Since 1990, when Hungary’s privatization program began in earnest, 45 percent of previously state-owned enterprises (SOEs) have been fully privatized and about 17 percent have been partially privatized (Table 8.1). While most of these privatizations represent small and medium-sized enterprises, Hungary has also made considerable progress in privatizing large firms in strategic sectors, including energy, banking, chemicals, and Pharmaceuticals. By mid-1997, the public sector had divested itself of about 70 percent of the book value of its original holdings. Further progress has been made in the second half of 1997, with privatization receipts largely exceeding the initial projections for the year.

Since 1990, when Hungary’s privatization program began in earnest, 45 percent of previously state-owned enterprises (SOEs) have been fully privatized and about 17 percent have been partially privatized (Table 8.1). While most of these privatizations represent small and medium-sized enterprises, Hungary has also made considerable progress in privatizing large firms in strategic sectors, including energy, banking, chemicals, and Pharmaceuticals. By mid-1997, the public sector had divested itself of about 70 percent of the book value of its original holdings. Further progress has been made in the second half of 1997, with privatization receipts largely exceeding the initial projections for the year.

Table 8.1.

Divestiture of State Enterprises

(As of June 1997)

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Source: State Privatization Agency.

According to the 1997 revision to the Privatization Law.

In designing its privatization strategy, Hungary opted primarily for a cash-based approach to im-prove public sector finances; moreover, it relied heavily on foreign investors to attract needed foreign exchange and to bring state-of-the-art expertise and technology to the domestic economy. Consequently, cash revenue from privatization has averaged about 3 percent of annual GDP since 1990, of which more than 80 percent was in foreign currency (Table 8.2).

Table 8.2.

Revenues from Privatization1

(In billions of forint)

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Source: State Privatization and Asset Management Agency.

Revenues accruing directly to the State Privatization and Asset Management Agency.

Includes dividends and other income.

Table 8.3.

Composition of the State Privatization and Asset Management Agency’s Cash Expenditure

(In percent of total)

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Source: State Privatization and Asset Management Agency.

This chapter discusses the evolution of Hungary’s privatization process, including the early period of spontaneous privatization, the slowdown that followed, and the more recent acceleration. In addition, it looks to the future of privatization and the role of the state in the private sector-dominated economy.1

Early Progress

Despite an early start relative to other countries in the region, privatization in Hungary proceeded slowly at first. Adoption in 1988 of the Company Act and the Foreign Investment Act, which offered incentives for private investors and for the formation of private companies, triggered a process of “spontaneous” privatization, whereby profitable assets of state enterprises were split off and sold primarily to company insiders. To prevent this practice and to lay the basis for an orderly transformation of enterprise ownership, the Transformation Act was passed in the following year, which encouraged enterprises to establish themselves into joint-stock companies.

The government then proceeded with privatization along three tracks. First, in 1990, 20 large firms were marketed primarily to strategic foreign investors. Second, a program to privatize about 430 small and medium-sized companies was initiated in 1991. Third, about 10,000 small-scale units with less than 10 employees (mostly shops and restaurants) were also slated for privatization. The net result of this three-track approach was mixed. Of the 20 large firms, only 6 had been privatized by 1993, while another 5 were bankrupt; for the medium-sized companies, only 75 had been sold. Small-scale privatization was more successful, with about three-fourths of the 10,000 units having been sold by the end of 1992.

With no new companies on offer, foreign investment dried up by mid-1993. To revive foreign exchange inflows, a 30 percent share of MATAV (Hungarian Telecom) was sold at the end of 1993 (for $875 million), which represented the first sale of a strategic Hungarian company and the largest single privatization transaction at the time in eastern Europe. Meanwhile, flagging domestic involvement in privatization led to the introduction of a preferential privatization-related credit scheme and to a system of vouchers, known as compensation coupons, which could be used to purchase shares in selected companies as restitution for the nationalization of property. Nonetheless, interest in privatization continued to wane in 1994 and in the first half of 1995 following the public reversal of several privatization deals. As a result, noncash methods were the primary form of privatization during that period. By the end of 1994, only one-third of state assets, mainly in small and medium enterprises, had been sold.

A New Direction for Privatization Since 1995

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

Winding Down the Process Beyond Mid-1997

While the original Privatization Law envisaged the completion of the privatization process by the end of 1997,12 the task of privatization was expanded through an amendment to the law, which was passed in July 1997. According to the modification, the State’s minimum long-term holdings in a number of key enterprises are to be reduced from 50 percent and 25 percent to a single golden share.13 As a result, the nominal book value of assets to remain in permanent state ownership fell from about Ft 350 billion to Ft 200 billion, equivalent to about 3 percent of GDP.14 The efficiency benefits of reducing long-term state ownership in key firms in the banking, telecommunications, and energy sectors may be quite substantial; however, through its golden share, the State will retain considerable control over the broader operations of these companies.15


The issue of privatization is also discussed in Chapter XI, with reference to state-owned banks.


As a result, the amount of state equity that could be privatized was increased by Ft 475 billion, to about Ft 1.3 trillion (about 80 percent of the State’s equity holdings in enterprises held by the State Privatization and Asset Management Agency (APV Rt) upon its founding in 1995).


In the case of large companies in which the State had a majority holding, shares were to be divested through a public tendering process; in cases where the State had a minority holding, remaining shares were to be offered to current private owners, followed by the enterprise itself, before being sold by auction of public tender. For details governing the sale of small firms, see section below.


This post has since been subsumed by the Minister of Industry, Trade, and Tourism.


The largest single deal involved the sale of a further 37 percent of the equity in MATAV, which raised $850 million. Sale of the five regional gas distributors, and the six electricity distributors and two generators, raised $460 million and $1.3 billion, respectively. Privatization of MOL and Budapest Bank raised $180 million and $90 million, respectively.


Among the large companies sold during 1996 were the chemical companies—Borsodchem and TVK; the rubber and tire maker—Taurus; the Forum and Gallert hotels; and the Hungarian Credit Bank (MHB).


Following this latest round of MOL privatization, the State’s share was reduced by 19 percent to just below 40 percent, which netted revenues of Ft 56 billion. A 57 percent stake in Kereskedelmi es Hitelbank, the last of the remaining large state-owned commercial banks to be privatized, was sold in September 1997 for $90 million.


State-owned shares in consolidated banks (MHB, K&H, Mezobank, and Takarekbank) are owned directly by the Ministry of Finance, and revenues from the sale of these assets accrue directly to the Ministry.


The amount transferred by the APV Rt to the budget is equal to cash revenues less operating expenses, the direct costs of privatization, and expenditures for certain items (including enterprise restructuring) up to an amount specified in the state budget.


From cumulative cash receipts of about Ft 570 billion.


In addition, shares and real estate were transferred to the Social Security Funds in 1996 and 1997.


In particular, it was decided that the privatization of the Hungarian Electricity Works, MVM, and the shipping company, MA-HART, would be postponed until 1998.


About 80 companies are affected by the amendment, of which 40 have seen the permanent government share reduced to a single golden share, while in 12 companies, long-term state ownership has been eliminated; 10 companies have seen their share rise; and 18 companies have been added to the list, mostly requiring a single golden share. Under this amendment, the number of companies in which the State is to retain a long-term share increased from 109 to 116, and the number of companies in which the State is to hold a golden share rose from 20 to 27.


This further divestment is in addition to about Ft 500 billion of assets still to be privatized under the old law.


The rights associated with a golden share include the power to veto changes in product lines and in the financial structure of the company, including mergers, divestments, and share conversions.