The new Law however is vague on the process and details of the presidential review of government’s proposals. One would imagine that the President would have to rely on technical expertise provided to him by his staff and that is, of course, granting the President does indeed review and not merely rubber-stamps government’s proposals. In any case, it is unclear whether the technical expertise should come from staff in his own administrative apparatus, Security Council or some other institution. Coupled with the lack of clear criteria for selection of strategic entities this confusion certainly does little for improving the already hazy environment surrounding Russian privatization.
Yet another, fourth loophole of the new 2001 Law arises from an implication that annual privatization programs should be handed for parliamentary review together with an annual budget draft. The Law however provides no guidance to a situation where a budget draft along with the privatization program is not approved, as if the creators of the Law simply deemed such “difficult” scenario as too unlikely ever to occur.
Fifthly, the 2001 Law also fails to set unambiguous criteria for dividing the large notion of “state” property into federal, regional and municipal subclasses. Last such criteria were set in 1991 by the Supreme Council of Russian Soviet Federative Republic and are obviously outdated. The lack of clarity is muddled further by a number of often conflicting bilateral agreements made between the federal center and various regions back in the nineties following the break-up of the Soviet Union.
Many hoped that the 1999 Conception for Management and Privatization of State Property and a row of new legislation that followed it would provide better guidance. Disappointingly enough most of these new laws concerned only federal enterprises and federal joint stock companies and thus was not entirely helpful for sorting out the municipal and regional property concerns. One exception was the January 11, 2000 Governmental Decree on Registrars for Economic Efficiency of Federal Enterprises and Federally-Owned joint stock companies. The latter merely recommended that regional governments set up the aforementioned registrars.
In other words the regulation of regional and municipal property, which as of 1999 consisted of over 65 thousand entities, continues to be in local governments’ domain and to a large degree because of that is plagued by a particularly heightened form of inefficiency and waste so typical of all state-owned enterprises in general.
On a more encouraging note, the government as of late is pursuing a policy of delineating authority and accountability between the federal, regional and municipal governments. An administrative reform, of which such vertical division of powers is an important element, is in RUSSIAN ECONOMY in trends and outlooks the making and a special Committee set up at President’s behest in 2000 had already produced a first draft of a Federal Law on State and Municipal Property.
The latter document is seen as radical in its strict and rather narrow-minded classification of state property, which according to the draft can only come in federal, regional or municipal form (the latter type concerns mostly education-related property). All other property that does not fall in either of these 3 categories is considered as commercial property eligible for lease, trust management and/or privatization. According to the draft unless a property falls clearly under the 3 mentioned categories or is a public-concern not-for-profit organization in which government’s participation is required3, all federal, regional and municipal governments are prohibited from purchasing it.
The reasoning behind the restriction is that it will help complete the process of delineation and neat classification of property. Once the law passes and appropriate changed are made in the Civil Code, the logic goes, the legal institution of state-run business will cease to exist.
In reality it means that all current state-owned unitary enterprises must either be transformed into kazennye (i.e. managed on an operational basis as all uchrezhdenia)4, incorporated or liquidated altogether. An exception is made for certain state social-aid agencies, which will be offered an interim form of ownership and may be transferred into concession.A draft of the Law on General Principles of Local Self-Governance, yet another piece of legislation that will affect the privatization future, is scheduled for Duma discussion in February 2003. A lot of it will be based on the reform concept put forward by the State Council, which calls for a complete inventory review of all state and municipal property, its classification and ‘optimization.’ The suggested classification of property would necessarily include re-allocation of property between federal and regional governments with many items falling into municipal ownership. The proposed re-allocation would not only affect enterprises themselves but also their land (if it is within a municipality’s boundaries) and even some utility companies. The State Council says that this re-allocation would serve a purpose of ‘solving socio-economic problems of municipalities, improving living standards and creating a beneficial environment.’ The process is likely to involve some kind of mechanism of determining value of municipal holdings, however the Ministry for Property Relationships reckons that municipalities should be prohibited from starting and owning enterprises for purpose of extracting profit.
The Ministry instead proposes that municipalities get by with collecting property taxes, of which Russia now boasts to have 5 kinds, as well as assistance from the regional and federal governments.
Although at this time it is difficult to predict in what form, if at all, these drafts become laws, the radical nature of the proposed legislation is bound to accelerate the privatization process. Given the exact opposite trend of the judicial reform such ‘unnatural’ acceleration may seriously hamper the process’ and outcome’s quality, not to mention heavy social costs as well as a strong reluctance from regional elites.
Type and degree of such government participation is to be determined by the President.
I.e. unlike on unitary enterprises the government carries a subsidiary responsibility on kazennnye enterprises perhaps that was the reason why such forms of state ownership never took of in Russia. As of 2002 out of federal unitary enterprises only 33 were kazennye.
Ministry for Economic Development is due to submit appropriate legislation for consideration.
INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru Finally, it is important that the government continues with a management reform of the property under its control. Such reform can be based on a simple inventory recount, which also has to include clear delineation of authority between various level of government over its particular holdings.
Efficiency problems of using Russian property abroad are just one area that would benefit enormously from such reform. Ever since the start of the privatization process, Vietsovpetro has been the only revenue source of all Russian state property situated abroad. The Russian accounting chamber reckons that Russian agencies, various enterprises and organization that own property beyond Russia’s borders knowingly present inaccurate data to the Ministry of Property. Similarly, information on government stakes in foreign-registered entities that belong to Russian organizations is also understated. The Russian government in the meantime is loosing, as some sources claim, about $1 billion in dividends a year. It has to be said that about 80% of all Russian state property abroad belongs to Russian embassies, consulates and other such diplomatic structures.
The following two measures would especially be relevant for addressing the need for better management of Russian property abroad:
creation of a complete up-to-date registrar of all federal property abroad establishment of clear rules and principles for dividend payment policy on Russian assets in foreign entities In the past few years there virtually has been no disagreement on the need for a law on nationalization, in the very least for detailing appropriate articles in the Constitution and the Civil Code. A fairly high degree of political sensitivity of the subject and existence of few alternatives ensured that the process for creating such law has been rather slow.
The Ministry for Property prepared a draft of it’s called a Law on Turning Private Property to that of the State (in short, nationalization), which underwent Duma discussions on October 21, 2002. This Ministerial draft gives two reasons for invoking the law: ensuring defense abilities of the state and national security.
According to the proposed draft, the government would each year specify the country’s needs in strategic goods and services necessary for ensuring national security in one of the classified articles of the budget and set aside funding for their purchase and/or production. If the government finds itself unable to purchase these strategic goods on a market or find a state-owned enterprise that is able to produce these strategic goods, the government has then a right to nationalize an enterprise that has an ability to produce the strategic goods. In these cases, the government upon consultation with the President makes a list of assets subject to nationalization and retains a valuator for determining a market price of these assets. If an owner of an enterprise marked for nationalization disagrees with the government’s decision he/she has a right to appeal in court.
4.3. State property management General approaches In the course of development of privatization along with contraction in the volume of government property in Russia over the ‘90s, the problem of an operative and strategic management of public enterprises (shares) has become increasingly pressing. The whole sectors of RUSSIAN ECONOMY in trends and outlooks the economy needed solutions to that (fuel and energy and defense, transport, communications, among others).
It was governmental Resolution # 1204 of September 9, 1999 on approval of the Concept for management of government property and privatization in the Russian Federation (below referred to as the Concept) that launched a new stage of property relations reform in Russia. Notably, apparently it has become the first attempt since 1992 to put the problem of state property management higher in the priority hierarchy than a formal change of property form.
A drastic downfall in prices for enterprises and their stock packages after the Rb. depreciation naturally determined in 1998-99 the shift of the federal center’s focus of attention towards boosting non-tax budget revenues by means of using government property. That in turn automatically required an introduction of a greater clarity to the relationship between different tiers of the government.
In the meantime, it can be argued that it is the implementation of the action plan aimed at improvement of the existing government property laid out in the Concept that forms an urgent task in the public property management area for the years to come. The document cited state unitary enterprises and economic entities with the government participation in their capital among other main objects of the property policy. The document emphasized a gradual qualitative contraction in the number of the objects in parallel with the implementation of the action plan on improvement of their management.
The Concept forms a perspective guidelines document and proceeds from the need of concluding strict contracts with managers, which will hold them responsible for ‘their’ enterprises’ performance, as well as carrying out a constant economic monitoring, and the need in a register of economic efficiency that would specify future performance of an enterprise or a company.
To address these tasks, one needs to implement long-awaited measures: to introduce standard reporting forms for government representatives in open-end joint-stock companies (OAO) (October 1999); to pass a decision on establishment of a register of economic performance indicators of federal state unitary enterprises (FSUE) and OAO whose shares are owned by the federal government (January 2000); transition to an annual approval (for FSUE and OAO with the federal government share over 50%) of economic performance indicators and control over observance with them and the use of property, identification of the share of FSUE’s profit subject to transfer to the budget, the recommended volume of dividends to be voted for by RF representatives in OAO boards (February 2000), the regulation of procedures of appointment of governmental representatives and their interaction with the Ministry of Property Relations and the respective sectoral agencies depending on the size of the government package, including timelines for notifications, submission of proposals, and provision in writing directives and reports on their participation in enterprises’ governing boards (March 2000).
The measures undertaken under the Concept over the past three years have already brought about some results. The period between 2001- 2002 has been notable for a qualitative shift in the structure of the federal budget revenues form privatization and the use of the federal property (see Section 1).
Some general matters that concern managing both unitary enterprises and economic agents with the government participation are worth a separate analysis.
First, as long as the state property management is concerned, it is the governmental staff policy that becomes especially important. Nowadays, in addition to a higher qualification of INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru those who carry out managerial procedures, it is the staff selection and a resolute battle against corruption that remains very urgent. Whilst putting the possibility of using the civil and criminal law provisions aside, one can offer a range of fairly visible measures to address the above:
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