Mass Privatization in Bosnia and Herzegovina

People Distrust Shares

AIM Sarajevo, December 16, 2000

The millions of German marks, mostly from USAID, spent so far on campaigns to inform the public in Bosnia and Herzegovina of privatization and their participation in the process, seem to have been poured down the drain. The same fate could befall most vouchers and certificates distributed to citizens in the privatization process, because according to the current situation, most of these claims might remain unused, thus bringing into question the entire mass privatization concept.

The people of the Muslim-Croat Federation in Bosnia were issued privatization certificates nominally worth DM15.6 billion on the basis of various arrears -- overdue military wages, pensions, frozen foreign currency savings and other claims. This is also the approximate book value of state capital. If there are valid and rational explanations as to why most people failed to take part in the privatization of smaller companies (companies with less than 50 employees whose value was below DM500,000 in the Federation, and below DM300,000 in Republika Srpska), due to mandatory cash deposits amounting to 35 percent of the price, the lack of cash has nothing to do with participation in mass privatization. The same reason, lack of cash, excludes mere mortals from the list of potential buyers of 277 companies that will be sold through tenders, meaning that cash would be required as payment. The group includes 86 strategic companies, selected by international experts, among which are the electric power company and the Postal, Telephone and Telegraph Service, whose buyers will probably be sought abroad. In this way 67 percent of the total capital of each "specially selected" company will be offered to strategic investors.

Domestic holders of privatization certificates can comfort themselves with the opportunity to buy the remaining 33 percent. The exceptions are the power utility and the telecommunications company, the most profitable companies in the Federation at this point, in which only 15 percent of the capital will be offered to certificate holders. The total value of state capital offered through tenders, that is, for cash, amounts to DM7.1 billion. The state will control DM 3.7 billion in companies that will not be privatized.

In the other Bosnian entity, Republika Srpska, vouchers have been distributed as "legal tender" in the privatization process, the value of which was not expressed in money. The essential difference between the privatization certificates in the Federation and vouchers in Republika Srpska is that the vouchers cannot be used to buy apartments, whereas the certificates can. The people generally have two options of becoming co-owners of state companies -- to either invest their certificates and vouchers in privatization investment funds, or to use them directly to purchase shares of certain companies as they see fit. Of course, they can also use "real" money to purchase shares as well, under the same conditions.

All privatization expectations started from the belief that the people would indeed use their certificates and vouchers. This was so because they cannot be used for anything else, and after the privatization process is over they will simply be voided. In the large privatization which was launched at the end of October, one-half of all state companies in the Federation -- 547 of them -- worth a total of over DM 3 billion, were offered for sale. Still, it is highly possible for these assumptions to turn out wrong. The best illustration of that is the outcome of the investment of certificates and vouchers in the privatization investment funds. Despite all assurances that investment through these funds was the safest, because the funds place the certificates by purchasing shares of various companies, thereby reducing the risks likely to arise when vouchers and certificates are invested in one company only, the popular response so far, especially in the Federation, was quite "meager."

In the Federation, only two funds out of the total 11 have met the legal condition of gathering at least DM200 million -- one has over DM 600 million, and the other slightly over the legally required amount. As it is, by Jan. 12, 2001, which is the deadline for trading certificates for shares, the privatization investment funds could amass up to DM2 billion in certificates. For purchasing apartments and payments in small-scale privatization, about DM1.2 billion in certificates was used, meaning that by the time privatization ends, up to DM2 billion in certificates would be used. Simple arithmetic shows that the people will still be in possession of certificates with a face value of DM11 billion, whereas the initial value of state capital available for purchase through certificates is some DM6 billion. What the end result will be will be known on Feb. 26, 2001, which is the deadline for certificate holders to purchase shares available to them in the 547 companies offered for sale. Afterward, the remaining state capital in other companies planned for privatization, among which are the two most interesting companies -- the PTT and the power utility -- will follow.

The companies whose price is either much lower or much higher than the initial, will be privatized in the second round of privatization, when limits on the lowest and highest price will no longer apply. The offered price will also be the final one, even if it involves a sum equal to one percent of the one initially offered, or a hundred times greater amount. This is to say that, theoretically, a certificate holder could purchase a company whose book value is DM1 million with a single DM100 certificate, and without a single penny in cash. Of course, if he/she is the only person seeking to buy the company's shares.

The numerous scandals, machinations and abuse that accompanied the start of privatization seem to have made the people turn away in disgust, identifying it with plunder, that is, yet another form of cheating. Following such logic, so-called simple, ordinary people have understood that they have nothing to look forward to in the process, and that their certificates are worthless in one way or another.

As paradoxical as it may sound, however, whether the entire process will indeed prove to be just another in a series of deceptions, will largely depend on the mass use of certificates. Although it is obvious that the most valuable portion of state capital is "reserved" for buyers with "real" money, the remaining portion, whose book value is slightly over DM6 billion and that will be available for purchase through certificates, will be completely devalued if most citizens fail to use their certificates. In that way they will leave the door wide open to various manipulators to indeed acquire valuable property for symbolic sums of money.

There will be no new chance to participate in privatization once it ends. It is also clear that the nominal value of certificates is twice greater than the book value of the property offered for sale, but the people cannot lose that much. By failing to use their certificates their holders will gain nothing, but by trading them for shares of any company they will have a chance that "at the end of the road" they might even get something in return, and more than they are getting now. And right now they are selling them for pittances -- a meager three German marks in cash for a certificate nominally worth DM 100.

Drazen Simic

(AIM)