Under planned economy, large state-owned enterprises used to enjoy considerable privileges and protection. They had to keep negotiating with the government for allocations and benefits, but their bargaining position was grounded in their central role in production, exports and employment, and supported by close relations with the administrative bodies of the governing party. The weakening of the old political system in the late 1980s resulted in the shaken position of formerly privileged firms. The threat of a crisis elicited a variety of responses: some enterprises adopted a strategy of wait-and-see, others tried to involve foreign investment, while a third group changed their organizational structure. During 1988 and 1989, more than a hundred enterprises transformed themselves into one or more companies. This process is known in Hungary as "spontaneous privatization."
This paper is one of the case studies of a research project, undertaken by Financial Research Ltd., focusing on transformation into company form as crisis management and its result, namely on the effect of corporate forms on the chances for privatization to succeed. We use the case of Ganz Danubius Ship and Crane Works (GD) to illustrate the alternatives and motivations of the parties concerned, their negotiations, the changes of the positions of shareholders and managers and the role of direct and indirect state control. The sources of information were the former investigations at GD, the study of enterprise documents and numerous interviews with managers and representatives of owners.

Industrial and Environmental Crisis Quarterly, Vol. 8. (1994) No. 1. 23-41.

Privatisation is coming to the end in Hungary. By spring 1998 the bulk of state owned property was in private hands. According to official statistics, private enterprises account for nearly eighty per cent of GDP and almost three quarters of the capital is privately owned. More than one thousand firms were fully privatised during the period 1990-1997.
Considering the recent ownership structure of the Hungarian economy, already fairly similar to that of several West European countries, government can declare at any time the end of privatisation process. Debates on legal and institutional frameworks of controlling the residual state property have started in 1997. Despite of detailed proposals of several governmental apparatuses and consulting firms, no final decision was made before the parliamentary elections in May 1998. The future of state residual property is yet to be seen.
This analysis summarises first the main characteristics and results of Hungarian privatisation process as the precondition of managing the residual state property. The second section gives the inventory of the different controlling institutions and describes the positive and negative features of their activities. The last section presents the alternatives of state asset management considered in Hungary for the post-privatisation period, including the possibilities of further privatisation transactions.

Country paper for C.E.E.P.N. research project on management of residual state property, June 1998

The idea of concluding privatisation in Hungary first arose in 1997. Since then, two governments have considered the proposals and turned them down. In our estimation, the postponement occurred for short-term political-power reasons rather than for well-grounded economic considerations. Even in this case, however, economic rationality remained undamaged, as a fair number of companies could be still sold during recent years, though at varying rates. At the end of 2004 it did not appear impossible that with a few exceptions the state assets in the competitive sector would soon be acquired by new owners. The principle can thus be confirmed that privatisation is worth declaring completed if it has really been concluded, i.e. when the assets to be sold and able to be sold have been acquired by private companies.

In: Állami vagyon ? privatizáció ?gazdasági rendszerváltozás, ÁPV Rt. (State Assets ? privatisation ? economic transition, State Privatisation and State Holding Company) 2005, Számadás a talentumról sorozat ("Giving account of the talent" series) pp. 16-43

(Experiments, results and drawbacks)

Public transport in large cities is a problem all over the world, for passengers, politicians running the city, and experts organising the network. What kind of structural features cause these difficulties? Where did the service provider and the company owner seek a way out? What results have there these steps achieved and what drawbacks have they faced? As well as information available to the public, the answers are based on an analysis of company documents and the experience gained as a participating observer or in some cases as a participant in decision making. Having analysed the attempts at transformation, the stabilisation and reorganisation schemes over the last ten years, the study has drawn the conclusion that the attempts have not resulted in long-term solutions. The most important result is that the attempt itself was made, partly because various representatives of the owner and the company management have thoroughly considered the reasons for the difficulties and their direct and long-term consequences. On the other hand, even the restricted result of the attempts is a result. It has become clear that no breakthrough can be expected from the changes implemented so far. If the owner and the company wish to provide a permanent, long-term solution to the now chronic problems, they must take more decisive action than they have so far.

In: A Budapest-modell, Egy liberális várospolitikai kísérlet, Szerk. Pallai Katalin, Nyílt Társadalom Intézet Alapítvány (The Budapest model. A liberal urban policy experiment. Ed. Katalin Pallai, Foundation of Open Society Institute) 2003, pp. 257-282

Restructuring and Privatization of Big Enterprises in Hungary

?Dinosaurs were huge animals?, a chief executive explained me in the early 80s before our extensive knowledge of paleontology was developed from the books of our children. ?If a rat started to chew their tail it took several years for the information to reach the dinosaurs? brain. Our big enterprises are just like dinosaurs? - he stated with self irony. Have these primordial creatures died out of the Hungarian economy? The crucial question of our research was how the political and economic turnover affected the Hungarian large scale industry. How has the organizational and ownership structure of the socialist big enterprises changed? How have their production structures, patterns of behavior and orientations changed? What enterprise strategies have proven to be successful? What has the role of the government been like in connection with big firms? In order to answer these questions we used a combination of economic and sociological methods, based on case studies and the processing the balance sheet data of 49 enterprises, which were considered as privileged, strategic firms under Socialism. First we will outline the main characteristics of the big enterprise group concerned, than have a look at the method and degree of organizational and ownership changes. In the last section the basic lines of disintegration, the elements and the constraints of disintegration will be presented.

Published by Perfekt-Pénzügykutató Rt. 1997 (in Hungarian)

According to general understanding, privatization in Central East Europe does not simply mean the transfer of individual firms from state hands to other proprietors, but it is the precondition and the main instrument of rebuilding the whole economic system. Thus, the task is not to fit in state owned enterprises into a functioning market but to create this new integration mechanism parallel with and by the mean of a wide-ranging change of ownership structure. One of the basic dilemmas of the transformation is, whether it is possible to build up the frameworks of a decentralized market mechanism applying a comprehensive, homogeneous privatization strategy, carried out by centralized governmental institutions. In other words: can privatization be designed?
Based on the Hungarian experience, in comparison with Czech-Slovakia and Poland, this paper will argue that all governments have tried to do so. Nevertheless, their attempts to design ownership changes have been successful at a different degree - not (only) in terms of privatized assets or enterprises but in terms of the impact of programs, guidelines and centralized decision making on the transformation of the proprietary structure. The degree of "design" will be characterized by the stability versus shifts of governmental privatization policies and the relationship between the programs declared and the empirical changes.

In: Institutional Design in New Democracies, A. Lijphart, C.H. Waisman eds., Westview Press, Boulder, Colorado, 1996. 177-194.

(Government's role in changing Hungary's ownership structure)

The paper discusses the shifts in Hungarian privatization strategies and in the role of the government in changing the ownership structure. Analyzing the forms of transformation, the goals and motivations of the participants (enterprises and government organizations) and the reasons for changing the main direction, it argues that the five years history of Hungarian privatization indicates the mixed and unstable character of the process. There has never been a uniform, homogeneous method of changing the ownership structure: market type techniques have been accompanied by central distribution of property.
The often changing governmental strategies, motivated predominantly by purely political considerations, show a clear tendency towards the re-establishment of centralized control of state organizations over the firms. The coming years can see an emergence of redistribution type solutions with highly dubious social and economic implications.

In: Strategic Choice and Path-dependency in Post-socialism, Jerzy Hausner, Bob Jessop, Klaus Nielsen eds., Edward Elgar, Brookfield 1995. pp. 287-308.

Politicians and analysts, businessmen and citizens generally agree that economic transformation should amount to market economy creation. Paradoxically enough, the gradual establishment of the basic institutions of the market, including private ownership, is contrasted by the signs of the reactivation of another integration mechanism, namely the redistribution. Following a temporary withdrawal in the late 1980s and early 1990s, the direct redistributive function of the state seems to have gained new vigor.

Acta Oeconomica, Vol.46.(1994)No.1-2. pp.63-78.

The Hungarian government introduced several preferential methods in the last years in order to accelerate privatization and to promote the creation of a wide, strong proprietary middle-class. The paper summarizes the empirical experiences with the first and most widespread privatization credit, the so called Existence Loan. It describes the key features and modification of the scheme, the role of the E-loan in the growth of private business and in the privatization process. Thereafter the different types of borrowers and the emerging ownership pattern are reviewed. Finally, the macro and micro economic effects of the E-loan are analyzed, together with the general preconditions supporting or obstructing the use of preferential credit facilities in changing the ownership structure.
The paper argues that some effects of the E-loan are undoubtedly favorable. It has supported the speeding up of privatization as well as the growth of private business through the expansion of existing organizations and especially the emergence of new ones. On the other hand, however, the E-loan scheme is a threat from the point of view of both the companies concerned and the economy as a whole. The problems with the E-loan concern three critical issues: the biased preference of privatization, separating this action from the general economic environment, the credit form of encouraging demand and the risk allocation in the economy.

Paper presented at the workshop "Output decline in Eastern Europe - prospects for recovery?" Laxemburg, November 1993

Restructuring is defined in this paper as a series of specific actions, aimed at the survival of firms and rescue them from liquidation. In this context, categories of direct state actions, corporate actions or actions implemented through intermediaries will be distinguished, according to the level of decisions and sources of financing. Restructuring will be further classified according to methods, such as organizational or financial, and according to timing, such as before, parallel with or after privatization.
Along these dimensions the most critical dilemmas of restructuring can be outlined. The first question is if restructuring can be or should be implemented before privatization or if it should be rather left to the new owners. The second dilemma concerns the question: who should be responsible and pay for restructuring. Is it sure that these measures have to be taken by the state and if yes, which bodies of the state: the government, the state owned lenders, the organizations representing the state as a shareholder, or any specific restructuring departments? Alternatively, is it possible to establish an environment where the SOEs themselves are willing and able to implement the restructuring process?
In Hungary the initial bottom-up approach was replaced first by centrally controlled privatization when restructuring was overshadowed and then by centrally controlled restructuring. Following a brief review of initial conditions, the paper will present the methods according to the different phases of privatization policy, describing the motivations and methods of organizational and financial restructuring. The last section offers a summary of the pros and cons of the different types of restructuring together with some conclusions.

Paper prepared for the United Nations Economic Commission for Europe, December 1993