Bosnian economy going astray

Sanctions for the Delay of Privatisation

Drazen SIMIC

FRI, 28 APR 2000

Sarajevo, 20 April, 2000 - Because of lingering with the beginning of privatisation, B&H Federation found itself under "silent" sanctions of the international community, especially the USA. When finally sale of state property began in this B&H entity on a larger scale in the past two months, due to the manner in which it is carried out, B&H Federation might be faced with much more serious, primarily financial, penalties.

However absurd such development might seem, it is in fact a logical sequence of events. When in November 1997 the parliament of B&H Federation passed the set of privatisation laws with defined deadlines for preparation and the beginning of privatisation in elaboration of which even American experts had taken active part, optimists, but especially those among representatives of the international community, expected quick transfer of state property into private hands. "Everything will be over in 18 months", international experts were certain.

Instead of the expected beginning of privatisation, endless delays followed, for "technical reasons". The whole concept of privatisation was based on the assumption that this would be a quick and mass transfer of enterprises and banks from state control into private property. Privatisation was also expected to serve as the most painless solution for "discharging debts" of the state towards its subjects. The debts of the state to its citizens, from the old foreign currency savings which have disappeared without a trace even before dissolution of former Yugoslavia and the beginning of the war in B&H, to members of the army and police for unpaid wages during the war from 1992 until 1995, debts from the time of the war to pensioners, and the recognised contribution of all citizens of working age in creation of what used to be social property and what will become private property in the process of privatisation, were transformed into privatisation securities.

The state was generous so the total sum of privatisation securities distributed to the citizens on all grounds reached the amount of 15.6 billion German marks. That is how hundreds thousand citizens of B&H Federation, who have no jobs, no salaries, no homes, have overnight become "wealthy" with securities worth several ten thousand marks. Unfortunately, they could not pay for electric power consumption, rent, clothing or furniture with these securities, because they can be used only for purchasing apartments or business premises, enterprises or company shares.

Determination of the number of soldiers who had participated in the war, the amount of privatisation securities which belong to all the citizens of age, completion of identity data, names and addresses, establishment of ten cantonal privatisation agencies, lasted for almost two years. Without these preparations it was impossible to even think of the beginning of privatisation. Managers of state enterprises, the government and privatisation agencies, lulled in their momentary positions which enabled them to control state property like their own, but without any obligations or responsibility, sat on their hands hoping that privatisation would not begin so soon. Although the law obliged them to do it, managers "forgot" to make privatisation programs for their enterprises and initial balance sheets.

This idyll in which the current authorities "firmly promised" every two or three months to donors and international financial institutions that they would begin privatisation "as of tomorrow", and in which the latter took their word for it, and despite verbal threats and conditions, granted them loans, one after the other, and donations worth tens of millions of dollars, could not last for ever. In the middle of 1999, very pompously, purchase of apartments began, and later privatisation of the first small enterprises. If apartments are disregarded, the rate of privatisation of enterprises in B&H Federation was such that it would have taken several decades to privatise all state enterprises in this entity.

The first shock happened towards the end of last year when the government of the USA, having lost patience listening to unfulfilled promises of federal officials, suspended its aid for privatisation in B&H Federation. Strong political pressure was exerted behind the scene and not at all diplomatic discourse between representatives of the international community and local officials took place behind closed doors.

Obviously such treatment had a beneficial effect on the process of transition in B&H Federation and suddenly things started to move from the standstill, and an attempt was made to do in just two months what had not been done in two years. Programs of privatisation of enterprises appeared and their initial balance sheets were made, and finally the list of all enterprises that were expected to become privately owned was completed. The sale of small enterprises was intensified and the beginning of "big privatisation" was announced for 15 May. And while B&H authorities were playing cat and mouse with the international community trying to prolong the beginning of privatisation, the citizens who could do nothing with their privatisation securities, decided to use the legal possibility of transfer of securities and started selling them for symbolic amounts of money in cash. Finally, the offer exceeded demand several times, so that securities are nowadays sold for just three per cent of their nominal value.

Because of the legal obligation when sale of business premises and small enterprises is concerned that at least 35 per cent of the price must be paid in cash, and the rest may be in securities, majority of the citizens could just watch what was going on with no possibility to participate. The result was that for state property worth, for example, 100 thousand German marks, less than 40 per cent was actually paid. Simply, the compulsory part to be paid in cash was 35 thousand marks, and the remaining 65 thousand could be paid in privatisation securities. This means that these securities which were worth 65 thousand marks could be bought without any problems for 2,600 German marks, so that a buyer in fact had to spend 37,600 marks in cash in order to become the owner of state property worth 100 thousand German marks.

While small enterprises were bought in this way, the local public grumbled and the international community tolerated it believing that it was a smaller evil than further remainder of these enterprises in the hands of the state. When recently at an international call for tenders 51 per cent of the capital of Sarajevo Holiday Inn estimated to be 24 million marks worth was sold for 15 million marks to a local businessman, and only about 10 million were paid in privatisation securities, representatives of international community reacted strongly. >From the ambassador of the USA, EU, representatives of IMF, the World Bank, and other international organisations and institutions present in B&H, they all questioned this way of selling state property accusing the public in B&H of not having done enough in order to attract possible investors to join in the privatisation process. For representatives of the international community the problem is not so much in the privatisation of a hotel in Sarajevo as much as in the fear that the same recipe might be used in privatisation of the remaining few profitable local firms, which means that foreign investors could be excluded from the process and that closeness with the current regime would be an enormous advantage. In this case B&H would be put in an unenviable economic situation. Donations are rapidly decreasing and absence of foreign investments would lead to a total collapse in this country. The explanation offered by protagonists of this business deal was based on the allegation that everything had been done pursuant the domestic laws currently in force, in creation of which representatives of international community had participated.

In order to reduce the pressure of the international community, the local officials questioned even their own pleading for the rule of law. Although the whole sale of the majority share of Holiday Inn, as they claim, was completely legal, the new owner’s taking over of the property was “frozen” until “verification in public is completed”. If everything had been legal, this move is violation of the legal right of the new owner to control his new private property, and an unambiguous message is sent to possible foreign investors that the regime is superior to the law it had passed itself. In such a situation arrival of foreign investors becomes even less probable and economic revival of B&H and its liberation from dependence on donations becomes even further away.

Original article