Regional Outlook : The East Bloc Is on the Auction Block : Governments are holding fire sales as they rush to embrace an old enemy--private enterprise.

To call it “The Sale of the Century” would be an understatement.

Eastern Europe’s unprecedented gambit to restore private property after the failure of communism’s collective ownership has simultaneously plunked onto the auction block the wealth of half a continent and the fate of 136 million people.

From the Baltic shipyard where Poland’s Solidarity trade union launched the struggle for democracy to a kiosk on Romania’s Black Sea coast dispensing syrupy soft drinks to sunbathers, Eastern Europe is selling its assets in a fevered rush to rekindle the entrepreneurship crushed by Communist zealots after World War II.

Prying the hand of state from every industrial complex and corner grocery is riddled with risk for inexperienced political leaders, as well as for the workers communism claimed to protect.

Scandals have marred early efforts at privatization, as Communist bureaucrats being edged out of authority scurry to feather new nests with the resources still at their disposal.

And while many East Europeans already live in what the West would consider poverty, the first fruits of the historic reversal of collectivization will be even harder times--double-digit inflation and mass unemployment.

Cost-conscious new owners in partnership with foreign investors are challenged to do more with less: to boost production that will generate higher income to pay old debts and make new investments while trimming overstaffed work forces to get rid of the “underemployed.”

Massive industrial operations that employ tens of thousands have proven grossly inefficient. It is just these industrial white elephants that privatization proponents would like to sell off.

But foreign investors are wary of the pitfalls of mega-production. They have insisted that manufacturing monoliths be broken up into manageable units before they will be considered for purchase or partnership.

Foreign investment is recognized regionwide as the best source of cash with which to renovate aging factories to be more productive. Industrial growth and the hard currency it can generate are the sole hope for paying off debts such as the $38-billion burden carried by Poland or Hungary’s $20 billion, the largest per capita in Europe.

But the people of Eastern Europe have begun to fear an invasion of Westerners who can outbid them, letting capitalism take over where communism left off in squeezing them out of ownership.

Poland has prohibited the sale of land to foreigners, and Romania has done the same in practice. A more liberal land law is expected from the Hungarian Parliament, although deputies seeking limits on foreign purchase of real estate have managed to stall the bill for months.

Debates are also raging over which, if any, industries should be shielded from foreign ownership, or in some cases from privatization. Hungary is attempting to exempt its media from foreign ownership--a little late considering the West German purchase of 19 daily newspapers already, and permission for an independent television station to be run by British publisher Robert Maxwell.

Farming may be left to collectives, at least in Hungary, where that approach has worked well. As the government recently put it, “One doesn’t upset a modest success, particularly when it feeds you.”

Balancing the quest for cash with national interests will be one of the toughest tasks for the new governments armed with electoral mandates to pursue capitalism with all deliberate speed.

“By the year 2000, about one-third of Hungarian business may be foreign-owned,” predicted Marton Tardos, a member of Parliament and one of Hungary’s leading economists. “But that’s not unusual for some of Western Europe’s smaller countries.”

Foreign interest in Eastern Europe has been keen, but the infant stage of privatization has given Western investors a case of cold feet.

Luxury hotels in the capitals are packed with businessmen from Japan, South Korea, Western Europe and the United States. But most explore the territory, then go home to wait for legal guarantees on taxes and profit taking before signing contracts or handing over cash.

Because privatization has never been attempted on the scale deemed necessary

in Eastern Europe, there are no proven formulas for success.

“It took Margaret Thatcher 10 years to privatize 5% of Britain’s industry, and we have to do 30% to 40% in three years,” Tardos said.

Economists throughout the region predict that it will take beyond the end of the century to cut to less than a third a state share of industrial wealth currently believed to be at least 90% in most of the region.

The mechanics are still being defined, and each of the seven countries embarked on large-scale privatization has been refining its own version of how it should be done.

Hungary has declared open season on industrial assets, selling outright to citizens who can afford it and swapping ownership to Western investors in exchange for technology and management expertise. Money from the sales is usually plowed back into the business.

Budapest’s approach has won praise from foreign consultants, but Hungarian citizens are the most fearful about selling out their national wealth.

Czechoslovak Deputy Prime Minister Vaclav Vales announced in late August that 70,000 small businesses, including hotels, restaurants and workshops, will be sold or returned to their original owners beginning next year. Finance Minister Vaclav Klaus had earlier pushed a plan to parcel out vouchers so Czechoslovaks could buy shares in their country’s companies, estimated to be worth about $60 billion.

That program has stalled in Prague, where political wrangling continues over the design and detail of privatization. But the idea of doling out ownership to the public has caught on in other states.

Vouchers are popular because they guarantee each citizen a piece of the pie. But detractors point out that creating nations of shareholders will do little to make the factories they own run more efficiently, which is the bottom line in generating growth to reverse recession.

Polish lawmakers in late July announced plans to award each citizen “privatization bonds” that can be redeemed for company stock, enabling the majority of Poles with little or no savings to take part in the transition to capitalism.

Romania has also announced a voucher system to transfer to individual ownership 20% of the nation’s assets. State Minister Adrian Severin estimated that the program would give each Romanian adult $2,239 worth of vouchers, hopefully providing “the embryo of a stock market.”

East Germany’s transition out of state ownership is in a class by itself because the risks are being underwritten by West Germany as the two states reunite.

Bulgaria has hardly begun the herculean task of rescuing its economy, and persistent political upsets have prevented the newly elected Socialist leadership from focusing on privatization. But even in Eastern Europe’s most heavily centralized state, foreign experts are under contract to seek out investment and design a stock market.

In Yugoslavia, where private enterprise has been allowed for a quarter century, Prime Minister Ante Markovic envisions yet another path to provide industry with capital and strip the state of responsibility for micromanagement. He proposes selling shares of each enterprise to its workers, on the theory that output will improve if the owners are responsible for it.

None of the architects of privatization claims that his program is the perfect solution, and all of the approaches have their drawbacks, in the view of Western experts.

In a recent report on Eastern Europe, Olivier Blanchard of the Massachusetts Institute of Technology and Richard Layard of the London School of Economics pointed out that giving shares to the workers fails to recognize equally deserving civil servants--like teachers and nurses--whose workplaces will remain in state hands.

Charles Twyman, a Washington consultant from the Deloitte & Touche firm working with Hungary’s new State Property Agency, said that sharing out the wealth with vouchers sounds good but accomplishes little.

“The objective is not simply to change owners. The objective is to make owners realize that if it doesn’t make money, you’re going to go broke,” said Twyman, dispatched to Hungary as part of a $5-million aid package from the European Community. “What is really at issue here is responsibility. There needs to be a linkage between ownership and responsibility.”

Privatization is an intimidating buzzword, “but mechanically, it’s nothing mystical. It’s just a lot of mergers and acquisitions and receiverships,” Twyman said.

What is truly daunting is the juggling act required of neophyte governments in administering the day-to-day affairs of the factories they own while simultaneously overseeing their transfer.

Poland, Czechoslovakia and Romania have only recently begun privatization, while Hungary passed its first enterprise law in 1977. Reform-minded Hungarian Communists enacted bankruptcy and foreign investment laws before losing power this spring to a center-right coalition.

That has given Hungarians a head start in the race among the emerging democracies for the limited and treasured resource of Western investment.

But even in Hungary, money hasn’t materialized in sufficient quantities. At the start of the year, Hungary’s 1,000 joint ventures with foreign firms were valued at only $600 million, reflecting the West’s hesitancy to commit big sums during the turbulent transition.

The modest rate of foreign investment has put pressure on the government to do what it can to reshape from within. And the Persian Gulf crisis and Soviet oil cutbacks have further undermined East European industry.

Hungary’s state-owned industries were put on notice two years ago that they would have to operate at a profit or face closure as subsidies are removed. That built a fire under state managers fearful of losing their jobs in an age of economic catastrophe that some fear may soon resemble America’s Great Depression.

Take, for example, the Hungarian Brick & Tile Co., a typically overstaffed and unprofitable government monopoly incorporating all 94 factories that produce bricks in the country.

Comptroller Imre Zagyvai said the factory management heeded advice from outside consultants and transferred responsibility for planning and pricing to each separate shop. It soon become evident that only 40 could operate profitably, so the rest are being sold, reorganized or shut down.

“Foreign investors are showing a lot of interest in us because all the new companies locating here will need to build facilities, so obviously that means more bricks will be needed,” said Mihaly Pollak, the lawyer overseeing Brick & Tile’s privatization.

Four factories were recently merged into a joint venture with the Austrian Wienerberger firm producing construction materials. The Austrian partner will replace antiquated equipment at the four plants in exchange for output from Brick & Tile facilities on the Austrian border.

Another losing operation has been sold to a Hungarian investor, and a giant hotel and office complex is planned at the park-like site of a Budapest factory that the company has decided cannot be renovated.

The hotel project hangs on passage of the new land law under debate in Parliament.

Real estate is proving a trickier task for privatization, because Hungary’s new government includes a political party that promised during the election campaign that it would restore ownership according to records from 1947, when Communists collectivized farmland.

As written, a new land law that Parliament is expected to endorse in late August should allow state enterprises like Brick & Tile to sell assets from inefficient factories to raise capital for more promising projects. But the proposal also seeks to give back land to those it was seized from, casting doubt on the ownership of some property that industrial concerns are hoping to sell.

Fear of mass unemployment is already gripping much of Eastern Europe, where workers never had to worry about losing their jobs under communism. Privatization only promises to exacerbate the trend in the short term. The selloff at Brick & Tile will be accompanied by a 40% reduction in the firm’s 10,000-strong work force over the next three years, for example.

Morgan Stanley, the international investment bank, recently predicted that 25% of Eastern Europe would be out of work in the next few years.

Injustice has been another bitter pill Eastern Europeans have had to swallow with privatization. Too often they have watched helplessly as Communist bureaucrats used their power and connections to “golden parachute” themselves into cozy new businesses. In pursuit of experience and inside information, foreign investors often tab former Communists to head up new private ventures.

Government inexperience has bungled other privatization deals. Here, profitable stationery and hotel chains were sold to foreigners for a fraction of their worth, depriving the owners--the citizens of Hungary--of the extra capital a competitive sale would have generated.

Andras Sajo, a professor of comparative economics at Budapest’s Institute of Economics, said the government of Prime Minister Jozsef Antall unwittingly threw away millions in late July when it criticized the foreign sale of shares in Hungary’s successful Ibusz travel network. The government retains 60% ownership, and the public denunciation sent stock prices tumbling.

Sajo said the government has slowed privatization in recent months, partly in response to public outrage over earlier abuses but also because valuation would sharply reduce the state’s tax base, cutting revenue the government needs to operate.