INTOSAI Working Group on the Audit of Privatisation

Papers for the Eighth Meeting
Budapest, 11 and 12 June 2001

The challenges posed by the privatisation process in Albania – an update

Country Paper by the Supreme Audit Institution of Albania

Sali AGAJ, Head of Audit Methodology

"… exists a rich evidence, which argues that the state enterprises haven’t served as they should, neither clients nor taxpayers. Where the state possesses none possesses, and where none possesses none takes care."

Margaret THATCHER

 

Low productivity and efficiency, political interference in economic development, the lack of competition, the slothful and overly slow answer, the low quality of the goods and services, their limited assortments, the abundance of bureaucracy and the lack of the capital investments in technology modernisation were the consequences of the domination of state property.

Therefore one of the three main principles at the core of the economic reform started in 1991 was privatisation of the economy including industry, agriculture and public services.

The privatisation of the wholesale and retail trading network at the beginning of the 90s was the first step in this direction. It helped to solve the urgent problem of supplying the population with everyday necessities. Also, the privatisation of these objects facilitated investment in them, which improved their extent and quality, making them capable of better quality and more cultured service. In this process, on one side the state budget was unburdened of the costs of managing trading enterprises and other necessary bodies, and on other side the income of the state budget was increased by taxes and tariffs on these businesses.

Albania was also unusual, if not unique, among transition economies in a prompt and radical privatisation of urban housing, which was almost complete by the end of 1993. In this period, about 220.000 state apartments were privatised, and 97 % of them were paid for in cash at the moment of sale.

The sale of state apartments to their users was a necessary step that had positive results. This step was both politically and socio–economically necessary. Through this step, many Albanian families became possessors of the apartments they lived in, so in a word they became owners. From the political point of view, this step was an important move toward the detachment from the old system. From socio-economic point of view, it created more favorable conditions for migration of families inside the country as well as outside it. People had less problems when they wanted to migrate because they could sell(or buy) an apartment. It relieved the state budget from having to maintain these apartments, created this kind of market and favorable conditions for private individuals to maintain these apartments. It made it possible for owning families to make additional investments in their apartments, improving their quality, and allowing a higher standard of living.

But, in spite of positive sides to the process, it was unjustifiable to sell state apartments to families who lived in them at a price that was only a small fraction of the real market price, in the conditions when a lot of people was homeless.

Also the privatisation of land of the collective and state farms into about 450 thousand size units began spontaneously and was completed under official auspices by the end of 1993. However because the land was so important in its economy, it appeared by the mid-1996 as the transition country deriving the equal-highest proportion of its output from private enterprises – at 75 percent.

The rest of privatisation was not so easy. The vouchers were used to distribute shares to the public, in what was called mass privatisation, begun in September 1995.

Since the beginning, a low level of demand for vouchers was identified, based also on the fact that the objects in the market ready to be privatised either were delayed or were not interesting from the businesses point of view. At a time when supply was constantly increasing and confronted by limited demand, vouchers’ prices stayed at low levels. The failure of use by the population of the privatisation vouchers has ensued mainly from:

As the consequence of this short-sighted policy during the privatisation process, nowadays the voucher market almost has ceased in the country.

Small companies have been disposed of largely through employees buy-out or action. Nearly all small-medium enterprises that had not been privatised during the early years of the process were sold and liquidated in 1997 and 1998. Many of them were economically not viable, hence they were liquidated and their assets were transferred to local authorities.

But major sectors still remained to be privatised and a regulatory framework for privatisation was approved and in May 1998 a draft privatisation plan was released according to which the publicly owned businesses could be sold below book value, that in many cases did not reflect the market value. This would enable the Government to divest the state shares in joint ventures to private sector counterparts and private enterprises in strategic sectors.

Currently the government is seeking strategic investors for all main state monopolies, including transport, telecommunications, energy, mining and water, intending to privatise them (at least partially).

In agriculture the government has now implemented a land registration scheme, which is expected to be finalised in 2001. This will make possible the purchase and sale of land on a secure legal basis.

The objectives of the privatisation process in our country can be summarized as:

Albania, when compared with Eastern European countries, had a considerable disadvantage because it undertook privatisation under difficult conditions. So in these circumstances, the creation of new owners and of the new rules of the game would be done through gradual steps, bringing true owners only after some time.

Privatisation in Albania, started in the second half of 1991 after a Law and according to a government decision "On the duties and rights of the National Privatisation Agency and preparatory commission of the Privatisation process". The privatisation process was carried out rapidly at the beginning, and mistakes became visible. The basis of the strategy had quantified objectives: ‘by 1996 we must privatise the majority of Albanian economy and in 1999 over 90% of GDP must be created by the private sector.’

The use of the direct form of privatisation as well as the decision to give assets of various units to the former workers allowed speedy privatisation of these objects. In cases where the former workers were not interested in buying the units, they could be sold through auction. Some 20.000 trade units were privatised, bought mainly by former workers. In these conditions, they bought the units they worked in for a certain price. In these circumstances in many cases, the shopkeepers became owners only for a little time after privatisation. These owners re-sold the units for a value that was even then 100 times greater than the purchase value.

The design of programme provoked negative reactions from the very beginning. The passage of time showed that this price was very low, a result which is given by the International Monetary Fund the definition ‘spontaneous Privatisation’.

After a year the privatisation process was interrupted. This interruption lasted only two months and the opinion of SAI during the audits carried out was that process started again too hastily. The haste shown resulted in two changes in the Government decision and the creation of the Privatisation Ministry with the duty to define privatisation policies and prepare privatisation documents.

The later phase included the privatisation of small and medium enterprises. The absolute necessity of this phase was indisputable, given the condition in which the economy of our country was in. According to a survey held in Albania by a German organisation in December 1993, 85,5 % of enterprises functioned with reduced capacity. Out of these, 8,1 % had machines used for over 30 years, 25,3 % possessed machines of about 21-30 years old and 33,8 % possessed machines 11-20 years old. So, it was necessary to be passed into their privatisation phase.

Small enterprises were considered those with values estimated at less 150.000 US dollars (USD), while medium enterprises were considered those with values up to 500.000 USD. The privatisation process of small and medium enterprises was speeded up during the January 1993 – April 1995 period. 4.397 enterprises were totally privatized during this period, while during the whole privatisation in general were privatized about 60.743 objects.

The privatisation of these enterprises had positive results such as:

Also, there were cases when a special decision of the government is taken for exclusions even in the case of only one object to be privatised. Wasn’t the National Agency of Privatisation enough to realize this process according to the legal competencies? Who are those groups of people, who have been supported in a special manner, even by giving them support with special decisions from the Government? These were the questions raised by SAI that left space for doubts which have to do with the abuses and corruption from certain segments of the government, as well as in the favor of certain segments of the population. The changes of the legislation not only created shades of doubts, but also at the same time they created difficulties in the information and especially they impeded the information of those were directly interested in this process. This important process might not have seen as a "reward for loyalty shown to the political grouping that is in power". Politics should have remained as far as possible from this process.

The right and exact definition of the private owners who would take this property went through difficulties which can turn objectively murky, causing problems and tensions. There were numerous privatisation methods which are discussed theoretically and were used in the practice. They changed depending on the concrete conditions and circumstances, on the aims of the process, on the economic policies to be carried out later on, etc.

In Albania, as opposed to the Western European countries, the problem of transferring property ownership from the state to private owners was a more difficult process because it was complicated by many factors:

  1. The difficulty of clearly defining property rights, and the difficulty in making property rights the basis for decision-making. This happened because after a long period in which state property was the only property form, in the moment of its distribution various claims on property rights burst out: former owners of the site, the enterprises’ managers and workers, workers at different levels of main and local administration. So, making accurate and procedurally fair decisions took a long time, and again it was not possible to find a solution that "would satisfy all" and would be 100% accurate.
  2. The accurate definition and evaluation of the property that would be privatised. This process, which was based in an environment that had in its foundation the lack of the capital market, certainly would be costly from the financial point of view, required a long time.
  3. The existing industry, totally depreciated based on old Russian and Chinese technology. This industry had value in many cases only on the basis of the depreciation norms applied. In fact, it was totally depreciated. According to the above mentioned survey, 37.2% of enterprises possessed machines that have been used for more than that 20 years, while 44.6% of them have been used between 10 and 20 years, without taking into consideration the fact that the technology entering into Albania often had been used and depreciated before.
  4. This process was accomplished in the conditions of very weak infrastructure, on the giving of the information about the property that would be privatised and the possibilities of its usage, despite the insufficient usage of its infrastructure. This on one side created subjective conditions to protect those who did not wish to give this information and on the other side it objectively rendered more difficult accurate dissemination and efficient use of the information.
  5. Foreign investments that considering their value during this period, may be called more desired than actual in our country’s economy, in the real conditions generally had the tendency to be managed in collaboration with new owners of the new businesses.
  6. The inherited banking system that had and has many problems, though with a relatively progressive development, could not play a major role in privatisation. The equities market was missing, so the most standard methods of privatisation could not be used.
  7. The quick and great dimension of the privatisation is a characteristic that has been stressed more in our country than in the other countries of Eastern Europe. The excessive preoccupation with speed increased the chances that the desire to realise privatisation overtook the real possibilities to fulfill a correct privatisation process. Quick privatisation firstly led to a sub-optimal property distribution, as for example very interwoven property (i.e. with a lot of owners), or putting the enterprises into the hands of inadequate owners, considering that capital market would encourage a re-distribution of the property by bringing about a true encounter of the owners of the various companies.
  8. The existence of a limited quantity of savings of the population. This limited quantity in our country reduced the demand for assets to be privatised.
  9. Corruption, which relative to the economic level of the people is more widespread than in the Western European Countries.

Because of the importance of the function, the State Supreme Audit by all means has tried to play the proper role on ensuring the accountability of this complex issue that the state bodies did conduct privatisation affairs responsibly.

What have been some of the recommendations of the SAI given to State privatisation bodies during its audits to achieve the goal of undertaking the privatisation process as effectively as possible?

  1. Units of state property, after being split into small parts, would be offered to the people, that is, the private sector. This means that enterprises, often united artificially as result of "giantonomy", could be split up into perhaps 10 smaller units, being sold one after the other, or even by temporarily keeping some of them under state management. Methods would be adapted to the concrete conditions of the enterprise’s branch and size. Many industrial enterprises, though they were kept closed, did not get privatised, not even by partial privatisation. They were under guard by spending on their conservation bringing nothing new and offering no better future prospects.
  2. State property that was to be privatised should be sold at a real market price and the potential buyers should have been announced publicly. Potential buyers should be carefully scrutinized before gaining the right to buy. In many cases, the state bodies that operated as definers of the initial price for these sales, are exposed to pressures for a lower price. So, it was better that other non-state organs be included in the evaluating group in order to fix a more real price. To fix the starting price, one should have taken into account how much an entrepreneur would have to pay to undertake a similar investment now.
  3. Purchase through bank credits, purchase that would be carried out by a complete cooperation between the lender and organs that estimate value of the assets to be privatised, the potential and the management capabilities of the buyers, would be a very effective form of privatisation. Here the mortgage of a real property, estimated properly, would have been an essential condition on the bases of which the decision would be made. We emphasised this, because quite often mortgages were written on the basis of small properties estimated at unrealistically high values.
  4. Renting of state property was a form which could be used often in this process, even for small enterprises. The only mistake that could take place when this form is used was setting the rent incorrectly. If the asset’s value was not correctly estimated, rent could be set too high or too low.
  5. The objectives of the privatisation process might first of all have been seen as a source of extra earnings for the state budget, but this should not have been a basic object. It should be combined with the use of vouchers.
  6. Examination and the application of the good international experience sales in conditions of emergency.
  7. At the same time we have underlined, the press and the mass media in general, would have to find their place in this process and play an important role. The duty of the media is to make "the jungle" of today’s market more transparent. Everyone has to know the selling and buying prices of state property and the number of the interested parties in an auction. And in very rare cases, where according to the existing law secrecy is required, the respective parliamentary committee would be informed in detail about the auction and the privatised assets.

Albania was the latest communist country that entered the road of economic transformation. Apart form the ups-and-downs and the intensity of the political processes, which undoubtedly has its reflection in the trend of economic reform, it could be considered as one of the most privatised transition countries.

April 2001