The privatisation process

Peter Mihok
Slovak Chamber of Commerce

The privatisation process plays an important and necessary role in the transformation of the Slovak economy into a functional market economy. It is internally structured as small and large privatisation, whereby small privatisation began in Slovakia in 1991. It was mainly concerned with shops, services and small production units, with approximately 10,000 of these units holding a total value of almost 14 billion Sk when they were sold through public auctions. Since the end of small privatisation in March 1994, the trade and services sector in the Slovak Republic is now almost exclusively in private hands.

Small privatisation was primarily concerned with smaller units of state owned properties, oriented towards the retailing of services. Sales took place solely at public auctions, at which only domestic business people were eligible to participate. Thus small privatisation was not particularly significant in view of the volume of privatised property. By contrast large privatisation is much more important, with the process taking place in two phases or 'waves'. The first wave included 678 state owned companies representing 169 billion Sk of property value, while the second included 549 companies worth 258 billion Sk.

The large privatisation process, which involved the main production companies, is rather more complex. For that reason it has been divided into a number of stages or waves, all connected to each other and characterised by their preferred method of privatisation. The second wave was initiated in the second half of 1994. In comparison to the first wave, which emphasised the use of coupon method privatisation, the second wave made use of the bonds issued by the National Property Fund of the Slovak Republic (NPF SR). This method will be used in conjunction with the standard methods already in effect.

The following are the strategic aims of the Slovak government and the Ministry of privatisation for the forming of ownership structures in the privatisation process:

  • to secure the interests of the state during the privatisation of strategically important enterprises (to set the level of state ownership);
  • to create the basis of economic participation and ownership structure, where a significant role will be played by the domestic business sector;
  • to secure the participation of employees in the privatisation of enterprises where they work;
  • to utilise the inflow of foreign capital in such a manner that it would be directed towards the modernisation and purchasing of new technology, ie, financial revival of enterprises.

Within the large privatisation scheme (herein after referred to as privatisation), both foreign and domestic businesses and private individuals may acquire property. As a legal entity established in accordance with the Slovak Act of Parliament 253/1991 on the jurisdiction of Slovak state organs in matters relating to the transfer of state property to private ownership and to the NPF SR. The NPF SR has a specific and irreplaceable role in this process. The reason for the existence of the NPF SR is to administer property transformation before state property is transferred to private ownership; its main activity being the sale of property designed for privatisation. The most frequent method of privatisation used by the NPF SR is the sale of a state company complete with its rights and obligations, or a company's transformation into a joint stock company with later sale of its shares. In terms of the form of sale, the most frequent is direct sale to an applicant, who, along with the sale conditions, is answerable to the Fund Presidium. Another form is public tender, an aspect of the procedure regulated by law. Other privatisation methods include transferring the property of a company not serving direct entrepreneurial purposes to towns/villages, as well as dealing with certain types of claims for restitution.

To date, the property of 1277 state companies in the amount of US$10,859 million has been transferred to the NPF SR. Of this the NPF SR has sold property totalling $1,497.8 million, with property in the amount of $353 million being transferred to towns/villages. Furthermore, they have invested property to the value of $9,009 million into approximately 738 joint stock companies, for the reciprocal release of shares worth $7,771 million. Of this amount they currently own the sum of $3,030 million shares.

Legalities concerning the privatisation process

The Act which primarily regulates the privatisation process is Law n.92/1991, which stipulates the precise criterion and procedure to be followed when implementing a privatisation project. Meanwhile, Law no 192/1995, which concerns strategically important enterprises, determines which of the enterprises are of national interest and should be included in the privatisation process, and which should remain in state hands, or at least require major state involvement.

For general information, interested parties may refer to the list of firms to be included in the second wave of privatisation, as well as to the list of firms whose direct sale was approved by NPF SR. These lists are published in the daily press or may be obtained from the NPF SR or the MSPNM SR.

When the prospective investor has chosen an enterprise in whose privatisation he would like to participate, he needs to discover whether the enterprise is still in state hands, or already a stock company. In the case of the latter, the prospective buyer will need to deal with the NPF SR. If it is the former, he will need to address his proposal to the MSPNM SR. All the necessary information concerning an enterprise may be obtained from either the founder, that is the particular Ministry under whose jurisdiction it falls, or from the company itself.

When it comes to the process of privatisation, there are no limits imposed on foreign investors. Instead, the Slovak Constitution guarantees the security of their private property, displaying full commitment to the bilateral agreements it has signed with many countries concerning the protection of investments.

Entry of foreign capital into the privatisation process

The entry of foreign capital into the Slovak economy has its basis and support in government policies. Foreign capital is primarily directed into enterprises where there is a need for new technology or for financial revival, with the main requirement being the restructuring of the enterprise concerned. This primarily involves companies where there is lack of opportunity to obtain domestic funds for the purpose of restructuring. To set up the right environment and competitive market economy, structures require the involvement of foreign investors.

Several ways of involving foreign investors in the privatisation process became clear from direct investment in acquiring enterprises, through capital investment in a Slovak enterprise, to agreements with management about the distribution of shares, activities, etc, on a contractual basis. The most desired foreign investor is one with know how, technological innovations and financial capital.

The share of foreign capital in Slovakian enterprises has reached about $1 billion, with the largest investor countries being Austria, Germany, the Czech Republic, the United Kingdom (UK), the Netherlands, France, Sweden and Italy. Major opportunities for foreign investment were created in the newly privatised enterprises, since these now have definite owners with specific business plans and the ability to make decisions concerning the direction the enterprise should follow. They are suitable and often eager for the creation of joint ventures, or for cooperation on a contractual basis.

Foreign investors can take advantage of many positive aspects of the Slovak economy, such as its strategic position in the centre of Europe, its highly trained labour force, its high level of people with a tertiary education, its low wage requirements compared to western Europe, and its legislative protection against double taxation.

Foreign capital in the economy of Slovakia

At a time of chronic shortage of domestic funds in the Slovak economy, foreign investment is of great importance. Therefore, the establishment of favourable conditions for foreign investment is becoming increasingly important. Foreign investment is required to pay for modern technology, management and to improve economic performance. In addition, the activities of foreign investors could play a positive role in the area of regional policy, unemployment and Slovak companies' penetration of foreign markets. Foreign capital enters the economy in the following two ways, as portfolio investment and as direct foreign investment.

Direct foreign investment

The key form of foreign capital participation in the Slovak economy is direct foreign investment. This should form the basis of production machinery and equipment modernisation, new technology and know how transfer, with more efficient integration of the economy in the international workplace. The final result of the process is that direct investments are an immediate source of capital for the production of competitive goods that may be successfully sold on international markets. This creates opportunities for the generation of foreign currency funds. However, in terms of time, this process is for a longer term than that associated with foreign portfolio investment.

Direct foreign investment into industry must first undergo an initial phase where the positive aspects are more or less invisible, for example, know how, licences, materials and semi-finished products. After this initial phase, in the period of full production, and particularly if the profits made locally are reinvested, the positive results begin to become apparent. In addition to increased quality, foreign capital may also have a multiplier effect due to resulting investment demand.

lnvestment climate

The Slovak Republic wants and welcomes inward investment. It offers the following to foreign investors:

  • a well-qualified workforce with a high percentage of university graduates;
  • labour costs are considerably lower than in western Europe, and the lowest of the most developed former eastern block countries;
  • a tradition of manufacturing and precision engineering;
  • free access to the European market for industrial goods;
  • excellent industrial relations and a workforce responsive to modern management techniques;
  • excellent quality of life for expatriate management, with outstanding cultural and recreational opportunities;
  • a first rate location in central Europe, ideally placed to serve both the developing economies to the east, including the former Soviet Union, and the European Community
  • first class road and river communications to both market areas;
  • a stable macro-economic environment, with a stable currency and low foreign debt per capita;
  • up to 100% company ownership;
  • up to 100% repatriation in hard currency of all post tax profits;
  • liberal regulation permitting the importation of goods and components used in further production process;
  • levels of taxation are often lower than in the home country and are fully creditable under double taxation treaties;
  • double taxation and investment protection treaties.

Inward capital investment into the Slovak economy

In 1996 there were 9,717 organisations with foreign participation in Slovakia. Foreign capital invested in Slovak companies totalled 25.3 billion Sk, or $845 million coming from different countries.

Slovak legislation is developing in favour of the foreign investor, as the Slovak Constitution decrees security of investment while offering up to 100% company ownership and up to 100% repatriation in hard currency of all post tax profits. All these factors are a clear indication of the political support for investment into Slovakia.

Major countries investing in Slovakia (1996)

Country Amount (million US$) Percentage share of the total foreign capital inflow No. of companies
Germany166,120,9 1,231
Czech Republic 126,5 15,9 2,009
Great Britain 106,8 13,4 81
Holland60 7,4 165
France 46,7 5,9 117
USA 18,1 2,3 226
Sweden 16,7 2,1 61
Italy15,5 2,0475

Major foreign investors in Slovakia (1996)

Country Country of origin
Tesco Stores SR Great Britain
Volkswagen Germany
Slovalco Norway
Chemlon France
Novacke chemicke zavody Czech Republic
Coca-Cola Amatil Slovakia Holland
Hypo-Bank Slovakia Germany
OMV Slovakia Austria
Tatransky Permon Czech Republic
Citibank Slovakia Great Britain
Bank Austria Austria

Foreign investment has a positive effect on the Slovak economy, such as development of the domestic supplier network, an infrastructure of new technologies and know-how, introduction of new management techniques, development of human resources, labour organisations, work discipline, and productivity of labour.

Foreign direct investment in the Slovak Republic

(In the million US$ - September 1997)

In the first 6 months of 1997, the amount of foreign capital invested in Slovakia increased by $47,66 million. Of the countries investing in the Slovak Republic the most important were Austria (48,9%), Germany (18,7%), the Czech Republic (9,6%) and Japan (8,6%). In the second half of 1997 the amount of foreign investments reached $1,075 billion.

Major countries investing in Slovakia (September 1997)

Country Amount (million US$) Percentage share
Germany 268 24,9
Austria 238,3 22,1
Great Britain 140 13,0
Holland 83,4 7,8
USA 80,4 7,5
Czech Republic 80,4 7,5
France 68,5 6,4
Others 116 10,8
All 1,075 100

From the capital invested in the first 6 months of 1997, 43% was oriented to industry, 25.5% to trade, 12.6% to finance, 11.6% to the building industry, 6.1% to telecommunications, 0.7% to the services and 0.5% to healthcare.

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