The number of FSUE in a certain sector to a great extent mirrors the level of the prereform production concentration on the one hand, and the level of the given sector’s attractiveness for outsider (and not only foreign) investors and the quality of the government property management policy over in the past, on the other. In this regard, a very insignificant (up to 50) number of FSUE=s can be found in the fuel and energy sub-sectors, metallurgy and the sector or chemicals that due to technological reasons would have a high level of production concentration yet in the conditions of the centralized economy. With the outset of market reforms, their export-oriented production plus a compulsory integration of a great number of the former public enterprises into holdings at the pre-privatization stage raised such a great interest in them on the part of private capital that pursuing its privatization program the government practically abandoned these most attractive sectors, though maintained some property in the form of shares in AO=s’ capital. Thus, there are only 6 unitary enterprises survived in the oil sector, 1 in the gas sector, and none- in the oil and gas construction sector.
Table Sectoral structure of federal, regional and municipal unitary enterprises between 2000- Federal state unitary enterprises as Regional and municipal unitary Sectors of January 1, 2002 enterprises as of January 1, Number Proportion Number proportion Industrial sector, including:. 1844 19,6 6044 16,- machine engineering and metal processing (exclusive 879 9,4 … … INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru of the sector for medical equipment) - forestry, wood-working and paper and pulp industries 229 2,4 … … - polygraphic 219 2,3 … … - light 153 1,6 … … - building materials 83 0,9 … … - food 64 0,7 … … - medical 59 0,6 … … - chemical 42 0,4 … … - fuel 35 0,4 … … - electricity 31 0,3 … … -non-ferrous metallurgy 27 0,3 … … - ferrous metallurgy 16 0,2 … … - microbiological 7 0,1 … … - milling and gruel and feeder - - … … Agriculture and forestry 1368 14,6 2000 5,Transport and communication 1033 11,0 1818 4,Construction 988 10,5 2799 7,Trade and public catering 909 9,7 9627 25,Housing 162 1,7 10155 27,Other, including: 3090 32,9 4477 12,- science and scientific services 1431 15,2 … … - material and technical supplies and sales 692 7,4 … … - healthcare, physical culture and social security 226 2,4 … 1,- geology and sub-soil exploration, geodesic and hy218 2,3 … … drometeorologic services - management 158 1,7 … … - culture and fine arts 155 1,6 … … - other kinds of activity associated with material pro140 1,5 … … duction - public education 60 0,6 … 0,- finance, credit and pension security 10 0,2 235* 0,total 9394 100,0 36795** 100,*Finance, credit, audit ** Subfederal and municipal unitary enterprises that submitted their financial accounts for 1996 and Source: the RF Ministry of State Property Homepage: www.mgi.ru; Kordyukova T., Galkin M.,Eugel F. Unitarnye predpriyatia- potentsialny dokhod ili potentsialnye riski dlya regionalnykh I mestnykh administratsiy// Credit Russia. An analytical bulleting of EA-ratings, the strategic partner to Standard and poor’s, # 19-20 (5647), October 2001; ACIS project “Povyshenie effektivnosti upravlenia gosudarstvennymi I municipalnymi unitarnymi predpriyatiyami” Materialy k seminaru of 7 December 2001 (draft). GBRW, EA-Ratings. Part 1.P.7.
The opposite pole is formed by a number of processing industries (primarily machine engineering) where the original level of concentration aggravated by the crisis in sales and the policy on ‘atomization’ of economic agents pursued at the initial stage of privatization allowed a great number of enterprises to stay out of potential investors’ sight, thus retaining their public status.
The problem of reforming unitary enterprises is related primarily to deficiencies in the legal construction of the economic right. Its essence lies with an asymmetry of powers exercised by the subject of such a right and those granted to the government as a title owner. Article 296 of the Civil Code of RF grants the title owner with a strictly formulated circle of functions: 1) establishment, reorganization and liquidation of an enterprise; 2) identification of the subject and purposes of its operations; 3) appointment of its head (director); 4) control over the property assigned basing on the economic right; 5) the right for a part of its profit (without reference to concrete mechanisms of realization of such rights).
At the same time, enjoying its economic right, a unitary enterprise controls its property, except the real estate, while in compliance with p. 5 Art. 113 of the Civil Code, it meets its obligations with all its assets. In the absence of the law on government and municipal unitary enterprises, its heads would have a greater freedom of action with regard to incomes and RUSSIAN ECONOMY in trends and outlooks property, which they de-facto own and control. So, there emerges a possibility to burden SUE with debts and the risk that counterparts or creditors would seize the enterprise’s property, which for the government means a great probability of loosing it. More specifically, such obligations may arise, should a unitary enterprise participate in capital of various economic agents associated with the UE’s head. Such companies are not limited by the necessity to coordinate their operations with an owner in the frame of special procedures, as it happens in joint-stock companies.
It is these particular circumstances that gave a rise to a strategic decision on reducing the number of unitary enterprises of all levels. It is intended to transform them in open-end joint-stock companies (OAO) in the medium run, with 100% of their stock owned by the government or a municipal administration, or to assign them to the Treasury. This allows not to use a special control mechanism – rather, delegating governmental representatives to the boards of such AO=s, which has become fairly ordinary means over recent years. The period between 2001-02 saw a preparatory work on incorporation of such enterprises. Some 2/3 of FSUE received proposals on their restructuring, including reorganization of 1,669 and liquidation of 531 of them.
The main ways of transformation of unitary enterprises were identified by the Government in its Resolution # 1438 of December 6, 1999 “On federal state unitary enterprises established on the basis of economic right”. The document provided the following situation under which the maintenance of the organizational and legal form of unitary enterprises based upon the economic right (as well as their transformation into treasury enterprises) is allowed:
the use of the property whose privatization is prohibited, including the one needed to ensure the national security, functioning of the aircraft and fleet, and realization of other strategic interests of RF;
carrying out operations aimed at solving social tasks, including sales of certain goods and services at a minimal price, as well as at organization and conduct of procurement and goods intervention for the purpose of ensuring the food security of the state;
the development and manufacturing of single kinds of products falling into the sphere of national interests of RF and ensuring the national security;
the production of single kinds of goods that are withdrawn from the civil turnover or the use of which in the civil turnover is limited;
carrying out operations that the federal laws reserves exclusively for public unitary enterprises;
carrying out single subsidized kinds of activity and unprofitable production;
carrying out research and scientific-technical activity in the sectors related to ensuring the national security.
In addition to retaining enterprises in the form of unitary enterprises based upon the economic right, the government identified still 4 variants of transforming organizational and legal structure of such enterprises:
reorganization, including their transformation into open-end joint-stock companies;
creation of federal treasury enterprises on the basis of their property;
their sales as property complexes; and liquidation.
INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru It is liquidation of the institution of SUE that appears the most radical decision. At the same time, a low liquidity of their assets and specifics of their operations makes the scenario of a gradual bringing the number of state unitary enterprises into line with the state’s managerial capacity (which implies retaining some 3,500 of them) more probable. In parallel with that, there should exist a complex of measures to improve their management, as stipulated in the Concept. The realism of such a scenario can be proved by the fact that the governmental medium-term program’s projections that by 2001 the program of transformation of unitary enterprises into joint-stock companies should be complete, with the state owning 100% of their stock, have proved to be far from reality. Let us remember that in 2002 there were 9, FSUE=s and only 90 AO=s fully owned by the state. During three years after the enactment of the 1997 privatization law (i.e. in 1998-2000), it was just a sole AO created in 1998 on the basis of enterprises owned by the federal government.
Whilst considering the above, one has to admit that quantitative estimates quoted in the scenario-based forecast of privatization of the government property appear overly optimistic and radical. The proposed contraction of the public sector to 1,5-2,000 federal enterprises by 2004 implies privatization of some 3- 3,500 of them annually. By itself, such a figure does not seem significant, however, it would be appropriate to compare it with the number of privatized enterprises objects during the monetary privatization period (See Table 1 of the Section “Dynamics of the privatization process”).
The scenario-based forecast of the government property privatization conjoins the reduction in the number of public enterprises and institutions with the amount of the government funding (in the form of direct financing and payment for the state order), which cannot be considered correct. In developed market economies, state orders are placed with companies of all kinds of property - furthermore, for decades the private sector viewed them as especially profitable and went into a cut-throat competition to get them. The actual problem lies with the level of economic agents’ maturity in Russia’s non-governmental sector and their capacity to accomplish these or those tasks of the national scale and to relate such a mission to the overall strategy of the country’s development. So, it is just single cases in which the approach that unambiguously conjoins the number of public enterprises and institutions with the government’s financial capacity can be applicable.
It is also important to note that a mass and accelerated incorporation of public unitary enterprises inevitably narrows the room for the restructuring privatization, when an enterprise is sold as a whole property complex – production equipment together with facilities, buildings, the site (a popular privatization option in the former GDR). Should such enterprises be transformed into AO, it will most likely result in problems with splitting their equity into separate packages for sale and their appraisal. Naturally, one cannot exclude the option of implementing a restructuring scheme of privatization by means of liquidation of the given public enterprise and launching a new business basing on its facilities and equipment.
It is the government’s impotence in carrying out its proprietor’s functions that serves as an argument in favor of the most urgent transformation of public enterprises into AO=s.
However, in the conditions of the national transitional economy where many privatized enterprises, even under new, private owners, do not meet expectations in terms of their efficiency and manageability, it is hard to expect that a mere change of an organizational and legal form in the public sector’s frame would have an immediate positive impact on their state. To prove RUSSIAN ECONOMY in trends and outlooks this, one can cite numerous problems inherent in the largest joint-stock companies with the governmental participation8.
Using the ‘survival and growth capacity’ characteristics for the purpose of qualifying enterprises for the respective group and solving the problem of their privatization appears a profound error. The economic practice of the ‘90s proved that these were different criteria, to say nothing of such well-known things as an extremely insignificant volume of outside investment even in the most attractive Russian companies. As concerns enterprises that currently are fully owned by the state, such a prospect appears more than doubtful.
Overall, in the meantime one can argue that the government’s organizational capacity for reforming unitary enterprises has entered in a serious conflict with the quantitative restrictor – that is, the scope of the sector for SUE. There also is a visible conflict between a radical orientation towards complete liquidation of SUE=s with the abolition of the right for economic performance as a whole and specifics of their economic operations related to the output of goods and services and completion of works whose main consumer is the state and the society on the whole, as well as a low liquidity of their assets. Finally, there is, though limited, a circle of state tasks (and public interests), the mandate on solving which can be delegated to SUE=s. However, this can be viewed as a sound option only if the respective regulation is improved.
The actual progress in privatization over the past 4 years, i.e. the period of the effect of the 1997 privatization law makes the scenario of a long existence of unitary enterprises most likely. Proceeding from this, it is the focus on a gradual contraction in the number of state and municipal unitary enterprises and a parallel implementation of a set of measures on improving their management laid out by the Concept that appears more grounded.
Retaining FUE=s as economic agents in Russian transitional economy in the foreseeable future makes it urgent for the government to focus on such a specific regulative matter in the property relations area as minimization of deficiencies generated by the right for economic activity.