“There should be no state where competition is possible.” Privatization of state property, what are we doing wrong?

“Where competition is possible, the state should not be present.” Privatization of state property: what are we doing wrong?

At the end of August, the presidential decree on reducing state participation in the economy was signed, and the updated list of large state assets to be privatized in Uzbekistan was approved.

According to it, shares in a number of financial institutions, industrial, transport, and trade enterprises will be put up for sale. The document also updated the conditions for selling and auctioning state assets and land plots.

Against the backdrop of this situation, Gazeta presents an interview with economist Otabek Bakirov about forms of ownership and privatization policy. It discusses when Uzbekistan began to abandon single ownership, what selling state property to entrepreneurs and investors actually means, how this process should ideally proceed, and its significance for ordinary people.

— Why is state property privatized? Could you first explain this?

— First of all, the agreement already accepted in many modern societies is that in a market economy, the economy must be multi-structured. The attitude toward property, that is, various forms of ownership, must be recognized. This means private and other collective forms of ownership alongside state property. That is, in any legal space, whether it is Uzbekistan, the US, or the European Union, it does not matter, all of them must exist.

Today, as a result of various political and social experiments and regimes, state property has become absolutely dominant in some countries. If we look at the past, in the Soviet Union, as well as in the Eastern European and Asian countries that were in its territory or sphere of influence, state property was mostly a monopoly. That is, in socialist production, mainly state property was recognized. Other forms of ownership were considered alien to the idea and ideology. In the late 1980s, when the regimes began to face various challenges, i.e., problems, the form of ownership also began to change. First in Eastern Europe, then in the Soviet Union, and thus for many, the issue of privatizing state property came onto the agenda.

Because if we talk about economic development and economic freedom, no single ownership, particularly state ownership, should have an absolute major advantage; this does not pave the way for competition and economic development. Therefore, the first norm adopted in our history was to build a multi-structured economy, that is, to recognize other forms of ownership as well. In 1988–1989, even before the collapse of the Soviet Union, the recognition of other forms of ownership came onto the agenda. The issue of privatization came onto the agenda much later, a few years later, after the union had already dissolved.

In Poland, this happened earlier because they had a strong "Solidarity" movement. In a number of Eastern European countries, the private sector had not been completely destroyed. Although there was political control, very small elements of private ownership and private business existed in Poland, Czechoslovakia, Yugoslavia, and Romania. The difference between the Soviet Union and them was that in our country, no form of ownership other than personal property, i.e., housing or personal belongings, was recognized. This was considered a bourgeois element, a remnant of capitalist society. In 1988–1989, the recognition of various forms of ownership began with the adoption of the Law "On Cooperatives." The adoption of the law, of course, and the fact that cooperatives began to process and provide services, created additional capital in them, which in turn created a need for additional property.

— In that case, how do you see its purpose? For example, several options are mentioned now, i.e., the purpose of privatization is for the state to rid itself of its assets, or to attract money to the budget, or to support the private sector in general. Are all of these important, or is there a priority?

— At the beginning of our conversation, we talked about the socialist system, the ideology that did not justify itself at that time and did not allow for competition. We gave a brief understanding of property relations in that regime. Even without this, state property exists in countries with healthy economies and free markets. Many sectors, for example, railways, postal services, and in some even banks, have been under state control.

If we take the example of Great Britain, after a long period of political power being under the control of the Labour government, a very large amount of property accumulated in the hands of the state. Mines, the railway system, banks, and naturally, it began to weigh heavily on the state and the budget. Its efficiency decreased. Therefore, when talking about the role of state property in politics, social life, and the economy in the Western example, Great Britain is cited as a model. After Margaret Thatcher (former Prime Minister of Great Britain) returned to power, a very large privatization program was announced. That is, railways, mines, and the energy sector were removed from state control. It is difficult to say that this process is characteristic only of countries like ours that have experienced a socialist past.

At the same time, there is another issue: from time to time, socialists or left-wing forces come to power in various countries, and one of their typical first steps in implementing their ideas is to return a number of economic sectors to state control. For example, in Chile, the socialist government took such actions in the 1970s. That is, they came forward with the claim that "the private sector cannot handle it, we must fulfill the demands and wishes of the working class." It is based on the idea that certain sectors must definitely be in the hands of the state.

— You mentioned above that some enterprises and assets will still remain under state control. Which assets should those be?

— The substance of ownership is often a reflection of changes in politics. Whatever changes occur in politics, whichever forces dominate in parliamentary elections and government formation, how they envision the process, and how they plan to fulfill their promises, reality is shaped accordingly. For example, if right-wing forces or liberals come to power, they want the state to exit all sectors as much as possible, even infrastructure systems. Some liberals even hold the view that prisons should be handed over to the private sector. Experiments have been conducted on this. I believe the state should keep social and infrastructure facilities under its control. The state can leave all other sectors where competition is possible and the market can self-regulate. In my ideal, it is like this.

— Does a change in the form of ownership, i.e., privatization in the context we are discussing, guarantee that an enterprise will work more efficiently? That is, we can also talk about the importance of management in this regard.

— You are asking a highly significant question. A very important question. Because a misconception has formed that changing the form of ownership from the state sector to the private sector increases efficiency. This cliché view is usually promoted when the state has a plan to quickly redistribute the assets under its control to loyal owners, regardless of whether they will be effective or not. For example, if you imagine Russia in the 1990s, the largest oil companies, iron and metallurgical plants, the largest assets currently controlled by existing oligarchs, were distributed through dubious loans-for-shares auctions.

The goal there was not to form effective ownership, but to continue a stable political regime. That is, the desire to continue Yeltsin's power even after the 1996 presidential election. Whether we like it or not, political goals have their place; it is very difficult to turn a blind eye to this. Therefore, my answer to your question is that privatizing state property does not always create an efficient, effective system or an efficient owner. An efficient system and an efficient economic regime emerge only if a competitive environment is ensured after privatization. Only if an open, free competitive environment is ensured. This process does not consist solely of handing over state property to a private owner. The processes leading up to the handover must also be very complex, open, and under public control.

— How should privatization actually be? How do you see the picture in an ideal scenario?

— In an ideal scenario, there are various forms of property, and those under state control can also be found. If we look back 35–40 years, even the apartments where people lived in Tashkent, Uzbekistan, were state property. For example, in Uzbekistan or Russia, the first step of privatization began with the privatization of apartments. That is, people were given the opportunity to privatize easily and cheaply. In both Uzbekistan and the Soviet territory, the first owners are considered to be those who privatized their apartments. This is the first stage.

The next stage of privatization was in small facilities. Under the Soviet regime, even shops, bus stops, and small barber shops were considered state property. In the early period of the 1990s, following the privatization of apartments, consumer service facilities were privatized. That is, extremely small facilities. This created a class of small and medium owners. The next stage involved privatizing assets related to large-scale production, industry, construction, and agriculture. This can be called medium and large privatization. This is where the forms differ sharply. That is, several methods were used.

In Eastern Europe and Russia, there was the voucherization method. In this, the value of the property was calculated and distributed relative to the population size. Per person, let's say, it amounted to 10,000 rubles. In exchange for a voucher, one could buy shares in small or medium enterprises. If we assume there were a thousand medium enterprises in Uzbekistan in 1995, their value was 10 trillion soums, and the population of Uzbekistan was 20 million, this means that vouchers worth 50 million soums were distributed to each of them. This was also considered one of the privatization methods. Like some countries, Uzbekistan went down the same path. Privatization measures were also carried out through share funds.

For example, in the 1990s, investment and share funds were established for the privatization process in Uzbekistan. People would buy their shares. These were very complex, difficult-to-understand processes. That is, for people without preparation or initial capital, it was difficult to understand and considered highly risky to enter. Therefore, starting from medium privatization, involving the absolute majority in the process was problematic. No one took the risk. Investing or making a decision is, naturally, equivalent to taking a risk. This problem is not only in our country; it is the same for everyone.

If we study its history, it is difficult to say that any country successfully covered a wide layer of the population in privatizing medium enterprises. In our country, only a few enterprises can be cited as examples. Because shares ranging from 5 to 24 percent were distributed to the labor collective. Only they can be considered to have become shareholders in some sense. That is, they did not buy shares from their savings; they were not shareholders by investment. They were paid for their labor.

In the 1990s, paying wages was a very big problem. Wages were paid in kind with potatoes, various drinks, and even cigarettes, and many enterprises calculated wages in shares. Several successful examples like this can be mentioned. In sectors with large companies like oil and gas or metallurgy, you see that the state share is 97–98 percent. In whose hands is the remaining 2 percent? In the hands of small shareholders who once came to own the shares distributed to the labor collective. For example, this can also be seen in the case of banks. In many state banks, some of which are now privatized, a 2–3 percent share portion is in the hands of minority, small shareholders. Those are precisely the shares of the employees. The shares that came into the hands of the employees.

For example, if some part of Uzbekneftegaz is to be privatized, I believe the public must definitely participate in it. I can explain this better using the example of UzNIF (Uzbekistan National Investment Fund). The fund did a dual IPO, placing part of the shares in London and part on the Tashkent Stock Exchange. When placed on the Tashkent Stock Exchange, Uzbeks had the opportunity to participate in the process on a priority, preferential basis. Similarly, if large combines that are the main taxpayers of Uzbekistan, such as Uzbekneftegaz, say, NGMK, or AMMC, are to be privatized, this exact experience should be used.

— Understood. In this case, how is the true value of assets determined?

— There are many models for this. The best and most effective is the market. If shares are circulating in a liquid form in the open market, the best tool to determine their price is the market. For example, a large part of Trustbank's shares move in the open market. Its price can be known based on the price of shares circulating on the stock exchange. Or Hamkorbank's as well. Its market price can be determined through its capitalization. At the same time, there are other companies fully under state control; they cannot be valued this way.

For example, Asakabank is 100 percent in the hands of the state. How do we value it? Its shares do not circulate on the stock exchange. Even if they did, they are not liquid, meaning there is no opportunity to buy or sell as much as desired on a regular basis; it is very limited. The same can be said for Uzpromstroybank. Of course, professional appraisers are hired for this. They value it by taking into account many factors: the asset's position in the market, its quality, composition, prospects, and regulation. The appraised price is put up for sale in various forms. That is, it can first come out as an initial price or serve as a basis for mutual, direct negotiations.

— Well, in this process, what do you think should be done so that an object recognized as state property, or an asset in general, is not sold for a song?

— This risk has always existed and will continue to exist. Privatization is a process that is always imbued with political motives. During the period when the privatization process takes place, the political circles in power want to form a class of owners loyal to them, especially when privatizing large assets. That is, loyal ones. Because property and power are institutions that complement each other, are extremely closely intertwined, and one cannot exist without the other.

— In this process, what do you think should be done to prevent conflicts of interest, i.e., to prevent property from being concentrated in the hands of a narrow circle?

— Again, we will have to refer back to the legislation. One of the first laws adopted after Uzbekistan became independent was precisely the law on the privatization of state property. Many do not remember this now. One of the first laws adopted by our parliament, formed in 1990, on November 19, 1991, if I am not mistaken, was the Law "On Privatization." This law was updated 33 years later, in 2024. A new law was adopted 33 years later. Article 4 of this law defines the principles. According to it, in particular, privatization must proceed on the principle of openness. In addition, there are principles of accountability and prevention of corruption.

The questions you are asking now are answered in the law, and it must be restrained by this. In an ideal scenario, it is like this. But in practice, if you look at the examples of assets privatized before or after the law, the principles in Article 4 of the law have been openly violated. There are cases where not just one, but several were violated at the same time. Now, if you ask what tools exist to restrain this, for now, in the conditions of Uzbekistan, I do not see a stronger or more effective tool than media and public control. Because we do not have a parliament. Therefore, the only institution that can raise questions about the legitimacy of privatization for now remains the public and the media. Unfortunately, I am not saying this happily. But even so, the public is subjected to huge manipulations.

The second issue is related to the absolute closedness in privatization. As you know, after 2017, Uzbekistan took big steps to ensure openness and transparency in many issues, but privatization remained an exception. In this regard, the State Assets Management Agency, which is a state body, became one of the most closed bodies in Uzbekistan. I have never seen any former or current head of the agency come out openly to the public and give an explanation. Yet, privatization is such a process that if you cannot ensure trust, the question regarding the legitimacy of owners in society will never disappear. The question will be asked again and again.

For example, even if we take Russia or Kazakhstan, the fact that large assets were redistributed to a loyal, compliant oligarchy in the 1990s is still questioned. Many political problems started precisely during this privatization period.

— Why is privatization beneficial and important for ordinary citizens, for the people?

— In an ideal scenario, we said that an efficient class of owners is created during the privatization process, right? Efficient, mutually competing owners are the backbone of any society. That is, they stabilize society. The more diverse, mutually competitive, and highly concentrated the class of owners is, the more stable society will be. That is, members of society who did not participate or were passive in the privatization process also benefit from this and are interested. New owners start paying more taxes.

It might not be a good example, but if we take Coca-Cola, which was privatized in 2021, there are certainly many questions about this process as well, but after new owners appeared through this, tax payments increased. If you take other large facilities privatized without mentioning their names, tax payments decreased. That is, if asked why trust is needed, I would say this trust is needed more by the owners than by the members of society. It is also needed so that the results of privatization are not reviewed again over time as politics change, and for the inviolability of property in general.

For example, the privatization of mobile operators and cement plants was under big questions. Why? Because no one had trust in that process. Even state bodies had no trust. Therefore, when they were being returned to the state, society did not ask where the property right went. Because they knew very well how it had been privatized. Similarly, it was known to everyone how cement plants were taken under control in the 2000s, how they were owned through fake privatization schemes.

But when the issue of the future nationalization of an asset acquired at a market price in a healthy auction with the participation of several competing bidders was raised, society did not stop anyone. There are many who want to own certain assets in various ways, trying to extract their share from within and privatize assets for a song. But whether 5 or 10 years pass, they will be asked questions again and again.

— Should there always be equal competition in privatization, or is it normal for some wealthy investors to have an advantage?

— Unless it is a special asset, additional criteria, conditions, and requirements should not be set as much as possible. Increasing the number of bidders in the open market, regardless of their profile and the source of origin of investments, or which sector they are from, allows us to find the best owners. For example, in the privatization of Coca-Cola, why could only soft drink manufacturers participate in the auction? Any investor could have been allowed. Say, if a large construction company had also participated and won, a worse manager would not have emerged from it. We had no right to say they had no experience.

In the privatization of some small banks, a requirement was also set that it must be a commercial bank or a financial institution. I also considered this requirement incorrect. Because a person who paid their own money and won in a competitive bidding can find the necessary specialists in management. They can assemble a professional team. Ownership and management do not necessarily have to be in the same field.

— In this process, what requirements and obligations do you think should be placed on investors?

— This depends on the nature of the asset. I think setting requirements regarding the profile is incorrect. For example, in the privatization of cement plants, the existence of a criterion like experience in production sharply reduces the number of bidders. A sharp decrease in the number of bidders naturally makes the price low. In privatization, one of the main goals should be to sell as expensively as possible and increase the number of bidders.

— No, I did not mean before privatization, but post-privatization obligations.

— Yes, there should also be post-privatization obligations. Say, if you impose additional obligations besides some price, you lose right there. If, say, investment or social obligations are imposed on you, a condition is added that you must invest 150 billion soums over a certain number of years. Or they say you must take care of two kindergartens that were under the social care of this asset over a certain number of years, that also lowers the price. The Pakhtakor stadium is a great example. Selling the Pakhtakor club along with the Pakhtakor stadium lowers the price. That is, these are two different assets. The Pakhtakor club and the Pakhtakor stadium should have been sold separately. Commercial and social facilities should be separated.

— Then why does the state mix these up and privatize them, in your opinion?

— The main issue is here. In many profiles and sectors, the state does not sincerely want to give up control. No matter how much it says otherwise, it believes it must keep them under its control. The further it moves from its control, the fewer measures of influence it has on it. This is also one of the reasons why the privatization of state banks is being delayed from year to year. The state still sees the implementation of many of its social programs—tasks related to unemployment and employment—through banks. It cannot see it outside of them. Therefore, it is constantly put off. Therefore, new decisions come out again and again.

— Well, let's say, if the policy of separating assets begins, shouldn't there still be some obligation before the incoming investor?

— Now, we are talking a lot about the example of banks. No obligations should be imposed on banks. That is, if an investor is buying, I believe neither social nor investment obligations should be imposed on them. Here, buy at a market price or enter into mutual, direct negotiations, invite several bidders, make a deal with the one who gave the best commercial proposals—this is what we must do. The same goes for mobile operators. Once an investment obligation is added to it, the sale price drops. This is not the first time; we have seen such situations many times. The state should interact with investors and owners only through taxes. The state itself should take on social issues. In our country, it is going the opposite way. The step should be: "Gentlemen, we are giving you a mobile operator at a very cheap price, we did not let other bidders participate, you won as a sole bidder, now please pay taxes."

— So, priorities must be reviewed.

— They must be completely reviewed. That is, correct privatization increases revenue for the state, and through this, the state can fully implement its task, the task on its shoulders. The state should not confuse these things. In our country, the mistake of both the old era and the new one is that we want to privatize assets that should not be privatized. We keep banks that should be privatized in our pockets. The second paradoxical situation is related to the fact that international financial institutions and our Western partners do not criticize the issue of privatization. I am also curious about the reason for this. For example, starting from the International Monetary Fund and the World Bank to European and Asian financial institutions, they seem to not want to enter into a conflict over this. Yet, this is the direction that deserves and should be subjected to the greatest criticism.

— When can it be known that a successful privatization has been carried out?

— By successful privatization, I do not mean a single facility; I believe the entire system must change. After a successful privatization, the political conjuncture and political ideology change completely. If after privatization you have arrived not only at a free market but also at free political pluralism, then it can be considered that a successful privatization has been carried out. Pluralism in your economy must also create pluralism in your politics.

— Understood.