PROJECT HISTORY
Summary of Model Program
Working closely with the provincial administration in Nizhny Novgorod and with financing provided by the British Know How Fund (BKHF), the Government of Canada, and USAID (program design phase only), IFC has developed a model program for privatizing Russia's state and collective farms. A priority objective in all phases of the work has been to produce a simple, generic privatization model that can be replicated throughout Russia. The pilot program involved the privatization of five state-owned farms in Nizhny Novgorod Oblast.
The design strategy has been to devise a "bottom-up," choice-driven privatization method that is accepted as workable and fair by the people most directly affected by the program. The model creates new private farms and farm businesses by dividing the state or collectively owned land and property among all the qualifying people, defined under Russian law as the living present and former members of the farm collective. Specially created entitlement certificates have been designed to give the qualifying individuals the purchasing power to "buy" land and property. Land entitlement certificates are equal in value; property entitlement certificates have different values, calculated according to a person's tenure and salary history. Since approximately half of all collective farm residents are retired workers, pensioners as a group play an important part in the reorganization process as holders of both land and property entitlement.
Privatization under the model program is achieved by sequential steps: land and property entitlement certificates are distributed to the people who qualify; an information campaign is launched to educate shareholders on how their entitlement certificates may be traded, leased, sold, bequeathed, combined, or otherwise used, including instructions on how to "buy" a portion of the farm at auction; the farm land and property is divided into lots for auction on the basis of existing operational subdivisions; individuals and groups can increase their purchasing power by soliciting additional entitlement certificates; land and property lots are "sold" for entitlement certificates at an auction where individuals and groups bid for sections (business units) of the farm; and finally, land and property deeds are issued to the new owners.
To ensure that participants understand the privatization process sufficiently to make informed decisions, a series of public meetings and practical workshops is conducted at farm workplaces and villages. Extensive, written information-pamphlets, public notices, information-based calendars, posters, and so forth-is made available to all entitlement holders. Any entitlement holders who might have difficulty receiving sufficient information or understanding adequately, such as the elderly and small groups of people living in remote villages, are targeted separately through a specially designed, more intensive information campaign.
Entitlement holders have several options for using their land and property entitlement, including: selling or leasing a land entitlement to another farm member; selling a property entitlement to another farm member; bequeathing an entitlement to a child or other relative; exchanging a land entitlement for a property entitlement (or vice versa); and using a land or property entitlement to bid for a land plot or property asset at auction.
Farm shareholders can join together to increase their purchasing power or can trade entitlement shares to be able to structure new business units of the size, economic specialization, and fixed asset and working capital base they choose. To facilitate this process of trading entitlement and forming new enterprises, the IFC project developed a set of standard legal contracts for the various selling, leasing, bequeathing, exchanging or combining transactions.
To further assist the process of forming enterprises, standard-form charter documents for emerging business groups were also developed by the project. Four forms of agricultural enterprises are recommended under the privatization program: limited liability partnerships (in which all partners share equal voting power); mixed partnerships (in which there are both full and limited partners); peasant or family farms; and individual owner/operator enterprises.
Passive investors (people who do not wish to take part in managing a new private enterprise) may lease their land entitlement to a family farm or a limited or mixed partnership. They may also become members of a new enterprise by investing their entitlement in the charter fund of a limited or mixed partnership. Generally, pensioners have opted to lease their land entitlement, while entitlement holders of working age have chosen to invest shares and become members of emerging partnerships.
The actual distribution of land and property assets among the new private enterprises is carried out through a public, three-stage auction process: an auction of farm land, an auction of fixed assets, and an auction of working capital assets. After the auction, the new enterprises receive deeds and take possession of their land and property, the required registrations are completed, the balance sheet (including debts) of the old farm is divided among them, and the challenge and opportunity of building a private business begins.
Background of Pilot Project
The federally approved land privatization program was designed between January and July 1993 and has been implemented from August of that year. On 9 November 1993, the first Russian state-owned farm, Pravdinsky, was privatized under the program, distributing by auction the 3,600-hectare enterprise among all farm residents, both workers and pensioners. During this first year of the program, an additional four pilot farms-Niva, 60 Years of October, Yemel'yanova, and Yolkinskoe-were privatized and reorganized under the model with IFC assistance, the final farm completing the reorganization process on 27 April 1994. A sixth pilot farm was privatized under the direction of the local Department of Agriculture; it completed the reorganization process according to the model program on 12 May 1994.
On 10 March 1994, at a conference organized by Nizhny Novgorod Governor Nemtsov to discuss land reform and the model program, Russian Prime Minister Chernomyrdin publicly endorsed the pilot program as the national model for privatization of state and collective farms in Russia. The conference was attended by heads of oblast administrations and representatives from over 40 regions in the Russian Federation. Also present were First Deputy Prime Minister Zaveryukha (Agriculture), Deputy Prime Minister Chubais (Privatization) and Minister of Agriculture Khlystun. During the conference-which was held concurrently with the land and property auctions at the third Nizhny pilot farm, 60 Years of October-Prime Minister Chernomyrdin publicly acknowledged the role and importance of foreign assistance in furthering the process of land reform in Russia.
Later in the spring of 1994, the State Property Commission (GKI), which is the federal authority responsible for privatization, and the Ministry of Agriculture requested IFC assistance in drafting new federal land reform legislation. The resulting Decree on Land Privatization was largely based on the model privatization program developed in Nizhny Novgorod Oblast. In April 1994, Prime Minister Chernomyrdin and the Council of Ministers adopted the decree that established the pilot as the national land privatization program for the entire Russian Federation. Subsequent decrees in July 1994 and February 1995 spelled out a comprehensive methodology for implementing the program nationwide.
Following the privatization of six pilot farms in Nizhny Novgorod and the completion of a replicable model, the program entered a second phase in the summer of 1994. In Nizhny Novgorod, IFC staff in cooperation with raion and oblast authorities launched a program that by the end of the second season had assisted 52 additional farms with reorganization according to the federally approved model.
In addition, the model's legal methodology and other program components were further developed and refined. A separate post-privatization program was initiated in Nizhny Novgorod to support private and privatizing farms. A network of four Rural Consultancy Centres were established to offer technical, legal, and management consulting services to private farms and enterprises.
The second phase also rolled out the privatization model to other regions of Russia, extending the IFC project to include pilot programs in three additional oblasts: Rostov-on-Don, Oryol and Ryazan. At the request of the oblast administrations and in close cooperation with oblast officials and local authorities, a total of 11 farms in the three oblasts were assisted through reorganization under the federally approved model.
At the close of the second season in May 1995, a total of 68 farms in four oblasts had been reorganized with assistance from the project. The successful expansion of the Nizhny Novgorod privatization program to Rostov-on-Don, Oryol and Ryazan demonstrated the replicability of the pilot model to Russia's most productive agricultural regions, the central and black-soil provinces.
The third phase of the IFC-assisted privatization program, which began in July 1995, emphasized the transfer of privatization expertise to Russian administration officials and farm commissions. A corresponding focus on training was launched in June with a four-day, all-staff training seminar, involving a total of 185 staff and program monitors. Based on this seminar, a comprehensive training package, including training and organizer manuals, has been developed and refined in Nizhny Novgorod.
In addition, the experience gained in the pilot and second phases has been encapsulated in a program manual of principles and practical, step-by-step guidance for administration officials (national, oblast, and raion), farm commissions, farm entitlement holders, and new enterprise managers. Approximately 10,000 Russian-language manuals were distributed in the summer of 1995 to federal-level officials involved in land reform, including the administrations of all the oblasts, raions and relevant government organizations. Distribution of 50,000 second-edition manuals, which incorporated new Russian legislation, began in February 1996. By the end of April, 25,000 second-edition manuals had been distributed to every state and collective farm in Russia. More than 90% of the farmers who responded to the manual mailing by returning questionnaires, calling the project hotline or sending requests to the project post office box indicated support for reorganization and requested additional manuals.
In the third season, the model program also expanded with a low-input approach in two new regions, Kirov and Volgograd, that have received on-site assistance from a mobile team based in Moscow. A hands-off, advisory/training approach was provided 13 additional oblasts: Belgorod, Chuvashia, Kaliningrad, Krasnoyarsk, Kursk, Marii-El, Moscow, St. Petersburg, Tatarstan, Tula, Udmurtia, Voronezh, and Yarolslavl.
On 7 March 1995, President Yeltsin signed Presidential Decree 337 granting rights related to land ownership, reaffirming and systematizing existing rights, and calling on the government to take specific actions to promote land reform. The decree, which emanated from the agro-industrial section of the executive office, received input from numerous sources, including the IFC/BKHF/CIDA team's senior agrarian theorist and legal advisor. Issuance of the decree, which underscored two crucial components of the IFC/BKHF/CIDA model of farm reorganization-distribution of land and property shares and conclusion of contracts between shareholders and enterprise leaders, coincided with the distribution of program manuals to all collective farms in Russia.
Nizhny Novgorod celebrated the oblast's 100th reorganization auction at AOZT Imeni Kirova in Gaginskiy Raion in April 1996. Governor Nemtsov participated in all the afternoon's proceedings, addressing the assembly of dignitaries and international, national and local media, and sharing a congratulatory telegram from President Yeltsin, which read in part "...Nizhny's success in land reform is known to all of Russia. I am convinced that ever more regions will follow your example...." By the end of the season, the Nizhny Novgorod team, in cooperation with the Oblast Working Group and Raion Commissions, completed a record number of 75 auctions for a total of 127 project-assisted reorganizations in the oblast.
At the close of the third season in May 1996, a total of 174 farms in 6 oblasts have been reorganized with assistance from the project and the governmental structures-Oblast Working Groups and Raion Working Commissions-to which reorganization expertise is being transferred.
From its inception in January 1993, significant resources have been applied to create and develop the model privatization program, including: resident western staff in Nizhny Novgorod; full-time staff contracted from the Agrarian Institute of the Russian Academy of Sciences; a mobile communications team based in Nizhny Novgorod; two U.S.-based agricultural consulting companies; full-time legal staff provided by an international law firm; agricultural, law and economics student interns; and support staff. At the beginning of the fourth season, 275 IFC staff work on the land privatization program in Moscow, Nizhny Novgorod, Rostov-on-Don, Oryol, Ryazan, Kirov and Volgograd; 26 staff, or about 9%, of this roster are western consultants.
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