In a capitalist economy such historical accounting numbers are irrelevant in private transactions: Why do I, a buyer, care if you poured money down a rathole?--I won't pay you a penny more for it. But when the state is restituting only part of an asset, the division of spoils requires some estimate of how much the government's part is worth. Not only did the process use book values to represent the portion they would not restitute, state managers strategically drove up book values with crazy expenditures (made with state funds) in the last days of socialism. This in a deliberate attempt, says Brandejs, to make it more difficult for people such as him to regain lost assets.
Brandejs finally gave up on restitution. It would take years, he felt, to assert his claim--and there emerged a much faster way to do just that: He submitted a privatization proposal to the Ministry of Privatization in January 1992. It wasn't easy. The state managers who controlled the hotel played all kinds of games with the books; no one could make heads nor tails of the operating numbers. Why the subterfuge? The hotel's managers themselves had submitted two privatization proposals, one "basic," another "competing." (The second bid brought in an Asian partner to finance still more renovations and offered to pay off Brandejs's restitution claim to the tune of $250,000.) Brandejs's proposal emphasized his restitution rights but also put up cash--nearly $3.5 million to the state. In addition, his company offered to assume all hotel debts.
The competitive process was grueling and lawyer intensive. Brandejs spent precious dollars preparing his bid, presenting his case at hearings before both the Ministry of Privatization and the Ministry of Trade. The managers withheld information as fiercely as Brandejs sought it; both parties politicked heavily. In the end, however, Brandejs won, getting approvals from both ministries and the national government, a three-stage obstacle course designed to provide checks and balances to limit corruption.
It took less than six months for Brandejs's proposal to receive final approval in July 1992. While Brandejs himself believes the process was grueling and drawn out, it worked like lightning compared to the alternative. Although he had begun his restitution claim a year earlier, what U.S. court could manage such a complex matter so adroitly in such a flash? And the criteria that gave Brandejs's family the winning edge flowed from legitimate principles of law: His family did have a moral claim to restitution and his proposal, which stressed that the business would be run as a family operation in a long and proud tradition, was found as the superior productive use of the assets. The judicious outcome considered both equity and efficiency as positive social goods, the perfect signal to send a society in transition to a market economy.
The Hotel Pariz today exudes the tender loving care of grandpa Brandejs's own, having been renovated from January 6 to March 31, 1993. Antonín is very proud of this speedy renovation, considering that under socialist management the hotel was closed nearly seven years before reopening in 1987--when managers discovered the missing bathrooms, leading to another two years of closure. Antonín works long hours and is a whirl of managerial energy. His brother manages the kitchen; his cousin's husband is an assistant manager. The hotel's staff of 130 has been kept on. But under the new management--and new work rules--some have decided to leave. Overall employment is up slightly, to 135, due to increased business. The occupancy rate in October 1994 was 86 percent--superb.
The two managers who ran the hotel for the state are long gone, but both are prosperous. One serves as a consultant to the many new private hotels springing up to service Prague's booming tourist sector. The other opened a new restaurant. When I asked Brandejs where a civil servant would get the money to do that, he smiled: "You don't have to ask," he said.
So Czech privatization has largely overcome the Hayekian knowledge problem by encouraging competition among the very people most likely to have the relevant information. As Roman Ceska, the former deputy minister of privatization and current minister of the National Property Fund, puts it: "This is the only way to get information into the process. It was an open competition to submit a proposal. Everybody was invited--the municipalities, the companies, the consultants--and were giving us their ideas. This created a flow of information to the Ministry of Privatization. The only problem is that we were deluged with so many project proposals"--over five proposals for each of the Czech Republic's nearly 2,700 large state enterprises.
Under laws passed in February 1991, the newly formed Ministry for Privatization compiled a list of large-scale firms to be privatized. Managers of each firm--for instance, the Hotel Pariz's former state managers--were required to submit a "basic" proposal, including key legal and financial information, as to how to privatize the assets. Excepting only infrastructure industries such as the railways, hospitals, and utility companies, every Czech firm--even behemoths like the Kladno factory with 20,000 workers--was fair game for privatization. On November 1, 1991, the ministry published the names of more than 1,000 firms eligible for privatization and invited competing proposals from the public as to how each firm should be privatized. The deadline for submitting such proposals was January 18, 1992. (When an enterprise had no proposals, the ministry would create its own proposal, usually dumping the company's shares into voucher privatization.) The process ignited a flurry of political and financial activity and about 15,000 proposals.
This was a magnificent database for rationally--and quickly--divesting the state of its (potentially) productive assets. Insiders who submitted basic proposals had incentives to draw up coherent privatization plans because their proposals were subject to outside competition. In the end, insiders saw about half their proposals accepted--a much higher rate than that enjoyed by outsiders. The key to their success was two-fold: They provided relatively reliable information, and they relied heavily on voucher privatization. Competing privatization proposals tended to rely much more on direct sales to new manager/owners. Ministry officials, conscious that a surprising number of citizens were purchasing voucher coupon books, wanted to reward the general public as much as possible.
In selecting among rival proposals, the Ministry of Privatization was able to award property rights not in a perfect manner, but in at least a plausible way, one that avoided rampant confusion and chaos. Moreover, it realigned political interests: The instant the process began in earnest, thousands of prospective entrepreneurs (those submitting privatization proposals, each including some benefit to the authors) began to push hardfor privatization. Since state managers were intimately involved in this competitive process, it removed them from the ranks of another competitive process: obstruction. In every other post-communist country, these apparatchiks form the core of opposition to reform: Why help privatize what you (as a state manager) can pilfer? The Czech answer: If you don't help us privatize, someone else will.
Privatization projects included various means for transferring state assets to private owners: direct sales, tender offers, restitution, auctions, and voucher coupons. All told, about half of the book value of large-scale privatization was distributed via vouchers--$10 billion. Beginning October 1, 1991, Czechoslovakian citizens over the age of 18 were invited to purchase their 1,000-point booklet to use in the voucher privatization auction. These coupons were officially registered for 1,000 Czech Crowns ($35, about one week's wages) at over 650 outlets across the country.
In original surveys, only some 2 million participants were anticipated, and Western consultants and bankers pooh-poohed the idea in great spasms of laughter. The spectacle of hapless financial illiterates understanding market investments was just too funny. When Klaus, as finance minister, explained precisely what he planned to do with voucher privatization to a group of industrialists and financial experts in Vienna, Austria in 1990, the corporate bigwigs thought he was insane, reports Albert Zlabinger, an academic economist in Vienna who set up the meeting.
Yet some 8.54 million citizens--71 percent of eligible purchasers--bought and registered voucher coupons. Enthusiasm was spurred by the spontaneous emergence of investment privatization funds (IPFs), some of which guaranteed 20,000 Crowns for those willing to turn over their 1,000-Crown investments. In the Czech Republic alone, 186 separate companies established 264 IPFs in the first wave (and another 353 funds in the second wave). They entered a competitive fray to represent investor interests and advertised heavily, thus increasing demand for coupons. Some 72 percent of all the coupon points were entrusted to such funds in the first wave of privatization.
Actual bidding for shares began on May 18, 1992, three weeks before the elections which would catapult Klaus's Civic Democratic Party to power and place the economist in the strategic position of prime minister. Indeed, political opponents argued then (and now) that the mass privatization scheme was pandering to popular sentiment. A most splendid compliment, given the violent populism which has elsewhere sprung up in opposition to capitalist reforms.
The voucher auction was conducted in five rounds in the first wave of large-scale privatization, six in the second. On the first pass, each company's stock value was set at the same price (three shares for 100 points). If a firm's stock shares were oversubscribed, the price on the next round was raised; if undersold, then the price reduced. On the next round, bids were again registered, and adjustments similarly made. Whenever excess demand was less than 25 percent, shares were allocated to bidders on a pro-rata basis (with individuals favored over funds) and the issue taken off the board. This iterative procedure continued until the final round. At that point, unsold shares were deposited in the National Property Fund, and oversubscribed issues were awarded on a pro-rata basis. The bidding in the first wave was concluded December 20, 1992.
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