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PRIVATIZATION 72: Mass market Spreading ownership through vouchers The problem: spreading ownership After the fall of the Soviet Union, post-socialist countries in Eastern and Central Europe faced the problem of how to change their failing centrally planned economies into workable market systems. Their old state-run industries needed an injection of new capital and management: but how to do this without selling them cheaply to foreigners? The idea: voucher privatization One way is to bring in new capital and management through privatization: but in stead of selling state enterprises cheaply to the first bidder, involve the general public by issuing vouchers that give them some measure of ownership in the process. Example: mass privatization In 1991 Czechoslovakia, later split into the Czech Republic and Slovakia, began its mass privatization programme through the use of vouchers. Before the programme was introduced, 97% of the companies in Czechoslovakia were state-owned. There were, of course, the traditional alternative methods of privatization: through auction or through a trade sale. But the government wanted ordinary citizens to be involved too - even though the general public were mostly unfamiliar with the workings of a market economy. And while some state enterprises might be very promising investments, many of them were potential failures: so the issue was how to ensure that ownership was allocated fairly, in ways that would not see ordinary people losing money on bad investments. Solving these problems was essential if public support for the transition was to be gained. To spread ownership into the new privatized enterprises, and to engender a practical understanding of capitalism, Czechoslovakia therefore developed a voucher system. The process itself had multiple stages, and the programme continued despite the break-up into two countries. First, the government selected 1,491 companies, representing the largest and most economically important, for privatization. Then, it issued a large number privatization vouchers for distribution to the general public. For the moderate sum of 1000 Koruny (about $28), equalling roughly a quarter of the average worker's monthly wages, each citizen could purchase 1000 points of investment vouchers. These vouchers could be invested through a number of new vehicles that were created to push through the privatization process: joint stock companies called Investment Privatization Funds (IPFs). The idea was that, rather than allowing the public to invest directly into enterprises that may be bad risks and might fail, they would instead buy in to investment companies which would have a number of enterprises on their books. That would help to even out the risks, and the investment funds would have both the incentive and the management skills to maximize the value of the enterprises on behalf of voucher investors. The first wave of bidding was divided up into five different bidding rounds. Depending on the demand between each round, the price would be adjusted for the next round. Thus, the Czech government could adjust the value of the shares on the basis of supply and demand. Results: rapid turn-around in ownership During the first round, 291 of the 1,491 listed companies sold all of their shares and went through complete privatization. A few more than 600 firms sold almost all of their shares. Over 8.5 billion voucher points were available for the public, and 98.8 percent of those available were used. There were a total of 300 million shares available for the general populace to bid on, and of those 300 million, over 90 percent were sold off. By 1998, some 80 percent of the country's enterprises were back in private hands. This meant that in just seven years, a country where almost all the enterprises had been state-owned had successfully become a market-oriented economy. Assessment: no magic ticket The various countries of Central and Eastern Europe have in fact all used different systems. Through the use of investment funds, the Czech Republic, along with Bulgaria, created a more decentralized mechanism than Poland and Romania, for example. The idea was to generate more concentrated holdings in the privatized companies, which it was hoped would then produce more committed and professional control and management. And there were quantitative, as well as qualitative differences. For example, the Bulgarian mass privatization, covering about 20% of the state-owned fixed assets, was about half the size of that in the Czech Republic. Russia too created a voucher privatization programme in 1992. Citizens were issued with free privatization certificates, which they could exchange for holdings in a set of new voucher investment funds, or sell for cash in the street, or exchange directly for shares in privatized companies. However, few citizens really understood the process, and many people sold their certificates very cheaply. Many of the privatized enterprses were unviable in any case, and few funds were able to get good quality shares at privatization auctions. Often the value of investments was uncertain, because there was no market in them. And the funds themselves were taxed as corporations. So most Russians were disappointed by the process. However, other former Soviet-bloc countries have adopted their own variants of the process. Uzbekistan, for example, established 38 investment funds in 1996, taking pains to ensure that good-quality privatization shares were available to them among the list of 300 companies being sold. Returning to the Czech Republic, one particular drawback with the Czech IPFs was that they promised fabulous returns to the investors, though it was always doubtful that they could ever fully deliver the amounts promised. Furthermore, the economic recession of 1998 showed that while there was much success, there was (and is) still much work to be done in reform of the Czech economy. If anything, ownership turned out to be too concentrated, with the banks controlling many of the investment funds. With many of the privatized companies also having loans outstanding to the banks, prices can be manipulated, false markets have been created and there have been many charges of corruption. On balance, however, the voucher privatization system of the Czech Republic and Slovakia must be considered a success. The success of the programme, despite the country's break-up, is a testament to the strength behind the ideas of vouchers for mass privatization. They proved an excellent and efficient way to make a mass shift, while including a previously uninformed populace in the economics of investment. Completion of the process means that millions of individual citizens have a stake in their own economy - one of the highest per capita shareholdings in the world: quite a turnaround for a country where just over a decade ago, almost all enterprises were state-owned. It is clear that mass privatization is not easy to accomplish; but when it is, and is done well, it provides the first step in creating a dynamic market economy. For further information:
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