On the Results of the 2011-2013 Privatization Program

In the document in question, the following objectives in the above sphere were specified: (1) creation of conditions for attraction of extra-budgetary investments in development of joint-stock companies on the basis of new technologies; (2) reduction of the state sector of the economy for the purpose of development and motivation of innovation initiatives of private investors; (3) upgrading of corporate governance; (4) further development of the stock market; (5) formation of integrated structures in strategic sectors of the economy and (6) formation of federal budget revenues.

Extension of the time horizon of the forecast plan of privatization of federal property fr om 1 year to 3 years was accompanied by a continuation of the former practice of introduction of numerous amendments. Generally, from the day of approval of the privatization program about 50 relevant regulatory legal acts have been passed of which 15 regulatory legal acts in 2013, twenty-four in 2012 and eleven in 2011 (one more regulatory legal act was passed late in 2010). The most important ones date back to June 2010 when a serious radicalization of privatization plans took place in respect of large companies wh ere the state approved reduction of its share in the capital. As regards more than a half of ten companies which were initially included in the privatization program, it was declared that the state would cease to participate in their capital before 2016. A similar prospect was outlined for a half of other 10 companies on which account the list of large assets offered for privatization was extended.  According to the data of the report on the activities of Rosimuschestvo in 2013, within three years of operation of the privatization program 730 federal packages of equities (participation interests) were sold which is 1.8 times more as compared to the 2008-2010 crisis period. At the same time, the index of that period is comparable with the total value of the two pre-crisis years (2006–2007) yielding to the indices of the mid-2000s when more than 500 packages of equities were sold on an annual basis.
The results of the privatization program are more modest as regards privatization of unitary enterprises: the number of federal state unitary enterprises (FSUE) in respect of which in the 2011-2013 period Rosimuschestvo issued instructions on the terms of privatization by way of transformation of the above enterprises into open-end joint-stock companies (216 companies) is about four times lower than the index of the 2008-2013 period; it is to be noted that enterprises which were transformed into joint-stock companies within the frameworks of formation of vertically integrated entities (VIE) accounted for more than two-thirds of their total number. In that part of the privatization program, in the 2011-2013 period decisions on the terms of privatization of 148 FSUE and equities of 85 joint-stock companies were made and measures on formation of 34 VIE (or more than ? of the number of those in respect of which there were the government’s decisions) completed.

The estimate of the budget effect of privatization in the 2011-2013 period depends on the indices selected for comparison. Technically, as regards budget revenues the program was fulfilled and even exceeded the target result as within three years the federal budget received Rb 25.67bn which amounts to 160% of the target value set in the privatization program (Rb 16bn without taking into account deals with equities of large companies).

However, the regulatory status and the values of the estimates of budget revenues stated in the privatization program differ a great deal from the budget outlay data. According to the data of the Reports on Execution of the Federal Budget (by the source of domestic financing of the deficit) presented on the Web-site of the Federal Treasury, the funds received from sale of both equities and other forms of participation in the capital being in federal ownership amounted to Rb 126.2bn (with the annual target value of Rb 174.3bn and the execution of 72.4%), Rb 43.9bn (with the annual target value of Rb 58.7bn and the execution of 74.7%) and Rb 41.6bn (according to the preliminary data) (with the annual target value of Rb 52bn and the execution of 80%) in 2011, 2012 and 2013, respectively. To the above, it is necessary to add funds (Rb 159.3bn) received by the Central Bank of Russia from the sale of a package of equities of Sberbank in 2012 which funds were transferred to the budget in the amount determined as a difference between the amount of the revenues from the sale and the equities’ book value, less the expenditures related to the sale of the above equities with a relevant reduction of a portion of the profit – which is subject to payment to the federal budget – received by the Central Bank of Russia on the basis of the results of 2012.

According to the budgetary reporting, generally, in the 2011-2013 period the federal budget received about Rb 371bn from the sale of equities and other forms of participation in capital (including equities of large companies) without taking into account the revenues from the sale of other assets (land and various property).

On the one side, the above value exceeds multifold the estimates of the revenues stated in the 2011-2013 program without taking into account the main revenues from privatization of equities of large companies which have a high investment appeal: Rb 6bn in 2011 and Rb 5bn each in 2012 and 2013, that is, the total of Rb 16bn. On the other side, federal budget revenues from the sale of equities in the 2011-2013 period happened to be 2.7 times lower than the estimate of Rb 1 trillion which was stated in the previous privatization program with taking into account revenues from a possible sale of equities of large companies in case of making by the Russian government of individual decisions.

The main specifics of the three-year privatization program consists in sale of federal packages of equities via private sellers designated by the government (mainly investment banks) on the basis of amendments to the existing law on privatization which was approved in spring 2010.

Generally, in the 2011–2013 period there were 13 such deals with equities of Russian companies with state participation (2 deals, 5 deals and 6 deals in 2011, 2012 and 2013, respectively) for the total amount of Rb 585bn. It is to be noted that quasi-privatization deals accounted for about 44% of that amount and they yielded nothing directly to the budget (Rb 5.951bn worth of an additional issue of the Obiedinennaya Zernovaya Kompania in 2012 and Rb 102.5bn worth of an additional issue of the VTB Bank in 2013 and the sale by OAO Rosneftegaz of 5.66% of Rb 148.1bn worth of equities of OAO NK Rosneft in favor of BP within the frameworks of the deal on acquisition of equities of TNK-BP in 2013). In principle, it is logical to expect that the funds received are utilized for development of companies. However, as in case of IPO of initially private companies there is no guarantee that the raised funds are utilized for investment (innovation) purposes.

So, it can be stated that in reality the privatization program was mainly subjected to solution of issues which have been dealt with one way or another from the beginning of the 2000s, that is, replenishment of the revenues side of the budget and formation of vertically integrated entities. It appears quite infeasible at least in the short-term prospect to assess the effects of the privatization as regards attraction of investments, including those in capital assets, carrying out of innovations, modernization and technological development, motivation of the stock market and upgrading of corporate governance, while in the long-term prospect it mainly depends on the state of things in the Russian economy in general.

Georgy Malginov, PhD (Economics), Head of the Property and Corporate Governance Department