Did Domuschievi and Peevski buy remission of privatization obligations?

Over the past week, a stormy scandal in the media was caused by the amendments to the Law on Privatization and Post-Privatization Control proposed by the "Attack" party and supported by GERB and VMRO. Accusations rained down from the media that the proposed amendments were completely "lobbying" with the aim of protecting the financial interests of the Domuschievi brothers and Delyan Peevski in particular. The accusations of protecting the interests of the Domuschievis were the loudest, given that the proposed amendments were submitted days after their case for changing their obligations under the privatization contract of the Bulgarian Navy was rejected. As a result, they are expected to have to pay over 50 million leva in penalties. To determine whether these accusations are justified, we must first familiarize ourselves with the entire history of the privatization of the BMF and the court cases that were conducted around the privatization contract.

What are the conditions for the privatization of the BMF?

In the summer of 2008, a German-Bulgarian consortium called "KG Maritime Shipping" became the buyer of 70% of BMF, for a price of 440.1 million leva. The Bulgarian partner in the deal is "Advance Properties", a holding company of the Domuschiev brothers. The tonnage that the consortium acquires through the purchase is equal to 1.4 million DWT (deadweight), and one of the conditions set in the privatization contract is that within 10 years after the sale this tonnage should not fall below 1.3 million. An additional requirement is that the average crew of BMF should number at least 2,360 people 10 years after the conclusion of the deal. And last but not least, investments in ships must total 779.9 million leva, at least within the 10 years after the signing of the contract.

These are the basic terms of the privatization contract concluded between the consortium and the state at that time, although there are some additional ones, such as the age of the vessels to decrease (i.e. to be renewed). In 2013, the Domuschievi holding fully acquired the consortium that had bought the BMF in 2008. Over the years, however, the holding was unable to fulfill its obligations under the privatization contract and the Domuschievis filed a lawsuit against the Agency for Privatization and Post-Privatization Control in an arbitration court, trying to change the terms of the contract. The arbitration initially ruled in their favor, but this decision was appealed to the Supreme Court of Cassation. This happened in 2017.

Why haven't the obligations been fulfilled?

According to Domuschievi, the obligations under the privatization contract were not fulfilled due to the "economic hardship" that arose as a result of the global economic crisis that began in 2008. The crisis did indeed deal a serious blow to commercial shipping all over the world, leading to a collapse in the revenues of all companies involved in the merchant fleet. However, it is debatable whether this is sufficient as a justification for the failure to fulfill the obligations under the privatization contract. Rather, it is not a sufficient justification for two main reasons.

First, in the summer of 2008, the crisis was already foreseeable, especially by people in the sector. The financial crisis began in 2007, and therefore it was possible to predict that a recession would come in late 2008 and 2009, and to react accordingly, perhaps by renegotiating the deal or simply abandoning it if the consortium judged that it would be unable (due to the crisis) to fulfill its obligations.

Secondly, the crisis has long since ended, but the obligations under the privatization contract continue to be unfulfilled. In fact, since 2013, the global economic crisis that occurred in 2008 has not been used as an excuse. From the point of view of global economic indicators over the past 4-5 years, the consortium should have been able to fulfill the obligations it voluntarily accepted. But this is not happening.

What does the Supreme Court decide?

After reviewing the case in the fall of 2017, the Supreme Court of Cassation (VKS) ruled that the arbitration did not have the necessary competence to rule on this issue. The case was returned to the arbitration, which in turn accepted the decision of the Supreme Court and considered that it was not competent to rule on the case and terminated the proceedings in the case for changing the privatization contract. As a result, the Domuschievs effectively lost the case because they failed to obtain the change in the privatization terms they requested.

After the final conclusion of the case, what is expected to happen in December 2018 is for the Privatization Agency to conduct an inspection of the implementation of the privatization contract. If it is established that the conditions of the contract have not been met, as will be the case, given that a lawsuit was being filed to change them, the Domuschievi holding will be obliged to pay a large penalty of approximately 58 million leva.

"Attack" introduces changes to the Privatization Law

In this context, the notorious changes to the Privatization Law are also being introduced. This week, two MPs (one from the Ataka party and one from the civil quota of VMRO), Nikolay Aleksandrov (Ataka) and Emil Dimitrov (VMRO), are introducing two proposals for amendments to the law, which will in practice simplify any potential penalties that the Domuschievs would have to pay if they were found to have failed to fulfill their obligations under the privatization contract. The first amendment provides that the obligations of the privatized company, directly related to the subject of its activity, cannot be attributed to the buyer for a period of more than five years. The second amendment provides that this amendment to the law can also apply retroactively, to privatization deals that have already been concluded. The ruling coalition, GERB and VMRO, accept the proposals, and outside of it they are also supported by the DPS and VOLYA.

These amendments would in practice simplify any obligations and corresponding penalties for their implementation that the Domuschievs owe, because the statute of limitations for these obligations would be halved, to 5 years. Accordingly, there is no way in 2018 that they could be held accountable for unfulfilled obligations over the past 10 years. Perhaps (eventually) the Agency for Privatization and Post-Privatization Control could fine them for unfulfilled obligations between 2008 and 2013.

Valeri Simeonov, who, in view of his long-standing conflict with Domuschievi, quite predictably opposed the proposed amendments, began to sound the alarm a week ago that GERB, Ataka and VMRO were preparing to adopt these "lobbyist" amendments to the law. He subsequently threatened that his party might leave the ruling coalition if they were adopted. Is he right in his criticism that the purpose of this bill is precisely to protect the interests of Domuschievi?

The changes are in obvious protection of certain business interests

In this case, there can be no two opinions on the matter. The timing and specificity of the proposed amendments to the law are very clearly in favor of Domuschievi specifically. First - the timing is exactly a few days after the arbitration terminates the court procedure and the case is dropped. Second - the amendments are introduced retroactively.

If they were not introduced retroactively, then perhaps there would be some argument that the amendments are simply aimed at optimizing and improving the current privatization law (according to the proponents). But when they are introduced retroactively, just days after the Domuschievs' case was finally dismissed and they will most likely have to pay a large penalty for failure to fulfill privatization obligations... it could not be more obvious that they are simply seeking to protect their interests.

Another potential beneficiary of the proposed amendments is the new partner of Delyan Peevski's media business - "New Image". The company is the buyer of "Boyana Film" and, according to the privatization contract, cannot sell the land of the cinema center for a period of 20 years after the conclusion of the deal. However, the proposed amendments will provide this opportunity, as they retroactively shorten the maximum statute of limitations for obligations under privatization contracts.

What is the big problem?

The big problem here is not even the amendments themselves. The privatization legislation in Bulgaria certainly suffers from serious deficiencies, in view of the, to put it mildly, unsatisfactory long-term effects of the privatization processes in the country. And perhaps such amendments to the law, which shorten the statute of limitations for privatization obligations, are not such a bad idea. Especially in view of the fact that the obligations imposed are very often in defense of other lobbying interests – of unions and former civil servants and partners who want to keep their jobs and source of income.

Let us not be deceived that all obligations imposed under privatization deals are authoritative and justified from both an economic and social point of view. Of course, concluding a privatization deal is a voluntary act. If the relevant private company does not believe that it can bear the relevant obligations in the long term, let it simply not conclude the deal. Or, if due to unforeseen circumstances it fails to fulfill them, then it owes itself the payment of compensation according to the terms of the contract. There is no dispute about this - such is the law and it must be implemented. But this does not mean that allowing more flexibility and easing the obligations under privatization deals is not a good idea in principle and will not actually lead to an improvement in the subsequent development of these enterprises.

If well-thought-out amendments to the privatization law are introduced, with the expertise of business and economic specialists, in fact amendments of a similar type (to shorten obligations and their statute of limitations, allow more flexibility in their implementation, etc.) can achieve exactly this and solve some of the problems with the privatization processes in our country. This is very important to say, so as not to build up hostility among the public towards such legal amendments in principle. In this particular case, of course, it is a matter of absolutely shameless legislative impudence aimed at benefiting specific businesses with strong political connections. And that is why the specific current amendments are harmful.

Another disgusting signal for all other investors

The biggest problem with the proposed amendments is that they send yet another disgusting signal to all entrepreneurs and investors in Bulgaria, whether foreign or domestic. The signal is that the laws do not apply to those with political connections. Is there a law that you are uncomfortable with? Can't win the case under your privatization contract? Has a strong competitor appeared on the market that you want to eliminate in order to maintain your market share? No problem – just call your people in parliament and everything will be sorted out.

And if you don't have your own people, we're sorry, you'll most likely be on the other side. Because every time a business benefits financially through its political connections, someone else will have to pay for it. And if you're not the one with the connections, then you're most likely one of those who will pay. That's how it is here. So if you're an entrepreneur who wants to invest in Bulgaria - get your head around it. Your most important and first investment should not be in the real, productive economy, but in the parliament, in the government, in the state bureaucracy. Who parasitize on this economy by deciding which businesses are profitable, which ones have to fulfill their obligations, which ones go bankrupt and which ones grow. And along the way, they rake in their share.

And then we wonder why foreign investment in Bulgaria is constantly falling. And why the growth of GDP or this or that economic indicator is not as high as we would like it to be, as it could be. There are many reasons, but one of the main ones is this. The fusion of the state with business in our country is so huge that the processes in the economy in our country depend entirely on politicians. A few weeks ago they decided to kill the market share of smokeless cigarettes in the country by completely unreasonably raising the excise tax on them to the level of regular cigarettes. Now they decide that they can retroactively amend the law in order to simplify the unfulfilled obligations of certain politically connected businessmen.

Not to mention the smaller cases of corruption and outright racketeering by public institutions. For example, the notorious mayor of Mladost, Desislava Ivancheva, who, after being elected on the wave of a false and manipulative campaign, set about defending...her own interests, of course, by racketeering every possible property owner in the neighborhood. At least she was eventually charged. But the problems at the higher levels of power (as we see) remain.

Conclusion

As long as this is the situation in Bulgaria, we cannot expect a higher level of investment. We cannot be surprised that in every possible competitiveness index, the quality of our public institutions and corruption are always highlighted as the biggest problem. We cannot be surprised that foreign investors are unwilling to reinvest their profits and expand their businesses. Because they are afraid that they will become the victim of a legislative attack ordered by some of their local politically connected competitors. Or because they cannot afford to pay for bribes at the state level in addition to expanding their business.

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