Privatization process and the State of Property Relations in 2009

The last year’s privatization program faced a drastic contraction of the effective demand, as potential buyers of public assets had found their investment capacity hit by the crisis. That led to a string of failures in selling public property. The sales slightly renewed only between the late summer and early autumn of 2009. In the circumstances the decision was made to dump second auctions, mothball the idea of selling assets, the prices of which continued to sag and/or were not announced. The motive behind the move was clear – if held, such auctions would not secure the required level of budget revenues, but the assets would be sold off at knock-down prices.

Overall, according to Mr. Yu. Petrov, the head of Rosimuschestvo, as of February 24, 2010, the agency scratched Rb. 1.93bn from privatization (the prior year’s figure was 7.19bn). Only 52 stock packages were privatized in 2009 (vs. 209 ones in 2008), of which the half were stakes that had been put for sale according to the 2008 prognostic privatization plan (vs. 138 such stakes in 2008).

Revenues that form direct derivatives from economic agents’ performance dried up dramatically, including dividends from JSCs with the government’s participation in their capital and shares of the federal public unitary enterprises’ (FPUE) profits, among others. By contrast, the situation with revenues from leased federal assets (that slid slightly) and land sites (posted some growth) was fairly favorable – the government merely collects rental payments, without being engaged in organization of the tenant corporations’ business processes. Plus, relationships with such firms are established through contracts which, as a rule, are concluded for a certain period of time, and rental rates are agreed upon well beforehand.

But overall, unlike the year of 2008, revenues from renewable sources have discontinued to play the role of a buffer – they proved to be just slightly in excess of the respective figures of early ‘2000s. At the time, the work on implementation of the 1999 Concept of public property management and privatization in RF was kicking in. As for revenues from privatization and sales of various assets, they hit the bottom.

The main trends in the property relations area in 2009 were:

• deceleration of the privatization process (when compared with 2008, budget revenues from privatization collected by Rosimuschestvo fell 3.7 times, and the amount of sold stock packages was down four-fold);

• prevalence of renewable sources in the overall structure of the federal budget revenues from privatization and public property management. The proportion of such sources has been on the rise for several straight years (even with account of sales of various assets by agencies other than Rosimuschestvo);
• continuation of the integration of state-owned assets. The magnitude of the process is comparable to that of 2008 (in all, the year of 2009 saw privatization by means of contribution with stakes of 109 JSCs and 216 FPUEs to vertically integrated structures’ authorized capital vis-à-vis the 2008 figures - that is, 65 FPUEs and 250 JSCs’ stock packages without regard to corporations and stakes in JSCs subject to integration into then emerging open-end JSC "Oboronservis" and public company "Rostekhnologii", as well as the stock subjected to the authorized capital of open-end JSC "Atomenergoprom";
• the rise in the national legal field of a new organizational and legal form oriented towards use of the federal property – namely, the public company. The one and only representative of the group by far has become "Rossiyskiye avtomobilnye dorogi" ("Avtodor"), the nationwide operator of the federal motorway network. The company is tasked to provide public services and exercise other federal powers in the motorway area with the use of federal property assigned to it on the basis of trust management;
• change in the attitude towards public corporations the establishment of which had formed one of the new government property and structural policy avenues over the prior two years. While addressing the Federal Assembly in November 2009, the RF President accentuated the prospect of transformation of all public corporations into joint stock companies under the government control. Meanwhile, public corporations with clearly set life deadlines should be liquidated once they have completed their mission. But the presidential address falls short of specifying any concrete timelines for the public corporations’ transformation;
• a gradual expansion of the practice of co-opting professional directors to managing bodies of the JSCs with the government participation in their capital (according to Rosimuschestvo, by the fall of 2009, there were 563 professional directors on the board (supervisory board) of 253 JSCs, or 7.6% of corporations with federal stakes in them of their aggregate number as of early 2009, while as of late 2008, there were some 50 such directors);

• minimization of the government’s direct property expansion in the course of implementation of anti-crisis measures, when recapitalization at the expense of budget resources was offered largely to the companies in which the state is a sole or majority stockholder (eg "Residential Housing Agency", "Russian Railways", "Rosselkhozbank", "Rosagrolizing", leading backbone defense corporations”), while the potential of a possible indirect increase of the public sector at the expense of banks and development institutions, which are the government’s agents with regard to provision of support to individual companies, has remained nonrealized.

The substance of the government’s anticrisis measures allows a privatization scenario which strongly depends on prospects of Russia’s economy getting out of the financial and economic crisis and the need to gap the budget deficit. This manifested itself in a broad variability of parameters of the 2010 privatization program.

Despite the initial optimistic estimates of the 2010 federal assets sale program grossing some Rb. 100bln, it does not appear overly radical. The federal budget should cash in Rb. 18bln from privatization. But, should the RF Government rule to privatize stock and other assets that have great investment attractiveness, the sales may yield up to Rb.70bln.

To this end, in late 2009 the RF Ministry of Economic Development drafted a package of amendments to the effective privatization act. Having made public in late March 2010, the amendments aim to extend the time horizon of the privatization program for the planned period, improve the information support of privatization and the make it possible to use electronic tenders in the course of privatization procedures, and put forward proposals on drastic cuts in the list of strategic corporations and JSCs.

G. Malginov, head of Department of Property and Corporate Governance