GOODBYE, VOUCHERS!

The circulation of Azerbaijani state privatization shares (vouchers) officially expired on 1 January 2011.  So Azerbaijan, like other countries, is switching completely from privatization vouchers to a single form of privatization - one based on exchange for money.

Strengths and weaknesses of privatization vouchers

Privatization vouchers are popular in many countries of the CIS and Central and Eastern Europe.  Mass, or voucher, privatization addresses problems of "unfairness," helps to develop stock markets and market institutions, alleviates the shortage of local capital and the complexity of financial valuations of state-owned assets.  In the long term, it facilitates the restructuring of enterprises and forms a shareholder-owned portfolio suitable for the development of an enterprise.  

Among the downsides to privatization vouchers are reduced revenues to the national budget and reduced attractiveness for foreign investors.  This method of privatization does not even provide adequate incentives for owners to introduce efficient corporate management; it prevents the inflow of capital and skills for restructuring and "disperses" property among many shareholders, which makes it difficult to restructure the enterprise.  The impossibility of achieving the economic goals of privatization has prevented this method from becoming the main one in most Central and Eastern European countries.

In reality, despite the similarities, which included free distribution of vouchers to be exchanged for company shares, the voucher privatization programmes in most transitional nations were different because they had different goals and strategies (in terms of size and manageability, speed and sequence of actions).  As a result, there were also different short-term results.  At the same time, long-term results and the further effectiveness of this method depend on secondary privatization, in other words, changes in patterns of ownership after privatization.

In the mean time, the experience of other countries proves that gradual and consistent monetary privatization with an individual approach to every enterprise is preferable and advantageous in the short term.  In the long term, the difference is less noticeable and the functioning of the enterprises depends more on the possibility of ownership change (among shareholders), the quality of corporate management and so forth.

The Azerbaijani model

In Azerbaijan, voucher privatization continued for more than 13 years:  the privatization of small enterprises began in late March 1996, privatization vouchers were first issued in March 1997 and privatization of medium-sized enterprises started in May 1997. The privatization programme, which was incorporated into the main law of property ownership relations in Azerbaijan, sets a legal framework for the transfer of 65% of state-owned, privatized property to people of the country, free of charge. To achieve this goal, vouchers - state privatization shares - were issued to citizens.

In different assessments by economic experts, 50-60% of the vouchers were held by foreign investors. Foreign investors took part in the process by buying privatization options. The option entitled them to buy one privatization voucher to take part in voucher auctions or to receive a fixed number of shares in monetary auctions and investment or commercial tenders.  More than 18.2 million options were sold from 1997-1998, which corresponded to 60% of privatization vouchers.  According to calculations by the State Committee for the Management of State Property (now the State Committee for State Property Issues), by selling 18.2 million options, foreign investors were able to buy 38% of the privatized state property in Azerbaijan.

The privatization vouchers could be used in the privatization of 15% of the assets of small enterprises and about 70% of shares in medium and large enterprises.  In the case of small enterprises, 15% of their incorporation capital was to be privatized via preferential subscriptions, and 85% via monetary auctions.  At the same time, other preferential measures were also used in the privatization of small enterprises.

Medium and large-scale enterprises were privatized by transforming them into joint stock companies:  15% of shares were sold on preferential terms to their staff, at least 50% were sold at voucher auctions and 10-20% were sold at monetary auctions.

In Azerbaijan, most of the vouchers were used in investment tenders and also in the form of their monetary equivalent.  About one third of the vouchers were used as payment at voucher auctions.

In accordance with the law, the vouchers were used in the process of small-scale privatization (privatization of 15% shares in enterprises) and as means of purchasing 15% by the staff of joint stock companies on preferential terms.

From the first voucher auctions until the end of 2009, more than 42,000 properties of different types were privatized, and about 1,600 medium and small enterprises were transformed into joint stock companies.  The privatization process formed a stratum of more than 250,000 shareholders; more than 50,000 citizens became owners of private property. Overall, more than 1.2 million of the country's citizens benefited from privatization in one way or another.

During the last year of voucher privatization, the State Committee for State Property Management took extra measures to ensure broader use of vouchers in the privatization of state property.

However, the state has effectively already handed over to private investors most of the small and medium manufacturing enterprises, service organizations, utility, trade and other facilities. In this sense, the resources for voucher privatization are now mostly exhausted.

Nonetheless, the process of "small" and "large" privatizations continued last year, too.  For example, from January-September 2010, 520 small state-owned enterprises and facilities and about 355 plots of land were sold at voucher auctions.  About 10 new joint stock companies were founded at former state-owned enterprises during the first three quarters of the year and shares in 25 state-owned joint stock companies were sold at 41 auctions. Seven relatively large state-owned enterprises were privatized via investment tenders.  A total of AZN 41 million was invested in enterprises privatized via investment tenders.  These funds were spent on expanding the industrial potential, introducing advanced technology, addressing problems of pollution and improving safety systems for staff.

The period following the vouchers

The State Committee on Privatization Issues officially informed people about the end of mass privatization as early as 9 December.  Despite this, 2.4 million privatization vouchers remained at the National Repository.  The reason is that in December, there were no specialized voucher auctions or investment tenders in which the privatization vouchers could be used.

The owners of these vouchers are a small group of investors; a few dozen. Some of the vouchers are still held by individuals who continued to conduct transactions with them on the black market, even after their period of circulation had expired, although at a very low price (a third of the 2010 price). The State Committee was unable to explain the rationale behind trading vouchers this year. Such transactions could only be conducted for speculative purposes, misleading individuals by inspiring hopes that the period of circulation of privatization vouchers would be extended.

After all, the methods of privatizing state property during the post-voucher period were described by head of state Ilham Aliyev's decree dated 22 June 2010, "On changes and complements to the State Privatization Programme."  These changes mean that shares which were to be sold by voucher privatization or at monetary auctions will, from 1 January 2011, be sold at specialized monetary auctions. The auctions will be held over five days. The staff of small enterprises and joint stock companies will also be able to purchase shares for money.  At the same time, they will enjoy some preferences when paying for their shares.

In the run-up to the transition to the new forms of privatization, the State Committee for Property Issues has implemented a number of measures aimed at preserving state property and ensuring its efficient use, tightening monitoring of the maintenance of specializations in the privatized facilities and introducing a single register of real estate.

Before the transition to the new phase of privatizing state property, the State Committee has tightened controls over the privatization processes, fulfilment of investors' obligations under the tenders they win, and maintenance of specializations in the privatized enterprises.  

To be continued...

To summarize, let us note:  privatization gave an impetus to the struggle for the local market, which resulted in the creation, simultaneously with the privatization of state-owned enterprises and facilities, of their modern alternatives - taxicab fleets, filling stations, supermarkets, restaurants and so forth.  This, for its part, resulted in an increased share of the private sector in gross domestic product.  At the same time, privatization is far from complete in Azerbaijan.