Table New key points of the state policy of state-owned property management and privatization: potential innovations Line Available approach Suggested approach Determining the composition of Drafting privatization plans on the basis “Declarative principle” – drafting privatization plans state-owned property assets for of proposals of federal executive bodies on the basis of business proposals, potential investors privatization in combination with the “privatize or explain publicly” principle for federal executive bodies Constraints on privatization Regulatory restriction system Replace a part of constraints with legally established encumbrances for owners Privatization under conditions (un- Investment tender; A combination of investment tender and trust mander the Federal Law “On Privatiza- sale based on the results of as a result of agement tion”) trust management Generating investments to compa- For extra large companies privatized on Define “investment mechanisms” under the Federal nies in the course of privatization the basis of custom-made schemes Law “On Privatization” for all large enterprises (e.g., with a net asset value of more that Rb 3m against the minimum monthly wage) Unitary enterprises The single possible option of transforma- Provide many options of transformation: – â OJSC tion – into OJSC with a 100% state par- with a 100% state-held interest, â LLC, into a public ticipation institution, non-profit organization Privatization of unitary enterprises Two separate procedures: incorporation, Provide a single procedure (incorporation with subsesale of shares quent privatization of a part of the shares) Interest in the development of com- State interest maximization model (both Undertake transition of the “positive conflict” model panies with state participation short- and long-term), costs incurred on (long-term state interests – short-term business interthe majority model of corporate govern- ests) with delegation actual rights to boards of direcance tors within the “influence – independence – awareness” reference system The mechanism of representation of Directive institution The institution of recommendations in combination state interests with higher responsibility of the members of boards of directors and delegation of more rights to independent directors The institution of independent direc- Not representatives of federal executive Impose restriction on “cross government” between tors bodies companies with state participation Appointing top managers in compa- Political decisions, nontransparent selec- Open tender, public recommendations of boards of nies with state participation tion, limited role of boards of directors directors to general meetings of shareholders Assessing parameters of the public Administrative approach – assessment of Economic approach – assessment of the sociosector and privatization the number of state-owned entities, privat- economic role of the public sector and effect of privaized entities (by type of enterprise, by tization on the development (contribution to GDP, state participation, by industry) GRP, export, market concentration, investment generation, etc.) It still remains to be seen whether the “new dimension” of the privatization policy is feasible or not. State measures may both increase and mitigate the afore mentioned risks. However, a major lesson learned in the 1990–2000s is still of extreme importance: effect of privatization can be nothing but long-term, while the rate of achieving the effect depends on the quality and rate of implementation of the entire package of lines of socio-political and economic reforms (the “institutional environment” factor).
RUSSIAN ECONOMY IN trends and outlooks 6.3. Russian Financial Development Institutions: Their Rise and Main Challenges on the Path toward Improvement of Their PerformanceIt is already for roughly a decade and a half that the RF Government undertook various efforts to build and fine-tune the financial development institutions in the country. This direction of the national economic policy is congruent with the common international practice:
there exist a string of tasks and fundamental reasons behind many nations’ strive to shape up development institutions and support their operation2.
In their general form, major drivers for governments to shape up and improve the development institutions’ performance are associated with the need to compensate for market failures, lower risks facing private investors, secure substantial positive externalities, assist in overcoming various barriers and cutting down transaction costs, ensure “synchronization” of changes in the economic subjects’ behavior. Hence it is not accidental that the most typical development institutions’ operational areas include boosting expansion of small- and medium sized businesses, backing import-export operations, infrastructure development, bolstering regional development, support of individual sectors of an economy (agriculture as a model example).
As a marginal note, there is no any strict definition of the phenomenon of development institution. We believe that experts are keen to define it as some kind organization (forms of whose incorporation may vary) which exhibits a combination of at least some of the following signs:
- it was created on the government’s initiative and with its participation;
- it centers on compensating for market failures and securing a demonstration effect;
- it is financed through one-time government contribution (in that case, such funding suggests it loss-free operation) or on the basis of regular budget appropriations;
- its operations pursues a long-term prospect, attainment of set for it strategic objectives;
- it operates on the basis of a specific legal base and special regulatory requirements;
- it focuses on employing private-public partnership mechanisms;
- as far as tactical decision making is concerned, it is autonomous from the government.
By various estimates there are a few hundreds of development institutions worldwide, and they fall under different classifications3 (e.g., basing the nature of services they deliver); however, one singles out, as a rule, the group of financial development institutions, which operate in various forms, including, inter alia, development banks, funds and agencies4.
The present Section was prepared in 2011 using findings of a project “Institutional analysis of problems of functioning of the financial development institutions system for the benefit of the support of innovation activity” completed by the Interdepartmental analytical center at the commission of the Russian Academy of National Economy and Civil Service under the President of Russian Federation.
For more details about the concept and typology of development institutions, objectives, tasks and directions of their operations, see: O.G. Solntsev, M.Yu. Khromov, R.G. Volkov. Development institutions: an analysis and assessment of the international record. Problems of prognostication, 2009, No. 2.
See, for example, a presentation by I.G. Sokolov, Research Fellow of the Gaidar Institute “Development Institutions and the budget: results and prospects” (July 2011 ã.).
For a more detailed classification and examples of public development institutions overseas, see presentation by Gref G.O., the RF Minister of Economic Development and Trade: “On creation of a public financial development institution (On the bill “On the Development Bank”)” (December 2006).
Section Institutional Issues While citing the need for a government’s interference to compensate for market failures with regard to innovation development in particular1, experts, at the same time, point at certain risks associated with such interference. As to the risks associated with the public development institutions, it is appropriate to single out the following ones:
- reallocation of support in favor of inefficient companies;
- “seizure” by the state of projects its supports;
- generation of sizeable biases into the market environment;
- substitution for private expenses.
In general it is believed that to lower such risks, nations need to employ more sophisticated systems of corporate governance and institutional organization.
6.3.1. Main Stages of the Rise of the Russian System of Financial Development Institutions From our perspective, it is possible to provisionally identify five main stages in the process of the rise and advancement of development institutions in Russia since the late 1990s. (see Table 15). Our phasing to a significant degree is determined by changes in the state’s resource capacity and a certain evolution, at the government level, of prevailing notions of the urgency and significance of support to innovation development “against the backdrop” of other directions of public policy.
Overall, until 2007 the mode of Russian development institutions’ development had been an evolutionary one: the evolution suggested a gradual (and not that costly for the budget) fine-tuning of individual vehicles of support to investment and innovation projects, which were implemented largely in the frame of assistance to the small- and medium-sized entrepreneurship (hereinafter - SME). At the time, implementation of a policy implying the economy diversification and innovation policy went on the back burner as far as the government (as well as allocation of budget resources) was concerned and was reduced to individual experiments and random initiatives.
The switch to an intense shaping up of financial development institutions and fuelling a substantial expansion of their resource base occurred in 2007. Behind that was a political decision2 to use a fraction of resources under management of the National Welfare Fund (some Rb 300bn) to capitalize several development institutions. In all likelihood there were numerous and heterogenic reasons behind the decision, but we assume a fundamental one was a strive for a certain compromise in the conditions where for one part the government was under a mounting pressure of advocates of a significant increase of public investment in the economy (enemies to a further accumulation of public financial reserves), while on the other hand, the government bent an ear to staunch champions of macroeconomic stability who had managed to organize a systemic resistance to an increase in the level of public spending. Investing a fraction of accumulated public financial resources in development institutions would “link” them to their future investment use, without giving a strong boost to public spending.
Meanwhile, the Russian leadership’s view on the main role of the national financial institutions system underwent several changes over the past five years. Back in 2007, extension of the development institutions’ mandate was linked primarily to the task of the economy diver Igniting innovation: rethinking the role of government in emerging Europe and Central Asia / Itzhak Goldberg [et al.]. The World Bank, 2011.
The Address by the RF President to the Federal Assembly of RF of 26 April 2007.
RUSSIAN ECONOMY IN trends and outlooks sification, advancement of its individual sectors, lifting infrastructure barriers. By contrast, in 2009-2010 the emphasis was already made on “fine-tuning” of the development institutions system1 for the sake of implementation of the innovation policy, technological modernization, attraction of additional investments, with account, inter alia, of an insufficiently favorable investment climate.
Table Main Stages of Emergence of the Development Institutions System Period External conditions Key developments Peculiarities 1999–2000 Tight budget constraints, encouragement The Russian Development Bank * and Emphasis on creation of relatively small of innovations is on the periphery of the Venture Innovation Bank are cre- self-financing institutions public policy ated** 2004–2006 Budgets constraints softened, a steady The Russian Development Bank Emphasis on the regional support of economic growth, greater attention to its launched the program of support of SME SME “quality” through regional partners; the Fund for Assistance to Development of Small Forms of Enterprises in the Research and Technical Sphere launched the “Start” program; the rise of regional venture funds; establishment of the Russian Venture Company (RVC); decision made to establish the Russian Investment Fund for ICT 2007–2008 A huge volume of budget revenues, Establishment of public corporations: Launch of the biggest institutions encouragement of innovation as one of the Bank of Development and Foreign major public policy avenues, an attempt Economic Acitivity (Vnesheconomto link substantial resources to individ- bank), the Russian Corporation for ual directions of development Nanotechnologies (Rosnanotech) *** Late 2008 – The economic crisis, slashing of re- Most of resources temporarily with- A vigorous use of the institutions and/or 2009 sources spent on encouragement of drawn from Rosnanotech; the Fund for their resources to implement the antiinnovation along with a greater attention Assistance to Development of Small crisis policy; the beginning of the procto the effectiveness of measures imple- Forms of Enterprises in the Research and ess of establishment of the “second-tier” mented Technical Sphere launches the “Anti- institutions crisis” program instead of a string of earlier implemented ones; the Seed Investment Fund is established under RVC since 2010 Improvement of the economic situation, RVC and ROSNANO founded a range A vigorous process of establishment of attempts to learn lessons from the crisis, of new institutions, including those new institutions; expansion of internainnovations form one of top priorities centering on infrastructure, and funds tional operations; a greater attention paid declared by the state overseas; establishment of the Founda- to improvement of the investment clition for Development of the New Tech- mate nologies Development and Commercialization Centre (“Skolkovo Foundation”); on the government’s initiative Vnesheconombank founds the Russian Fund for Direct Investment (RFDI) and the Russian Agency for Export Credit and Investment Insurance (EXIAR); the Russian Development Bank begins implementing a program on support of modernization and innovation * Currently JSC Russian Bank for Small and Medium Enterprises Support (JSC SME Bank).