Czechoslovakia: The sell-off begins

Issue 

By Adam Novak and Steve Painter

PRAGUE — Any hopes that Czechoslovakia might quickly develop a vigorous small business class took a heavy blow in the Czech republic's first round of privatisation auctions, which began on January 26-27.

Of the first 16 small businesses sold off in Prague, only one will really be owned by an independent Czechoslovak entrepreneur, even though only Czechoslovaks were permitted to bid in the auctions.

Prominent among the buyers were foreign-based (mainly Viennese) emigres whose citizenship has been restored since 1989. But even those with no such historic link to Czechoslovakia apparently had little problem finding agents to buy for them.

Choice items in the early rounds of bidding selling for 10 times their starting price, and few Czechoslovaks were able to buy. Most of the more desirable central city small businesses will shortly be in foreign hands, and it is inevitable that the later heavy industry and large business privatisation will be even more heavily dominated by foreign capital.

In the first auctions, many businesses failed to reach their reserve price. While central city restaurants and antique shops were hot items, enthusiasm was lacking for suburban shops and services — contrary to the expectations of some liberal and left supporters of the government, who had hoped that the small privatisation would break up the state monopolies controlling foodstuffs.

Foreign entrepreneurs know they can make a killing out of the downtown tourist trade, but they are not so sure about other sectors.

Four-stage program

The government has a four-stage program for the privatisation of state property, which between 1948 and the early 1960s came to include almost every commercial and industrial enterprise, from the largest factory to the smallest street kiosk, as well as the vast majority of housing stock and farmland. The stages are:

  • The "restitution", under which property will be given back to its original owners, or compensation paid. This is a scheme rejected by all of the other Eastern European governments because of its potentially enormous expense for already shaky economies.

  • The "small privatisation", under which 100,000 shops and services will be auctioned off.

  • The large privatisation, under which large state ld. This will be accompanied by some form of coupon issue offering citizens the possibility of limited shareholding.

  • The break-up of collective farms. This is the most difficult part of the program and is unlikely to proceed quickly. State and cooperative agriculture is relatively efficient, and disruption of it could cause serious food shortages.

By the time the small privatisation auctions began, neither the large privatisation nor the restitution laws had been approved. The restitution process affects many small businesses that might otherwise be included in the small privatisation.

However, the government would permit nothing to delay the small privatisation, because it is desperate to make at least a symbolic beginning to the economic destatisation process. Businesses subject to unsuccessful restitution claims will be included in a second round of auctions.

Paradoxically, while the privatisation is supposed to be a step towards destatisation, its immediate effect will be to transfer a huge amount of funds into the government ministries controlling the process.

Noted US-based Czechoslovak emigre economist Milan Zeleny (denounced as a communist by advisers surrounding finance minister Vaclav Klaus) has pointed out that the privatisation "drains away capital from the entrepreneurial sphere, where it is needed, to the state coffers, where it is completely useless, stops being capital and becomes simply a pile of money, good for paying the wages of bureaucrats and politicians, but very bad for enterprise".

In fact, the Czech privatisation ministry adamantly opposes leasing enterprises to private entrepreneurs, a measure that would permit a much wider participation in private enterprise and the accumulation of small amounts of private capital, though it would raise less money for the state.

The mafia resists

While foreign interests dominated the first round of auctions, the main winners were local bureaucrats, popularly known as the mafia, who didn't even attend the auctions.

This mafia consists of those who are transforming power and influence under the old regime into private property, power and influence under the new. The new business class, both big and small, will consist mainly of foreigners and former members of the old bureaucratic elite.

Because of the continuing power of bureaucratic interests, the privatisation commissions were instructed to avoid getting bogged down in wrangles with them and to press ahead with those auctions that were not obstructed or contested. The mafia held choice enterprises out of the auctions, and now it has several months to find ways of removing them altogether from the official process. Overwhelmingly, this is an attempt not to defend state property but simply to ensure a prominent role for the old managers and their connections.

Mlada Fronta Dnes journalist Jiri Leschtina recently exposed a scheme in the towns of Usti nad Labem, Liberec and Jablonec nad Nisou to divide the most attractive food shops from their parent state enterprise and attach them to another organisation seeking a joint venture deal with the Netherlands firm Ahold.

On this point at least, the Czech Commerce Ministry and the mafia seem to be at one. The ministry has long been negotiating with the aim of withdrawing some 10% of food shops from the small privatisation for sale direct to Western buyers. The minister's view is that foreign domination of the retail system is "inevitable sooner or later, and we just wanted to save the population time and money".

In another manoeuvre, some enterprises have unilaterally declared themselves joint stock companies, a form in which they might issue shares rather than be auctioned off.

Others have attempted to avoid privatisation by hastily taking on apprentices, since enterprises employing apprentices are excluded from the first round of auctions.

Another common dodge is to sign lease agreements, sometimes illegally backdated, since lessees with agreements dated before November 30, 1990, are entitled to buy an enterprise at its estimated value without going to auction.

More legitimately, many local government bodies opposed privatisation of services under their control and in some cases virtually boycotted the privatisation commissions. The mayor of Liberec pointed out that legislation obliges the city to continue providing the present level of services until the end of 1992, and profit from the enterprises is necessary to make this possible.

The mafia is by no means finished even with the enterprises that have been sold. There's still the matter of so-called stocks and materials, most of them unsaleable or obsolete, and in any case worthless except according to official valuations. These items were not included in the auctions, and many of the new owners will be forced to buy them at non-negotiable prices.

After the first round of auctions, the district privatisation commissions and the ministries have demanded, and will certainly receive, greater powers to overrule opposition.

Big capital takes over

The small privatisation was originally conceived, against the opposition of the neo-liberal Klaus clique, as a redistribution of national property to an emerging middle class, but that's not how it

Proponents envisioned employees purchasing or leasing their workplace before it was placed on the market, or citizens' cooperatives owning community services and other enterprises.

However, a growing alignment between the bureaucratic elite and international capital shifted the emphasis towards the creation of large private capital at the expense of small. Collective ownership was quietly but firmly shelved, and the small privatisation became little more than an adjunct of the large privatisation.

The tight control of the destatisation process by republic-level ministries and Vaclav Klaus' federal finance ministry will continue to strengthen the hold of what many Czechoslovaks now call "white communism".

There will be some sort of private sector in commerce and services, but this will not lead to any serious price competition among the shops ordinary people use. The cheapest food will continue to come from the trucks and street stalls that many suppliers have begun selling from because of the prolonged crisis of the retail food sector.