New approaches to privatization policy

At the last RF government meeting the assessment of state-owned assets was disclosed; it makes about Rb 12 trillion. At the same time, the RF Minister of Economic Development stated that this value is underestimated of scale and the real market value of assets exceeds Rb 100 trillion.

At the official level such estimates were disclosed for the first time in many years. Recall that in March 2010 the Federal Property Management Agency has published the estimates for the first time since 1991, so the register of state property can be regarded as completed.

Comprehensive work in this area was started after the approval of regulations on accounting of federal property and keeping a register of federal property by the RF Government Decree No. 696 of July 3, 1998. The effective Regulation on accounting of the federal property appeared nine years later in connection with the adoption of the RF Government Decree No.447 of July 16, 2007 "On improving the accounting of federal property", when the previous document was declared invalid.

Thus, the formation of the state property register took about 12 years, being extended nearly for the entire first decade of the 2000s, while there was an urgent need for that information back in the first half of the 1990s, or at least by the end of voucher privatization in mid-1994, when the privatization process was still quite intense. This is a demonstrative example of actual quality of the administration of government economic policy, in particular related to direct government functions.


In view of the above, the wide variance in the state property estimates is not surprising. Estimates of the total nominal value are directly related to the completeness of the register formed to date. As to the actual market value, it depends in many ways on the type of assets and the approaches to assessment. In regard to the state shareholdings of established long ago joint-stock companies it is possible to focus on the stock market quotations, but there are great difficulties in evaluation of assets of unitary enterprises, institutions, land and real estate.


For example, the basic approaches to real estate assessment are comparative (based on recent similar transactions), cost-based (based on the full replacement cost, net of depreciation) and remunerative (based on the estimates of future income from the use of the object). Clearly, it is rather difficult to apply those approaches to real estate, not to mention the property of unitary enterprises and institutions, for example, due to the lack of similar transactions or just one comparable transaction available. There are well known similar problems in taxation of property of individuals, associated with the difference in estimates of apartments made by the Bureau of Technical Inventory (BTI), and the market price, as well as the cadastral value of the land. In addition, a large part of state property is used in non-commercial activities (e.g., education, healthcare) and in performance of public functions (such as defense, security), and the income arising in this case is an indirect result of such activity.


Therefore, the disclosed market value of state assets is rather eventual cost. Relatively modest budget revenues from privatization in the 2000s is an indirect evidence of this fact (although they have markedly grown in 2011-2012.). This also applies to the role of the state in the budget deficit financing (though the state makes foreign borrowings at the same time), and comparison with privatization revenues in other countries. Moreover, the main source of the Russian federal budget revenue from privatization in the last two years was the sale of shares of large companies of national importance, disposed through the investment banks, engaged by the government. However, in the past year revenues from privatization (Rb 201.5 bn) were less than the dividends of state companies (Rb 212.6 bn).


The Ministry of Economic Development has proposed a novation in the form of automatic inclusion of the property, which functions are undefined, in the privatization program after January 1, 2015, what requires from the federal executive agencies to define such functions of the assets under their control before the specified deadline. This approach, on the one hand, may encourage the authorities to maintain the largest possible number of objects, while urging the management of subordinate enterprises and institutions to create more incentives for asset stripping and deriving private benefits from the assets under their control due to the lack of confidence in their position.


The big problem is an adequate definition of the functions of each object of state property complex, as a multi-purpose nature of a number of state-owned assets should be taken into regard.

On the other hand, the proposed approach can increase the scope of the expected in 2-3 years privatized assets. Herewith, there will be inevitably emerged an issue of specifying the terms and methods of privatization with regard to market conditions and demand for specific assets. The inflow of a large scope of additional property to the market will contribute to reduced prices for those assets, which is crucial in the priorities of the budget approach to privatization. It is highly desirable to develop the potential effects of privatization with regard to its feasibility, comparative economic and allocative efficiency of the public and private sectors, the opportunity costs, the potential risks and impact on the development of individual markets, industries, regions and national economy in general.


Since from a formal legal point of view privatization is any transformation of unitary enterprises in other organizational and legal forms, another aspect is the issue of comparable effectiveness of these transformations, depending on the preferred type of legal entity (joint stock companies, limited liability companies, independent non-profit organizations), as well as the degree of decentralization and manageability of newly established holding companies in case of their capital extension with the state-owned shares.


It should also be noted that basing on the information of the Head of the RF Ministry of Economic Development, the amount of currently available state assets at the federal level as broken down by all categories of legal entities is substantially less than in 1999: there are over two thousand shareholding companies, as compared to about 3.9 thousand, about 1.8 thousand of state unitary enterprises against nearly 13.8 thousand, over 20 thousand institutions against 23.1 thousand. Therefore, the trend to reduce the amount of state property anyway could be implemented without a targeted approach to the assets.


G.N. Malginov, Ph.D. in Economics, Head of Ownership and Corporate Governance Department