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Another supplement to the forecast plan for 2010 is worth mentioning: pursuant to the Order of the Government of the Russian Federation dated October 23, 2010, No. 1837-, the blocks of shares of 20 power generating companies were added. The overwhelming majority of these blocks of shares were minority stakes (less than 1%) and included into the forecast plan, because they were to be contributed to the charter capital of Inter RAO UES OJSC.

The Order of the Government of the Russian Federation dated March 17, 2010, No.346-.

The Order of the Government of the Russian Federation dated August 4, 2010, No.1321-.

RUSSIAN ECONOMY IN trends and outlooks of large companies (fixed assets book value of more than five million minimum wages1) was very limited to auctions, corporization of unitary enterprises, and contribution of assets to the charter capitals of strategically important joint-stock companies.

Second, lack of the possibility within the framework of privatization arrangements to define investment terms and conditions for those who buy state-owned property, as well as terms and conditions for modernization, restructuring of privatized enterprises. Tender is the sole privatization arrangement which provides for specific terms and conditions to be met by buyers of state-owned property. However, Clause 21, Article 20 of the Federal Law On Privatization of State and Municipal Property specifies an exhaustive list of terms and conditions of a tender, which only includes preservation of jobs, advanced training of personnel, retaining the core activity, restoration, repairing of heritage and social security sites.

Third, restrictions imposed on reduction of state-held interest in companies during additional issue of shares. Though Article 40 of the Federal Law On Privatization of State and Municipal Property allows a state-held interest to be reduced during additional issue of shares in accordance with the decisions made by the President of the Russian Federation, the Government of the Russian Federation, it is strictly established that :

where a state-held interest accounts for more than 25% but not more than 50% of votes, the charter capital may grow by issuing additional shares, provided that the state retains a blocking interest (25% plus one voting share);

where a state-held interest accounts for more than 50% of votes, the charter capital may grow, provided that the state keeps holding a controlling interest (50% plus one voting share).

Though it is obvious that the foregoing restrictions were imposed in order to prevent the risk of dilution of state-held blocks of shares, reduction of revenues from privatization, such restrictions are regarded as a serious barrier hindering companies with a state-held interest from attracting strategic investors by way of additional issues of shares, generating inflow of financial resources2.

Forth, excessive regulatory control of a series of arrangements oriented to privatization of small enterprises, which interfered with rapid reduction in the number of public sector enterprises and raised extra barriers for access of a wide range of potential buyers, in particular small and medium-size businesses.

The first three restrictions were most significant given the stated plans of privatization of large enterprises, which include the primary entities of the transport infrastructure.

Federal Law of May 31, 2010, No. 106-FZ, On Amendments to the Federal Law On Privatization of State and Municipal Property3 was adopted following a very intensive process of work-out of different approaches as part of regulatory support to a new stage of privati Since January 1, 2009, the minimum monthly wage has been established in the amount of RUB 4,330 (Art. of the Federal Law 91-FZ dd. June 24, 2008 On Amendments to Article 1 of the Federal Law On Minimum Monthly Wage).

It is obvious that in certain cases it may be considered more reasonable from the economic (political, etc.) point of view to retain state control (blocking interest in) of a company than provide inflow of direct, additional investments in the development of the company, however the question at issue is that the applicable legislation leaves no room for choice.

A group of PMs submitted a draft law to the State Duma on March 25, 2010. After passing the first reading on April 16, 2010, the draft law was seriously amended and (a single amendment which derived from another draft law which was developed at the same time) and adopted on May 19, 2010 in the second reading, and the State Duma adopted its final version as early as May 21.

Section 6.

Institutional Problems zation,. The law includes a series of regulations which change essentially the terms and conditions and specific privatization tools. The following innovations are most relevant :

(1) transition to mid-term planning of privatization of federal property ;

(2) entitling the Government of the Russian Federation to make decisions on privatization of state-owned property beyond the scope of the standard procedures specified by the Federal Law On Privatization of State and Municipal Property ;

(3) allowing the Government of the Russian Federation to delegate the functions of buyer of federal property to legal entities ;

(4) removing restrictions as to potential arrangements of privatization of large state-owned properties whose book value is more than five million minimum monthly wages ;

(5) simplifying the application of an arrangement of privatization such as deposition of state-owned property to the charter capital of joint-stock companies ;

(6) discarding the concept of standard price of property which is subject to privatization;

(7) simplifying privatization of small federal properties, widening access for participation of potential buyers in privatization ;

(8) extending significantly requirements to transparency of privatization procedures.

Let us examine these innovations in detail.

(1) Transition to mid-term planning of privatization of federal property While it was previously stated that the Government of the Russian Federation is to adopt the forecast plan of privatization of federal property on an annual basis, now Clause 1, Article 7 of the Federal Law On Privatization of State and Municipal Property specifies that the Government of the Russian Federation may approve the forecast plan (program) of privatization for a period of 1 to 3 years. In September 2010, the Government of the Russian Federation made relevant amendments to the Rules of Development of the Forecast Plan (Program) of Privatization of Federal Property1.

Hence, the scope of privatization planning, longer, more consistent and meaningful actions and procedures for preparation of entities for privatization became wider. It should be noted that "structural" trend in privatization is supported by that the plan of privatization must contain a forecast of the impact of privatization of property on structural changes in the economy, including specific industries.

In the meantime, it should be noted that the new forecast plan of privatization of federal property for 2011 2012 approved by the Government of the Russian Federation in November 2010 contains the relevant section on a formal basis, because its contents are no different from the previous forecast plans (e.g., the focus is placed on breakdown by industry of companies of the public sector and entities for privatization); however, it contains no even the most general assessment of expected changes in a share of the public sector in the economy or specific industries.

(2) Entitling the Government of the Russian Federation to make decisions on privatization of state-owned property beyond the scope of the standard procedures specified by the Federal Law On Privatization of State and Municipal Property This innovation seems to be both most revolutionary and arguable. Clause 2, Article of the Federal Law On Privatization of State and Municipal Property was supplemented by paragraph 15 under which from now on this law may not be applied to relations arising during The Order of the Government of the Russian Federation dd. September 13, 2010, No. 725, On Amendments to the Rules of Development of the Forecast Plan (Program) of Privatization of Federal Property.

RUSSIAN ECONOMY IN trends and outlooks alienation of federal property in accordance with the decisions which the Government of the Russian Federation makes with a view to creating terms and conditions for attracting investments, encouraging development of the stock market as well as modernization and technological development of the economy. Such a general wording seems to impose no limits to the application of this regulation, and the law neither contains requirements whatsoever to potential buyers of alienated property, nor any specific terms and conditions for the application of this arrangement.

Of course, one may suggest that this arrangement would be applied on a custom-made basis to the largest and unique or very important entities. Furthermore, it should be noted that under the last paragraph in Clause 2, Article 3 of the Federal Law On Privatization of State and Municipal Property alienation of the property listed in this clause must be regulated by other federal laws and relevant by-laws. Hence it may be inferred that practical implementation of the given approach will require development and adoption of a relevant statutory instrument which would resolve a high level of uncertainty prevailing for the moment.

Most probably the regulation in question was introduced into the Federal Law On Privatization of State and Municipal Property in an effort to extend the potential of investmentdriven privatization of large companies, in particular by way of direct sale of a federallyowned block of shares to strategic investors of a company which already hold a control interest in the same (50 75%)1. One of the preconditions for application of such an approach became a widely-held perception of that for fear of new investors the existing strategic investors of companies may act as a break on the process of privatization2. In this respect, it should be noted that orientation towards the existing shareholders of companies seems to be unreasonable in some cases, because at least they may not be strategic investors.

One way or another, it only may be assumed for the time being that the arrangement in question the Government of the Russian Federation makes decisions on alienation of specific federal properties beyond the scope of the Federal Law On Privatization of State and Municipal Property will be applied exclusively to direct sales of small blocks of shares to strategic investors. No regulation for this option of privatization has been established to date thereby leaving a wide range of different solutions and compromises. In this respect, it is worth mentioning a recently discussed (also at the level of high-ranking officials) possibility of placing, on a sole source basis, a state-held interest in a large entity of the transport infrastructure (Sherenetyevo Airport) in management of a strategic partner for a long-term period (2030 years)3. In addition, the business community more than once submitted a proposal on granting to all private shareholders the priority right to buy out privatized shares in a semi See, for example: M. Tovkailo, A. Nepomnyaschiy. The Property Will Be Transferred to a Single Owner. Vedomosti, March 3, 2010.

See, for example, statements made in follow up of the round table dedicated to the subject matter of Increasing the Role of Privatization as a Tool for Attracting Investments in the Russian Economy which was held at the Ministry of Economic Development and Trade Of Russia on March 29, 2010, as attended by the First Deputy Chairman of the Government of the Russian Federation I. Shuvalov, the Minister of Economic Development E. Nabiullina, and representatives of investment banks and business entities http://www.economy.gov.ru/ minec/press/news/doc20100329_05.

ibid.

Section 6.

Institutional Problems public company1. It should be noted that a relevant draft law was submitted to the State Duma by a PM as early as May 20082, but the initiator withdrew the same in six months.

In our opinion, all of the above listed options contradict (maybe in different ways) the principle of fair competition and may result in undervaluation of alienated properties.

(3) Allowing the Government of the Russian Federation to delegate the functions of buyer of federal property to legal entities This innovation is directly related to the development of instruments of new privatization3.

Before that (prior to the date when the Federal Law "On Privatization of State and Municipal Property" was amended), only designated public agencies which were in the service of the Government of the Russian Federation, could act as sellers of privatized property (apart from an executing agency authorized by the Government of the Russian Federation). Under the new version of the law, clause 1 (paragraph 16), article 6 of the Federal Law On Privatization of State and Municipal Property, the Government of the Russian Federation is entitled to commission legal entities to make arrangements for sale of privatized federal property and/or act as buyers. The Government of the Russian Federations decision on commissioning a specific legal entity to perform such functions must specify federal properties which are subject to privatization, specific actions to be performed by the legal entity, the size of and payment procedure for a fee due to the legal entity. Under paragraph 8.1, clause 1, article 6 of the Federal Law On Privatization of State and Municipal Property, a list of such legal entities is to be approved by the Government of the Russian Federation. A new version of clause 2, article 14 of the Federal Law On Privatization of State and Municipal Property specifies that the Government of the Russian Federation may decide not to set the initial price thereof in employing this type of sale of privatized property.

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