In a surprising move, the Bulgarian Privatization Agency abruptly shut down the sale and privatization of its VMZ-Sopot Bearing Plant. SKF AB(Sweden) had been finalizing arrangements to acquire the facility for approximately BGN 15 M.

The privatization agency cited security issues for its move, but environmental concerns may also be involved.

The huge government-run Voenen Mashinostroitelen Zavod Military Machine Works complex in Sopot is actually a number of large manufacturing facilities, only a few of which ever involved the production of bearings.

Founded in 1936, the machine works is among the most advanced in Bulgaria. The entire facility originally produced only military products, weapons, ammunition, vehicles and related material. With the collapse of Eastern Europe's military economies, the facilities have been gradually re-oriented. Today, the factories of VMZ-Sopot now manufacture everything from vacuum cleaners to bicycles, shoes and furniture.

There is, however, ongoing manufacture of military products at the vast complex. This is what triggered the privatization agency to stop the sale. In fact, military production there is still extensive. Rockets, guided missiles and various types of large ammunition are being produced, using entirely modern, state-of-the-art machine tools and manufacturing methods.

In its privatization efforts, the Bulgarian government decided to break down the massive VMZ-Sopot works as a series of transactions, selling off related facilities piecemeal. The Privatization Agency stated from the outset it believed the Bearing Works was the crown jewel, the most interesting to outside investors and likely to command the highest price.

The works has production capability for ball bearings and tapered roller bearings, along with linear-motion bearings and bushings.

The privatization sale of the VMZ-Sopot Bearing Works was announced in January 2001, immediately attracting the interest of a number of bearing manufacturers around the world.

By April 2001, SKF, ZKL (Czechoslovakia) and Kushin Bussan (Japan) had emerged as the leading contenders to buy the facilities.

In June 2001, Privatization Agency Executive Director Levon Hampartsoumyan announced SKF was considered the leading preferred buyer. SKF had begun due diligence almost immediately back in April, and he indicated their offer was not only the best price, but also adhered to the government's other requirements. The key issue was SKF agreeing to continue paying all 1,695 workers for a full year after taking control. SKF's cash offer turned out to be BGN 15 M, more than the Privatization Agency had expected and "several times higher" than any other offer.

Now the Privatization Agency has abruptly halted the sale, at the insistence of the Bulgarian government and military.

Bulgaria's concerns are that the true extent and layout of the facilities have long been considered military secrets, and the true extent still cannot be disclosed. Work has begun on the task of declassifying and decommissioning the complex to the point where outsiders could be allowed to acquire and operate the Bearing Works as a separate, segregated and secure area.

The Privatization Agency also now acknowledges there are serious concerns about the environmental situation at the complex. Some outside environmental auditors (who have not seen VMZ-Sopot but are familiar with the handling of hazardous materials at similar facilities) have expressed concerns that it is likely to be grossly contaminated with military-oriented hazardous waste. Some believe any environmental cleanup at VMZ-Sopot would be so extensive and take so long that the complex can never be made safe for re-opening or worker exposure by any European environmental standards.

The Privatization Agency is expected to make another announcement regarding the Bearing Works sometime in the next few weeks.