The Estonia Page > EconomyPrivatisation in EstoniaContents: Privatisation in Estonia has been decisive. It is best illustrated by the fact that almost two thirds of the nations GDP comes from the private sector. The central element contributing to the major progress has been a streamlined and centralised privatisation process, which has welcomed foreign investment. Initial emphasis on selling majority stakes to strategic investors has helped attract fresh capital and know-how and raise productivity. Estonia's privatisation programme has been among the most ambitious of those adopted by the states in Eastern/Central Europe. Due to this, over 80 per cent of formerly state owned enterprises have been privatised in Estonia. The Privatisation AgencyThe Privatisation Act in Estonia was not adopted until 1993. However, the process of privatisation had started earlier. Until August 1993, there were two separate government bodies responsible for privatisation. The State Property Department arranged auctions for the sale of smaller shops and service businesses. In October 1992, with the help of German Treuhand consultants, the Privatisation Enterprise was created to initiate the large-scale privatisation of industrial enterprises. The first international tender of state enterprises was announced in November 1992. In the summer of 1993, after the adoption of the Privatisation Act, these two organisations were united into the Estonian Privatisation Agency (EPA), which is subordinated to the Ministry of Finance and funded by the state budget. According to the Privatisation Act, the main functions of the EPA include: * compiling a privatisation programme for each year,
including lists of enterprises to be privatised, The EPA is headed by an 11-member Board. Among the members are the Minister of Economic Affairs as Chairperson, the Minister of Finance, a representative of the Bank of Estonia and members appointed by the Government. The EPA itself is managed by a General Director to whom are subordinated four units: Privatisation Unit, Financial Unit, Surveillance Unit and Land Sales Unit, and three independent departments — Legal, PR and Foreign Relations and Regional Offices. At the beginning of 1998, there were 67 employees working in the EPA. ^ back to topLegal FrameworkThe first legal act regulating privatisation, a law on small-scale privatisation, was adopted at the end of 1990 when Estonia was still occupied by the Soviet Union. The Basis of Property Reform Act was adopted in June 1991. Section four of this Act focused on privatisation. In August 1992, a law which handled large-scale privatisation was adopted. Large-scale enterprises were those that had a net book value of more than 600 000 Estonian kroons (EEK; 1 DEM = 8 EEK). A comprehensive law regulating the whole privatisation process was passed in July 1993. This law did away with the above mentioned distinction and set the general guidelines for carrying out privatisation regardless of a company’s size. According to the Privatisation Act, the employees of an enterprise do not receive any special privileges or rights in the privatisation process. All potential buyers compete on equal terms. Besides the Privatisation Act, a number of other laws and legal acts regulate aspects of the privatisation process, such as the Foundation of and Participation in Legal Persons in Private Law Companies by the State Act, the Property Act, the Land Reform Act, the Using the Privatisation Vouchers Act, the Bankruptcy Act, the Securities Market Act and the Commercial Code. ^ back to topAssessment of the Recent Privatisation of State Owned CompaniesImmediately after the restoration of independence the Estonian Government made an explicit commitment to privatise virtually all state-owned enterprises as quickly as possible. Smaller enterprises were sold by auction to the highest bidders for cash. As the process was relatively straightforward, sales of small enterprises proceeded quickly and nearly all such enterprises were sold by the end of 1994. The sale of medium to large enterprises, which had a greater impact on both employment and output, got off at a relatively late start. Reflecting political factors, the initial procedures were rather complicated, as a rule requiring governmental approval on a case-by-case basis. As a result only seven such enterprises had been privatised through management & employee by-outs by the end of 1992. The Estonian Privatisation Agency's privatisation method is judged by many observers to have been successful, with most enterprises believed to be operating profitably and growing, while both investment and employment guarantees have been over-fulfilled. For example, out of 472 medium or large scale privatisation's concluded by the end of 1997, only about 19 privatised enterprises have gone bankrupt. A considerable part of this relative success can be attributed to the fact that the tender method borrowed from Treuhand and supported by the Privatisation Act in 1993 resulted in the majority of sales to outside investors (both Estonian and foreign private companies). From enterprises sold by the EPA, about 70 percent were sold to outsiders. The experience in Estonia has been that outsiders tended to bring modern management and marketing skills as well as the capacity to make capital investments, all of, which were crucial for the effective turnaround. A notable feature associated with the privatisation process in Estonia has been the relationship between the growth of the private sector and the process of privatisation of the state enterprise sector. The sale of state enterprises often resulted in a decrease of employment, largely reflecting the over-manning characteristic of enterprise operations in Soviet times. Although many enterprises were sold with employment guarantees, these guarantees were usually for a lower number of jobs as compared to the pre-privatisation period. This allowed for an improvement in productivity and competitiveness.
Division of Funds from Privatisation of State Property in 1997:
Division of Funds from Privatisation of Land in 1997:
*Reserve Fund of the Property Reform of the Local Governments The speed with which privatisation took place would likely have resulted in potentially serious political and social dislocations had it not been for the relatively dynamic private sector that started to develop in Estonia in 1992. Newly formed private enterprises were able to absorb a significant proportion of labour from privatised state enterprises, especially in the Tallinn region. Recently, an additional factor has been the rapid recovery of output and employment among many privatised state enterprises, particularly those, which were privatised to outsiders (and especially to foreign investors taking advantage of Estonia's relatively low-cost labour). Both factors contributed to relieving much of the social strain associated with the privatisation campaign and allowing it to be completed in an orderly fashion. In October 1991 (shortly after independence was regained) there was estimated to be 10 000 small enterprises and approximately 500 medium to large state owned enterprises. By the end of 1997 the number of private enterprises had increased to over 61 000 while virtually all small enterprises and 472 medium to large previously state owned enterprises had been privatised. The experience with privatised state enterprises has been generally positive, with improvements in both governance and viability.
As seen in the chart, the peak in privatisation was in 1994 when the speed of privatisation through tender, with preliminary negotiations, could be described as a "one agreement per day" period. At the beginning of mass privatisation by Estonian Privatisation Enterprise in 1992 about 500 big enterprises or business units that were suitable for privatisation through tender with preliminary negotiations were earmarked for privatisation. For the time being infrastructure and utility enterprises were not included in the list. As of today the ownership of 472 enterprises and structural units sold from 1993 to 1997 for the total purchase price of 4 389 001 000 EEK has been transferred through tender with preliminary negotiations. Investments worth 4 319 409 000 EEK and jobs for 56 154 people have been guaranteed. The purchasers have assumed liabilities of the enterprises for the total of 2 160 278 000 EEK. Another method of privatisation of state enterprises has been that of auction. For an auction, contrary to the tender method, no specific conditions are set in regards to employment guarantees or continuation of previous production. Although small, the primary value of auctioned enterprises has usually been company trademarks or the value of the real estate. From 1991 to 1997 1 348 objects were sold in auctions and the total purchase price was 605 278 000 EEK. It is expected that the objective set in 1992 will be attained in the near future.Taking into consideration the amount of time spent on the privatisation process, it would be realistic to expect the process, through both tender and auction, to be complete by the end of 1998. ^ back to topThe Role of Privatisation VouchersEstonia began a voucher program already in 1993, however, vouchers have played a secondary role in the privatisation process. The EPA has generally encouraged the privatisation of enterprises for cash from buyers who are able to inject effective management and capital. Two types of privatisation vouchers are issued to the public; those to compensate owners of property prior to 1940 (restitution vouchers) and those based on the number of years of employment in Estonia (national capital vouchers). The two types of vouchers can be used interchangeably for the privatisation of housing and land, or for the purchase of shares of state enterprises or special funds. The trading of vouchers was fully liberalised in 1994. The market value of a voucher in February 1997 was about 37 per cent of its nominal value. The largest share of vouchers was expected to be absorbed through the privatisation of housing and land. However, due to political reasons, initially calculated prices for land and housing were substantially reduced resulting in a decline of the market price for vouchers. It also decreased their relative share in total assets available for vouchers. Vouchers can also be used to acquire directly owned equity in enterprises in two ways. The first is through participation in "initial public offerings"(IPO's). In these cases the EPA normally sells the majority interest to a core investor responsible for providing management skills and capital. A minority interest can be sold at public offerings for vouchers. The second route is via a mechanism offered to investors at EPA tender auctions, whereby they can pay for up to 50 per cent of their purchase price using vouchers. That fact that vouchers are traded at a substantial discount to their nominal value, offers such investors a significant reduction in price relative to cash payment. Vouchers can also be used to purchase shares in special funds, mainly the Compensation Fund. The primary purpose of the Fund is to provide an alternative investment option to the holders of vouchers as well as to maintain and increase reserves of the issued bonds by investing monetary resources. ^ back to topPreparation of Public Utilities and Infrastructure Companies for PrivatisationWith the process of privatising state enterprises essentially completed, the Government turned its attention in 1996 to the privatisation of infrastructure companies, including the energy complex, railways, ports and telecommunications companies. Of the 100 largest Estonian enterprises, these infrastructure companies accounted for 20 percent of total sales volume in 1995. According to the privatisation program of 1996, a study of five infrastructure companies for possible privatisation was planned. These companies were: Estonian Railways Privatisation of the infrastructure operations is complicated because of their size, their importance to the economy and the course of its development, and their essentially monopolistic characteristics. The Privatisation Agency expects this to take approximately two years. As the result of specifics of infrastructure enterprises an amendment in the Privatisation Act has been enforced which enables the EPA to arrange a tender with pre-negotiations in two rounds. The amendment enhances the the possibility of analysing the present activities and financial and economic background of the bidders. According to the Foundation of and Participation in Legal Persons in Private Law Companies by the State Act (12 June 1996) Estonian Parliament - Riigikogu - has to approve the list of infrastructure enterprises, the shares of which can be sold only with consent of Parliament. The list has been prepared by the Government and was presented to the Parliament in spring 1998. Foreign investors have already shown interest in some of utilities privatisation projects. For example, US and Scandinavian companies are seeking opportunities to buy into the Estonian energy sector. The planned privatisation of infrastructure companies forms a core part of a program to modernise Estonian infrastructure and take advantage of a perceived niche market in transit trade between east and west. In the railway sector, plans have been announced to shut down one third of the unprofitable passenger lines, to intoduce outside capital, and to concentrate on freight traffic which is aimed to triple by the year 2000. As for the oil shale sector and transport (including railways) they are able to generate positive cash flows only with cost of decapitalisation. Financial resources, infrastructure companies can generate by itself are inadequate to enable them invest into modern equipment and technology. Greater financial discipline and cost efficiency is to be encouraged among remaining state enterprises, which should be exposed to a competitive market environment whenever possible. Privatisation of most of these enterprises should enhance both their short and long-term performance. Any postponement here would clearly have an adverse cost impact in future on most of the other sectors of economy, as prices eventually adjust to cover full cost of production. Where conditions of natural monopoly apply, price regulation would be expected to be based on efficiency considerations. Maximising medium-term growth prospects will be achieved by submitting without delay all enterprises and households to such efficiency based pricing. Currently the rates for some important commodities like oilshale, electricity, heat, are proposed by a commission under the Ministry of Economic Affairs, with the final decision taken by Government. This process has proved both lengthy and open to political debate. The aim is to create a mechanism, which establishes an objective and transparent standard for rate setting that can be evaluated by prospective buyers at the same time as they are making a judgement about the prospective profitability and value of these companies. An important issue for both the Government and prospective buyers will be deciding upon the feasibility of continuing to use oil shale to produce electricity in Estonia over the long terms because it is likely to become a relatively costly fuel (especially if environmental costs are taken into account). These initial steps take time. Still some parts of Estonian Energy and Estonian Oil Shale are likely to be privatised in 1998. To complete the privatisation of the remaining three sectors (ports, railways and telecommunications) will take somewhat longer. This is because in the case of ports and railways the prior restructuring will likely result in the state retaining responsibility for a significant but as yet undetermined part of their activities. While in the case of telecommunications, the privatisation strategy must take into account the existing agreements with the foreign shareholders (Finnish and Swedish telecommunications companies) in the main telephone and mobile phone companies (Eesti Telefon, Eesti Mobiiltelefon) in Estonia. ^ back to topUseful LinksOther Sites
^ back to topThe Estonia Page > EconomyThis fact sheet was published by the Estonian Institute in August, 1999 and is intended to be used for reference purposes. It may be freely used in preparing articles, speeches, broadcasts, etc. No acknowledgement is necessary. |