: / Strategies / National Poverty Reduction Strategy (2003-2005)

Kyrgyzstan Review, 10 years ago

G. Privatization

387. Reforms of recent years have actively transformed state property to the private sector, drastically changing its structure and its forms of ownership. A mixed economy based on a market system has been formed. The foundations have been established for the development of the local stock exchange, for small and medium-scale entrepreneurship and the infrastructure of an effectively functioning market economy has been established. As a result of the reorganization of state property and the privatization of small enterprises and housing, real owner have appeared in the country, and the basic conditions have been created for attracting foreign and local investors to the economy.
The share of state property in all sectors of economy has decreased significantly. As at 1 July, 2002 the level of privatization was 69.7 percent. A large number of state-owned facilities have been transferred to communal property and local communities. The level of privatization by sectors is as follows: in industry 89.2 percent, construction 58.9 percent, transport 57.6 percent, trade and public catering 97.5percent, in public amenities 99.9percent, in non-production sphere 44.2 percent. At present, the State owns packages of shares in 222 joint stock companies, including majority holdings of shares of 142 joint stock companies. Active further reduction of state ownership of joint stock companies is being pursued by the sale of state-owned packages of shares, through the stock exchange, on the basis of investment tenders, by auctions and so forth.
388. The legal framework regulating the procedure and mechanisms of restructuring and privatization of state property has been developed significantly. A new Law on Privatization of State Property of the Kyrgyz Republic has been adopted, that clearly regulates major issues of privatization and the procedures for alienation of state property to be owned by individuals and legal entities. The law sets down clear standards related to procedures and methods of property reorganization. When privatizing state-owned packages of shares of joint stock companies, the possibility of selling them through the stock exchange market has been envisaged. When assessing state property, not only balance sheet evaluation methods have been envisaged, but a market-based approach as well. Transparency of the privatization process has been strengthened. The Jogorku Kenesh of the Kyrgyz Republic approved the Concept and the Program of Denationalization and Privatization of State Property for 2001-2003.
389. Regulations have been prepared in recent years and approved by the Jogorku Kenesh of the Kyrgyz Republic. The program of privatization in strategically important sectors of the economy (energy, telecommunication, oil-and-gas sector, air transport, gold mining sector) has been started, their assessment has been carried out and privatization schemes have been selected. Enterprises in these sectors have been reorganized, restructured and separated into independent joint stock companies. At present, the State is the largest shareholder that owns a controlling package of shares in the companies of these sectors. At the same time, a purposeful gradual reduction of state ownership is taking place in basic, strategic sectors. Joint stock companies work on the basis of market principles. In order to successfully conduct the sale by tender of the States shares in the JSC KyrgyzTelecom, the attractiveness of the company was increased by allowing it to issue licenses for mobile telecommunication services. The Government has approved a tender commission. A consultant on privatization has been selected on a competitive basis.
390. The legal structures for bankruptcy has been developed significantly, creating conditions and possibilities for the rehabilitation of economic enterprises, clearing the market of weak, insolvent and non-operating enterprises, as well as enabling the sale of unused assets to effective owners. The developed legal framework provides for the possibility of restoring and rehabilitation of enterprises, and of attracting direct investments to the real sector. During 1995-2001, as a result of bankruptcy procedures, 526 enterprises were recognized bankrupt; during 1999-2002, 80.9 percent of bankruptcy procedures were initiated by creditors. The bankruptcy mechanism involves several public administration bodies authorized to ensure collection of taxes and other compulsory payments. Bodies of the State Tax Inspectorate and the Social Fund of the Kyrgyz Republic have become especially active in this regard. During this period they initiated bankruptcy procedures against 245 enterprises (65.7 percent of the total number of enterprises, the bankruptcy procedures against which were initiated by creditors). Over the past three years, the number of enterprises against which procedures of rehabilitation and restructuring have been applied, has increased three times. This has allowed their preservation as legal entities, or their assets have been preserved as a single functioning whole. During recent years within the bankruptcy framework, glassworks, a cotton spinning plant, a tannery and a starch production factory were restored as large joint stock companies with the participation of foreign investors, and a significant number of jobs have been created. These joint stock companies also have a large export potential.
Certain amendments and addenda have been introduced into existing legislation in order to overcome problems arising form insufficient control, embezzlements and corruption of some special administrators during the process of bankruptcy. The State Body on Bankruptcy Affairs has been entrusted with a supervisory function over the activities of special administrators and liquidators, as well as over the authority of the only state representative on the issues of initiating bankruptcy procedures against debtors in relation to which the Republic is a creditor.
391. The Kyrgyz Republic has become a pilot country for implementation of the program, Corporate Governance and Enterprise Reform, financed by the Asian Development Bank. The first phase of this program helped to establish basic legal, regulative and institutional framework for corporate governance and legal framework for bankruptcy. The reform has been undertaken of managing bodies of joint stock companies, while the principles of corporate governance have been introduced in practically all enterprises. Members of the board of directors of joint stock companies and ordinary shareholders have attended training courses. Charters of joint stock companies have been made compliant with the principles of corporate governance and reregistered. As a result, legal education and consciousness of shareholders with regard to corporate governance have been changed radically. Reform has been conducted in the area of accounting and audit. Introduction of the principles of corporate governance in the real sector of economy ensures maximum transparency of the most important decisions taken, with direct participation of shareholders in their discussion and adoption. The first project implemented on development of corporate governance has been recognized as a model for countries with transition economies. At present, the Asian Development Bank provides assistance in implementation of a second project on further corporate governance development.
392. The process of privatization currently faces a series of problems impeding effective reform that need to be resolved. Being an owner of packages of shares in a significant number of joint stock companies, the State cannot sell its holding due to:
the low paying capacity of potential buyers,
a lack of investment attractiveness of the enterprises involved,
ineffective measures taken to promote shares in the market, and
in a number of cases, a low proportion of state shares offered for sale that does not give the buyer the right to fully participate in the management of the joint stock company.
It is necessary to reassess the existing regulating and legal framework, develop new mechanisms of privatization, valuation of property in the process of privatization and bankruptcy, in compliance with the new Law on Privatization.
393. An important problem is an insufficient level of development of the institute of valuers of real estate and property. Inadequacies reflect:
insufficient experience and qualification of personnel in the issues of market valuation of property,
lack of financial resources to acquire professional knowledge on property valuation and its upgrading, certain amendments and addenda have been introduced into existing legislation for the purpose to increase their responsibility.
limited possibilities for qualitative preparation of corresponding documents, and
development of an organized real estate market.
This problem becomes particularly significant in connection with the introduction of real estate taxes that presupposes an adequate valuation of the property of legal entities and individuals. The insufficient development of a valuation institute, as well as the absence of licensing and registration processes, also impede development of the real estate market, including mechanisms for leasing and mortgage of land that are new for the country. This creates the grounds for poor quality of valuations services and their corrupt nature.
394. With introduction of private land ownership, legislation provided for portions of land to be transferred to owners of buildings and facilities free of charge, while other portions were not to be included into the cash surrender value during privatization and did not belong to the owners of the structures located in the plot. In this connection, it is necessary to regulate the transfer of ownership rights and assessment of land plots during privatization, the relationship between the state/owner of the land plot and the owner of the structures situated in it.
395. Improvement of effectiveness of state property management still remains one of the most important problems. Weakness in quality and relevant skills of personnel, poor procedures, ill-defined relationships between state representatives and joint stock companies, do not permit the establishment of an effective organization for state assets management. It is necessary to improve the regulatory and legal framework for regulating processes of state property management, including leasing, concessions and dividend policy.
396. The major goals of state property privatization policy to the year 2005 are strengthening and development of the private sector and improvement of the effectiveness of state property management. The priorities in the strengthening of the private sector of economy will be the improvement of the legal framework, privatization and attraction of investments to telecommunication, energy, air transport, oil and gas sectors, improvement of effectiveness of state property management and rehabilitation of enterprises. In this connection it will be necessary:
to restructure and privatize joint stock companies of strategic sectors of the economy and resort and recreation facilities by attracting investments in compliance with the approved concept and program of privatization of state property;
to complete the privatization of facilities started at previous stages;
to improve effectiveness of state property management, including anti-crisis management at state-owned enterprises and in large joint stock companies with state shares;
to continue using bankruptcy procedures actively for the purpose of enterprise rehabilitation;
to carry out privatization of ownership rights to land parcels;
to improve legislation and regulating and legal framework for privatization, management and bankruptcy; and
to actively develop the institute of assessment of real estate, property and business.
397. In compliance with the approved action plan and schedule of implementation of concrete measures on privatization of state-owned packages of shares of the JSC KyrgyzGas, JSC KyrgyzTelecom, air transport companies and distribution companies of the electric power sector by 2005, it is required:
to work out optimal ways for further development of the energy sector and privatization of distribution companies with a detailed elaboration of various privatization models. State packages of shares of electric and thermal power distribution companies will be privatized by 2005;
to develop, approve and start implementation of the program of reorganization and privatization of the gas sector. Reorganization of the gas sector will be carried out by privatization of the state package of shares of gas distribution companies and companies selling liquefied gas;
to privatize the state package of shares of the joint stock company, National Air Carrier Kyrgyzstan Aba Joldoru; and
to conduct a tender on sales of 51 percent of shares of the JSC KyrgyzTelecom.
398. Active privatization of objects of the resort and recreation sector, as well as state packages of shares of medium enterprises of various sectors of the economy will be continued, envisaging attraction of direct investments for their development. To increase investment attractiveness of enterprises, several companies will be selected in which it is intended to carry out procedures of anti-crisis management (analysis, restructuring, renewal of technical, technology park, introduction of know-how, and so forth). Conducting open tenders - auctions, contests, tenders, will carry out completion of privatization started previously. This will include auctions without establishing the reserve price, sales of facilities at the place of their location, broad advertisings, direct negotiations, transfer of property assets to repay the debts.
399. Active work will be conducted on establishment of joint enterprises and production operations with participation of foreign companies on the basis of state assets and enterprises in which there is an equity holding by the State.
400. Certain work will be done to increase effectiveness of state property management, introduction of an effective system of financial rehabilitation of enterprises. With a view to reforming state property management, mandatory conclusion of contracts will be required between state representatives in managing bodies of economic enterprises and other elements in the partnerships or associations. The program on managers activities will become an integral part of the contract, stipulating the procedure and requirements for reporting, forms of control, managers responsibility. A clear and unified system of selection, preparation and evaluation of managers will be developed. It is intended to upgrade the professional skills of companies managers and members of boards of directors. For this purpose, it is necessary to establish a system of education and refresher courses for the managers of state shareholding, members of boards of directors that will require technical and financial support from international organizations. Open contests will be conducted among managers and commercial structures to transfer them the right to manage state shareholding, to represent the state on boards of directors. Corresponding regulating and legal acts will be drafted and adopted for the purpose of regulation of this process.
401. The newly established Interdepartmental Council on Bankruptcy will be conducting a justified, active and coordinated examination of economically and socially important enterprises that are indebted to the State. It is necessary to improve the legal basis of bankruptcy procedures and mechanisms, to develop proposals for determining the procedure for taxation of economic subjects in the process of bankruptcy. In relation to insolvent economically and socially important economic enterprises, it is intended to conduct some work on coordinated decision-making by the concerned ministries and departments collecting mandatory payments (bodies of the STI, Social Fund, Ministry of Finance). A concept of a single creditor on behalf of the state will be implemented, and realization of bankruptcy of a missing debtor will be ensured. Control over the observance of legislative requirements by special administrators will be strengthened, including those relating to possible preservation of production or a part of production, its restructuring or rehabilitation. In order to increase the responsibility of special administrators for committing illegal actions in the process of bankruptcy, legislative measures will be taken to increase their criminal and administrative responsibility.
402. Stock-taking and updating of the regulations on privatization, creation of new documents on the procedure and conditions of conducting auctions, bidding, transfer into management with further purchasing, direct sale, etc., will be conducted in connection with introduction of the Law on Privatization of State Property in the Kyrgyz Republic.
403. For the purpose of developing the quality of valuation activities in the Republic, it is necessary to adopt the Law on Valuation Activities and Valuation Standards that will apply to the activities of valuers. Development will be undertaken of an institute of private independent valuation of land, business and real estate in accordance with market requirements. It is intended to prepare a set of documents regulating and developing this process, to study and introduce international standards of valuation activity in the Republic. It is planned to review the legal framework regulating the process of privatization of land owned by the State when privatizing the structures located on it, its assessment during privatization and a mechanism of transfer of the land ownership into private property.
404. Solution of the above tasks will promote optimization of the ownership structure, development of entrepreneurship, further development of market relations, rehabilitation of enterprises, inflow of investment into the Republic, and increased employment. On the basis of the results of implementation of the program of privatization for the years 2001-2003, it is estimated that the proceeds of privatization will amount to about 900 million soms (without taking into consideration strategic, basic sectors of the economy).