Privatization in Kyrgyzstan was introduced on December 20, 1991,
with a program for the transfer of almost all state-owned enterprises.
A decree in January 1992 and several amendments to the above law on March
6, 1992 designated the State Property Fund as the principle institution
responsible for the sale of enterprises. The privatization program called
for the closure of 200 state-
owned enterprises and the privatization of 35 percent of the
state-owned companies, 50 percent of construction enterprises, 70 percent
of housing, all service industries and 25 percent of agricultural firms
by the end of 1993. In 1994 President Akayev announced the government's
intention to complete the privatization of agricultural firms in 1995.
Although delayed a year, by the end of 1994, 46 percent of all state-owned entities had been privatized, and of these, more than half were transferred directly or leased through competitive bidding. The remaining 54 percent was sold to labor collectives or transferred into joint stock companies. This initial preference for labor collective ownership (leverage buyout) was abandoned in later stages of privatization since real collective ownership was believed to be least effective in attracting new capital or know-how for enterprise restructuring. The law was further amended to offer higher percentages to the management and other interested parties with no affiliation with the privatized enterprises. The program eventually evolved to include five forms of privatization mechanisms: auctions, competitive bidding (mainly used for small companies in the service and trade sectors), lease with the option to purchase (for small- and medium-sized firms), tender competition and joint stock company option (larger enterprises).
In order to allow for a wider distribution of shares among the public and in so doing, create a more egalitarian system, Kyrgyzstan introduced more competitive methods of enterprise sales and citizen privatization coupons. Pursuant to legislation co-authored by the World Bank and USAID and approved by the Kyrgyz Parliament in January 1994, all citizens were granted privatization coupons on a formula linked to both salary and duration of work service. Thirty-five percent of the shares of enterprises to be privatized were designated for investment by coupons; five percent were donation to employees; and 60 percent were to be evaluated by an inter-ministerial committee for sale to strategic investors. By 1995 more than 775 companies out of 4,400 were privatized by coupon sale. Coupons could also have keen placed in investment funds, used to buy shares in companies undergoing privatization until January 1996, exchanged for ownership of housing occupied by the coupon holder until the year 2000, or since September 1994, sold for cash on the stock exchange. Trading in corporate securities began in May 1995 on a limited scale.
Currently, there are 22 licensed investment funds operating in Kyrgyzstan, of which only five are commonly considered to have a sound investment policy. Of these, Osh Invest, Kyrgyzinvest, BNC and Bereke are said to be major players. Kyrgyz investment funds control nearly 50 percent of the shares of all companies that have undergone privatization. In March 1995, President Akayev proved to be true to his November 1994 pledge to regulate investment funds so that Kyrgyz investors would not fall victim to the same kind of scandal as Russian MMM investors. According to the terms of his decree the investment funds have right to use more than 10 percent of their total assets to purchase one issuer's shares, or to own more than 25 percent of an enterprise stocks. These restrictions, however, did not apply to Kyrgyz Republic state securities. The legal parties had the right to carry out a number of other forms of activity together with investment activity from the time of reforming the investment fund. The law set the minimum number of founders for an investment fund at three.
On February 13, 1994, a legislation was passed that provided for a form of legal private ownership of land. On November 3, 1995 a new presidential decree extended the right to utilize and lease land from the initial 49 years to 99 years, opening the way for the eventual private ownership of land in Kyrgyzstan. The law also allowed the land leases to be sold, exchanged, or used as collateral for securing bank loans and credits. Although land was to be used for agricultural purposes, restrictions on the choice of crops were lifted. While the legislation originally called for foreign access to land under the same terms, this privilege was later revoked. Apparently, there was some concern when Chinese investors began acquiring large packages of land at prices that would be considered bargains on international markets.
Privatization of the bread holding enterprises, Kyrgyz Dan Azyk and KDA has been nearly completed. The KDA alone was composed of 44 medium and large enterprises and 37 small-scale enterprises. Almost all of the small enterprises have been privatized. Several grain storage and milling facilities have also been scheduled for privatization in 1996.(2)
By the end of 1994 the government had managed to privatize all
small retail stores and service outlets like barber shops and a plan was
drawn up with a list of 28 largest state-owned loss makers to be privatized.
Enterprises in the areas of national security, energy, communications,
rail and air transport, health education, sports, publishing and scientific
research were withheld from privatization until 1996-1997. Table
below provides a breakdown of the privatized enterprises in Kyrgyzstan:
Source: Kyrgyz Republic Goskomstat.
* These figures does not include privatized housing units
The ISA took place on 8 and 9 November, 1995. During the first day, shares were offered in lots through an open-cry auction with bidding starting at 100 percent on the starting price based on the state's valuation of shares offered. A closed auction was held on the second day for any shares remaining. An estimated 2,618 bidders from the United States, Turkey, Germany, India, Russia, Great Britain, and Pakistan participated were registered for the auction. The total starting price was estimated at $9,224,000. The Kyrgyz nationalists opposed the international auction arguing that the nation's assets must not be offered to foreign companies.
Despite the successful progress of privatization the Kyrgyz government
has been faced with financial difficulties in post-privatization restructuring.
In late 1994 the Enterprise Reform and Resolution Agency was established
to deal with the problems. Soon after, an estimated 27 highly indebted
firms were earmarked to be liquidated by September 1996. Many of these
enterprises were placed on a care and maintenance program" to limit their
financial losses while studies were done to assess their problems. Apart
from these, many other small-scale and medium size enterprises have been
faced with finance and production problems, typical in most transitional
economies. The wage and pension arrears have passed the $30 million mark
and unemployment has posed a major problem in the republic reaching 1.6
million in 1996. Although some degree of macroeconomic stability has been
achieved by the government, the microeconomic reality of the Kyrgyz society
has yet to be improved to the levels so that privatization and restructuring
would be viewed as positive steps forward.
2 Kyrgyz Republic: Recent Economic Developments, The International Monetary
Fund, Staff Country Report no.96/98 (September 1996), pp.9-10.