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Minister A.R.Belousov and Deputy Minister – Head of the Federal Agency for State Property Management O.K.Dergunova have participated in round table “Privatization: Objectives of the State, Expectations of the Investors”

11.10.12

On October 10, 2012 round table ‘Privatization: Objectives of the State, Expectations of the Investors’ took place, organized by the Vedomosti newspaper.

The venue was participated in by President of JSC Russian Railways V.I.Yakunin, Director General of JSC Sovcomflot S.O.Frank, head of the Working Group on Creating an International Financial Center A.S.Voloshin as well as representatives of federal ministries and agencies, Russian and foreign business circles and the expert community.

The Ministry of Economic Development of Russia was represented at the round table by Minister A.R.Belousov and Deputy Minister – Head of the Federal Agency for State Property Management O.K.Dergunova.

In his speech, A.R.Belousov presented to the audience a vision of the concept of state property management evolution.

In his opinion, privatization is just one of the three pillars underlying solution of a more general problem. The latter consists in withdrawal of strategic assets from civil circulation and their usage capitalization in accordance with strategic objectives. The other two pillars without which any talk of privatization is pointless are the said assets management technology and, properly, usage of development of such assets having remained at the state’s disposal.

Speaking of privatization of major state-owned companies, A.R.Belousov noted that it is strategic significance of the assets concerned, not resistance on the part of the management, that checks such assets sales. According to the Minister, when undertaking to sell Rosneft, one ought to take into account the company’s unique offshore operator standing. “The whole contractual legal framework of Rosneft activities, inclusive of relations with foreign counteragents, relies, first, on the company’s Offshore Operator No 1 status and, second, on direct control over the company as exercised by the state,” noted A.R.Belousov.

The same is true with JSC Sovcomflot: the company privatization can not be considered apart from its role in utilization of the Northern Sea Route, as the Minister said.

The situation with RusHydro is much the same. “We ought to be aware that the main target consists in deployment of cheap generation in the Far East. Currently, there is an excess of available generation there but that is expensively coal-based,” he said. However, it is cheap (primarily – hydraulic) generation that is required for the territory development”, as the Minister noted. “Those are rather complicated issues impeding privatization”, concluded A.R.Belousov.

The Minister specially pointed out at the necessity to build systems to monitor what happens to privatized assets after their sales. "Assets privatization i.e. the state’s withdrawal from ownership of a specific asset fails to cause the asset to cease being strategic in view of its key role for development of certain branches of industry and occasionally – for implementation of the long-term strategy for development of Russian economy and, in the grand scheme of things, of the Russian society as a whole," said A.R.Belousov.

 

 

Summary of A.R.Belousov’s speech at round table ‘Privatization: Objectives of the State, Expectations of the Investors’, Moscow, October 10, 2012.

 

I am glad to welcome you to the privatization round table. I would like to bring to notice that this is the first venue of the kind, as far as I can remember. This is, as the President said yesterday (though on a somewhat different occasion), ‘the first trial set”. I hope that such venues arranged in the format of rather square talk, discussion of the privatization topic, will be recurrent. Taking advantage of me being the first speaker, I would like to set the talk substantive mood and dwell on the problems we are facing.

I will begin with expressing two considerations. In the first place, we (me and Olga Konstantinovna) take a self-interest in the matter, preparing a detailed and, I suppose, revolutionary concept of state property management evolution. It wall be considered by the Collegium and then – by the Government, and today’s talk for us is an important stage in the concept elaboration. In the second place, we are well aware that privatization is just one of the three pillars underlying solution of a more general problem. The latter consists in withdrawal of strategic assets from civil circulation and their usage capitalization in accordance with strategic objectives. The other two pillars without which any talk of privatization is pointless are the said assets management technology and, properly, usage of development of such assets having remained at the state’s disposal.

Things we dislike. First: we currently have a privatization program taking shape without one having any notion of branch-specific strategies. As a matter of fact, the notion of what and how to privatize ought to naturally proceed from the notion of development of the branches whereto the state-owned assets pertain. This primarily applies to the transport, power industry and defense industry complex infrastructure.

The general trend consists in migration from management through mediation of the Federal Agency for State Property Management to that via regulations. Currently, we lack significant strategies of the kind except for those in place in very few branches. The transport strategy, where certain notions of how to develop do exist, may be one of the exceptions. This is the first drawback. This results in our core document, the ‘privatization program’, taking shape today in a considerably chaotic way. Second: in either event, we have shaped a privatization program, our currently dominant approach consisting in privatization carried out in the form of sales of properties. It is surely business that we are to sell. But selling a business requires a great deal of pre-sales preparation. And it is here that the real clash occurs. We want to sell properties, aware that this way, cheap as it is, saves one the necessity to go to expenses on the corresponding business development: on the company decapitalization, on building business processes within the company, on corporate governance etc. Otherwise, having decapitalized the company, built a governance system etc, we will sell at a high price. That is what the clash consists in. I believe that we currently lose too much. The third problem we doubtlessly face is the motivation system. We need to create a system enabling solution of the conflict inevitably arising in the curse of privatization – that between the owner and the management. We have begun carrying out this sort of work. We have begun to come to terms with Sovcomflot and to conduct negotiations with Russian Railways but in a vast majority of cases the problem yet defies solution. This means that a model for settlement of such conflicts in the course of privatization is not in place. This results in our frequently encountering opposition on the part of management unwilling to break the governance system as it is, consisting, basically, in disposal of properties.

Then, the fourth problem: in the process of privatization, even prior to the ‘first trial set’, we have to identify for ourselves the reason why we are selling based on relevant analysis. This is a very sensitive matter affecting both the criteria we stipulate at selling and requirements to the consultant. In reality, there are at lest three competing objectives of our undertaking privatization. The first one is definitely the simplest: raising funds for the budget. The second objective is less simple but, actually, more important: search for strategic partners that are not always investors, cross-holding of shares and exchange of assets being equally possible. Finally, the third objective consists in attracting a strategic investor. While solving the problems, we definitely have to take into account the economic role played by a specific strategic asset in development of the corresponding industry branch and the corresponding strategy. Very often collisions related to this problem grow in public opinion into a sort of politically flavored intrigue. Actually, there is no intrigue here. I will give some examples. Why have not we sold Rosneft yet? Not because we meet any opposition in this respect (mostly – on the pat of the managers), not in the least. In reality, when undertaking to sell Rosneft, we ought to take into account the company’s unique standing as an operator of the corresponding economy branch. The latter is secured in the legislation and the whole contractual legal framework of Rosneft activities, inclusive of relations with foreign counteragents, relies, first, on the company’s Offshore Operator No 1 status and, second, on direct and indirect control over the company as exercised by the state. The same is true with JSC Sovcomflot, for example: we can not consider privatization of the company apart from its role in utilization of the Northern Sea Route which is a strategic issue for us. The situation with RusHydro is much the same. If selling or privatizing RusHydro, we ought to be aware of our strategic target consisting in supplying cheap generation in the Far East. Currently, we have an excess of available generation there but that is expensively coal-based. However, it is cheap (primarily – hydraulic) generation that is required for the territory development, and we ought to build the corresponding asset management chain exactly with this aim in mind.

And the last problem yet unsolved today is that of monitoring what happens to privatized assets after their sales. Assets privatization i.e. the state’s withdrawal from ownership of a specific asset fails to cause the asset to cease being strategic in view of its key role for development of certain branches of industry and occasionally – for implementation of the long-term strategy for development of Russian economy and, in the grand scheme of things, of the Russian society as a whole . Examples are such companies as Russian Railways, Sovcomflot our major banks and others. We ought to monitor what happens to such asset further and how they work. We need monitoring that could prompt us which regulations are to be embedded in the process. This is the array of problems that we are concerned about and that we are obliged solve within the framework of the Concept.

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