Privatization promotion innovations: opportunities and constraints

Following Russian Government's recent approval of a new 3-year privatization program for 2014-2016, Rosimuschestvo (Federal Agency for State Property Management of Russia) made a few statements about its intention to make this process more transparent by introducing external management for a period of sale of JSC's stocks with the establishment of asset managers for the purpose of detecting conflicts and engaging professional auditors who would be selected on a competitive basis to assess financial conditions of privatized companies.

First of all, about sources of financing of asset managers and professional auditors, basically about adequacy of budget allocations to Rosimuschestvo as part of the existing and next 3-year federal budgets with regard to such budget items as ‘Provision and organization of presales preparation of federal property, as well as reorganization of federal state unitary enterprises' and ‘Real estate appraisal, recognition of title and regulation of relations concerning state property'.

Furthermore, the status and functions of asset managers is not quite clear, because it is the board of directors and the board are generally regarded as the key management bodies of a joint-stock company. Semantically, the term ‘external management' relates to the law on insolvency (bankruptcy), meaning a bankruptcy procedure against the debtor for the purpose of recovering its solvency.


If we consider a possible role of asset managers as title transfer from the state, it is to be recalled that the Russian legislation provides for several ways of privatization, including sale of JSC's stocks based on trust management results. It allows the state to cease its control in certain companies by retaining the stocks for a period the procedure in question, thereby making it possible for defining certain key business development objectives as part of trust management.


Finally, like in the case with the engagement of independent directors, there are questions about criteria of independency and professionalism as well as the degree liability of those whom the state is going to engage for participation in supporting privatization.

On the other hand, Rosimuschestvo stated that it would provide incentives for investors in privatization transactions by simplifying access to fundraising for buyers. This refers to selection of credit products designed to finance the purchase of a state-held share, build up a special pool of lending banks (negotiations with a few of the top-20 banks are underway) which prior to lending are entitled to have full information about assets to be sold and their appraisal, if an auditor selected by Rosimuschestvo provides a negative audit report. In such a case, analogies should unavoidably be drawn between the role of such a governing institution and the function of mortgage brokers in the housing market.


In general, the world practice has examples of credit support to privatization process. For instance, the privatization process in Chile in the 1970s featured provision of loans for purchase of privatized assets, because the national private sector was running short of substantial capital and foreign investment activity was limited up to a certain point. Such a privatization scheme, when an offer for sale of a control interest in a privatized company by public auction was accompanied by issuing loans to buyers, was popular to a certain extent. However, it was used basically at the final stage of the initial privatization process (1974-1978). The second stage (1984-1989) followed the deep recession and financial crisis in 1982-83, when no loans were issued to buy stocks, with only a few exceptions, when the government offered stocks of certain companies (e.g., banks) to a wide range of buyers in the stock market.


In the modern Russian conditions, provision of loans on special terms for privatization process is exposed to the risk of limited borrowing of private resources and indirect use public resources as borrowings from state banks. Adverse effects may include both narrowing of the "planninhorizon" which concerns a privatized company's business activity on the part of new owners and managers with a drift towards basically operator functions, and the development of quasi-privatization processes, especially when a privatized asset has been pledged as collateral with high probability of being transferred to the ownership of lending banks, thereby drawing analogues with the notorious events of the 1990s. The possibility of indirect use of state banks' assets in the privatization process inevitably creates a threat to the image and reputation of the entire new privatization program.


It should be noted, however, that a more than moderate amount of Rb 3bn annually in 2014-2016, net of revenues generated from sale of stocks of JSCs which are leaders in certain industries, is the sole quantitative benchmark with regard to direct budget revenues in the new privatization program.


Further focus on the foregoing amounts would hardly require credit subscription to the privatization process. With regard to revenues from sale of stocks of the largest companies, the engagement of advisors to such investment in 2011-2012 was an attempt to arrange for privatization transactions at a level beyond the standard practice level.


Furthermore, it should be noted that the Federal Property Management State Program approved by the Russian Government Order dated February 16, 2013, No. 191-r contains no reference at all to lending of privatization, which is not the case with engaging asset managers and auditors.


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