Privatization Jiří Havel

Privatization is the process whereby property passes from the hands of the state (the public sector) into private hands. It is the opposite of nationalization, when private property passes into public hands. The term confiscation is understood as the removal of property in cases where it has not been decided whether it will remain in the hands of the state or will be further appropriated. The state can acquire property by various means: by purchase, reversion (the acquisition of property which has no heirs), or donation. The state can also decide to carry out expropriation; however, according to present constitutional regulations this can only be in the public interest and with compensation.

After World War II every country saw a growth in the public sector. The wartime economy seemed to have proved that the state could be a good manager, especially in the long term. It was considered to be a suitable response to the economic crisis (the Great Depression of the 1930s). In a number of developed countries the extent of redistribution grew and the state appeared to be the guarantor of the development of certain branches. Conservative governments however claimed that such measures could only be temporary; Winston Churchill, for example, privatized the steel industry at the beginning of the 1950s.

In the 1970s doubts appeared in the theory of economics and especially in political programs about the effectiveness of the expansion of the state sector, and privatization programs began to be advocated. That was what took place in Britain, the shop window of conservatism in the 1980s. Under British privatization, shares were sold at prices which made it possible to make profits rapidly (thanks to the deliberate setting of lower-than-anticipated prices). The Labor Party then accused the Conservatives of the populist buying of votes with the state’s money. In the same way, the sale of council houses in Britain changed political behavior. The passing over of the ownership of council houses into private hands had the anticipated statistical response of an increase in the number of right-wing voters. Those who were renting council houses were able to purchase them at less than the market price … A number of promised intentions were not fulfilled, and privatization did not always lead to better-quality services and greater competition. Nevertheless, for a long time the outcomes of privatization were evaluated as having been very successful and given as a model to other economies. They were certainly successful in the political field. The Conservatives won the elections four times in a row, governing for 18 years from 1979 to 1997.

After 1989, reforms in the former socialist countries dealt with a deeper issue than in the Britain of the 1980s, which seemed to be the model. The share of the state and cooperatives in the economy approached 100%, the highest by far being in Czechoslovakia. The dimensions of the state’s ownership and the large number of enterprises gave wings to the declaration of the main architect of privatization Dušan Tříska, who noted that to approach privatization by the same methods as Margaret Thatcher would have taken roughly 600 years.

The vision of reform put into effect in the Czechoslovak Republic gave the first priority to privatization. Everything else had to be connected to the creation of the private sector. One could say that a functional legal system and other market institutions were created only gradually after privatization. Czech economists made the mistake of thinking once the right laws were passed by Parliament, the legal system would function; they did not think about how it could be put into practice without qualified courts, procurators, police, and supervisory and monitoring offices. Czech reform economists focused on the hypothesis that a functional market had to be created by private subjects and that everything else was secondary.

Privatization in the Czech Republic officially took several forms:

1. Small Privatization

2. Large-Scale Privatization

2. 1. Auctions

2. 2. Free-charge transfers to municipalities

2. 3. Public competitions

2. 4. Direct sales to selected interested parties

2. 5. Transfers to forms of public limited company

2. 5. 1. Share auctions, sale on the capital market

2. 5. 2. Free-charge transfers to municipalities

2. 5. 3. Public competitions

2. 5. 4. Direct sales to selected interested parties

2. 5. 5. Coupon method

3. Restitution

3. 1. Righting of property wrongs (handing over real estate)

3. 2. Transformation of cooperatives

3. 3. Restitution of church property

4. Spontaneous privatization

4. 1. Privatization in conflict with legal and moral principles

4. 2. Setting up of new businesses in the usual way

The Small Privatization was the first step in privatization. It involved the public sale or renting of small business such as shops, restaurants, workshops, and so on. The method used was by auction. It was on the whole a successful form of privatization, politically compensating for the delay in the Big Privatization. Its disadvantage was the manipulation of auctions (including blackmail), the nontransparent origin of the purchase money (preferential treatment of the underworld), the low level of repayment of bank loans and poor payment track records on the part of the purchasers. A number of prices were greatly exaggerated (rents) and there were conflicts over compensation for the goods in the shops, etc.

The Big Privatization concentrated from the beginning on the coupon method. It was seen as the key to the transformation in ownership and a kick-start to the capital market. The Big Privatization was at the same time a splendid method of addressing the population politically, since at that time people had a very lukewarm attitude to privatization plans. Thanks to Viktor Kožený’s “Harvard Fund” campaign, every voter was promised 10,000 crowns. Every citizen over 18 (i.e., every voter) had the right to a book of coupons. The registration of the first coupon books began in the week leading up to the 1992 election, thus making it plain to all that the magnanimous donor distributing handouts was Václav Klaus personally, and his Civic Democratic Party (ODS). The ODS won a famous victory in those elections. Voters had shown a similar enthusiasm in voting for nationalization in 1946.

The political success of coupon privatization formally speeded up the privatization process. Another advantage was that businesses we not burdened with other privatization debts. A disadvantage was that the vision of coupon privatization meant that for five years businesses were virtually without oversight, exposed to the mercy, or lack of it, of their managements. In the second phase businesses had to survive the first wave of owners created by investment funds, as a rule by the state-owned banks. The funds and their representatives wanted to lay their hands on the money they had borrowed for the campaign. Many of their managers put the burden on the businesses they had purchased, which, however, needed real investors and access to the market instead. Coupon privatization was thus, in the first phase of privatization, formal; most businesses did not find strategic owners until the second half of the 1990s, when they finally went through the necessary restructuring. We are told that coupon privatization made money thanks to the income from the sale of coupon books (1,035 crowns each). In the light of the obligations of the state in getting rid of old ecological burdens in privatized businesses there was of course a major loss.

The privatization in the two waves of coupon privatization in 1992 and 1993 was carried out according to a standard method. It was another ten years before it was decided that bank socialism should be abolished. This represented the informal institutionalization of financial corruption linked with certain political circles. At the same time in the banking sector the hidden expenses of the transformation were deposited long term in bad debts. The cleaning up of the financial sector and the reimbursement of bank socialism cost around half a billion crowns, including lost profits and taxes. All the big banks were privatized at a loss for a negative sum in the course of a formal gain of around one hundred billion crowns. The main profit it brought was the ending of corruption and the establishment of conditions for the Czech financial market.

In spite of the fact that in the Czech Republic there was a very large measure of property restitution, restitution represented only a small part of nationalized property. Among the political parties, restitutions were advocated chiefly by members of the People’s Party (known colloquially as Lidovci), who, step by step, approached their unspoken aim: the restitution of property to the Roman Catholic Church. The motto of the Lidovci “What has been stolen must be returned” sounded fine. The problem lay in the fact that after the war it was the Lidovci who had voted for nationalization. One historian noted that the motto of the Lidovci should really have been: “We’ll return what we stole, and we’ll do it again at your expense!” Restitution took a winding path which depended on the interests of individual groups. The leadership of the ODS was not enthusiastic about restitutions; they held up the vision of reform and caused thousands of legal conflicts. Even the property of President Václav Havel got mixed up in the restitution process, although he was never actively involved in it. Neither, however, did he do anything to stop it.

The limit for restitutions was set formally at February 25, 1948—i.e., the day the communists came to power. The essence of restitution was the return of physical property, or in some cases compensation, although at the very low value of the time. The legal construction was “compensation for some wrongs” because it would never be possible to make compensation for all the damage done to the owner. The symbolism of the step was emphasized.

Part of the restitution involved the transformation of agricultural cooperatives. They were legally required to return the greater part of their property to the original owners. This wiped the cooperatives off the economic map of the country. Without transformation they would, as powerful subjects, have ruled the economy; with transformation, they were burdened with huge debts, in many cases impossible to pay, and they lost land and properties to boot. Politically, the transformation of the cooperatives was brilliant, because just about every rural inhabitant could claim some land. And each one knew who had to be thanked, and had something to be grateful for.

The Church, especially the Roman Catholic Church, got back all properties related to religious purposes. It was returned to them by an enumerative method, essentially as a gift. So what was left? There was still the property that the Church had managed. In Austrian law this church property counted as the property of the crown (state), which was why Emperor Joseph II was able to make reforms, close down monasteries, and retain the property. The Church argued that the property should have been theirs and that they should have been financially compensated, and based on much more advantageous principles than others. At critical moments, the Lidovci made their political support for an important decision conditional on a promise of such compensation to the Catholic Church. The last time this happened was during the second election of Václav Klaus as President. A rational essence of Church restitutions would be to bring the Church’s financial relationship with the state to an end on the condition of a one-off provision of property in return for the relinquishment of further contributions.

The dimensions of the spontaneous privatization, which in the Czech Republic was thought of as consisting primarily of illegal or immoral activities, are not formally quantifiable. For obvious reasons, it is impossible to trace such transfers of money and property from public businesses. Apostles of reform claim that this activity is exaggerated, and to some measure was unavoidable. What the citizen believes the extent of privatized robbery to be depends on his social status and political orientation. It is an established fact that none of today’s Czech millionaires knows anything whatsoever about any dishonest privatization practices.

We are unable to answer the question of the financial dimensions of Czech privatization any more precisely than this. Property was privatized in various periods and for the most part we know only its simple accounting value from the times of darkest socialism. That is useless. We have a more precise knowledge of the profits of privatization, but without the expenses which were borne by other institutions. If we somehow calculate the sum of historical prices from various times we reach a very problematic total of somewhere around a billion Czech crowns. How much the whole transfer of public property into private hands at 2010 prices would represent is an impossible question to answer. It would very likely come to more than ten billion crowns.