Privatization: Interim Results

February 3, 2012

 

The panel included all the parties engaged in the process: CEOs of state companies, government officials, investment bankers, private equity investors and fund managers. The key outcome of the discussion was that privatization is good and necessary for Russia. But some internal contradictions and internal conflicts in the process need to be cleared up.

First, is privatization aimed at financing the budget deficit, or is it merely a political decision designed to bring in structural reforms? The majority of panelists said that the latter was more important. Privatization is necessary to reduce the state’s role in the economy, shrink the public sector and increase the role of the private sector.

Aleksei Uvarov said it is not only important to privatize large state holdings, but also to spin off related entities from state holdings to reduce the size of the public sector. Slava Pivovarov recalled research by McKinsey that labelled privatization as “low hanging fruit” to achieve growth. Kirill Dmitriev said that promoting competition was important, and privatization could help achieve that. Alexei Kalinin mentioned the importance of privatization for growth of the market in breadth and in depth. Nikolai Shvets said that as the head of a state company, he needs to see the rules for the development of a particular sector made before privatization is carried out, while he praised the state as the most effective owner of assets. Ruben Aganbegian pointed out that fiscal goals and structural reform are actually at loggerheads.

The moderator summarized the remarks by saying that everyone apparently agreed that privatization is good, but the prevailing thought was that nothing would happen until the budget comes under pressure.

The panelists then discussed a number of technical issues. It turns out that the legislation has been changed so that the state can now privatize assets without the need to create a special fund.

Privatization deals from last year were mentioned: VTB and Freight One, as well as the failed Sovcomflot deal. There was also a mention of upcoming deals, such as United Grain Company, a block in Apatit and the sale of SG Trans.

There was suggestion that privatization should occur in small blocks, with a gradual increase in the free float. Private equity deals can also be conducted in the same manner as pre-IPO deals.

The discussion moved on to the question of whether privatization deals should involve new shares and new equity deals to finance company development, or simple divesture from the state. The moderator mentioned that there is a dichotomy between the goal of structural reform via privatization and the government’s paternalistic approach and hope that it can be successful in tackling corporate finance issues at the privatized companies.

It was mentioned that there are other ways to privatize, such as through share swaps or issuing convertible bonds, as Blackstone did in autumn 2011.

The role of private equity funds was discussed. Dmitriev said that he would be interested in buying some assets, particularly agricultural, banking and logistics and transportation assets. Kalinin sees the main role for private equity firms as “sherpas”, taking stakes pre-IPO or intermediating further sales of these assets to investors.

The role of exchanges in privatization was also highlighted, including the need to conduct privatization deals on MICEX. There was a reference to the Brazilian experience, where Novo Mercado, the exchange that set the listing rules, revolutionized corporate governance for companies trading on the exchange and ran well ahead of the legislative process. There was also mention of two OECD models for the treatment of minority investors: the “conventional majority model” and the “majority model based on a 3% threshold”.

The conversation touched on what requirements buyers must meet.

There was also a brief mention of the opportunities for Russian private and state pension funds in privatizations.

There was a discussion of dividends from companies up for privatization. Gleb Nikitin and Uvarov take dividend policies of state companies very seriously as a way to improve corporate governance and said there was a great deal of discussions on the issue.

Pivovarov indicated that two types of dividends are possible: special dividends distributing cash before a sale, and regular dividends, which are a part of a normal corporate governance and dividend policy and should be generous for state companies with strong cash flows.