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Privatization Progress In Central Eastern Europe
Oxford Analytica, 03.10.05, 6:00 AM ET
In terms of the private sector share of gross domestic product, the new EU
member states from Central and Eastern Europe (CEE-8) have achieved
substantial convergence towards the developed Western countries. Private
activities generate over 80% of national income in the Czech Republic,
Estonia, Hungary and Slovakia, 75% in Lithuania and Poland, 70% in Latvia
and 65% in Slovenia.
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Furthermore, the 2004 Transition Report of the European Bank for
Reconstruction and Development gives the whole CEE-8 a ranking of 4.3 (in a
range of 1.33 to 4.33) in small-scale privatization, a structural indicator
comparable to the average of advanced capitalist economies. In contrast to
the Soviet successor states (e.g., Armenia and Georgia), whose high private
income shares reflect the outsized role of retail trade and services with
little value-added, private small and medium-sized enterprises in CEE make a
significant contribution to regional manufacturing and local job creation
along with a growing integration in foreign trade.
However, nearly a year after EU accession and 15 years after the 1989
revolutions, the CEE-8 still exhibit significant gaps in large-scale
privatization. The EBRD identifies Poland and Slovenia as the main laggards,
with Latvia and Lithuania occupying intermediate positions behind the Czech
Republic, Estonia, Hungary and Slovakia. However, even early reformers like
Hungary, which began large-scale privatization in the early 1990s, have
encountered delays privatizing major state-owned enterprises. The CEE-8’s
remaining SOEs are clustered in four sectors: financial institutions,
energy, telecommunications and transport.
In November 2004, Poland’s Treasury Ministry divested its shares of PKO BP,
the country’s largest state-owned bank, via a public issue on the Warsaw
Stock Exchange (WSE). Ministry officials conceded that the offer price was
lower than what might have been obtained–underscoring that political
considerations can influence the use of public offerings as a divestiture
tool in CEE. Major insurer PZU may follow this year.
Following the global trend towards cross-border consolidation, foreign
mergers and acquisitions are driving bank privatization in other CEE-8
countries, where political concerns over the remaining “national assets”
being bought by foreign firms are generally less than in Poland. For
example, in January 2005, Austrian-based Erste Bank exercised an option to
purchase the residual 20% shares of Slovakia’s Slovenska Sporitelna to
supplement its assets in Czech Republic, Hungary, Slovenia and Croatia.
Possible candidates for further privatization in Hungary include the Land
Credit and Mortgage Bank.
Under pressure from the EU to restructure their energy sectors, CEE
governments are turning to strategic foreign investors to buy shares in
state energy companies: The authorities in Bratislava are in discussions
with Italy’s Enel to sell 66% of power monopoly Slovenske Elektrarne; Nafta
Polska, the state agency overseeing energy privatization in Poland, is
negotiating with ConocoPhillips (nyse: COP – news – people ), possibly to
purchase a 17.5% stake in oil group PKN Orlen; PKN is expected soon to
finalize its purchase of a 63% stake in the Czech Republic’s Unipetrol,
signalling the growing importance of intraregional investments in CEE power;
and regional investors are also figuring importantly in the divesture of
state shares of Hungary’s energy giant MOL, which initiated trading on the
WSE in December 2004 to augment its long-standing listing on the Budapest
bourse.
However, political factors have impeded energy privatization in CEE-8. For
example, citing unacceptably low bids, the Czech government cancelled a
tender for coal-mining firm Severoceske Doly in March 2004. The low offer
prices reflected conditions (notably the effective exclusion of foreign
buyers) imposed to avoid mine closures. The country’s accession to the EU
removed the foreign investor restriction and opened the way for a renewal of
the Severoceske tender in 2005. The government must now reconcile the allure
of an attractive offer price (which would boost privatization revenues to
lower its budget deficit) with the socio-economic fallout of a foreign
divestiture (which might heighten unemployment at marginal mines). The
government has postponed the privatization of energy firm CEZ beyond the
2006 parliamentary elections.
The Czech government has pursued a more proactive strategy in the telecoms
sector, launching an aggressive restructuring of Cesky Telecom (CT)–the
last state-owned telephone company in the CEE-8–to maximise the firm’s
attractiveness to foreign buyers. From a $78 million loss in 2003, the
company reported a $235 million profit in 2004, the best performance of any
telecoms operator in CEE. This will be the country’s flagship privatization
this year. Government authorities have invited tenders from five bidders
(including Belgacom, Swisscom, Telefonica and Tiscali), whose final offers
are due by March 29, and anticipate proceeds surpassing $2 billion for the
51.1% stake.
Rising fuel costs, eroding pricing power and diminishing margins have
complicated divestiture of CEE-8 transport sectors. The Czech Republic has
deferred privatization of Czech Airlines and Czech Airports until after the
2006 elections. Similarly, the Hungarian government has postponed selling
railway firm MAV and bus company Volan until after the next electoral cycle.
However, Hungarian officials are proceeding with plans to divest state
shares of troubled national airline Malev–problems in privatizing the
company have exemplified the challenges to divestiture of state-owned
carriers in CEE.
The CEE-8 stock exchanges (led by Slovakia, Slovenia and the Baltic states)
posted stellar performances in 2004, well surpassing those of the West
European bourses. This largely reflected the salutary effects of EU
accession, strong GDP growth and increasing trading activity. However, the
regional stock market surge also demonstrates the growing use of initial
public offerings as a privatization method in CEE. This phenomenon is most
pronounced on the WSE, which, in addition to issues by MOL and PKO, has
served as an IPO platform for Polish liquor companies (Polmos Lublin) and
biotechnology firms (Bioten). Notwithstanding the controversy surrounding
the PKO offer price, the CEE stock markets will be important mechanisms for
divestiture of the region’s remaining state banks.
Yet IPOs are unlikely to become dominant privatization venues for CEE’s
energy, transport and telecoms sectors, whose large capital requirements
favor strategic foreign investors. Among a dwindling number of regional
divestiture targets, those sectors are apt to attract the bulk of
privatization-related foreign investment as “second wind” FDI ramps up in
the new member states.
Economic factors–namely the absorptive capacity of local equity markets and
the strategic calculations of Western investors–are likely to shape the
final phase of CEE privatization during the second half of the decade.
However, political sensitivities remain, and will continue to complicate and
potentially delay some major sell-offs.
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