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Nikolay Vassilev:
deputy |
ON THE POSITIVE side, the sale of DSK Bank to Hungarian bank OTP for e311 million means that the entire Bulgarian banking sector is in private hands and more than 80% of shares are owned by foreign investors. The government has also said it is committed to breaking up and selling off its electricity distribution sector in seven companies by the end of the year.
Prospects are, however, much worse for the sales of telecom operator Bulgarian Telecommunications Company (BTC), and the tobacco monopoly Bulgartabac. These sales, which have suffered setbacks and delays, are now mired in Bulgaria’s highly politicized courts or facing vetoes by political vested interests.
Bulgaria’s government has a lot riding on the successful completion of these sales. The IMF, which has praised the government’s overall economic management, is nonetheless pressing for further structural changes. The ratings agencies, which have been steadily upgrading Bulgaria’s long-term foreign currency rating, regard more privatization as a prerequisite of further upgrades. The debt markets are starting to wonder whether the external financing framework needs to be reassessed.
Marco Annunziata, emerging markets analyst at Deutsche Bank, says that while the DSK deal provided “much needed reassurance”, another major sale in the coming months is essential. Privatizing either BTC or Bulgartabac would “give another significant boost to Bulgaria’s outlook and would significantly improve the country’s chances of receiving an investment-grade rating sometime next year,” he says.
The delays clearly annoy Nikolay Vassilev, the deputy prime minister and economy minister (pictured above), who believes they are politically motivated.
Ministers are still determined to sell these companies. But the most optimistic timetable they can offer at the moment is that the sales will be completed by the end of their term of office in 2005.
The latest supreme court decision on BTC’s sale, announced last month, which is allowing venture capital firm Advent the right to bid for the company, has “made things more complicated,” says Vassilev. “This means we will either do a deal with Advent, the other bidders, Turk Telekom and Koc Holding, or there will be no deal at all,” he says. “It is unfortunate that the courts have complicated matters – there is a legal battle and we don’t know the result.”
What upsets ministers even more is that BTC is in desperate need of the management expertise and cash injection that can only come from a foreign investor. The company is already under intense competition from two efficient privately owned mobile phone companies. In 2005 an unchanged BTC will see its competitive position further undermined as the network opens up to competition.
“It is in a dire position,” says a banker. “It gets most of its revenue from a handful of clients, it is under-invested, it is hardly digitalized and it covers only 30% of the country. Although rebalancing has been done of its pricing, local calls are still heavily subsidized and international ones overpriced.”
In contrast, the fate of Bulgartabac, which is profitable but which could be even more successful under private ownership, is a purely political matter. Bulgaria’s tobacco farmers, who are mostly ethnic Turks, are worried that a privatized Bulgartabac – the company is already overstocked with leaf – would refuse to buy their produce. As a result the junior government coalition partner, the NRF, a mostly ethnic Turkish party, is blocking the sale of the company.
The most that ministers have been able to achieve is the flotation of 12.8% of the shares on the local stock exchange in 2002. Earlier that year they had been forced to abandon the sale of 80% of the company after four bids ranging from $64 million to $110 million had been received.
Ministers are now trying to prepare a new strategy, which includes talking to tobacco multinationals Philip Morris and Imperial Tobacco.
Most frustrating of all for Vassilev is the damage that these delays are causing to Bulgaria’s reputation in international markets. This is inevitable even though the economy minister believes that any criticism of the government is undeserved.
He says that the country now has “the best privatization law it has ever had”. This law has opened up the state’s stake in 1,600 companies to the private sector. There are no preferences for employee/management buyouts, deferred payments are limited and privatizations are carried out by a specialist privatization council.
“It is only in these two companies that there have been problems. We have got strong competition for each sale and got good prices. You have to remember that 95% of the companies are worse off in state hands because management is too political and inefficient. They would be better off if we had given them away 10 years ago,” Vassilev says.
Ministers will be looking for the sale of the electricity supply industry, for which BNP Paribas has been appointed as the government’s adviser, to deliver more good news. This will please investors though it is less popular among Bulgarian consumers as end-user prices have risen by 50% in the past two years to ensure that charges are in line with costs.
Any delays in the sale of BTC and Bulgartabac will only delay what has been an inexorable shift towards a privately owned economy in the past six years. Privatization has been a key element of the policies of this government and its predecessor, the right-of-centre Union of Democratic Forces (UDF). The sale of state assets has earned the state between e200 million and e400 million a year since 1997.
This government’s main achievement has been to sell financial institutions. As well as DSK Bank, it has sold Biochim Bank to HBB Bank, Bulbank to UniCredito Italiano and insurance company DZI to Contract Sofia. This not only generated revenue for the government but has helped create a more dynamic financial sector, which is helping industry to grow.
Bulbank’s deputy chairman and executive director, Luigi Lovaglio, says the parent bank is more than happy with its investment. The key facts that persuaded UniCredito to invest were “the economic stability, the fast growth in GDP, the financial security of the currency board, the low level of inflation and, looking at the banking sector, the relatively low level of penetration. UniCredito considers Bulgaria an important platform for deploying its strategy in new Europe where it has invested $2.6 billion.”
Biochim chairman and chief executive Rumen Beremski says that “there is no systemic risk, which makes things more predictable and stable”. However, he adds that this environment also makes the market more difficult as “banks are becoming more aggressive and margins are decreasing”.
