To privatise or not? That is the question

After the 1989 fall of the communist regime of what was then Czechoslovakia, the transfer of property from state ownership into private hands was of the upmost importance, as this was the basic precondition for a transition from the centrally planned economy to the market-driven economy.

The entry of a strategic investor would mean additional resources for Bratislava Airport. The entry of a strategic investor would mean additional resources for Bratislava Airport. (Source: TASR)

After the 1989 fall of the communist regime of what was then Czechoslovakia, the transfer of property from state ownership into private hands was of the upmost importance, as this was the basic precondition for a transition from the centrally planned economy to the market-driven economy.

Over the years privatisation, as this process was called, has taken on undertones of corruption, cronyism and non-transparent practices. This happened especially during the reign of the three-time Prime Minister Vladimír Mečiar. Mikuláš Dzurinda and his two governments continued in selling state assets. However, his successor Robert Fico pulled out from this process completely. After centre-right parties formed the ruling coalition following the June 2010 election, the Iveta Radičová government voiced its determination to support steps towards enhancing the effectiveness of selected companies with state ownership. Due to the bad reputation of the word privatisation, however, the government is instead now looking for strategic partners.

History of Privatisation

Before the Velvet Revolution in 1989 all production assets were state property in what was known at the time as Czechoslovakia. Specifically, this pertained to all production companies including small workshops; contrary to some other communist countries where craftsmen and tradesmen were allowed to own and run small units. To start up the market driven economy and competition, it was necessary to change the ownership structure. Accordingly, the cure for the economy was named shock therapy – the idea was to do it quickly in order for the economy to recover and start to develop a competitive environment in an expeditious manner. The privatisation process started shortly after the revolution and involved various forms. In particular, restitution was one of the forms utilised. This refers to the process by which assets that had been nationalised after 1948 were returned to their previous owners or heirs. Assets of billions of the then Czechoslovak and Slovak crowns changed hands.

The privatisation itself was divided into so-called small privatisation taking place in the early 1990s, during which small- and medium-sized production units, shops, and service providers were sold. Along with this, the state was also selling large companies, within two waves of the so-called large privatisation. There were more methods used to change the ownership: direct sales, public tenders, public auctions and coupon privatisation. All the methods had their own advantages and disadvantages, and various degrees of transparency and fairness.

One of the methods was known as coupon privatisation. This method entailed the distribution of shares of companies being privatised amongst people. Note, this particular method enabled ordinary people to get, more or less fairly, part of state assets, on whose creation they participated during the previous regime. This process brought the germination of the capital market. Under this process each adult was able to acquire a so-called coupon book for a certain fee and then change the coupons for shares of selected companies. They could do this on their own or via so-called investment privatisation funds, which chose companies on their behalf.

Coupon privatisation became popular, especially after promotional campaigns by some of these funds. In total there were two waves of coupon privatisation. However, in the early stages of his third term Mečiar changed the second one into the bond method. Under the bond method, those who acquired a privatisation bond for 1,000 crowns, received 10,000 crowns after five years.

Firstly, the privatisation process was geared at the federal level and after the 1993 split of Czechoslovakia, into what we now know today as the Czech Republic and the Slovak Republic, the two new independent countries managed it separately.

The privatisation got a “bitter flavour” during the third term of Vladimír Mečiar. Specifically,
the local businessmen started to be preferred to foreign investors, in efforts to create a national business class and for transfer of assets from state into private hands; non-standard and less transparent methods were utilised.

There are several examples of disadvantageous sales of state assets during Mečiar’s reigns. Noteworthy is the notorious privatisation of one of Slovakia’s largest companies, that of steel-maker Východoslovenské Železiarne. The company gradually and deceptively became under the control of a close ally of Mečiar, Alexander Rezeš. Under his leadership VSŽ expanded its empire to include: press, a football team and an insurance company, as well as a fleet of over 20 luxury vehicles and aircraft. After Rezeš left the firm in 1998, following the election victory of parties allied with Slovak Prime Minister Mikuláš Dzurinda, the former rich and prosperous VSŽ was found to have lost 11 billion crowns that year, and to be in danger of defaulting on its loans to banks. In 2000 the company was sold to an American investor, U.S. Steel and renamed as U.S. Steel Košice. Other examples of ‘bad privatisation‘ were Slovenské Liečebné Kúpele Piešťany spa, and Nafta Gbely. In some of these cases, privatisation was reversed and new investors were selected or their revitalisation was needed.

During the first term of Mikuláš Dzurinda, in 1998, although the process of privatisation retained some negative undertones, more transparent methods started to be utilised. The state was selling majority or minority stakes in Slovak companies while the size of stakes sold depended on whether these companies were regarded as strategic or not. The state sold stakes in the Slovak telecom monopoly Slovenské Telekomunikácie (to Deutsche Telekom), Slovenské Elektrárne (to Italian Enel), regional electricity distribution companies, national gas utility SPP, Transpetrol, regional bus companies, Slovenská Poisťovňa, as well as banks such as Slovenská Sporiteľňa, VÚB, and IRB. In general, there were two goals pursued by privatisation: to raise money to cover transition costs during the reform of the old-age pension scheme and improve performance of companies as the state management proved to not be effective enough.

Nearing the end of its second term, the Mikuláš Dzurinda government also prepared the privatisation of two main airports, in Bratislava and Košice; and cargo railway company ZSSK Cargo. But of these only the sale of the 66-percent share in the Košice airport to the TwoOne Austrian-Slovak consortium materialised. While the Dzurinda government halted the sale of Cargo earlier prior to the parliamentary election, the successor, government of Robert Fico, completely cancelled the sale of the 66 percent of shares in Bratislava airport. In general, the Fico government opposed privatisation and did not continue it. The chief reason was that Prime Minister Fico believed that the state was able to manage companies in its ownership.

Iveta Radičová’s government

The change of “drivers at the wheel” of government in July re-opened the issue of privatisation. In its programme for the four-year term the Iveta Radičová government promised not to privatise strategic companies. Instead, it decided to support all the steps necessary to enhance the performance of selected companies with state participation. The companies this may refer to are the frequently mentioned Letisko M.R.Štefánika – Bratislava Airport and Železničná Spoločnosť Slovakia Cargo (ZSSK Cargo). The cabinet of Iveta Radičová is now re-opening the door to strategic partners as players in these two state-owned companies in an effort to counteract their operational losses or failure. Moreover, the sale of stakes in state-owned heating companies or the sales of remaining state stakes in some other companies are also mentioned. But the government has changed the rhetoric and is now looking for strategic partners.

The Institute for Economic and Social Reforms (INEKO), a public policy think tank, perceived these governmental plans in a positive way.

“Our analysis has shown that companies in state ownership are mostly loss-making or with only low profits while those at least partly-privatised companies reach significantly better results,” Peter Goliaš, the director of INEKO, told The Slovak Spectator. “Apart from this, most of these companies are falling more and more under the pressure of competition while the task of the state is not to compete with private companies.”

Goliaš expects that the entry of strategic partners into Cargo and Bratislava Airport will result in improvement in terms of the following: effectiveness of these two companies; cancelation of redundant work positions; and making prices, for example in railway transport, more realistic. Nevertheless, he does not see any fundamental difference in the entry of a strategic partner or privatisation.

So far a final decision about the sale of companies’ stakes or entry of strategic partners has not been made. The Radičová government has replaced management in some of these companies and they now face the daunting task of consolidating their operations.

“We have an interest in consolidating Cargo as well as Bratislava Airport,” said Ľubomír Tuchscher, the head of public relations at the Ministry of Transport as cited by the Sme daily in late October. “Only afterwards we will look for a partner.”

In an earlier interview Tuchscher confirmed for The Slovak Spectator that the Ministry of Transport realises the need to find a strategic partner for ZSSK Cargo as well as Bratislava Airport.

“But we do not want to do this quickly and at any price,” Tuchscher told The Slovak Spectator. “We prefer the entry of strategic partners to privatisation. Such a partnership should be mutually beneficial.”

The Transport Ministry noted that it is aware of the difficult financial situation of both companies and especially of Cargo, which last year received an eight-year loan of €166 million from the government because of its financial problems. ZSSK Cargo announced earlier this year that it will be unable to make the initial installment payment on the loan due in February 2011, according to the SITA newswire. ZSSK Cargo attributes its difficult financial and operational situation to a significant drop in cargo transport caused by the economic crisis.

“Primarily, it is necessary to consolidate the company; that is the basic task of the new management [installed in mid September],” ZSSK Cargo spokesperson Monika Schmidtová told The Slovak Spectator. “Currently, the company management is analysing the situation and only on the basis of those results will it proceed to the question of the potential entry of a strategic partner.”

ZSSK Cargo said that it is already taking tangible steps to reduce its costs, increase revenues, and improve its economic performance, for example in the form of electronic public procurement.

Bratislava Airport

The situation for Bratislava Airport is somewhat different. The airport's shareholders, the Transport Ministry which holds 48 percent of the shares and the National Property Fund with 52 percent, replaced the airport’s entire top management on September 9. According to SITA, Transport Minister Ján Figeľ stated that among the reasons for the wholesale change of managers in top posts was the ambiguous decision-making and unsupported preference for certain financial partners and companies.

Bratislava Airport reported a loss of €2.7 million in 2009 but the company’s management does not view this as a particularly poor result since three airlines operating at the airport went bankrupt last year.

“In spite of the loss of three airlines, SkyEurope Airlines, Air Slovakia and Seagle Air, which in 2008 made up as much as 55 percent of the total operating revenues of the airport, we recovered relatively quickly, our performance has stabilised and we have again registered an increase in the volume of passengers,” airport spokesperson Dana Madunická told The Slovak Spectator, adding that some other airports had taken six to eight years to recover from similar situations.

Madunická said Bratislava Airport’s management views the decision about the entry of a strategic investor to be a matter for the airport’s shareholders. Further, Madunická asserts that it is important to choose the proper kind of partnership as there are several successful models in the world.

"The entry of the strategic partner would in particular mean for the airport additional financial resources being used for the development of services and completion of the necessary infrastructure which we are not able to cover from our own resources," said Madunická.

However, Madunická said Bratislava Airport does not view the 2006 privatisation plan – that would have sold 66 percent of airport shares to the TwoOne consortium consisting of Schwechat airport in Vienna, the Penta private equity group and Raiffeisen Zentralbank of Austria – as very beneficial.

More information about Slovak business environment you can find in our Investment Advisory Guide.

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