There are lots of variants of reforming state-shared enterprise management ranging from radical privatisation to more careful attempts to change stimulus of managers and other employees, to promote formation of particular environment and improve enterprise monitoring.

Various methods of enterprise reforming have been used in the world practice: appropriate amendments to the current legislature, corporation of enterprises, creation of state holding companies for private structures and transfer of state block of shares to these companies, etc.
In many countries experiments made by using alternative mechanisms of management have served to strengthen positions of radical privatization adherents. Nowadays, this very direction is considered the best way for overcoming inefficient functioning of state enterprises. However, we should also take into consideration the fact that privatization sometimes becomes impossible, in some cases it is not even considered purposeful.
As far as we know, under the present law of Georgia privatization of some objects is forbidden. These objects belong to the state. Besides, it is always problematic to take decisions with regards to the privatization of monopolies (in particular, natural monopolies). Nor can we deny that attempts to privatize some enterprises have often been a failure as there is no demand for them.
Thus, some of enterprises will always be in state property while other ones will be in state property due to objective necessity and economic purposefulness. Thus, improving their management mechanism would be an actual measure.
The study of both Georgian and post-Soviet experience has revealed the fact that state is the most passive shareholder of joint stock and limited liabilities companies. In this form of enterprises managers have complete freedom while the state as a proprietor does not manage to apply its rights as a result of which:
a) Financial assets of enterprises are often transferred to companies formed specially for this purpose and the profit that the enterprise might receive is lost;
b) There are agreements containing the inflated cost of production and service. In some cases, state property is looted;
c) State agencies do not have information on the real state of enterprises;
d) The possibility to eliminate cases of negative results caused by unqualified and illegal actions is very small;
e) The number of less marketable and insolvent enterprises increases and budget revenues decrease.
Proceeding from the above-mentioned, it is necessary to create such mechanism of state-shared enterprise management that would serve to eliminate loot of state property and its use for wrong purposes. Policy of enterprise expenses would be rational leading to the increase of its liquidity and growth of state revenues.
Consideration of the existing experience in the state property management through state holdings has revealed the fact that state holding companies are not a novelty. They have been spread in West Europe after the World War II (Italy, Austria, Sweden, Great Britain, etc.).
It is noteworthy that state holdings play quite an important role in developing countries (Egypt, Alger, Pakistan, etc.) Formation of holdings in the end of 70s and in the beginning of 80s of the last century has reached its climax. In the second half of 80s the role of state holdings in the economy of foreign countries has gradually reduced mostly due to the privatisation of state enterprises.
In some cases, formation of state holding companies aimed at the restructuring of enterprises and financial reorganisation (for example, Italian state holding company IRI). The main objective of state holdings was state management (for example, Austrian holding OIAG). Such holdings were as a rule formed after the large-scale nationalization of private companies.
The study of foreign experience shows that state holding companies have been especially efficient only when they had a narrow circle of tasks.
State holding companies have been formed in Russia since 1992. They were mainly formed with the purpose of reducing potential objects of management and exercising more qualified control over state enterprises.
The main purpose of forming large holdings was control over some branches of economy, which can be estimated as delegation of state property management rights to corporate sector.
The analysis of entrepreneurial activities in the Russian companies where different forms of state participation were used has revealed the fact that companies whose state-owned block of shares were transferred to holdings have received better results than the companies with other forms of state participation.
There is particular experience of the functioning of state holding companies in Georgia, too.
According to the decree of the Cabinet N634 of 20 August 1999, provision about the formation and activities of holding companies was approved. Some state holdings were formed in accordance with the branch principle (“Saksamtometallurgy”, “Samto Kimia”, etc.).
However, their functioning turned out to be unsuccessful. They failed to solve their tasks. The main reason of it was lack of real financing resources, low qualification of managers, low development level of market economy, unstable political, financial and social state of the country.
Proceeding from the above-mentioned, it is possible to make particular conclusions.
The following is necessary for the successful functioning of state holdings:
1. Clear determination of the reasons of their formation consisting in the following:
a) The main reason of forming state holding company that is legal entity of private law (joint stock company) is maximisation of holding and enterprises incorporated in it; holdings are not formed for solving any social or political problems.
b) The reason of forming holdings with incorporated enterprises that can not be privatised under the law of Georgia or that belong to state property, is improvement of management in these enterprises leading to the improvement of their financial state.
c) If a holding company is formed on the basis of enterprises that can be privatised, the main reason of its formation should be restructuring of these enterprises, improvement of its liquidity level and privatisaiton process.
2. Their functions and responsibilities, relations with founders and enterprises, financial resources, accountability and principle of recruitment should be clearly defined.
3. Holdings should be formed in such a way as to make them mobile and controllable.
4. Holding should perform its operative activities within the frames of the current Joint Stock Companies law and organisation chart. It should not be limited in this.
5. Formation of holding companies should not impede privatisation process of state property, but it should rather make this process quick and effective.
6. Holding should perform role of buffer between some government structures and state-shared enterprises.
It is not expedient to form holding companies in accordance with the branch principle as it will not produce desirable effect. Control of state enterprises by branch ministries has some drawbacks. The main drawback was that most decisions were not based on principles of market economy and were mainly directed at the duration of the functioning of this or that enterprise.
According to the Georgian Entrepreneurial law, holdings must be formed as joint stock companies. Their authorised capital stock is determined by the nominal value of state-owned shares in state enterprises, which will be realised by its partner-founders or sometimes by holdings in case of delegation of partner rights. Companies will be managed in compliance with the Entrepreneurial law of Georgia.
Information base of state enterprises and the present-day state of enterprises show that enterprises formed by regional departments should be excluded from the unity of enterprises due to the fact that they mainly deal with providing service to the territorial entity (local transport, public utilities, etc.). Centralised management of such enterprises by state holdings is not justified both from operational and economic point of view. The same concerns enterprises that face bankruptcy case, liquidation or privatisation process.
After the preliminary processing of the information only 206 enterprises formed by state were left. In these enterprises the state owns major interest including 59 joint stock and 147 limited liabilities companies. State holding company should be formed based on state-owned shares in these very joint stock and limited liabilities companies. These shares will be transferred to the company for the formation of authorised stock capital.
The transfer of state-owned block of shares to holding companies in state enterprises will not lead to the liquidation of these enterprises as independent legal entities though in the case of holdings particular changes are expected. Issuing from the economic purposefulness there might be expansion or, on the contrary, restructuring of some enterprises. Holding itself will be an independent legal entity and it will have relations with enterprises incorporated in it as well as with founder-partners.
The main financial resource of holding should become dividends from the net profit of enterprises incorporated in it. Decision on the distribution of annual net profit will be taken in the public meeting of these enterprises. If the decision will concern distribution of net profit in dividends, in this case 50% of dividends will go to the account of holdings while 50% will be left at the disposal of the state and transferred to the national budget of Georgia.
The received dividends should be used by holdings in two directions:
1) For the improvement of the material and technical base of enterprises and settlement of their financial and social problems.
2) For the efficient functioning of holdings.
Naturally enough, there will be the possibility to redistribute sums received in the form of dividends to enterprises with the purpose of improving their liquidity level.
Expected incomes of holding should be planned and approved by partner who, in its turn, should meet requirements of investment projects during the taking of decision.
Formation of state holding companies, provided their activities are purposeful, will make it possible to implement a number of positive trends connected with the transfer of state-owned shares to the corporate management. This consists in creating conditions:
– For the integration of enterprises;
– For uniting risks of companies;
– For using qualified cadres in management;
– For the strengthening of enterprise monitoring;
– For the conduct of effective expenditure and investment policy;
– For the reduction of the number of controllable objects at the expense of the enterprise restructuring and liquidation, etc.
We should also note that formation of state holding company would not be effective if positive results of its functioning would not overlay the negative trends that might accompany management process consisting in the following:
– In the potential possibilities of the slow privatisation rate of state property and thus financial results;
– In the possibility of guidance by political motives during the decision- taking process, etc.
– Thus, establishment of state holding company will make it possible to more efficiently control the share of state property presented in the form of state-owned shares in joint stock and limited liabilities companies.