For Sale—Cheap: Farms, Buildings, Cinemas, Kindergartens and More
State-owned enterprises, including power utilities, in many countries have collected a menagerie of assets unrelated to their core business. And they are selling cheap.
In the Soviet Union, state-owned enterprises had an exalted role. In the centrally planned economy, these companies, utilities and other state enterprises were important generators of government revenue. They were the cash cows of the socialist state.
With this important mandate came certain perks. While many citizens in the former Soviet Union lived in austere conditions, state-owned enterprises acquired assets for their staff and special guests to enjoy. These included exclusive kindergartens, beach resorts, luxurious guest houses, farms to produce fresh food for employees, and countless other special businesses and services.
The acquisitions were known as “non-core assets” because they did not relate directly to the work of the state-owned enterprise, which might be a power utility company, transport operator, bank or factory. After the break-up of the Soviet Union in the 1990s, economic liberalization changed the role of state-owned enterprises and diminished the need for these assets.
Today, the glory days of the Soviet state-owned enterprises have passed. Many of these enterprises in former Soviet countries, including in Central Asia, are struggling to compete with the private sector. They need large-scale investment and access to capital to upgrade their operations and stay competitive. They have little need or desire to retain the resorts, buildings and other non-core assets they accumulated in Soviet times.
The solution seems obvious: divest these non-core assets and use the revenue generated from the sale to invest in upgrading the core work of the enterprise. By some estimates, these non-core assets might represent up to a quarter of the consolidated value of state-owned enterprises in Central Asia.
But this is not recognized by managers of many state-owned enterprises. They are focused on operations and maintenance, attracting external investment and surviving the next quarter. Non-core assets are seen as problems to dispose of and they are often transferred to local municipalities, other government agencies or low-paying private sector buyers.
The resulting loss of value can be startling. In one case, a building identified by a state-owned enterprise as a non-core asset was sold at 1/500th of its market value. Though it was an old building not being used directly by the enterprise, it was located in the middle of a booming downtown district. It was a potential real estate bonanza sold off for a pittance because it was identified as a problem rather than an opportunity. There are many other similar examples.
In Central Asia, state-owned enterprises are sitting on a treasure trove of undervalued assets
What can be done to reverse the situation?
To begin with, state-owned enterprises that hold non-core assets need a well-planned corporate investment and divestment strategy. As part of that strategy, I suggest keeping these key principles in mind.
1. Find out what is there.
All non-core assets should not be treated the same. These assets include a great variety of facilities, including office buildings, guest houses, greenhouses, farms, kindergartens and myriad others – often located in disparate areas of the country. They provide discounted social services to employees of the enterprise and sometimes the surrounding communities.
While the list of non-core assets is mixed and diverse, they can generally be grouped as social infrastructure (schools, kindergartens and clubs); real estate and office buildings; and associated and specialized businesses. Government-run disposal or privatization programs often simply labels them all “for sale” without understanding their intrinsic value and potential for revenue maximization.
2. Find the real value.
Once these assets are identified and categorized, their worth should be determined based on their current market value, rather than the often nominal “book value” assigned by the enterprise’s internal accounting procedures. Based on my experience, non-core assets represent less than 5% of state-owned enterprises total value, based on the nominal book value of these assets. An accurate valuation would increase that percentage dramatically.
Pricing these non-core assets at historic and depreciated values on the company’s books decreases the incentive to privatize them. Replacing historic value estimates with an independent market valuation would increase profits and would also give managers of these enterprises a greater incentive to sell them in an efficient and strategic manner.
3. Find the experts.
Non-core and inefficient assets of state-owned enterprises are often poorly operated, with maintenance costs that exceed earnings. When these assets are sold to local governments, the problems persist. The private sector is a powerful resource in addressing this issue.
Partnerships with private sector operators can increase the efficiency, and hence the value, of these assets. This can be done via public private partnerships, concession agreements, and other instruments. Partnering with the private sector in the divestment journey is a good way to modernize and professionalize asset management, creating true and fair value for assets, while improving quality of services and maximizing revenues from divestment.
The efficient, strategic divestment of non-core assets is not a panacea for state-owned enterprises. But it is a powerful tool for reform that is hidden in plain sight, in kindergartens, beach resorts, and office buildings all over Central Asia.