Privatization Methods and Ownership Outcomes in Romania[*]
John S. Earle
Upjohn Institute for Employment Research
Central European University
and
Álmos Telegdy
Budapest University of Economic Sciences
Central European University Labor Project
May 2002
Abstract
This paper describes the Romanian large privatization from its beginning in 1992 by July 2000, using a database which includes 88 percent of the surviving population of firms eligible for privatization. We describe the design of the three privatization methods applied: management employee buyouts (MEBOs), the Mass Privatization Program (MPP) and sales of blocks of shares to outside investors. Also, we provide the ownership outcome of the privatization policies, finding that during the first five years of privatization only a minority of the employment was transferred to private hands (47.3 percent) and an even smaller share of the capital of the firms, measured by the book value (25.2 percent). By this time, domestic and foreign outside investors being involved in a trivial number of privatizations having only 2.7 percent of the total employment in 1996. Later, sales became more popular, at the end of the analyzed period 21 percent of the employment and 24.3 percent of book value was under investor ownership. The privatized share of the initial state sector was 53.2 percent by the end of the period. MEBOs were very popular in the first years of the process, until 1995 being the only important method of decreasing state ownership. Unlike in other countries, insiders obtained usually a large fraction of shares, many times all of them. The importance of this privatization method decreased somewhat, but at the end of the analyzed period 30.4 percent of the employment was under employee ownership. Voucher privatization was also important, 15.1 percent of book value of the surviving population was transferred by this method.
1.Introduction
Despite the central role of privatization policies in economic transformation and public debate, there has been remarkably little systematic research on privatization in Romania. This paper provides a comprehensive analysis of the methods and outcomes of the large-scale privatization process up to the middle of the year 2000. It describes both the legal framework and the practical application of the various privatization methods. For each method, and for the large-scale privatization process as a whole, it analyzes the resultant ownership structure and corporate governance outcomes, relying on a database compiled from several sources and covering almost 90 percent of the relevant enterprises.[1] In addition to the unusual coverage of the Romanian privatizable firms, our data have excellent measures of the post-privatization ownership structure: contrary to commercial registries used in other countries, which usually have only dummy variables indicating the presence of owner-types, our data provide information on the exact percentage held by different types of owners, as well as the privatization method used for the transaction. Providing a detailed and comprehensive statistical description of the post-privatization ownership structure is a unique contribution to the understanding of privatization policies in Romania.
Although this paper aims to be comprehensive in its analysis of the large privatization process, it is worthwhile to point out immediately the boundaries of the work. Rather than discuss new private sector development, it focuses only on large-scale privatization, excluding not only the small privatization of shops and service outlets – much of which was accomplished in early asset privatization – but also the privatization of housing and that of agricultural land.[2] There is also little discussion about state-owned entities initially not entitled to any privatization, principally the regii autonome, although some statistics are provided concerning the initial state sector (as of 1992). In practice, this means that the paper’s primary focus concerns corporatized enterprises placed in the portfolio of the State Ownership Fund (SOF) – and thus rendered privatizable by that body – from the very beginning of the privatization process.
With respect to this set of enterprises, the purpose of the paper is to provide an analysis of the major privatization methods that have been employed: management employee buyouts (MEBO), the Mass Privatization Program (MPP), and individual sales.[3] Concerning outcomes, it provides a quantitative accounting of the post-privatization ownership structure and corporate governance, the former by means of nearly comprehensive information on privatization transactions and the latter through an analysis of the concentration of ownership and the institutions that have evolved as a result of each privatization method.
Despite the intense interest of scholars and policymakers in the privatization process in transition economies, and the alacrity with which a number of commentators have formed strong opinions on this topic, it is remarkable, how rare is a study with comprehensive accounting of the post-privatization ownership structure on these countries.[4] Perhaps the reason for the lack of such systematic research is the difficulty in assembling full data on privatization transactions. The premise in this paper, which could be applied more broadly than just to Romania, is that systematic measurement of the post-privatization ownership structure is an important step towards understanding what has actually happened in these countries and in evaluating the performance of the Romanian governments in carrying out policies to further economic transition. Moreover, it is a critical first step in estimating and understanding the effects of alternative privatization methods on enterprise productivity and efficiency.
The rest of the paper is organized as follows. Section 2 examines the corporatization process and determination of the privatizable and non-privatizable sectors, and the background for the implementation of Romanian privatization policies, focusing on the organizational structures set up to handle privatization (principally the SOF and the five so-called Private Ownership Funds, or POFs). The following three sections (3 to 5) consider the main types of privatization methods employed to privatize the state-owned companies: MEBOs, the MPP, and sales of enterprises. In each case, a detailed analysis of the ownership structure and corporate governance institutions resulting from the particularities of the policy designs is provided. Section 6 takes a broader perspective of the overall process, assessing what has been accomplished in Romanian privatization, the problems that have been solved and the new ones that have been created, and the residual state holdings slated for privatization at some point in the future. Section 7 concludes.
2.Organizational Set-Up and Corporatization
This section provides background information on the organization of state-owned companies previous to the beginning of actual privatization process.[5] It describes the division of the state-owned enterprises into those eligible and those non-eligible for privatization, the establishment of organizations involved in the privatization process, and the design of the initial privatization plan.
2.1 Corporatization, firms left out from the privatization process
The first event in the process of privatization of Romanian state-owned enterprises was the adoption of the Law on State Enterprise Reorganization (15/1990). The law divided the state-owned companies into two groups and modified their legal status. The first group consisted of those enterprises, which remained in state ownership, and thus were not eligible to any privatization for a long time, as we discuss below. Renamed regii autonome, they include the companies from the “strategic domains” of the economy “as well as in other fields of activity established by the Government,” according to the Law (Art. 2). State-owned enterprises in the second group were reorganized as “commercial companies”, initially with 100 percent state ownership. Only these open joint-stock companies were declared eligible for privatization as going concerns, the regii's privatization being prohibited by 1997, as we discuss below.
Insert Table 1 about here
Table 1 shows the composition of the state sector in 1992, by legal form. Although relatively small in number, the regii are typically large firms. Data show that taken together, they accounted for close to 21 percent of employment in the state-owned sector in 1992. The table also demonstrates that only a small portion (accounting for 2 percent of the total state employment) was in mixed ownership – resulting from joint ventures and spontaneous transactions – by 1992. The cooperative sector, indeed, was much larger (6 percent of state employment). This ownership form was the "private" sector under the communist regime, however, with little or no authonomy. This paper focuses on by far the largest set of firms in the table: the 100 percent state-owned commercial companies, nearly all of which were slated for privatization, are discussed below.
Before the analysis of the privatization process, we present very briefly the companies taken out from the privatization process. Table 2 shows the industrial distribution of the regii autonome, and the average employment of the firms in each sector. The industrial distribution of the regii is very uneven: more than half of them belong to the energy production and water distribution industry (51.5 percent). The other sector with a higher presence of the regii is transportation (14.6 percent). The average employment figures show that these firms tend to be really large, especially in agriculture, extraction, other manufacturing and telecommunication. Furthermore, they tend to be quite capital-intensive, accounting for about 47 percent of the total assets of state-owned enterprises (Romanian Development Agency, 1997). As a final remark, we should mention that many of the firms prohibited to change their ownership from state to private belong to sectors which are indeed in state ownership in many countries, such as energy production, extraction, railways, utilities. However, a large fraction of the regii belong to sectors of the economy which can hardly be explained on the grounds of economic reasoning that they should not be privatized: these are primarily firms in agriculture, trade, construction and polygraphy, but tobacco industry and telecommunication could also be included in this category. On the other hand, the large manufacturing mammoths were not classified as regii, and thus they were eligible to privatization. This did not happen, as we show below, but not because it was prohibited: the reasons for it should be sought elsewhere.
Insert Table 2 about here
2.2 Establishment of the Organizations Responsible for Privatization
After the reorganization and corporatization of state enterprises, the next legal step on the road to enterprise privatization was the passing of the Commercial Companies Privatization Law (58/1991), which was heavily influenced by advice from the consulting firm Coopers and Lybrand. The Law had little to say about how privatization was supposed to be accomplished. Rather, it was mostly concerned with the legal framework for the establishment of the organizations that were supposed to take over the ownership duties of the state: the State Ownership Fund (SOF) and five Private Ownership Funds (POFs). The shareholding of each commercial company was divided in a ratio of 70-30 percent between the SOF and one of the POFs. The SOF’s organization and governance resembled those of Ministries of Privatization and State Property Funds in other transition economies. It was responsible to privatize 10 percent of the “shares initially held” each year, which led to the widespread interpretation that the privatization of the commercial companies should be completed in 7 years. Although the Law permitted the SOF to apply a broad range of methods (public offering, auction, direct negotiation or some combination of the three), it provided no detail on how the methods should be applied. In addition to it, the SOF was controlling the companies until they became private. It has appointed representatives to the company boards and attempted to carry out pre-privatization restructuring, presumably in order to ease the task of selling. For much of the period, it had all the sales revenue and 70 percent of dividends from all of the commercial companies in its portfolio for carrying out these purposes. In practice, this has meant that the SOF has had considerable discretion to engage in cross-subsidization, taking the sales revenue and dividends and redistributing them as it saw fit.[6] The branch structure of the SOF portfolio for the firms that survived until July 2000 is shown in Table 3.
Insert Table 3 about here
The POFs, these strange organizations were supposed to “operate on a commercial basis” on behalf of the 18 million adult Romanian citizens who had received free “Certificates of Ownership” in each of them and became the nominal owners of these holdings. Ultimately, the POFs had the task to exchange these certificates with the companies' shares, carrying out by this act the Romanian mass privatization, which would have given each adult citizen some ownership in the state-owned companies. Besides these tasks, it had to help the SOF to privatize the companies, which provision only served to further confuse the status of the POFs.
If one takes their name at face value and accepts the rhetoric of the government, the POFs are private organizations and have been so since their founding. In this case, the Privatization Law would by itself have already privatized 30 percent of all the commercial companies. But this view is called into question by the fact that the state (through the SOF) still retained a majority shareholding in each company, which meant that the POFs could have little influence over company management. The "private" ownership was totally dispersed and no institution was set up to provide information on their activity. The nonexistence of such institutions made impossible (or very limited, in the best case) that the certificate holders could ever influence POF decisions. No dividends were distributed during the five years of existence of the POFs, and the board of directors was appointed by the Parliament and the Government.[7] Finally, the Romanian government itself has hardly treated the POFs as private institutions, for instance, depriving them of most of their shares in the MPP in 1995-96 and forcing them afterwards to convert themselves into investment funds (so-called SIFs), although the latter change was primarily cosmetic.[8]
Although the recentralization of authority in the SOF could have been a useful step towards privatization, avoiding the possibility that de facto property rights in the enterprises might become diffuse and vested in branch ministries or enterprise management, the vagueness of the legal framework regarding the application of the privatization methods and the weak incentives of the organizations made impossible the privatization of a large number of companies through case-by-case sales. The contradictory tasks that the POFs were supposed to fulfill (Earle and Sapatoru, 1994), the govermnent hostile to privatization and the importance of the price of shares further diminished the effectiveness of the program (Earle, Munteanu, and Sãpãtoru, 1993). As a result, the first transfer of ownership took place only towards the end of 1992, 16 months after the adoption of the law (State Ownership Fund, 1996), and the pace of privatization was exceedingly slow thereafter.
3.Management-Employee Buyouts
Privatization through transfers (giveaways or sales at low prices) to employees have been common but controversial in transition economies, due to their relative ease of administrative and political implementation, but they are also frequently alleged to be ill-suited to the restructuring demands of the transition. Despite these concerns, in Romania this was the only method that had any success at all in the early years. The management-employee buyouts (MEBOs) were usually accomplished through direct negotiation between the SOF and enterprise employees. The popularity of the method was revealed already in the very beginning of the privatization process. In a pilot privatization program, originally intended to experiment with alternative privatization techniques for a sizable number of companies (350, according to the Privatization Law), only 22 were finally completed, and of those 15 were exclusively and 4 partially privatized by the MEBO method. Subsequently, after the urging of advisors financed by the British Know-How Fund, application of the MEBO method was greatly expanded and encouraged through special credits and tax reduction for the whole period of repayment (Law 77/1994, discussed in detail by Munteanu, 1997).
Consistent with much of insider privatization (particularly majority buyouts or leasing programs) in other Eastern European countries, the SOF relied on insider initiative to begin the MEBO privatization process. Although the rhetoric surrounding the program suggested that the method was most suitable for small and medium-sized companies (also consistent with international practice), the legal framework did not explicitly restrict MEBOs to any particular set of firms. Although there is no direct evidence that the SOF authorized most applications, the silence in the media suggests that rejections were exeptions rather than typical. The policy simply opened and encouraged employees to initiate the privatization of their companies – for their own benefit.[9]