Back to the drawing board for Kazakhstan's road concessions

By bne IntelliNews June 4, 2009

Clare Nuttall in Almaty -

Kazakhstan's attempt to test its new concessions law with the launch of four public-private partnership (PPP) tenders for major road projects wasn't a success. The government is now re-thinking its approach as it seeks to attract private funds for the many infrastructure projects in the works.

The roads in question were the Almaty-Korgos section route between Kazakhstan's borders with Uzbekistan and China, the Astana-Karaganda segment of the Yekaterinburg-Almaty road, the Almaty-Kapshagay road and the Big Almaty Loop Road. All four tenders were launched simultaneously with a deadline of March 25, 2009, but "no serious bids" were received, according to a source. This was a disappointment for the Kazakh government, which had hoped to plug a gap in public funding, as well as test driving new concessions legislation adopted in 2008.

Observers say the failure of the four tenders was partly down to the fact they were launched in the depths of the international economic crisis, but also because the tenders were rushed and badly planned.

Kazakhstan has an urgent need to increase investment in transport, energy and communications infrastructure. Improving its road and rail networks will allow it to play a key role as a transit state between China and Europe, Russia and the Middle East. A report from the World Bank, which recently committed over $2bn to a road building project in Kazakhstan, observes that much of the country's road network was built in the Soviet era and has since deteriorated due to a lack of adequate maintenance. "Half of the roads in the country's network need major maintenance or full rehabilitation," the report says. "Kazakhstan's road safety record is poor with road accidents and fatality rates increasing in recent years. The current unsatisfactory condition of roads in the country prevents development of international and regional trade and limits access of rural communities to essential public services and work opportunities."

Ulf Hindstrom, a senior banker at the European Bank for Reconstruction and Development (EBRD), supports Astana's plan to involve private sector investment in construction, reconstruction and maintenance of Kazakhstan's road systems. "Currently, there is too little money for systematic maintenance and a shortage of good managerial compentencies," Hindstrom told delegates at the European Finance Convention Kazakhstan Infrastructure Summit 2009. "Something needs to be done to increase the quality of construction and ensure that money is well spent. The Kazakh government has turned to concessions to address the quality and maintenance issues, which could potentially be a very good move."

At the same conference, Ajdan Karibzhanov, managing director for investments at the Samruk-Kazyna National Welfare Fund, said frankly that, "The problem is money. The majority of money given from the state to Samruk-Kazyna is being used to support the banking sector, and there is not much left to fund such projects. $30bn to 40bn is needed, but we only have $1bn."

Promise of PPP

The Kazakh government is very keen to use PPP to attract private investment, and has been working for several years to get the legal framework right. This process is being personally overseen by Prime Minister Karim Massimov, and there is also a lot of political backing from President Nursultan Nazarbayev.

Kazakhstan's largest and highest-profile road development project is the $7.5bn International Transit Corridor development programme. The World Bank's $2.1bn loan approved in May will finance the rehabilitation of a 1,062-kilometre stretch of road between Shymkent and the Aktobe/Kyzylorda oblast border - part of this mega-project.

In the hopes of attracting more funds for such projects, the concessions system in Kazakhstan has gradually been developed since the concessions law was adopted in 2006. The first pilot project was the Sber-Ostkemen line, which opened in December. Also in 2008, a new law was adopted intended to allow for a model more similar to that used in the US. The Kazakh government has set up an agency dedicated to PPP and is now developing a concept for PPP until 2020, which will include a list of all the projects to be put out to tender.

It is considered particularly important that such projects go ahead at times like today, when they can provide a much needed boost to the economy. "Infrastructure projects are efficient tools to create employment and growth in times of crisis, but it's necessary to attract a lot of money. PPP is good because it's a way to get private money and new skills, and to share the risks," says Bolat Smagulov, chairman of the Kazakhstan Centre of State-Private Partnership.

However, the EBRD's Hindstrom points out numerous issues with the decision to launch concessions for four major road concessions as a test for the new law. According to Hindstrom, the documents did not fully meet international standards. There were also problems connected to timing. Preparations were rushed to meet political deadlines, the bid times were unrealistically short, and because the tender process was launched over the New Year holidays, they didn't land on many potential bidders' desks until mid-January - barely two months before the deadline.

Launching all four tenders at the same time raised the danger of collusion between bidders or, as eventually happened, a lack of quality bidders. The documentation also required that the bids were fully underwritten. This was an obstacle for international financial institutions, which in general have to fund any bidder that wins, provided it fulfils their basic environmental and social criteria.

However, such teething troubles are typical for any governments introducing PPP for the first time. Theodore Matheny, partner at law firm Salans, says he's bullish about PPP in Kazakhstan, but that initial tenders are almost always followed by further changes to the concessions law. "I am not aware of any jurisdiction that got it completely right the first time round," he says. "It is now essential that the government is willing to make changes, and does so quickly."

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