Belarus needs foreign investment. But the stream is weak now, and privatization, which could revive the process, is stalling. However, there are positive signs. Director of the National Agency of Investment and Privatization Natallia Nikandrava told TUT.BY about the obstacles for investors on their way to Belarus, the importance of the ban on the revision of privatization results and the investor need in the Ombudsman and right to entrepreneurial risk.
“Pilot” is over, long live “pilot”
– Privatization in Belarus is firmly connected with two stereotypes: “our assets are interesting to nobody”, and “everyone is just waiting for the opportunity to buy our assets”. So what Belarusian assets attract investors?
– If assets are located in the strategic sector (defense industry, mining, petrochemistry), if they are large enough and work effectively, demand is strong enough. In order to attract investors to these companies a political decision is primarily required. If it exists, you can prepare your company for the arrival of a strategic investor – to enter the corporate governance, make a diagnosis, get rid of non-core assets, implement IFRS, develop a strategy to attract investors and conduct an open international competition.
– But the authorities are rather interested in the ability to resolve an issue with problematic enterprises.
– Loss-making assets require significant changes, primarily within the company. Problems can be justified by external factors, but it is often the result of poor management. In such a case, it may require serious restructuring. It should be borne in mind that the investor is more interested in qualitative terms, but not in quantity terms, thus, the focus should be on increasing profitability and efficiency, rather than production volumes. Otherwise, the demand for most of our assets will continue to go down. If the company is chronically unprofitable, the way out for it is bankruptcy or liquidation. If such an asset is interested for the investor, it should be offered at a realized price.
By the way, there are private corporations or foundations abroad (for example, American Industrial Acquisition Corporation applied to us with a proposal), which buy distressed assets, usually divisions or subsidiary companies of leading global corporations. Such funds manage professionally the portfolio of bad assets to maximize their value. After the rearrangement of assets, the fund puts them up for sale.
The practice of privatization in Eastern Europe has showed that there is the greatest positive effect both for the company and for the country when the strategic investor is a foreigner, not a local resident. This gives the company an access to technology, markets, increases its efficiency. But for smaller companies or companies that provide services, a local investor is preferable.
– The agreement between the Agency and the World Bank has been extended for another two years, meaning that the result of NAIP’s five-year operation is satisfactory. But still there is no any success story. Is it because poor selection of assets or tough criteria for selection of investors? Overcharge? Or it is a problem at the macro level?
For proper evaluation of the results it is necessary to clearly understand the project goals. The pilot privatization project is being implemented in accordance with the international approaches prescribed in the Agreement on the Grant of the Austrian Trust Fund for the project on privatization between the Ministry of Economy of Belarus and the International Bank for Reconstruction and Development. Our task was to create an institutional framework for the implementation of individually targeted and transparent approach to privatization by generally accepted international standards. Offering new, innovative approaches to privatization we have to go beyond the Belarusian legal framework. Significant differences relate to the preparation of enterprises to conduct the transaction, the approaches to the tender and the choice of the investor, asset valuation, etc.
– When the task was already given to you, it was obvious that the agency had not enough authority.
– Yes, the agency is not authorized to make the final decision on the deal, this involves many stakeholders. Hence, there are difficulties associated with the finishing of a series of transactions.
– Since 2012, how have you managed to bring together the Belarusian approaches to the standard ones?
– A lot of work has been done, and, according to the World Bank estimation, the agency has achieved significant results to adapt and use of the international approaches to privatization of state enterprises. Some of our proposals are already reflected in the legislation: it is extremely important that we have managed to detail market valuation during privatization transactions, of course, by international evaluators. They value their reputation, and foreign companies really believe this estimate.
– What has happened with the participants of the pilot projects over the years?
We have prepared eight joint-stock companies for tenders to find a strategic investor. Together with financial consultants we conducted a full financial, legal, operational diagnostics of the companies, financial statements of the enterprises was transformed in accordance with IFRS, market valuation of the companies was carried out on international and national standards, marketing materials and investment memoranda in Russian and English languages were prepared. For each company individual strategies to attract strategic investors were developed.
International tenders and extensive marketing campaign was carried out, through various channels direct contact with more than 800 potential investors were realised.
Although the majority of investors estimate Belarus’ country risks as significant and thoroughly study proposals for business development, strategic investors showed great interest – we received more than 10 expressions of interest from investors from Russia, Ukraine, Lithuania, Poland, Norway, Malaysia, Hungary, India, Germany, Latvia, China and Belarus. Investors were interested in the food industry most of all – OJSC Minsk Margarine Plant and JSC Konfa.
In respect of three enterprises investors submitted official applications with guaranteed investment and social obligations of investors and the proposed price for government shares. The agency together with a financial advisor prepared individual projects of purchase and sale contracts for investors who submitted the best proposals.
– Why did not the other pilot enterprises attract investors?
– In respect of one company we have suspended the work on behalf of the government. Concerning four construction companies investors showed their interest; but after the enterprises were examined, official investment proposals were not filed for a number of objective reasons .
On behalf of the Council of Ministers, the agency offered several options for cooperation with a potential investor for JSC Medplast. It was decided to attract investors to Medplast through an additional issue of shares based on the market value of the enterprise.
– With whom from the first eight do you continue working, except Medplast?
– We work with two more companies. These are Minsk Margarine Plant and Baranovichi Plant of reinforced concrete structures. They have a chance to attract investments.
It is important to note that according to the World Bank estimate, the agency formed necessary potential and gained substantial experience in project implementation and management of the World Bank funds, and this enabled the bank and the government to begin detailed discussions of preparing a new project to improve the competitiveness in Belarus, where the agency has a key role, including the possibility to fulfill functions of the project implementation unit (PIU).
– The new agreement implies the expansion of the list, and the empowerment of NAIP in the project. What can the investor expect now?
– In the Additional Agreement, we have offered and provided in addition to the standard privatization, that is, the direct sale of shares, the use of other methods to attract investors, including the sale of additional shares of the enterprise, the establishment of joint ventures and other ways to invest. The agency will use in its work more flexible approach in attracting strategic investors for state-owned enterprises.
– Has it been already determined who gets into the advanced privatization list? Was it your initiative?
– Yes, it was selected by the agency. From 3,000 state-owned joint-stock companies we have selected those that met the criteria of the World Bank in terms of revenue, number of employees. In addition, the enterprises should not be chronically unprofitable. The short list consisted of 20 joint companies. Then we talked to the relevant ministries. Some enterprises have been excluded, and the rest we have visited, because it is important that the management want to cooperate with us. Right now there are eight finalists. I can’t name them. Currently, the relevant government decree has been prepared by the agency and is being coordinated. The selected companies operate in the petrochemical, food, textile industries.
“If violators are 99% of the checked, then the law is wrong”
– You speak positively about the experience of Kazakhstan, where the state reimburses the investor 30% of capital investment. For us, this proposal sounds absolutely fantastic, but the theme of the relations between the state and the investor, guaranteeing property rights remains very painful. What are the necessary steps in this area?
– Kazakhstan works in other realities, they have their own peculiarities: remoteness from Europe, proximity to China. But we also have something to offer to the investor.
Firstly, NAIP offers to establish a ban on the revision of privatization results in 3 years after purchase. During the first three years a lot can happen – the investor could fall down on the job or could not fulfill the conditions of the investment agreement. But three years have passed – and the state has no right to reconsider its decision. This is a normal international practice.
Secondly, we propose to create an institute of investment ombudsman to address any problems of investors out of court. By the way, to some extent now we carry out similar functions in relation to foreign direct investors in the framework of post-investment support.
Another area that we will develop is the work of the Foreign Investment Advisory Council. This body has worked actively until 2012, now it is important to enhance and raise it, to create a platform for dialogue between the state bodies and foreign investors. We invite all concerned to join our initiative and send us your suggestions and problematic issues.
In Belarus, a mechanism for attracting foreign direct investment through depositary receipts has been created. Are there indications that it can work? It would be very interesting to know the real market valuation of our assets …
Yes, probably, in spite of the recurrent speculative risks, only the use of instruments of international stock market allows us to take into account all the factors that affect the market valuation of assets.
However, it is not so simple, but the creation of the issue legal framework of foreign depositary receipts is a positive step. The receipts issued for shares of open joint stock companies will allow the Company not only to raise additional capital from foreign investors, that is the number one task, but also to create an attractive image for investors, as the issuers of depositary receipts for shares in the companies are well-known global investment banks – the Bank of New York, Deutsche Bank, CitiBank. In addition, the depositary receipts can be used as security deposit to attract foreign funding, and the fact of their quotations on the stock markets will improve the liquidity of the shares.
The purchase of foreign depositary receipts for Belarusian shares is attractive to foreign investors, because in this way they gain access to the shares of Belarusian companies, without departing from the scope of the national legal framework, working according to the rules of established financial sites.
– It sounds positive, but this tool has a lot of “buts” …
– This is the instrument of the future. Firstly, it is quite complicated. The cost of the preparatory work in view of the use of consultants may be up to several million dollars, and therefore, the value of issued depositary receipts, in practice, can not be less than 50 million dollars. That is, only several persons will be able to afford them, for example, the big famous joint-stock companies with strong brands. JSCs have no right to show losses, which significantly reduces the number of candidates. There should also be full publicity of activities, which is disclosed under the international standards, and comprehensible to the investor intended use of funds raised.
It is important to note that the proportion of shares authorized for sale through depositary receipts should not exceed 25%. In this case, one of the key questions is admission and guaranteeing of the investor’s participation in the development and decision-making of companies. It is necessary implement actively corporate governance at the enterprises of the public sector, which is clearly negatively perceived by the management.
In any case, before the tool works, certain economic conditions should be created, and transparent privatization should be initiated.
– This year, despite the ongoing recession, there have been many positive signs – the sanctions have been lifted, we have moved up to the international financial reporting standards, the state support is offered in competitions, where there will be equal access to resources for all forms of property, progress is expected in the visa issue. What else is needed and whether it is possible to expect, for example, in the medium term of the investment growth to the country?
According to estimates by UNCTAD experts, a special policy in the sphere of attraction of investments is the second essential factor, important for the foreign investor. In assessing the country for investments, macroeconomic stability is especially important, as well as market factors (size, growth, per capita GDP) and productivity (availability and price of labor), the regulatory environment (customs regulation and labor market regulation, competition policy , trade, privatization), taxation, and then a special policy with regard to foreign direct investment.
Therefore, if we do not dwell on the measures to improve the special preferential regimes that the Ministry of Economy actively develops, we can say that the work is about to begin or have already begun to address the following priority issues: the division of functions of the state as owner and regulator; the introduction of corporate governance in the public sector; the introduction of assessment institute to regulate the impact of the national legal instruments to predict the consequences; stimulating investment through the public-private partnership mechanism. By the way, NAIP has taken over the functions on the development of this area, and now the PPP Center is created on our base.
If we talk about our proposals, based on the experience of the pilot project, as well as on the analysis of the legislation of the competing countries for investments, we are talking about the following:
– access of independent international and local appraisers to conduct a market assessment of the value of state assets;
– flexibility in the requirements that accompany the sale of these assets;
– revision of the system of sanctions for unintended violations – checks should be preventive in nature; – introduction of long-term contracts for electricity for legal persons – it must be accessible, not higher than in the competing countries for investments in the region. This is one of the key problems of today;
– providing the investor on a free of charge basis with industrial facilities, land and other objects of use of up to 30% of the total investment.
– The discussion about the need for decriminalization of some economic articles is becoming more and more important, as well as the recognition of the fact that business is a risky activity where failure does not necessarily imply the existence of a crime. Where do you see the distinction between the rational state interest and opportunity for businesses to operate normally?
– If the violations in the economic sphere are detected in 99.8 per cent of the audited entities, this indicates a complex, imperfect legislation, which leads to inefficiencies in the economy.
Maybe we should define the most important sectors of the economy, for example, related to the provision of environmental regulations and the public security, and in the rest industries to minimize supervising functions, focusing on preventive measures and mandatory disturbance analysis by supervisory bodies to identify systemic problems and making proposals to change the legislation and the transfer of control to self-regulating organizations, public associations, professional associations, etc.
In addition, coming to verification, the auditor needs to determine what resources are involved in the production, how much labor is involved in the process, analyze financial performance. If there is a significant and stable revenue growth and high export, thus, the imposition of various kinds of sanctions could lead to stagnation and harm not only to the owners, but also to the labor collective and the economy as a whole.
At the same time, when it comes to small businesses and individual entrepreneurs, there is a need to assess whether the amount of fines commensurate with the expenditure on payment of working time of the people engaged in monitoring, and subsequent compliance with all necessary procedures, as well as to assess the impact of inspections. During the period of recession it is more economically feasible to provide incentives for the implementation of activities of self-employed, as this reduces the chances of the further general growth of poverty rate of the population and reduce the burden on the state in matters of employment and other social state services.
– Belarus holds various investment forums very actively, although many people are still very skeptical – they say that there are many agreements of intent, however little is being implemented. How can you formulate why we need investment forums? What does NAIP expect from the forum “Expanding Horizons: investment, finance and development”?
– It is time to move away from officious administrative and bureaucratic measures, which are timed to important meetings, negotiations and signing of agreements and memorandums. This means that later these agreements and memoranda should be transformed into transactions and contracts. Even signed contracts require implementation and involve considerable time lags in the development of specified amounts. Sometimes agreements are terminated, frozen, not brought to the final realization, etc.
It should be understood that such activities are held not just for show, but primarily in order to create an information-platform for dialogue between the public administration bodies, representatives of the business circles of the country, investors, experts and international financial institutions. Our forum will be held in the format of open dialogue, where not only the speaker, but each member of the audience has the right to express his or her view to be taken into account.
For the first time on 29-30 September this year we hold Belarus Forum in cooperation with the non state companies: the leading investment company UNITER and an independent think tank, the Institute for Strategic Studies, BISS. In addition to the presentation of the country as a promising investment platform we put emphasis on the development of the road map that will set the main areas of concerted actions to improve the institutional environment for the expansion of opportunities for investment and funding, which will contribute to the development of the public and private sectors of the Belarusian economy. It is expected that the upcoming forum will become an annual event, every year we will summarize and prioritise.
The following parties confirmed their participation in the vent: representatives of the investment bank Rothschild, the Nordic Environment Finance Corporation, NEFCO, the London and Warsaw Stock Exchange, Bank of New York, the Organization for Economic Cooperation and Development, representatives of the largest investment companies and funds, consulting firms, academia (the Higher School of Economics) the diplomatic corps and, of course, representatives of the real sector.