Privatization Policies and Progress

7.2 Privatization-Related Institutions

7.3Privatization Patterns in the Machinery Industry

7.1 Privatization Policies and Progress

The Government’s privatization program has so far undergone three phases:

(1) Thefirst stage(1991-92) consisted of the privatization of approximately 10 percent of State assets mainly through the sale of enterprises to managers and employees in agriculture, retail and consumer services.

(2) The second stage (1993-95) consisted of four separate privatization programs based on the type of enterprises and number of employees:

 Small-scale privatization (less than 200 employees, although manufacturing and construction companies of this size were privatized under mass privatization),

 Mass privatization (200-5,000 employees),

 Case-by-case privatization (more than 5,000 employees), and

 Agro-industrial complex privatization (all enterprises in the agriculture sector).

(3) The third stage (1996-98) aims to complete privatization of the remaining state assets. Privatization during this stage mainly consists of cash privatization and is open to foreign investors without any limitations.

Small-scale privatization has been conducted through cash auctions and commercial tenders. The total number of enterprises and objects qualifying for small-scale has been estimated to be approximately 20,000 and has concentrated mainly in the general retail, distribution, and consumer services sectors.

Mass privatization has encompassed over 1,712 companies from all sectors of the economy. The procedure for this type of privatization has been as follows: 10 percent of the company shares were given to employees; around 51 percent were sold through coupon auctions to investment funds in which the citizens of Kazakhstan invested coupons distributed by the Government; and the remaining shares (around 39 percent) were sold through open cash auctions to domestic and foreign investors. Cash auctions under mass privatization were initiated at the end of 1995.

Case-by-case privatization covers about 200 large enterprises involved in the chemical industry, the extraction and processing of natural resources, energy, metallurgy, transportation (oil and gas pipelines, roads, railways, and air transport), major department stores, and telecommunications. The privatization of these enterprises can take the form of direct sale, auctions, management contract, or commercial tender (conditional sale).

Case-by-case privatization has been open to foreign investors without any limitations on foreign participation. Contract management is viewed as an intermediate stage prior to sale since companies having management contracts can have the option to purchase the enterprise at a later stage. (Chapter 5 discusses the problems associated with this type of arrangement).

Agro-industrial complex privatization covers the agro-processing sector and includes such industries as food processing, mills and storage facilities. These types of enterprises have been sold or transferred under the following scheme: 10 percent non-voting shares have been given to employees; another 10 percent with priority sales have been offered to employees; 51 percent have been given to producers, suppliers and related companies;

and the remaining 29 percent has been kept by the State. The remaining State shares are now being privatized through the mass privatization open cash auction, which includes foreign and local participation.

Although Kazakhstan has made significant progress in small-scale and mass privatization, only about one-third of all state enterprises eligible for sales through cash auction has actually been sold to the private sector. The Government had expected the completion date of the privatization to be December 1997, but it no longer expects that target to be achieved. The privatization of large-scale enterprises, which represent an important part of Kazakhstan's productive assets and which dominate production activities in the machinery industry, is proceeding particularly slowly (see Table 7.1).

Moreover, privatization of the larger state-owned enterprises remains to be undertaken on a case-by-case basis. Only 40 of the 203 case-by-case enterprises targeted for privatization have been completed to date. In an effort to accelerate the privatization of these enterprises by the end of 1997, the Government has held tenders for a number of companies to be managed under contract, rather than be directly purchased.

Several problems have constrained privatization of large-scale enterprises in the machinery industry and related production activities in agriculture, mineral processing and transportation. These are summarized as follows:

 Lack of enterprise restructuring before privatization.

 Large enterprise debt, including wage arrears.

 Underdeveloped stock exchange.

 Discrepancies between laws and their application.

 Decree reversals and associated uncertainty.

 Lack of enterprise experience with new tax code.

 Inadequate government guarantees.

The Machinery Industry in Kazakhstan: Economic Conditions and Policies

Table 7.1

Privatization of State Owned Enterprises, 1994-97 Small-Scale

Privatization

Mass Privatization

Agriculture Privatization

Case-by-Case

Privatization TOTAL

Pre-1994 153 0 602 0 755

1994 2,645 382 888 3 3,918

1995 3,920 1,056 472 2 5,450

1996 3,467 839 644 28 4,978

1997(1/2) 3,417 1199 62 23 4,701

Total 13,602 3,476 2,668 56 19,802

Source: Center for Economic Reforms,Kazakhstan Economic Trends -- Second Quarter 1997.Almaty:

Government of Kazakhstan.

The fist problem relates to the lack of any restructuring of the enterprises. The Kazakhstan Post-Privatization Fund (1997a) reports that foreign investors have been despondent over the state of the enterprises. Significant progress in the restructuring of large-scale privatization within the machinery industry will be needed before privatization efforts can succeed.

A second problem inhibiting progress in privatization of large-scale enterprises of machinery-related activities is the size of inter-enterprise debt. Table 7.2 shows the amount of total and industrial enterprise debts and arrears. The GOK has made little progress in resolving the problem and foreign investors have been relied upon to absorb the debt when companies are privatized. According to discussions held with the former State Privatization Committee (now a department within the Ministry of Finance), the State often prohibits investors from selling an enterprise for a specified period after its initial purchase. Although no specific period was given, it appears that the restriction often extends for three years.

Another problem is the lack of a well-developed stock exchange that would allow foreign investors to purchase and liquidate holdings of privatized enterprises. The anticipated growth and development of the exchange, however, is likely to broaden the range of investment opportunities. To date, the Central Asian Stock Exchange (CASE) has been used for privatization of state property. A small number of these companies have state shares that can be traded with the permission of the State Property Committee.

The tax and legal situation has improved considerably and does not pose as great a

Government, particularly in the discrepancies between laws as they exist on paper and their implementation. Advances are also being made in laws governing movable property. The tax code is already generally considered as the best in the former Soviet Union, according to the Kazakhstan Post-Privatization Fund (1997b). The Fund also believes that the new civil code offers a framework that is very close to the continental European civil law system, and the proposed bankruptcy law is well drafted.

Table 7.2

Enterprise Debts and Arrears, mid-1996 to mid-1997 (billions of tenge, end of month)

May 1996 Dec. 1996 May 1997 Debt Receivable

All Enterprises 1/ 496.5 521.9 524.0

of which:Percent Overdue 62.4% 63.9% 65.0%

Industry Sector Enterprises 244.1 256.3 270.0

of which:Percent Overdue 65.1% 64.5% 64.4%

Debts Payable

All Enterprises 1/ 735.6 1,019.6 1,065.3

of which:Percent Overdue 62.0% 52.4% 53.7%

Arrears in Wages 40.0 47.9 42.3

Industry Sector Enterprises 371.6 612.9 665.1

of which:Percent Overdue 59.4% 42.1% 44.1%

Arrears in Wages 16.0 17.6 16.4

1/ Based on surveys of large and medium-size enterprises.

Source: Center for Economic Reforms,Kazakhstan Economic Trends -- Quarter II 1997.

According to the Congress of Entrepreneurs, the lack of adequate government remains a major constraint to the privatization process. The Foreign Investment Law of the Government of Kazakhstan (1995) does not allow the Government to issue guarantees, and there is presently no legislation to guarantee foreign investments. The issue is complicated by the distinction that exists between guarantees that are deemed a

‘administrative’ and those that are other guarantees. According to Maltsev (1996), only administrative guarantees appear to be permitted. Without an adequate legal regime and the enactment of specific legislation, a government guarantee to an investor may be contested and should not be considered binding.

The Machinery Industry in Kazakhstan: Economic Conditions and Policies