulate economic power.

Ironically, this law forced fund owners 'underground', giving them an incentive to transform their funds into private companies and thus removing them from state supervision. As the end of the Mečiar government in 1998 drew near, many of the largest funds were either transformed or taken over by private firms, ending once and for all any pretense of paying dividends to the intended beneficiaries - millions of Slovak citizens.

Ten years after reform began in central Europe, economist Jeffrey Sachs gave a mixed review to coupon privatisation, which he called an experiment gone wrong through human frailty.

"Looking back, I would not feel an urgent need to privatise all at once, as was the case in 1990 when we thought it was important to tackle it as quickly as possible," Sachs said in a 1999 interview with the daily Sme. "As it turned out later, the risk was often greater than the actual benefit. Voucher privatisation was an experiment, and the government took little notice of the possibility of abuse, which occurred right from the beginning."

As will be seen in the following pages, those who inherited the funds' wealth have gone from strength to strength, turning often minute footholds in state and private companies into lucrative buy-outs, or transforming contacts in the state apparatus into solid negotiating positions against powerful investors. To understand where these companies came from is to understand the source of their economic power.


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