New wave of privatization in the Czech Republic

01.04.2020
At the end of December last year, the Czech Ministry of Finance drafted a new policy regarding state-owned assets. It outlined which companies should remain in state hands and which should be privatized. The sellout of those companies earmarked for privatization is to commence later this year.
Czech Finance Ministry Prague MAIN

Ministry of Finance, Prague, Czech Republic (ŠJů, CC BY-SA 3.0)

Ministry of Finance, Prague, Czech Republic (ŠJů, CC BY-SA 3.0)

The forty-page document was first uploaded on the website of the Czech Chamber of Commerce on December 20, 2019. In the document titled “The Strategy of the state ownership policy”, the Czech Finance Ministry describes in detail the guidelines that will be applied in management of all state-owned assets.

Currently, the state owns too many companies and is not in the position to manage them effectively. It therefore calls upon responsible ministries to sell all companies in their portfolios that have no strategic significance for the state, as well as companies in which the state holds less than 10 per cent of shares.

The main issue with the current management of state-owned assets is seen in the decentralized nature of the ownership structure. Unlike in many other OECD countries, where all state-owned assets are managed centrally by a single entity, the system in the Czech Republic is highly decentralized. Different companies are owned and managed by different ministries. This often leads to either an ineffective management of the companies, or, even worse, a confusion over who is responsible for managing which company.

Besides calling for the creation of a more centralized management structure, the Finance Ministry recommends that the state privatizes companies which “would be better off in private hands.” However, this would only apply to those which are not considered “strategically important” for the state, such as railroads or major energy companies.

“It is recommended that the state should make every effort to transform those state-owned enterprises that already operate in a purely competitive environment into private companies,” the document reads.

State-owned companies that provide important public services could potentially also end up in private hands, under the condition that, again, they are not seen as essential for the survival of the state. “The state should also analyze the activities of other entities providing public services with a view of transferring them into standard business companies,” says the government.

Companies earmarked for privatization

The policy paper sorts all state-owned companies into three categories. The first and the second category consists of companies, enterprises and other organizations that are either strategically important for the state to meet its economic policy objectives or those that provide vital services to the public. Those companies need to remain in state hands, the paper says.

All companies, whether partially or wholly owned by the state, that do not fall into those two categories should be either privatized or liquidated. There are currently 112 companies that are either fully or partially owned by the state. Most of those are either strategically important, or are already in liquidation.

Although the Finance Ministry has already compiled a list of all state-owned companies and sorted them into the three above-mentioned categories, it is the responsibility of each ministry to create a comprehensive registry of assets in their respective holdings.

Till June 2020 all state ministries have to sort their assets into those three categories. By the end of the year, they should sell or liquidate companies that would be in the last category.

In the list already compiled by the Finance Ministry, there are 9 companies earmarked for privatization. Some of those companies are fully owned by the state, others feature the state as only a minor shareholder.

Those earmarked for privatization due to take place later this year include South-Moravian Breweries, Spa Resort Budov, Prague Central Bus Station Florenc, Prague Airport Management Services, EON and Uniper.

Most of those companies are fully-owned by the state. However, the last mentioned companies, EON and Uniper, are German energy companies where the state owns less than 1 percent of shares.

Why now?

According to the Czech business daily Ihned, dividends paid by state-owned companies to the budget have been shrinking in recent years. Similarly, revenues from state-controlled enterprises have declined last year for the fourth consecutive year. For comparison: In 2015, the state received nearly CZK25bn (EUR982m) from companies in its holding, in 2018 that figure went down to CZK15bn (EUR589.1m).

Although the decision to privatize companies might seem as purely economical, many journalists and political opponents of the current governing coalition in the Czech Republic — made up of the Social Democrats and the billionaire Andrej Babis’ led ANO — claim that the government has other incentives than merely making the state-owned companies more efficient. “The government coalition of ANO and the Social Democrats realized that if it wants to keep showering its voters with money it needs to take them from somewhere,” wrote a popular Czech political commentator Julie Hrstkova in her column for Ihned.

An analogical sell-out of other state-owned assets had already been announced in November last year by the Ministry of Industry and Commerce. To channel more financial resources into the state budget, the Ministry said that it would sell state-owned stocks of aluminum, copper or lead. This decision was criticized heavily from across the political spectrum.

Despite the backlash, the government announced that a new policy regarding mandatory holdings of material reserves, such as food, oil, or metal will be on the table by March 2020.

While the sale of metals in state reserves such as aluminum or lead has been debated for some time now, the government has recently began flirting with the idea of letting go of some of its other strategic stocks, such as food and medicine.

The state budget for 2020, approved in December last year by the Chamber of Deputies, foresees that the sale of the surplus material will bring an additional CZK600m crowns to the state revenues.

Filip Brokeš is an analyst and a journalist specializing in international relations.


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