Privatization Policy in 2017

Share–based equity transactions with the seven companies being privatized by special decisions taken by the President and the Government of the Russian Federation, with due regard to the market environment and recommendations of the leading investment consultants, have not been settled. A conclusion could be drawn based on the statements of the leaders of the Federal Agency for State Property Management, made already this year, that preparatory arrangements were being conducted with regard to the shareholding company “Sovkomflot” and “United Cereal Company”. The privatization measures launched under the previous privatization program aimed at the assets’ consolidation of the Sheremetyevo and Vnukovo airports have been completed in 2017. The State share in the capital of the united operators in these airports was fixed at 30.43% and slightly more than 25% respectively.

From the financial point of view, according to the progress performance report as of January 1, 2018 based on the domestic funding sources of the budget deficit, published on the website of the Federal Treasury, the means received from the sale of shares and from other federal ownership forms of the equity participation, accounted to 14. 284,5 million rubles. It exceeds more than twofold the forecast value of the budget income from privatization included in the privatization program, i.e. 5.6 billion rubles annually, exclusive of the cost of shares of major companies.
More than a half of this amount, i.e. 8.531.7 million rubles, was secured in the course of the implementation of the Russian Federation Governmental Decrees in 2010 and 2016 and agreements between the Federal Agency for State Property Management and PAO AFK Sistema, with regard to the repurchase by the latter of the federally owned shares of the shareholding company Sistema Shyam Teleservices, Ltd, for 777 million US Dollars with an instalment for five years. The company in question, is a joint Russian – Indian venture; the Russian Federation bought a package of its common stock shares based on the 2007 Agreement between the Governments of Russia and India on the expansion of funds received as debt repayment and owed by this country to Russia in compliance with the state credits extended by the USSR and the Russian Federation and with the Law on Federal budget for 2010–2012. This transaction with assets which are not part of the acting privatization program was the only one going beyond the typical privatization procedures.
Apart from it, 46 blocks of shares of economic companies have been sold in 2017 for a total of 5.19 billion rubles, while decisions on the conditions of privatization have been taken with regard to 18 federal state unitary enterprises. The number of the sold blocks of shares of economic companies has dropped fourfold comparatively to the year 2016, i.e. 179 units having fallen down almost 4 times, below the level of the 2009 crisis, i.e. 59 units which was the minimum performance in the 2000s. Over ? (36 units) of the total number of blocks of shares sold were those advertised already back in 2016. As per the total amount of transactions, that is 5.19 billion rubles, the fall was not that dramatic, i.e. by 45%, but even this figure was less than any of the year-to-year indicators in the previous three years: 2014 – 8.0 billion rubles, 2015 – 7.3 billion rubles, 2016 – 9.5 billion rubles. The number of the privatized federal state unitary enterprises was also less than the previous minimum of 2013, which was 26 units.
The last year failure in the privatization dynamics could be partially explained by a relatively late approval of the predication plan (program), which provided a possibility to launch assessment activities and presales preparation of the assets only from the middle of the first quarter of 2017.
However, the main reason is the lack of the adequate demand, especially at the local level. Approximately in 60% cases the reason for the failed sales was the lack of applications, i.e. 126 out of the 209 of the overall sales in 2017. Low liquid assets with limited realization opportunities due to their unsatisfactory financial, pre – bankruptcy state, lack of real economic activity dominated among the privatized assets, and the suggested prices did not match the assessment of the potential customers. A switch to the new tool of sales played its role; in this case the services provided by its organizers are to be paid for by customers rather than out of the budget and the transactions are to be handled only in the electronic format via six sites selected at the end of 2015.
Two very important innovations have to be underlined in terms of legal regulation of the privatization.
Firstly, amendments to the 2001 Privatization law exclude off-shore companies from among the buyers, the off-shore companies being legal entities registered in a state or a territory on the list of states and territories as approved by the RF Ministry of Finance, which grant tax privileges and/or do not disclose or provide information on financial operations performed, as well as legal entities controlled by an off-shore company or a group of persons which include an off-shore company.
Secondly, the approval of the Directive regulating the selection of legal entities for the organization of sales of the federal assets in the process of privatization on behalf of the Russian Federation and/or fulfillment of the seller’s functions, in compliance with the Decree No. 748 of the Government of the Russian Federation of June 26, 2017.
The awkward procedure of selection includes a decision on its organization providing for the establishment of a commission of the Ministry of Economic Development and further on the two stages of the selection process itself. The selection of the candidates based on their professional and qualifications potential and in accordance with the submitted data, using the typical forms and receiving assessment points, takes place in the beginning of the process. Then the final selection is made based on the best value proposal.
The proposed tool represents an attempt to regulate the attraction of legal entities to the sales of assets in the process of privatization: investment consultants for the organization of the sales’ transactions of major companies’ shares included in Section I of the privatization program, i.e. the sale according to individual model based on certain decisions, as well as private sellers for the sale of the assets under Section II of the privatization program, i.e. sale according to a model procedure.
As a follow up of this document, a new version of the list of such organizations was approved in 2017. While the overall number was kept at 23 units, the focus was shifted towards the Russian companies, with the private non-banking structures prevailing among them.
A list of 65 economic companies was determined with their blocks of shares to be handed over to the “Russian Auction House” shareholding company, which has been in operation in this field for about five years, with the aim of selling them and paying for the services according to the new model. The amount of the agent’s remuneration for the arrangement and holding of the sales is excluded from the selling price of the shares in the process of privatization, and is subject to the payment at the expense of the winner above this price. However, the amount of the remuneration in percentage to the selling price was determined as 2% for the vast majority of the sixty five blocks of shares.
The efficiency of these innovations causes questions due to the lack of criteria in the selection of assets for the sales according to individual models and questionable objectivity of the factors required for the selection of consultants and sellers needed for the assets’ privatization.

Georgy Malginov, Candidate of Economic Sciences, Head of Ownership and Corporate Governance Department, Center for Institutional Development, Ownership and Corporate Governance