Ministry of Defense Sets New Rules for Sales of Military Assets

August 20, 2013

The Ministry of Defense has developed a new package of rules and regulations governing privatization of military assets. The purpose of the reform is to de-commercialize the Ministry’s operations and effectively divest all its unnecessary assets through tenders, organized by independent vendors. Already in 2014 the Ministry of Defense expects to sell 30 items of immovable property worth 6.2 billion roubles under the new system.

The Ministry of Defense has developed three projects related to the new rules regarding sale of military assets. The agency proposes to amend the presidential decree, “On the changes to the procedures of sale of released military assets, corporatization and privatization of military trade,” issued in 1997, as well as a number of government decisions taken since then and until 2008, when the Ministry of Defense was authorized to act as the exclusive seller of its assets. Having analyzed the “significant experience in terms of independent sales of real estate” gained by the Ministry of Defense led by Anatoly Serdyukov, the new management declared it negative. In November, 2012, when Serdyukov was replaced by Sergei Shoigu, a moratorium on privatization of agency’s assets was introduced, Dmitry Kurakin, the Head of Property Relations Department of the Ministry of Defense told Kommersant.

For the first time Sergei Shoigu stressed the need for reform at a meeting of the government in June (see Kommersant of June 14). He stressed that his predecessor had turned the agency into a “marketplace to sell assets,” and such a situation, as well as the results of those sales, could no longer be tolerated, and suggested to prohibit direct sales by released assets by the military, in order to ensure “de-commercialization of the Ministry.” It was the practice of such sales that led to the Oboronservis scandal, the most controversial corruption scandal in the country. As the result of that scandal the budget lost 5 billion roubles, and Mr. Serdyukov lost his job.

The rules governing “direct sales” of real estate were approved by the order of Anatoly Serdyukov of March 3, 2010. Since then, the military organized 256 auctions with a total starting price of 33.165 billion roubles. But only 88 auctions were completed, bringing a total of 15.66 billion roubles. All bids “were held in Moscow, regardless of the actual location of the property”, and only through public auctions (without electronic bidding), that are “declared invalid due to lack of buyers.” These and many other problems were cited by the project developers as requiring solutions. According to the agency, the surplus assets, including written off equipment, are too expensive to maintain and secure: for example, uninhabited military camps are guarded by about 7 thousand soldiers.

The Ministry proposes to contract out all the activities related to organizing auctions, including market assessment, showing and promoting the properties, to professional vendors, selected on a competitive basis. These vendors would be rewarded in direct proportion to the auction results. In this regard, the military referred to already proven practices of selling the federal property by other agencies. In 2010 the government for the first time approved a list of 23 investment companies accredited to sell privatized state assets.

As an incentive for efficient auctioning, the Defense Ministry proposes to establish an arrangement whereby the intermediaries would receive a certain percentage of the proceeds based on the total value of a transaction, as well as on the difference between offer and purchase prices. In this case, sellers’ services would be paid by the buyers of assets, and not from the budget. In addition, it is proposed to use a wider range of different options, including the Dutch, in order to get rid of some hard to sell movables. Including the 25 thousand tons of scrap metal stored in a warehouse in Ulan-Ude, that the Ministry of Defense, under the current rules, is forced to sell at a public auction in Moscow, an example given by Mr. Kurakin.

As decided by the government, all the projects should be submitted for its approval by September 1. The deadline to complete public debates is today, and now the military authorities have to discuss the proposals with the Ministry of Economic Development, the Ministry of Finance and the Ministry of Regional Development, in order to reach an agreement. According to Dmitry Kurakin, the Defense Ministry had made a list of properties to sell in 2014. It includes about 30 objects (more than half of them are located in Moscow, St. Petersburg, as well as Moscow and Leningrad regions) with a starting price of 6.2 billion roubles.