The 1995 Privatization Law

Privatization regained momentum in the second half of 1995, following the adoption of a new Privatization Law, which sought to complete the process by the end of 1997. Under the law, the range of assets to be privatized was expanded by reducing the previously mandated minimum state shareholdings in specified enterprises.² In addition, greater emphasis was to be accorded to cash sales of enterprises through the use of simple and transparent bidding procedures, with less recourse to nonpecuniary conditionality, including preserving employment levels in newly privatized firms.³ While a significant discretionary element remained, privatization was to proceed along a number of clearly defined tracks, depending on the size of the company and the State’s ownership stake.

The law also established a new agency, the State Privatization and Asset Management Agency (APV Rt), jointly responsible for privatization and asset management, which was formed by merging the State Property Agency and the State Asset Management Agency. At its inception, the APV Rt held a majority interest in 171 large and 259 small and medium-sized enterprises, and a minority interest in 145 large and 176 small and medium-sized enterprises, with a total value of about Ft 1.6 trillion. The new agency was put under the control of the minister without portfolio responsible for privatization, a post that was created at that time to elevate the political profile of privatization.⁴

Large-Enterprise Privatization

Under the new framework, privatization accelerated, resulting in cash sales of about Ft 440 billion in the fourth quarter of 1995, of which more than 90 percent was in the form of foreign exchange. The bulk of this revenue was attributable to the sale of large strategic enterprises in the energy, financial, and infrastructure sectors, including large minority shares in six electricity-generating companies, majority stakes in five regional gas-distribution companies, an additional share of the telecommunications company, MATAV, and a majority share of Budapest Bank (all to strategic investors), as well as further divestment of the oil company (MOL) to institutional investors.⁵ The privatization of the energy sector was also facilitated by new energy pricing rules, which aimed to increase energy prices to world levels by 1997, while ensuring an 8 percent return on equity in the energy sector. This policy necessitated several large step increases in gas and electricity prices between 1995 and early 1997, with subsequent increases to occur regularly to take account of exchange rate movements and changes in input costs.

Reflecting the substantial divestment in the previous year and the consequently smaller stock of assets remaining in state hands, the pace of privatization slowed somewhat in 1996. Nonetheless, a number of large enterprises in the industry, tourism, and banking sectors, as well as further segments of the energy sector, were sold during the year, netting cash revenues of about Ft 115 billion, of which about 70 percent was in foreign exchange.⁶

Despite the planned winding down of the privatization process, cash revenues from privatization are currently projected to pick up in 1997 (to about Ft 300 billion, against an initial target of Ft 180 billion) in response to a final sell-off of remaining state assets. Revenues in the first half of the year were about Ft 100 billion, reflecting primarily the success of global offerings of MOL and Richter Gideon shares.⁷

Small-Enterprise Privatization

To accelerate the sale of smaller enterprises, the 1995 Privatization Law established a separate two-step “simplified” procedure for the privatization of companies with share capital of less than Ft 800 million and fewer than 500 employees. In the first round, cash-only bids would be acceptable through public tender, with the sole condition that the bid price be at least 50 percent of the nominal book value of the shares on offer. If unsuccessful, a second round would be open to noncash bids, including the use of preferential credit, installment payments, leasing, compensation coupons, and employee buy-outs. Under this simplified scheme, 25–100 percent of the shares in 140 companies (from a portfolio of 300 enterprises that qualified for the scheme) were offered for sale, netting revenues of about Ft 12 billion, mostly from Hungarian investors.

Use of Privatization Receipts

In accordance with the guidelines in the budget law, the bulk of cash revenues from privatization and dividends accruing to the APV Rt in 1995–96 was transferred to the state budget and, together with privatization receipts accruing directly to the Ministry of Finance,⁸ were used to reduce public sector debt.⁹ Total transfers from the APV Rt to the budget from privatization revenues earned during 1995–96 amounted to about Ft 375 billion (about 5 percent of GDP),¹⁰ and a further Ft 150 billion from current receipts is expected to be transferred in 1997. The bulk of these transfers has been used to retire government debt owed to the National Bank of Hungary, in proportion to the structure of the debt outstanding at the end of 1995. Since most of the outstanding National Bank of Hungary credit to the government was in the form of interest-free or low-interest loans (arising primarily from devaluation-related losses), retirement of this debt substantially raised the average cost of credit from the National Bank of Hungary. Transfers to the central budget account for more than 60 percent of the APV Rt’s expenditures to date (Table 8.3). Other major expenditure categories include enterprise restructuring(9 ½ percent of total expenses or ¾ percent of GDP), payments directly related to the privatization process (including consultants’ fees), the cost of managing the APV Rt’s portfolio (6 percent of total expenses), operating costs of the APV Rt(1½ percent of expenses), and cash payments to local governments (6¼ percent of total expenses) (see below). In addition, the APV Rt has set aside Ft 31 billion to cover contingent obligations (including for environmental cleanup) under already concluded privatization contracts, from which Ft 6 billion has already been drawn.

Obligations to Local Governments, Privatized Firms, and Holders of Compensation Coupons

To promote privatization and to compensate local governments and individuals for the sale or confiscation of their property, the APV Rt is legally obliged to transfer a portion of the proceeds from privatization to privatized enterprises, local governments, and individuals who suffered under previous political systems. The majority of these transfers (about Ft 100 billion) is due to local governments under three separate legal provisions: (1) as compensation for the municipal land on which privatized enterprises are located and to cover their rights as founding owners of the privatized firms (about Ft 60 billion, of which Ft 22 billion was paid in 1996); (2) 25 percent of the shares in the electricity supply companies; and (3) 40 percent of the shares in the regional gas supply companies. The first two obligations will be settled in cash; the other will involve a transfer of assets.

Payment obligations to privatized firms are governed by the 1989 Transformation Act, which states that enterprises that transformed themselves into joint-stock companies prior to 1992 are to receive 20 percent of subsequent privatization revenues arising from their sale. More than 1,000 firms, including those that netted the largest privatization revenues, are potentially eligible for a payout, which could total more than Ft 30 billion.

The third group eligible for transfers of shares in state enterprises are holders of compensation coupons. Between 1990 and mid-1997, about Ft 150 billion of shares in state enterprises had been exchanged for coupons, and an additional Ft 80 billion have yet to be issued or redeemed.¹¹