. Last Updated: 07/27/2016

Buying Land Is Next Hurdle for Private Firms

With more than 120,000 enterprises now in private hands, the sell-off of Russian companies is drawing to an end. But less than 1 percent of these firms formally own the land on which they stand. Poul Funder Larsen reports on moves to turn useless dirt into a valuable asset.

Moscow's ailing ZiL truck factory may not seem to have a lot going for it. Production has fallen, its trucks have a bad reputation and its management is slow and conservative.

But ZiL does have one fantastic asset: It occupies tens of hectares of prime land in south Moscow with a potential market value of hundreds of millions of dollars.

Moscow mayor Yury Luzhkov recently acquired a controlling stake in the factory for the city, and he has just moved to tap that gold mine. By transferring some of ZiL's production facilities to sites outside the city limits, he plans to free up downtown property, allowing him to sell 49-year leases and in the process raise about $35 million dollars for the ailing truckmaker.

The ZiL proposal underscores the huge benefits that Russian companies could realize by gaining control over the land they occupy and shows that the issue of land privatization is increasingly coming to the fore, analysts said.

According to reports in the Russian press, ZiL will move four of its Moscow production units, including one in the Shabolovskaya neighborhood just south of the city center, to sites outside the outer ring road.

Moscow's other major carmaker, Moskvich, is currently facing bankruptcy procedures, and the future of its assets -- including major pieces of land in southeastern Moscow -- will only be settled after court proceedings due to start next month, said Yevgeny Tsvetnov, a spokesman for the city government's industrial department.

Most of Russia's 120,000 privatized firms do not own the land they stand on. They do not even have a clear lease agreement. Instead, they occupy the land under a Soviet-era concept of temporary management which gives city officials a big say in how the land is used and gives companies few rights to sublet, sell or redevelop.

Many companies seeking to get a clearer title to their land still face stiff resistance from regional authorities who see land ownership as a source of power in dealing with local enterprises, the analysts said. The process is also slowed by disagreements over the price companies must pay to take full ownership of city land.

The city government's proposal for ZiL shows that even in Moscow, where authorities have doggedly opposed land sales, there is some movement toward giving privatized firms a clearer hold on their land, analysts said.

The city clearly understands the importance of the issue and, for new development sites as opposed to land under privatized firms, the authorities have "moved the city leases toward the characteristics of ownership," said Gerald Gaige, head of real estate advisory services with the Arthur Andersen accountancy firm.

Elsewhere in Russia, where regions allow the purchase of land parcels by the companies that occupy them, land sales are now picking up. The new head of the State Property Committee, Alfred Kokh, has repeatedly singled out the issue as "a main priority" for the committee in next year's privatization program.

In St. Petersburg, a pioneer of Russian land privatization, the large LOMO opticals manufacturer has already privatized some 20 hectares of city land on which its main production units are situated, said Marina Zvereva, head of the company's real estate department.

"In total, LOMO has 38 pieces of land in St. Petersburg city and region as well as elsewhere in Russia that we hope to privatize," Zvereva said. The total space of this land comes to more than 1,000 hectares, she said.

In another development, the Far Eastern Shipping Company, situated in the Primorye region in Russia's Far East, last week announced plans to begin the privatization of its land, Reuters reported. But the company is starting small: Initially it intends to buy three plots that occupy a total of 2,400 square meters and come with a price tag of around 83 million rubles ($15,000).

The federal government is currently preparing a decree that would hand over land to the companies that occupy it, but government sources said this was unlikely to have an immediate impact.

"Next year's government privatization program stipulates that, decrees notwithstanding, the privatization of real property must proceed on the basis of laws, that is, the new Land Code," said Vladimir Palutin, head of the legal department in the recently formed Industry Ministry.

The draft Land Code, however, remains in limbo after the Federation Council, the upper chamber of Russia's parliament, this summer vetoed a conservative version passed by the Duma.

The right of land ownership is guaranteed in the Russian Constitution, and nearly 2 1/2 years has passed since a Yeltsin decree, issued in July 1994, opened up the possibility for such sales.

Still, only a tiny minority of the country's 120,000-plus privatized enterprises have taken control of their land. According to statistics from the State Property Committee, less than 1 percent of the actual land space occupied by these companies is so far in private hands.

"None of the companies in The Moscow Times Index [of Russia's 50 leading stocks] currently owns the land occupied by them," wrote Sergei Komlev, a senior analyst with the Moscow investment bank United Financial Group, in a recent research note. That means the land beneath industrial giants such as KamAZ and Norilsk Nickel remains under formal government control.

But that is changing as companies realize the advantages of actually owning their land.

"Ownership of the land makes the enterprises a complete economic unit," said Arthur Andersen's Gaige.

Through land ownership, companies can boost their chances of attracting domestic or outside capital, because the plot can be used as collateral or be contributed to a joint venture.

LOMO hopes ownership of its land will attract foreign and domestic investors for a new share offering that will take place when all the company's land has been privatized, Zvereva said.

But there are also considerable short-term benefits to owning land, including the opportunity to rent or sell plots, Zvereva said.

Also, the difference between the lease paid formerly by the company and the land tax now levelled on the privatized land saves LOMO more than 200 million rubles a year, she added.

Under the July 1994 Yeltsin decree, privatized companies -- specifically, those in which private shareholders own more than 75 percent of the company's stock -- can obtain the land they occupy at a price of no more than 10 times the land-tax rate.

The decree, however, left it up to Russia's 89 regions to execute the privatization program. While a few -- including St. Petersburg and the Saratov region -- were quick to launch the sell-offs, others, including the city of Moscow, have delayed.

Some regions have also fixed prices higher than those outlined by the decree, often in contradiction to federal legislation.

Cash-strapped enterprises, for their part, have not been in a rush to put their money into the land they are standing on.

The total land occupied by privatized enterprises has been estimated at some 3.5 million hectares, an area roughly the size of the Netherlands. But little more than 2,000 privatized companies have bought the land they stand on, while another few thousand deals are in the making, according to government figures.

"The numbers are far less significant than the fact that the process is now well under way," Gaige said.

A substantial number of properties have been privatized under procedures worked out by the recently completed USAID-sponsored Enterprise Land Sales project, in collaboration with the State Property Committee.

Louis Faoro, chief of the Enterprise Land Sales project, reports that its activities in 39 regions have contributed to 1,000 sales, with another 1,500 transactions in progress.

According to Faoro, the USAID project's most lasting achievement may be that it is "leaving behind some 36 firms [acting as privatization consultants] that continue the work in the regions on a commercial basis."