Kazakhstan's privatisation programme faces "strategic" challenge

Kazakhstan's privatisation programme faces
The Samruk-Kazyna sovereign wealth fund has repeatedly denied the KMG EP buy-back plans.
By Naubet Bisenov in Astana May 30, 2016

The Kazakh government’s aim of privatising strategic assets via initial public offerings by 2020 is threatening to come into conflict with its desire to maintain significant control over the companies.

Its attempts to interfere have already stoked disagreements between directors it appoints to boards of companies and independent directors, notably in the conflict between state-owned KazMunayGas and its London-listed upstream arm KazMunaiGas Exploration Production (KMG EP).

Any overt attempt to interfere in privatised companies risks being very damaging for the reputation of Kazakhstan, which is seeking to attract foreign investment and sell stakes of up to 25% in seven flagship companies. These comprise KazMunayGas, Kazatomprom uranium producer, Kazakhstan Temir Zholy railway operator, Kazpost, Air Astana, Samruk-Energy electricity producer and Tau-Ken Samruk mining holding company,

Rumbling disagreements between the KazMunayGas and KMG EP directors have led to rumours of the national oil and gas company buying back minority shares in its operating company in a bid to reduce the influence of independent directors.

Reports resurfaced in late April over disagreements between KazMunayGas and KMG EP over the huge cash pile the latter accumulated when the price of oil was high; the national oil and gas company first announced plans to seek a loan to buy back minority shares in KMG EP but later denied the plans. Kazakhstan watchers suggest the move is driven by the national company’s need to service and pay its vast debts, standing at $10.7bn at the beginning of 2016.

This and other proxy fights in Kazakh London-listed companies are now threatening to undermine the government’s large-scale privatisation plans, especially those involving IPOs as there is no certainty as to how much control the government will exert over its strategic assets.

KazMunayGas and its parent, Samruk-Kazyna sovereign wealth fund, which manages state-owned assets, have repeatedly denied any buy-back plans.

“I am not aware of the conflict. There are different opinions on a board of directors as independent directors have one opinion and the other directors have another,” Umirzak Shukeyev, the CEO of Samruk-Kazyna, told bne IntelliNews on the fringes of the Astana Economic Forum on May 25-26. “I cannot comment on this.”

KazMunayGas’s deputy chairman for corporate development, Daniyar Berlibayev, echoed Shukeyev that his company doesn’t seek to regain full control over its production arm. “There is no talk of it. I won’t comment on it,” he told bne IntelliNews, adding that KazMunayGas wouldn’t seek to get hold of the cash pile totalling $3.1bn at the end of March, because “we are managing our debts”.

Reputational problems

“This is not a conflict but this is simply difference in opinion on some issues. If this is the case then I am not aware of it,” Sir Richard Harry Evans, an independent director of Samruk-Kazyna, told bne IntelliNews.

However, he admitted that the rumours might have damaged Kazakhstan’s business reputation among potential investors. “We haven’t created particularly a sort of fine record in London. If you look at problems and reasons associated with Kazakhstan they are entirely reputational,” Sir Richard said. “If we want to go to London markets we have to work and repair our reputation and make people believe.”

Despite all the denials, Samruk-Kazyna acknowledges that there are faults in corporate governance at Kazakh companies and certain problems with the government’s interference with their work.

“We are trying to make it clear for the current shareholders that our management style is not based on criminal concepts but on international rules and standards,” Adamas Ilkyavichus, the fund’s managing director, said. “We are also making this clear to those whom we are trying to lure to invest in our companies.”

Samruk-Kazyna admits that the government will continue to interfere in companies via “corporate governance” and the fund will ensure that state interests are taken into account in the running of these companies. “The state interferes in our activities based only on corporate governance principles. The state is our shareholder,” Berik Beysengaliyev, another managing director of Samruk-Kazyna, said.

He noted that the chairman of the fund’s board of directors is the prime minister and several government ministers are members of the board. “It interferes only through the work of the board of directors. There is no direct interference as such. Naturally, we have to take account of state interests as we own such strategic assets, especially the social aspects, and we will take them into account,” the managing director said, answering bne IntelliNews’s question.

The Kazakh government’s privatisation plans involves the full or partial sell-off of 783 companies, including 217 in direct ownership of Samruk-Kazyna or via its national company subsidiaries. Out of 217 companies, 44 will be privatised via two-stage electronic competition, IPO/SPO and public-private partnership. The seven above mentioned flagship companies will undergo IPOs and another 37 will be privatised by other means. The remaining 173 companies will be auctioned electronically and reorganised or liquidated if there is no demand for them.

Samruk-Kazyna has for years tried to get rid of non-core assets, such as railway platforms, hotels or sport facilities owned by its subsidiaries, in order to boost competition in the wider economy. But it managed to sell only 38 assets out of planned 106 assets in 2013-2014, including two via “People’s IPO” programme – national power grid company KEGOC and oil-transporting KazTransOil, – the fund’s CEO, Umirzak Shukyev, told bne IntelliNews.

“The rest wasn’t sold because of the economic crisis and sluggish demand,” Shukeyev explained. “Another hurdle was that we couldn’t reduce the price of assets below their book values because there is direct criminal punishment for doing this.”

“A new wave of privatisation in 2016-2018 takes these problems into account and we have amended legislation and drafted rules so we can now get down to it,” the Samruk-Kazyna CEO added.

Despite usually good legislation and rules, Kazakhstan often suffers from the implementation of programmes and ideas it adopts due to corruption and red tape. Kazakhstan occupies 123rd place out of 177 countries ranked in Berlin-based Transparency International’s Corruption Perceptions Index 2015.