Sell-Off Speculation

Economic News

22 Jul 2010
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With a new left-led government in place in Sofia, foreign investors are asking whether Bulgaria's privatisation programme will continue on schedule. So far, the messages from the administration have been mixed, with local observers divided as a result on their predictions.



Privatisation has been a top priority for successive governments since the fall of communism in the early 1990s. Although it got off to a slow start, with just 4% of state assets transferred to private hands by the spring of 1996, legislative changes and increased political will after the financial crisis of 1996-97 encouraged a wave of mass privatisations over the following years.



By the end of 2002, the government had divested itself of some 80% of state assets earmarked for privatisation. Nonetheless, 20% of GDP is still generated by the public sector, and there are some notable divestitures remaining, mainly in the energy sector.



Bank privatisation is considered an untrammelled success. By the end of 2003, with the sale of the giant state retail bank DSK, the banking sector had more or less been completely privatised. Just one small bank remains in state hands today, with a market share of perhaps 0.5%. With more than 85% of assets now in foreign, primarily European, hands, the vital financial services sector has been given a much-needed injection of capital and expertise, and has been experiencing strong and sustained growth for the past three years.



In 2004, the completion of the sale of the state's fixed-line telecoms operator, the Bulgarian Telecommunications Company (BTC), brought to an end years of wrangling over the sale, which was first mooted in 1997. The telecoms sector is now controlled by the private sector and with increased liberalisation and a new mobile licence recently awarded to BTC, telecoms customers are looking forward to greater competition and better services and lower prices.



However, the rate of divestiture has dropped off significantly during 2005, with very few privatisations going ahead at all.



The failure to privatise Bulgartabac, the state tobacco firm, symbolises the stalled process. This deal fell apart amid fears that foreign rivals might buy out the industry and cease production, despite claims that the low costs of production in Bulgaria would in fact make the country an attractive location for any of the large international players.



In an election year, however, there seemed little political will to force the deal through, and this might explain the slow pace of privatisations across the board. Now, with the Bulgarian Socialist Party (BSP) taking the main ministerial portfolios in the new coalition government, one might expect that a brake could be put on the entire process.



Yet the new prime minister, Sergei Stanishev, who has led the BSP for three years, told deputies on August 16, as they voted to accept his proposed cabinet, that his administration's priorities would include encouraging private enterprise and continuing with privatisation.



However, he has also appointed another left-wing heavyweight, Rumen Ovcharov, to a vast newly-combined economy and energy portfolio. Energy remains the sector most under state control, and some local observers fear that Ovcharov's appointment might signal the government's intention to retain control of the sector.



Currently two thermal power plants (TPPs) at Varna and Rousse are under the hammer, with the Russian firm RAO EES the favoured bidder. But the country's competition commission blocked the sale of both assets to one buyer, and some believe the new government might decide that privatisation has gone too far.



The state gas distributor, Bulgargas, is also due for sale, but Ovcharov has already intimated on the private BTV channel that the energy privatisation strategy would need revision and that the company should be restructured prior to any sale.



In the same interview, Ovcharov was similarly equivocal on the sale of Bulgartabac, saying that a new strategy would be devised by the end of 2005, but that the government had to clarify issues such as the social functions of the factories, and whether to sell off the assets whole or piecemeal.



Nonetheless, more optimistic analysts are not so worried. Andriana Sukova-Tosheva, executive director of the Bulgarian International Business Association, pointed out to OBG recently that privatisation has not been instigated in the country merely for ideological reasons. Privatisation has been the principal source of much-needed foreign direct investment (FDI) and government revenue. With the International Monetary Fund (IMF) expressing increased concerns over the current account deficit, the Bulgarian government has little choice but to press ahead with the sale of its assets to shore up the fiscal balance, especially as its decision to peg the lev to the euro means it cannot play with its currency and must rely on FDI.



Moreover, Stanishev's government is in fact a three-party coalition, including the two parties that formed the previous government. Although the socialists are now leading, a radical left-wing re-nationalisation process is clearly not on the cards while the centre-right former ruling party, the National Movement for Simeon II (NMSII), must be kept on board. The most likely manifestation of socialist doctrine, says Tosheva, will be in the social charter - on policies such as the minimum wage and increased social benefits - not in any major revision of economic policy.



However, a period of stagnation in the privatisation programme could be likely over the coming year, more through political inertia than government antipathy.



The cumbersome three-party coalition has been constructed with one goal in mind: EU membership in 2007. This is an issue on which all three parties agree, but consensus in other areas of policy may be hard to find. EU accession seems to hang on reform of the judiciary, and there is little pressure from the EU to continue with privatisation. EU accession is also dependent on a stable government being able to pass the necessary legislation for membership. The government is therefore unlikely to take risky steps in any direction on issues that do not directly pertain to the EU. Perhaps privatisation will therefore have to wait a little.

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