The privatization of a large enterprise is complicated. Rarely do the financial records of a state-owned enterprise being prepared for privatization accurately portray the market value of the firm’s physical assets or its financial status. The state, as owner of the firm seeks to maximize the proceeds it receives from the sale, but it also has an interest in the success of the new enterprise and in minimizing the social impact of restructuring. Successful privatization requires specialized legal, corporate finance and investment banking skills in one place.

Early in USAID’s presence in Slovakia, the Ministry of Privatization requested USAID support in privatizing several large enterprises. Given the importance of privatization to Slovakia’s economic transformation, such assistance was an important element in our assistance program. We provided support for the privatization process and industrial policy making and helped prepare large industrial firms for privatization.

In 1991, Price Waterhouse assisted the Ministry of Privatization to restructure four large firms in the textiles, knitwear, woolen fabrics and building materials industries in preparation for their privatization. Starting in 1992, Deloitte & Touche helped the Ministry prepare a master plan for the privatization of all large-scale enterprises, design the coupon privatization program, and set up and implement an open, transparent process for preparation and approval of specific privatization transactions. Deloitte later completed diagnostic studies of ten important but debt-ridden firms to identify their underlying technical and administrative weaknesses and outline their potential commercial viability. The analysis strongly influenced the Ministry of Economy’s foreign investment and industrial policy papers. Deloitte personnel, with the assistance of Crimson Capital, then designed recovery plans for the most debt-burdened firms, including debt consolidation and restructuring, which led to successful recoveries for four privatized firms. Deloitte also assisted the Ministry of Finance to prepare needed capital market regulations and performed a financial analysis of the National Property Fund.

Other USAID assistance to privatization transactions resulted in the privatization of a dozen textile firms and the partial privatization of several chemical companies, but the government then decided that the chemical companies were too important strategically that no further assets could be privatized. USAID assistance (first through IESC and then through Deloitte) to help two large makers of defense equipment find articles to produce for the civilian market met essentially the same fate. Strategic business plans, new products and other restructuring enabled at least a partial financial turnaround, but the firms were, in the end, declared by the government to be of such strategic importance that they would not be to privatized.

The Slovak government’s negative privatization policies led to an early end to these efforts. A good part of our privatization assistance did not have the direct and immediate results we had hoped for. But the training our experts provided and the collaborative work they performed strengthened the ministries of Privatization and Economy (capabilities which are still being used today) and improved the operations of many firms.

In an effort to sustain Slovakia’s adjustment to market forces, USAID then expanded its economic restructuring assistance at the firm level. Given the magnitude of enterprise development needs, a special enterprise-restructuring project was one of USAID’s largest activities in Slovakia. Implemented by the Recovery Group and other business advisory firms, the project facilitated the transformation of private enterprises into viable market competitors through direct technical assistance and the enhancement of Slovak management advisory abilities. In less than three years, the project provided comprehensive restructuring services to 71 firms employing over 17,000 people and accounting for 13% of Slovakia’s industrial GDP. In the first two years after receiving these services, participant firms increased sales and cash flows by an average of 10%, decreased labor costs despite large wage increases, and lowered costs as a percentage of sales. The project also provided management support to over 100 additional enterprises and gave specialized business training to 1,700 managers, independent consultants and accountants in Bratislava, Banska-Bystrica and Kosice. It built the consulting capacities of eight companies to sell their services in turnaround management, marketing, strategy, organizational development and financial structuring. The project launched the Slovak Management Training Center to provide on-going business education services.

The International Executive Service Corps (IESC) participated in Slovakia’s transitions in many areas, especially by solving problems faced by new private businesses. From 1991 to 1998, IESC executive volunteers completed 280 assignments for 225 clients, in places ranging from Trstena in the north to Komarno in the south, and from Michalovce in the east to Malacky in the west. IESC volunteers provided hands-on assistance to some of the largest and smallest companies in the country. Some companies were on the edge of bankruptcy, some faced start-up difficulties, while others needed help to avoid being overwhelmed by their own success. One of the latter cases was the Bucina wood-processing manufacturer, a former nationalized company that was privatized. IESC assistance reorganized the company’s marketing system, increasing export sales by more than $15 million, expanded production, and solved the company’s inventory and materials handling problems. In another case, IESC helped a company in Presov to launch the local manufacture of cash registers, introduce new product lines, expand domestic and export sales and hire more people. The company’s products are now used in 80% of Slovakia’s retail establishments. The imprint of IESC experts can be found in private enterprises throughout the country.

The MBA Volunteer Corps project supported by USAID enabled U.S. MBA graduates to work with hundreds of private enterprises, mainly start-up firms, directly and through the Entrepreneurship Center and other small and medium enterprise development institutions from 1992 to 1996. The Peace Corps also provided volunteers to regional development centers and other small business development organizations for a decade.

Rural-based firms were included in the process. Four programs were carried out to deal specifically with agricultural restructuring. Iowa State experts focused on improving farm and cooperative productivity and business practices to raise farm profits and long-run commercial viability. They and their counterparts got the Support Fund for Agriculture established and running and helped formulate agriculture policies now part of the law. The Support Fund provides long-term funds for farmers to buy equipment and land. Perhaps Iowa State’s most lasting contributions occurred in its farm management program, whose beneficiaries are now able to take charge of their destinies in an open market system. More than ever before, farmers and agribusiness owners are undertaking strategic business planning and deploying farm assets for maximum profitability.

VOCA also supplied agriculture volunteers in Slovakia during the 1991-97 period. Its 110 volunteers implemented a total of 143 projects all over Slovakia, mainly in the transformation of former cooperatives, business management, farming operations and private farm management. A sample of assisted enterprises showed that a large majority increased sales by 50% or more in the first year after VOCA assistance, even though, on average, only half of their VOCA volunteer’s recommendations were adopted at the time. VOCA agricultural volunteers will continue to be available to Slovakia through VOKA. Other assistance from Land O’Lakes, a large American dairy cooperative, helped dairy producers and processors, while the Cooperative League of the United States helped develop farm cooperatives as commercial enterprises.

The United States Department of Agriculture (USDA), in cooperation with the University of Arkansas, provided policy advice and other assistance from 1991 to 1999. With that assistance, the Ministry of Agriculture developed the country’s food system market infrastructure and agricultural financing systems. The Ministry and related institutions obtained legislation and regulations to support orderly market-driven food production and processing systems. Budget outlays for agriculture were reduced and the subsidy system, now using market-based incentives, is more transparent. A crop disaster indemnity fund has been established. Productivity in the sector has been raised, and parts of Slovak agriculture are moving solidly into international competitiveness. The grain warehousing and agriculture laws of 1998 were major steps in the process. They allow the collateralization of commodities, reduce the payment delays that affected the sector and permit the establishment of trade associations. These changes put Slovak agricultural policies in good shape for OECD membership and EU accession negotiations.

The Slovak-American Enterprise Fund (SAEF) was established as an independent, SEED Act-funded public corporation to provide loan and equity funding and business training to small and medium-sized enterprises in Slovakia, similar to those established elsewhere in Central and Eastern Europe. SAEF partner firms must be owned by the private sector, as either privatized or start-up firms, and they must be solid enterprises. While the success of many of its earliest operations paralleled the fate of other enterprise lending in Slovakia, SAEF has restructured its operations and is actively seeking good business partners in the manufacturing, agribusiness, service and retail sectors.

The experience of privatizing large firms pointed out that their indebtedness to banks was a major impediment to bank restructuring and that this indebtedness seriously eroded the ability of the financial sector to play a major role in future development. State banks were especially affected, as they financed the vast majority of state enterprises. Much of state-owned enterprise debt was the result of industrial policy decisions in the communist era and a continuation thereafter of poor business and administrative practices.

When the government expressed its desire in 1996 to upgrade the operational capacity of the Slovak Credit Bank (VUB), the largest bank in the country and key to any financial sector restructuring, USAID responded positively. KPMG developed the financial and technical skills of the bank’s loan workout and restructuring department, strengthened its financial management, corporate finance and treasury management operations, and established its capacity to do investment banking. The bank’s corporate finance and merchant banking skills were indeed strengthened: the VUB was able to (and did) help its clients restructure their operations and financial obligations. But the government did not privatize or liquidate VUB. Instead, it required the bank to continue the policies that led to a low-quality, illiquid loan portfolio. USAID, in cooperation with the World Bank, has since restarted its efforts to solve the liquidity crisis at the nation’s public banks.

Other bank improvement projects were more successful in helping ease the transition of the Slovak banking system to a market-led system. The Arthur Andersen Banking Advisory Project trained 540 bankers in risk evaluation, improved credit classification techniques, and better general credit processes. In addition, bankers learned how to lend against receivable accounts and inventories and how to evaluate loan syndications and participations as potential vehicles to mitigate their banks’ exposure to risk. Further, 200 bank loan officers learned to detect the early signs of problems with loans and how to do loan workouts. With USAID assistance, the National Bank of Slovakia’s Institute of Banking Education gave over 2,000 bank employees the basic banking skills that had been absent in bank training programs and university courses. Today, modern banking skills are practiced throughout the private commercial banking system and over half of all new commercial bank loans in Slovakia are subjected to risk classification procedures that meet Slovak law and international standards.

The technical skills of the National Bank of Slovakia (NBS) examiners in charge of on-site bank inspections were upgraded through a four-year effort implemented by KPMG and International Business Technical Consultants. The on-site supervisors how perform comprehensive examinations using risk-based supervision policies and procedures that are updated to reflect experience with the procedures. Formal training was followed by applying the procedures in real examinations and by extensive experience with U.S. counterpart agencies in programs tailored to each examiner’s needs. In addition, an in-house training capacity was developed among the examiners that enables the NBS to train new on-site supervisory personnel. The on-site inspection staff is now fully capable of performing high-quality professional on-site examinations, essential to both the NBS’s overall bank supervision functions and to assuring the prudential management and financial stability of Slovakia’s banks.

The Financial Services Volunteer Corps (FSVC) made major contributions to debt and equity capital market development. It helped its counterparts build an appropriate legal and regulatory framework and pushed market evolution towards being a mechanism for raising capital (instead of serving just as a liquidity device during privatization). FSVC prepared the Office of State Supervision of Capital Markets for conversion into a fully independent regulator. FSVC seminars on advanced financial sector topics and regulatory issues updated and expanded the knowledge of commercial bankers, brokers, regulators, supervisors and industry associations. FSVC also helped the National Bank of Slovakia on open market operations, payments systems, supervision, and government debt issuance and pricing. Its cooperation with the Bratislava Stock Exchange helped move it towards better self-regulation and more effective and efficient client services. FSVC also strengthened the self-regulatory structures of industry associations. Only time will tell how well market institutions are prepared to use their expanded skills.

The Entrepreneurial Management and Executive Development (EMED) program enabled many small and medium entrepreneurs in Slovakia who wanted to increase their American contacts to learn how to make their firms more solid and more profitable. This successful program operated over a five-year period, including times of governmental indifference to the fate of small and medium private enterprises. Through the EMED program, over 230 Slovak business people from many parts of Slovakia visited business leaders in the United States. The program enabled small and medium business people to adopt changes that increased profits and efficiency. Over two-thirds of the participants reported sales increases in the first year after their program, including many over 50%.

Advanced academic business training is being provided for the first time in Slovakia through the Masters in Business Administration program initiated at Comenius University with the cooperation of the University of Pittsburgh. This project upgraded the economics faculty of Comenius University and expanded its library facilities to enable the University to offer a new, high quality week-end (executive) MBA programs and a program in Mathematical Economics and Finance. By the end of the project in 2000, two classes of executive MBA students will have graduated, as will two classes of undergraduate economists.

Agriculture management education was upgraded at several institutions of learning through an Iowa State University (ISU) project. The University of Agriculture at Nitra created new courses and adopted case studies developed through the project to make its teaching more realistic to students. The University of Economics in Bratislava also adopted the case study method of research, writing and teaching. The Agroinstitute at Nitra now new gives courses in agricultural marketing and entrepreneurship.

U.S. electric energy consulting firms helped the Slovak Electricity Company to address free-market managerial challenges and technical, regulatory, and environmental issues. As part of USAID’s regional cooperation with similar organizations in Poland, Hungary and the Czech Republic, Electrotek Concepts advised on the economics of transmission services and pricing; Bechtel provided assistance in the power pool regulatory area; and the United States Energy Association (USEA) worked on environmental coordination and enhancement. This program allowed the CENTREL systems to connect to Western Europe’s power grid in 1997 in preparation for their participating in competitive power markets. The CENTREL countries have made significant progress in complying with the EU’s electricity directive, needed before EU admission and before successful promotion of major foreign investment in the sector. Electrotek’s energy efficiency project in Handlova and other sites demonstrated the advantages of low-cost weatherization of municipal housing and identified cost-effective mechanisms for energy efficiency for condominium associations. Adoption the energy-saving techniques it demonstrated and its pricing and subsidy recommendations would decrease energy use and subsidies. Electrotek also prepared new courses in energy saving for universities in Bratislava and Kosice. In addition, the USEA partnered the Slovak Electricity Company with the Southern Company, a U.S. electricity producer, in a program of technical and management exchanges and regional seminars that focused on making the Slovak utility more efficient. The Southern Company made its personnel and facilities available to the program at no cost.

The U.S. Nuclear Regulatory Commission (NRC) and Department of Energy (DOE) assisted the Slovak Electricity Company, the Slovak Nuclear Regulatory Authority, the Nuclear Research Institute at Trnava and the nuclear power plants at Bohunice. DOE-provided the technical know-how that ensures nuclear safety, and Slovak now has trainers in safe nuclear power plant operation. Monitoring equipment, simulation software and emergency operating instructions effectively built safety awareness and installed safe operating procedures. The NRC program strengthened the legal and regulatory capability of counterpart personnel to enforce strict safety procedures for nuclear power plant operation. Slovak regulatory staff now have risk-based regulations and inspect for performance and related safety regulation compliance. The Slovak Nuclear Regulatory Authority is now fully capable of providing nuclear safety assistance to neighboring countries.

The growth of private housing ownership, construction and financing activities was supported through several SEED Act-funded projects as part of USAID’s program to promote both private enterprise development and greater citizen involvement in economic and social decision making. The Financial Services Volunteer Corps program worked with financial sector institutions to modernize laws and regulations to allow housing mortgages and initiate private financing. The East European Real Property Foundation helped form associations of real estate brokers and professional appraisers and trained appraisers in modern real estate valuation techniques. Current conditions in financial markets limit the impact of this work, although all the tools are in place, including the ability of financial institutions to issue mortgage-backed securities and to use real estate as security for property loans.

USAID assistance through the Urban Institute guided the original framework for the key housing privatization and condominium law of 1993, which permits the sale of public housing to tenants and the formation of condominium associations. The Institute also promoted municipal housing privatization and the growth of homeowners’ associations in order to manage and renovate privatized housing stock. The Union of Associations of Housing Owners, and its four Education and Information Centers (VICs), now have the ability to deliver seminars, training and consultations to local governments, municipal housing management enterprises, new private owners in condominiums, and emerging private property management firms.

PADCO helped found the Association of Slovak Building Entrepreneurs. The Slovak Technical University uses PADCO-developed courses to train private contractors in construction management, market-oriented engineering concepts and alternative housing technologies. PADCO assisted the Ministry of Construction to develop its 1996 procurement law, which requires competitive bidding on all contracts. Unfortunately, the government all but ignored the law for several years.

Earlier, the Urban Institute also worked with the Ministry of Labor, Social Affairs and the Family to relax rent controls and change the housing allowance system. At the time, the government chose not to put its recommendations into law. At the request of the new government, the Urban Institute updated its earlier work, which allowed the Ministry to implement a better, more targeted allowance system.

The U.S. Treasury Department has provided fiscal and financial advice during most of USAID’s presence in Slovakia. For the majority of their time in Slovakia, Treasury experts found that government authorities were not interested in their recommendations for increasing the economic efficiency and equity of the tax system and revising tax laws to make them better support the growth of a market economy. Most counterpart officials were more concerned about revenue generation than the microeconomic impacts of the tax system; the former government adopted only a few recommendations regarding revenue administration. However, the current Slovak government received U.S. Treasury assistance on government debt issuance and management.

Coopers & Lybrand trained accounting and consulting firms to install modern managerial accounting systems in Slovak companies. This allowed them to acquire and implement the principles of activity-based cost accounting and activity-based management systems which, by project end, had been transferred to over 70 companies. The five consulting companies trained under the project will continue placing these systems in client firms.

Modern business and finance need good systems governing commercial relationships, especially a commercial code that provides for modern business transactions, bankruptcy laws that do not require liquidation of the enterprise and do not protect debtors or creditors unfairly, and collateral laws that facilitate efficient financing mechanisms. To this end, ABA/CEELI legal advisors provided a draft of a newer commercial code and were instrumental in preparing revisions to the present bankruptcy law that correct its most glaring defects, even though defects remain. The Slovak Bankruptcy Institute founded at that time is a center for continuing impartial bankruptcy education and training. The U.S. Department of Justice and the Federal Trade Commission participated in preparing the competition (anti-monopoly) law enacted in 1994 and helped the Anti-Monopoly Office become effective in fostering competition until that office became politicized

With USAID funding, an American NGO, Partners for Democratic Change, established two Market Mediation Centers in Slovakia to institutionalize voluntary mediation as a form of dispute resolution in the commercial sector. It trained mediators and judges and conducted mediations that amply illustrate the efficiency of finding mutually satisfactory outcomes of disputes, without the expense and delays that court proceedings would entail. The Department of Social Work at Comenius University now teaches mediation techniques to lawyers and members of the chamber of commerce.