The Belarus Privatisation Model
Published: 04 February 2013
Each time the Belarusian economy hits a bump experts start to predict a forthcoming full-scale privatisation in Belarus. The logic is simple: when the level of subsidies from Russia diminishes and foreign lenders refuse to extend new loans, then the only remaining option is to privatise state enterprises. But it is already 2013 and the properly remains largely in state hands.
A recent study of implementation of the 2011–2013 Belarus State Property Privatisation Plan shows that each time Belarusian authorities make noise around privatisation they never mean a full-scale privatisation. They usually put on sale low-profit enterprises with ageing workforce and expect that investors will remain in the same sector without reducing employment.
Belarusian researchers Tatyana Chyzhova, Dmitry Isayonak and Lidia Mikheeva analysed data, which Property Committee published in the wake of privatisation auctions, auction announcements and auction results and came to interesting conclusions.
Privatisation for the Media Rather than Investors
Implementation of the Privatisation Plan for 2011 – 2013 revels that it is actually “a pilot version”. Its main goal is to minimise possible social risks, arising out of the privatisation, and to alleviate them across a given region or industry. Its goal is far from the serious full-scale privatisation across the specific sector. The Privatisation Plan provided for the very broad, but shallow denationalisation across various sectors of the economy.
For instance, the government included a number enterprises where it wanted to retain a controlling stake or recently-privatised enterprises where it had a minority suggests that the Privatisation Plan was largely pursuing the purpose of publicising the privatisation process and the “Belarus privatisation model” through the media.
On Offer: Low-Profit Facilities with Ageing Workforce
The enterprises, forming the backbone of the Privatisation Plan for 2011, are largely low-profit companies with pre-retirement age personnel. The privatisation of them is often needed not to gain profit, but rather to ensure the employment and maintain the living conditions in a particular region. Even the loss-making enterprises maintain average wages similar to average wages across the country.
The government is aware of the social risks of privatisation, meaning significant restructuring and conversion for such enterprises. This is why it aims to qualify the sale with the certain obligations on the part of the buyer. First of all, it requires preservation of jobs at the plants with large teams, as well as of the plant’s profile over the several next years.
The “Ideal” Investor for Belarusian Authorities
The target investor, form the point of view of the Belarusian government should have the following characteristics: significant experience, proven reputation in the relevant economy sector, wants to expand production, but does not strive for refocusing of the enterprises in question. He should also be willing to invest seriously in the modernization of the existing production and is ready to take on the significant social obligations.
Such “ideal” investors do exist, but they are few. In 2011, the Belarusian companies were dominating among the buyers at the auctions, along with the companies from the neighbouring countries, working in the relevant industry for a long enough time and acquiring the property for expansion purposes.
However, the owners willing to work under such conditions work in a relatively narrow segment of the industry, primarily in the clothing and furniture manufacturing industries, equipment production, and communications.
No Change of Business Sector
The state Privatisation Plan did not suggest a possible change in the sectoral structure of the Belarusian economy. As a consequence, the privatisation was relatively successful in those sectors, in which the presence of the private business has already reached a detectable level.
The new industries turned to be less attractive for the investors, considering the risks associated with the restrictions on changing the profile and reducing the staff of the plant. Due to this approach, privatisation in the other sectors will be possible only after the private business appears there, grows stronger and feels a need to expand through the purchase of the enterprises, intended for privatisation.
Alternative Privatisation: Sales of “Vacant State Property”
At a lower level, in Belarus, an alternative denationalisation scheme is being implemented through the sale of the “vacant state property” with a minimum starting price of one “basic amount”. This form of privatisation has proved to be more attractive for the business community.
The sales were much higher in comparison with the privatisation of the enterprises, thanks not only to the low priced items, but also to the fact that, when buying the facility, the owner has no need to take on the responsibility for the personnel. One can predict scaling of the ultra small-scale privatisation due to the adoption of a set of measures to support the business activity in the regions.
The Effect of Privatisation on Businesses
In fact, the Privatisation Plan has contributed primarily to the enlargement of the existing actors in the Belarusian market rather than brought additional private capital to the Belarusian economy. It appears that the government’s tried (with little success) to share social responsibility for the personnel of the depressive enterprises with the business community.
The government also unsuccessfully tried to attract investors and cheap loans in exchange for minority stakes in state enterprises. This scheme worked well in the case of the profitable and promising enough Beloozersk Power Mechanic Plant, but shares of the freight sector companies, offered for sale under the same scheme, failed to have found a buyer.
Things to Improve
The authors of the policy paper on privatisation (can be downloaded below) came up with specific recommendations for the government, which could also be of interest for potential investors. They include a suggestion to target selected foreign investors, operating in the relevant sectors rather than widely publish privatisation lists in media.
Experts advise the government to analyse in advance possible changes in the sectoral structure of the Belarusian economy in the event of the large-scale market reforms. These trends also include the economic evolution trends emerging within the Eastern Europe region. They also question whether the requirement to preserve the sectoral profile makes much economic sense.
The experts are confident that the government should separate retention of workforce from the goal of privatisation. Instead of trying to impose a burden on the investors, the government should develop employment programmes for regions, where the arrival of a new property owner may create the social risks. It should not the task of investors to take care of the unemployment level.
The authorities should come up with measures to increase opportunities for the downsized personnel. They should have access to additional training or acquire new qualifications that would be in real demand on the market.
The Future Outlook
Although a number of foreign investors such as Coca Cola, MAN and Heineken have been successfully functioning in Belarus, the Belarusian state is not in a hurry to sale the state property. A large redistribution of property contradicts the ideology of the state.
Belarusian authorities are proud that they have avoided the “bandit privatisation which took place in Russia in 1990s. They prefer not to say that the main reason why they avoid privatisation is not that of economic efficiency. It is easier to keep political grip over the society under control where the state dominates the economy. As long as Russia will subsidise the Belarusian regime for its geopolitical loyalty, no serious privatisation will take place.
This review was prepared on the basis of policy brief Privatization in Belarus in 2011: Results of Auctions, Leading Actors and Social Impact (available in Russian or in English). The study was conducted by Belarus Public Policy Fund as a part of a program jointly carried out by Pontis Foundation (Slovakia) and Belarusian Institute for Strategic Studies.