Ben Aris in Warsaw -
The Kazakh government has agreed with the European Bank for Reconstruction and Development (EBRD) on a radical deal that will see the state effectively outsource part of its diversification drive to the multilateral bank.
The plan involves a possible KZT1 trillion (€4bn) of investment being pushed into every part of the economy, with the EBRD taking charge of a significant part of the decision-making and implementation process. In the first stage of the cooperation, international financial organisations (IFIs), led by the EBRD, will be given $2.75bn to supervise of a $5bn state-run investment programme. "It's a totally out-of-the-box idea. It's never been done by the EBRD before," says Janet Heckman, director of the EBRD Kazakh office, who will be point for much of the work.
The Kazakh government will allocate the money to the EBRD-led team of IFI specialists, which will then get to "choose the projects we want, and design them," says Olivier Deschamps, managing director for Turkey, Eastern Europe, the Caucasus and Central Asia in an interview with bne. "The state then comes in as a co-financier, providing grants and technical assistance, or as a revenue back-up when it comes to PPPs [public-private partnerships]."
For investors, the key point is that the projects will be selected on the basis of their economic and commercial merits only, shorn of the oligarchic or political considerations that often interfere with the commitment of government investment funds.
Memoranda of understanding have already been signed with the European Investment Bank and Asian Development Bank, and the EBRD expects to sign off on its leading role on the deal before the end of May.
Perhaps one of the motivations for reaching out to the EBRD is the disaster that has been the development of the massive Kashagan oilfield. After almost a decade of delays and huge cost overruns, production was finally launched in September last year only for it to be immediately shut down again due to pipeline corrosion from hydrogen sulphur gas. A flagship project for the country, the $50bn project highlights, among other things, the operational difficulties that continue to stymie the government's ambitious plans.
The EBRD's Heckman says there are many synergies to be gained, as much of Kazakhstan's development strategy mirrors the EBRD's own goals. But until now the development bank has operated in parallel with the government's efforts to diversify the economy away from natural resources, acting more like a private equity fund and concentrating almost exclusively on the private sector.
The new deal envisages the bank working hand in glove with the state to tap international best practices to get the reforms working faster and more efficiently. "Our strategy is exactly along the lines of what the Kazakh government wants to promote and work on the most. It is an exciting development because they want to use the best experts in class globally, which is what the IFIs will be assisting them with," says Heckman, speaking on the sidelines of the EBRD's annual general meeting in Warsaw on May 14. "What they want to do is kick-start reforms."
The idea came from the Kazakhs: after taking over as prime minister at the start of April, the first thing Karim Masimov did was go to the EBRD to suggest joining forces, according to bne sources.
The idea is borne out of several needs. Kazakhstan has been become increasingly liberal in its approach to economic reforms and focused on the need to diversify the economy, in part to provide jobs to its young population. However, the effort is going slowly.
The root problem that this new scheme is attempting to address is the lack of human resources available to the government when it's trying to push through deep, difficult and painful reforms, say the EBRD officials involved with the plan.
The Kazakh government is not intending to hand over complete control of the investment projects, as the ministries will retain an important role and oversee each project together with the IFIs. "All of the projects will be managed by a joint 'council of control' that will include the key ministers and the heads of the IFIs," says Heckman, adding that the EBRD will play a leading role in the day-to-day operations of most of the investment projects.
The Kazakh experiment could well produce a new model for cooperation between development banks and governments in Central and Eastern Europe and the Commonwealth of Independent States. Many of the countries in the CEE/CIS region suffer from the same problems: they operate largely as a closed shop; there are market practices, but there's also nepotism, insider dealing, corruption and simple inefficiency. This new model is an attempt to fling open the windows and let the sunshine of transparency illuminate state investment projects.
"Typically many of these governments have good ideas and have adopted suitable policies, but where they all always fall down is on the implementation," says one EBRD official working in Kazakhstan. "One of the key benefits of tying up with the EBRD is the access to its sophisticated and extensive resources, making use of the EBRD's large team of expert bankers who collectively have centuries of experience. So it's not just about the money. It's about leveraging what we know to see what's needed. An important part is the increase accountability and transparency that agrees together with the government. That will give us the ability to monitor the progress of the project."
Still, there is significant money involved. In addition to the $2.75bn that the Kazakh government is committing to what is in effect a pilot programme, the EBRD says that it will commit its own money and expects to "significantly increase investments into Kazakhstan," says Heckman.
More importantly, the EBRD usually brings in private investment to match its own money, up to a ratio of 80:20 in private money-EBRD money, says Heckman. Just how the money is spent will depend on the specifics of each project. "The money can be used for project financing or for technical advisory in other key areas. The value of the projects could be anything. We work from very small projects for $10m up to $100m," says Heckman.
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