CEE: The power of privatization

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Proposed privatizations in central and eastern Europe need to be viewed with scepticism, as they have a habit of disappointing.

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Privatization is back in the news in central and eastern Europe. At the start of November, Kazakh president Nursultan Nazarbayev announced plans for a massive sale of state assets including national champions such as KazMunaiGas, rail operator Kazakhstan Temir Zholy and Samruk-Energy. 

Not to be outdone, Uzbekistan’s government followed suit a couple of days later with a promise to privatize more than 1,200 companies across sectors from basic materials and chemicals to electronics. 

In south-eastern Europe, the Serbian government said in mid-November that six binding bids had been received for a majority stake in the country’s largest telecoms provider. Large-scale privatization programmes are also under way in Slovenia and Romania. 

In theory, this is all excellent news – yet experience suggests that it would be a mistake to get too excited about the latest round of public sector sell-offs. Privatization processes in CEE have a habit of disappointing

The sale of Telekom Srbija, for example, has already been postponed once, in 2011, and officials have said it could be called off again if the current bids are not deemed high enough. What is more, one of the bidders in the Serbian process, Telekom Slovenije, was itself the subject of a privatization cancellation this summer after failing to generate sufficient investor interest. 

Slovenia also appears to have made little progress on finding buyers for the other dozen state-owned firms that have been slated for privatization since 2013, while Romania’s privatization process looks to have stalled following the IPO of Electrica last June. 

Grandiose plan

As for the ambitious Central Asian programmes, the market reaction has been one of deep scepticism. A similarly grandiose plan for selling stakes in Kazakh state assets in 2011, the so-called "People’s IPO", fizzled out after two small public offerings. Meanwhile, investors are likely to be extremely wary of involvement in Uzbekistan, whose president Islam Karimov outdoes even Nazarbayev in authoritarian tendencies. 

It is also easy, based on the evidence from CEE, to be cynical about the value of privatizations. Russia and Ukraine are most often cited as awful warnings – yet even in Poland, the poster child for privatization, the process has not always lived up to expectations. 

Investors in the privatized companies, who have seen the price of their shares hammered by Polish policymakers’ decision to nationalize the country’s second pillar pension funds, have certainly had little reason to cheer. Meanwhile, the fact that a clear-out of senior management at listed state-controlled companies is widely expected following the change of government makes it clear that privatization is no guarantee of freedom from political interference.

It would be a mistake, however, to write privatization off. It may not be the panacea some claim but, by setting yardsticks for management and exposing companies to market-based capital allocation, it can make them more productive. And in countries such as Kazakhstan where more than 50% of the economy is in state hands, even a modest increase in productivity across those firms could add a good few percentage points to GDP over the medium term. 

On balance, then, privatization is rather like democracy – it may not be perfect, but it is better than the alternatives.