In practical terms, this implies minimization of commercial risks arising in the course of carrying out government entrepreneurship via unitary enterprises. The list of the most evident and widespread commercial risks in this particular sphere comprises:
the possibility of a partial alienation of the property the government assigned to FUE=s;
a low probability of generating revenues from FUE=s’ operations, which may be attributed both to their sectoral specifics (a low profitability and low asset liquidity rates, focus on state orders and the consequent problem of the government honoring its obligations)and to the possibility of outsider structures intercepting the respective financial flows;
The planned transformation of the federal railway transport under the auspices of the RF Ministry of Railway Transportation into joint –stock company ‘Russian Railroads’ at 100% owned by the state at least is unlikely to ensure a considerable effect. In this regard, one should refer to the respective experiences of the electricity and gas sectors that have passed the incorporation stage yet in 1992 and consequently been transformed into giant holdings (RAO ‘UES Russia’ and ‘Gasprom’), with their control blocks owned by the state: these companies have failed to show a substantially greater efficiency compared to the railway sector, which in turn was carrying out its inner changes in the frame of natural monopolies reform program. These three sectors were bearing a great deal of similarity over the past three decades: non-transparent financial flows, cross-subsidizing, and the aging of capital assets being close to critical.
INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru the danger of aging of the production assets due to a non-targeted use of investment funds and ‘eating up’ profit;
the risk of FUE=s’ bankruptcy and the government completely loosing its property rights for the assets assigned to them to conduct economic activity.
The main remedies the government should seek in order to minimize the risks are:
bringing FUE=s’ operations in line with requirements provided by the legal acts of the RF Government and the RF Ministry of State Property of 1999-2001: more specifically, they imply re-registering their renewed charter documents with the RF Ministry of State Property; appointing of enterprises’ heads on the contract basis; fixing in their charters the government’s right for a share of their profit; introduction of a new accounting and control system;
an efficient exercising by the owner of his powers in the frame of the effective law and the aforementioned requirements (identification of the volume of powers;
control over the use of property and attaining certain indicators of FUE=s’ economic performance; contributing to the non-tax revenues of the budget system by means of FUE=s regular transferring a pre-set share of profit from current operations; pursuance of staff policy through the respective rulings of attesting boards and cancellation of contracts);
specification and organizational optimization of the governing impact of the state on FUE=s (creation of specialized FUE=s to manage a great volume of relatively small, dispersed assets; integration of unitary enterprises into holding structures;
strengthening the governmental control functions in large FUE=s by means of establishment Supervisory Boards that would comprise representatives of all the government agencies controlling the given enterprise; as concerns FUE=s of strategic importance, they should be directly subordinated to the RF Government);
continuation and completion of the work on inventorying the government property in the part of inclusion of public unitary enterprises in the Property Register of RF basing on a clear distinction drawn between federal, regional and municipal tiers (and preclusion of a situation when a federal unitary enterprise exists without clearly defined subordination to a certain agency).
It is also necessary to amend the effective legal base underlying unitary enterprises’ operations.
First, the urgent need to pass a special law to regulate their operations cannot be questioned. Though the need in such a law has become visible since 1995 (when the Civil Code of RF was promulgated), its final version was passed on November 14, 2002 (# 161-FZ ‘On state and municipal unitary enterprises’).
The mission of the law is to minimize drawbacks of the right for economic operations.
The quintessence of the new law became a certain narrowing of the level of a unitary enterprise’s economic freedom (a strict definition of purposes of its creation and allowed kinds of operations, the volume of legal capacity), strengthening of regulatory procedures of its management by the state and protection of its property rights (regulation of entering in large- scale deals, transactions that involve interest, restriction of their rights for establishing daughter unitary enterprises, an assumption of the possibility of withdrawing a part of their property in favor of the state).
The list of major innovations that allow speaking about toughening the system of management of SUE=s comprises the following provisions, among others:
RUSSIAN ECONOMY in trends and outlooks Unitary enterprise may not establish, as a legal entity, another unitary enterprise by assigning a part of its property to that (the daughter enterprise), which effectively blocks organizational possibilities for stripping the parent enterprise off its assets;
Unitary enterprises may become participants (members) of commercial and nonfor-the-profit organizations where the participation of legal entities is allowed. The decision of the given unitary enterprise to participate in a commercial or non-forthe-profit organization may be made only upon the consent of the owner of the unitary enterprise’s property. As well, managing the share (contribution) in the authorized (equity) capital of the newly established economic structure or partnership, as well as the stock belonging to the unitary enterprise, may become possible only upon the noted owner’s consent;
Unitary enterprises may not become founders (participants) of credit institutions (thus, the possibility for their heads to control financial flows is limited9);
Unitary enterprises have no right to sell the real estate belonging to them, lease it, use it as a collateral, contribute with it to an economic company’s (partnership’s) authorized capital or otherwise manage the property without the owner’s consent;
Without such a consent, unitary enterprises have no right to exercise deals related to disbursement of loans, guarantees, receipt of banking guarantees and other charges, assignments, debt transfer, and to conclude agreements on society in participation;
Establishment of a treasury enterprise is possible both on the federal (as provided by the Civil Code) and regional and municipal levels, though the list of grounds for their establishment is limited (only for the purpose of using the property whose privatization is prohibited, solving social tasks, and manufacturing products associated with the national security and defense or single kinds of products withdrawn from the turnover);
Restrictions have been introduced for heads of unitary enterprises with regard of combining their position with commercial operations: it is just research and creative activity which is allowed for them in addition to exercising their immediate functions;
All large transactions in excess of 10% of the given unitary enterprise’s authorized capital or of 50,000 minimal salary rate have to be reconciled with the owner;
Public enterprise carries out its operations following a revenue/expenditure estimate approved by the owner;
The owner is granted with the right to transform a unitary enterprise into a public or municipal establishment;
In 2001, to inventory the governmental share (SUE=s) in commercial banks, a special interdepartmental commission was established). The Commission reported that the government owned shares in 424 banks (including control blocks in 62 banks). Some 600 SUE=s control 714 stock packages worth a total of some Rb. 2.5 bln. in 250 credit institutions. All the agencies were bound to assign their stock to the RF Ministry of Property until July 1, 2002. SUE first reacted y distorting the information on their participation in credit institutions, while some of them attempted to increase commercial banks’ authorized capital to dilute the governmental share. Nevertheless, as of late October 2002, the Ministry has received some 90% of all the stock. An analogous attempt should be launched with regard to insurance companies and investment funds.
INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru The procedures have been specified of formation of an authorized capital of unitary enterprises founded upon the right for economic operations.
In compliance with the Civil Code of RF, the law defines the legal status of government and municipal unitary enterprises, powers and obligations of owners of their property, procedures of establishment, reorganization and liquidation of unitary enterprises. Commercial organization not granted with the property rights for the property fixed with it by the owner is not recognized as a unitary enterprise. It is only government and municipal enterprises that can be established in the form of unitary enterprises. The property of a municipal enterprise belongs, on the basis of property rights, to the Russian Federation, a Subject of the Russian Federation or a municipal establishment. However, the most crucial defect of this particular organizational and legal form is still there.
As well, one cannot help but note that the adopted law bears a whole range of other substantial deficiencies, such as:
unsound provisions that identify cases of possible establishment of unitary enterprises and primarily an excessive number of grounds for establishment of public enterprises;
the absence of the much-needed development of the respective provisions of the Civil Code that define a special legal capacity of unitary enterprises;
an insufficient development of the provisions that concern changing the kind of unitary enterprises and reassigning its property to another owner of the public or municipal property;
inconsistency between some provisions of the said bill with the Civil Code of RF, other effective laws (more specifically, the federal law ‘On auditing activity’ and inconsistency between the terminology applied therein with the one used in subacts, etc.)Second, the fact of enactment of the law ‘On state and municipal unitary enterprises’ should not imply refusal of the government policy aimed at strengthening its controlling impact on unitary enterprises by improving the effective legal base developed between 1994 to 2001, i.e. by means of further development of the Standard Chapter of FSUE and the Standard Contract with its head, improving the work of Attestation Commissions with the overall emphasis on enhancement of the level of maintenance of public property.
The main means to ensure the above is to introduce to the said documents provisions on restricting opportunities for heads of unitary enterprises to carry out certain kinds of operations without a prior consent of the owner’s representative, extending the incentive system to encourage them honor already concluded contracts, including a range of grounds for their cancellation, consequent penalties, and labor compensations.
Third, as far as contracts are concerned, there may appear new items, such as, for instance, the obligation of heads of unitary enterprises not to combine their position with a paid job in commercial structures, entrepreneurial and political activity, not to take part in transactions involving interests, and to report regularly their personal income and property to their superior agencies. At the same time, the enterprise head labor compensation system should be modified, so that to ensure an interrelation between various bonuses designated for comple For more detailed comments on the law, ee: Povyshenie effectivnosti budgetnykh raskhodov na finansirovaniye udghetnykh organizatsiy (uchrezhdeniy), upravlenie gosudarstvennymi unitarnymi predpriyatiyami. M., IEPP, RUSSIAN ECONOMY in trends and outlooks menting a reasonable fixed salary and economic performance of their enterprises, the presence or absence of disciplinary punishments, and honoring terms and conditions of their contracts. One should also extend the circle of grounds for canceling their contracts at the owner’s initiative (in certain cases along with paying off a compensation).
Fourth, from the perspective of organization of an efficient system of management of, and control over operations of heads of unitary enterprises and restricting their excessive freedom of action, a charter of such an enterprise has to comprise provisions on restricting opportunities for heads of unitary enterprises to carry out certain kinds of operations without a prior consent of the owner’s representative. On 19 November 2001, the Ministry of Justice registered a joint order of the RF Ministry of Economic Development, the Ministry of State Property and the Ministry of Taxes and Levies which identifies the list of procedures of identification of the above indicators.
It will be transferring profit to the budget according to pre-set standards and the adoption and implementation of a program of development of unitary enterprises for a certain period of time, which should be reconciled with government agencies that should form indicators of success in the government’s managing impact.
Economic companies with governmental participation The implementation of main provisions of the governmental Program with regard to economic companies with governmental participation, the majority of which is represented by AO=s, is capable to contribute to a better realization of the government’s interests in the corporate governance area. However, in practice a lot will depend on concrete mechanisms, some of which are analyzed below.