Privatisation and denationalisation in Armenia is being carried out in compliance with the Law on Privatisation and Denationalisation of State Owned Enterprises (SOEs) and Unfinished Construction Sites (UCSs) adopted in August 1992. The law sets the framework for the transfer of state owned enterprises to private owners. This process is carried out in annual programmes. The law provides foreigners substantial opportunities to participate in the privatisation process.

On March 20, 1996 the National Assembly of the Republic of Armenia adopted two important laws concerning the privatisation and denationalisation of state owned enterprises and unfinished construction sites. For the first time since the beginning of the process, the Law of the Republic of Armenia about the 'Report on Implementation of the Programme of the year of 1995 on Privatisation and Denationalisation of State Owned Enterprises and Unfinished Construction Sites' was approved and another 'Law of the Republic of Armenia on the 1996-1997 Programme on Privatisation and Denationalisation of State Owned Enterprises and Unfinished Construction Sites' was adopted (hereinafter: the Programme).

The Programme has been formulated and elaborated as an organic continuation of the previous privatisation programmes (1994 and 1995). However, in comparison to former programmes, the 1996-1997 Programme has more specific tasks, basic objectives and principles of choice of enterprises and sites included.

The law constitutes the goals to achieve and basic objectives of the 1996-1997 Programme on privatisation and denationalisation. The goals to achieve are the following:

• completion of small scale privatisation;
• partial privatisation of the productive infrastructure sector (communication, energy, transport, etc.);
• broader scale implementation of international tenders;
• completion of privatisation in the agricultural products processing and light industry sectors;
• improvement of the methods of privatisation and denationalisation;
• extension of the framework of methods for the sector of privatisation and denationalisation of unfinished construction sites (including the sites of residential houses) and completion of privatisation and denationalisation in this sector;
• establishment of favourable conditions and organisational structures for extension of privatisation and denationalisation volumes;
• promotional activities for attraction of foreign investments, establishment of competitive environment.

The basic objectives of the Programme are as follows:

• regulation and organisation of the process of privatisation and denationalisation of state-owned enterprises and unfinished construction sites;
• elaboration of an appropriate process of preparatory works prior to privatisation and denationalisation;
• application of forms of privatisation and denationalisation as effective economic policy instruments in monopolistic infrastructures of the economy;
• creation of public services enterprises by means of the privatisation and denationalisation of sites and enterprises which are extremely important for the economy;
• privatisation and denationalisation of national monopoly sectors (communication, energy, etc) through the attraction of foreign capital;
• implementation of privatisation and denationalisation as instruments of anti-monopoly policy in the monopolistic sectors of economy.

It is important to define:

1. the target indexes of privatisation and denationalisation;
2. the main directions, choice principles, priorities and limitations for the privatisation and denationalisation of enterprises and separate groups of unfinished construction sites;
3. the conditions for the participation of foreign citizens and the utilisation of foreign investments in the process of privatisation and denationalisation
4. the basic directions for privatisation and denationalisation in the period 1997-1999.

According to the 1996-1997 Programme, some 3,569 enterprises will be privatised, including 195 in industry, 24 in transport and communication, 83 in the construction complex, 3 in telecommunications, 70 in agriculture, 3 in logistics, 1,586 in state trade and public catering, 760 in consumer services, 191 in housing and communal services, 172 in the social sphere, 5 in automobile servicing, 16 in natural resources, 66 in the Yerevan municipality and 395 unfinished residential buildings.

The law has constituted the time period of the 1996-1997 Programme to be from 1 July 1996 to 1 July 1997. Some 16 enterprises included in the Programme are to be privatised through international tender, 346 enterprises will be privatised via free subscription to shares, 2 sites will be denationalised, and the rest should be privatised through the other forms set down by law, including free subscription to shares.

According to the Programme, the distribution of privatisation vouchers to the population was completed on 31 December 1996. The nominal value of each privatisation voucher was 20,000 Armenian drams(equivalent to US$20).

Sector-specific peculiarities and approaches of privatisation

Energy

In energy sector it is expected, in particular, to incorporate the former 'Armenergo' state enterprise and the 'Armgas' state concern (monopolistic productive infrastructures) through the privatisation of a part of their property, keeping the rest under state ownership.

Industry

The privatisation process will have to become a decisive factor for implementation of an appropriate policy on industrial complex reorganisation. The following represents the classification of enterprises and the privatisation strategy in the industrial sector:

1. enterprises which are not subject to privatisation in the next two to three years. This includes enterprises from the military industrial complex as well as institutions of fundamental and strategic importance;
2. enterprises on the basis of which the base industries of the republic should be established while preserving the state share. These enterprises are:
   1. mining and smelting enterprises: Zangezur Copper-Molybdenum Plant, Armgold, KapanOre Mining Plant, Agarak Copper-Molybdenum Plant, Akhtala Ore Mining Plant, which are not included in the Programme;
   2. a group of large scale enterprises: privatisation of these enterprises will have to be implemented through specific approaches in connection to their peculiarities. All enterprises of this group, except the Sirius and Fork-Lift Truck factories are included in the Programme;
   3. enterprises in which large-volume investments have been made and which are of strategic importance for the republic. Among them are: MARS State Enterprise and Transistor State Enterprise (both included in the Programme);
3. enterprises which are less significant in the base production complex. This group comprises other enterprises of the Ministry of Industry and Trade. Among them are:
   1. enterprises which operate or can operate on the basis of local raw material. For future privatisation, specifically designed preparatory works should be implemented for these enterprises aimed at rehabilitating their industrial capacities and allocating sustainable consumer markets (eg the Factory of Diatomites, Karakert Stone Melting Factory, etc). These enterprises are not included in the Programme;
   2. enterprises which were subject to conversion however this process has been hindered due to the scarcity of fiscal resources.

Construction Materials

Leased enterprises from this sector are not included in the Programme, since in accordance with the acting law they can be privatised without being listed in the Programme. The Ani-Pemsa Factory, the Ararat Cement Factory (new technological line) and the Artiktuf Production Company will be privatised at a later point.

Agriculture and Foodstuffs

The following approaches have been adopted in this sector:

1. privatisation of 50 per cent of bakeries;
2. privatisation of all bread distribution units, except the Gyumri and Goris units;
3. inclusion in the Programme of three subsidiaries of the 'Armwheat' State Enterprise (Yerevan Combined Fodder Enterprise, Baghramian Bakery and Sevan Bakery);
4. exclusion from the Programme of enterprises located outside of Armenia;
5. to propose the Yerevan Cognac Factory for privatisation through international bid;
6. preservation of the 'ArmWater Resources' enterprises as state owned enterprises. Programmatic privatisation will touch only the internal network servicing enterprises.

Transport and Communication

Thirty-four enterprises from this sector were included in the privatisation programme of 1995. In the 1996-1997 Programme, the privatisation of one more enterprise is expected. In this Programme a decision has been reached not to privatise bread distributing transportation enterprises.

The 1996-1997 privatisation Programme included some 21 out of 45 highway construction and maintenance enterprises. Privatisation of the railways is not in the plan. Kindergartens and consumer services units should be subjected to community authorities, whereas trade structures are leased and may be privatised by private owners.

The servicing structures of civil aviation will be privatised and denationalised.

Health

The Programme proposes to privatise and denationalise those enterprises of the sector which provide for specialised medical care, guaranteed hospitalisation and treatment.

The establishment of a system comprising state owned, denationalised and privatised medical institutions will enable the effective resolution of the following tasks:

• improving the effectiveness of the public health sector;
• more targeted utilisation of limited state fiscal resources;
• targeting of revenues accumulated from denationalisation and privatisation to the implementation of state guaranteed projects;
• introducing diverse forms of privatisation and market relations into the health sector with the aim of improving the quality of medical care through free competition;
• reduction of the brain drain and unemployment.

Trade and Services

According to the Programme, the Ministry of Industry and Trade (formerly the Ministry of Trade, Services and Tourism) has planned to:

1. complete the privatisation of retail trade enterprises, small scale public catering enterprises and consumer services, as well as enterprises from the productive sector;
2. privatise enterprises of special orientation through a differentiated approach;
3. carry out the privatisation of the closed network of public catering enterprises (buffets, canteens, cafes incorporated in productive enterprises) in parallel to the privatisation and denationalisation programmes of those enterprises.

Housing

While elaborating the principles of privatisation for the housing sector water supply and sewerage enterprises, it was decided to privatise 49 per cent of the assets and to leave the remaining 51 per cent as state property.

Out of this sector the hotels, bath-houses, laundries and garbage extraction services are proposed for privatisation, whereas renovation, cemetery and garbage processing services are committed to community authorities.

Construction, reconditioning, industrial, designing, distribution and transportation enterprises of this sector are proposed for privatisation.

Taxation and fiscal policy

Taxation

The taxation system in Armenia is based on the 'Law On Taxes and Duties' (April 1992) shaping the basic tax system of the country. According to Armenian tax regulations, foreign investments and domestic enterprises are subject to the identical rates. Profit tax, however, provides tax holidays for foreign investors.

Profit Tax: is levied on the profits of enterprises having the status of legal entity. It includes a general tax scale having rates of 12, 18, 25, and 30 per cent dependent on annual profit. Banks and insurance companies are subject to 30 per cent. Profit tax is calculated on:

Taxable profit = Gross income - (VAT + excise tax + costs and expenses (including other taxes))

New enterprises (including foreign enterprises) receive a tax holiday for the first two years. For enterprises with foreign investment the profit tax from the third to tenth year is reduced by:

50 per cent if the foreign investment is at least $100,000 and the share is over 50 per cent,

30 per cent if the foreign investment is at least $40,000 and the share is between 30 and 50 per cent.

If such an enterprise is liquidated before the end of three years, the full profit tax for that period is charged. If liquidated before the end of five years, the tax for the third to the fifth year is calculated beginning with the third year.

Income Tax: levied on wages or salaries and the income of employees of enterprises that are not considered legal entities. The monthly tax scale is measured in minimum monthly official salaries that currently are set at 720 Dram. A maximum tax of 30 per cent is levied on incomes exceeding the minimum wage fortyfold. Income received outside of Armenia is included in the total amount taxable in Armenia. The income tax levied in Armenia can be reduced by the size equal to the income tax paid in another country, therefore avoiding double taxation. Foreign individuals residing in Armenia are subject to the same rates as Armenian citizens. Residence is presumed if the individual stays in Armenia for more than 183 days.

The payments made by enterprises to the Social Security and Pension Fund are linked to wages. This is equal to 37 per cent of the total sum of wages paid to employees: two per cent goes to the state Social Security Fund and 35 per cent to the state Pension Fund.

Value Added Tax (VAT): levied on the circulation of goods and services including import sales. The VAT rate currently is 20 per cent.

Some tax exemptions are: financial intermediaries, pharmaceuticals, constructive services performed by foreign or international organisations, circulation of currency and securities, activities associated with granting of patents, copyrights, and licenses, scientific and related activities.

Investment climate

The Foreign Investment Law (July 1994) defines the legal process of the rights, guarantees, and incentives for a foreign investor doing business in Armenia. Investments are defined as financial, tangible, or intangible property (including intellectual property). Investments made in Armenia by its citizens living permanently outside the country also fall under the jurisdiction of this law.

The law provides the following incentives and guarantees for foreign investments:

• the legal regime and implementation cannot be less favourable than that for local entities;
• a five year grace period is granted to foreign investors if the legislation effective at the time of initial investment is amended;
• confiscation with full compensation can occur only by a court decision when an emergency is declared in accordance with the legislation;
• investors are entitled to full compensation through a court order for damages as a result of illegal actions or performances by the government bodies or their officials;
• compensation is to be paid promptly at current market prices or prices determined by independent auditors. If the payment is delayed, interest will be added;
• investors are entitled to repatriate profits, other legally earned assets, and property;
• investments are exempt from customs duties on property imported for use in the production process;
• investments are provided with profit tax holidays;
• Armenia has bilateral foreign investment treaties with number of countries.

The Pledge Collateral Law (June 1995) provides guarantees against liabilities in business. According to the law, the lender has a priority right to be paid from the value of the pledged assets if the borrower cannot pay the liabilities guaranteed by pledge collateral. Foreign entities have the same rights as the Armenian citizen and/or enterprises to be pledgers or pledgees. A written agreement of the pledged collateral must be notarised and on record.

Statement on the Process of Privatisation