Kazakh rail on track for private money

By bne IntelliNews July 10, 2008

Clare Nuttall in Almaty -

On a windswept plain among the Tian-Shan mountains, trains line up everyday at one of Asia's busiest border crossings. Kazakh wagons transporting minerals and other natural resources pass trains from China loaded with manufactured goods bound for Central Asia, Russia and beyond the CIS to Europe. Since its opening in 1956, the Alataw Pass has been the only rail crossing between Kazakhstan and China. Now, with the volume of trade between the two countries forecast to triple by 2020, not only is a new railway from China to the Caspian being built through Alataw, construction is also about to start on a second rail link through the Khorgos Pass.

On May 20, ENRC Logistics, the transportation division of Kazakh minerals company Eurasian Natural Resources Corporation, announced it had won the contract to build and operate new rail infrastructure between Khorgos and Zhetigen, a small town near Almaty that is due to become the city's new logistics hub. Building a second rail route via Khorgos, which is currently the main road crossing between the two countries, will take some of the burden of increasing traffic off the Alataw Pass, the busiest land port in northwest China. In 2007 around 5m tonnes of goods were transported through Alataw, an increase of 60% on the previous year.

ENRC Logistics' contract covers construction of the 300-kilometre, single-track railway between Khorgos and Zhetigen, as well as four intermediate stations, 10 intersections and a loading complex. The railway is due to become operational in 2012, and ENRC will operate it until 2036. According to ENRC, the entire project will cost $900m, making it the largest-ever private sector infrastructure investment in Kazakhstan.

Getting the private sector involved in the infrastructure sector is a key objective for the Kazakh government, as it readies itself for a massive construction programme spanning railways, roads, energy transmission, housing and numerous other projects needed to repair and expand its inadequate infrastructure, much of which dates from the Soviet era. ENRC and other interested parties are currently working with the government as it updates its concessions law and other relevant legislation to facilitate private sector involvement in these schemes.

ENRC's chief financial officer, Miguel Perry, highlights the importance of the Zhetigen-Khorgos railway as a route to get the company's products to the Chinese market, which is increasingly hungry for Kazakh raw materials. The company has long recognized the potential of Kazakhstan's location in the heart of Eurasia, as consumption of raw materials shifts eastwards from Europe and the US, to China, India and Russia. However, investment in infrastructure will be required for Kazakhstan to fully realize its potential as a raw materials exporter.

"This contract is a positive thing for us as a group because it will secure an export route to one of our key markets," Perry says. "With the increasing volume of trade between Kazakhstan and China in particular, as well as Kazakhstan and Russia, Kazakhstan's infrastructure needs to be upgraded. The forecast volume of trade between Kazakhstan and China clearly indicates that capacity needs to be increased."

The volume of cargo transported between Kazakhstan and China is expected to almost triple between 2008 and 2020, increasing from around 19m tonnes per annum today to 46m tonnes. At the same time as Chinese demand for Kazakhstan's raw materials is increasing, Kazakhstan is both a customer of China's manufactured goods and a transit route to Europe. At present, the two main export routes are the road port at Khorgos and the rail port at Alataw. Construction of the new railway will increase cargo transit capacity from Kazakhstan to China by 30m tonnes a year.

In particular, the Khorgos route will cut the time to transport goods from the Chinese border to Almaty by almost half; Khorgos is just 300 km from the southern capital compared with the 580 km to the station of Dostyk, on the border at Alataw.

ENRC's railway is not the only construction work planned for the border crossing. Kazakhstan's Ministry of Transport and Communications wants to build an airport large enough to handle large cargo planes at Dostyk. It is currently seeking investors for the $500m project. Logistics company STL announced on June 20 that it is planning to build bonded warehouses and an intermodal container terminal at Khorgos, to be completed by 2010. "We estimate that rail freight volumes to and from China will grow by 300% during the next four years via Khorgos and there is demand to expedite transit cargo by rail and road between China and Europe," said the company's Managing Director Erlan Dikhanbayev.

New silk roads

These plans, however, are just a fraction of the vision that local politicians and international organisations have for Central Asia. Kazakhstan's post-Soviet railway ambitions started on a small scale. Now, however, the plans are multinational, and aimed at recreating the complex web of routes crossing Central Asia in the days of the Silk Road. From east to west and north to south, the new rail and road routes are intended to entice cargo trade back to the continent. Today, just a tiny fraction of trade - by some estimates as little as 1% - between Europe and Asia goes overland.

Seven months ago, and some 2,000 km from Khorgos, Gurbanguly Berdymukhamedov was wielding a gold-plated spanner as construction started on another railway line. Turkmenistan's president bolted together the first two sections of track of a new railway that will run from Ugen in Kazakhstan - which links up to the Russian railway network - through Turkmenistan, to Gorgan in Iran. When completed, this north-south corridor will enable goods to be transported from Europe to the Persian Gulf in a single continuous journey. Due to open in 2011, the line will initially transport up to 5m tonnes of goods a year, which will increase to up to 12m tonnes in future."

Back in 2004, after a visit by Kazakh President Nursultan Nazarbayev to China, the Kazakh government formulated plans for a new east-west railway from the Dostyk border crossing and the Caspian Sea. The 3,000-km line is being built on the same narrow gauge as the European and Chinese networks, allowing trains to sweep across the Kazakh steppe from Urumqi to the Caspian. Previously, railways in Kazakhstan, Russia and the rest of the CIS countries have been built on a broad gauge, necessitating changes at the borders to east and west.

At present, shipping goods from China to Europe takes 56 days, and the Trans-Siberian railway 15 days. The new route across Kazakhstan will cut this to just eight days. While goods sent to and from northern China are still likely to go via Siberia, the new Kazakh line is set to draw off much of the traffic from Xinjiang and the western and central provinces of China.

More new lines are planned. In November 2007, seven countries in the region signed an agreement to spend almost $19m on more roads and railways crossing Central Asia to connect Europe, China, Russia and the Middle East. Eight road-rail corridors most east-west, but some north-south, are planned to be built by 2018. Kazakhstan, Kyrgyzstan and Tajikistan have signed up to the agreement as well as four other countries in the region - China, Mongolia, Afghanistan and Azerbaijan.

Finding funds

Kazakhstan alone is to spend $7.5bn on the expansion and modernisation of its railway infrastructure by 2012, Transport and Communications Minister Serik Akhmetov announced earlier this year. The investment programme comprises 12 large-scale projects, nine of which will be on a concession basis. The government also plans to spend up to $3.5bn building 1,715 km of new railways and $1.07bn to electrify a further 2,185 km.

Although Kazakhstan has substantial revenues, and one of the world's fastest-growing sovereign wealth funds, the sheer scale of these plans raises questions about how they will be funded.

National railway operator Kazakh Temir Zholu announced it would raise freight tariffs by an average of 15% a year between 2008 and 2012 in order to raise funds for the programme. It expects to raise around $5.66bn for infrastructure investment. However, this will not in itself be sufficient. The government has, therefore, made it clear that it is keen to attract more private sector involvement. "The issue of [public-private partnerships] is increasingly important as a means of delegating some responsibility that has traditionally been the government's to the private sector," Baryat Sultanov, Kazakhstan's Minister of Economic Affairs and Budget Planning, said at a recent conference.

Legislation is already being revised in order to facilitate PPP-style investments. On June 16, Kazakhstan's Senate reviewed a draft law intended to create a legal basis for state concessions, and submitted it to the Majilis, the lower house of parliament. The draft law is intended to make it possible to grant concessions for construction and reconstruction of state property. It will involve changes to the existing law on concessions, adopted in July 2006, as well as laws on natural monopolies, highways, railway transport, investments and on the securities market. It will also require changes to the tax, budgetary and land codes.

Under the law on concessions, state-owned assets in a range of sectors outside the extractive industries may be granted in the form of concessions for up to 30 years. Several projects in the form of concessions, including the Sher-Ust Kamenogorsk railway, have already been initiated. Now the Kazakh government wants to see more, and is considering structuring investments on a model based on BOT (build, operate, transfer) or the UK-style PFI (private-finance initiative). "I think public-private partnership is a good model to promote," says ENRC's Miguel Perry. "One of the things we're working on at the moment is to get the concept legally recognized under Kazakh law. Once this happens, we should be able to get financing on a stand-alone basis. We're working with the government to encourage them to make a series of revisions to the law. When this legal platform is created, this will facilitate more concessions being awarded to the private sector for further projects like this in future."

Apart from Russia, Kazakhstan is the only one of the CIS countries to aim to attract private sector involvement in infrastructure on such a large scale. Investors, especially the experienced international investors the government hopes to attract, have been sceptical. However, a change to Kazakh legislation, and the success of the ENRC project would go a long way towards reassuring other potential investors.

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Kazakh rail on track for private money

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