National Agenda : Going Private--the Profit and the Pain : Germany has just finished the fastest, costliest selloff of socialist enterprises in modern history. Is it a model--or a warning?

By MARY WILLIAMS WALSH

Jan. 10, 1995 12 AM PT

TIMES STAFF WRITER

BERLIN —

Come the greening of America, householders in cities like Los Angeles may be able to buy refrigerators that don’t use Freon, one of a family of cooling compounds long standard in U.S. models that work their way into the atmosphere and damage Earth’s protective ozone layer.

Appreciative consumers will then be able to look to the former East German town of Niederschmiedeberg, nestled in the piney hills just north of the Czech border, where a little-known appliance company named Foron perfected and began marketing the world’s first modern, propane-cooled refrigerator in 1992.

Until 1990, Foron was but a cog in the decrepit industrial machine of the Communist German Democratic Republic, a textbook case of the command economy, unable to turn a profit even though it enjoyed a monopoly, weighed down by a payroll of hundreds of men and women in make-work jobs.

The story of how Foron made its way from socialist dinosaur to free-market paladin is a messy tale but a useful example of the dreams and the destruction, the initiative and frustration playing out in the former East Germany since the fall of Communist rule.

For ever since unification in 1990, eastern Germany has seen the fastest, costliest and most comprehensive privatization drive in modern economic history. More than 8,000 firms, like Foron, have been converted from lumbering “people’s enterprises” to private businesses as the economy has been transformed from socialism to capitalism. Thousands more firms have been pushed into liquidation.

Other onetime Soviet Bloc states have been trying to take their economies private too, but nowhere have the changes been as rapid and as thoroughgoing as in the former East Germany, which had the unique good fortune--or the singular bad luck, as critics insist--to be absorbed root and branch by the world’s third-most powerful economy.

Absorption by West Germany in 1990 meant eastern Germany had a powerful midwife for its rebirth as free-market terrain: a new German government agency, usually known as the Treuhand (pronounced TROY-hahnt), or “trustee.”

The Treuhand’s brief was to acquire virtually all of East Germany’s national assets, and then to act as a huge, state-run investment bank, either privatizing or liquidating the properties as expeditiously as possible.

In its 4 1/2 years in business, the agency handled not only those 8,000 companies but practically everything else of any commercial value in eastern Germany, from collective farms and village day-care centers to giant steel mills and film studios. It was responsible for retrieving the assets of the former East German Communist Party. It peddled forests, castles and one medieval fortress.

At the end of 1994, the Treuhand officially closed its books; the great eastern German economic selloff was formally brought to a close.

This milestone has allowed many in Germany to step back and consider the Treuhand’s record, and whether eastern Germany’s painful and path-breaking conversion to capitalism could, in the end, have been carried out in a better way.

Could things have been done more fairly? Could more jobs have been saved? Could more of the east’s tattered industrial stock have been preserved? Were the thousands of liquidations really necessary? Did the Treuhand move too quickly?

And, did the whole process have to be so expensive? Treuhand has had to spend billions of marks just keeping the companies afloat--paying staffs, reducing debts--while it sought buyers for them. German taxpayers, saddled with a Treuhand deficit of $170 billion, are looking at increased levies and stepped-up government borrowing.

The answers ought to be of interest to more than just the Germans. For ever since the earliest days of Thatcherism in Britain, privatization has been an international buzzword, with countries from Latin America to Eastern Europe to Southeast Asia trying to unload their frumpy state enterprises and promote free-market states of mind. Germany is now acting as a consultant for selloffs in about 30 countries in Africa, the Middle East, Europe and Asia.

Where Germany has created new wealth and positioned its impoverished east as a new global competitor, its methods have shown the way to these countries. But to the extent it has done harm, its example stands as a cautionary tale.

And from his ringside perspective in the executive suites of Foron, refrigerator manufacturer Eberhard Guenther thinks the German case holds lessons for both the bold and the timid.

Europeans, it is true, can now buy a socially useful product--Guenther’s ozone-friendly, propane-cooled refrigerator--something that might not even be on the market today had a once-insolvent Foron not been put on the auction block and taken private.

But at the same time, Guenther says, Foron’s transformation from “people’s enterprise” to private concern, at the hands of the Treuhand, nearly killed the company.

“My company survived in spite of the Treuhand, not because of it,” he says. “We had to fight the Treuhand.

“But then,” he adds, “once it became clear that my company would survive, the Treuhand really helped us.”

From their offices in a grim-looking, Hitler-era building in the heart of Berlin--it was, in fact, Luftwaffe headquarters--Treuhand officials themselves argue that while they made some mistakes, their overall performance is an unrivaled success.

Of the 13,799 large, doddering, government-owned East German companies in existence in 1989, more than half are still open for business today, competing as dog-eat-dog capitalist entities. Many have been fully restructured and refitted. Only about 85 are still in limbo, deemed salable but still unsold, awaiting privatization by a successor agency to the Treuhand.

Such a performance compares glowingly with that of, say, Hungary, which also launched a privatization drive in 1990, but which lacked Germany’s vision and perseverance and, in the 4 1/2 years since, has managed to sell off a mere 11% of its government assets.

Treuhand officials also claim to have preserved the jobs of more than 1.5 million eastern Germans--a matter of no mean importance in a struggling, post-Communist region where the unofficial unemployment rate approaches 30%.

In addition, about $140 billion in new private investment ($97.9 billion of which is legally secured and the rest pledged) has been offered for eastern Germany’s needy towns, cities and farmlands, including about $2.5 billion from U.S. investors. Already, some results can be seen in the form of stylish new office buildings and well-equipped shop floors.

“At first, this was a painful process,” says Wolfgang Vehse, director of international relations for the Treuhand. “But in the end, people will see that we have built an internationally competitive industry in eastern Germany. The region is positioned to become one of the strongest industrial locations in Europe, and on the globe.”

But against that proud accomplishment, detractors argue that the price was simply too high. And the critics are not limited to disgruntled Communist managers stripped of their powers and perks.

By most counts, 4.4 million eastern Germans were thrown out of work during the transition to a market economy--and that in a region with a working-age population of about 9 million. Meanwhile, the Treuhand has taken in only $47 billion in asset sales, nowhere near enough to offset the $217 billion it has had to pay out to keep the privatization drive on track.

The most disturbing effect of all, however, is the bitter feeling on the part of many eastern Germans that their once-national property has been sold off to outsiders--to western Germans, mostly--and that the easterners who kept the economy plodding along all those difficult years under communism didn’t have the wherewithal to enter the bidding fray.

The psychological scars are so deep, critics say, that they have put the east into a worse position--for all its newfound economic potential--than Eastern Europe’s other former Communist states, which on the surface seem markedly poorer and less promising.

“At the beginning of the 1990s Poland and Hungary were insolvent, but they recovered quite well from that, and today they are in a better situation than east Germany,” argues Karl Otto Poehl, a former president of the German central bank, the Bundesbank. “They had to recover on their own, and in this way, they didn’t develop this colonial mentality.”

The process that led to the Treuhand began in the east. A government trust that would manage the country’s assets if communism fell was the brainchild of Wolfgang Ullmann, an East German theologian and a leader in the citizens movement that pushed for the reform of the East German state in 1989 and brought about its downfall.

Ullmann’s dream was to create a Treuhand that would protect East Germany’s public patrimony while giving each citizen a voucher--a legal certificate that would entitle him or her to a share of the country’s assets. If citizens had a stake in the new national economy, his thinking ran, the more motivated they would be to make the new, post-Communist order succeed.

The voucher idea has been tried with success elsewhere. The Czech Republic made free-shares-for-citizens vouchers the core of its much-praised privatization program, for instance, and with them created thousands of small and medium-sized citizen-entrepreneurs who are now fiercely loyal to Prague’s democratic government. The voucher idea was tried less profitably in Russia and Lithuania, however, where the shares were structured in a way that gave preference to Communist-era business managers--and thus helped the Old Guard hang on.

In Germany, though, the voucher idea never even made it into play. Germany’s top economic decision-makers were convinced, then and now, that it would be more productive to set up a single, autonomous agency and let it sell everything to general bidders, in exchange for money.

“The thing about vouchers is that they only seem to bring money to the people concerned,” said Treuhand chief Birgit Breuel, when asked last month whether she had any doubts about Germany’s rejection of the voucher idea. “Vouchers do not bring investors. They do not bring fresh money. They do not bring new technology.”

“You must be fair if you compare the Czech Republic and Germany,” adds Vehse, the Treuhand international relations director. “In Germany, we have had a real privatization.”

Thus, by the time the Treuhand was a going concern, it looked more like a traditional Western investment bank than Ullmann’s idealized guardian of East Germany’s assets and public interest.

“I have a bad conscience that I did not fight strongly enough for this concept,” says Ullmann, today a member of the European Parliament. “If I had, each citizen would have received their part of the east’s property. It seems to me that this would have been a much more secure way, without the enormous social breakdowns that eastern Germany has experienced.”

What set the Treuhand apart from traditional investment banks was the speed at which it completed its contracts, particularly in its earliest weeks and months. To spur its staff along, the Treuhand offered bonuses for completed sales, as if the staffers were real-estate brokers on commission.

“There was a massive pressure to privatize as fast as possible, and be finished soon,” remembers Sylvia Birkhold, former Treuhand legal adviser. “If legal advisers complained about a hastily made contract, we were told, ‘You will ruin our monthly statistics! You are threatening my awards! Come on, sign it.’ ”

Treuhand officials argue that the speed and incentives were essential to keep the privatization drive from bogging down, as similar campaigns in Poland and Hungary did. And speed, the Treuhand notes, was also essential if costs were to be held in check.

For all the validity of these arguments, though, the haste also left openings for unscrupulous investors. Before long, it was clear that some buyers had no intention of fulfilling the promises they had made about the money they would invest in their new acquisitions or the number of eastern staffers they would continue to employ. And,it turned out, the early privatization contracts had often been drawn up so swiftly that they couldn’t be legally enforced.

In July, 1993, the Treuhand even had to take back 30 privatized companies--something it had sworn it would never do--after it became clear that the investors had bought them only to milk the assets. (The Treuhand’s Vehse says 25 of those companies were later successfully re-privatized.)

In still other cases, when the Treuhand couldn’t find buyers on its own breakneck timetable, it simply shut businesses down, rather than refurbish them in hopes of making them more attractive.

That is what nearly happened to Foron.

As Guenther, Foron’s boss, tells it, the Treuhand decided early on that his refrigerator company didn’t stand a chance in a market dominated by such giants as Siemens and Bosch. Thus, even as he was readying his all-new, Freon-free refrigerator for the market, the Treuhand was trying to shut him down.

“It’s easy to have all the right answers at the end of a process,” he says today, “but I would have hoped for more imagination on the part of the Treuhand as it restructured the economy.”

In many cases where the liquidations went through, the Treuhand’s liquidators earned inexplicably vast sums for their work. According to a minority report issued last September by members of a Bundestag investigatory panel, the Treuhand paid 134 liquidators about $142 million, with one operator receiving $19 million in fees. The investigators claimed that if this liquidator had charged ordinary, market-based fees, he’d have had to work 50 years to earn as much.

When asked about such goings-on, Breuel conceded that her agency had made some errors, but argued that these were greatly overshadowed by its successes.

“We have concluded 85,000 individual contracts,” she says. “I’d like to see the person who wouldn’t make a few mistakes over the course of such a process.” (The Treuhand eventually revised its procedures for paying liquidators.)

But the most fundamental setback for the Treuhand came about not because of its own impatience or its failure to supervise liquidators, but because of a separate, political decision by Bonn to convert most of East Germany’s currency to West German marks at the entirely unrealistic exchange rate of one to one. While eastern Germans were initially thrilled to get the mighty deutsche mark at par with their rickety Eastern currency, the effect on their economy overall was disastrous.

Suddenly, east German manufacturers had to buy all raw materials and pay their staffs in deutsche marks--a non-starter for many bedraggled eastern manufacturers.

“I don’t think things could have been done differently,” says Klaus von Dohnanyi, a former mayor of Hamburg who has been working as a special emissary of the Treuhand. “I’ve never seen one country with two currencies. There really was no alternative to the currency unification.”

But currency parity meant that the Treuhand was selling the east German companies at precisely the time when they were in the most desperate shape--and the most vulnerable to outside plunderers.

Even as easterners have complained that their national economy has been gutted by quick and disadvantageous sales, however, many investors have been arguing that the prices they paid for their east German companies now seem too high. In the industrial city of Halle, for instance, no sooner was the local portfolio of businesses privatized than a report surfaced that one out of five buyers was clamoring to renegotiate its contract.

With criticism coming from both sides, it is remarkable that the Treuhand was able to stick to the policy course it set for itself when it opened for business in 1990. And informed observers say that only Germany, with its strong currency, solid international credit rating and political stability, had the wealth and the nerve to ride out the storm of the last 4 1/2 years.

“We are not boasting that we are the only country on Earth that can privatize,” says Vehse. “But we were able to create this successful framework. We had money. We had a triple-A credit rating. We had experienced managers. We had an efficient legal system, and we had the social network to run all the procedures. We could go fast. All the other countries have had to go slow.”

Researchers Andreas Scharpf and Christopher Steinmetz contributed to this story.

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Help From Friends

Bonn has lured billions of dollars in new private investment for the east, mostly from western Germany. The United States and France are among the top participants.

Sources of Investment

Total: $97.9 billion

Western Germany: $82.9 billion

Non-German Sources:

Other:$15.0 billion

France: $3.8 billion

U.S.: $2.5 billion

Britain: 1.9 billion

Canada: $1.3 billion

Other*: $5.5 billion

* Includes Denmark, Italy, Luxembourg, the Netherlands, Austria, Switzerland

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Treuhand ‘Sidelines’

Germany’s massive Treuhand agency acquired 13,799 large eastern enterprises in 1990 and privatized 8,125 of them. In addition, it acquired other properties:

Storefront Businesses

Total: 23,422

Closed: 8,172

Privatized: 15,250

Breakdown:

Shops: 10,740

Hotels: 2,300

Pharmacies: 1,417

Bookstores: 475

Movie theaters: 318

Farmland

Total acquired: 3.7 million acres