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(Second Draft, January 26, 2005)
Restructuring of Serbian Enterprises
by Dusan Pavlovic
Jefferson Institute, Belgrade
This is an unedited draft. Please do not quote without permission.
I. INTRODUCTION
1. Why Restructuring?
Research on privatization in Serbia in many ways gives the identical results
that were obtained by the research conducted in Central East Europe in the
first half of the 1990s. In Serbia too, lots of ink has been spent on the model of
privatization and its suitability for a country like Serbia; there were lots of
discussion on how the privatization proceeds should be used up; but, at the
onset, there was not much discussion on what is happening with the firms
after they have been sold off.
Privatization is usually justified by the fact that old owners are either unable or
have no motive to work efficiently. If we postulate more efficient economy as a
goal, privatization could be seen as a means rather than an end. In their study
on privatization, Havrylyshyn & McGettigan (1999) argue that restructuring,
not privatization, should be the focus of the analysis. The example of Russia
illustrates that if the final goal is mere privatization, then state-owned
monopolies merely turn into private monopolies.
In this paper I try to address the question if privatized companies were
transformed into going concerns by pointing at the link between the
privatization model and restructuring that ensued. The study is presupposed
on the assumption that the major goal of privatization is not the mere transfer
of ownership from state to private hands but rather the restructuring of
socially-owned enterprises. Where social property is privatized without the aim
to restructure, where the seller does not pay attention to who the new owners
are, privatization might not give rise to pick-up in economic growth, more
efficient economy, and the increase in overall welfare. Restructuring is defined
here as the change in the behavior of economic agents (not the change of
agents), especially when it comes to operating and financial nature of
enterprises. Privatization, therefore, makes sense only if privatized enterprises
produce more, of higher quality, and if they make profit.
[ref. Restructuring: is it only profitability or reallocation of resources?]
It is widely accepted that privatization leads to restructuring and restructuring,
in turn, increases competitiveness of firms. Competitiveness of firms, naturally
enough, leads to competitiveness of the economy. If we assess the state of
the Serbian economy according to the rating proposed by the World Economic
Forum in 2004, Serbia ranked 77th (out of 102 countries) in Growth
competitiveness index and 76th (out of 95) in Business competitive index. This
points at low competitiveness, and it is only natural to ask what is the reason
for such a poor performance of the Serbian economy three years after the
privatization program was launched: Did privatized firms fail to restructure and
fail to became more competitive because of the wrong privatization model, or
they did restructure but the share of such firms in the whole of the economy
remained relatively small? According to EBRD, private sector’s share in GDP
was no more than 50% in Serbia in 2004, which intimates the latter answer
(Transition Report 2004, p. 6, 172). This survey attempts to finds out a
straightforward answer to this dilemma.
So far there have been only two studies that partly overlap with the goal
stated in this research: namely, assessment of the effects of the 2001
privatization model. The first is published by the Center for Liberal-democratic
Studies in 2003. This study assesses solely the changes in corporate
governance, which in my research constitutes only one part. Second, the
Center’s study comprises also socially owned enterprises, whereas mine does
not. Another study came out as a result of survey conducted by the Faculty of
economy in Belgrade (2003). This study, however, assesses exclusively the
attitudes of managers in privatized firms and reduces the issue of
restructuring to subjective values. Section 4 in this introduction shows that my
ambitions are larger than this.
The introduction is structured as follows. Section 2 explains sampling. Section
3 discusses some issues that relate to the problem of restructuring. Section 4
sets out the structure of the questionnaire.
2. Bias and the Sample
This study summarizes, by way of analysis of data, a survey of 90 enterprises
privatized in the period 2002-2003 under the privatization act passed in June
2001. The estimation so far suggests that about 1/3 of the companies were
privatized during the 1990s, 1/3 in 2002 and 2003, which left about 1/3 of the
worst performing companies in the pipeline for 2004 and after.
The sample is unavoidably biased. The bias consists in the fact that,
considering the model of privatization, the Agency of privatization in the period
under analysis (2002-2003) privatized the cream of the crop. However, this
bias is diluted somewhat by the fact that Serbia had already undergone one
phase of privatization during the 1990s when the enterprises were privatized
by a different model under the Milosevic government. It is this phase of
privatization when the best performing enterprises in the true sense of the
word were privatized and put under the control of the cronies of Milosevic
regime. In the 1990s, privatization was more a strategy of giving out benefits
to Milosevic’s friends rather than a means to restructure the economy. The
number of the best performing enterprises from the 2002-2003 phase is,
2
therefore, reduced by the number of even better performing enterprises that
were privatized before the breakdown of the Milosevic regime in October
2000. Among them are Telekom Srbije, Galenika, Apatinska pivara,
Hemofarm, Pivara Celarevo, Tehnogas, Sintelon, C market, Knjaz Milos etc. A
number of these enterprises managed to survive the fall of Milosevic and is
today, assessed by annual profit, among top 20 best enterprises of the
Serbian economy (See: Most successful, Special edition of Ekonomist
magazin, November 2003).
The sample is composed in the following manner. Companies under scrutiny
are the companies that were privatized in years 2002 and 2003. The
companies are split between those sold in tender and in auction. Closing with
December 29, 2003, the Agency of privatization privatized 31 companies by
tender and 880 by auction (See Table 1). Since the policy of the Ministry and
the Agency was to use tender for relatively better-off and larger companies,
one part of the sample includes all the tender sales. Since these companies
were more attractive and pricier for the investors, these companies came
attached with a richer package of conditions that were imposed on new
owners. The owners were required to invest as well as to lay off under
meticulous conditions. These requirements were laxer for auction sales. Thus,
the imminent future of the firms sold in tender seems to be different than the
future of those sold in auctions. This is why in the research’s findings that
relate to companies sold in tender will be separated, when necessary, from
the companies sold in auction.
Year
Offered Sold Success No of
Book
Sale price Social
Investment
2002/03
rate
employed value
program
Tenders 64
31
44%
27.784
553.168
801.752
269.862 625.826
Auctions 1029
880
86%
75.465
415.681
337.215
-75.954
Share
298
169
57%
34.977
95.112
149.368
-5.902
fund
TOTAL
1391
1080 78%
138.226
1.063.961 1.288.308 269.862 707.723
Table 1: Total privatization proceeds for 2002 and 2003 closing with December 29, 2003.
(Expressed in thousands of euros; Data obtained from the Agency of privatization).
In composing the auction sample, I used random sample from the list of the
880 smaller and medium sized firms obtained from the Agency of
privatization.
[About here: Structure of the population.]
The sample embraces only manufacturing firms. (Services are excluded as
they account for smaller share of the population.) The sample does not
include public enterprises. Not only because when the survey was conducted
these enterprises were not privatized (not even parts of them), but also
because the nature of the problems that these companies face, due to their
status and size, is somewhat different from those of socially-owned
enterprises. For the same reason, the enterprises from applied industry
(namenska industrija). The banks were omitted too, not only because the first
bank was privatized in January 2005, but also because banks’s operating and
financial profile differ from firms in real sector.
3
Since most companies that are surveyed are able to generate financial data
that are comparable to pre-divestiture data, I decided to compare the data
from the last year before privatization (YEAR -1) with the first year after the
privatization (YEAR 1). The year of privatization defined as YEAR 0 is not
analyzed, as this year implied both social and private status of the firm. The
firm prospectuses and annual financial reports, from which the ratios (see
Table 2 in section 4) were used, were solicited directly from financial
managers.
I have cut the full sample into several subsamples. The subsamples are
based on:
a. type of sale (auction or tender);
b. whereabouts of the firm (Vojvodina, Belgrade, Central Serbia);
c. type of owner (insiders or outsiders; foreign or domestic).
Previous research (D’Souza & Megginson, 1999) showed that, depending on
the type of divestiture, different firms experience different levels of
improvements. Since, as explained earlier, the nature of sale has the capacity
to affect the future of the enterprise, I test if there are really differences
between the firms which where privatized in auction and in sales. Second,
Serbia is a centralized country in which most of economic and financial activity
take place in Belgrade. Therefore, classification under b) tries to establish if
privatization in regions outside Belgrade (Vojvodina, Central Serbia) gave
some results, or it is only firms in Belgrade that fare best after having been
privatized. In some countries the distance from the center has proven to work
in the similar manner as liberalization of foreign trade: firms which were not
located in center and were unable to build competitive advantage by linking
themselves to banks and politicians. As a consequence they tried harder and
fared better than those from center (Samonis 1998, 5).
Third, the privatization literature went to a great extent into analyzing the
impact of insiders and outsiders to restructuring of enterprises, concluding that
outside privatization works better (Djankov & Murrell 2000, 15-17). This
conclusion will be tested by this survey too. Another way to look at the type of
ownership would be to distinguish between foreigner and domestic owners.
This is important because successful restructuring is affected by political risk
and uncertainty, and foreign investors have better ways to deal with
uncertainty. By buying up domestic firms, multinational companies are
diversifying the risk because domestic companies are but a part of their
portfolio. This gives them more breathing space and easiness to take up
serious restructuring.
3. Determinants and Methodological Issues
After some 15 years of experience in privatization in East Central Europe
researchers singled out several determinants that affect the restructuring of
enterprises. Among them are: change of ownership and the type of the new
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owner, hard budget constraints, competition, and institutional reform (Djankov
& Murrel 2000; 2002). This research does not examine all the determinants. I
left out from the framework the institutional aspect of the enterprise
restructuring. The reason for avoiding institutions is methodological in nature: I
want to focus, as much as possible, on the internal aspects of firm
restructuring. Of course, privatization cannot be successful if institutional
environment is business-unfriendly. What is happening inside depends
considerably on what is happening outside. As will be clear from section 4,
there will be some aspects of institutional framework involved in the analysis
but they will not present the analysis of institutional framework per se. For
instance, question if small shareholders can easily sell their shares at the
stock exchange market can suggest a variety of conclusions. It can point at
the absence of legislation that allows small shareholders to sell off (which was
the case until early 2005), but it can also point to the ineffectiveness of the
court to enforce the existence of this provision. Yet, the fact that small
shareholders cannot freely sell their shares also suggests that there could be
some obstacles for this practice in the very firm that is surveyed. In the case
of C Market, for instance, small shareholders have not been able to dispose
with their shares because the general manager had been refusing to sign the
prospectus that would allow shareholders to sell freely their shares at the
stock exchange market. Therefore, even if the survey finds out that courts are
ineffective, this finding will not serve here as an indicator for measuring the
rule of law variable but for measuring the behavior of the newly privatized
firm’s managers.
***
This is perhaps the proper place to clear up the dilemma as to what role the
change of ownership plays in firm restructuring. This is important to clarify
because my research is designed to survey only the enterprises that are
privatized. Socially-owned enterprises are left out because they do not meet
the first precondition—namely, that of privatization. In his paper on
“Determinants of Enterprise Restructuring in Transition” (2000), Luc Moers
argues that restructuring does not necessarily go with more ownership
change. I agree. But I wish to prove that the absence of privatization can be
said to lead to defensive restructuring, and that such a type of restructuring is
not a proper subject matter of this research.
Defensive restructuring is typically the first phase of restructuring. Such
restructuring is brought about by initial change in environment, typically
affected by stabilization and hard budget constraints. But this change in
institutional environment can bring about only part of necessary
transformation. As the 1996 World Bank Report suggests ‘most adjustments
have involved downsizing—of output, employment, and asset. Managers have
been survival-oriented; like turnaround managers everywhere they have
focused on sustaining cash flow’ (World Bank 1996, 47). Managers of the
firms did undertake some action in response to changes. But this can, in a
word, be described as a survival strategy rather than restructuring of the firm.
Since the upshot of the initial reform is a nascent market environment, so will
it be restructuring—incomplete and underdeveloped. The sought-for
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restructuring involves more than a mere reaction to initial reform. This more
radical restructuring is called innovative.
The major claim of this research (it is restructuring, not privatization that
matters) suggests another question: namely, is it possible to restructure
without privatizing? There were proposals (Stiglitz 1999) to hold up
privatization as long market institutions do not develop (for instance, financial
market). Something like this took place in Poland and in China. Part of the
suggested answer to this question draws on the fact that the major
determinant that enables enterprise restructuring is not privatization but rather
the change in general economic environment. In some cases, general
liberalization of the market and hard budget constraints contributed more to
firm restructuring than the fact of privatization. But this can be done owing to
the fact of announcement of divestiture. Firms which hurried to restructure
before being privatized would most likely not have done so if there had not
been an announcement that privatization is unavoidable (Kinkeri & Nellis
2004, 95). Besides, if changed institutional setting is enough to bring about
the restructuring, why efficient enterprises structure cannot persist in the
absence of the ownership change? The government can for a time relax its
control over enterprises but if the ownership change is absent the political
interference can resume. Kinkeri and Nellis write:
‘The higher level of institutional reforms, the more positive the economic
performance impact from a change of ownership. But institutional reforms do
not guarantee performance improvements unless there is a minimum level of
ownership change: the key finding is that economies must have private
ownership and procompetition policies to progress’ (ibid. 107).
The key variable with which to support the claim that restructuring without
privatization is an unfinished business is finance. The bulk of the firms which
were slated for privatization after the beginning of reforms in East Central
Europe were non-profitable and non-liquid. New owners typically bring in fresh
funds to restart the production. This can be done only if the firm is actually
privatized. I surely do not endorse the view that any privatization is better than
no privatization. But the absence of privatization must imply that it is the state
that takes care of the socially-owned firm, which suggests that, at best, it is
defensive restructuring that took shape.
Secondly, and more importantly, it is not clear how a non-privatized
enterprise, as an agent with unclear property status, could borrow money on
healthy financial markets. As Blanchard states:
‘Restructuring typically implies replacing much of [firm’s] equipment. State firms
are unlikely to have the funds to finance such outlays. Financing from retained
earnings may be difficult, and is unappealing in the absence of well-defined
rights to future profits. The same property rights issues are likely to rule out
equity finance, or large debt finance’ (Blanchard 1997, 78).
Thus, a special attention in this study is given to the financial capability of
freshly privatized enterprises. For, while it is true that privatization is not the
goal in itself, when it comes to the financial capability of an enterprise, it can
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be observed that privatization simply cannot be avoided. In most cases, it was
only the new owner who was prepared to pay off the debt and invest. Thus,
only when a company is privatized it can attract financial support with which to
relaunch production.
This research is presupposed on the assumption that the transformation of
state-owned firms involves more than merely an adaptation to changed
circumstances. In this survey innovative restructuring, as an alternative to
defensive restructuring, involves incorporation of the principles of corporate
governance into the organization of firm management, increase in efficiency,
and the ability to tap capital market to finance investments and to compete
successfully in a capitalist economy. This is the subject of the following
section.
[ref. another survey would have to be run to substantiate this claim
ref. see CLDS findings for the difference between social and private companies]
4. Structure of the Survey
This section spells out indicators of restructuring. Indicators serve as
measures to establish if a firm did restructure. The structure of the survey
originates from the presumption that there are three major constraints that
inhibit restructuring: corporate governance, managerial capabilities, and ability
to access financial resources (Meyer 1998, 18). Accordingly, the survey is
divided up into three sections:
1. corporate governance;
2. firm performance (efficiency);
3. financial position of the firm (which incorporates, in a form of an
addendum, analysis of financial statements).
Part 1 tries to establish if the privatized firms carried out necessary changes
in running the firm. The problem of corporate governance has been haunting
Central East European enterprises during the 1990s, as privatization brings
with itself the separation of the role of ownership and management. This part
looks at if this separation has been introduced, if the state substantially
withdrew from the company, if the managers and workers are given
appropriate incentives for extra work, under what conditions the employed are
prepared to obstruct production process, and if the protection of small
shareholders is implemented. This part also tests whether shareholders think
keeping shares pays off by asking the question if the shares can be sold at
any time or whether the management pays out the dividend that is at least 5%
of the share’s market value.
Corporate governance implies a change in incentives of the firm relations,
which makes it part of the story about government-firm relation. The major
idea is to separate government from the firm and terminate state’s
interference in the firm’s business. Since socially-owned enterprises used to
perform social function, it is easy to determinate the link by assessing the
7
level of labor in the firm. Thus the question if the firm has reduced its labor
force after privatization will be posed. This indicator resists the prevalent view
that reduction in work force is not the major sign of restructuring, for the
reduction is something that takes place in the first phase of the privatization.
In time, privatized firms, if they are reformed, decide to expand, which implies
hiring. On this view, employment, not layoffs, is the sign of successful
restructuring. Meyer does not consider ‘downsizing is not part of strategic
restructuring. It increases productivity, as measured by value of goods and
services produced in a period of time, divided by the hours of labor used to
produce them, in the short run but it does title to position the firm to future
competition. It can be at best the first step in corporate restructuring’ (Meyer
1998, 12). I submit that privatization on the long run increases employment,
but in my survey this distinction between the two phases is irrelevant, for the
aim is to measure restructuring in the short run, namely—in YEAR 1 after
privatization.
Taking into account the method of privatization in Serbia after 2001, it is
almost unlikely that the problem with protection of small shareholders appear
in such a dramatic form. The reason is that, on the sale model, new owners
are able to purchase more than the controlling stake, meaning that they have
no particularly big motive to obstruct small shareholders in the attempt to sell
shares to someone other than the majority owner or the manager. But this is
precisely the point of this survey: it attempts to establish that, when it comes
to the freedom of small shareholders, the obstacles to selling shares have not
been generated by the sale model set up by the 2001 privatization act.
Part 2 looks at enterprise performance. This means that firms became profitmaking instead of loss-making. Efficiency suggests itself as a first variable. It
should be noted that efficiency cannot be measured in a straightforward
manner. This is why efficiency will have to be established by way of proxy. It
is implies that the model achieved ‘(1) better matching between managerial
talent and productive asset and (2) better incentives for management’ (Roland
2000, 232). This suggests that management turnover is one of the most
critical criteria for enterprise restructuring. Indeed, this was supported by
Djankov and Murrel who showed, by way of empirical analysis, that there is a
positive correlation between high management turnover and enterprises that
restructured (Djankov & Murrell 2000, 15-17). Management turnover implies
hiring the managers who understand accounting, marketing, capital
budgeting, who have fund-raising skills, and possess good knowledge of the
targeted market. Such kind of managers should replace those who were only
able to extract subsidies from the government, capture the state, and secure
monopolies at domestic markets. It should be emphasized, however, that in a
market economy this replacement can easily be achieved because of the preexistence of the management market. At the onset of the transition, however,
when a good deal of privatization takes place, such a market does not exist.
Since this sets hurdles to an efficient allocation of managers, we need to
settle for the assessment of a mere (viz. quantitative) management turnover,
not a qualitative one. Finally, to establish better incentives for managers is
relatively simple, it will only have to be seen if the principles of corporate
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governance are incentive-based. (Eg. if bonus correlates with good
performance of managers.)
The resistance to privatization, and hence restructuring, comes from old
(usually bad) managers facing an ‘endgame’ situation (Roland 2000, 235).
The hypothesis of this research is that direct sale model applied in Serbia is
immune to this obstacle. Direct sale method has accomplished the objective
of matching managers and assets, one of the fundamental objectives in
privatization restructuring. A similar conclusion can be drawn about the
structure of the new ownership. Djankov and Murrell have shown that
enterprises that are more likely to restructure are the enterprises with
concentrated rather than disperse ownership structure (Djankov & Murrell
2000, 10). Since dispersed ownership lead to insufficient monitoring of
incumbent managers, as the practice of the firms that were privatized in
Serbia during the 1990s forcefully shows, the restructuring of disperse
ownership will naturally face larger obstacles. But this problem seems to have
been solved by the application of direct sale model that brought about
concentrated ownership structure and, hence, immensely facilitated the
replacement of old managers. The hypothesis I want to test is that the
problem of management resistance rarely appear in the firms that were
privatized in Serbia under the 2001 privatization act.
It has yet to be seen whether, by relatively easily solving the problem of
management turnover, it was possible in the case of privatized Serbian
enterprises to solve the issue of external financing. This problem typically
appears in the case of dispersed ownership. Since free distribution of shares
implies a giveaway to liquidity-constrained agents, transfer of ownership and
financing are, as it were, decoupled, and the solution to financing has yet to
be found after privatization (Roland 2000, 243). This would mean that the
problem of decoupling would not appear in the case of direct sale with the
consequence of concentrated ownership because new owner is more likely to
put up the funds for new investments. However, in the Serbian case this goes
mainly for tender sales as the new owners came largely from the field, while in
auction sales new owners seem to be as liquidity-constrained as those new
owners who took part in giveaway privatization programs across Central and
East Europe.
If we agree that management turnout brings about a better match of skilful
managers and productive asset, it has also to be assumed that better
managers are more able than old ones to make profit. The assumption of a
positive correlation between managerial skills and profitability seems in order.
The underlying idea to measure profitability draws on the following logic.
Profitability is measured in absolute terms, but also with respect to core
activities. During the 1970s, Serbian firms established themselves as
autonomous: besides the core activities, firms had many side activities. Some
of them were related to the core activities but some of them were not. Beside
these side activities, the firms developed many activities which were unrelated
to any activity of the company. As communist party imposed social function of
the firm, some firm had to develop housing, health clinics, or even
kindergartens. This created a complex structure of the enterprise in which the
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firm basically was able to completely do the job without the suppliers where,
without a close analysis of financial statements, one could not establish where
the major profit comes from—core activity, side activities, or from unrelated
activities. During the 1990s, due to the restricted access to other markets, as
a survival strategy, Serbian firms attempted to diversify the revenue based on
non-core activities (leasing out business space, switching to other lines of
production etc.), thereby making profit. Even though this was also a type of
restructuring (but of a different kind and based on the imperatives of the time),
it would be unwise for this type of research to neglect this phenomenon and
conclude that the firm has restructured although it derives the profit from noncore activities. The profit was surely not overblown, but it could nonetheless
mislead investors as well as those who are interested in restructuring of firms.
Other set of questions is supposed to measure company’s motives for
competition. Managers were asked what sort of competition they think they
face, and whether competition is coming from abroad or from domestic
companies. The question of harder budget constraints is considered usually
as the most important one, especially in the early phase of privatization. Since
direct sale does away with receiving subsidies from the state, the question
that was asked here is not if managers receive financial help, but if managers
expect to be helped in case their companies go bust. The question ascertains
if the company is left to itself, or it expects to be bailed out directly by the
state, indirectly by the banks, investors, or someone else.
I said in section 3 that institutional environment that is conducive to firm
restructuring will not be covered in this survey. However, there are certain
aspects of the institutional design that have significant impact on firm
behavior. The question will be asked if the managers think that the courts are
effective in enforcing contracts. The weakness of the rule of law creates
phenomenon of relational contracting that supplements the laws or act in
place of law. Roland calls this phenomenon closed networks and lock-in that
creates ‘the loss of competitive outside the business opportunities. These
inefficiencies reduce competition and increase the likelihood of collusive
behavior’ (Roland 2000, 189). In order to establish the extent to which firms
are locked in, we asked the question whether a company would buy goods
from a new supplier if he proposed to sell inputs at a 10% lower price.
Part 2 concludes by measuring productivity. The questions posed here assess
if the firm is able to produce cumulative change in sales volume and number
of workers, respectively. The idea is to obtain an estimate in labor productivity.
Part 3 establishes basic facts about financial position of the firm. It largely
relies on the data obtained from financial statements. The brunt of this subpart of the research is based on financial ratios analysis. It aims at
establishing the level of profitability and liquidity of the firm, thus helping both
short-term and long-term investors figure out whether or not to invest in the
firm. I believe that this finding contributes toward reaching a conclusive
argument as to whether a firm has restructured or not.
10
Ratios are critical in providing investors with necessary information to make
intelligent decisions. The selection of ratios (variables) was based on the
previous research made by Magginson, Nash, and van Randenborgh (1994),
Boubakeri & Cosset (1998), and Megginson & D’Souza (1999), and
Aussenegg & Jelic (2002).
Table 2 gives the financial variables, the proxy and the predicted relation that
will be analyzed.
Variable
Proxy
a. Profitability
Return on sales: net income/sales
b. Operating
efficiency
Sales efficiency: sales/total
employment
Net income efficiency: net
income/total employment
Capital expenditure to sales
Capital expenditure to total assets
Real sales: nominal sales/consumer
price index
c. Capital investment
d. Output
f. Leverage
g. Liquidity
Debt to asset: total debt/total asset
Quick ratio: ref.
Current ratio: ref.
Predicted
Relationship
ROS1>ROS-1
SALEFF1>SALEFF1
NIEFF1>NIEFF-1
CESA1>CESA-1
CETA1>CETA-1
SAL1>SAL-1
TDTA1<TDTA-1
QR1>QR-1
CR1>CR-1
Table 2. Ratios to be used in financial analysis of the firm.
The predicted relationship is supposed to show that in cases a, b, c, d, and g,
there is a increase in value. Profitability (measured as return on sales),
operating efficiency (measured as sales efficiency and net income efficiency),
investment (capital expenditures to sales and capital expenditures to total
asset), output (nominal sales deflated by the consumer price index) are
expected to increase in companies that move from public to private
ownership. (See Aussenegg & Jelic for explanations for otherwise: pp. 12-19)
In leverage (measured as by the long term debt to total asset ratio), however,
the situation should be reverse. State-sponsored companies were able to
borrow under favorable conditions. Privatization should lead to higher
borrowing costs, so leverage is expected to decline.
Liquidity (measured by current and quick ratio) is another form of measuring
financial strength of the company. It is supposed to increase as company
switches from social to private.
Rationale for Ratios
Financial capability of the firms plays the pivotal role in assessing the success
of restructuring. To obtain a reliable analysis I analyzed financial statements
(the ones that were accessible) and the data they contain. Methodology that
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was applied here was identical to the one that is used in financial analysis: I
tried to establish the level of risk and rate of return of a company seeking
fresh resources from a bank or an investor. I assumed that the ability to raise
cash is one of the most important aspects of restructuring. If, after
privatization, a firm remains unattractive for investors or turns out to be unable
to raise cash with banks, the firm cannot be said to be restructured. (I am
aware of relative inefficiency of the underdeveloped financial markets in
Serbia. This market has proven to be a poor supplier of financial resources
with which to start production, which is why this indicator shall be assigned
less weight.)
The employment of ratios makes little sense if analyzed in itself. Ratios must
always be put in a comparative prospective. In general, there are three ways
to compare financial ratios: among the firms surveyed; with the firm itself; with
the average ratio that holds for the industry the firm is coming from. The first
type of comparison was not employed here because the idea of the research
was not to compare firms with one another (which would be a requirement of
an investor), but rather to compare the firms, as it were, with the previous
selves, namely—with its position that existed before privatization. I also
resorted to the third type of comparison but not with industry averages of local
industries and services but of that of developed economy because the latter
were available, whereas the former were not. I was fully aware of the
limitations of the last type of comparison.
Firms of different size and from different industries are difficult to compare
because the statements need to be standardized. Since this research is not
about which firm is better than other, but rather whether or not the firms are
restructured, I avoid cross-firm comparison, and settle on comparison over
time. Common-size statement are used here to make comparison over time
because I am interested in seeing if the firm performs better now (after the
privatization) than it did in the past (before the privatization).
In analyzing ratios, I paid attention to short-term and long-term solvency.
Naturally enough, long term solvency is more attractive for long term investors
who wants to see if a firm can make profit, produce more, add value, and pay
dividends. Since the moment at which privatized firms were surveyed caught
the firms at the onset of their private life, I, in the analysis, put more
emphasize on short-term liquidity that are the target of banks and creditors.
Credit risk are much lower than equity risk and can be more easily quantified.
12
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