Is State Capitalism Marching On?

In the last two years, the coalition government led by the GERB party has increased the state's intervention in the economy. Every time there is a problem - a water supply shortage, public procurement failure or bankruptcy of a "strategically important company", the cabinet proposes yet another state-owned holding to solve it. The state-owned Bulgarian Development Bank (BDB) began bankrolling local oligarchs, substituting for their failed banks, and preventing the market from throwing them overboard. The competition authority abandoned all pretence of being a fair regulator; instead, it began picking winners in the economy.

The shift is symptomatic of the elite's changing strategy. Intermediaries are no longer needed when money has to be syphoned from public coffers. Gone are complex ploys, like the scheme in which the now-defunct Corporate and Commercial Bank (Corpbank) collected the deposits from the big state-owned companies to finance political and business projects and ensure media support. While until a few years ago, governments had to balance according to the interests of several competing oligarchs, and sometimes lose power, now the GERB-led cabinet can directly control them.

"No" to competition, "yes" to the state

A recent attempt by the Movement for Rights and Freedom (MRF), the party that represents Bulgarians of Turkish ethnic origin and supports the current government, to change the law in order to allow private citizens to hire employees of the National Protection Service as personal bodyguards, is probably the most significant privatization of the past few years. Aside from this being an all-too-real joke, it seems that the Bulgarian state has reversed the process of economic liberalization.

The construction of new pieces of public infrastructure and repairs of existing ones that take the lion's share of budget outlays are good examples. In the last two years two state-owned companies - Montagi and Avtomagistrali, received multi-billion contracts without bidding in public procurement procedures (see at p.46). The official reason is the need to speed up the construction of vital infrastructure but the real one is the desire to circumvention the tendering process.

Up to this point considerable public resources were distributed through bidding procedures to a few favoured companies, which then hired subcontractors to compensate for their own lack of capacity. Now, however, public contracts have been discontinued and subcontractors are chosen through the state-owned companies without the limitations of a procurement procedure and the basic transparency it provides. This way, even the all-powerful favourites will become a lot more dependent and obedient in order to stay in the game.

At the same time, the government does not shy away from using the power of regulatory bodies to reward its political friends and to solidify its base. One telling example is the decision of the Commission for Protection of Competition's (CPC) to choose who should and who should not buy NovaTV - the biggest private TV channel in Bulgaria, and who should not buy the local assets of Czech energy group ČEZ, which include the biggest power distribution company in the country.

In both cases, foreign investors had to comply with vague demands of the government, only to see their places (in the case of NovaTV) taken by politically more convenient local buyers. If anyone ever doubted the CPC's impartiality, it is now clear that the anti-trust body is not the independent regulator that will guarantee competition in the Bulgarian economy.

When the CPC is not at hand, the government is openly attempting to forcibly take over private companies. A prominent example in this resoect are the multiple efforts to nationalize arms manufacturer Dunarit, which was part of Tsvetan Vasilev's fallen Corpbank empire alongside already nationalized aircraft repair plant Avionams. Recently, it was the turn of Vasil Bozhkov and his National Lottery. Under the noble pretext of curbing the vice of gambling, the speedily amended Gambling Law has established a government monopoly in this sector.

The cherry on the cake in this new policy is the BDB. Created to assist small and midsized businesses, in recent years the bank actually turned into source of government assistance to favoured businessmen. One-third of BDB's loans portfolio consists of credits extended to companies connected to two businessmen, both related to the Movement for Rights and Freedoms - Delyan Peevski, who is an MP from the party and Rumen Gaytanski, aka the Wolf, who owned several companies jointly current honorary chairman of MRF Ahmed Dogan. These exposures can result in the end in the nationalization of those companies losses.

The new fashion - of government holdings

Of course, the state's increased role in the economy could sometimes be attributed to mere incompetence. When the government is in a bind (see at p. 10) and no apparent solution is at hand, the only politically viable course of action is to throw public money at the problem concerned. GERB has simply taken this practice to an extreme by making it seem that any problem can be resolved by creating a new state-owned holding.

This is how the water crisis in the city of Pernik precipitated the birth of the Bulgarian Waterworks Holding under the aegis of the regional development ministry. To make more bang, one billion levs from the country's fiscal reserve were poured into the new structure.

The Ministry of Economy had created its own holding group - the State Consolidation Company (DKK), which assembled many state-owned companies from different sectors with a combined worth of about one billion levs. Two years ago the government increased DKK's capital by 500 million levs. The model follows that of the Bulgarian Energy Holding (BEH) group, created back in 2008. For all these years since then, BEH's sole purpose has been to transfer money from its profit-making subsidiaries to those losing money.

The main characteristic of these structures is the almost total lack of transparency over the expenditure of public funds. The ineffectiveness of the state-run economy is best highlighted in the energy sector. The National Electrical Company (NEK), which is inherently a monopoly and dictates the rules in the sector by simultaneously buying and selling electricity, is more than 4 billion levs in debt and has lost over 1.2 billion levs. On the other hand, instead of investing profits generated by Kozloduy nuclear power plant in the proper handling of nuclear waste or new technologies, BEH has been syphoning them out to the unprofitable lignite-fired Maritsa East 2 thermal power plant. Even so, the thermal plant's debt amounts to more than 1.6 billion levs and the accumulated losses amount to 850 million levs.

Kaloyan Staykov, the economist from the Institute for Market Economics, is damning about the state's role. "The common theme in all these cases - BEH, DKK, the funding of the construction of Hemus highway and the plans for a new waterworks holding, is that the state has no idea how to manage its assets. And it has no idea why it has these assets, to begin with. The new law on state-owned companies introduces a requirement to present an evaluation of the necessity to create a new state-owned company, but there is no such requirement for existing companies or assets. The only explanation for the existence of most state-owned companies is that they were inherited from a period when there were no private companies, but have now been taken over by private interests. There is no reason for not privatizing or awarding a concession for companies operating the railways and the postal service, the companies within BEH, waterworks and many others," he believes.

More than just a waste of money

When Boyko Borissov formed his third government three years ago, the new economy minister Emil Karanikolov had already announced the halt of privatization. "We welcome every action that has to do with passing legislation that will regulate public-private partnerships," he said then.

The gesture seemed to target those swaths of Bulgarian society which felt deprived during the post-Communist economic transformation. Although this is not a substantial part of the Bulgarian electorate, those people have provided crucial swing votes, blowing into the sails of populist parties. And since one such a party - Ataka ("Attack" in Bulgaria) which was then part of the governing coalition had proposed Mr Karanikolov for the job, his position sounded all too logical.

But there was something more sinister about it. The Minister of Economy gave voice to those who have always branded the privatization process as unjust, not because of its social cost, but because it was not under their control. The ragtag group of former officers of Communist-era State Security service, businessmen from the murkiest years of Bulgarian transition and newly minted oligarchs has become collectively known as "The Librarians" because many of them have found refuge in the University of Library Studies and Information Technologies. According to their narrative, Bulgaria has veered into a destructive path, led by liberal values and Western ideals. And all those who rode the wave of economic liberalization and took part in the privatization process are - if not outright criminals - then part of a wicked group who must be punished and in the meantime stripped of their assets.

This is a smear campaign constantly trumpeted by the tabloid empire of Delyan Peevski. It has served him all too well since most of his business adventures have been attempts to hijack someone else's business, be it in retail, insurance or construction.

The anti-privatization, anti-liberal rhetoric also fitted PM Borissov's game plan. It allowed the prime minister to depict his liberal critics as "bad hombres from privatization".

"The paradox is that, on the one hand, people have the least trust for institutions and the state as a whole, but on the other, they expect transparent responsibility," sаys Parvan Simeonov, director of Bulgaria's Gallup International.

He believes that the hate of private wealth is bigger than the hate of the state, which explains why Bulgarians are not that suspicious when the government is expanding its economic activities, even when it means keeping afloat haemorrhaging companies that should have been restructured long ago.

The privatization of state-owned assets was the key condition for getting the support of international creditors for the macroeconomic stabilization of Bulgaria after 1997. The path has taken then has now made it possible to countenance the country's accession into the Eurozone. The "total revision of privatization", as announced by the prosecutor general, moves in the opposite direction. It can only be speculated whether this is the result of interests that seek to steer Bulgaria away from the Eurozone and the EU's banking union or just mere populism.