Банкеръ Weekly

Briefs

Privatization Control Removed due to Brussels

If they fail to hurry up, the elected MPs risk the very real danger of a fine being imposed on Bulgaria by the European Commission. This time it could happen because the text of the Law on Privatization and Post-privatization Control (PPC Act), which according to the commissioners discriminates investors in the country – and this is the notorious paragraph 8. (1) of the transitional provisions. According to it, the State may establish mortgages on the assets of privatized companies. This happens when the buyer does not comply with its obligations under the privatization contract. According to Brussels, the text is restrictive.

The paragraph was adopted in March 2007, and then there was a lot of criticism towards it. The wish was to counteract unscrupulous buyers. By dropping it out, however, the state will not be able to counteract wrongdoers, and those who are subject to control, will be in position to easily empty the privatized companies.

Despite the reasoned opinion of the European Commission and the guidelines through an explicit letter of March 2013, the penal procedure against Bulgaria is pending because the country still has rules that have not been brought into line with European law - for equal treatment of investors, which is enshrined in the principles the free movement of capital and freedom of establishment. And the sanctions have not been removed from the privatization law.

Now the Ministry of Economy, under the threat of sanctions from Brussels, has prepared and submitted for public discussion of the text repealing paragraph 8. (1) of the Law on Privatization. The first reading, however, showed that according to it the state will have less power in monitoring compliance with the commitments undertaken by the purchaser in the sales of Bulgarian enterprises and there will be no an adequate measures how to penalize them. The Privatization Agency (PA) will lose its freedom to monitor contract compliance.

Now the law says that the Agency has the right, in case of outstanding obligations within privatization contracts, to establish a legal mortgage and to take precautionary measures on the assets of the privatized company itself.

This measure was introduced after the practice showed that in Bulgaria the buyer under the privatization contract does not often fulfill the commitments for payments, while the controlling authority may not impose any real action.

First, because the new owner does not have enough assets - often the purchase takes place through an entity specifically created for the transaction, and, secondly, the buyer company may be transferred to an offshore company. 

And the state thus is falling into a stalemate. If it tries to defend its interests, there will be a financial penalty. Otherwise, Sofia is leaving the European Union to dictate what to do and the state just agrees.

According to the letter of the European Commission with creating a mortgage Bulgaria violates the interests of investors of the European Union, as it provides the possibility of the state to impose security measures not only against the property of the buyer (regardless of the amount of participation), but also on that of the privatized company. The collateral provided in paragraph 8 for state claims, arising because of obligations to persons other than the owner of the privatized company, was supposedly affecting the economic interests of other shareholders and violated their right of establishment and restricted the free movement of capital in the EU.

The submitted by the Bulgarian side arguments in defense of the existing provision of paragraph 8 of the Transitional Provisions of the Law amending the Law on Privatization (May 20, 2013) are not considered to be well founded by the European Commission. If Bulgaria fails to waive the right of the state to impose protective measures against the property of the privatized enterprise, the country will be brought to the Court of Justice of the European Union, as the procedure is. The minimum financial penalty after its decision can be a one-off sum of 793,000 euros plus charges for each day from the date of the court decision to the moment the state actually removes the text offending the EU rules for which Bulgaria may at the extend of 10,000 to 60,000 euros.

In this regard, the Ministry prepared and the draft law amending the PPCA repealing paragraph 8 of the transitional provisions. It should be also clear that this will not apply to all mortgages that are made at the time of adoption of the new legislative text (in the opinion of Emil Karanikorov, Executive Director of the Agency for Privatization). Each law is applicable since the moment of its adoption, not retroactively. That is why there is no way to fully satisfy the demands of the European Commission.

And just maybe the next legislative folly is a step towards new privatization procedures in which profitable state companies, or parts of them, will go into the hands certain ‘blessed’ people.

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