FILE COPY /204v9 Report No. :12049 Type: (MIS) Title: PRIVATIZATION IN THE REPUBLICS Author: I1i, SO0 J. Ext.: 0 Room: Dept.: JUNE 1993 PSD Group, Legal Department -PSD and Privatization Group,- CFS _JointStaff Disc'ussio Pae Privatization in the Republics of the Former Soviet Union: Framework and Initial Results Soo J. Im Robert Jalali Jamal Saghir - S~~ - .3-.- 0 |03@ _53 SE[3 a M ES l * ~~~~~~~~- 0 Copyright © 1993 The World Bank 1818 H Street, NW Washington, D.C. 20433, U.S.A All rights reserved Manufactured and printed in the United States of America First Printing June 1993 The findings, interpretations, and condusions expressed herein are entirely those of the authors and should not be attributed in any manner to the Legal Department, CFS, the World Bank, or to members of the Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication, and accepts no responsibility whatsoever for any consequence of their use. The paper and any part thereof may not be cited or quoted without the authors' expressed written consent. ABSTRACT This paper compares de privatizauon eapei nces of de 15 Republics of dte Former Soviet Union as of March 1993. Currenty, these Republics are at varying stages of completing their legal fiameworks for privatization. Salient common featrs of these experiences include the ambiguous stus of basic proprty rights, the centralizea haracter of institutional stucturs, the extensive preferences given for employee ownership, and the minor involvement offoreign investors. Program implementadon in the region has not taken place as quiddy as initially targeted by these countries. Many have adopted a mul-track approach. In a number of Republics, the privatization of small-scale enterprises is under way, and various mass privatization programs have been already launched or are being designed vith the aim of acceleratig the tansfer of state ownership and generating widespread participaiion. The lack of a supporing legal and financial infratructure-including mechanisms for enforcingcontracts, underdeveloped financial markets, weak adm wLstrtive capacity and the near absence of expertise in commercial pracie-has ofien emerged as a major obstacle in the implementation process. Despite these obstacles, almost all of die FSU Republics havesuccesllyinitiatedtheprocessofbuildingbasiclegalandinstitutional infruc forpr.vatiauioi, and implementation is progressing at an impressive rate in several Republics. i ACKNOWLEDGEMENTS This paper is a joint product of the staff of the Privat Sector Development Group of the Legal Department and the Private Sector Development & Priavizaton Group of the Cofinancing and Finandal AdvisoryServces Department PleasecontactMessrs. Etic Haythorne (Senior Counsel, PSD Group, Legal Department) and Jamal Saghir (Senior Finmacial Officer, CFSPS) for fiurther information and inquiries in td.e fiture. We would like to thank the stffof the Country Departments M and IVofthe Eutope and Central Asia Region and Bank staff of other Departnents for their availability and cooperation in providing us with important information on each countty presented in this paper. Special thanks are also due tO the peer reiewers for their valuable comments and suggestions, t the Ford Foundaton Internatonal Law Fellowship Program at Harvard Law School for supporting Ms. Soo J. in durng the project, and to the Geotge Washington University for making Mr. Robert Jaali vailable. Secretarial support b Ms. Nagwa Aziz is gratefully acinowledgee- ii FOREWORD Privatization in dhe Republics of the Former Soviet Union: Framework and Initial Results is a special discussion paper produced jointly by the staffofthe Legal Department and the Cofinancing and Financial Advisory Services Departnent Providing technical advice on puvatiion and PSD issues is the primary focus of thePSD Groupsofboth Departments, anddieminaingcrsscountryaeperienceonprivatizaton is an important erment ofthis work Because the assessment of intial results needed to cover both the legal framework and the institutional, technical and operational results, it was agreed tO mount a collaboratve effort drawing upon the different skills and experience in both Departments. Andrew Vokink Kevin Young Chief Counsel Maner Europe and Centrl Asia PSD and Privatization Group Legal Department Cofinancingand Financial Advisory Services .. u row . - s' U5.A, / >1.>'OC $8 i NG .OR SOVIET FNION KI A -> . e CN1IDt A - XKA;.' .. ', _, . > - _ - '-b~E i m FORERYSVIETUNIO -~~~~~~~~~~~~~~~~~~~~~~~~~LMM Aftobr* NAVO" CAMAS mm 0 4M~~~~~~~~~~~~~~~~~~~~~~~~~~~~ afbfw W./IAIMAN OFIR -MW POLAND~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Table: Country Background Data (1990) Country Population Area GDP (thousands) (tMou. sq.krn) (riflion current rubles) Armenia 3,325 30 9,692 Azerbaijan 7,149 87 14,697 Belams 10,278 208 40,100 Estonia 1,583 45 7,977 Georgia 5,462 70 14,915 Kazakhstan 16,746 2,717 46,322 Ky%ghyv.tan 4,395 199 8,320 Latv;i 2,686 65 12,201 Lithuaiia 3,731 65 13,287 Moldova 4,367 34 12,750 Russia 148,255 17,675 626,300 Tajikistan 5,302 143 7,112 Turkmenistan 3,669 488 7,344 Ukamine 51,860 604 164,761 Uzbekistan 20,532 447 32,430 Soure: The Wodd Bank v TABLE OF CONTENTS Abstrac ........................ i Acknowledgements .................... ..... ii Poteword ....................... il Map of the Former Soviet Union . ........................................... iv Table: Country Background Data .......................................... v PART 1: INTRODUCTION ........................................ 2 Table 1: Ptofile of Stae COwned Enterprise in the FSU .............................. 2 Table 2: industria Sctor Profile ........................................ 3 Tahle3:IndustraSubsectorPtofle .................................., 4 PART 2: SUMMARY OF MAJOR FINDINGS ................................... 5 PART 3: POLICY AND SUPPORTING FRAMEWORK . 7 Conditions of SteOwnership ..................................... 7 LegdlFrnmework ..11... . . . . . . . . . . ... 11 Box 3-1: Core Lgal Frameworks for Privaadon .............................. 13 institutional Framework ..................................... 15 Box 3-2: Institution Prnmeworks for Privatzation ............................. 15 Employee Ownership ...................................................... 18 Box 3-3: Employee Preferences ..................................... 19 Partdcipation of Forein iveors ..................................... 21 PART 4:IMPLEMENTATION ISSUES ................................... 23 Privatzaon Reuts ................................... 23 Table 4: Pivatization to Dae ................................... 23 Targes and Priorities ................................... 25 Methods and Satregjes ....2... 26 Box 4-1: The Russian Voucher Scheme ..................................... 28 Valuaton ................................... 29 PART 5: CONCLUDING OBSERVATIONS ................................... 30 ANNEX A. Country Profiles ................... 31 Arnenia ................. .................. 31 Azerbaijan ................. 34 BeLus ................. 35 Estonia ................................ 37 Box 6-1: Companies Sold .. .............................................. 38 Georgia ................. 39 Box 6-2: Privatzation of Housing ........................................... 40 Box 6-3: Privatizaion of Land ........................................... 40 Kazakhstan ........................................... 41 Kyrghyzsan ........................................... 43 latvia ........................................... 45 Lithuania ........................................... 47 Moldova ........................................... 50 Russian Federation ........................................... 52 Tajilcisan ........................................... 55 Turktenistan ........................................... 56 Ukrine ........................................... 58 Uzbekstan ........................................... 60 ANNEX B: County Privatzation Legiuaton Availble in English ...................... 63 SelectedRefrenoes ......................................... 72 V#s E Part I Inroduction Since the dissolution ofthe former Soviet Union which includes additional information on indi- (-FSUn) there has been a great deal ofprivatization vidual Republics. Economic reform programs in activity in the 15 emerging Republics,' which are each FSU Republic are continuing to evolve, and engaged in transforming their economies from a adjustments are constantly being introduced as centrally-planned to a market-based system. Priva- institutions and officials change and as the imple- tization programs with the goal of transferring mentation process unfolds. This paper is thus a state-owned enterprises (SOEs') to the private snapshot of the privatization process as of March sector have been designed, adopted, and are in 1993. various stages of implementation. Though there has been a great deal of ad-hoc information ex- Initial Conditons change between countryofficials and advisors, little systematic comparison has been made between the While the overall scale of the privatization pro- privatization experiences of the Republics of the grams in all of the FSU Republics is ambitious and FSU. The objective of this paper is to provide a unprecedented, initial conditions in the Republics brief, preliminary overview ofthe region's progress have proved extremely difficult to overcome in toward privatization as of the end of March 1993 achievingrapid and effectiveprivatization. Because (unless otherwise noted). The paper summarizes of problems in setting precise definitions, there is and compares privatization policies, their support- no agreed-upon estimate of the number of enter- ing frameworks, and the implementation process prises eligible for privatization. Rough estimates in the 15 Republics. It does not attempt an in- indicate that chere are over 470,000 SOEs and depth analysis or assessment of the privatization facilities ofvarying sizes. Ofthese, the approximate experiences of each Republic. The scope of this paper is limited to describing l Armenia, Azerbaijan, Belatus, Estonia, Georgia, Kakh- and comparing the approaches taken to transfer- stan, Kyrghyzstan, Latvia, Lithuania, Moldova, the Rus- ringstateowniership through saleofassets orshares, sian Federation, Tajiidstan, Turkmenistan, Ukraine, and particularly with regard to commercial and indus- Uzbeklstan. trial enterprises and the environment in which this 2 These areas merit firther research, as their impact on the takces place. The paper does not discuss related privatization experiences in the FSU becomes more obvi- takes p,. The paper c.oes not discussrelatedous. For instance, the issue of how to use proceeds has not privatization issues such as demonopolization, fi- yet received much attention. Most FSU Republics provide nancial reform, use of proceeds, and conversion of tharprivatizationproceedswillbekeptinspecialaccounts. defense/military complexes,2 and it does not ad- Exactly how the fiunds will be spent remains to be dterr- dress the problems ofgovernance facingenterprises mined by the nationalor local soviet. A few FSUcountries that are either newly privatized or likely to remain (e.g., Armenia, Russia, Ukraine) have announced in ad- vance the general guidelines for the use ofproceeds. Typi- state-owned. cally, they include assistance in the fuiancing ofenterprise This cross-countrycomparison isbasedoncoun- restructuring and of social safety nets. try profile material that is presented in Annex A, 2 Privatization in the RApubis of the Fomer Soviet Union number of medium-to-large state-owned enter- fusnctioningbankcredit system to provideworking prises- in the FSU exceeds 85,000 (Table 1). Russia and investment capital. Management skills needed and Ukraine alone account for over 80% of this for competitive market-oriented enterprises are in total. The industrial sector consists of approxi- short supply, and general macroeconomic condi- mately 47,000 SOEs employing over 34 million tiens have been extreme, characterized by rapid workers (Table 2). The engineering, food and light inflation and declining output. industrysectors dominate in both the average num- The previous Soviet legal system was entirely ber of employees and the overall number of enter- inappropriate to a modern market economy, and prises (Table 3, see page 4). there is litde or no tradition of private property The industrial sector of the FSU was vertically rights in the region, as evidenced by the absence of integrated to a high degree, and frequently one or restitutionprocedures outside theBalticstates. The a few enterprises supplied products for the entire legal foundationcurrentdyunderlyingtheeconomic country. With the break-up of the Soviet Union reform process in each Republic continues to be and the ce!lapse of inter-Republic trade, this con- influenced by old Soviet Union legislation and centrated production structure remains highlyvul- nerable. Moreover, the structure of the Soviet Thedefinitionsofsmall,mediumandlargeenterprisesvary industrial sector was heavily integrated with mili- across the region. The criterion generally used is the tary requirements, but with the end of the Cold numberofemployees. Porinstance, in Russia, small-scale ,ar~r requirements, but with the end of the Cold enterpnses incude all those employing less than 200, War demand for industrial goods related to mli- whereasinGeorgiatheyaredefiedasthosewithlessthan tary needs has fallen off precipitously. There is no 50 employees. Table 1: PROFILE OF STATE OWNED ENTERPRISE IN THE FSU SMALL MEDIUM LARGE Country Number Definition Number Deflnftion Number Definiflon Armenia 10,000 <50 Empl. N/A - 700 N/D Azerbaijan N/A - N/A - N/A - Belus N/A <200 Empl. 400 200-1,000 Empl. 220 >1,000 Empl. Estonia 3,500 N/D N/A 256 N/D Georgia 15,000 <50 Empl. 1,006 50-1000 Empl. 100 >1,000 Empl. Kazakhstan 27,500 <200 Empl. 8,000 200-5,000 Emnpl. 200 >5,000 Empl. Kyrghyzstan 20,000 <200 Empl. 1,200 200-5,000 Empl. 20 >5,000 Empl. Latvia 5,000 N/D 350 5,000 Empl. Tajikistan N/A - N/A - N/A - Turknenistan 2,172 N/D 1,381 N/D N/A - Ukraine 60,000 [c] 40,000 N/D 6,000 [d] Uzbekistan 35,900[e] N/A - - 1,000 >1,000 Empl. LEGEND N/D: Not defined NlA: Not available (a] This figure may vary between 150,000 to 320,000 (bI Small entprises with anaverage of up to 200 officiallylisted workers and a balance sheet valueoffixed capital as ofjanuary 1, 1992,of less thanRI million. [c] Value does not exceed 20 million Rubles. [dj Value range from 20 to 1,500 million Rubles. [e] Includes medium and small entetprises. Sources:TheabovedatareroughapproximanonsbasedonawidevatietyofWorldBankreportsandofficialandunoffidalsources. Privatwiadon in the Republics of the Former Soviet Union 3 confusinglegalconceptsdatingfromtheperestroika summary of major findings, while Part III dis- period and earlier.4 The application and substance cusses overall policies and suppot ing frameworks of the new legal system must be understood in for privatization, focusing on issues related to the terms of this heritage.' Thk. underlying framework conditions of state ownership, legal and institu- for privatization contains a number of features that tional frameworks, employee ownership, and par- complicate the implementation process, including ticipation of foreign investors. Part IV reviews ambiguo,ss institutional authority over the privatiza- accomplishments to date and major implementa- tion process, suspended between the executive and tion issues. Finally, Part V offers some brief con- legislativebranchesofgovernmentandthecentraland cluding observations. local administrations; strong employee rights tradi- tions, reflected in various employee ownership pref- erence schemes; and undearstatus ofland ownership 4 The exactstatus, in lawand practice, ofUnionlegislation in connection with the orivatization of enterprises. n such d l ce s, t b in the Republics remains a complex issue that eludes easy In such difficult circumstances, to be committed characterizations across the region. While some Repub- to privatization is to accept a remarkable challenge. lics formally announced a 'complete and direct prohibi- It is, however, generally recognized in many Re- tion of the operation of Union legislation' upon publics that privatization is an essental path to declaration of independence, others provided for the economic transformation, though it may be accom- principle ofsubsidiary and temporary incorporation. At panied by social hardshipand dislocation. Any assess- the same time, the signa.ories of the Agreement on the p*nied by social hardship Creat on ofthe Commonwea. . ofIndependentStatesmay ment of progress and approaches thus needs to take be bound byArticle 11 ofthe Agreement, which appears into account the tremendous scale of the problems to preclude the application of the norms of the forner and the iarsh starting conditions &ced byprvatiza- Union, inter ali In practice, Union law is stitl exten- tion programs of the Republics of the FSU. sively applied where there is a legal vacuum. 'Shaping a Market-Economy Legal System, prepared by the EC/IS Strcure of This Study Joint Task Force on Law Reform in the Independent States,October1992 (provisionalversion) at7l-73 [here- inafter the Legal System]. The balance of this paper is organized into four s Consider, forinstance, thefactthatalltheRepublics have sections, Parts II through V. Part II presents a Civil Codes dating fiom 1963-64 in force, as amended. Table 2: INDUSTRIAL SECTOR PROFILE Number of Number of Avg. Number Country Enterprises Employees of Employees Year Armenia 605 269,466 445 1991 Azerbaijan 3,717 398,498 107 1991 Belarus 1,231 1,453,000 1,180 1991 Estonia 256 202,800 792 1990 Georgia 1,365 505,050 370 1990 Kazakhstan 2,458 1,315,000 535 1991 Kyrghystan 250* N/A N/A 1992 Latvia 349 285,500 820 1990 Lithuania 584 493,000 843 1990 Moldova 493 347,000 705 1991 Russia 25,240 20,730,000 821 1987 Tajikistan N/A N/A N/A N/A Turkmenistan 1,381 139,934 101 1991 Ukraine 6,938 7,100,000 1,023 1990 Uzbekistan 2,006 916,300 457 1991 Total 46,873 34,155,548 630 * Medium to large enterprises over 200 people. Note: The data provided above are rough estimates based on various World Bank reports and may not reflect actual figures. The industrial sector is mainly comprised of the following subsctors: Agro-industsy, F^.cst industries, Chemicals, Fuel, Enginering industries, Metallurgy, Building Materials, Ught industries. Source: The World Bank Table 3: INDUSTRIAL SUBSECTOR PROFILE Food Induslry Ught industry Engineedng Frest industry Chemicals Bullbng Materlals Others No. of No. of No. of No. of No. of No. of No. of No. of No. of No. of No. of No. of No. of No. of Counuy Erimprises Emploe, Enacprise Emplcq'e, Enreaprie Enployee nretprnxs Employ-e Enreprm isenployeet Enterprises Employee Enteprises Employmr Year Armenia 121 19,514 73 74,704 90 124,710 18 5,565 16 10,618 94 16,483 193 17,872 1991 l Azerbaijan 1,187 54,932 251 94,390 1,302 185,687 554 11,567 36 25,816 387 26,106 0 0 1991 F Belarus NIA 109,800 N/A 20,400 N/A 698,300 N/A 97,500 N/A 115,900 N/A 88,500 N/A 90,500 1991 R EEtonia 51 28,200 45 43,300 46 58,200 48 28,000 17 16,200 21 14,300 28 14,600 1990 S GGorgia 443 77,700 246 114,000 195 155,400 110 29,900 40 23,200 146 44,500 185 N/A 1990 *t Kazakhstan 455 N/A 585 N/A 645 N/A 233 NIA 86 N/A 270 N/A 139 N/A 1991 IZ Kyrghyzstan 200 N/A 74 N/A 70 N/A N/A N/A N/A N/A N/A N/A N/A N/A 1990 Larvia 99 23,100 39 70,000 87 92,400 51 33,800 21 23,200 33 18,000 19 25,000 1990 Ethuania 142 66,000 106 97,400 139 193,200 59 41,400 27 23,200 64 38,800 47 33,000 1990 E Moldova N/A NIA N/A N/A N/A N/A N/A Russia 5,480 1,380,000 4,034 2,490,000 7,019 10,810,000 3,885 1,810,000 561 1,220,000 2,161 1,040,000 2,100 1,980,000 1987 Taildstan N/A N/A N/A N/A N/A N/A N/A Turklnoistan 255 17,530 258 68,977 463 38,742 119 4,750 9 8,915 287 19,519 51 5,424 1991 Ukraine 1,582 684,000 1,300 756,000 2,020 3,549,000 0 0 692 623,000 853 695,000 491 793,000 1990 Uzbddstan 405 98,500 708 335,400 364 313,200 96 25,800 49 43,700 231 69,100 153 30,600 1991 Totab 10,420 2,559,276 7,719 4,164,571 12,440 16,218,839 5,173 2,088,282 1,554 2,133,749 4,547 2,070,308 3,406 2,989,996 Note: The abov data are tough esXtma based on various Bank reports and nay not reflec acxa figuxs 'Mc totals for No. of enterprises and enployecs do not equatc to the total figures given in Tabe 2 duc to missing subsector data. Source: Thc World Bank. *1 E Part 11 Summary of Major Findings CGOidom ofSeate OwUnmip InstitusionalFrameuork Basic private ownership and enterprise legisla- The institutional frameworkfor privatization in tion is now in place in all the Republics ofthe FSU. the FSU exhibits a general tendency towards con- Nonetheless, the legal attributes of state ownership solidktingtherolesofthepolicyformulatorandthe remain unclear in several areas. While the legisla- legal seller in one specialized agency. Each Repub- tive branch ofstate is identified as the owner ofstate lic, however, differs somewhat in terms of how the property in all the Republics, the issue of how such official status of a privatization agency is defined, property is owned and managed at the enterprise what roles traditional line ministries play, and who level has not been clearly resolved. The boundaries can participate in the selection and approval pro- of state ownership remain blurred in a number of cess. Republics. In most FSU Republics, decentraliza- tion of state ownership across different levels of Employee Owneship government has not yet been completed or con- tains risks of jurisdictional conflicts between the Each FSU Republic has provided for an em- central and local authorities. Finally, the extensive ployee preference scheme, creating an opportunity use of post-privatization conditions in the region for the employees of a state-owned enterprise to creates potential for state encroachment on the acquire an ownership interest in it on advantageous basic rights of the new private owners. terms, whether in the form of enterprise shares, purchases of physical assets, or a 100% buy-out. galeFramework While the exact scope of preferences difrers from country to country, the overall financial incentives While most FSU Republics have a similar ap- provided through price discounts or financing ar- proach to building the legal framework for privati- rangements have been much more substantial than zation, they are at varying stages of completing it. those found outside the transition economies. Each Republic has a very basic form of enabling legislation in place. Most have adopted overall Paticapation ofForign Intesors privatization programs, butafew Republics remain at an early stage offinalizing them. While a major- Most FSU Republics impose certain legal re- ity ofthe FSU Republics have been contemplating strictions and requirements on foreign investors some sort of mass privatization program, in all the when they seek to pardcipate in privatizations. RepublicsexceptRussiaandLithuaniavariousgaps While more and more FSU Republics are lifting in subordinate legislation and implementing regu- such controls in order to encourage foreign partici- ladons remain. These gaps must be filled before pation-particularly with regard to medium-to- serious large-scale implementation can get under large enterprise privatizdons-foreignpiestorshave way. not played a significant role in the privaa*ion pro- 6 Privatiztion in the Republics of the Former Soviet Union cess so far. In all the Republics, foreign investors face plans are broader in scope than others, but most formidable practical impediments in the absence of have been very ambitious and lacked realistic agen- proper currency regulations. Also, such investors das and sequencing. Understandably, these goals may find the future direction of the privatization may reflect the need to establish political momen- process too uncertain in Republics where a limited tum independent of concerns about the adminis- amount of implementation has taken place so far. trativecapacityrequiredforconcrete results. Clearly, a learning process also took place as implementa- Pivatization Results tion programs were launched, with many early deadlines pushed back to more realistic dates. While national privatization programns are well underway in countries such as Lithuania, Kazakh- Methods and Strategies stan, Kyrghyzstan, and Russia, others are still lag- ging behind. In addition, the available data on Thegeneral trendamongthe FSURepublicshas privatizationachievements constitutesaveryrough beentoadoptamuli-trackapproachwhich applies approximation, since some Republics fail to disdn- different methods of privatization to small, me- guish between various sizes of SOEs. Taken to- dium and large SOEs. Most programs give prece- gether, however, these estimates indicate that about dence to small-scale privatizations, specifically 77,000 enterprises have been privatized. Of these, targeting small retail, trade and service shops that thevast majority (67,000) havebeen small business can be rapidly divested. The objective of this ap- units. The privatization of large SOEs is still very proach is to promote the emergence of an infra- limitedinall the Republics, thoughvoucherschemes structure for a market economy. Videly-used have already been implemented in Russia and methods in small-scale privatization include divest- Lithuania ment by auctions, competitive bidding, tender The privatization process has proven to be intri- offers, and leasing. Privatization of medium and cate and time consuming so far. The task is also large SOEs has presented a greater challenge, as the made difficult by the neaw absence of supporting decision to dispose ofthese enterprises case-by-case infrastructure. Common characteristics among all or n masse has dictated the use of different meth- of the Republics include a lack of reliable mecha- ods. To this end, many Republics have either nisms for enforcing contracts, underdeveloped fi- developed or are contemplating some form of a nancial markets and limited absorptive capacity, voucher scheme. Other common methods that weakGovernmentadministratvecapacity, andthe have been used include tender offers to strategic viual non-existence of financial and technical investors, and employee-management buy-outs. It expertise in the areas of commercial practice and would be premature to assess the effectiveness of market transactions. these methods at this time, however. No single approach to privatization can be ap- plied as a general model for the entire FSU. A Valuation successful privatization program in one Republic might fail in another. In light of the slow pace of The absence of accounting principles and capa- privatization to date, the FSU Republics need to bilities, high levels of inflation and the uncertainty accelerate their preparatory work for privatization of future cash flows have made the application of and move on a fast track for implementation on all traditional westem valuation models impossible in fronts. the context ofthe FSU. Consequently, valuation of enterprises has not played a prominent role in the Targes and Priorities privatization process in the Republics. Further- more, the Republics have been more concemed Though a majority ofthe Republics have estab- with theequitable redistribution ofstate assets than lished privatization targets and have prioritized with raising capital through sales to investors. As thet to one degree or another (i.e.,startingoffwith foreign participation in the privatization process small-scale enterprises, corporatizing larger SOEs, evolves, however, valuation will become a more etc.) significant differences among these plans have critical issue. affected the pace of implementation. Some of the * PART II Policy and Support Framework CONDITIONS OF STATE OWNWRSHIP which have legal dde. The ongoing ambiguity surrounding ownership may be the legacy of the Basic ownership and enterprise legislation is essentially communal (therefore, non-exclusive) now in place in all of the FSU Republics. Nonethe- nature of property in a planned economy.7 Conse- less, the legal attributes of state ownership are quendy, not only the concept of private property unclear in several aspects. While the legislative but also that of public property (as legally under- branch ofthe government is identified as the owner stood in a market economy) had to be introduced. of state property in all the Republics, the issue of The 1990 USSR Law on Ownership, the most how such property is owned and managed at the important piece of legislation to be issued during enterprise level-in particular, how ownership in- the perestroika era, was the first step towards estab- terest in enterprises extends to the assets of enter- lishing the ownership relations that are necessary in prises, bodh in law and practice-has not been a market economy. This law, however, contained a resolved. The boundaries of state ownership re- number of limitations on private ownership and main blurred in a number of Republics, due to failed to clarify the relationship between the private lingering claims made by non-state bodies. Inmost sector and state with respect to tide.8 FSURepublics, decentralizadon ofstateownership While new ownership legislation in the Repub- across different levels of government is not yet lics tends to resemble its Soviet predecessors in completed or contains risks of jurisdictional con- form,9 it provides much greater scope for private flicts between the central and local authorities. property and seeks to establish a dearer legal basis Finally, the extensive use ofpost-privatization con- ditions in the region creates potential for state 6 This paper i ConCed With doesC propery relations encroachment on the basic rights of the new private and does not address inter-Republic claims related to the owners. division ofcertain Unbon property, some ofwhich contin- ues to be subject to the 'joint-use" rule. Such property lies Owshijip Legiska-ion outsidethescopeoftypicalprivatizationexperiencesinthe regionL In order to create effective private ownership 7 Seeeg.R.Kolowsk,"Market Intutions,EatEuropean In RetRfom,andEconontiicalTheory, 26Joum ofEconomie through privatization, the legal system must first Issues673 (1992). establish dear property ownership, use, and dispo- * For instance, the law permitted the labor coliective of an sition rights.' In most transition economies, the SOE to keep and use some ofits profits after paying cermin rights and dutes traditionally associated with own- taxes, without defining the property rights with regard to ership have been assumed by entrenched srake- the physical investments (e.g., medical and housing facil- ties) made by the coliective with such fiunds. holders with competing interests-namely, 9 Theefforttoenumerateobjectsofownershipanddifflmnt managers, workers, local government authorities, forms ofownership in a single, positive list is one ofsuch ministries, and industrial associations-none of legislativetraits. 8 Privatikation in the Republics afthe Former Soviet Union for state property. In connection with state owner- Many FSU Republics are attempting to trans- ship of property, most FSU Republics formally form SOEs into some form of readily recognized designated their supreme legislative body to repre- company organization." This, of course, requires sent the state and to dispose of such property on the creation of company laws that govern the behalf of the state. For instance, Article 32 in the relations between the state as the shareholder, en- Law on Property of Ukraine provides that "The terprise managements and workers. While nearly subject of the right to state (Republic) property is all FSU Republics have specific laws regarding the state, in the form of the UkSSR Supreme joint-stock companies, final legislation on other Soviet.' In Russia, on the other hand, Article 20 of types of business organizations is lagging behind in the Law on Propetydeclares that "State property is many.'5 Some Republics, such as Estonia, do not the property of the people." Taken alone, this appear to have sufftcient legal mechanisms in place Russian provision does not make it dear whether to ensure the accountability ofenterprise managers the legislative branch is authorized to dispose of to boards ofdirectors representing the state's share- state property on behalf of "the people." This holder interest. Others may, under the slogan of authorization can only be inferred based on the "denationalization,"7 risk having corporatization constitutionalityofthelaterLawonPnvatizaionof confused for or misinterpreted as sanctioning fur- Stte andMunicpalEnterprises, in which the legis- ther self-management.'8 This legal dimension is lature provides for the goals and methods of trans- ferring assets under state ownership.'l " Similarly, Kyrghyzstan failed to address explicitly who represents the statewith respectto s.ateproperty in its Law Eerise Maagement Syem eOnwnersbhp. Some of then operated as seW-managed, self-financing ,, broac, dwlamtion of who owns state prop- units, with rights to net income and attenuated ties to the The broad declaration of whoowns s tate prop- centralgovernment. Seee.g Z. Begetic and Michael Conte, erty, however, does not solve the issue of "how" World Bank Internal Discussion Paper (Europe and Cen- these assets are managed. The exact definition of tral Asia Region), December 1992. the corporate form lays the foundation for creating 12 See the eal System, sara note 4 at 147. a formal process through which the state as the 0 See, for instance, art. 5 of the Belarus Law on Enepnises. owner can delineate its rights and duties against 14 lingeringdoubtabouttheownershipattributesofthenew prvate sector may underlie -~me ofthe post-privatization competing stake-holders. Enterprises in planned restrictions and conditions discussed below. economies do not operate in forms characteristic of 15 In several Republics (e.g., Kyrghyzstan), such transforma- market economies (such as joint stock or limited ton often has meant corporatization-cum-privatization, liability companies).'I Moreover, the final years of where labor collectives acquire a mJority of shares. the perestroika system created new forms of opera- "6 In those Republicssuchas KazakhstanandUkrainewhere tion induding cooperatives, spin-off firms, and such legislation exists, it tends to recognize company and partnership types based on pr-revolutionary Russian and employee leases, that became increasingly indepen- continentad models. TheLegal System, supranote4at 120- dent from central administration. 21. In a majority of FSU Republics, the organiza- 17 This is a poorly defined but often used phrase, connoting tional status of a state-owned enterprise remains some transfer of ownership short of tide conveyance. It confuing. It is uncertain, for instance, whether an appearsinprivatizationlegislationinArmenia,Azerbaijan, Kazakhstan, Kyrghyzstan, Tajikistan, Turkmenistan, and SOE is a form of joint-stock or limnited liability Uzbeistan. In Uzbekistan, for instance, many large enter- company owned by the state or a distinct categoiy prises have been transformed into closed joint stock com- with its own unique characteristics.'2 Although an panies under the control of the 'Associations," which SOE is typically declared to be a juridical person, appear to have replaced traditional line ministries in some ofienitisnottheowneroftheassetsthatitpossesses cases and enjoy a certan autonomy from the central oraenata bot isinstheadn iventhe assetstthafipossesse government as quasi-commercial entities. See the or creates, but is instead given the right of "posses- UbesanoutyPfi. X . , ~~~~~~~Uzbekistan Country Ptofile. sion, use and disposal" over them by the state'3_ 1C Even in some Eastern European countries such as Hun- i.e. the SOE is given so-called "full economic gary, these sorts of legal reforms have been subject to the jurisdiction" short of complete tide. Such a legally criticism that they failed to unambiguously establish the inconsistent posture can create uncertainty about ownership rights of either the state or of natural persons whether new private buyers ofthe assets of an SOE maagremesngpawrS ofentrp undlndightsofself management. See F. Dhanji and B. Milanovic, Privatiza- enjoy fill ownership rights in light of possible don in Eas*rn and ntrdEarope,World Bank Working residual ownership claims by the state. '4 Paper Series No. 770, September, 1991. Privat&asion in the Republics of the Former Soviet Union 9 closely linked to the actual practice of corporate the rights of former owners via "restitutiont" pro- governance in the FSU. Active state monitoring of grams, in contrast with the other Republics where enterprise assets through improved accounting and such rights are largely unrecognized.23 As a matter auditing mechanisms is crucial in preventing asset- of law, restitution has precedence over privatization stripping or spin-offs from occurring.'9 in Estonia, Latvia, and LithuaniaJ4 The scope of Finally, one ofthe most interesting attributes of their restitution programs and the pace of imple- state ownership ofenterprises in the FSU is that the mentation have not been uniform. The objects of value of land (and sometimes buildings20) is typi- restitution have ranged from all forns of property cal}y excluded from the sale price of an SOE di- (Estonia) to land and buildings only (Lithuania). vested through auction or tender. Unlike market The process of defining the subjects of restitu- economies, in the FSU the plot of land on which an don-in other words, who is entided to have their enterprise is located is not part of that enterprise's propertyrights restored-has been plagued byciti- fixed assets.2' Ownership of land either by natural zenship and residency issues,25 with Latvia suffer- or juridical persons continues to face various re- ing the most controversy due to its demographic strictions on use and transferability.22 In connec- composition.26 tion with enterprise privatization, land is appraised Although most filing deadlines (which varied separately. It is leased (or sold in certain cases in depending on the nature of property at issue) Russia) to the owner of a privatized enterprise expired in 1992, claim-processing has been slow through a potentially cumbersome and uncertain due to patchy and undear legal rules. With regard process of negotiation with or valuation by local to real property, in particular, heavy reliance on governmentofficialswho are typicallyleftincharge restitution in-kind has led to confrontations be- of administratng real property. In the retail or tweenfornerownersandcurrentoccupiers.Calcu- service sector, the location of an enterprise may be the most important asset that the state can offer. The value of the relevant land would be enhanced ifit could be treated as a standard enterprise assetin 1 The Republics are faiunar with onlythe taditional Soviet the form ofa fixed long-termaleasehold orafreehold aaccountirg sysm, which dieges significantly fiom ac- cepted itrnational accountingstandards. Naturally, this interest. has frequently led to acute valuation problems, often paralyzing the implementaton process. In addition, inde- Boundies ofStae Onnœs pendemt auditing as commonly understood in a market economy never existed in the Soviet system, since there Even when dejurestate ownership is established, were no shareholders and every creditor was an SOE. the boundaries of state ownership remain blurred m See eg& the Estonia and Lithuania Country Profiles. unless competingclairns of ownership bynon-state Under the Soviet system, an entprise receved its fixed assets free of charge from the state and recorded them as bodies, such as labor collectives and formerowners, liabilides in the "contributed capitalr account are effectively resolved. A number of FSU Repub- 2 In some countries such as Kazalkhstan, land remains the lics, such as Armenia, Azerbaijan, Turkmenistan, exclusivepropertyofthestate Inotherswheresomepnvate Ukraine, and Uzbekistan, have not been consistent ownership rights are recognized, there are severe restric- in resolving ownership-related claims from labor tons on use and transferability. In Russia, fir instance, privately owned land can be sold firely only ifit is used for collectives. These Republics recognize explicit or private housing construction or subsidiay farming. implicit veto-type rights of the labor collective over 13 InGeorgia,however,somerestitutionrightsmayberecog- the proposed privatization plan oftheir enterprise. nized on a case-by-case basis in connection with land This recognition of rights in property disposition privatization. See the Georgia Country Profile fr more undermines the state's legal ability to transfer clear X This is based on the Rnman law principle of "defective tide to buyers other than the labor collective. Such tide (good-faithpurchasersdonotprevailovertheoriginal a presumption in favor of workers' ownership of owners). exisng SOEs should not be confused with an 25 InlightofthecontinuingethnicreselementintheFSU, employee prefrence policy which seeks to create theseissuesareimportantintheprivadzadonprocess,since worker ownership in thefitzreby ranserring state all the Republics regulate the nationality of the buyer of stare-ownedases ownership. 26 A majority of the aurent population conssts of immi- In the Baltic states, the external boundaries of grants from other parts of the FSU who arived in Ltvia state ownership systematically take into account afier the end ofWorld War II. 10 Privat&ation in theRpublis of the Fo,mer Soviet Union lating "just compensation" when in-kind restora- main Program (in part 2.4) and normative acts by tion of property is not feasible involves similarly a central government agency, all ofwhich are legally complex issues concerning valuation, especally in binding on different levels of government. With the event ofextensive modifications to the original regard to small-scale privatizations, the relative property. Each country, however, is committed regulatory void left by the center has allowed local to-and proceeding with-privatization despite governments wide-ranging discretion. Conse- lingering uncertainty.27 Lithuania has been able to quendy, the speed of implementation of small make the most rapid progress toward privatization privatization has varied gready across the Russian sofarbygettingaheadstartonresolvingcitizenship Federation, depending on local attitudes and ca- disputes and by proceeding with the development pacities. of the legal infrastructure for privatization.28 In much smaller countries, it is easier to provide for organic and functional oversight from the cen- Dee,traliztion of State Ownersb* ter. In lithuania, for instance, the local privatiza- tion agency is appointed by the national The internal boundaries of state ownership in govemment-through recommendations of the connection with distributing state property across local soviets-and may include a representative of different levels of govemment play an important the central privatization agency. While the local role in the privatization process. Each FSU Repub- agency is expected to comply with the decisions lic has faced the issue ofdeciding which property is from the center, it is authorized to prepare and owned by which state authorities (federal, republi- implement its own privatization program on the can or municipal). Depending on the size of the basis of objects selected in coordination with the country, there can be as many as 8 different kinds central agency. The basic privatizauon law recog- of state-owned property as is the case in Russia.2 nizes two distinct spheres of jurisdiction and pro- The formal demarcation of state property can be vides each with certain powers of disposition over time-consuming, involving such controversial de- individual SOEs.3 cisions as how to share political influence and Several FSU Republics have not yet formally privatization proceeds.30 Several FSU Republics, provided for such oversight by the center. Loosely- induding Armenia, Azerbaijan and Ukraine, have drafted authorizations for local privatization pro- not yet adequately resolved this issue. grams, coupled with declarations that decisions by In most Republics, a certain degree of decen- the center are binding on all levels of government, tralization state ownership seems inevitable, par- invite jurisdictional conflicts. In such cases, it is ticularly with regard to enterprises that are small in important to specily the scope and process of scale and local in nature. The typical pattern for central supervision with regard to local state prop- small enterprises has been ownership and privatiza- erty in detail. This obviously is not an easy task. tion by local authorities, as is the case in Estonia, Kazakhst, for instance, has recently dismantled Latvia, Lithuania, Russia. and Uzbekistan. The land and housing sectors have been subject to similar local control. This means that, in theory, 2' ForinstanceEstoniaandLatviaareconsidenngtheuseof cultural and dwelling facilities that were built for some voucher scheme to sausfy unresolved restituton employees atnd that appear on the balance sheets of dainis. I The 1989 Lthuanianlawonctizenshipwasoneofthefirst large SOEs can be privatized on the basis of dec- to be passed in the FSU, with the legislative process for sion-making by local authorities, even though these privatization beginning a year and balf earlhr an Latvia SOEs are owned by the central government and and Estonia. themselves not subject to privatization. 19 Namely,fderalpropert,republicanpropery,propertyof Some legislative control by the center is neces- akrai,propnyofanoblat,propertyofautonomousoblast order to regulate the exercLe of ownership or okrug, propertyofthe cities ofMoscow and St. Peters- saryin m orar to egtuae tn ezoecoe o owneshlpburg, and other municipal property. rights by the region or municipality and to ensure 30 Most FSU countries prvide that proceeds fromn privauza- a unified privatization policy. In a country as large tion will be allocated to diflizent levels of governnent as Russia, complex constitutional and federation Local govemments can keep a substantal portion of the norms protect the autonomy of non-federal levels pmceedsreceivedfrompranglocally-ownedpropeny, raqngg from 30% (Uituania) to 50% (Kazakhstan). of government with respect to the disposition of aSt gesom3ude the t nitot0% (Knedcos.n o their property. Privatization policy coordination compel SOEs to purchase some stare capital, and to sdl has been sought through restrictions set out in the enterpriseshates. Prvatization in the Republics of the Former Soviet Union 11 its former dual administrative structure, rather sdll remain at an early stage of finalizing these pro- than seeking to strike a precarious balance between grams. In Republics other than Russia and Lithuania, national and local authorities. It now has a single various gaps in subordinate legislation and imple- system of state agencies controlled by the center menting regulations related to mass privatization re- with the purpose of privatizing both national and main that they will need to be completed before local state property. serious large-scale implementation can get under way. Post-Privatizwtion Role ofthe Swate The legal framework for privatization in each of the Republics of the FSU consists of a complex In the process of privatizing SOEs, post-sale series of legislative documents adopted by various conditions of some duration-which are either public institutions. At the top ofthe legal hierarchy statutorily imposed at auctions or contractually ofnormsareenactmentsbythehighestlaw-making binding in competitive tenders-can be found in authority in each Republic-known as the Con- each FSU Republic. These can range from mini- gress of People's deputies, Supreme Soviet, or Par- mum employment rates (e.g., Armenia) and busi- liament-in the form of laws (zakon). Presidential ness profile maintenance (e.g., Azerbaijan and edicts (ukaz) are traditionally accorded a subordi- Uzbekistan), to more general investment require- nate status, although in some Republics, the prin- ments. 'With regard to housing or land stock, cipleofseparationofpowersmayhavecomplicated typical conditions take the form of more restrictive the issue somewhat. Note that in many Republics, imits on use and transferability for an extended such as Russia, the President may exercise certain period of time, suggesting that something le than emergency powers granted by the parliament, par- full ownership, as itis understood in market econo- ticularly in the area of economic reformn and priva- mies, was transferred in the first place. tization. The government (Council or Cabinet of While many of the post-privatization restric- Ministers) may also adopt decrees (postanovenie), tions found in the Republics ofthe FSU may stem usually less normative than the other two in con- from legitimate interests in regulating and promot- tent. Finally, lower agencies of government pro- ing economic activities, they tend to be broader in mulgate normative acts, or regulations, on the basis scope and less dearly defined than those typically of and in execution of a superior enactment.33 found elsewhere. There appears to be little or no Typically, at the core of such a framework is the elaboration on post-sale provisions such as intro- basic privatization law (zakon) passed by the parlia- ducing a regulatory framework that would permit ment. In such legislation, the overall objectives and more specificity and flexibility in enforcement. rules of privatization are stated.34 In the Baltic Even for tertns that are contractual in nature, it is states, basic laws on property reform list the broad unclear whether private parties can expect fair principles ofrestitution and privatization. Only in interpretation and application of contracts by the Lithuania has the parliament passed a comprehen- state. While most of these conditions may be valid sive privatization law which deals systematically in terms of existing norms of constitutional and with the enterprise sector, regardless offirm size. In property law, they pose the risk ofabusive interpre- Latvia and Estonia, a complex set of legislation tation and application by bureaucrats. In the ab- governs disparate privatization programs applying sence of impartial and experienced judicial systems or effectve alternative dispute resoluton mecha- `2 This sub-section does not include an analysis ofthe overa nisms in the FSU Republics, it might be difficult to legal inrastuctr necessasy for a market economy to curb unlawfil state encroachment on newly priva- operate, such as laws on contracs, bankruptcy, secured .,ed propertytransacuons,banking,ant-monopoly/compeitonaswdlI as the judicial/alternative dispute resolution mechanisms. 33 Inpracce, however,thesesubordinateenactnents,which LEGAL FRAME WORAiP2 often are not published, can subvert the meaning of the superior legislation which frequently fails to provnde suffi- While most FSU Republics have a similar ap- dent detail. Seethe Leg4 Spte, supranote4 at 80-81. proach to building the legal framework for privatI- ' This parliamentary authorizaon is necessary, gnven that vroahtbui earfinsagesr fo o plti. state ownerslup is identified with the supreme lgislaiuve zation, they are at varygbody of the s as discussed in the preceding section. It Each Republic has a very basic form of enabling is possible, howev, that under a different sa ofconstitu- legislation in place, however. While most have uonal nons, prvatizaon may occurwithout recourse to adopted these overall privatization programs, a few the legislative branch. 12 Privatization in the Republics of the Former Soviet Union to certain small and large enterprises. In all the Republics, (such as Armenia, Azerbaijan, Belarus, other Republics, the basic privatization legislation and Turkmenistan), these Programs are sdill being applies to the commercial and industrial sector in prepared orate awaitingfinal approval. InMoldova, general.3 The privatization of land and housing is while the basic privatization law was adopted in typically governed by separate laws. 6Usually ex- July 1991, the Privatization Program went into duded from the objects ofbasic privatization legis- effect only in March 1993. In Kyrghyzstan, the lation are enterprises or facilities related to defense/ Program for the current period was suspended in security concems and cultural/historical heritage.37 late 1992, when the new "Concept Note on Priva- Overall similarities in the basic legal approach tization" was adopted to reflect a major policy shift suggest that most FSU Republics have been quite in that Republic.45 susceptible to the transference ofprivatization norms Pursuant to these Programs or other such policy across national boundaries. statements, the subordinate or related legislative While basic privatization legislation can now be documents are required in order to enable the state found in each Republic, the timing of enactment to launch the implementation process according to varies across the FSU. Except in Azerbaijan and Belarus, where such laws were finally adopted in Bearuarys19, w the legislation took place either in In Ukraine, however, a separate (though substantially January 1993, th enationts hae either a similar) law on privatization governs small state-owned 1991 or 1992. Such enactments have established a enterprises in addition to the basic legislation. more permanent basis for a legal framework than is '6 In Kazakhstan and Moldova, however, basic privatization possible under Presidential edicts.38 However, ba- laws also apply to the housing stock. sic privatization laws have never been sufficient to 3 In the Privatization Programs, as will be discussed below, start the privatization process by themselves, a more detailed list of excluded activities and different As the most basic form of enabling legislation, categories thereof can be found. In Armenia and Belarus, for instance, the basic privatiza- each ofthese privatization laws authorizes the peri- tion laws appear to have replaced the earlier provisional odic preparation ofthe Privatization Programs and Presidential edicts regarding the privatization of certain the establishment of state agencies responsible for categories of the enterprise sector. See e.g. the respective implementing them.39 Usually short in length and CountryProfiles. declamatory in style, with many references to other 39 The Uzbekistan legislation deviates somewhat from this pattern. No such master Privatization Program for the laws that are often still pending, none of these laws entire enterprise sector is called for, and industry-wide is of sufficient detail to be self-implementing. privatization programs have been since developed. As for Moreover, depending on the specific method of the main privatizatdon agency, it was established under a privatization identified, companion legislation on subsequent Presidental edict. Seethe Uzbeldsan Country such important issues as voucher distribution and Profile. transformation of SOEs into joint-stock compa- 40 In Belarus, forinstance, thefailureofthelegislativebranch so far to pan a law on vouchers subsequent to the enact- nies may be necessary in order to enable the priva- ment of the basic privatization law (anuary 1993) has tization process to begin. These companion laws meant that there is sdll no legal mechanism which will frequently take much longer to materialize, thus initiate the implementation of the privatization process. effectivelydelayingtheoperationofthebasicpriva- "1 In the case of Armenia, the Privatization Program must tizaion law.40 present detailed information; for instance, artide 5 of the basic privatization law requires 'the preferable forms of TIhe Privatization Programs called for in the privatizationand denationalizationaccordingtospheresof basic privatization legislation share the following function and individual enterprises' to be defined in the purposes: to identify the methods ofprivatization41 Program. and to produce the list of targets and priorities, as 42 In most cases, the Programs differentiate between those well as the list of excluded categories,4 during a enterprises that will not be privatized (usually, natural given period of time, typically one to two years.43 monopolies) and those that require spedal governnent approval or ministerial consent on a case-by-case basis The Programs serve as the basic blueprint for the (such as energy and transportation industries). course of future implementation,4 requiring peri- 43 InRussia,forinstance,the 1992 PrivatizationProgramwill odic dearance by both the legislative and executive be replaced with the i993 Program, a draft of which is branches of che state before taking effect. This currendy waiting for parliamentary approval. process is inevitably time-consuming both at the i They may also contain certain amendments to the basic privatization laws (e.g., Russia) or even in some cases, preparatory and approval stages, often aggravated principles or dividing state propertyaaoss different levels by the lack of political consensus across different of government in some cases (e.g., Azerbaijan). branches of government. In a number of FSU 4 SeetheKy tyzsanCountryProfileformoreinrformation. Privatization in the Republics of the Former Soviet Union 13 the methods identified - e.g., auction, tender, jority of FSU Republics have been contemplating liquidation, a mass privatization (with related pro- mass privatization for some time, only in Russia visions on voucher distribution and exchange and Lithuania have detailed government dectees or mechanisms). Depending on constitutional norms regulations emerged early enough to permit rapid regarding the separation of powers in the FSU implementation as of March 1993.47The Russiar. Republics, some of these issues may require enact- experience suggests, however, that it is not neces- ments by the legislative body in the form of laws sary to adopt all the necessary details connected (zakon). A few Republics such as Russia have been with mass privatization in advance, so long as there able to bypass the lengthy deliberation usually is a serious commitmnent to closing the gaps at each associated with such process by issuing government stage of the implementation process-induding decrees or presidential edicts. Regulations drafted corporatization, voucher distribution, and exchange by privatization agencies have also played a crucial for shares.48 role in the implementation process (e.g., Russia). The status ofthe core legal framework for priva- These regulations are often quite detailed and spe- tization in each Republic is summarized in Box 3- cific, resembling instructions more than rules, and 1. It should be stressed that this summary reflects reflecting the legacy of the old Soviet system. In each FSU Republic, the overall amount of nlegisladve work repubi,ed he forarrg aoutnthe priva- 11 In Lithuania, for instance, over 200 pieces of subordinate legislative work required for carrying out the prva- legislation relate to privatization and restitution. tiation process appears to be overwhelming. Most 47 In Russia, within a few months of the official adoption of FSU Republics do not appear to have adequate thePrivazationProgminthesunnnerofl992,itsmain technical capacity for the task, and external assis- pdvatzaaton agency began introducing numerous regula- tance on this front has been available or is currently tionstotransform SOEsintojoint-stockcompaniesandto being designed for many Republics. Those Repub- issue privatization vouchers under the authority of Presi- =. . w. s r. ss ........................ sdent Yeltsin's decrees. fics with a higher degree of internal pofitical con- detYls,sdces lf In other words, in the interest of speed, some uncertainty sensus have been able to introduce necessary inthemassprivatizationprogramcanbetolerated,solong legislation more rapidly than others. While a ma- as it does not lead to a loss of overall public support Box 3-1 BasicPdvatlzatton Pdvatlzalon Subordate Country Enactment(Dabt) Prgrm LeWsatIon Armenia Presidential decree on small enterprises. (6.91) Privatization Program No infornation Law on Privatization & Denationalization. awaiting parliamentary available. (7.92) approvaL Azerbaijan Presidential decree on commerciaLizing retail Privatization Program No information trade organizations and public kitchens. (8.92) under discussion. available. Law on Denationalization and Privatization. (1.93) Belarus 1991 Provisional decree on privatization. Prvatization Program to No information (suspended, 10.92) be prepared in the available. Law on Privatization. (1.93) futur. Companion legislation on vouchers under discussion. Estonia Law on Privatization of State-Owned Sevice, Disparate privatization Various Cabinet Retail Trade & Public Catering Services. (12.90, programs for small SOEs Resolutions for amended for broader application 5.92) and selected large SOEs. implementation. Law on general principles of property reform, indcluding restitution. (6.91) Supreme Councd Resolution on privatization of selected large SOEs. (8.92) Comprehensive privatization enament for large SOEs pending. Conflnued next page 14 PWrvatization in the Rpublfis ofthe Former Soviet Union Box 3-1 (confinued) BascPivatlon Pdtvazoon Subodinate Counlry Enactmens (Date) Proams Legislaton Georgia Law on Privatization of State Enterprises. (8.91) 1992-93 State Various implementing Privatization Program. Government decrees. Details on mass privatization under discussion. Kazakhstan law on Denationalization & Privatization. 1991-92 and 1993-95 Various implementing (6.91) Privatization Programs. Presidential decrees. Legislation on investment funds in connection Details on privatizadon with nmass privatization to be prepared. investmnent coupons under discussion. Kyrghyzstan Law on the General Principles of Desatization, 1992-93 State Various implementing Privatization & Entrepreneurship. (12.91) Denationalizadon and Government decrees. Law on the State Property Fund. (7.92) Privatization Program. Details on the mechanics Presidential decree on regional and municipal (suspended, 12.92) of voucher distribution property. (8.92) Concept of and auction under Denationalization & discussion. Privaiaion for 1993. (12.92) Latvia Law on the basic principles and objectives of Disparate privatization Line ministry regulations restitution and privadzation. (3.91) programs for small and on implementation. Law on privatizing municipally-owned trade, selected large SOEs. Details of the mass commetce, restaurants and service. (11.91) privatization program to Law on the preparation of a program for be prepared. privatizing medium tO large SOEs. (3.9;:) Law on Cerdficates. (11.92) Lithuania 1991 Law on Inital Privaiization of State General Privatization Over 200 pieces of Property, authorizing the sale of small and large Program of Uthuania. subordinate legislation SOEs for privadzadon vouchers. related to restitution and 1992 Law concerning employee priority to privatization. acquire shares of entities in pdvatiaton. (amnended, 2.93) Law on Privadzadion. (7.91) Molova Law on Privadzadon. (7.91) State Privadzation Implemendng regulation Program for 1992-94, to be prepared. adopted in March 1993. Russia Law on the Privatization of State and Municipal 1992 State Pdvatization Various privatization Enterprises. (7.91) Program. 1993 State agency regulations. Over 40 Presidential decrees, some of which Privatizadon Program More complete rules on relate to commercializadon (7.92), voucher awaiting parliamentary the transfer of shares distribution (8.92), and sale of shares. (10.92) approval. currendy being drafted. Legislation on cstodial and trnsfer arrangemnents for a nadonal bid center expected soon. Tajilistaft Law on Denationalizadon and Pdvaiadon of No information No information Property. (2.91) available. available. Presidential dece on Organization of Work for Denationalizadon and Privatization (4.91) Turkmenistan Law on Destatizadon and Privatization of Prvatzation Program No informaton Property. (2.92) awaiting parliamentary available. approvaL Continued next page Privatization in the Republics of the Former Soviet Union 15 Box 3-1 (continuecd Baic Pdvatlzalton Privottbafn Subordinate Country Enactments(Date) Programs Legislation Ukraine Laws on the privatization of small and other 1992 State Privatization Various privatization state enterprises. (3.92) Program. agency Orders. Mass Law on Privatization Certificates. (3.92) privatization details and investment funds under discussion. UzbeWkistan Law on Destidzadon and Privatization. (11.91) Industry-wide Various implementing privatization programs regulations. only those major pieces of legislation that are tion transactions as a representative of the state.50 publiclyavailable. There isalargesetofcompanion Latviaappears to be exceptional in its heavyreliance and subordinate legislation and regulation about on the existingline ministries: theyare permitted to which little is known on a systematic basis. The participate in the policy formulation process and consolidation and dissemination of such legislative are entrusted to implement privatization policies in documents need t', receive priority attention in specific sectors of the economy. This structure many FSU Republics. appears to have led to much confusion and delays in implementation. In the case of Estonia, two iNS TU7TIONAL FRAMEWORK'9 special government agencies carry out the privatiza- tion programs for small and large enterprises, but The institutional firamework for privatization in overall strategic guidance and policy formulation- the FSU exhibits a general tendency towards con- distinctfrom implementation and monitoringfunc- solidatingtherolesofthepolicyformulatorandthe tions-occur largely at Cabinet level. Box 3-2 legal seller in one specialized agency. Each Repub- provides a brief oudine of the institutional frame- lic, however, differs somewhat in terms of how the work in each of the 15 Republics. offcial sttusofaprivatizationagencyisdefined,what roles traditional line ministries play, and who can 49 Thissubsectiondoesnotdealith theinternlboundaris partcipaw min the selection and approval prooess. of nadonal versus local ownerslip and the related insdtu- tional arrangements discussed earlier. Nearly al the Repubics of,the FSU have , In a small number ofcases involving very large or strategi- y , ... . cally sensitive enterprises, consultation with other special to centralize the privatization process by establish- govment minisrries(e.g., anti-monopolv) onacase-by- ing a specialized privatization agency or agencies to case basisistypicallyrequired before decidingwhether and provide strategic guidance and carry out privatiza- how to privaize. Box 3-2 Country Major Institutons Status Armenia (1) Special Joint Privatization Commission, (1) Consists of members from responsible for strategic guidance and both the executive and legislative implementation supervision. branches. (2) State Board for Privatization (ak.a. (2) Part of the executive branch. Administation for privatization and disposal of state property), representing the state as the legal seller. Azerbaijan (1) State Property Committee, authorized to own (1) Reports to the President. and manage state property as well as to develop and implement the Privatization Progmm. Belarus (1) Committee of State Property, responsible for (1) Part of the executive branch. designing and managing the privatization process. Contlnued next page 16 Privatiztion in the Republiks of the Former Soviet Union Box 3-2 (continued) Counthy Majorinsitutons status Belarus (1) Committee of State Property, responsible for (1) Part of the executive branch. designing and managing the privatization process. Estonia (1) Department of State Property, primarily for (1) Reports to the Cabinet. carrying out small privatization. (2) Reports to the Cabinet. (2) Estonian Privatization Agency, responsible for (3) Reports to the Cabinet. selling off large SOEs. (3) Minister of Reform, coordinator of different privatization programs. Georgia (1) State Property Management Committee, (1) Part of the executive branch. authorized to draft the Privatization Program and serve as the legal seller of SOEs. Kazakhasmn (1) State Property Committee, authorized to act as (1) Part of the Council of the main policy-maker and legal seller. Ministers, chaired by a Deputy Prime Minister. Kyrghyzstan (1) State Property Fund, delegated to assume the (;) Reports to the Supremne Soviet ownership interest of state property and responsible for managing the privatization process. Latvia (1) Line ministries, responsible for selecting and (1) Traditional government arm. privatizing SOEs under their supervision. (2) Traditional government arm. (2) Ministty of Economic Reform, intended for policy coordination. Lithuania (1) Central Privatization Committee, responsible (1) Chaired by the Deputy Prime for developing the national privatization program Minister in charge of and coordinating the overall privadzation process. privtization. Moldova (1) State Property Fund, responsible for overseeing (1) Reports to parLiament. the overall privatization process. Russia (1) State Comnmittee for the Management of State (I) Part of the executive branch, Property, responsible for conceiving and managing headed by a Deputy Prime the privatization process. Minister. (2) Property Funds, authorized to assume the (2) Part of the legislative branch. functions of the owner and seller of state property. Tajikistan (1) Conmmittee for Administradon of State (1) Part of the executive branch. Property, responsible for preparing a program for prvaization in cooperation with other mtinistries. Turkmenistm (1) Ministry of State Property and Business (1) Reports to the President. Support, responsible for drafidng the Privatization Progamm and implementation. Ukraine (1) State Property Fund, authorized to draft the (1) Accountable to the parliament. Privaizadon Program and manage the implementation process. Uzbekan (1) Committee for State Property Management (1) Created by the President, and Privatization. resoonsible for overseeing the reDorts to the Cabinet. Privatization in the Republics of the Former Soviet Union 17 Typically, specialized privatization agencies form example, have recently consolidated their institu- a part of the executive branch. Relatively few Re- tional structures, veering away from the Russian publics (Kyrghyzstan, Moldova and Ukraine) have approach.56 Even in Russia, the local counterparts chosen to have theirprivatization agencies report to of the GKI and the regional Property Fund have the legislative branch. Armenia, on the other hand, often operated together as one agency, defacto. has struck a compromise by establishing a joint Management Oversight: Even when policy for- commission representing both branches, while in mulation and privatization authorities are consoli- Russia both branches are represented through two dated in one specialized privatization agency, such agencies intended for different roles (but ovTrlap- an agency may have an uneasy relationship with ping as discussed below). Kazakhstan has recently traditional management oversight bodies-such as integrated its formerly independent privatization line ministries-that used to (or still continue to) agency into the Council of Ministers, thus adopt- derive a portion of their budget from enterprises ing the executive branch approach. It is not easy to under their supervision. In Ukraine, for instance, weigh the relative advantages and disadvantages of the privatization agency is forbidden from interfer- each structure, because both of these branches of ing in the general business operations ofSOEs. It is the state playan important role in building the legal not specified at what stage of the implementation framework for privatization as discussed above. process that enterprises are bound by the agency's Neitherbranchcanindependendycontrolthepriva- decisions related to or incidental to privatization. tization process completely by itself.15 So far, the Some FSU Republics, by contrast, appear to have implementation experiences of the three Republics conferred exclusive management powers, at least in with parliamentaryagenciesdonotrevealanypattern, law, on their privatization agencies (e.g.,Azerbaijan, suggesting that political landscapes and personalities Kyrghyzstan, Uzbekistan). unique to each Republic may be the dominant factor In light of the enormous size and complexity of in building an effective institutional framework.'2 the state enterprise sector in the FSU, privatization Legal Seller Small regionally-based enterprises agencies generally have delegated some manage- have typically been owned and transferred by local ment oversight during the privatization process. authorities in most Republics as previously dis- This delegation can be confusing when traditional cussed. Medium to large SOEs, on the other hand, line ministries have transformed their legal status to are privatized by the central privatization agency semi-private types of organizations, such as amal- which is responsible for both conceiving the overall gamations or associations."' In each FSU Republic, privatization process and representing the state as the legal seller in individual transactions. In Arme- 5 That is, in the absence of constitutional reform. nia and Russia, however, these two roles are split However, the institutional capacity of a parliamentary agency to monitor multitudes of transactions scattered all between the Spedal Joint Privatization Commis- over the country may be questioned. sion and the State Board for Privatization; and the 5' For instance, the power and prerequisites accruing to the State Committee (GKI) and the Property Funds, holder/seller of state assets prior to divestiture may be respectively. The basicprivatizationlawin Moldova, greater than any budgetary rewards expected from privai- on the other hand, authorizes the State Property zationproceeds. Fund to assume responsibility for policy formnula- 54 In Russia, insdttituonalatbiguity does not appear to have been a significant botdeneck in the ongoing mass privati- tion and implementation without explicidy desig- zationprogram;however,therecanbeisolatedincidentsof natingitor anyother agencyas the holder and seller conflict, as illustrated in the case of ChelyabinskOblast, of shares in SOEs. wherethelocalPropertyFundattemptedtoabortavoucher The division of institutional authority has not auction by putting up only 4 SOEs for sale, instead of 27 been accompanied so far by dear rules on the authorized by the MKI, the GKI's local counterparm been accompanied so far by clearrulesonthe In Uzbeistan, howeve, a new state entity (outside of the boundaries between multiple agencies with poten- main privatization agency) entrustedwithholdinggovern- tiallydifferent economic incentives.53 This can lead mentshares in corporatized SOEs appears to haverecently to some delay in the implementation process when emerged. It is too early to tell what kind ofchange, ifat all, these agencies belong to different branches of gov- this will bring in the institutional framework for privatiza- ernment that have achieved a less-than-solid politi- uon. The whole arrangement may well have been aimed at cal consensus."4 Overall, institutional structure in inpre"ing technical trust functions without making any impact on the existing structure the FSU seem to be on an evolutionary track 5 Uktrainehasfavoredtheparliamentarybranchinthepo- towards single agencies acting as both policy execu- cess while Georgia has selected the executive. tors and legal sellers." Ukraine and Georgia, for "7 See e.g. the Uzbekistan Countty Profile. 18 Privatiztion in the Republics of the Former Soviet Union the decisions reached by the privatization agency to Estonia and Lithuania). In most FSU Republics, implement specific privatization transactions are however, these measures are undertak-en by an declared in law to be binding on ministries and enterprise-level, ad-hoc committee representing othersuchmanagementoversightbodies.'8Whether various parties with widely diverging interests, such such declarations are translated into effective coop- as the central and local privatization authorities, eration among the different govemmental bodies enterprise workers, and bankers. In Ukraine, such concerned is ultimately a political issue. commnittees include potential outsider buyers who AgencyPower:Generally,theprivatizationagen- filed the initial privatization application. In most cies entrusted to supervise the overall privatization cases, detailed regulation on how this committee process appear to enjoy fairly high political status. should operate is missing. In Lithuania and Russia, for instance, the heads of privatization agencies enjoy the rank of Deputy EMPLOYEEOWNERSHIP Prime Minister. However, most agencies do not seem to have adequate staffing and financial re- Each FSU Republic has provided for an em- sources allocated for their task. Needless to say, the ployee preference scheme. These schemes create an mobilization ofboth political and financial support opportunity for employees of an enterprise to ac- behind these agencies is important since they typi- quire ownership interests on advantageous terms, cally play a major role in drafting the Privatization whether in the form of enterprise shares, purchases Programs. Moreover, they are endowed with sub- of physical assets, or a 100% buy-out. While the stantive role-making authorities on such issues as exact scope of employee preferences differs from valuation and sale documentation. Concomitant country to country, the overall financial incentives with the scope of their powers, legislative mecha- provided through price discounts or financing ar- nisms to prevent bureaucratic abuse are also neces- rangements have been much more substantial than sary. In most Republics, detailed rules on the those granted outside the transition economies. composition, operating procedures, conflicts of interest, and dispute resolution mechanisms (in- An employee preference scheme gives the em- dluding an appeal process) of these privatization ployees ofan enterprise as individuals or a group- agencies have not yet been adequately legislated. including qualified fortner workers-an opporunity Selection and Approval: Individual privatiza- toacquiresomeownershipinterestintheirenterprise uon transactions which take place pursuant to the on terms more fivorable than are generally appli- programs discussed above maybe initiated in prin- cable.59 Box 3-3 summarizes the major employee ciple by various government bodies (top-down preference schemes adopted by each Republic. It approach) or enterprise employees and other pro- suggests astrongpro-worker sentiment in the FSU. spective private buyers, subject to approval by Management entitlement, on the other hand, ap- appropriate privatization agencies (bottom-up ap- pears to be somewhat limitet in scope-at least in proach). Typically, privatization agencies publish law. Nonetheless, in cases where managers may standard forms of application for interested appli- purchase shares in corporatized SOEs on a prefer- cant buyers seeking agency approval, thus enhanc- ential basis, such as in Russia, where they are ing the transparency of the selection process. Most entided to purchase up to 5% of the total number FSU Republics have also legislated basic criteria for of shares at book value, their individual benefits can application evaluation, seeking to limit discretion- be quite substantial given their smatl number. arygrounds for rejection. The review and decision- Moreover, they may derive indirect and informal makingprocess is firthersubject to fixed deadlines. benefits from their cose relationship with the labor Once approved for privatization, the enterprise collective in buy-out transactions where financial needs to be prepared for the transaction. In the case incentves are often much greater, as discussed below. of medium to large enterprises, this often entails 5s Ne,dhttheseeititimayhvetbeconsltedprorto corporatization, an important transformation pro- sdecting certain SOEs for privatization in somne cases (e.g., cess typically supervised by central privatization Georia). authorities when it is carried out en masse. Other " Thissectiondoess'tdiscussothertypesoffinandalrewards preparatory measures such as inventory valuation for which employees are digible. In a number ofcounties preparatory ~~~~~~~~~~(e.g.,ArminiaandRussia,whenanenrerprise(orsomeofits and the drfting of sales documents may be del- sgAmu saanouwheuaseut4e mploymmay egated to relevant line ministries (as in Armenia) or qualiFy for a porton of proceeds. In Russa, for instance, specialized governmental bodies (as in the case of employees areentided to 30% ofthe liquidation proceeds. Privatiwtion in the Repubics of the Former Soviet Union 19 Box 3-3 Country Employee Preferences Armenia (1) Labor collectives awarded up to 50% discount. (2) Installment payments available for individual workers. Azerbaijan (1) Labor collecri' s permitted free use of certain objects of industrial and social value. (2) Sale of shares and other assets on an installment basis, with concessions worth up to 30% of the value (additional 10% if some post-sale conditions are met), with certain net profits used for financing. Belarus (1) Implicit preference to worker buy-outs. Estonia (1) Workers as preferred buyers in the first phase of small-scale enterprise asset dispositions (but reduced preference in later auctions in the current phase of the program). (2) No price concessions in the sale of shares of corporatized SOEs. Georgia (1) Shares sold to employees at a discount not exceeding 20% of par value within 2 years from the registration of a corporatized SOE (lock-in during this period). (2) An association representing a majority of tde workforce eligible to participate in auction or competitive bidding to buy the enterprise on a 2-year installment basis (the first payment must be at least 50% of the total price). Kazalkhstan (1) Under the current Program, partnerships formed by more than 50% of employees entitled to 10% price discount in auction or tender of small-scale enterprises. (2) For medium to large SOEs that are corporatized, the labor collective entided to recive, free of charge, 10% of the total authorized capital subject to individual salary caps. Kyrghyzstan (1) Under the suspended Program, the labor collective (not individual members) given the right to buy 20% of shares of its enterprise at a 30% discount, in installment payments, plus free transfer of certair social infrastructure facDities. (2) Under the Concept Note on Pdvatization, the labor collective given an option to choose among 3 different modes of share allocation, with ownership interest ranging from 20% to 51%, with preferential terms limited to the use of privatization vouchers (up to 25%) plus other privileges (up to 10%). Latvia (1) Discounts available to workers in asset dispositions. Lithuania (1) Employees eligible to buy up to 50% of the total authorized capital of large SOEs (but only 30% may be voting shares) at preferential rates prior to the public subscription of shares. Moldova (1) Up to 20% of the shares of an enterprise sold to employees at a nominal value (likely to be much lower than the book value under the unique capitalizaton plan announced for mass-privatizaton). (2) Labor collecdve's buy-out offer preferred to those comparable from outside buyers. Russia (1) A menu of options given to employees of a corporatized SOE: a) receipt of gratis 25% of shares, subiect to individual salary caps, that are non-voting, plus a right to purchase 10% of voting shares at a 30% discount under a 3-year installment plan (while managers may buy up to 5% at book value); b) purchase of 51% the authorized capital at the price 170% of book value); or c) a work-out contract for 1-year for a right to purchase 20% of shares on favorable terms (applicable only to certain medium-sized SOEs). (2) 30% discount and 1-year installment plan for employee buyers in privatizations of non-corporadzed enterprdses through competition or at auction. Tajikistan (I) Active participation by labor cellectives, who have the first priority to select among the possible modes of ownership transfer (rarngig from leases to outright sales). Turkmenistan The draft Privatization Program contemplates that for (1) small retail units: a) shops with less than 5 workers given freely to employees, b) next class of small shops to be purchased by employees at a residual value; and for (2) latger shops and corporatized medium to large SOEs: employees eligible for up to 25% of the total nunber of shares at a discount, with the rest divided among managers (5%), suppliers (10%) and the state (60%). Conllnued next page 20 Privatization in the Republics of the Former Soviet Utnion Box 3-3 (continued) Country Employee Preferences Ukraine (1) Under the current lease law, the labor collective as the lessee has been given the right to income earned and a 3-year period to decide on a buy-out while excluding any other potential buyers (this is likely to change in the future). (2) Buyers' associadion formed by not less than 50% of the workers given certain discounts to buy all or a part of their small-scale enterprise (at auctions, this association to be preferred, if all terms are equal). (3) For large corporatized SOEs, employees permitted to use their privatization certificates to buy shares at nominal value and to use cash (up to half of the value of their certificates) to buy addition.a stock at nominal value.. Uzbekistan (1) Worker buy-outs financed with bank credit and installment payments. (2) Very small units in catering, trade ard services to be given away to employees. The pervasive nature of employee preferences magnitude is closely related to capitalization and does not follow any particular sectoral characteris- valuation norms. tics, such as service-oriented operation or labor- Employee Buyers: When an enterprise is soldon intensive production, that suggest a specific anongoingbasisoritsassetsaredisposedof,employee economic design at work. The immediate strategic groups, rather than individual employees, tend to necessity of drawing employees into the privatiza- enjoy preferred buyer status. In buy-out transac- tion process appears to have prevailed. However, tions of going concerns where the state engages in there continues to be some lingering tension in one-on-one negotiations, the labor collective (fre- many of the FSU Republics in light of the uneven quendyled bymanagement) plays adominantrole, distributional impact of employee ownership. It as in the case of Armenia, Belarus, Kyrghyzstan, discriminates between enterprise employees and Tajikistan, and Uzbekistan. In other typesofdispo- the restofthe publicand stll further between those sitions, through auctions or competitive tender, working for profitable and unprofitable enterprises. preferential treatment is sometimes given to loosely Estonia, Kazakhstan, and Kyrghyzstan are moving organized associations formed by a majority ofthe in the direction of curtailing employee preferences work force (e.g., Georgia and Ukraine). Unlike in in the future. Lithuania, by contrast, has recently Russia, where qualified employees (consisting ofat increased the ownership stake employes can acquire least one-third of the payroll of an SOE) need to from 30o to 50%/ ofthetotalauthorized capital ofan establish themselves as apartnership or corporation enterprise. Most Republics appear to stlll be heatedly to bid, these associations do not appear to have a debating the merits of employee ownership.A0 well-defined legal status. Share Allocation: In cases where shares of an Overall, in addition to the possible use ofcertain enterortise are on sale-applicable mosdy to priva- residential enterprise funds (such as in Russia), the tizations of medium and large SOEs-the average financial incentives granted to various groups of stakeofemployee ownership (rangingfrom 10% to employee buyers can be quite generous. There are 51 %) is much greater dtan the corresponding fig- substantial price discounts reaching as high as 50% ures (5 to 10%) observed in the past in other types in some Republics with installment payments avail- of economies.6' This means that many medium able, along with free transfers of infrastructure and large enterprises in the FSU, at least initially facilities in some cases.6! Particularly in 100% buy- following privatization, will have a widely dis- Forin ciM 1993,somec vcmembusof persed shareholder base. Typically, in addition to the Russian l,gislat ue wre cal ifor assenatic buy-out initial free give-aways, which are subject to indi- option for management and workars, the so-called 'foutth vidual salary caps, as in the case of Kazakhstan and variant," to be induded in the 1993 Privatization Program. Russia, employees of such enterprises are encour- 61 See Barbara W. Lee, 'Should Ernployee Participation Be aged to buy and keep their shares in privatized PartofPrivatization?"World BankWorking PapersSeries enterprisesthtough acombination ofprice conces- No. 664, May 1991. enterprises through a This is supported bydte fact thatprivatization in mostFSU sions, financing arrangements, and lock-in mecha- Republics has been irnplemented primarily through the nisms. Since price concessions usually involve participation of employees and their labor collecdves, as discounts offsome nominal value of a share, their will be discussed later in Part IV. Privatization in the Republics of the Former Soviet Union 21 out transactions, magnitude of financial incentives co find the future direction of the privatization may be even more substantial due to the internal process too uncertain in many Republics. valuation process which is carried out free of com- petitive bidding. In negotiating specific terms, the Overall, FSU Republics impose fewer controls members of a collective can exercise monopolistic on the entry of foreign capital to establish joint bargaining power.63 In the FSU, the availability of ventures-either with SOEs or the emerging private other local potential buyers is limited by the lack of sector-or new enterprises than they do on foreign available financial resources. In some cases, the participation in privatization.This paperis concerned collective may even have an exclusive right to with examining the norms for regulating the latter. It presentaprivatization plan duringa given period of does not discuss how each Republic has addressed time as in Armenia. Worker buy-outs in connec- standardissuesconcerningforeigninvestment,suchas tion with leases may provide for still further incen- expropriation, foreign exchange controls, capital and tives, such as the use of enterprise income towards profit repatriation, and tax relief. As a point of refer- the purchase price as is seen in Ukraine. ence, however, it may be said at the outset that most Future Employee Ownership Interest: Em- FSURepublicsappeartohaveadoptedlawsonforeign ployee ownership structures of post-privatized en- investment which are liberal in substance, though terprises in the FSU are likely to change over time. detailed regulations, particularly in the area of As employee shares eventually become freely trans- currency control, are still pending in most cases.6 ferable, based on experiences in other countries, the Selling state-owned assets to foreign investors is share of actual employee ownership is likely to never entirely free of controversy because of con- decrease. This may take along time, however, since cerns that these assets, which represent decades of it will strongly depend on the development of a national savings and investment, will be given away stock exchange or an over-the-counter market.64 too cheaply to outsiders. Underlying this appre- The way in which the nature of collectively owned hension may be a general fear of foreign domina- enterprises will evolve is less clear, since the legal tion. Balancing these risks against the obvious entidements of individual members of such enter- advantages of foreign investment through privati- prises are not well defined, and collective owner- zation has not been easy in the FSU.67So far, actual ship interest is rare in market economies. In the participation by foreign investors has not been short run, however, employee/management cwn- substantial in the FSU. Yet no FSU Republic has ership can serve as avalid mode for privatization, to banned foreign participation outright. Rather, for- the extent that employees accept the risk of assum- eign investors are subject to certain systematic ing ownership and that financial ties to the state are conditions and rules of privatization that apply effectively severed, preventing post-privatization exdusively zo them, including possible application of bailouts. Particularly in the cases of weak or non- different institutional processes. OnlyafewRepub- viable enterprises which are sold intact instead of lics, such as Moldova and Uzbekistan, have adopted being liquidated, the system ofpreferences needs to a case-by-case approach to foreign participation. be carefully designed to reflect such concerns by ensuring that individual employee owners have 6JIn comparison, those transactions related to corporatized ensomeo thaeirwndicaitual employee. owners have SOEs where employees may opt for 51% buy-out permit some of their own capital at stake. less room for such manipulation, as the rules ofcapitaliza- tionandshareprescaiptionsareprescribedinstandardterms. PARTICIPATION OF FOREIGN IN VES TORS 6 In the absence of an organized secondary market, there is simplytoo much transactioncostin buyingandsellingstock Most FSU Republics impose certain legal re- 6F For instance, in late 1992 Kyrghyzstan adopted a new strictions and requirements on foreign investors Concept Note on Privatizaton, which declared, interai, when they seek to participate in privatizations. that "the attraction of foreign investors to the process of privatizationwlilopenwidepossibiitiesfbrsolvingthemain While more and more FSU Republics are lifting problems ofthe reforn at the levd ofenterprises." (Sec V). such controls to encourage foreign participation, "6 Most Republics provide for, in general terms, a national particularly with regard to medium-to-large priva- treatmentstandard,spedalincentives6forfireigninvestors, tizations,65 foreign investors have not actually played transfers of capital and profits, protection against expro- a significant role in the privatization process thus priation, and fair compensation. See e.g., Foregn Direct far.Inthe Republics, foreign investors face practi- Investmentinthe States oftheFrmer USSR, the World Bank far. In the Republics, foreign investors face practi- (Country Department III), 1992 at 22-39. cal impediments due to the absence of proper 67 Even the Treuhandanstalt has been frequendy accused of currency regulations. Also, such investors are likely selling out too cheaply in the former East Germany. 22 Privatization in the Republics ofthe Former Soviet Union Scope: In nearly all the FSU Republics, the discussed above can be quite complex, especially if official list of assets to be privatized that foreign there is no centralized privatization agency to begin buyers can acquire tends to be narrower than that with, as in Latvia, or if the screening of foreign for domestic buyers. Foreign ownership ofland, for investment in general is within the purview of instance, remains forbidden in the FSU as ofMarch multiple ministries, as in Moldova. In other cases, 1993, even in those Republics where private rights however, once foreign investors select certain SOEs to own land are recognized. Some Republics are for acquisition, with or without pre-screening by likely to lift this restriction in the future in order to the state, they tend to follow typical application spur higher interest among foreign investors."s In and approval procedures like domestic buyers of addition, in most cases there is a separate list of state assets. This is true even in countries like restricted sectors (such as defense, energy, etc.) in Azerbaijan or Kazakhstan, where there is a separate which foreign buyers have to obtain additional "one-stop" agency for admitting and monitoring case-by-case approval from some governmental all foreign investment. body external to the main privatization agency, as The most complex and confusing set of require- in the case in Azerbaijan and Russia. Further, in ments concerning foreign investors arisesoutofthe nearly all the FSU Republics, foreign investors currency transfer issue. Resulting legal uncertain- cannot participate in small-scale enterprises sold ties and fear of unpredictable enforcement may through auction or tender.09 Finally, in connection well be the most practical obstacle facing foreign with mass privatization, the amount of ownership investors. In each FSU Republic, a coherent and interest that foreign investors can acquire in indi- detailed set of rules permitting offshore and, to a vidual enterprises will be determined in part by the lesser degree, onshore foreign investors to legally scope of employee and management preferences, transfer their hard currency in and out of the which, as discussed above, can be quite significant. country has not yet been finalized.73 Furthermore, Selection: Even with regard to those categories while nearly all the FSU Republics impose a special of enterprises with no apiori restrictions, foreign privatization exchange rate74-usually set lower investors may not be able to freely select the enter- than the market rate-most have not yet deter- prises for acquisition. In Estonia and Latvia, for mined on how such a rate will be set.75 Finaly, spedal instance, the selection process so far has been bank accounts may be required in many cases to dominated by the state in an attempt to anticipate deposit local currency to be used in privatization.76 which enterprises would appeal to foreign buyers. In Lithuania, the list of enterprises selected for Beginning in mid-April 1993, the Estonian goverunent ward-currencyprivatizationtransactionsbythemain mnaypemrnitprospective buyers of a selected group of large privatization agency used to require further parlia- SOEs to buy the land on which they stand. InRussia, forinstance, thelocalprivatizationagencyneeds mentary endorsements. Foreign investors' partici- to *nuayapprove the par'cipatonofforetg ivestors n pation outside the list prepared by the government these tcions underthe State ProgramofPrivatization would not be possible in any event, since in the (part8.1).Inpractice,smallprivatizationhasbeenopento Lithuanian mass privatization program the pri- Russiansonly, eithercompletelyor duringthefirst round maty means of payment is in the form of vouchers of bidding. It is possible, however, that some foreign inves- which are held by domestic citizens and cannot be , tors mnay enter the competition by using Russian "fronts." 7 h Tius restriction mayhave been recendyliftedi lithuantia. sold for cash.70 In Russia, by contrast, foreign See the Counuy Profile for more information. investors can participate in the mass privatization 71 A French company, for example, has recently bought a program of medium to large SOEs by buying 20%stakeinacementplantinPerm,Russiausingvouchers. vouchers fom others-except from emp!oyeeswith n1 See the Kazakhstan Country Profile for more information. preferential rights as described above-with pay- 73 In Russia, for instance, due to dte absence ofproper Centra Bankregulation,someebasicprovisionsoftheUSSR GOSAANK ment made in rubles.7' In the new mass privatiza- issuedinMay 1991 weresdillappliedasofMarch, 1993. tion program of Kazakhstan, foreign investors may 74 Armenia,however,willliftdiisrequirementforestablished participate by buying enterprise shares from invest- investors in pre-existing joint ventures or enterprises. ment funds, which are the exclusive intermediaries 75 It appears to be difficult to eliminate this notion of a for exchanging all privatization vouchers distrib- double-exchange rate in the PSU. Even in Russia, for uted to Kazakh citizens.n ~~~~~instance, where a single ecwhang rate regime was adopted uted to Kazakhl citizens.n in 1992,someinvsmofearedthattheCntralBankmight Requirements: In some countries, institutional seek to revive a double exchange rate as of March 1993. arangement for meeting the special approval re- 76 In the case of Russia, however, this requirement has so far quirements for investing in the restricted sectors been rarely (if at all) enforced in pracdce. * PIDAnR T I V Implementation Issues PRNVAIM1ZA TIONMESULTS ambitious targets. Significant progress has been achieved in small-scale privatization, however, where The Republics of the FSU have been struggling over 67,000 enterprises or approximately 15-20% to privatize their economies for nearly two years. ofthe total have moved to the private sector (Table Their accomplishments in introducing the basic 4).77 The results to date of the privatization pro- legal and insdtutional framework for privatzation grams for more complex medium and large SOEs have been substantial. Understandably, the privati- zadon results thus far have been less than the initial 7This figure indudes leases to labor collectives. Table 4: PRIVATIZATION TO DATE As of March 1993, Except where noted otherwise $mall Medlum LaOe Enter se Enterprdes Enterprses Armenia Azerbaijan _ Belarus [a] < -44 medium to large-> Estonia 875 7 Georgia [b] - Kazakldmn <-6,000 small to large-> Kyrghyzsran [c] <-1,866 small to large-> Latvia 1,500 Lithuania ,d] 1,864 <-1,284 medium to large-> Moldova _ _ _ Russia Ic] 60,000 220 600 Tajikistan Total of 390 (Size not defined) Turkmenistan Ukraine Mff 1,000 Uzbekistan i 2,000 35 [a] Employee-Management Buy-Outs ("EMBOs") [b] April 93 [c] December 92 [d] February 93 [el Figures on privatization of small enterprises vary between 50 and 60,000 from one source to another [f LeasesEMBOs [gl Leases/EMBOs Source: The above data are very rough esdmats based on figures reported by each Republic, both official and unofficial. It should be emphasized that the definition of small, medium and large enterprises varies from Repdwtic to Republic and each Republic uses different definitions ofthe term privatization. These definitions include (1) sale ofall the assets of an SOE; (2) sale ofall or part ofthe shares ofa corporatized SOE (3) majority employee ownrship; and (4) leases. 24 Privatization in the Republws ofthe Former Soviet Union have been less dramatic, though. While some Re- capital for particularly attractive enterprises. Other publics have made progress in implementing their countries have developed financing schemes which privatization programs, such as Lithuania, Kazakh- provide buyers with the option to pay on an install- stan, Kyrghyzstan and Russia, others are still in the ment plan basis: extending up to 3 years in process of drafiing and developing a general pro- Kyrghyzstan and 4 years in Armenia. In general, a gram, as is the case inArmenia,Azerbaijan, Belarus, number of emerging obstacles are undoubtedly Moldova and Ukraine. So far, over 77,000 entities contributing to the slow pace ofprivatization in the of all sizes have been privatized or leased. In addi- Republics induding, inter alix tion, voucher schemes have already been imple- " Underdeveloped financial markets and institu- mented in Russia and Lithuania, though it is too tions which are not organized to provide debt early to assess their success. The Country Profile financing on a commercial basis; AnnexA provides a detailed summary ofscope and * Inflation which has eroded the value of do- privatization implementation in each Republic. mestic savings; All the Republics of the FSU have been influ- ° Short supplies of capital to finance both priva- enced by the success or failure of privatization tization and private sector development; programs in Central and Eastern Europe-more e Weak institutional capacity of the govern- specifically in Poland, Hungary, Germany and the ments; Czech Republic-as well as by the design and imple- The virtual non-existence of financial and mentation of the privatization program in Russia. technical expertise in the areas of commnercial Speed offimplementation in the Republics appears to practice and market transactions; be closely linked to the following functional factors: Liability issues (ranging from inter-enterprise " The governrene's commitment and willing- arrears to environmental liabilities); ness to initiate a comprehensive and transpar- e The absence of a social safety net and labor ent privadzation program and to set up the mobility system; and legal and regulatory frameworks and mecha- ' The demonopolization process; nisms for enforcing contracts; Also, it was indicated that a significant share of * The type of approach that is taken, either creditexpansion has been directed towards selected single or multi-track; sectors and enterprises. Most of this credit is con- *The methods and techniques that are used in centratedonlargerenterprisesandcarriesextremely each sector; and negative interest rates. It is recognized that, to some s The availability of expertise and financial degree, a certain level ofsubsidies and credit expan- support. sion will have to be offered to the SOE sector in Each country possesses a unique microeconomic order to make systemic reforms more socially fea- environment that requires individual attention, sible. However, such subsidies must be designed to and there is no single ideal approach that can be bolster, not delay the privatization process. applied as a general model to the entire FSU. A successfil privatization program in one Republic Regional Overview might fail in another. In almost all of these coun- tries, a significant number of SOEs have been In the Baltics, the issue of restoring private decapitalized through the build up of non-liquid property rights-restitution-has delayed the over- accounts receivable from other public sector com- all pace of implementation of the privatization panies and by high leverage. Some of these enter- program. Initially, restitution claim deadlines were prises might become viable and salable as a result of set in all three Baltic Republics. Estonia and Latvia a financial restructuring of the public enterprise have, however, both extended their deadlines sev- sector. eral times. Most people have been hesitant to In general, it is worth noting that the privatiza- purchase or lease a property that maybe restored to tion process to date has proven to be intricate and someone else later. On the other hand, Lithuania has taken more time than anticipated. The process has enjoyed the most success in implementing their is made difficult by the near absence of supporting program because they have kept firmly to their infrastuctre for privatization, whether financial, original daim deadline of January 31, 1992. As a managerial or accounting. In countries such as result, Lithuania has advanced further in imple- Russia,Turkmenistan,ArmeniaandGeorgia, afew menting other privatization programs than its two wealthydomestic individuals have provided equity Baltic neighbors. On the other hand, in Lithuania Privatizauion in the Republics oftbe Former Soviet Union 25 a temporary moratorium was placed on privatiza- privatized, with 51Y% of their shares transferred to tion at the end of 1992 in order to allow authorities employees and managers. to modifyauction procedures to addressallegations of a lack of transparency. After new regulations TARGETSANDPPRIORTIES were introduced that required dosed and registered bids for all auctions, the moratorium was lifted in The privatization programs adopted across the February 1993. FSU broadly define the process and methods of InTranscaucasia, the implementation phase has privatization, the list of targets and priorities, and started. Real advances have taken place in the the list ofexcluded categories. Inmost cases, enter- housing sector, where apartments have been di- prises or facilities related to defense/security con- vested to tenants either through sales or free trans- cerns, water and forestry resources, cultural and fers. In Turkmenistan, lack of interest from either historical heritage, certain public utilities, and hos- the government or potential participants has pre- pital and education institutionsareexduded. Nearly ventedthecommencementofprivatizationofstate- everything else is eligible to be privatized. owned enterprises. In Uzbekistan, in addition to There are significant differences among these the privatization of urban housing, some land has plans and their actual stages of implementation. been leased to farmers and about 2,000 retail and Some ofthe plans are broader in scope than others, service units were leased out or sold to labor collec- but most have been ambitious, ranging from the tives. Kazakbstan, Kyrghyzstan, and Uzbekistar. objective ofprivatizing35-40% ofall fixed assets by are the only Central Asian Republics that have the end of 1992 in Kyrghyzstan, to 40% ofSOEs by madeprogresstowardsenterprisereformandpriva- 1994 in Moldova and 750 SOEs by 1993 in uzation. Kazakhstan had privatized more than 6000 Georgia, to the corporatization of over 6,000 large entities, and Kyrghyzstan more than 1800 entities. enterprises by November 1, 1992 in Russia. In Privatization in Russia has also reached the most cases, officials were aware that these targets implementation phase, and the achievements of would be difficult to achieve but felt that they less than a year are already noteworthy. In view of needed ambitious targets to build momentum and the decentralized approach to small scale privatiza- to render the reform process irreversible. tion in Russia ana the vast territory involved, As implementation programs were launched, obtaining reliable and accurate data has proven many deadlines had to be revised to more realistic difficult. However, the data that are available sug- dates. Kyrghyzstan, for instance, moved its dead- gest that about 50 - 60,000 small entities have been line for privatizing 35% of the state's property to privatized, representing over 30% ofthe estimated the end of 1993. In Russia, only 25% of the target total number of small entities, and the number is number of large SOEs had been transformed into growing rapidly. The GEI has reported that, as of joint-stock companies by the original November April 1993, in the retailing, catering and services deadline. These experiences reaffirm the assertion sectors only, over 50% of small entities were priva- that some initial experience with privatization is tized (46,000) out ofan estimated 90,000 entities. needed in order to fiy achievable targets and to The pace of implementation ofsmall-privatization define attainable priorities. in Russia varied gready from region to region, As indicated in Chapter III, during 1992 the however. While some cities have auctioned off priority for most Republics of the FSU was to more than 60% of their small enterprise sector, develop a comprehensive legal and institutional other regions have barelybegun the process. Nizhni framework to oversee the privatization process. Novgorod, Russia's third largest city, began auc- This was to be followed by corporatization of the tioning shops as early as April 1992. SOEs. Turkmenistan and Ukraine have yet to By mid-March 1993, voucher distribution complete suitable frameworks. Their priority is throughout Russia was completed and 150 milion therefore to finalize thisprimarystage beforebegin- people had received their 10,000 Ruble privatiza- ning the implementation phase. The other Repub- tion vouchers. Consequently, some 220 voucher lics have advanced to the stage of setting auctions have been held, thereby accelerating implementation priorities and tagets, selecting sec- Russia's mass-privatization program. In addition, tors and enterprises to be privatized, and-in some 2,500 of the largest SOEs-50% of the total- Republicsransactions have even taken place. have been corporatized into joint-stock companies In terms of adopting an overall approach, the and approximately 600 of them are essentially Republics appear to prefer a multi-track strategy 26 Privatication in the Rpublies of the Former Soviet Union that gives precedence to the small-scale privatiza- short term plan to privatize even state land. The tion program, targeting small retail, trade and Baltic Republics have adopted land use rights, service shops that can be rapidly privatized. The where land is inheritable but not tradable. Georgia main objective ofthese privatizations is to promote however, has taken the initiative in land reforms the emergence of the inftastructure for a market andplanstoprivatize70-75%ofitslandbytheend economy. The divestment ofsmall organizations is of 1993. So far over 55% has been privatized. also simpler and does not require the same degree Moldova, however, has agreed to privatize land but ofcentralizedregulationasdoestheprivatizationof over a number of years, a process scheduled to be larger SOEs. This fact provides a partial explana- completed in 2001. In Russia, the Constitution tion for the rapid privatizationofover65,000 small does not permit private land ownership. The most enterprises in Russia, Estonia, Lithuania, Latvia, common fortn of disposing of land in the other and Ukraine. Republics is through negotiated leases. The paths chosen by the Republics tend to diverge after small-scale privatization has taken METHODSAND STRATEGIES place. Armenia, Azerbaijan, and Turkmenistan plan to extend privatization in phases to medium and The privatization programs that have been de- eventually to large SOEs. Russia, Georgia, Kazakh- veloped across the FSU Republics incorporate all stan and Lithuania are opting for more rapid mass- the traditional methods of privatization. The prin- privatization schemes. One reason for choosing a cipal privatization approach to emerge so far in more rapid approach is to curtail the wild privati- most of the FSU countries relies cn a balanced use zation' that often occurs when the privatization of atop down" and 'bottom up" approaches. progrm is viewed as moving too slowly and when In general, most Republics have adopted a "top the state is unable to exercise its ownership rights. down" approachtosettingrulesandestablishingan In countries such as Estonia, the privatization approval process, while adopting a "bottom up" program was developed over time in a piece-meal approach tha allows the enterprises themselves to fashion. First, a restitution process was launched, put together theirprivatization plans and to imple- and then legislation ws passed in December 1990 ment the transactions.With regard to medium and that permitted privatizaton of small enterprises. lar cale enterprises, Russia has opted for the Thiswas followed byapilotprogram that extended "boLcom up" approach for enterprise proposals to the sale of seven larger enterprises. Recently, while settng the rules of the game at the central legislation was drafied which would enable the authority, or from the top down. In small scale prnivazation of housing stock and some shares of privatizations, both rules and program initiatives larger enterprises through vouchers. The Baltic have largely been delegated to local authorities, states, in general, have aimed at minimizing the leaving the enterprises and central authorities with number of SOEs through restitution, thereby fa- a notably passive role. Exceptions to this balance of cilitating privatization. "top down" and 'bottom up" approaches have Another objective set by some of the Republics occurred in Kazakhstan, where a predominandy is to amas public support duringthe earlystages of "top down" approach seems to have prevailed. In privatization. Considering the social hardships that Lithuania, the atop down" approach appears to accompanyprivatization,includingunemploymes have been sccessful in promoting rapid imple- inflation, drops in subsidies, etc., popular support mentation in cases of small privatization. is an essential ingredient for a successful program. As for larger enterprises, the "top-down" ap- To this end, Russia, has initiated several pilot proachhasbeen,sofarlimitedtoafewtransactions demonstationauctionsofmoreprosperousSOEs'9 Similarly, Latvia has identified 25 SOEs for its n Widptivaeimionrefersheetotheearlysutgeofsponta- demonstration privatization agenda. neous priiatio which ae conmonly regarded as det- A final target forprivatization thatis common to rimeitotheenteprisesthadareaffctedItindicthat all the Republics of the FSU is land and housing. vauiousacio hevebeenmakenbyvestedinterestgroups. While every Republic, vith the exception of e manages, to ither strip the assets or otherwise Azerbaijan and Belarus, has targeted residential obhtvik Biscuipnthrough privatiedtuthe dwellings for transfer to the private sector, land vou/aucion scheron December9, 1992. Itwas the ptivatizationdoesnotseemtoenjoyanequallyhigh first latge SOE to test popular share holding in Russia. It priority. In fact, Kazkhstan and Belarus have no was chosen due to its profitabiity and brand recognition. Privatizsation in the Rfepublics Of the Former Soviet Union 27 where either hard currency earnings or demonstra- maximization. For example, new owners may be tion effects have been sought. In light of the rela- required to continue existingoperations foranum- tively slow progress achieved in large privatizations ber of years as opposed to immediately converting relying on initiatives from outside buyers-or, to a more profitable business. In Kyrghyzstan, for more typically, enterprise employees-some FSU example, the evaluation of tender offers that are Republics, such as Kazakhstan and Kyrghyzstan, based on restrictive social and economic plans has are considering more centralized state initiatives in slowed the pace of privatization. the future. It is clear that, regardless of the ap- Large-scale privatization: The privatization of proach, there is a need for transparent rules and medium and large SOEs has presented a greater regulations governing the process. challenge to the FSU Republics. The common In countries where a mass privatization strategy approach has been to corporatize the large enter- has been implemented or is contemplated for me- prises into joint stock companies. Thereafter, the dium to large SOEs, a combination of "top-down" decision remains as to whether to dispose of these and 'bottom-up" approaches appears to be pre- enterprises case-by-case (commercial privatization) ferred. As is the case in Russia, individual privatiza- or en masse (voucher privatization) to the general tion plans can then be prepared by the enterprises public. The commercial privatization approach themselves under close state guidance within a can consist ofcompetitive sales ofshares, either by limited time frame. Moldova appears to be the only auction or by tender, to strategic investors or em- FSU Republic that is considering a pure "top- ployee-management buy-outs. The traditional ad- down' mass privatization scheme with virtually no vantage of commercial privatization is that it participation from non-state bodies. In designing a provides bettercorporate governance through own- successful mass privatization program, both the ership concentration and that it raises capital for number of enterprises subject to it and the desired the government. Its drawbacks are that: 1) it can be speed of implementation should be considered in a slow process, since firms are sold on a case-by-case order to strike a necessary balance between enter- basis; and 2) it targets a limited number ofinvestors prise initiatives and state control. and excludes the general population. Russia has Small-scale privatization: The most common adopted an innovative blend of mass privatization method for privatdzing small SOEs is through sale with case-by-case auctions that are organized rap- at auctions. Kazalhstan, Kyrghyzstan, Latvia, idly with minimal enterprise preparation. In most Lithuania, Estonia, Georgia and Russia have cho- Republics, larger SOEs are generally privadzed sen some type of organized bidding process as the case-by-case due to the extensive pre-sale prepara- primary method of divesting the small enterprise tion that they require. sector. The majority have opted for cash auctions, Mass Privatization: Mass-privatization schemes but some allow the use of other instruments as are also being widely adopted in order to speed up well.seThis decentralizedmethodishighlyefficient the process of divestment and to promote wide- and provides capital for the local selling govem- spreadparticipationthroughdistributionofvouch- mental agency. Some other widely-used methods ers to the population. Russia, Ukraine, Latvia, for privadzing small enterprises among the FSU Lithuania and Georgia have all devised some form Republics include divestment by competitive bid- of voucher scheme82 in their mass-privatization ding, tender offers, or leasing. programs. To date, Russia and Lithuania are the AlthoughmostoftheFSURepublicshaveleased only Republics to have made real advances in a portion of state property to the private sector- implementing their voucher programs. There are some with option to buy-the use of leases pre- certain important distinctions between the two dominates in the Republics with the more strategies, however. First, the Russian vouchers all conservative privatization programs. Nearly all of have identical face values of 10,000 rubles while the leases have been made to employees and labor collectives. Theprocessoftenderoffersorcompeti- '0 In Kazakhstan, unused housing vouchers can also be em- tive bidding is more cumbersome and time con- ployed at auctions. In Lithuania entetprises are auctioned suming than other methods, particularly when off for vouchers plus a cash quota. based on the most attractive social and economic *1 These include provisions such as maintaining the sase offr,8.aswel.ason.rc . In abusinessforagivennumberofyearsorlimitingthenumber offer,8' as wel as on price. In avtion, potential of layo&ff. investors may become discouraged when the re- 82 Diffmat Republics maycall them privatization accounts, strictions imposed are not compatible with profit cerdficates, points, or vouchers. 28 Privatization in the Republics of the Former Soviet Union Lithuanian vouchers have face values based on equitable ownership, and therefore gave priority to citizens' age brackets. Secondly, Russian vouchers the following criteria: are fully tradable for cash or other assets while 0 Admirnistrative simplicity Lithuanian vouchers are not.83 Finally, Russia has e Speed and security of distribution gone through the lengthy and expensive process of " Making shares of enterprises available for printing and distributing its vouchers in a physical bidding as soon as distribution of vouchers is format while Lithuania simply credits the complete individual's savings account with the value of the e Widespread public acceptance voucher. Russia has also emphasized the use of investment In addition, Russia and Lithuania have different funds to act as financial intermediaries, but has auction mechanisms for acquiring shares in large chosen a laissez-faire approach to their develop- SOEs. In Russia, all bids are made through the use ment. By March 1993, 300 funds have emerged of vouchers (Box 3-2 above), while in Lithuanian and registered with the state. Investment funds can auctions, bidders must use acombination ofvouch- be an effective way to concentrate ownership and ers anda cash quota to bid for shares. Kazakhstan provide effective governance of enterprises. These is opting for a slightly different method of mass- funds also reduce the risk exposure of individual privatization: shares of medium and large SOEs investors through diversification. will be given to investment funds and the public Spontaneous Privatization: Wide-spread spon- will be given certain Privatization Investment Cou- taneous privatization was encouraged in a number pons to invest in them. of countries by continued ambiguity of owner- in designing a method to incorporate vouchers ship-resulting in multiple claimants of SOEs- inamass-privatizationscheme, anumberoffactors and a lack of effective control over the SOEs. wereconsidered, induding: thenumberofSOEs to Spontaneous privatization, the illegal transferring be privatized using vouchers; the percentage of of SOEs to the private sector, is often initiated by total shares to be offered through vouchers; the employees. In Ukraine, due to the lack of control strengthofthebankingsystem; the rate ofinflation; exerted on SOEs by the line ministries, spontane- and especially the level of public support. These ous privatization developed quickly and was con- andotherfactorswereusedtodetermine: 1)whether centrated primarily in the small and medium sized to have vouchers with or without face value; 2) SOEs. In Russia, spontaneous privatization ini- whether or not to make vouchers tradable; and 3) how to distribute the vouchers, whether in a physi- The on exception to this rul is that when people have cal forn or through savings accounts. The design- outstanding housing loans, they can sel their vouchers at erswere also concerned thatvouchers would be part government-rn auctions and use the proceeds to pay off of a broader program of creating effective and their debt. Box 4-1: The Russian Voucher Scheme The Russian voucher scheme has certain unique characteristics that make it distinctive from the Czechoslovakian or Lithuanian models. Russian vouchers take the form of actual paper certificates and are uniformly issued in 10,000 ruble denominations. They are made in bearer form, thereby making them transferable.Unlike other voucher schemes, every Russian citizen, regardless of age or years in employ- ment, is to receive one voucher with the same nominal value. Citizens pay a 25 ruble fee which reflects administration and distribution costs. The tradable nature ofthesevouchers has resulted in the formation of secondary markets where vouchers are actively traded for cash. The main function ofvouchers, as intended by the government, is to bid for shares of medium to large SOEs in the auction process. All bidders must specify the number of vouchers they plan to invest. Thereafter, they have a choice whether to: 1) limit their bids by stating a maximum price or the minimum number of shares they are willing to accept per voucher; or 2) leave an open bid based simply on the number of vouchers submitted. The privatization agency will then establish a floor price by dividing the face value of the vouchers tendered by open bids by the total number of shares available. All bids which fall below this floor are discarded. The final price per share is calculated by taking a weighted average of the number of bids at the floor price and those specified bids that fell above the floor price. Privatization in the Republis of the Former Soviet Union 29 tially took the form of managers or workers simply subtracting accumulated depreciation from the diverting the profits from the enterprises. In 1991- initial balance sheet value of the asset, This "re- 92, spontaneous privatization has resulted in the sidual value" is then used as a minimum bid price transfer of state assets to new private firms and in the auction process.84 In view of rapid inflation, cooperatives in the form of leasing or buying state this residual value is very low and has not been an assets at negligible prices. To stem this widespread impediment to sales. Often, the final value has been stripping of state assets, many Republics adopted several times higher than the starting price. In the the ambitious and aggressive privatization pro- small privatization programs ofcities such as Nizhni grams noted above. Novgorod, the right to lease a business is auctioned and the winning bidder is then able to purchase the VALUATION assets and inventories at book value. With regard to large corporatized enterprises, the book value of Valuation cfenterprises and assets has not played capital is calculated by subtracting liabilities from a critical role so far in the privatization process of assets, and a nominal share price is established. The the Republics of the FSU. This reflects a lack of final share price however, is demand-dependent, accounting rules and capability, high levels ofinfla- reflected by the number of vouchers remitted at tion, and the inability to forecast future cash flows voucher auctions (see Box 4-1, above: Russian with any degree of accuracy. In addition, most Voucher Scheme). privatizations that have taken place so far have Similarly, in Kazakhstan, the small scale pro- transferred ownership primarily to citizens. There- gram calls for open auctions where the public can fore, the Republics have been more concerned with bid for the right to lease the business. The winner equitable redistribution of state assets to the public, then is able to purchase the assets ofthe business at rather than raising capital through sales to inves- book value. Therefore, even though the physical tors. In the future, it is expected that valuation will business may be sold for a nominal price, the become a more important issue as the involvement premium received for the leasing rights will reflect of foreign investors grows. the total market value. A few other republics, such Thus far, the trend seems to indicate that histori- as Georgia, Kyrghyzstan and Moldova, have devel- cal book value is the main tool used to establish a oped laws and regulations covering valuation prin- minimum floor price, and the final valuation is ciples. Turkmenistan has applied a version of the market based to the extent that it is based on a Russian assetvaluation model. In Uzbekistan, there competitive bidding process. The Russian auction are six different governmental departments and program is an example of this approach to the employee groups involved in the valuation process valuation and pricing of enterprises and assets. that contribute to the slow pace of privatization in Russia has been using the SOEs' book value to the country. establish initial values for both asset prices of small enterprises and share prices for joint-stock compa- In cases where the residual value equals zero, a practical nies. The book value of assets is calculated by opening bid price is detenmined. * PART V Concluding Observations Privatization has never been easy to implement, In the process of building a sound legal and even in developed market economies such as those institutional framework, there is a need to follow of Great Britain and Canada. The total number of up on the basic enabling privatization legislation in SOEsthatwereprivatizedworldwide between 1980 a majority ofthe FSU Republics through appropri- and 1991 amounted to 6,832 enterprises,85 and the ate companior. or subordinate legislation. In par- Republics of the FSU seek to privatize over 85,000 ticular, the implementation of mass privatization medium to large SOEs within a relatively short programs is likelvto requireasubstantial amount of period of time. An ambitious and unprecedented legislative vwork, even though all the detailed regu- process in scale, the long-term sustainability of lations related to the program do not need to be privatization plays a vital role in the economic announced in advance and at once. A centralized transformation of the FSU. Maintaining high and insdtutonal structure may be important to prevent growing levels of public support over an extended confusion and delays associated with parcipation period of time is thus a key to the success of the bymultiplestateauthoritiesintheimplementation privatizadon programs. It is also important to con- process, but sufficient political and financial sup- tinue to promote foreign participation in light of the port may then need to be mobilized behind such lac of domestic capital and market know-how. The insdtutions. examination of the overall policy and supportng In light of the extent of share allocation to framework for privatization in the FSU suggests that employees, the development of an organized sec- there may be a number of important issues in this ondary market where these share can eventually be regard that merit priority attention in the future. transferred is important in order to facilitate owner- First of all, most FSU Republics can diminish ship concentration in the future. More immediately, the ambiguity surrounding the exact legal param- a number of Republics may need to ensure that eters ofownership bycdarifying the juridical nature employeebenefitsthataregranteddonotexceedwhat of state-owned enterprises and the status of prop- is intended by law. Also, the legal relationships erty interests in enterprise assets. Corporatization between the collective ownership interest and that of steps prior to or in connection with privatization the individual member need to be clarified. need to be taken with legal mechanisms necessary Final!y, if foreign investors are to play a more to ensure the accountability ofenterprise managers active role in the future, the FSU Republics need to in place. This might then be followed by proper promulgate clear regulations related to hard cur- enforcement of accounting and auditng rules in rency transactions and any special exchange rate practice in order to prevent any devolution ofstate rules in connection with privatization. Addition- ownership interest. Also, decentralization of state ally, basic legal protections of foreign investors' ownership does not appear to be accompanied by property interests could be further strengthened by adequate functional and organic oversight by the introducing credible dispute resolution mecha- center over local authorites in many Republics. nisms and fair compensation rules. The issue of building a sound judicial syem to prevent abusive post-privatization state interfer- O'SeeKikni,Nellis, Shirley. Privaizan. rwLesonsoofFtpe- ence needs to be examined in more detail. ,nenwe, 1992, p.22. *1 AnnexA Country Profiles ARMENIA Legal and Inszutiona Overview collectively-and any potential buyers (Art. 29). Eligible buyers are broadly defined to include indi- In July 1992, the Law on Privatization and vidual citizens and groups thereof, foreign inves- Denationalization was adopted by the Armenian tors, and "existing enterprises without state Supreme Soviet, laying down the legal and institu- participation" with no exact definition given. Ap- tional foundations for privatization. This law ap- plications related to the small privatization pro- plies to all SOEs, induding those small enterprises gram, as discussed below, are to be processed not yet sold under the Presidential decree of June separately by the Board. The others are to be 1991, state property in cooperatives and joint en- submitted to the appropriate national or a local terprises, and unfinished construction objects (Art. government. Enterprises which are approved for 1). aObjects of national wealth and of cultural and privatization will be "prepared' by the relevant historical value" remain outside its scope. Relations Ministries and Departments as prescribed in the concerning the privatization of land are governed Program (Art. 30). by the Land Reform Law enacted in February 1991. Housing resources are also to be addressed Major Privaizaion Schemes later in a separate legislative act. The 1992 law on privatization caUs for the Commercial and Industrid Enterprises establishmentofaSpecialJointPrivatizationCom- A. The 1992 Law on Privatization supports vari- mission of parliament and government to provide ous methods of privatization, ranging from strategic gudance and to oversee the implementa- outright sales, such as worker buy-outs or don process (Art. 23). A detailed outline of the auctions, to such "denationalization" tech- specific tasks to be accomplished during a given niques as management contracts. It also stipu- period is to be presented in the annual Program. lates that certain enterprises should be This Program, prepared first by the government identified in the Program as: 1) subject to under Art. 22 and then endorsed by the joint compulsory privatization; 2) privatized Commission under Art. 23, must be approved by through an agreement with workers only; 3) the Supreme Soviet before taking effect under Art. amenable for partial or full sales of shares; or 5. Local authorities adopt their own programs on 4) requiring international bidding (Art. 5). the basis of the above Program for local property. B. Small Privatization: The draft Program calls It is important to note, however, that the divi- for privatizing some 350 small units (up to 25 sion of property between the central and local employees) in the catering and retail services. authorities has not yet been resolved. The actual Under Article 33 of the 1992 Law on Privati- task of selling SOEs, including the valuation pro- zation, the labor collective of such an enter- cess, is to be carried out by the State Board for prise will have the exclusive right to submit a Privatization, also known as theAdministration for proposal to buy the enterprise within 20 days PrivatizationandDisposalofStateProperty,which after the public announcement of sale. If the istoenterintoprivatizationtransactionsasthelegal enterprise is not to be sold to them, an open seller (Att. 25). The distribudon of functions and auction and contest will be carried out. the relationship between the Commission and the C. Mass Privatization: The draft Program con- Board has not yet been articulated. Armenia's rela- templates transforming large SOEs into joint tively complex arrangement for policy formulation stock companies and partially privatizing and implementation poses the risk of potential them-tentatively up to 30% of the total asset bureaucratic botdenecks. With the current draft value- through a voucher system. Detailed Program for 1992-93 still awaiting the eligibility criteria and distribution mecha- Commission's clearance, it is hard to predict when nisms have not been issued yet. Similarly, the implementation process will begin in earnest. policy decisions regarding the face value of The right to initiate privatization is given to vouchers, their usage, trading rules, and the governmental bodies, employees-individually or role of investment funds are still pending. Privatization in the Republiks of the Former Soviet Union 33 Housing/Land Although no time table has been fixed, the A. Housing: A law on privatization of state hous- government priority is to start off with small-scale ing was passed in 1989, but a new privatiza- privatization. Specifically, the short-term target is tion program to rapidly transfer housing to to privatize about 350 small firms in the retail and the current occupants is underway. catering business. This is to be followed byprivatiz- B. Land: Agricultural land is to be granted for ing unfinished construction sites, transport enter- free. However, these grants are for limited prises, and small to medium sized firms in the agro- purposes only-either for operating peasant and light industry. Large SOEs will be more diffi- and collective farms or for constructing resi- cult to privatize since they employ an average of dential buildings. The current Land Law also about 445 employees. The proposed plan is to restricts ownership of other buyers of land: 1) introduce a voucher scheme, though details remain conversion of agricultural land to other uses is to be worked out. The first step would be to strictly controlled; and 2) the owner must wait corporatize the large enterprises into joint-stock 3 years after paying off the total cost of the companies. land before he or she can sell it. So far, implementationhas beenimpededbythe delayed approval of the draft program. Since the Scope and Implementation privatizationprogram has notyetbeen approved by the parliament, the government has devised other Armenia is about to launch a program to priva- ways to withdraw progressively from economic tize the Republic's 10,000 small and 700 large state activity and is using leasing extensively. owned enterprises. Over 600 of the large firms The only area of major progress has been land belong to the industrial sector, which employed reform, where Armenia claims to have privatized about 20% of the work force as of 1991. approximately 90% of its agricultural land to date. AZERBAIJAN La land IJsfittional Ovmi valuation and to recommend detailed terms of ownership transfer to the SPC for final approval. In January 1993, the Law on Destatization and Privatization was adopted by the parliament. This Major Privatizaton Schemes legislation calls for the corporatization, commer- cializadon, and privatization of all enterprises ex- Comm evizlIndmirialEnterprises cept defense/security complexes, health services, A. The basic privatization law broadly outlines a cultural monuments, and the state monopoly sec- case-by-case approach. The annual Program tors. Housing and agricultural privatization are to will contain a multi-track approach, taking be addressed in separate laws, while new land into account the different sizes of SOEs. In reform legislation is under preparation. Addition- particular, the details of small scale privatiza- ally,aPresidentialdecreeoncommercializingretail tion will soon be finalized. Among the pos- trade organizations and public kitchens through sible methods of privatization are leasing-, sale segmentation exists, dating from August 1, 1992. to the labor collective with a provision for Breaking up these service units and establishing dividing the property into shares held by the them as separate juridical persons with a charter individual workers; transfer of assets into a that specifies state ownership rights will prepare joint stock company enabling the SPC to them for future privatization transacions. distribute its shares to the collective and other Under Article 3 of the law on privatization, the citizens; and sales by tender or auction. State Property Committee ("SPC"), which reports B. There is likely to be no mass privatization in to the President, is authorized to own and manage the near future, as the Azeri voucher system, state property as well as to develop and implement initially known as the "Special Means of Pay- the annually-set State Privatization Program. Sub- ment," has recently been rejected by the par- ject to parliamentary approval, the Program will liament and alternative proposals are at still an contain, inter a( principles of property division early stage. into national and regional objects and specific lists of SOEs that are subject to or outside of the Spe and Impemenp tion Program. GivenAzerbaijan'srelativelyslowstartso far, it is hard to predict when this Program will be The Azeri industrial sector accounted for 54% enacted or when all the regulatory gaps will be ofnetmaterial productandabout one fith of total filled. Similarly, it remains to be seen how the employment in 1991. There are a total of 3,717 authorityof the SPCwillbeexercisedin the future SOEs in this sector, with an average of about 107 particulary over tegional properysor objects" in employees per enterprise. There is no data available existing firee economic zones. on the number of small firms in Azerbaijan. Due to einitiative forindividual privatizationtrans the adverse impact of the regional conflict on actions may belong to labor collectives, govern- Azerbaijanseconomy the pace of privatization has mental bodies (includingthe SPC itself, or private been very slow. The law on privat zation was not buyers, whether foreign or domestic (Art. 7). Eli- adopted until January 1993, for example. As a gible buyers indude citizens, domestic juridical result, the government has yet tO formulate a suit- persons of which state ownership does not exceed able general strategy for enterprise reform, but 25%, and foreign investors, eitherjuridical or physi- small privatization is now receiving serious govern- cal (Art. 5). The SPC will act on national property ment attention. and its local counterpart will act on regional prop- The case-by-case method of privatization has erty, but 'in consideration of' the labor collective. proven tO be painfolly slow. Therefore it will be Upon the SPCs approval of the privatization of a some time before government control is lifted from particular SOE, an enterprise-level committee wil the SOEs. In the interim, emphasis will be given to then be formed-consistingof representatives from restructuringandnimprovingoperations. Privatization the SPC, lbor collective, trade unions, financial programs forthelandandhousgsectorsarepending institutions and local government-to undertake appropriate legislation, expected sometime in 1993. BELARUS Legal and Institutiond Overview privatization program can be launched by June, 1993, either under the CSP's authority In early 1993, the basic lawon privatizationwas or through separate legislation in the near passed byparliament. The companionlawonpriva- future. tization vouchers, however, is still being debated. B. Privatization of Medium-Sized SOEs: Identi- Similarly, a land reform lawis under consideration. fied as enterprises with between 200 and Privatization that began under the authority of a 1,000 employees, these mid-size SOEs are to temporary decree issued in 1991 has been sus- be privatized principally on a case-by-case pended since October 1992. Gaps in the legal basis. About half of them have been already framework pose a major obstacle to progress. identified and approved for leasing and buy- Thus far, the Committee of State Property outs. ("CSP"), part of the executive branch, has had C. Large-Scale Privatization: So far, the govern- central responsibility for designing and managing ment has opted for a case-by-case approach the privatization program for national property, that is considered to be appropriate in light of while local Soviets have been left in charge of the large size of Belarussian enterprises. The communal property. In practice, the CSP has relied average number of employees per enterprise in on local authorities to carry out the privatization of Belarus is about 1,017-compared to the 592 national property on location. This institutional employee average in the FSU as a whole. arrangement is largely preserved in the new law. D.Mass Privatization: In the future, the govem- Those eligible to participate in privatization ment is hoping to introduce a voucher scheme include citizens, juridical persons with more than which will include the housing and land stock 75% of authorized capital formed from the depos- in addition to enterprises. However, it is now its of natural persons, and foreign investors (Art. 4). facing serious parliamentary opposition. However, nearly all the privatization applications that have been processed have been submitted by HousngLand worker collectives for buy-outs. In the past, an A. Housing: There is no specific program for the application of this type would be submitted to the privatization of housing. However, if the CSP. In the event of approval, a privatization voucher program is established, citizens will commission consisting ofseven to nine representa- be allowed to purchase their dwellings tives from ministries and state banks, as well as an through the use of vouchers. accountant or economist working for the enter- B. Land: So far, land and real estate cannot be prise, would be appointed to value the enterprise. If purchased but have been leased to the new agreement was reached with the collecdve, a con- owners. The draft mass privatization program, tract stipulating the terms of payment and any if enacted, could change this situation. In obligations of the new owners would be prepared rural areas, the collective land ownership of and signed. By the terms of the privatization law, the Soviet era remains the dominant form of the SPC itself initiates privatization transactions, ownership, applying to 90% of the land, though an implicit preference for worker buy-outs though the government hopes to lift restric- appears to remain in place. tions on private farm holdings. Recendy, how- ever, parliament has rejected legislation on Major Privatiafion Schemes private land ownership. Commereial and Industrial Enterptrises Sope and Implem _aiox A. While the new law includes methods of valua- tion and other procedures that are appropriate Belaruscontains220large(1,O0Oormorework- for medium to large SOEs, no separate strat- ers) and 400 medium (200-1,000 workers) SOEs. egy for rapid small scale privatization-such as Thegovernmentinitiallyaimedat: 1) restructuring sale by aucdons-is discussed. However, the 139 of the large entities and corporatizing them government is hoping that a fast-track small into joint-stock companies; and 2) privatizing 157 36 Privatiztion in the Republis of the Former Soviet Union ofthemedium-sized enterprises in 1993. Although ties, 44 medium and large industrial SOEs were there is no accurate figure available on the number privatized through emnployee-management buy- of small SOEs, 889 municipal enterprises were also outs (EMBOs?). This method underscores the targeted for priority privatization. It is doubtful preference given to labor collectives, who have whether these targets will be met this year, given the purchased their enterprises at low prices. EMBOs, slow pace of completing the legal and institutional along with leases, will probably continue to be frameworkandthegovernmnent's cautiousapproach. dominant techniques of privatization unless a Prior to the suspension of privatization activi- voucher system is adopted. ES TONIA Legl and Iaitiana Oerviewtk The selection process for small privatization begins with proposals submitted to the DSP by the The privatization frameworkin Estoniahas been municipality where the property is located or by built over time through a combination of various ministries or departments. The list ofenterprises to laws, starting with the Property Law in June 1990. be privatized must be approved by the Estonian In December 1990, small-scale privatization was government, but municipalities are in charge of introduced with the Law on Privatization ofState- conducting actual sales. The eligible buyers in the Owned Service, Retail Trade and Public Catering transactions are limited to the residents of Estonia Services, subsequently amended in May 1992. In who are over 18 years old and meet the 10-year June of 1991, the Law on Property Reform was residency requirement and other juridical specifi- enacted, listing the most comprehensive principles cations. For large SOEs covered under the 1992 of ownership reform in Estonia, induding resdtu- Resolution, the DSP selects individual enterprises tion rights in all forms ofproperty, such as housing, for privatization at the suggestion of either local enterprises, and land. Privatization of large SOEs governmental bodies "of property location" or the began on an experimental basis under the Imple- ministry in charge of the SOE (Art. 9). Once a menting Resolution of the 1990 law on small particularenterpriseisselected, theEPApreparesit privatization. The August 1992 Supreme Council for the transaction and looks for potential buyers, Resolution 'On Enacting Conditions and Proce- which may include foreign investors. dures for the Privatization of State and Municipal Property" permitted further sales of3O large enter- Major Privatizaton Schemes prises, which are defined as exceeding 600,000 kroon in value. A more comprehensive Privatiza- Commereial and Induaral Enupries tion Act is currendy being drafted, with the aim of A. Small Privatization: The first phase of this tyingexistinglegislation together and ofpresenting program began in 1990 with the trade and a systematic program for all large enterprises, in- services sector. The selected enterprises were cluding a voucher scheme. Privatization of land sold by municipalities to residents only, and housing resources are addressed separately, through a variety of methods, induding auc- throughthe 1991 LandLawandthe 1992Law"On tion, share sales, and business plan competi- the Privatization ofState and Municipal Housing." tions. About 80% of these transactons went The institutional structure appears to be in a to workers and managers who were given transitional stage. In the past, the Ministry of certain preferential rights. Since the May 1992 Economy("MOE"),whichincludedadeputymin- amendment, small privatization now encom- istry of ownership reform, played a key role along passes all other SOEs valued at less than with the Department of State Property ("DSP"). 600,000 kroon that are not subject to restitu- The DSP has been serving as the primary imple- tion claims. The second phase of the program mentationandmonitoringagency,particularlywith imposes no residency requirement and takes regard to small privatization. Recently, under the place only through a public bidding process rubric of the new 1992 Resolution, the Estonian for physical assets or shares in ongoing SOEs. Privatization Agency ("EPA") was also established Employees will be preferred only if they offer to manage assets and negotiate transactions for the highest auction price. large SOEs. A Minister of Reform has been estab- B. Large Privatization: The pilot program con- lished to coordinate all aspects of the privatization ducted under the authority of the 1990 law process-land, housing, and enterprises. In the required a case-by-case analysis subject to near future, the DSP and EPA may be merged, parliamentary approval. Under the 1992 though their specialized functions may survive in Resolution, the EPA plans to sell a selected substance. The DSP, EPA, and the Minister of group of SOEs through compedtion, where Reform report to the Cabinet, which makes overall offers would include price plus other employ- policy decisions. ment and investment plans. 38 Privatization in the p2ublics of the Former Soviet Union C. Mass Privatization: A voucher scheme has Land Law expanded ownership rights for been under serious discussion for some time, individuals but not groups, though some re- but the specifics are stil being resolved. In strictions on resales remain. Over 10% of addition to privatizing medium-to-large SOEs arable land has been transformed to private through exchanges of vouchers for shares, the hands in this manner. Note that restitution program may also indude compensation daims have been mired in complex adminis- vouchers for restitution claims. Certain re- trative procedures. gions have already begun distribudon of vouchers, which will initially be used to priva- Scope and Impl ementation tize the housing sector. The percentage of enterprises shares subject to sale through There ave approximately 3,500 small and 256 vouchers has not yet been determined. In the large industrial SOEs in Estonia. The privatization case of large SOEs that have already been program in Estonia adopts a multi-track strategy, privatized, 20% of total shares are reserved for where different methods of privatization will be the general public. applied to small and large enterprises. The institu- dional frameworkis in the final stages ofcompletion HoWing/Land and implementation has already begun. To date, A. Housing Vouchers will be used to privatize about 25% of the small businesses-mainly in public housing stocks, as mentioned above. trade, catering and the service sector-have been Residents receive housing vouchers that reflect privatized, 80% ofwhich have been sold to employ- the value of certain housing space based on ees and management. Seven large SOEs have also their employment record. Local authorities are been sold to joint stock companies formed by in charge of establishing the kroon value of the employees and managers (see Box 6-1 for a list of vouchers and distributing them in their dis- these companies). The slow case-by-case process tricts. Some regions have already initiated this coupled with the issue of restitution have been process. There are many issues left unresolved, majorimpedimentstotheprivatizationprocess.To however, such as whether to include unused date, over 200,000 restitution claims for property housing vouchers in the enterprise privatiza- have been received but only 0.5% of these daims tion program. Also, it is estimated that about have been resolved. one-fifih of the total housing sector may be The government, with assistance from the subject to restitution claims. Treuhandanstalt, is planning to stage demonstra- B. Land: In both small and large privatization tion privatizations, consisting of 38 large SOEs transactions as of March, 1993, land has not employing some 26,000 persons. The method to been for sale, though this is likely to change in be used will be international competitive bidding the near fiuture. Instead, long-term leases have on the basis ofthe criteria described above. Tender been arranged with buyers. In the agricultural offerswere solicited in major international newspa- sector as early as 1989, reforms to re-establish pers in mid-November. Presendy, the 103 bids that private ownership were initiated by granting were received are being evaluated and selection permanent use rights for farming. The new should be completed by March 1993. Box 6-1 Namot Typeof Cmpany Buness 1. Baltika clothing 2. Talleks excavators, machinery 3. Sami construction 4. Voit clodting, underwear 5. Tallin taxi company 6. Valga ATB transport 7. Mareta textiles GEORGIA Legal and Intturtional Overwvew Major Privatizaaon Schemes The August 9, 1991 Law on Privatization of CommerridlandIndatrialEntrprises State Enterprises establishes basic principles and A. Under the current Privatization Program, the conditions for privatization in Georgia. The pri- following methods of privatization are permit- mary subordinatc legislation includes various de- ted: sale of SOEs through auction or competitive crees promulgated by the government on auctions, bidding, sale of shares of open joint-stock com- competition, and corporatization. The lists ofthose panies, and buy-out of leased assets (Part III). sectors either prohibited from privatization or sub- B. Small Privatization: Small enterprises in ject to privatization, as well as the priorities and Georgia are to be sold at auction as a rule targets, are to be published annually in the State (State Program, Part III). The first auctions Program of Privatization. Separate legislative acts will indude retail shops, catering services, and govem housing and land privatization programs. unfuiished local construction projects. The Under Article 4 of the 1991 privatization law, Decree of May 28, 1992, 'About the State- the leading institution in charge ofpolicy formula- Owned Property Sale by Auction," provides tion and implementatior is the State Property for procedural rules, such as advance notice, as Management Committc (SPM"), a part of the wetl as rights and duties of the seller, pur- executive branch. It ca ;es out a unified policy of chaser, and other participants. privatization through tt the Republic through its C. Large Privatization: Large enterprises are to localbranchesandthecorrespondingmanagement be subject to privatization either by transfirm- bodies ofthe two autonomous territories. The SPM ing them into open joint-stock companies preparestheStatePrivatizadonProgram,whichisfirst subject to mass privatization or through trade submittedtothegovenmentandthencertifiedbythe sales with competitive bidding involving a Supreme Council. Under the 1992-93 Privaization certain amount of direct negotiations. Al- Program, it is now also the official setler of SOEs, though the final plan has not yet emerged on replacingthe State Property Fundinthis role. Prior to how these sales would take place, it is likely actual privatization, SOEs remain under the supervi- that the highest bid, based on price, will be sion of respective sectoral Ministries. awarded as the winner. In organizing and controlling the implementa- D.Mass Privatization: A voucher scheme out- tion process, SPM considers proposals initiated by lined in the current Privatization Program the ministries, local/municipal authorities, public contemplates transforming a group of large organizations,employeeassociationsthatrepresent enterprises into joint-stock companies by a majority of enterprises' workforces, and other December 1, 1992, pursuant to privatization possible buyers-the list ofwhich indudes citizens, plans submitted by management, followed by foreign investors, juridical ornatural, and domestic the distribution of vouchers in 1993. Despite juridicalpersonswithastate-ownedshareofcapital this ambitious schedule, a legislative gap per- not exceeding 25%. On September 21, 1992 the sists with regard to detailed information on government issued a decree that transfers owner- such issues as face value of vouchers or rules of ship of a number of large enterprises to be priva- trading. tized to the line ministries. As a result, the SPM must now obtain relevant ministerial approval to Housing/Lad privatize those enterprses. Privatizaton commis- A. Housing. Private ownership of rual housing sions will be set up to review individual privatiza- has never ceased to exist in Georgia. Apart- tions.Thecommissionswillbeheadedbyamember ment housing, on the other hand, is now sub- ofthe SPM and will also be comprised ofrepresen- ject to rapid transfer of ownership to the tatives from line ministries, enterprise manage- present tenants upon payment of the costs of ment, the workers collective, a local bank, local the transfer and titling. The new owners also authorities, and local trade unions. have to contribute in advance a sum equiva- 40 Pivaization in the Republics of the Former Soviet Union lent to a two-year lease for building maintenance and the future purchase price were superficially low. purposes. Once they receive tide, they are free to The SPM has adopted a flexible multi-track sell or othenvise transfer their ownership rights. strategy for transferring these enterprises to the Most urban housing has been already transferred private sector. The priority is to privatize small to the private sector (see Box 6-2 for details). firms in the trade, catering and consumer services B. land: No decision has yet been made regard- sectors in order to aid in the emergence of a market ing whether land will be sold along with en- infrastructure. The first auction oftrucks was held last terprises, but leases of 10 to 15 years are more March. Concurrendy with the privatization of small likely. As for agricultural land, about 50% of enterprises,largeSOEswillbecorporatizedintojoint- which is already transferred to the private stockcompaniesinpreparationforfull-scaleprivatiza- sector, 70-75% will have been distributed by tion. The government has identified 752 enterprises the end of 1993 to farmers and urban dwellers and assets to be sold, and a list naming 200 of these with rural families for free, up to a prescribed targets has been published. The long term plan is to size. This land can be freely traded two years privatizeallofthe 1,1001argeSOEswithin4toSyears. after the receipt of tide (see Box 6-3 for details). In 1993 everycitizenwill receive vouchers called "Privatization Cards," withthe amount to be deter- Scope and Itnpklmentation mined one month prior to distribution. In addition The state owned enterprise sector in Georgia is to this mass privatization program, which is charac- comprised of some 15,000 small and 1365 state- terized by a government-led top-down approach, ownedindustrialenterprises.Overallimplementation Georgia also emphasizes a bottom-up approach for has been largely been limited to long-term leases of some large SOEs, where privatization can be initi- smallenterpriseswithanoptiontobuy.Grantingsuch atedbyemployeesorotheroutsideinvestorsthrough leases, however, was recently suspended, as the rents a competitive bidding process, as described above. Box 6-2 Privatization of Housing Georgia leads the other FSU republics in privatizing urban housing. Some 28% of housing has been privatized since the program began in March 1992, and all houses were expected to be privately owned by the end ofthe year. Every day some 300 apartments are transferred, free of charge, to the tenants. Transfer of housing is free to the present tenants, who have to pay only the costs of the transfer/titling and the equivalent of a two-year lease as an advance to ensure that funds are available for major restorations or innovations.Once title is given, the new owner is free to sell or otherwise transfer the housing. There is some possibility ofrestitution of land to former owners, especiallyto victims ofthe 1937 nationalizations. This is being considered on a case-by-case basis and has not occurred. Georgia has long experience with private housing, with 95% of rural housing previously and currendy private, and with a population that is nearly half rural. This may make it easier to establish a genuine housing market. Right now, however, the market is tin and the prices high. While the free transfer of housing helps speed privatization and the emergence of a housing market, it raises some concerns that need to be addressed. First, since rents in the past did not cover the costs of maintenance, the new owners are facing the real costs of maintenance for the first time. There is a risk that people will be less willing to spend to maintain an asset they received for free since there is no way for them to weigh the cost against the value ofa free good. The rapid emergence ofan active housing market is crucial if people are to understand the value of housing and maintenance. box 6-3 Prvattzatton of Land Georgia has also made rapid strides in privatizing agricultural land. There are 1,150,000 hectares of cultivated land in the country, and until 1991, only 6% ofthis land was privately owned. By the spring of 1992,50% was distributed free of charge to citizens and farmers according to well-defined policies. By the end of 1993, the government intends to privatize 70-75% ofthe land. The other 20-25% will remain state property to be used mainly for the production of seeds. Thelandis distributed byavillage commissionwhich is elected in avillage meeting andhas full authority to decide who is eligible for which land. All village residents, and urban dwellers with family in the village, have a right to apply. The land can be traded two years after tide is received. KAZAKHSTAN Legal and Institutional Overview Major Privatization Schemes The legal foundation ofprivatization was estab- Commercial and Industrial Entelprises lished in the Lawon Denationalization and Privatiza- A. Small Privatization: Under the 1991-92 Pro- tionofJune22,1991,whichcomprehensivelyliststhe gram, retail shops of all sizes and small public basicprinciples for transformingstate-ownedprop- catering services were to be privatized by auc- erty in all branches of production and cultural/ tion or competition, except for buy-outs by social services, including the housing and agricul- leaseholders. In particular, all food-stuff shops tural sectors, other than what is considered the under 100 square meters and other shops exclusive property of the state (Art. 9). Annual under 16 square meters were subject to man- Programs for Denationalization and Privatization, datory privatization. For small enterprises in prepared by the Cabinet and confirmed by the other productive sectors, corporatization as President after thzy are approved by the Supreme well as leasing for those with physical produc- Soviet, provide further guidance on implementa- tion places were available as additional "dena- tion. Recendy, the new Program for 1993-95 has tionalization" techniques. Under the new been adopted in March 1993, containing a differ- Program for the current period, small privati- ent strategy from that of the previous Program, zation will be carried out through auction or which was found to be unsatisfactory. tender, where the purchase price will be paid The 1991 1 w establishes the State Property in the form of 50% cash and 50% housing Committee ("SPC") as the main policy-maker and vouchers described below. Systematic pre-sale legal seller. Recendy, the SPC ceased to operate as liquidation will be also considered. The con- an independent agency after being integrated into current privatization of wholesale and truck- the Council of Ministers, with its Chairman up- ing concerns through segmentation and graded to the rank of Deputy Prime Minister. The auctioning of individual trucks and ware- process of transferring local communal property was houses is expected to generate competition in initially supervised by the corresponding representa- these areas for newly privatized retail units. tivesoflocalsoviets. InMarch1993, underapresiden- B. Large Privatization: Under the new current tial resolution, this parallel structure was abolished in Program, very large and "special" SOEs will favorofestablishingasingle system fortaiserringall be privatized on a case-by-case basis under the state property under the authority of the SPC. leadership of the SPC, in accordance with any The SPC periodically approves lists of enter- specific legislative acts pertaining to these prises not subject to privatization. SOEs specifi- enterprises and in consultation with the Com- cally designated for privatization in the annual mittee on Anti-Monopoly Policy. The list of Program will be automatically subject to the SPC's permissible methods includes sale to a certain jurisdiction. In other cases, any eligible buyer-the number of investors on stipulated terms, sale list of which indudes employee groups as the through auction or tender, management con- collective buyer, citizens (those with 5-year resi- tracts, and open sale of shares. In 1991-92, dency on a priority basis), foreign investors, and the medium to large enterprises identified by other juridical persons whose "property does not the SPC and local soviets were to be trans- belong to the state" (Art. 10)-may also initiate the formed into joint stock corporations, where process by filing an application. When the applica- the ministries determined the order and con- tion for a particular SOE is approved, a Privatiza- ditions of distributing their shares. tion Commission is formed from representatives of C. Mass Privatization: Under the new current the SPC, managers and workers of the enterprise, Program, a new type of voucher called the financial institutions, trade unions, and other spe- Privatization Investment Coupons is to be cialists and prepare a detailed sales plan for the introduced in order to privatize medium to SPC.S6 Under the old 1991-92 Program, the first 86 Under the new Program, the role of these Privatization and foremost right to choose a particular form of Commissions is likely to be drastically reduced (with the privatization transaction belonged to the labor possible exception for very large SOEs), as the overall collective (Part 1I). privatization process is subject to increasing state controL 42 P)Wvatiwaion in the Republics of the Former Soviet Union large SOEs. These vouchers are points-de- than200employees), 8,000or22.4%aremedium- nominated and non-material. Following rapid large (200-5,000 employees) and 200 or 0.6% are corporatization -with 100%o state owner- very large (more than 5,000 employees). In total, ship-they will be used to purchase at least these SOEs employ about 5.5 million workers. 51°% of the shares of enterprises, exclusively Kazakhstan, the largest of the Central Asian through investment funds,. in waves of cen- republics, is also leading the pace ofprivatization in tral auctions organized by the newly estab- the region. A comprehensive legal and institutional lished State Privatization Fund under SPC's frameworkhas been established, and a detailed plan control. Foreign investors may participate by proposed by the World Bank, EBRD and USAID purchasing enterprise shares direcdy from formed a basis for the development of the new investment funds. Note that some enterprises current Program. Implementation has also started may be required to keep a certain state share at several levels. package in the care of specialized holding By March 1993, some 6000 small to large end- companies or in the form of a 'golden share" ties have been privatized and over 205 larger enter- which confers on the state certain veto rights priseswere transformed intojoint-stockcompanies. over major business decisions. In all other The initial phase of privatization under the old cases, however, all the shares of corporatized Program was strongly biased towards employee SOEs will be subject to mass privatization preferences, as the majority of these firms were auctions, with the exception of the shares privatized by worker collectives whose proposals reserved for the labor collective for free. often received automatic state approval. Moreover, acumbersome case-by-case method was used, slow- Housing/Land ing down the process. A. Housing. Under the previous 1991-92 Pro- The government has recendy adopted a multi- gam, and now extending into the current track strategy that will speed up the pace of imple- period, each adult citizen who meets the resi- mentation. The priority is to continue small-scale dence requirement is to receive a fixed amount privatization, targeting the retail, trade and service of free coupons based on a complex set of firms. A systematic and organized auction process rules related to work record and family status. should accelerate the pace while maintainingtrans- Initially, once distributed, they could not be parency. The formidable number of medium to traded, but in order to facilitate the new small large enterprises in Kazkhstan has led to the devel- privatization program mentioned above, they opment of a mass-privatization technique. To this may be now freely purchased and sold."e With end, Privatization Investme it Coupons are being dwellings offered at a fixed price, cash install- distributed to citizens, which in turn will enable ment payments were also accepted if the num- them to invest in shares ofprivatization investment ber of coupons was insufficient. Dwellings funds. With regards to very large enterprises, it is thus purchased may not be exchanged or sold. expected that the case-by-case approach will re- In a number of cases, residents were able to quire a much longer period of implementation. obtain their housing for free without surren- Despite the fact that the govemment does not dering their coupons, creating much confu- intend to privatize arable land, some progress has sion in implementing the program. been made in transferrin g housing to private B. Land. As the exdusive property of the state, hands. By mid-1992, 300,000 units or 10% ofthe land is not to be privatized, but may be leased housing sector was privatized. Once the distribu- on a long-term basis up to 99 years (1993-95 don of housing coupons is completed, the pace of Privatization Program, Part II). privatization should accelerate. S%vpe 1d Inmbk entWi D7 The reasons for restrictng voucher use to the invesunent funds indude (1) the simplification of share auctions due By early 1992 there were approximately 35,700 to a limited number of bidders; and (2) corporate gover- ' ~~nance enhancement dhrough thcoversigtbyinsttutional wholly state-owned commercial enterprises in Ka- itmoohh s zakhstan. Of these, 27,500 or 77% are small Qess They wiD not besecuritized, however. KYRGHYZSTAN Legal and Instit#tional Overview employees as a labor collective, individual citizens and their groups, foreign investors, and legal enti- The legal foundation for privatization in ties with state participation of less than 50%/o- Kyrghyzstan is comprised of a complex package of could initiate the privatization process, but thus far, legislative acts adopted by the Kyrghyzstan Su- it has invariably been initiated by labor collectives. preme Soviet, the government, the President, and At virtually any time, a labor collective or another various state agencies, especially the State Property controlling group could submit a plan for privati- Fund. The principal enactment is the Law on the zationtotheSPF. Upon receiptoftheplan, the SPF General Principles of Destatization, Privatization would organize and chair a Privatization Commis- and Entrepreneurship of December 20, 1991, the sion, composed of representatives of workers and Law on the Privatization of the Housing Fund of the local soviet, a banker, an auditor and any other December 20, 1991, and the Law on the State individual chosen by the SPF. The Commission Property Fund ofJuly 1, 1992. Major subordinate was authorized to determine the new capital struc- legislation includes various decrees issued by the ture, the value ofthe enterprise and a time table for government related to organizing auctions or com- transforming the enterprise. petitions, conducting valuations, and listing the peculiarities of privatizing state or municipal agri- Major Privatizatin Schemes cultural enterprises. The above framework relates to national property only, but under a Presidential Comme?ri and IndwtridEnterpries edict of August 3, 1992 the destatization and A. With the old Program in force, privatization privatization program is now extended to regional was largely carried out on a case-by-case basis. and municipal property. If a labor collective did not have a plan for a Under the 1991 basic privatization law, all state buy-out and if such an enterprise was within and municipal enterprises, associations and organi- the categories authorized for privatization, the zations which are legal entities can be objects of SPF could initiate the process by authorizing "destatization" and privatization. Land and other an auction or tender to sell the enterprise. mineral or natural resources, as well as cultural and B. Small Privatization: The Concept Note historic sites, remain under exclusive state owner- broadly lists leasing and asset dispositions as ship. A January 1992 decree set forth a program the primary methods for privatizing small which listed the specific categories of enterprises SOEs. subject to corporatization and privatization to be C. Mass Privatization: "The most acceptable" carried out by the SPF. Implementation was ini- method of privatization for medium to large tially planned to take place in three phases lasting SOEs, according to the Concept Note, is until 1996. In December, 1992, the Supreme So- transformation into joint-stock companies viet approved the Concept Note on Privatization, along the three share allocation options rec- and the above program has since been suspended.89 ommended: 1) 35% sold to the labor collec- Under the 1991 privatization law, the State tive, with the state disposing the remaining Property Fund ("SPF"), which reports to the Su- 25% to the general public in exchange for preme Soviet, is delegated by the latter to exercise their 'special means of payment," such as the ownership interest of state property. The SPF privatization vouchers, and 40% through assumesalltheresponsibilitiesassociatedwithpriva- open sale; 2) 51% sold to the labor collective, tization at national and local levels. In theory, it 25 % to the public for vouchers, 20% through possesses both executivepowers andproperty-own- open sale, and 4% remaining as a state-owned ing functions of the privatization process, but in "special share;" and 3) 20% sold to the labor practice supervision of large enterprises has been collective, with the state distribudng the rest, delegated to the relevant ministry or "concem," an administrative body under the council of ministers 89 A new Program of Further Development and Support of resembfing a ministry in duties and budget. Entrepreneurship, as well as a long list ofnew or amended resem g a m y dtregulat.o, IS ected to tke effe sometme in 193, Under the now suspended program, either the representing a major change in the county's approach to SPF or any other eligible buyer-which includes privaiaoion. 44 Privatization in the Republies ofthe Former Soviet Union 35% of which is targeted for foreign investors. to promote agricultural production. The gov- Note that each option permits the labor col- ernment proposes to review land privatization. lective of an enterprise to use the vouchers of its members to buy up to 25% of the total Scope and Impleneation number of shares. Details on the mechanics of voucher distribution and exchange into shares There are no accurate figures on the number of will be worked out in the future. SOEs in Kyrghyzstan, since larger industrial enter- prises are organized in conglomerates and each Hosing/Land contains from 1 to 10 units. A rough estimate A. Housing: Under the 1991 Law on the Privatiza- (>1,000 employees) includes about 37,000 SOEs, tion of the Housing Fund, apartments and 1,000 of which are large business units. dwelling houses are to be transferred through the The pace of implementation has been uneven, useofthe speal means ofpayrene The tat is to with detailed rules for privatization being formu- prmivwze80% ofallhousingbytheendof 1993. lated on the basis of the new Concept Note. By B. Land: In general, ownership and leasing rights December 1992,1,866 small enterprises were priva- to land on which property is being privatized tized, some 53% through auction or tender and are not yet darified. The plots of land on 18% through purchase by labor collectives. Prior- which housing is built remain under state ityis given to the privatization ofsmall shops, trade ownership, but are managed by local authori- and service establishments. The corporatization of ties. As for arable land, ownership reform large SOEs has begun, and some 140 firms have began in 1991 to permit private farming, and been transformed into joint-stock companies. In after a brief suspension it has resumed again. about half of them, the labor collectives own a Some farm land has been also leased in order majority of shares. LATVIA Legal and Instiutional Oveiew must submit an alternative plan to the Council of Ministers within a limited period of time. A priva- On March 20, 1991, the Law on the Basic tizationcommissionattheenterpriselevelwillthen Principles of State Property and its Conversion was be formed to carty out the mechanics of the trans- enacted, listing the general objectives ofrestitution action, including the management of experts for and privatization. A small enterprise privatization valuation. As for small enterprises subject to the program commenced in November with the Law 1991 law, municipalities appoint a privatization on Privatization of Municipally Owned Objects of commission to carryout auctions and tender offers. Trade and Commerce, Restaurants, and the Ser- vice Sector. In March 1992, the Law on the Con- Major Privatization Schemes cept and Preparation of a Program of Privatizing Commeria and Indwiad Enter State and Municipal Property called for preparing prises a systematic privatization plan for large SOEs.After A. Small Privatization: Pursuant to the 1991 introducing the Latvian ruble this past summer, law, once "municipalized," (i.e., registered as some efforts to start privatization of larger SOEs municipal property) rhe assets and inventory were madewith the Lawon the OrderofPrivatizing of retail shops, restaurants and service outlets Objects of State and Mtnicipal Property. To that are subject to cash tender or auction con- end, the Law on CertifiLates was passed near the ducted by municipal authorities. The pur- end of 1992. The foundation for privatization of chaser may be either a natural person who land is set in the 1992 Law on the Privatization of meets a residency requirement or a registered Land in Rural Areas. legal person. Any employee or group of em- While policy formulation activities are to be ployees may also participate. In deciding on a coordinated by the Miristry of Economic Reform particular offer, future business plans (such as ("MER'), different line ministries have established a mit 'mum operation requirement) are con- their own sub-divisions onprivatization, decentral- sidered. izing the decision-making process. At the imple- B. Luge Privatization: In July 1992, a list of 25 mentation stage, the institutional arrangement enterprises was approved by parliament to be becomes more diffused, as line Ministries select sold for hard currency, and also for Latvian candidates for privatization under their purview rubles since November 1992. A part of the and review specific privatization plans prepared at demonstration privatization program, they the enterprise level. The MER is to be kept in- will be sold as going concerns. The following formedofsuchdecisionsandmayintervenetooffer month another list of over 500 SOEs subject its own alternatives. It is not clear which entity has to various modes of transactions, such as open final say in such cases. auction or tender, corporatization and sale of Pursuant to the 1992 law on the order of priva- shares, leases with a buy-out option, and post- tization, a list of enterprises which are to be priva- liquidation asset disposition, was prepa-ed. As tized in the current and coming years wll be of November 18, 1992, privatization plans for prepared, based on the recommendations bysector these SOEs should have been submitted to the ministries. Any eligible buyer-the list of which appropriate line ministries. Failure to comply includes citizens or permanent residents of Latvia with the above requirement may result in with a minimum of 16 years of residency, domestic involuntaty corporatization. legal persons excluding SOEs, employees with 5 C. Mass Privatization: The Law on Certificates years of work record either individually or as a suggests that privatization vouchers will be group, and foreign investors-may submit a pro- issued for purchasing state and municipal posal for an SOE on the list to the responsible property. Corporadzed enterprises will be ministry, which decides whether to approve the required to reserve 25% of their stock for this proposal. If not, it then sets a deadline for a new purpose. Note, however, that there is a special submission. Once approved, the proposal is sub- list of enterprises that the ministries have ex- mitted to the MER for a final check If the MER empted from this program. The vouchers will decides to estop the approval of the ministry, it be in the form of accounts opened at the Sav- 46 Privatization in the Republics ofthe Former Soviet Union ings Banks and Land Banks for all Latvian began with granting land use rights-inherit- residents in ar. amount based on their resi- able but not tradable-to certain individuals. dency status. The recipients are entitled to sell Under the 1992 land law, all present users or gift their vouchers to other account holders may apply for land allotment, but former after paying a certain fee. Although details of owners have a preferential right. the program are far from being finalized, it - appears that the certificates may be also used Scope and Implementation to compensate restitution claims. Detailed regulations were pending as of March, 1993. There is no accurate count of the number of small enterprises, as their ownership and the re- Hoeing/Land sponsibility for their privatization has been trans- A. Housing: Another contemplated use fox the ferred to municipalities. However, it is estimated vouchers lies in privatizing housing stock that over 5,000 SOEs are in this category. The After restitution to former owners is com- Latvian privatization programn has been hindered pleted, in the public rental sector the govern- by two main elements: 1) the introduction of the ment is expected to introduce a system to Latvian currency, and 2) the process of restitution. permit tenants to buy their housing by using The latter has been a major impediment since a some combination of vouchers and cash. definite plan to compensate previous owners for B. Land: Urban real estate is to be leased for 5 seized property remains to be drafted. years in connection with small privatization as By March 1993, about 50% of the small trade, discussed above.m If the new owner complies catering and service entities were estimated to have with all lease conditions, the question of pur- beenprivatized.Themethodsusedconsistedmainly chase may be reviewed at the expiration of the of sales to employees with a few cash auctions. contract. As early as 1988 in rural areas, how- 90 Inmanycases, this leasemaybeasvaluableas, if notnmore ever, reforms to re-establish private fairming than, other asses on sale. LITHUANIA egal and InautJioeid Overview the General Privatization Program of Lithuania and submits it to the CPC for final approval. The 1990 Law on Fundamentals of Ownership Subsequendy, privatization agencies carry out the laid the foundation for restoring certain state- public subscription process for shares in these large owned immovable property to former owners enterprises after they are valued in accordance with through a restitution process. The framework for procedures set by the Ministry of Finance. In both transferring various state-owned assets through auctionsandsubscriptionsofshares,onlyLithuanian privatization was established in 1991 through a citizens with vouchers, or investment funds acting package oflaws passed bythe parliament-on Initial as their intermediaries, can participate. Other types Privatization of State Property, on Land Reform, ofprivate investors-domesticorforeign-are per- on Privatization of Agricultural Entities, and on mitted in a separate hard-currency privatization Privatization of Apartments. There is also a sepa- program. rate enactment on the priority of employee owner- ship dating from 1992 (amended in February 1993). Major Privatiwtio Schemes The total number of subordinate legislation pieces adopted to implement the privatization and resti- Command ald Idustrial Enterprtses tution process exceeds 200. A. Lithuania's enterprise privatization program Privatization is implemented by the Central has two basic approaches-one based on Privatization Commission (CPC") and by the "vouchers" and the other involving hard cur- privatization commissions of towns and districts rency. Under the latter approach, a selected subordinate to it. The CPC is appointed by the group of SOEs is subject to hard currency parliament on the recommendation of the Prime privatization through auction or tender offers. Minister and chaired by the Deputy Prime Minis- So far, progress has been limited to the prepa- ter in charge of privatization. Local commissions ration of some 60 large SOEs for tender, with are appointed by the national government on the a few sales finalized. The 'voucher" approach, recommendation of regional soviets. In addition, a on the other hand, has achieved impressive CPC representative may be appointed to these results, particularly in small privatization. commissions. Together, they develop and coorti- B. Mass Privatization: By early 1991, eligible nate privatization programs and strategies for en- citizens received vouchers which were re- terprises within their respective jurisdictions in corded in their investment accounts at the consultation with the relevant ministries or local Savings Bank for use in both small and large soviets. As forthemechanicsofprivatization, priva- privatization programs. Though not in the tization agencies are established under local gov- form of physical certificates, the vouchers have ernmentstocollectenterpriseinformation,organize varying face values reflecting the age brackets auctions and public subscriptions of shares, and to of recipients. Although they cannot be ex- prepare privatization documents. changed for direcdy for cash,9" they may be Most small enterprises which are subject to the exchanged for freely transferable shares in regulation by local governments are prepared for investment fimds, many of which have privatization by local privatization commissions in emerged spontaneously since early 1992. Cash coordination with the CPC. After an auction is is an additional means of payment, but only carried out, a privatization agency furnishes the up to a strictly limited amount. The quota is relevant documents to the local govemment and to set usually equal to the face value of the indi- the enterprise at issue, as well as to the local com- vidual voucher entitlement plus some minor mission, which affirms the results. For larger SOEs, adjustments. Note that the purchaser of state draft privatization plans are prepared by the rel- property or shares thereof through small or evant ministries or local governments after any large privatization programs must make 5% necessary industrial restructurng or segmentation cash payment. is carried out. The Ministry of Economy consoli- I Thoughnotyetofeiciallyconfirmed, thisprohibitionnmay dates theses separate privatization programs into be no longernforced. 48 Privatization in the Republics of the Former Soviet Union C. Small Mass Privatization: Defined as those B. Land: In enterprise privatization, land cannot with a book value of less than I million be acquited with vouchers, but leasing rights Wanas, small SOEs are sold through weekly for buildings and land accompanying enter- auctions held by local privatization agencies. prise privatization are permitted. Certain plots Ownership is awarded to the highest bidder of land in urban areas are, however, sold for with certain conditions: 1) the existing busi- vouchers as household land while land for new ness activity must continue for at least one construction is sold by way of auction for cash more year; and 2) layoffs are restricted to 30% only. Since 1989 in rural areas, limited land during that period. Note that the cash quota use rights-inheritable but not tradable- does not apply in the case of bidding for SOEs were granted to certain former collective farm- that are not sold in a first auction. Recently ers. Under the new 1991 law, land free of changes have been introduced to the process restitution claims or the above use rights can requiring dosed, registered bids to avoid coer- be purchased, up to 80 hecrares, with cash and cion. vouchers. A five year waiting period require- D.Large Mass Privatization: Larger SOEs ex- ment before the sale or lease of land by new ceeding 3 million talonas are privatized private owners has been recendy lifted. through public subscription in varying amounts according to individual privatization Scope and Implementation plans approved by the CPC.92 Note that this process involves neither top-down There are 7,844 medium-large commercial corporatization nor "bundling" of enterprises SOEs. As of February 1993, the number of enter- in a wave of auctions. Shares of an enterprise prises that have been included in the Privatization are first offered at a fixed price related to its Program total 4,482, comprised of2,038 medium! book value. If they are over/under subscribed, large and 2,444 small SOEs. Of these, the 3,184 they will be offered in a second round at have been sold, including 1,864 small and 1,284, higher/lower prices until the number of shares medium/large SOEs. subscribed comes within 10% of the total Uthuaniahasmadesignificantprogressinimple- offered. There are no resale restrictions at- menting its privatization program, which follows a tached to these shares. Shares can be exchanged unique multi-track strategy. A temporary morato- as long as the exchange is registered with the rium on enterprise privatization was imposed atthe company. A stock market is scheduled to open end of 1992 due to allegations that coercion was this summner -though this is likely to be de- used in auctions of small enterprises, however. This Liyed. Because of limited demand for shares in moratorium was lifted last February after changes some very large SOEs, new initiatives are being were made in auction procedures and regulations. explored, such as ystematic segmentation or It is hoped that the stock market and voucher lifting restrictions on foreign investors. tradability will enable consortium of ownership to occur. Although plagued by restitution problems Hotuing/Land similar to its Baltic neighbors, the government has A. Housing: Along with restitution, privatization not allowed the privatization process to slow down. of state-owned housing stock is taking place Under this approach, implementation is pro- through the above program, combining ceeding at a satisfactory pace. Medium and large vouchers and cash. All households have a legal enterprises have been divested by public share right to buy their rental apartment unless it is offering, with 68% of shares on average transferred subject to restitution or special exemption. to private ownership. Investment funds have The price of the dwelling is set by the govern- emerged as intermediaries for pooling voucher ment on the basis of the construction cost, creditsandpurchasingsharesinjoint-stockcompa- building type, size, location, and amenitics. nies.Underthecommercialprivatizationapproach, The buyer must make a cash down-paymnent where SOEs are sold for hard currency, 8 entities not less than 20% of the purchase price. Note have been sold, raising proceeds totaling $800,000. that there is no cash quota, as described above, In addition, Philip Morris bought Klaipeda To- in housing purchases by existing tenants. Pres- endy, 92% of the applications to buy housing sa Themedium-sizedSoEscanbesoldeitheratauctionsor have been processed. by publc subscription. Privatication in the RTpublis of the Former Soviet Union 49 bacco for US$12.5 million in March 1993. The ing. The remaining 82% of agricultural land has government is encouragingmore foreign participa- not yet been privatized, and this process is esti- don in hard currency privatization. mated to require five more years for completion. Land privatization has made relatively little The primary reason for the delay has been the land progress. Only 246,000 hectares have been re- survey requirement prior to restitution. An addi- stored to their former owners and an additional tional problem is the excess of claims over the 340,000 have been parceled out for private farm- available supply of land. MOLDOVA Legal and Insdniend Ovavw which can be privatized for cash is limited to less attractive objects such as unfinished build- The 1991 Law on Privatization presents a gen- ing sites and bankrupt SOEs. Each Moldovan eral framework for transf&rring state-owned assets. citizen will receive a fixed number of vouchers Article 3 excludes those assets related to the defense based on the duration of meaningfil employ- capabilityandsecurityofthestate,nationalcultural ment-induding military service, but every- property, social services to the public, or state one, induding infants, is automatically monopolies from the process of privatization. This credited with a minimum of five years. With a legislation also governs the privatization of the face value denominated in rubles, they are in housing stock. The primary means of realizing the bearer forn but cannot be sold or exchanged citizens' right to own assets targeted for privatiza- except with immediate relatives. The issue of don is to take the form of vouchers (Art. 5). investment funds has not yet been decided on. Under Article 7, the responsibility for policy Some 300 SOEs have been selected for the formulation and implementation is placed on a current period, and it is contemplated that parliamentary agency, the State Property Fund they will be divided into a pre-determined ("SPF"). Itsauthority,however,mayoverlapsome- number of shares. There is yet no precise what with that of the Minisqy of Economy, an regulation regarding how the process of issu- executive organ responsible for overal economic ing shares is to be systematically accom- reform including privatizadon. Thus far, no ex- plished-in other words, how to transform plicit delegation of audtority is provided in regd these SOEs into joint-stock companies and to which state agency may carty out the necessary establish state ownership prior to transferring measures for transforming SOEs prior to divesti- title to the new buyers. Note that the shares ture, and to hold their assets with vested rights of purchased wit these vouchers must be held ownership. for a minimum of two years. FollowingthegguidelinesestablishedbytheSPF, B. Small Mass Pratization: As the Moldovan the enterprise subject to privatization will make an program makes no distinctions based on the inventory of its fixed and operating capital. The size of enterprises, small enterprises will be result will be sent to the SPF for review and ap- subject to the same process as large SOEs, proval. The SPF will then request the appropriate except for the fact that they may be auctioned financial bodies to issue stock reflecting the ap- offas going concerns in single units rather proved ledger value of the assets targeted for priva- than in bundles of shares. Under the govern- tization. The SPF will inform the public of the ment decree on Certain Measures in Prepara- inventory results and the stock issuance as well as tion for Privatizadon, demonopolization and the rules, place, and time of voucher distribution. segmentation will precede privatizadon in the Subsequendy, the local bodies of the SPF will trade, catering, and consumer service sectors. organize the exchange of vouchers for shares of enterprises located in their distrct through auc- HowmnL and tions. At this stage of Moldova's privatization pro- A. Housing: With the vouchers described above, cess, only those ctizens with vouchers and their Moldovan citizens are eligible to buy their intermediaries can participate in such auctions. rental apartments. Those who purchased and paid for their dwelling space from housing Mlgor Privaiaioxn S&ema construction or equivalent cooperatives will be issued proper legal deeds on their private CommGrid ad Indwsrid Eneirps property. Approximately 70% of housing has A. Mass Praizaton: The Privatization Pro- been transferred to the private sector. gram for 1992-94-approved by the parlia- B. Lund Industral sites may not be subject to ment in March, 1993-envisions privatization privatization until the year 2001. For arable primarily through a system of auctions, where land, the first phase of land reform has re- prospective buyers will bid for shares of SOEs sulted in distribution of 100,000 hectares to with vouchers only. The list of enterprises private farmers. Their interest has been thus Privation i* the Repubhs ofra y dFomer Sovi Union 51 far limited to certain land use rights, and thdy areinduded. Dueto thevetyrecentadoption ofthe cannot sell their land until the year 2001. privauzation program, no implementation has yet occurred. Current targets aitn to privatize about Scope and Impmenatxio 40%ofstate-ownedassetsduringthenexttwo-year period and to begin the distribution process for Crude estimates of the number ofenterprises in vouchers. However, given the slow pace of overall Moldova result in a total of about 7,490 SOEs. Of progress, this goal may be overly ambitious. these, 7,000 are considered small, 440 medium and Moldova's approach seems to be single-track in 50 large enterprises. A total of 493 industrial sector nature, where small enterprises and shares of larger enterprises employing some 350,000 employees enterprises will be divested by similar methods. RUSSIAN FEDERATION Legal and Istisutional Overview lish enterprise-level Privatization Commissions consisting of 3 to 5 representatives of the manage- The basic framework for privatization in the ment and workers. Each Commission prepares the Russia Federation ("RP") is presented in a law Privatization Plan which identifies the particular enacted by the Supreme Soviet in 1991 on the stock allocation scheme selected and submits it to Privatization ofState and Municipal Enterprises. It the GKI for approval. In subsequent auctions for applies to all forms of state-owned property in the enterprise shares, Russian citizens or any other RF, other than land, housing and social/cultural person (including foreign investors) in lawful pos- institutions, which are governed by separate legis- session ofprivatization vouchers and their interme- lative acts. The State Privatization Program, pre- diaries may participate. Under no circumstances, pared by the Council of Ministers and approved by however, may a legal person whose capital includes the Supreme Soviet, provides further guidance rid state contribution in excess of 25% act as a buyer or instructions. It also contains a list of enterprise participate in auctions. As for other non- categories subject to privatization during a given corporatized enterprises subject to privatization period. While the Program applies to the entire RF, through auction, tender, or buy-outs led by part- local programs are to be developed in accordance nerships or corporations formed by employees, with its provisions to implement privatization of Privatization Commissions consisting of represen- various types of property found in the Federa- tatives of the GKI/MKI, local soviets, enterprise tion-namely, federal property, republican prop- management and workers, and relevant financial erty, property of a krai, property of an oblast, bodies will determine the terms and conditions of property of autonomous oblast or okrug, property sale. Note that foreign investors are not allowed to of the cities of Moscow and St. Petersburg, and participate in the first round of small-scale privati- other municipal property. zation without the permission of the MKI. The 1991 RF law on privatization established 2 major implementing agencies. The Stare Commit- Major Privatization Schemes tee for the Management ofState Property ("GKI"), a part of the executive branch, is responsible for Commercialad Indusridl Enter rises conceiving and managing the overall privatization A. Small Privatization: The 1992 Program di- process. It enjoys the exclusive right to issue subor- vides SOEs that are subject to privatization dinate normative acts related to privatization. With into small, medium, and large enterprises on respect to each type of property listed above, the the basis of the book value of fixed capital or GKI's local counterpart, the MKI, will implement the size of the workforce. All small SOEs, the relevant local programs. While the MKI is numbering around 200,000, are to be priva- responsible to the executive organ at the corre- tized through competitive auctions and ten- sponding level of government, in most cases its ders carried out by the MKI's and regional chairman will also be the chairman of the GKI's Property Funds. As the usual owners of these territorial branch. The task of selling enterprises enterprises, municipal and regional govern- and distributing proceeds is assigned to the Prop- ments bear the ultimate responsibility for their erty Funds, a part ofthe legislative branch, respon- privatization. sible for ownership and control in its role as the B. Mass Privatization: Beginning on October 1, shareholder and seller ofsuch property. The opera- 1992, each Russian citizen was entitled to tional boundaries between the two are not clearly receive one voucher with a face value of drawn in some aspects. For instance, the issue of 10,000 rubles and an expiration date of De- how far GKI's involvement extends beyond cember 31, 1993. These vouchers are immedi- corporatization ofSOEs remains unresolved, though ately tradable, and they may be used to this apparently has not led to any serious delay in purchase up to 80% of the total number of the implementation process of the Russian mass shares of a joint stock company formed out of privatization program. federal or oblast property under a Presidential Pursuant to the 1992 Program, SOEs subject to Edict dating from October, 1992. The sales or opting for corporatization are required to estab- ceilings may be set significantly lower for Privatization in the Republics of the Former Soviet Union 53 othet types of local property. Under a very Housing/LandPrivatization: recent Presidential decree, however, at least A. Housing: Tenants can receive a certain por- 29% of shares in all SOEs transformed into tion of their dwelling space free of charge, joint-stock companies are to be made available with the purchase price of the remaining space for vouchers. Naturally, the actual amount of prescribed by the state. Recendy, vouchers shares on sale for the general public will vary have become an accepted means of payment. depending on the size of employee share- B. Land: Under a Presidential edict of March, holding. The responsibility to conduct 1992, natural and legal persons may be given voucher auctions lies with the Property Funds, the right to acquire land or enter into a lease which will conclude the contract for organiz- in connection with enterprise privatization. ing the sales with the GKI. Investment funds Vouchers may be used as a means of payment will be allowed to serve as financial intermedi- for individual buyers of land in some of these aries to facilitate trading and to diversify risk. cases. In general, however, private ownership They are required to exchange no less than of land is subject to various legal restrictions 50% of their stock for vouchers and to spend and uncertainties. Privately owned land can be at least 50% of their total funds in buying sold freely as long as it is used only for private shares of SOEs being privatized while not housing construction or subsidiary farming. In owning more than 10% of an enterprise indi- all other cases, land can be sold after 10 years vidually. if it was acquired without payment, and after Some 6,000 large enterprises were instructed to 5 years if it was paid for. In rural areas, land transform themselves into joint-stock companies reform is taking place through a complete byNovember 1, 1992. Employeeswere expected to break-up of state or collective farms into choose between two basic corporatization-cum- smaller individual/cooperative units or cre- privatization plans: 1) gratis receipt of 25% of ation of a joint stock company. shares subject to certain individual salary caps that are non-voting, plus a right to purchase 10% of Scope and Implementation voting shares at a 30% discount from book value under a 3-year installment plan; or 2) purchase of The Russian Federation, by far the largest FSU 5 1% of the authorized capital in the form of Republic, contained some 214,803 state owned common shares by dosed subscription at a price set enterprises as of October 1992.93 Of the total, at 170% of book value, where payment in fill is approximately 18,000 are medium sized, 6,000 are required within 90 days. Unless a 2/3 majority of large, and the remainder are small-less than 200 the labor collective approves the second plan, ben- employees-enterprises. In 1987, the industrial efits will be granted under the first plan. The sector alone consisted of more than 25,000 firms, remaining shares held by the government in about employing more than 20 million workers. From 5,200 ofthese corporatized SOEs will be subject to the outset, the Russian privatization program had the above mass privatization, while those of the the objective of rapidly transferring ownership of largest/strategicSOEs-numbering 1,000-will be industrial assets from the state to the country's 1 53 sold on a case-by-case basis under supervision by million citizens. Given the immense size of the the GEI and ministries. Russian state-owned sector, enterprise reform has Though medium-sized enterprises are not sub- progressed miraculously. ject to the mandatory corporatization rule, they As for small-scale privatization, the first wave of may elect to be part of the mass privatization auctions took place in April 1992, in Nizhni program under the same conditions as large SOEs. Novgorod, Russia's third largest city. In view of the Others will be either sold to external purchasers or decentralized approach to small scale privatization divested through internal buy-outs. Note that in in Russia and the vast territory involved, obtaining addition to the two options previously described, reliable and accurate data has proven difficult. employees of certain medium-sized SOEs may enter into a contract with the government to main- 3 The total number ofSOEs is expected to incease as larger tain the solvency of their SOEs during a bone-year associations and trusts are partitioned into smaller units tain the.ovn or a duringh tonpurc prior to privatization. In January 1993, one estimate put work-out period in return for a right to purchs the number ofsmall enterprises (less than 200 employees) 20% of the shares on favorable terms. between 150,000 to 320,000 separate entities. 54 PrniatiWom in tm Republis of the Former Soviet Union However, the data that are available suggest that SOEs in vouchers auctions that began in December about 50 - 60,000 small entities have been priva- 1992. Since then, dose to 300 voucher auctions tized, representing over 30% of the estimated total have taken place locally, and many more are sched- number of small entities, and the number is grow- uded to occur over the rest of 1993. In the future, ing rapidly. The GKI has reported that, as of April the GKI is planning to introduce a national bid 1993, in the retailing, catering and services sectors centerto remove the need for physical participation only, over 50% of small entities were privatized in locally held auctions. Note that shares may be (46,000) outofanesdmated 90,000 entities. How- also sold through tender offers. ever, there have been regional disparities. The short-term goal for Russia is to expand the Out of some 6,000 large SOEs subject to mnan- auction process, and hundreds of voucher auctions datorycorporatizationbyNovember 1,1992,5,600 are takingplace every month. The overall goal of its complied as of March 1993. At this time, 96% of ambitious program is to privatize 1/3 of all state Russian citizens received their 10,000 ruble vouch- owned assets by the end of 1993,1/2 by the end of er, usingthem to bid for shares ofmedium to large 1994 and 213 by the end of 1995. TAJIKISTAN Legal and Inaihsiond Overiw istries, and to carq out transactions in coordina- don with local soviets. Dating from early 1991, the Law on Denation- alization and Privatization lists broad objectives for Scope and Implmetation economic reform. However, its substantive provi- sions make various references to subsidiary laws Adverse political conditions in Tajikistan have that have yet to materialize. In its most skeletal halted the privatization program which was emerg- form, this law provides for active particpation by ing in early 1991. The Republic's non-membership laborcollectivesbygivingthempriorityinselecting in the Bank has limited the amount ofinformation possible modes for ownership transfer, ranging available on the progress of privatization. Prior to from leases to outright sales. It also authorizes the current civil unrest, the government had identified CommitteeforAdministrationofStatePropertyto 1,270 SOEs for privatization. Although 390 enter- prepare concrete privatization programs for Re- prises were reportedly sold, there are no details avail- public property after cooperating with other min- ableonthesizesoftheenterprisesorthemethodsused. TURKMENISTAN LlUgand Inseitraional Overview units and of medium-sized enterprises, and finally privatization of large-scale enterprises. In early 1992, Turkmenistan enacted a basic B. Small Privatization: The first phase of the privatization law that outlines broad concepts and draft program is to conduct sales of retail units objectives for economic reform. It specifically ex- through Privatization Committees composed cludes assets related to defense, state security, and mainly of representatives from the local au- protection of the environment. As this legislation thorities and possibly the Ministry of Trade lacks sufficient detail to permit actual transactions, and MSP. Retail units would be divided into a set of follow-up laws on agriculture, retail sales, 3 categories, depending on the number of housing, and enterprise privatization is currently employees. They would be given free of under preparation. charge to the employees or sold to them at The 1992 law authorizes the Ministry of State some residual value-original cost minus Property (now renamed the MinistryofState Prop- depreciation--or corporatized with shares erty and Business Support), reporting to the Presi- distributed between employees, managers, dent, to implement privatization of republic suppliers and the Committees. AU shops property. Local soviets supervise the transfer of would be required to keep the same product communal property. The decisions of the MSP, line for 1-2 years. however, appear to be binding on all state and local C. Medium to Large Privatization: In the subse- govemment bodies for state property under its quent stages of privatization, these enterprises jurisdiction, posing the risk of conflicts of author- would be privatized on a case-by-case ap- ity. At this stage, with minimal implementation proach, with corporatization occurring only achieved, no such conflict is yet apparent. when the individual enterprise is ready. The Under Section 10 of the 1992 law, the shares of a corporatized enterprise would be destatization and privatization of property may be allocated along the same lines as in large retail initiated by the labor collecdve of an enterprise- privatization listed above, with 60% of the opposed to individual employees-the enterprise shares reserved for an eventual sale by the council, the MSP and local soviets, and other MSP. Those enterprises that are insolvent or eligible buyers, the list of which includes citizens otherwise non-viable would remain with the andlegalentitiesofTurkmenistanaswellasforeign line ministries. Note that Turkmenistan has investors in some cases. Note that those enterprises only a few very large SOEs. with some state ownership stake are not explicidy D.Mass Privatization: Schemes using vouchers prohibited from acting as buyers. The members of have not yet received serious consideration a labor collective are given priority to select among from the government. the possib'e modes of reforming their enterprise, however, ranging from leases to outright sales. An Housing/Land application regarding national property must be A. Housing: Sales throughout Turkmenistan submitted to the MSP for approval, while one for began in 1988 under a special law which tar- local property is reviewed by the local soviet. geted war veterans. A new law for the city of Ashkabad was passed on January 1, 1992, Major Privn'zasion Stheme permitting residents who had lived or worked in the city for more than 15 years to obtain Commridand IndustriEntprises free ownership. Others who wanted to buy A. The MSP, with assistance from the Economic their apartments were required to pay a price Research Institute and key ministries, drafted based on initial cost minus depreciation with a comprehensive Privatization Program for no allowance for inflation. The current ten- consideration by the Cabinet in 1992, but no ants, however, would not be ejected even if final program is in force yet. The draft pro- they did not apply to buy their housing. Vari- poses a phased approach, starting with small ants of this program began elsewhere. Under scale privatization to be completed by 1995, the Presidential decree of March 12, 1992, followed by sale of a larger number of retail existing aud future new owners were prohib- Privatkation in the Republa ofthe Former Soviet Union 57 ited from seJling their housing except to a special 140,000 workers. While the final outlines of the government comnmittee for 10 years after pur- draft Privatization Program are still being debated chase. Since early 1993, the entire housing priva- as of March 1993, the legal and institutional frame- tization program has been suspended. work remains incomplete. Turkmenistan has cho- B. Land: Long-term leases for industrial sites sen to undertake economic reform with great would be considered under the draft program caution, and in the industrial sector no productive in connection with enterprise privatization. assets have yet been privatized. Recently, a limited plan to foster private own- The government's tentative objective is to ini- ership of land in the agricultural sector has tiate privatization of the small business units, fol- been announced, designed to allocate up to 50 lowed by transforming the larger enterprises into hectares of hitherto unirrigated land to eligible joint-stockcompaniesonacase-by-casebasis. Trans- applicants who, once selected by the govern- formation will occur individually as enterprises are ment, are required to farm the land and are deemed ready. Shares of those corporatized enter- prevented from selling or renting it for 10 years. prises would be divided among employees (25%), management (5%) and suppliers (10%), with the Scope and Implementaion remaining 60% equity retained by the govemment for eventual sale once a buyer is found. Under this Turkmenistan's retail sector is comprised of strategy, the MSP could end up with a large port- about2,172 stateownedshops, while the industrial folio of enterprises with a controlling interest for an sector consists of 1,381 SOEs employing about extended period of time. UKRAINE Legal and It uson Ovew which the state-owned share of property does not exceed 25%. Once an application is approved, a Thelegalfoundation forprivatizationwasestab- Privatization Commission composed of represen- lished through the enactment of the Law on the tatives of the applicant buyers, state/local authori- Privatization of State Enterprises, dated March 4, ties, and financial agencies is formed to prepare the 1992, and its somewhat simplified derivative on detailed terms of the sale and conditions. small enterprises, dated March 6,1992. These two laws apply to enterprises owned by the state, the Major P)ivatiwtion S&hemes Crimean Republic, and local communities. They does not extend to housing, state land, socio- Command and Indual En rises: cultural facilities, collective farms and consumer A. The current Program identifies categories of cooperatives. Privatization in the first two catego- enterprises that are either subject to privatiza- ries are governed by separate legislative acts. tion or exempted from privatization in 1992, The State Property Fund ("SPF") and its re- as well as those that require prior coordination gional offices are in charge of managing the priva- with the Cabinet. The first category of enter- tizatio process for ratioal property,while property prises are further broken down into 6 Groups belonging to the Crimean Republic or municipali- (A through F) based on their estimated book ties will be privatized by appropriate local authori- value and operation characteristics. Each ties. The Chairman of the SPF sits on the Cabinet, group has its own set of applicable privatiza- but without a ministerial tide, and the SPF is tion methods. accountable only to the parliament. It has promul- B. Small Privatization: For the Group A enter- gated a number of implementing regulations sub- prises valued under 20 million rubles, the ordinate to the basic privatization laws on issues available methods of privatization include such as filing a privatization application. It also purchase by "buyers' associations," which are bears the responsibility for preparing annual Priva- formed by not less than 50% of the workers, tization Programs that list the goals, priorities, and buy-outs by leaseholders, auction, and compe- methods of privatization. The Programs are re- tition-with or without deferred payment. viewed first by the Cabinet before approval by Multiple means of payment may be accepted, Parliament is sought. Under the SPF's authority to including privatization certificates. The buy- manage the implementation process, it approves ers' association is given certain discounts to enterprise-specific privatzation applications, un- buy all or part of an enterprise. When other dertakes transformation of SOEs, and acts as the bidders are interested, resulting in an auction, lessor or seller of state property. However, it may the buyers' association is the preferred buyer if not interfere in the operation of enterprises in all the terms are equal. The same generic ap- general (sec. 7). The legislation does not make it plication procedure and valuation guidelines, clear at what stage of the privadzation process the rather than a distnct fast-track method, ap- SPF may issue decisions that might interfere with pear to apply to Group A. the functions of line ministries or enterprise man- C. LIAge Privatization For the Group B and C agers. enterprises whose values range from 20 to The intividual privatization transaction maybe 1,500 million rubles, privatization through initiated by the SPF itself, other local authorities, sales of shares by auction upon transformation employees, or any other eligible buyer by filing an into joint stock companies is also permitted. applicationwiththeSPFortheappropriateCrimean In practice, a large number of these larger Republic or local privatization agency. Note that enterprises have been leased to labor collec- the buyers' association formed by enterprise em- tives. As the lessee, these cooperatives have ployees participates in the process as a single buyer enjoyed significant advantages under the Law with due benefits. Other permissible buyers in- on Leasing, such as the exclusive right to de- dude domestic citizens, excluding govenment cide whether or not to enter into a buy-out personnel involved in implementation, foreign in- provision during the first three years of the vestors-juridical or physical, and legal entites in lease. Recent legislative amendments may Privathzation in the Repulics of the Fonner Soviet Union 59 include the SPF's authority to override this may purchase the buildings housing the enter- provision in the future. prise, but not the land on which it is located. D.Mass Privatization: Uuider the Law on Priva- Instead, a right to enter into a long-term lease tization Certificates, each Ukrainian citizen is for the land with the local government au- entitled to receive in the amount of 30,000 thorities is provided. Ukrainian legislation on rubles-to be revalued in the upcoming new land reform and independent family farming national currency- and certain credits in his allows private ownership of land subject to or her privatization account at the Savings certain restrictions on size, resale, and employ- Bank. The total nominal value of these certifi- ment of hired labor. Under recent decrees, it cates is set to equal the book value of all assets is now possible for a member of a state or subject to privatization, currendy fixed at collective farm to receive title as well. 1,520 billion rubles. In addition to acquiring shares in SOEs direcdy, the recipients have Sope andImpkmentaion the right to place or invest the certificates in various investment funds, trust companies, or The state enterprise sector in Ukraine consists of other intermediaries which will be established 60,000 small, 40,000 or more medium and 6,000 under new legislation. The law leaves many large enterrises. The privaization program is still details for future implementing regulations in the development stage, and the only implemen- open. Among them are such important ques- tation to date has taken the form ofleases, number- tions as who will decide when to apply this ing about 1,000, and corporatization of 60 method of privatization to a particular enter- enterprises. The slow pace of transition, coupled prise and how to capitalize the SOE initially with the minimal amountofgovernanceexerted by and set the relative values of shares in different the state, has promoted a large amount of sponta- enterprises. neous privatization. The vast number of SOEs in Ukraine has also not been consistent with the HousingILand proposed methods of privatizadon. Another im- A. Housing: Under the 1992 law on 'Privatiza- pediment to the implementation process is the don of State Housing," all residents are en- mass-privatization plan, which has yet to be formu- tided to receive, free of charge, a certain lated in detail. The decision to introduce an inde- amount of floor space. Where the size of the pendent Ukrainian currency has also slowea the existing housing is less than their entidement, pace of the program. they will be issued housing checks totling the L'viv authorites, however, began small scale replacement cost of the shortage. These hous- privatization by holding an auction of 17 small ing certificates may be converted for use in state businesses, mainly retail and service oudets. acquiring SOEs. In the reverse situation, thc The prices ranged from US$1,200 equivalent for a residents pay for the surplus space in cash or vacant and run-down restaurant on the outskirts of regular privatization certificates. the city to US$55,000 equivalent for a shop in the B. Land: Tk. buyer in a privadzation transaction city center. All payments were in cash. UZBEKISTAN Legaland Insltio Ovvww right of first refusal to choose among different forms of privatization under Article 6 of the basic The legal basis of privatization in Uzbekistan is privatization law. laid out in the Law on Destatization and Privatiza- don dated November 19, 1991, and further imple- Major Privaization Sehems menting regulations issued in October 1992. Under this law, state property is to be divided between the Commercial and Indsid aEntertprises Republic and the provinces, with large local enter- A. There are 35,900 medium and small enter- prises that are not geared to "national needs" allo- prises and 1,000 large enterprises (more than catedtoprovincialauthorities.Varioussubordinate 1,000 employees) in Uzbekistan. The 1991 resolutions ofthe Cabinet have since been adopted privatization law lists 3 methods of enterprise on privatization issues ranging from housing to reform: leases with buy-out option, outright implementing institutions. sales, and transformation into joint stock All SOEs subject to privatization are supervised companies or collective property. Uzbekistan by the Committee for State Property Management espouses sectorally-differentiated programs and Privatization ("CSPMP") and its local branches developed through a complex package of sub- under a Presidential decree dating from February ordinate legislation. 1992. Its Chairman is appointed by the President B. Small Privatization: Some 4,500 entities in and confirmed by the Supreme Soviet, and the catering, trade and services have been slated CSPMP reports directly to the Cabinet. The for privatization during a two-year period CSPMP participates in policy formulation, sets starting from October 1992. Various small- procedures, prepares and implements privatization sized local industry firms are also targeted for programs. Local approval is still necessary for priva- privatization. While a few very small service tizingnon-Repu'blicenterprises. UnderArticle 9 of entities are to be given away to employees, the the regulations confirmed by the August 3, 1992 rest will be privatized by a case-by-case Cabinet resolution, the CSPMP's decisions are method; the labor collective will be consulted, binding in principle on ministries, departments, and the buyer may be required to enter into concerns, associations, enterprises, organizations, agreements that preserve various aspects of the local administration bodies and citizens. However, enterprise, such as output or employment. the CSPMP's authority appears to suffer from the C. Large Privatization: As for major industrial enormous complexity of the structure of 'Union-wide" SOEs, the associations have Uzbekistan's industrial sector, which consists of transformed them into state-owned, dosed large "associations." These associations, some ex- joint stock companies under the slogan of amples of which include the Light Industry Asso- "denationalization." There not yet a final plan ciation or the Food and Beverage Association, have for government share distribution. assumed all the activities of individual sub-sectors, which used to be under various ministries of the Housing/Land Privatization former Union, through controlling various con- AX Housing: After the experimental sale of hous- cerns, which in turn control several enterprises ing in the city of Tashkent in 1992 pursuant each. to a Resolution of the Cabinet, the CSPMP is Under the 1992 regulation, privatization may planning to replicate such programs elsewhere be initiated by the labor collective as a group, to allow tenants to acquire their dwellings at citizens, and 'nonstate" legal entities through filing nominal cost. Note that once purchased, such an application with the CSPMP for an enterprise dwellings will be subject to temporary restric- onthe listofcategoriessubjecttoprivatization (Art. tions on selling and buying. 4). Foreign investors (juridical or physical) can B. Lancd Pursuant to the decrees of the President acquire state property subject to apriori approval on distribution of land, a substantial portion and quotas. With CSPMP's approval, an enter- of arable land has been distributed to indi- prise-level commission will be set up to conduct vidual farmers in the form of lifetime leases, valuation. Note that the labor collective is given similar to arrangements in the People's Re- Privatzason in the Republics of the Former Soviet Union 61 public of China. These plots of land are inher- enterprises of varying sizes, and 1,000 very large itable, but not transferable, and subject to SOEs with more than 1,000 employees. As of certain use restrictions. March, it is estimated that 2,000 small enterprises and facilities and some 30 medium size enterprises Scope and Implementatson were leased or sold to labor collectives. Thus far, the number ofindividual proprietorships has been very Uzbekistan has adopted a cautious, gradual ap- limited. proach to privarization. There are over 35,900 E ANNEXB List of Country Privatization Legislation Available in English 64 Privatization in the RepubliUs ofthe Former Soviet Union ARMErIA 1. Law on Ownership, dated 31 October 1990. 2. Resolution of the Armenian Republic Council of Ministers on the Creation and Development of Small Enterprises, dated 22 January 1991. 3. Decree of the Supreme Soviet of the Republic of Armenia on the Principles of Privatization, dated 13 February 1991. 4. Draft (latest available, 1992): The Law of the Republic of Armenia on Privatization and Denational- ization of State Enterprises. AZERBAIJAN 1. Law of the Republic of Azerbaijan: 'Property in the Republic ofAzerbaijan," (with decree on imple- mentation) dated 9 November 1991. 2. Ukase of the President of the Republic of Azerbaijan "On Commercialization of the Activity of Trade Enterprise," dated I August 1992. 3. The Law of the Republic of Azerbaijan on Destatization and Privatization, 1993. BEL4RUS 1. Law of the Belarussian Soviet Socialist Republic "On Property in the Belarussian SSR," (with decree on implementation) dated 11 December 1990. 2. Law of the Republic Belarus on Foreign Investment on the Territory of the Republic of Belarus, dated 14 November 1991. 3. Decree of the Supreme Council 'On Implementation of the Law of the Republic of Belarus on Demonopolization and Privatization of the State Property," dated 19 January 1993. 4. Draft (1992): The Act of the Republic of Belarus 'On the Destatation and the Privatization of the State Property in the Republic of Belarus." 5. Draft (1992): The Act of the Republic of Belarus "On the Registered Privatization Vouchers in the Republic of Belarus." ESTONIA 1. Conception of the Estonian Government of General Principles of Privatization, undated. 2. Law of the Estonian Republic "On Privatization of State-Owned Services, Trade and Food Service Enterprises," dated 13 December 1990. 3. Tallinn City Soviet Decision on "Procedures for Preparations for and Conducting Privatization of State-Owned Services, Trade and Food Service Enterprises in Tallin," dated 9 May 1991. 4. Normative Concepts I and II of the Estonian Republic Law "On the Fundamentals of Property Re- form," dated May, 1991. 5. Law of the Estonian Republic on the Foundations of Property Reform (with implementing decree), dated 13 June 1991. 6. Decree of the Estonian Republic Supreme Council 'On Enacing the Law of the Estonian Republic on the Privatization of State and Municipal Housing," dated 4 May 1992. 7. Resolution signed by chairman of Supreme Council "On Enacting Conditions and Procedures for the Privatization of State and Municipal Property," (with addendum) dated 13 August 1992. 8. Resolution by chairman of Supreme Council "On forming an Enterprise for Privatization," dated 13 August 1992. 9. Resolution by chairman of Supreme Council "On Starting the Sale of Shares of State-Owned Enter- prises," dated 13 August 1992. iO.Draft (dated 10 September 1991): Law on Foreign Investment. Privatization in the Republics ofthe Former Soviet Union 65 GEORGIA 1. Law of the Republic of Georgia "On the Basis of Entrepreneurship Activities" (with implementing decree), dated 25 June 1991. 2. Law of the Republic of Georgia "About the Privatization of State Enterprises in the Republic of Georgia" (with implementing decree), dated 9 August 1991. 3. Law of the Republic of Georgia "On Investment Activities," dated 10 August 1991. 4. Law of the Republic of Georgia on Privatization of Housing, dated 1 November 1991. 5. A Decree No. 48 by the Government of the Republic of Georgia "About Arable Land Reform in the Republic of Georgia," dated 18 January 1992. 6. Council of Ministers of the Republic of Georgia, Act. No. 107, "About the Privatization (free tran- sition) of Dwelling in the Republic of Georgia," dated 1 February 1992. 7. Cabinet of Ministers of the Republic of Georgia, Resolution No. 259, "On the First Stage of Liber- alization of Foreign Economic Activity of the Republic of Georgia," dated 5 March 1992. 8. The Decree of the Government of the Republic of Georgia "About the State-Owned Property Sale by Auction," dated 28 May 1992. 9. The Decree of the Government of the Republic of Georgia "About the Competitive Sale of State- Owned Property," dated 28 May 1992. 10. An Act by the Government of the Republic of Georgia "To Define the Procedure How State Enter- prises May Be Transformed into Public Joint Stock Companies," dated 28 May 1992. 11. Decision No. 829 of the Government of the Republic of Georgia on "State Program of Privatiza- tion of State-Owned Enterprises of the Republic of Georgia" (with approval on 18 August 1992), dated 11 August 1992. 12. Law of the Republic of Georgia "On the Foreign Investments," undated. KAZAK1STAN 1. Law Governing Ownership, dated 1 January 1991. 2. Ukase of the President of the Kazakh Soviet Socialist Republic on "Questions Related to the Kazakh SSR State Committee for Management of State Property," dated 22 Aprii 1991. 3. The Kazakh SSR Act (Law) on "Denationalization and Privatization" (with implementing resolu- tion) dated 22 June 1991. 4. Resolution No. 101 by the State Committee of Kazakh SSR on State Property, dated 1 August 1991. 5. Decision of the President of the Kazakh SSR "On the Program of Destatization and Privatization of State Property in Kazakh in 1991-92 (first stage) and on the State of Coupon Mechanism of Privati- zation of State Property in the Kazakh SSR," dated September 1991. 6. Edict of the President No. 732 on "Measures Aimed at Intensification of Work in the Field of De- nationalization and Privatization of Property in Branches of the Material Sector," dated 28 April 1992. 7. The State Program for Denationalization and Privatization for 1993-95. KYRGHYZTAN 1. Statute on "Sale by Competitive Bidding," as approved by a Ukase of the President of the Republic of Kyrghyzstan, dated 7 August 1991. 2. Law of the Republic of Kyrghyzstan on "General Principles of Destatization, Privatization, and Entrepreneurship in the Republic of Kyrghyzstan' (with Decree on Implementation), dated 20 December 1991. 3. Law of the Republic of Kyrghyzstan on the "Privatization of the Housing Fund in the Republic of Kyrghyzstan' (with Decree on Implementation), dated 20 December 1991. 4. Law on the "State Property Fund' of the Republic of Kyrghyzstan, dated I July 1992. 66 Privaidwtion in the Republics of the Forer Soviet Union 5. Denationalizaton and Privatization Program for State-Owned and Communal Property in the Republic of Kyrghyzstan in 1992 and 1993. 6. Concept of Denationalization and Privatization of State and Communal Assets in the Republic of Kyrghyzstan for 1993, approved by the Resolution of the Supreme Soviet, dated 16 December 1992. LATVL4 1. Council of Ministers, Republic of Latvia, Resolution No. 107 "On the Creation and Operation of Foreign Business Offices in the Republic of Latvia," dated 19 April 1991. 2. Latvian Republic Law on Privatization of Agricultural Enterprises and Collective Fisheries (with implementing decree), dated 21 June 1991. 3. The Republic of Latvia Law on the Return of Buildings to Their Legal Owners (with imple- menting decree), dated 30 October 1991. 4. Law of the Latvian Republic on the Management of State and Municipal Property in Companies" (with implementing decree), dated 10 June 1992. 5. Law of the Latvian Republic on the Order of Evaluation of Objects of State and Municipal Property to Be Privatized (with implementing decree), dated 10 June 1992. 6. Law of the Latvian Republic on the Order of Privatization of Objects of State and Municipal Prop- erty (with implementing decree), dated 16 June 1992. 7. Draft (dated 3 July 1991): Law on Foreign Investment LI7IUAAL4 1. Enterprise Laaw of the Republic of Lithuania (with implementing decree), dated 8 May 1990. 2. Law on Foreign Investment in the Republic of Lithuania (amended as of March, 1992), dated 29 December 1990. 3. The Law of the Republic of Lithuania 'On the Initial Privatization of State Property," (amended as of 18 December 1991), dated 28 February 1991. 4. Law on Spheres of Business Activity Where Foreign Investment is Prohib.ted or Limited, dated 2 may 1991. 5. The Law of the Republic of Lithuania 'On Privatization of Apartments," (amended as of 20 Decem- ber 1991), dated 28 May 1991. 6. The Government of the Republic of Lithuania, Decree No. 238 on 'Reorganization into Smaller Units of State Enterprises and State Stock Corporations Which Are Being Privatized," dated 19 June 1991. 7. The Law of the Republic of Lithuania on "Privatization of Unprofitable State Enterprises,' dated 23 July 1991. 8. The Law of the Republic of Lithuania on 'Privatization of the Property of Agricultural Enterprises," dated 30 July 1991. MOLDOVA 1. Law of the Moldovan SSR "On Privatization," dated 4 July 1991. RUSSL4NFEDERA47ON Part 1 (199091) 1. Law on Ownership and Property, dated 24 December 1990. 2. Law on Enterprise and Entrepreneurhip, dated 24 December 1990. Privatizwaion in the Republics ofthe Former Soviet Union 67 3. Law on Privatization of State and Municipal Enterprises, with Decree on Implementation, dated 3 July 1991. 4. Statute of the RSFSR Supreme Soviet "On the Russian Federal Property Fund," approved by De- cree No. 1533-1 of the Supreme Soviet, dated 3 July 1991. 5. Law on Registered Privatization Accounts and Deposits, with Resolution on Implementation, dated 3 July 1991. 6. Decree on the Delimitation of State Ownership, dated 27 December 1991. 7. Guidelines on Privatization of Enterprise, dated 29 December 1991. 8. Fundamental Provisions of the Program for Privatization of State-Owned and Municipal Enterprises, dated 29 December 1991. 9. Edit No. 334 on Additional Powers of Administrative Authorities of the City of Moscow for the Period of Implementation of Radical Reform, dated 29 December 1991. 10. Decree of the President of the Russian Federation on Accelerating Privatization of State-Owned and Municipal Enterprises, No. 341, dated 29 December 1991. 11. Reguladons on Use of Economic-Stimulation Funds of State and Municipal Enterprises, dated 1991. 12. Regulation on Buy-Out of Property of Leased Enterprises, dated 1991. 13. Draft: Decree on Administrative Responsibility of Officials in Privatization, undated. Part 2 (1992) 1. Edict No. 16 on "Ensuring Accelerated Privatization of Municipal Ownership in the City of Mos- cow," dated 12 January 1992. Append&ces i. Regulations on the Privatization of the Housing Stock of the City of Moscow ii. Regulations on the Procedure for Privatization of Enterprises Engaged in Trade, Public Catering or Household Services in the City of Moscow iiL Regulations on the Acceleration of the Privatization of Municipal Enterprises and Organizations in the City of Moscow 2. Resolution No. 52 of the Government of the Russian Federation on "Acceleration of the Imple- mentation of the 1992 Privatization Program," dated 29 January 1992. 3. Edict No. 66 "On Acceleration of Privatization of State and Municipal Enterprises," dated 29 January 1992. Appen&ces i. Temporary Regulations on the Procedure for Submitting, Filing Out, and Accepting for Con- sideration Applications for Privatization of State and Municipal Enterprises in the Russian Fed- eration Sub-appendices Standard Forms of Documents to Be Used in ProcessingApplications for Privatization of State and Municipal Enterprises, ii. Temporary Methodological Instructions for Assessing the Value of Objects of Privatization iii.Temporary Regulations on theTransformationofState and Municipal Enterprise into OpenJoint- Stock Companies iv. Temporary Regulations on Privatization of State and Municipal Enterprises in the Russian Federation at Auctions v. Temporary Regulations on Privatization of State and Municipal Enterprises in the Russian Federation through Competition vi. Temporary Regulations on the Procedure for the Use in 1992 in the Privatization of Means of the Economic Incentive Funds and Profit from State and Municipal Enterprises viL Temporary Regulations on the Work of Commissions for Privatization 4. Law of the Russian Federation "On Revisions and Addenda to the RSFSR Law On Privatization of State Owned and Municipal Enterprises in the RSFSR," dated 5 June 1992; and further amendment there of, dated 24 June 1992. 5. Decree No. 2980-1 of the Supreme Soviet: "State Program of Privatization of State andMunici- 68 iPivatization in the Repubics of the Former Soviet Union pally Owned Enterprises of the Russian Federation for 1992," dated 11 June 1992. 6. Summary of Presidential Decree No. 623 "On Measures for Support and Revival of Insolvent (Bankrupt) State Enterprises and Application of Special Procedures to Them," dated 14 June 1992. 7. Russian Presidential Edict No. 721 "On Organizational Measures to Transform State Enterprises and Voluntary Associations Thereof Into Joint Stock Companies," dated 1 July 1992. 8. Statute "On the Commercialization of State-Owned Enterprises With Simultaneous Conversion into Public-Type Stock Corporations," approved by Edict No. 721 (see Tab 7 above), dated 1 July 1992. Sectiom i. Procedure of Commercialization With Simultaneous Conversion into Public-Type Stock Cor- porations ii Procedure of the Alignment of the Organizational-Legal Form of Voluntary Combines of En- terprises with Current Legislation iii. Regulations Governing the Formation and Activity of the Working Commission on Privatiza- tion iv. Model Bylaws of a Public-Type Stock Corporation 9. Russian Federation Government Resolution No. 547 "On Measures to Implement Russian Presi- dential Edict No. 721 Issued on 1 July 1992" (see Tab 7 above), dated 4 August 1992. Astachments i. Statute 'On Procedure for Registration of Stock Issues by Openly Traded Joint-Stock Compa- nies Established in the Process of Privatization" ii. Model Privatization Plan 10. Decree of the Government of the Russian Federation No. 490 "On the Procedure for the Intro- duction of the System of Privatization Checks in the Russian Federation," dated 15 July 1992. Appendices i. Steps to Be Taken on Introduction of the System of Vouchers in the Russian Federation ii. Regulations on Coordination Committee on the Introduction of Vouchers in the Russian Fed- eration. I 1. Text of Decree of the Government of the Russian Federation No. 595 on "Revaluation of Fixed Capital (Funds) in the Russian Federation," dated 14 August 1992. 12. President of the Russian Federation Decree No. 914 'On the Introduction of the System of Priva- tization Vouchers in the Russian Federation," dated 14 August 1992. 13. Decree of the Government of the Russian Federation No. 708, "On the Procedure for Privatiza- tion, Reorganization of Enterprises, Organizations of the Agro-Industrial Complex," dated 4 Sep- tember 1992, approving the appended, and with later amendment dated 11 December 1992. i. Regulations on the Reorganization of Kolkhozes, Sovkhozes, and Privatization of State Agricul- tural Enterprises, ii. Statute on Privatization of Enterprises for Initial Processing of Agricultural Products, Fish, and Sea Products, and Enterprises for Production-Technical Service and Material and Technical Support for the Agro-industrial Complex, iii. Statute on Reorganization and Privatization of State Cooperative Enterprises of the Agro-Indus- trial Complex 14. Russian Soviet Federated Socialist Republic State Committee for the Management of State Prop- erty Directive No. 369-r, dated 20 August 1992. Atachment i. Statute on Territorial Commissions to Introduce Privatization Checks in the Russian Federa- tion ii. Instructions on Procedure for Issuing Privatization Checks to Citizens of the Russian Federa- tion 15. Decree of the President of the Russian Federation No. 1151, under the rubric 'Official Depart- ment," "On the Conduct of an Experiment on the Territory of Moscow Oblast in 1992 in the Auction of Land Parcels for Individual Residential Construction," dated 1 October 1992 Privatization in the Republics of the Former Soviet Union 69 16. Ukaz No. 1186 of the President of the Russian Federation "On Measures on the Organization of a Securities Market in the Process of Privatization of State and Municipal Enterprises," [note: an- nexes are missing] dated 7 October 1992 17. Decree No. 3608-1 of the Supreme Soviet of the Russian Federation "On the Course of the Implementation of the State Program for Privatization of State and Municipal Enterprises in the Russian Federation for 1992," dated 9 October 1992. 18. Ukaz No. 1228 of the President of the Russian Federation "On the Sale for Privatization Checks of Housing, Land, and Municipal P:operty," dated 14 October 1992. 19. Ukaz No. 1229 of the President of the Russian Federation "On the Development of a System of Privatization Checks in the Russian Federation," dated 14 October 1992. 20. Ukaz No. 1230 of the President "On Regulation of Leasing Relations and Privatization of Leased Property of State and Municipal Enterprises," dated 14 October 1992. 21. Ukaz No. 1231 of the President "On Confirmation of the Model Statute on the Committee for Management of the Property of Kray, Oblast, Autonomous Oblast and Okrug, and the Cities of Moscow and Petersburg," dated 14 October 1992 (Attachment). 22. Ukaz No. 1304 of the President "On the Use of Privatization Checks for Social Protection of the Population," dated 26 October 1992. 23. Directive No. 695-r of the GKI 'On Confirming the Statute on Licensing the Activity of Special- ized Privatization Investment Funds, and the Statute on Procedure on Registration of Share Is- sues," dated 4 November 1992. 24. Directive of the GKI No. 701-r, approving the "Statute on the Sale of Shares in the Process of Privatization" and the "Statute on Specialized Check Auctions," dated 4 November 1992. 25. Edict of the President No. 1334 "On the Implementation in the Electrical Power Industry of Edict No. 992," dated 5 November 1992. 26. Edict of the President No. 1391 "On the Sale of Objects Being Privatized for Privatization Checks," dated 16 November 1992. 27. Edict of the President No. 1392 "On Measures for Implementing the Industrial Policy during Privatization of State Enterprises," dated 16 November 1992. Appenices i. Interim Statute on Holding Companies Created Upon the Transformation of State Enterprises into Joint Stock Companies ii. Amendments to the Standard By-laws of a Joint Stock Company, as approved by Edict No. 721 (see Tab 7 above) 28. Edict of the President No. 1403 "On Special Features in the Privatization and Reorganization of State Enterprises and Production and Scientific Production Associations in the Oil and Refining Industries and Industries Providing Petroleum Products Into Joint Stock Companies," dated 17 November 1992. 29. Decree of the Government No. ', <, "On Procedure for Decisionmaking by the Government of the Russian Federation and the GKI and Its Territorial Organs on the Privatization of Enter- prises," dated 18 November 1992 (with Addendum). 30. Directive No. 716-rp of the President on Establishment of Privatization Center, dated 23 Novem- ber 1992. 31. Decree No. 908 of the Government "On Measures to Organize Information for Russian and For- eign Investors Concerning the Privatization of State Enterprises," dated 24 November 1992. 32. Edict of the President No. 1484 "On Unique Characteristics of Privatizing the 'GAZ' Production Association," dated 30 November 1992. 33. Edict of the President No. 1519 "On Special Privatization Conditions of Enterprises in Bryansk Oblast," dated 30 November 1992. 34. Directive No. 2294-r of the Government, agpxwg the "Program for Support for the Establish- ment and Development of Specialized Privatization Investment Funds," dated 7 December 1992. 35. Presidential Edit No. 1559, "On Changeover to Joint-Stock Companies and Privatizaion of State Enterprises, Associations and Organizations of the Russian Federation Gas Industry," dated 8 December 1992. 70 Privatization in the Republics of the Former Soviet Union 36. Directive No. 1143-r, amendfing the "Statute on Closed Share Subscription During Privatization," from the previous Direction No. 308-r, dated 16 December 1992. 37. Government Decree No. 1003 "On Privatization of Communications Enterprises," dated 22 De- cember 1992. 38. Russian Federation Law "On the Right of the Russian Federation Citizens To Obtain Land Plots for Private Ownership and Sale for the Purpose of Conducting Personal Subsidiary and Dacha Farming, Gardening and Individual Housing Construction," dated 22 December 1992 (with implementing decrees). 39. Edict of the President No. 1702 "On the Transformation of Coal Industry Associations, Enter- prises, and Organizations into Joint-Stock Comnpanies and Their Privatization," dated 30 Decem- ber 1992. 40. Edict of the President No. 1705 "On Expanding Opportunities for Participation by the Public in Specialized Check Auctions," dated 31 December 1992. 41. Draft: Temporary Regulations for Selling State-Owned Share Packages at Closed Tenders in the Russian Federation, dated 1992 42. Draft: Regulation Governing Large-Scale Privatization, dated 27 April 1992. 43. Draft: Manager/Employee Guide for Privatization, dated 27 April 1992. 44. Draft: Regulation on Investment Tenders, dated 6 May 1992. 45. Draft: Regulation on Foreign Investment in the Russian Federation, dated 6 May 1992. 46. Draft: Directives for Valuation of Property to be Privatized, dated 1992. 47. Draft: Standard Regulations on Committees for Property Management in Ethnic and Administra- tive Regions, dated 1992. Regiond i. Adopted by the Small Council of the Moscow Soviet, 'Program for Privatization of State- Owned and Municipal Firms in the City of Moscow in 1992," undated. ii. The Tatarstan Republic's State Program for Privatizing State and Municipal Property During 1992 and the Outlook to 1995, undated. iii. Decision No 307 of the Small Soviet of the St. Petersburg City "On Sales of St. Petersburg Property and City Contracts at Investment Auctions," dated 20 October 1992. Par3 (1993) 1. Edict of the President "On Procedure for Issuing 1992 Privatization Checks to Certain Categories of Citizens," dated 10 January 1993. 2. Edict of the President No. 8 "On the Use of Sociocultural and Municipal Facilities by Privatized Enterprises," dated 10 January 1993. 3. Edict of the President No. 216, agproving the Statute "On Procedure for Circulation and Cancel- lation of Privatization Checks,' dated 12 February 1993. 4. Draft: The State Program for Privatization of State and Municipal Enterprises in the Russian Fed- eration in 1993, undated (published on 4 February 1993). TAJIKISTANI 1. Law on Property, dated 5 December 1990. 2. Law of the Tajik SSR on Denationalization and Privatization of Property in the Tajik SSR, dated 21 February 1991. 3. Ukase of the President of the Tajik SSR on Organization of Work on the Denationalization and Privatization of Property in the Tajik SSR, dated April 16, 1991. Privaficasion in the Republiws ofthe Former Soviet Union 71 TUR[XMENIS TAN 1. Law on Destatization and Privatization of Property in Turkmenistan, dated 19 February 1992. URAINE 1. UkSSR Law on "Property," dated 26 March 1991. 2. Draft (1991): General Concept for the Denationalization of Property in the Ukraine. 3. Edict by the Ukrainian Supreme Soviet Presidium on Transferring Enterprises, Institutions, and Organizations Subordinate to the Union and Situated on the Territory of Ukraine to the Posses- sion of the State, dated 30 August 1991. 4. Law of Ukraine on the Privatization of the Property of State Enterprises (with implementing de- cree), dated 4 March 1992. 5. Law on Privatization of Small Scale Enterprises (with implementing decree), dated 6 March 1992. 6. Law on Privatized Securities (with implementing decree), dated 6 March 1992. 7. Law of Ukraine on Privatization of State Housing, dated 9 June 1992. 8. Ukraine's Supreme Soviet Decree on a State Program of Privatization of Property of State Enter- prises, dated 7 July 1992. 9. Order No. 138 of the Chairman of the Board of the Fund of State Property of Ukraine, i 'Statute on Procedure for the Issuance to Specialized Enterprises of a Permit (License) for the Performance of Intermediary Activities in the Process of Privatization of State Enterprises, dated 12 August 1992. 10. Order No. 345 of the Chairman of the Board of the State Property Fund of Ukraine, on&ming 'Procedure for Filing and Consideration of Privatization Petitions, dated 26 August 1992. 11. Order No. 371 of the Chairman of the Board of the State Property Fund of Ukraine, coofiing "Statute on Privatization Commissions," dated 8 September 1992. 12. Order No. 56 of the State Committee of Ukraine for Housing and Municipal Services, g the "Statute on Procedure for the Transfer of Apartments (Buildings) to the Ownership of Citi- zens," dated 15 September 1992. 13. Order No. 329 of the acting Chairman of the Board of the State Property Fund of Ukraine "On Procedures for Work With Enterprises Having Foreign Investment and Economic Companies," (with Annex) dated 28 September 1992. 14. Decree No. 572 of the Cabinet of Ministers of Ukraine "On the Mechanism for Enactment of the Law of Ukraine On Privatization of the State Housing Fund," (with various Procedures, Rules, and Standard Partnership Bylaws) dated 8 October 1992. UZBEKISTAN 1. Law on Ownership, dated 31 October 1990. 2. The Law of the Republic of Uzbekistan, "Destatization and Privatization," (with implementing Resolution of the Supreme Council of the Republic of Uzbekistan, Resolution No. 107), dated 19 November 1991. 3. Resolution of the Cabinet of Ministers No. 362, "Regulations on Committee for State Property Management and Privatization of the Republic of Uzbekistan," dated 3 August 1992. 4. Resolution of the Cabinet of Ministers No. 378, "On Privatization of State Housing Fund in the City of Tashkent," dated 13 August 1992. 5. Resolution of the Cabinet of Ministers (unnumbered) 'About the Measures for Denationalization and Privatization of Enterprises/Organizations of the Local Industry," undated. 6. The Law of the Republic of Uzbekistan, "On Lease," undated. 7. Draft (latest available, undated): Resolution of the Cabinet of Ministers on 'Denationalization and Privadtzaion of Enterprises of the Uzbek State and Joint Stock Associations." 72 Privatization in the Republics of the Former Soviet Union SELECTED REFERENCES Aghevili, Bijan B., Eduardo Borensztein, Tessa Republic, Washington, D.C.: The World Bank, van der Willigen. 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NewYork- PracticingLawlnstitute, 1992. be Part of Privatization?, Washington, D.C.: The 504 pp. (Commercial Law and Practice Course World Bank, 1991, 26 pps. (Working Paper No. Handbook Series; No. 604). 664). Dhanji, Farid, Branko Milanovic, Privatization Sachs, Jeffrey D. "Privatization in Russia: Some inEasternandCentralEurope: Objectives, Coaints Lessons from Eastern Europe,"American Economic and Models of Divestiture, Washington, D.C.: The Review, pps. 4348, May 1992. World Bank, 1991,28 pp. (WorkingPaperNo. 770). Sacklen, Mats. "Negotiating Investments in Eldridge, Patricia Fry. "Russian Energy Legisla- Central Europe," ._nternational Financial Law Re- tion: Regulating State Monopolies to Allow the view, pps. 31-35, Mar. 1992. Development of Competitive Market," 13 Energy "Shaping a Market-Economy Legal System," LawJournai pps. 1-24 (1992). prepared by the EC/IS Joint Task Force on Law Gray, Cheryl, W. TheLegal Frameworkfor Pri- Reform in the Independent States, October 1992 vate Setor Activity in the Czech and Slovak Federal (provisional version) at 71-73. FP03. -1 Fetjit4, Michel J. N 8051.