How to Make Belarusian Privatisation More Sensible

Belarus will need to pay over $3 billion this year to serve its mounting external debt. This payment is more than twice than in 2012.

In the absence of significant foreign investments and additional Russian subsidies, Belarusian authorities may have to privatise more state enterprises.

Although a number of foreign companies have been operating in Belarus for decades, the process for privatisation is far from transparent and often unpredictable, a recent study from the Belarus Public Policy Fund suggests. 

Although the efficiency gap between Belarusian state enterprises and foreign private companies is increasing, Belarusian authorities are not in a hurry to sell off state property. They lack a clear vision of the goals that should be achieved as the result of privatisation and often impose conditions which make privatisation unattractive for foreign investors. 

The integration of Belarus with Russia and Kazakhstan within the Customs Union has been a mixed blessing for Belarus.  On the one hand, potential foreign investors have access to a bigger market, which extends from the Polish border in the West to Korea in the East. But at the same time it has intensified competition within the Customs Union.

Now the key challenge for Belarus is to compete with often more favourable business environments in Russia and Kazakhstan. The better the investment climate, the better the chances that a large foreign investor would come and, consequently, the higher the asking price for privatised state property. Belarus is missing what its eastern neighbours have: a more liberal economic climate, private ownership of land, lower taxes, and other virtues of a more market-oriented company. 

However, the not-so-favourable investment climate is not Belarus' biggest problem. 

Main Barriers to Effective Privatisation 

When it comes to selling state enterprises, a whole plethora of Belarusian state institutions comes into play. It is difficult to clearly understand differences between them and their responsibilities. 

More importantly, Belrusian authorities and foreign investors have very different approaches to valuation of state property. Belarus insists that the balance sheet value of the enterprise should be the most important factor. Foreign investors are more interested in anticipated revenues of the enterprise. The problem is that when all liabilities and losses of privatised companies are taken into account, they become not nearly as attractive for potential buyers. 

The new owners would have to deal not only with the old debts of the enterprise but also with various strings attached to the privatisation contract. They may need to guarantee that no massive layoffs would follow, that the volume of production would remain the same or that the investor would continue to inject money into the enterprise. 

Even the very process of understanding what old and new liabilities come with the enterprise is not an easy task. The Belarusian state fails to publish coherent lists of enterprises offered for privatisation and the uniform conditions for sale of state enterprises simply do not exist.

This is yet further evidence that privatisation is Belarus lacks a coherent strategy and goals. Instead, privatisation is often done on an ad hoc basis, where each deals depends on how well the foreign investor can navigate its way in the corridors of Belarusian state institutions.  

How to Make Privatisation More Effective 

The most obvious step which Belarusian authorities need to take is to concentrate various privatisation procedures in a single state agency. It is no secret that the Presidential Administration takes the most important economic decisions in the country, including the privatisation of sizable chunks of state property.

Making the already existent National Investment and Privatisation Agency accountable directly to the Presidential Administration would help ease negotiations between the state and potential investors.

Agreeing on the right price tag for privatised assets remains the most difficult hurdle for foreign investors. If the parties reach a stalemate in negotiations, the use of independent experts to evaluate the property should be accepted by both parties.

The unwillingness of the parties to defer, despite their disagreements, to independent experts would probably mean that one of the parties is not genuinely interested in the deal. Otherwise, they should unconditionally accept such a valuation. If the state is unsatisfied with the result of the valuation, it would be counterproductive to refuse the sale altogether or organise another broad auction in order to invite new bids. 

Instead of the requirement to preserve jobs at state enterprises, which are often overstaffed and inefficient, the state should insist on the mandatory retraining of personnel. A more flexible approach would also make sense in requiring the enterprise to preserve its core activities or guarantee a certain number of investments. 

Finally, the process of privatisation should be more transparent not only to the parties involved, but also to the general public. This includes publishing the lists of enterprises offered for privatisation and developing a uniform set of rules for privatisation.

Although the practise of offering special favourable conditions to certain investors should remain, the process needs to become much more open and predictable. That would benefit not only the foreign investor, but also the state and the Belarusian people at large. 

This review was prepared on the basis of Policy Brief Privatization in the Republic of Belarus: Framework Improvements and Chief Priorities of Andrej Skryba. 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. 

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