Where a Red Flag Halts Adam Smith

MIHAIL SECOSAN went to the Bucharest post office in October expecting to become a shareholder in one of the Romania's nearly 4,000 companies slated for privatization. No way.

He was told his official coupon could not be processed, even though "mass" privatization had begun days earlier. "What am I supposed to do with this?" asked Mr. Secosan, clutching his coupon.

Welcome to privatization, Romanian-style. The process is so poorly conceived and executed that the state will essentially keep control of the economy even as it steps half-heartedly toward a free market.

Most Romanians have no idea where to invest, and officials aren't helping. "It's like a poker game," says Catalin Dimofte of the business journal Adevarul Economic. "No, it's more like Russian roulette."

Engineered by the ruling ex-communist Party of Social Democracy, the scheme seems designed more to appease the World Bank than to turn over assets to the masses.

Under the plan, 17 million Romanians can exchange coupons with a face value of $325 for shares in 3,905 companies.

The coupons, along with vouchers from the first wave of privatization in 1992, can be used to buy up to 60 percent of the newly privatized firms. The state will hold the remaining 40 percent or more until it finds suitable local or foreign investors.

Befuddled investors

The privatization list reveals only company revenues, profits, and estimated capital in 1994. Consequently, many Romanians will make bad choices, according to Ioana Vlas, president of the brokerage firm Gelsor S.A.

The population is so confused that by early December only 5 percent of the coupons had been turned in, according to officials.

Despite its many flaws, Romania's privatization program does have some merit. The state's absolute control over the economy will surely diminish over time as market forces kick in.

"This isn't as much as we could have hoped for, but it's at least a step in the right direction," says Aurelian Dochia, former president of the National Agency for Privatization.

Even so, most of the companies on the block are junk, according to Romulus Maier, economics editor of the opposition newspaper Romania Liberia, who estimates that only 15 percent are viable.

Nearly 1,000 companies showed no profit or had loses in 1994. Many surely will go bankrupt. Also, the government revalued state-owned companies in 1994 by an average of 900 percent. When these overpriced companies fetch a fraction of the asking price, the value of their shares will plummet too.

One might have expected the government to encourage the country's burgeoning investment funds to snap up coupons, allowing Romanians to invest in companies through the funds. Wrong. Unlike the successful Czech privatization program, Romanian vouchers are nontransferable.

"We wanted to give everyone a chance to participate directly in the process and to make their own decisions without an intermediary," says Dana Simion, a deputy director at the National Agency for Privatization.

Critics charge that the government wants to prevent the concentration of shares in anybody's hands but its own. Having successfully shunted private funds to the sidelines, the state will remain the biggest single shareholder in the privatized companies and the only one able to exercise any real influence.

"The government wants 'privatized' companies that are under state control," says Costea Munteanu, an associate professor at the Academy of Economic Studies.

Romanians have another option. They can entrust their coupons to one of the five state-created, joint stock Private Ownership Funds, which later will be transformed into investment companies. But by choosing many of the fund managers, the government indirectly controls these entities too.

Slow motion

Slated to begin Oct. 2, the coupon program was delayed until Oct. 10 because the government had neglected to send out the subscription forms and company lists.

The first official list had to be withdrawn because it contained several already privatized firms. According to the Romanian press, nearly 1,200 eligible Romanians failed to receive coupons because the government had mistakenly classified them as dead.

All this has made Romanians more mistrustful of their leaders.

"I don't think anything will change," says Suzan Negip of the International Research and Exchanges Board. "The government's just trying to improve its image with the West."

Accountant Mihaela Dorneanu shares that cynicism. She has opted not to subscribe. "The list only includes bad companies," she says. "What's the point?"