Stumbling Toward Privatization

The sell-off of state companies in Eastern Europe was supposed to be well under way by now. Yet in much of the region, privatization has practically become a dirty word, with voters fearful of change returning ex-Communists to power. As a result, the process is proceeding only in fits and starts.

Poland finally has launched a long-delayed mass privatization program. The Czech Republic, in contrast, swiftly dumped its state-owned enterprises into two voucher programs. Yet looks can be deceiving. These companies, although they are technically private, are owned by investment funds, which in turn are controlled principally by local banks. So far, these banks haven't done much to restructure and hire new managers.

In Hungary, the government did sell off 30% of the phone company in 1993. But last January, Socialist Prime Minister Gyula Horn heeded the left wing of his party and cancelled a deal to sell HungarHotels. Coming just after the Mexican monetary crisis, the move dashed investor confidence.

SPEEDIER SALES. Now, Hungary's privatization appears to be back on track. "Because of the budget deficit, they have no choice," says Tamas Kovacs, an economist with Creditanstalt-Bankverein. Finance Minister Lajos Bokros is counting on $1.2 billion in privatization revenues. In May, Parliament finally passed a privatization law that provides the framework for speedier sell-offs. In June, Horn sacked Industry & Trade Minister Lszl Pl, who had been impeding the sale of electric utility MVM. In July, the government sold 20% of savings bank OTP in a private placement.

Slovakia is the most bewildering case. Just as the economy was starting to expand, Prime Minister Vladimr Meciar pulled the plug in June on a plan to sell state enterprises in a coupon-for-shares program. Now he wants citizens to accept instead five-year bonds drawn on the state holding company. Meciar says this procedure will prevent investment funds from exercising too much control. But opponents fear Meciar will sell the companies to current managers, who will bring in no new capital or knowhow. These maneuvers recently scared foreign investors into spurning a global share offering in petrochemical producer Slovnaft.

The obvious need for capital investment in key industries may force governments to speed up privatization efforts. "Economic development is severely constrained by a lack of adequate communications," warns Clell G. Harral, a telecommunications specialist with the European Bank for Reconstruction & Development. The Czech Republic, after repeated delays, agreed in June to sell 27% of phone monopoly STP Telecom to TelSource, a Dutch-Swiss consortium. In Poland, however, the state both owns and regulates phone monopoly Telekomunikacja Polska and is reluctant to let go of this cash cow--its tax payments make up an estimated 10% of the national budget. It's this kind of short-term thinking that's a drag on competitiveness in the region.

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