Privatization on the edge of a knife

18.12.2012 — Analysis

In keeping with the wishes of the Russian president, authorities in the Sverdlovsk region are preparing to sell off the next piece of the state-owned "pie" into private hands. Officials plan to use the proceeds to cover holes in the budget, potential buyers are scraping together money for the auctions, and the employees of the businesses in question are nervously wondering if the new owners will send them packing. This correspondent for RusBusinessNews now understands how the regional government intends to take stakeholders' interests into account over the course of the privatization.

A "road map" for privatization

The first harbinger that signaled an imminent sale of state assets was a comment made by Dmitry Medvedev. Delivering a message to the Federal Assembly in 2010, the then-Russian president proposed a divestiture of property that was no more than unneeded ballast, "The government does not need to own 'factories, newspapers, and steamships.' Everyone needs to focus on their real tasks."

A legal basis to further his challenge was provided when Vladimir Putin returned to the Kremlin. In one of President Putin's first decrees, he ordered the government and municipalities to sell all the capital stock they owned by 2016 (except in businesses that specialize in raw materials).

The regions interpreted the president's remarks as a recommendation for direct action. The impact of his words can particularly be seen in the three-year program for managing state property that was adopted on December 4, 2012 by the Legislative Assembly of the Sverdlovsk region.

In decades past, the region collected many expensive facilities in its "storehouse," the most valuable of which are poultry farms. In 2013, the Sverdlovskaya and Pervouralskaya factory farms will be put up for auction, as well as the Monetny Shchebenochny Zavod and a number of other more obscure assets. The government predicts that it will raise about three billion rubles from these sales.

In 2014 privatization will bring in around 3.2 billion rubles. Among other things, there are plans to transfer the Reftinskaya and Sredneuralskaya poultry farms to private hands, and they have a combined value of approximately 2.9 billion rubles, based on their financial reports. "The federal center has created a 'default of privatization,' which directs all state property to be transferred to private ownership, unless there are substantiated reasons to do otherwise," notes Alexei Pyankov, the minister for managing state assets in the Sverdlovsk region. And this one exception has given the regional authorities some room to maneuver. The governor of the Sverdlovsk region, Evgeny Kuyvashev, instructed the government to take an extremely cautious approach to the sale of socially important assets, and if needed, to leave them under state control.

Decisions about putting specific state-owned firms on the market will be made on a case-by-case basis. It is already clear that some of them will not be acquired by private owners. For example, officials do not plan to sell SUE Farmatsia that supplies pharmaceuticals to drugstores in remote towns and villages. The cabinet also postponed the privatization of SUE Oblkommunenergo, which ensures that the housing and public utilities sector operates smoothly in many provincial cities.

Alexei Pyankov thinks some poultry farms might also be removed from the auction block. "If we were to realize that the sale of a particular poultry farm would threaten the region's food security, then that asset would remain in state hands. The program is just a guideline, a 'road map,'" he emphasizes.

Preparation for sale

The sale of "factories, newspapers, and steamships" is not an end unto itself. The discussion about effective ownership is still ongoing in Russia. It's still common in the Sverdlovsk region for workers to stage walkouts and hunger strikes at companies that are being squeezed like a lemon by their owners. Thus, potential buyers will have to promise not to lay off a single worker during their first year of ownership. But the most effective defense against unscrupulous owners will be to modernize the facilities - thus making it unprofitable for any new owner to shut down or sell off pieces of a market-based engine that's running like a well-oiled machine.

The stated value of the factories and plants is nothing more than the lowest threshold. The government is confident that the auctions can bring in much more money to the treasury of the Sverdlovsk region. Currently, auditors and investment advisers are studying the companies' financial and economic positions. Their first piece of advice has already been noted. For example, the sale of the Reftinskaya poultry farm will be announced only after new equipment is put into operation - so its price will go up.

State unitary enterprises will be prepped for sale in a different manner, as they have accumulated many non-core assets on their books. The most famous of these is the Monetny Shchebenochny Zavod. Recently, the government of the Sverdlovsk region has worked hard to divest the company of the townhouses in the center of Ekaterinburg that were signed over to the firm at some point in time. "We should only offer the production-based asset for sale - just the company that produces and sells gravel, including the equipment and the production site, but without any additional assets. We'll take everything else out of there," promises Alexei Pyankov.

The regional government is committed to ensuring the transparency of the assets. "Investors won't open their wallets if they don't ultimately understand the size of the accounts payable, whether the accounts receivable can be collected, or if legal problems are going to surface later on. If any violations are discovered during the audits, we'll take steps to correct them. And if we find grounds for calling in law-enforcement agencies, then so be it. We won't hesitate to do that," notes the head of the Ministry for Managing State Assets.

Buying a brand name

Experts are calling the Sverdlovsk regional government's refusal to sell 34.56% of Koltsovo Airport, OJSC an unexpected surprise in the privatization program. This block of shares in Ekaterinburg's airport was transferred from federal to regional ownership in 2011, on the condition that the regional authorities raise at least 32 billion rubles by 2030 under a public-private partnership to modernize the facility.

At some point the plans for the strategic development of the airport, which is already recognized as one of the best in Russia, almost became a victim of tactical budget woes. The shares are valued at 2 billion 130 million rubles - and the treasury of the Sverdlovsk region, overburdened as it is with social entitlements, would have loved the money. But that moment passed, and the public budget will get by on bank loans.

And, it should be noted that along with the proceeds from the privatization, public money will be allocated for "focal points for growth," which officials feel will eventually bring a profit. For example, 500 million rubles from the regional coffers will go toward the continued construction of the infrastructure for the Titanium Valley special economic zone. For several years the federal center has been planning to invest 3.25 billion rubles into this project in the northern part of the Sverdlovsk region. Regional officials will spend a little less.

Currently the region's landmark project - Ekaterinburg's bid to host the World EXPO 2020 - comes with its own cash demands. In 2013, when the International Exhibitions Bureau announces which of the five cities in the running has been chosen, there are estimations that 300 million rubles will have been spent to promote this major Russian city.

It's expensive to "sell" the image of the Sverdlovsk region - and a task more complicated than privatizing poultry farms. But there is simply no other way to attract large-scale private investment into the production capacity of this old-economy region. To be bluntly honest, Ekaterinburg cannot win a popularity contest against Dubai, which is also contending for the rights to EXPO 2020. But on the other hand, the rulers of the UAE have no plans to create a cluster for innovative engineering. And this is a good time for a reminder that this Universal Exposition is not a tourist exhibit, but a demonstration of production "might". And naturally that will be found, not on the beaches of Arabia, but in the industrial landscape of Russia.