The Belarusian Privatization Case: a New Momentum



Dzmitry Shylau



The privatization project in Belarus that was gathering some momentum upon the breakup of the Soviet Union and was being shaped according to the same patterns and dynamics as in other Commonwealth of Independent States (CIS) and Central and Eastern Europe (CEE) countries, at a certain point of the republic’s sovereign history was pretty much put on hold. The mass privatization project stumbled upon the inability of setting clear objectives apart from guaranteeing social equality during the transition to market economy. Issuance of privatization checks and their non-repayable distribution between adult citizens was where the attempt of voucher privatization stalled and it’s no surprise that it’s now widely considered as a dead project.

The regime of the first Belarusian president Lukashenka deemed privatization initiatives unnecessary and put emphasis onto the development of the state sector (which can be characterized as conservation rather than modernization), whereas the private sector was forced to occupy just some niches of economy where it wouldn’t rival the monopoly of the state-owned enterprises (SOEs). This model of development of Belarusian economy clearly did not serve as a catalyst for privatization, which was well underway in the aforementioned CIS and CEE neighbors (especially the latter), and therefore when Russia introduced a more pragmatic approach to its economic relations with Belarus primarily in terms of raising gas and oil prices, which provided pretty much the sole basis for the so-called “Belarusian economic wonder”, the necessity of privatization of a bunch of SOEs stuck in the Soviet past and in desperate need of modernization and effective management became evident once again.

Despite the clear necessity to finally embark on an active privatization program and get rid of some dinosaur SOEs in constant need of subsidies from the state budget, the clearly autocratic regime tends to keep all the strings in its hands. Its non-transparent target privatization projects have already proved to be insider-friendly and consequently quite ineffective, which is clear from the notorious cases of Velcom, a mobile operator whose majority holding was sold by the state to a businessman from Cyprus, who resold it shortly to an Austrian investor for a figure doubling the amount of the original transaction. [1] Privatization of Motovelo enterprise in 2007 is yet another project the details of which were concealed from the public eye, however it’s well-known that the supposedly Austrian company ATEC Holding GmbH that bought it and promised to invest up to $20 million throughout 2007-2012 [2] turned out to be just a group of Russian individuals with a virtual office in Vienna, who as it’s been announced recently have encountered serious financial difficulties, whilst the enterprise whose staff was shortened from 5 thousand workers to 1280 stopped its operation. [3] These are just a couple of examples of “wise” target privatization that the Belarusian leadership keeps talking about.

As a result, where Belarus stands in terms of privatization today is legislation that gives full powers to the President and the government as far as privatization decision-making is concerned; Ministry of State Property, which is supposed to be an agency responsible for privatization initiatives, but has hardly any say in them; no longer active Special Investment Funds; so-called “25 investment conditions” that can’t be found in any legal act! [4] However, despite almost a 20 years’ delay, the economic problems and rivalry with Russia over prices on mineral resources there is almost as good a momentum that calls for active privatization as in the beginning of the 90s.



The Polish Experience: Liberalization, Timing and Political Will are Everything

The state of economy in which Poland found itself after the collapse of communist regimes across Central and Eastern Europe due to the breakup of the Warsaw Pact and the demise of the Soviet Union was not much different from its neighbors. Much like Belarus today Polish economy desperately needed to be restructured after forty years of centrally planned economy, with over 8 thousand SOEs (in comparison there are around 10 thousand enterprises in Belarus today still in the hands of the state), the privatization of which was considered to be one of the key aspects of Poland’s market reforms. [5] The reason why Polish privatization experience is so valuable a lesson for the prospective transformation in Belarus is that Poland was one of the first former communist states to initiate profound economic as well as political reforms, its privatization policies can be considered an overall success despite at times volatile political situation and to some extent some social dissatisfaction with difficulties accompanying the reforms. A broad variety of privatization methods used in Poland over the two decades of economic reforms proves to be another argument for using Poland as a role model Belarus could learn a lot from.

Among the first things that we need to consider when talking about privatization is why should one do it? In Poland right from the start of economic reforms those in power understood that privatization of unprofitable SOEs is very essential and would serve a number of short-term and long-term purposes, including redistribution of the financial resources to social needs and infrastructural development, attracting foreign investment, bringing in new technologies and professional corporate management, reducing the prices and increasing the quality of finished goods, etc. The newly established Solidarity government introduced and implemented the well-known ‘shock therapy’ economic reforms agenda largely in the vein of International Monetary Fund’s recommendations with a change of legislation to push the privatization of SOEs forward. Clearly, decision-making in privatization is one of the key aspects, therefore the ability of enterprises to overcome the position of employee councils meant a lot as oftentimes enterprise’s workers would strongly oppose restructuring due to a very likely risk of being laid off. Among the other new legislative developments was the permission to transfer state-owned enterprises in poor conditions to a recovery commission; the Law of Financial Management of State Enterprises was expanded and now permitted recurrent revaluations of enterprise assets; antimonopoly laws as well as legislation allowing real estate transactions were adopted by Sejm. [5]

At the same time in the neighboring republic, Belarusian authorities were in fact in the midst of initiating and preparing for the implementation of a vivid privatization program. The Law on Privatization was adopted in 1993 according to which 1/3 of state property was not subject to privatization remaining in the state dominium as a traditional monopoly. [6] Also, after discussions in the parliament, in the final version land property issues were excluded from the document which to this day holds privatization in Belarus back. The Law on Privatization provided for mass unpaid privatization, which permitted issuing vouchers to all adult citizens that could be later exchanged for the stock of commercialized state enterprises. Special investment funds were created to oversee this process, ‘Property’ and ‘Housing’ vouchers were issued and distributed thus starting mass privatization in Belarus in July 1994. However, due to a shift in political environment following 1994 president elections, privatization project slowed down due to constant procrastination of crucial steps and eventually pretty much stalled by the end of the 1990s.

If the Belarusian government would have carried on with privatization project since 1994 and would have created conditions for further transfer of people’s vouchers into the stock of Belarusian enterprises, it would be possible now, 15 years later, to have a proper comparative analysis of mass privatization results in Belarus and Poland. However, due to the lack of clear legislation providing for and promoting broad and rapid privatization and, of course, government policies and decisions Belarus today is not much different from where Poland was in the beginning of the 90s in terms of SOEs vs. private enterprises ratio.

As far as gradual vs. rapid privatization discourse is concerned, Poland has ultimately put emphasis on the former – individualized approach which allows to carefully select the best possible investor (even though voucher privatization did attempt to speed things up). [7] If keeping in mind what the Belarusian authorities are saying today, one would likely jump to a conclusion that Lukashenka’s regime has finally followed in the footsteps of its western neighbors: target market-oriented privatization of major SOEs (which is oh so surprising following Belarusian leader’s populist statements in the 1990s about his reluctance to sell a tiny bit of Belarusian land, let alone a major Belarusian enterprise) is evidently what’s on the agenda today. So, what’s the difference?

When we look at ‘target’ privatization of Polish and Belarusian cases, the difference is striking and the question is what this target is. In the case of the former Soviet republic, it doesn’t look like privatization schemes of BEST, Velcom mobile operators or Motovelo industrial enterprise privatizations to put it mildly don’t seem in the country’s best interest. Therefore, it seems most important at this point to understand how transparency in the implementation of privatization policies can be achieved and how preservation of national interests can be ensured.

Poland at the very beginning of its transition encountered quite a few boulders in privatization path – already by 1990 privatizations carried out in the best interest of certain officials or enterprise management also referred to as ‘nomenklatura’ privatizations were commonplace, so in order to prevent such ‘sweetheart deals’ workers’ councils were granted the right to sack such unscrupulous managers, which was meant as the cure for spontaneous privatization initiatives, however at the same time it could be used unrestrictedly to crush all of the privatization initiatives oblivious of what reasons were behind them. [8]

In order resolve these issues the Law on Privatization of SOEs was passed by the parliament. The Law also provided for the creation of the Ministry of Ownership Transformation, also known as Ministry of Privatization. [9] The fact of enacting clear privatization legislation as well as establishment of an independent privatization agency have to be emphasized as a good starting point for initiating a successful privatization program. The Ministry of Ownership Transformation became responsible for such crucial aspects of privatization as developing and proposing new privatization programs, addressing inquiries regarding the most adequate privatization methods for Polish enterprises, proposing appropriate privatization laws, supervising commercialization of SOEs, as well as carrying out sales of enterprises and their assets, etc. [8] The fact that the Minsitry of

Privatization was enabled to fulfill its mission without consent of the Ministry of

Industry that was in charge of state-owned enterprises and was filled with bureaucrats from the old regime quite reluctant to carry out rapid privatization if any at all is very important.

In Belarus the government body responsible for privatization process on the paper, the Ministry of State Property, is just another wheel in the bureaucratic machine with no real powers as far as privatization initiatives or actual privatization deals are concerned. Quite recently however, on May 25, 2010 a decree providing for the establishment of state institution called National Agency of Investment and Privatization was signed by President Alexander Lukashenka.

The Agency was made responsible for attracting foreign investment, primarily by means of privatization of state property, and it will report to the government. [10]

The idea doesn’t sound bad at all, however there’s something lacking here – no clear accompanying legislation was passed, the President, the government, the Ministry of Property, especially the former kept all of their prerogatives in terms of privatization decision-making. No word yet has been heard in regards to how the agency will be staffed, it has only been announced that it will be formed on the basis of National Investment Agency. In comparison, Poland’s Ministry of Ownership Transformation staff ratio was roughly 50% Polish personnel to 50% of expatriates. Expertise was provided by Americans, most notably Jeffrey Sachs, young Masters of Business Administration, besides quite a few expatriate and

American experts from New York were brought in by the adviser of the Minster of Privatization, Jerzy Thieme who worked in the USA since he left Poland in 1981.

Attracting expatriates as well as countrymen that were born abroad proved to be a very effective way of bringing in much needed expertise not just in Poland, but also in the Czech Republic and Hungary and even China, therefore even if Belarusian authorities today facing self-inflicted tepid relations with the West and treating expatriates not much better than traitors, are reluctant to use the help of foreign-born countrymen, expatriates, students of foreign universities, it is crucial for them to shed these post-Soviet fears and concerns and use these very natural contacts for the best of their country. Poland’s MoP also drew expertise from volunteers, oversees colleges and universities graduates, people from World Bank and Peace Corps. As for the locals, the privatization ministry would attract people from private corporations and classified ads. [8] It doesn’t seem to be an impossible task for Belarusian National Agency of Investment and Privatization, however it’s clear that it requires a great deal of political will and equity to make this project worthwhile for the sake of country’s good.

Poland’s Ministry of Privatization was primarily responsible for mass privatization project, which according to most experts had mixed success, however by contrast with the dead-end of Belarusian unpaid privatization project it still seems that Polish MoP and National Investment Funds did a much better job than Ministry of State Property and Special Investment Funds here clearly to a large extent thanks to the way they were staffed and the powers they were granted. Yet another reason of the failure of mass privatization project in Belarus is that after 1994 elections and especially after 1996 referendum, President Lukashenka started the implementation of what he calls “tightening screws” agenda. The privatization project which was starting out as a quite promising one was no longer a priority, moreover those enterprises that were privatized in 1991-1992 became subject to thorough inspections of the Control Chamber according to the criteria that were adopted in 1994 [11], which is at the very least biased and unfair. Most certainly, such a shift in the political environment had a major impact on the willingness of

SOEs to participate in the project, therefore already by September 1994 roughly half of the enterprises refused to be commercialized. By 1995 renationalization became the case for some of the first enterprises that were privatized in the beginning of the 1990s. [11] However since Russia introduced a pragmatic approach primarily evident in increased gas and oil prices, which allowed Belarus to prosper without caring much about unprofitable SOEs draining donations from the state budget, the privatization project that was shut down so abruptly and without much foresight became topical again.

What Belarus should learn from Poland’s experience is that in order to achieve success in a privatization project a large and broad scope of reforms and changes in legislation is absolutely compulsory. And by new legislation I imply not only laws providing for smooth implementation of privatization policies. Overall liberalization combined with a vivid privatization program work together very well because they complement each other. For instance, workers who are dismissed after restructuring of a privatized enterprise takes place can very well find themselves in a newly funded private firm. Poland’s success story shows that when a boost in the emergence of newly founded private firms goes alongside privatization, it can really breathe a new life into the country’s economy. One more factor is that due to plentiful liquidations, restructurings, bankruptcies of money-losing SOEs conditions are created for new firms to find their niches and actually prosper. It’s a win-win situation for the government as well because it no longer has to subsidize unprofitable “monsters” from the state budget and at the same-time privatized and newly-established private enterprises contribute substantial financial injections by paying taxes. On the other hand, when a country tries to privatize just to a certain extent without giving up certain levers in the economy, tries to control the investor’s every step, making up rules that are not even on the paper, no matter how desperately it needs the money from privatization deals it’s not going to work because serious investors are looking for stable, transparent and fair conditions they can work in and liberalized economy provides such conditions whereas autocratic regime still believing in Gosplan (state planned economy) cannot.

Another lesson to be learned from Poland’s privatization story is to what extent the state should privatize the enterprises it owns. The parts of the Polish economy that were privatized in full are today in no need of state’s subsidies or other help, there are many success stories among such enterprises, their restructuring was carried out very well. On the other hand, the areas that were privatized only partially or just slightly commercialized do not rank as well as the truly private ones, they still draw state resources and are in need of additional restructuring. [7]

As far as methods of privatization are concerned, mass privatization project might have been a success in terms of creating an equity market in the county, getting pretty much all of the adult citizens of the country involved in privatization processes, but by contrast with for example sales to strategic and especially foreign investors it didn’t do as good a job when we talk about completed privatization projects, maintaining reliable corporate governance and most importantly of course economic results. Management as well as employee buyouts proved to be not as efficient as sales to foreign investors, but as the first stage of privatization of an enterprise it still worked quite well. What’s also clear from Polish ownership transformation experience is that those enterprises that weren’t privatized, including those that were commercialized but never got into private hands, they come last in terms of performance, need for restructuring and state subsidies. Some of the areas, for instance Polish Railways, are a great example of how important timing really is. To this day they require huge subsidies and report significant losses. What’s very disappointing is that the number of such unprofitable SOEs in Belarus is huge and even the ones that report profits require substantial subsidies from the state, therefore if the political climate allows to privatize them, it should be done sooner than later.

References

[1] Velcom Sale: a great example of great privatization? //

http://naviny.by/rubrics/mobile/2007/11/20/ic_articles_127_154043/

[2] Ministry of State Property and ATEC Holding GmbH made a sales contract of

"Motovelo" stock// http://news.tut.by/93318.html

[3] Semashko admitted unsuccessful privatization of "Motovelo" //

http://news.tut.by/166641.html

[4] 25 investment mysteries of Belarus // http://liberty-belarus.info/Приватизация/25-

инвестиционных-загадок-Беларуси.html

[5] Privatization and economic restructuring in Poland: an assessment of

transition policies // The American Journal of Economics and Sociology, April,

1996 by Dennis A. Rondinelli, Jay Yurkiewicz

[6] The Law of the Republic of Belarus of January 19, 1993 "About

denationalization and privatization of state property in the Republic of Belarus"

[7] Moving Ahead: Privatization in Poland by Barbara Blaszczyk

[8] Foreign Experts, Capitalists, and Competing Agendas: Privatization in Poland,

The Czech Republic, And Hungary by Connie Squires Meaney

[9] Economic Transformation in Poland: Success or Failure? by Dr. Marek

Wroblewski

[10] National Agency of Investment and Privatization to be created in Belarus //

http://news.tut.by/economics/art171381.html

[11] In regards to reformation of state property in the Republic of Belarus in 2005

http://www.economy.gov.by (Ministry of Economy Home Page)

[12] EMCC Case Studies: Transport and logistics sector: PKP Group, Poland