Clare Nuttall in Almaty -

A key question for Kazakhstan is how best to use its oil and mineral wealth to create the foundations for an enduring economic security, which will continue even when those natural resources are exhausted. The Kazyna Sustainable Development Fund, which announced September 9 it's planning to turn into an independent investment fund by 2012, is at the heart of the government's strategy for diversifying the economy.

The experience of other oil-rich developing countries highlights the dangers of revenues being frittered away, damaging rather than developing their economies. To avoid this, the Kazakh government set up Kazyna, a 100% state-owned umbrella organization comprising several funds and development institutions, in March 2006 - at the same time as state holding companies Samruk and Kazagro were formed.

Kazyna's function is to channel government monies into productive investments, in line with the government's 2003-2015 strategy for industrial development and innovation. Operating under the chairmanship of former Finance Minister Arman Dunayev, Kazyna is intended to ensure better coordination between the government and various development finance, innovation promotion and other agencies. The government thereby hopes to speed up diversification of the Kazakh economy.

Rather than simply throwing money at the various issues, Kazyna's remit includes introducing best corporate governance practices to its subsidiaries, increasing their efficiency and helping to develop Kazakhstan's stock market. It is also responsible for channeling private sector investment into the Kazakh economy.

In a recent interview, Prime Minister Karim Massimov, a driving force behind Kazyna's creation, stated that, "Kazyna can do nothing without partnership with the private sector. For each dollar invested by Kazyna, there should be a dollar invested by the private sector."

"Someone should take risks because purely state financing of projects ends pitifully as a rule. This principle underlies the creation of Kazyna," Massimov added. This is reflected in Kazyna's investment criteria; projects selected must have private sector participation and be economically viable, in addition to being compatible with the fund's development priorities.

Finger in pies

Kazyna has its fingers in many pies, not just in Kazakhstan but also in the rest of the CIS. Investments it's made include those in the Moscow-based Macquarie Renaissance Infrastructure Fund and the Aktau City project, right down to venture capital investments and funding for small and medium-sized enterprises (SME).

Its subsidiary, the Development Bank of Kazakhstan, specializes in funding major projects; the latest 10 projects to be approved include funding the modernization the ferroalloy production plant in Taraz, construction of the Aktau International Sea Port, and construction of the first transport and logistics centre in the West Kazakhstan region.

Smaller projects are funded through the Development Fund of Small Enterprise, which, it announced in July, will spend KZT115.5bn ($96m) financing projects through the state SME support programme. High-tech companies are funded through the National Innovation Fund, which also makes fund of funds investments in venture capital funds. The Investment Trust of Kazakhstan, another Kazyna agency, also provides financial support to private sector companies.

The fund's private equity arm, Kazyna Capital Management, was launched in May 2007 and today has over $300m under management. It was launched to develop the non-resource sectors of the Kazakh economy and bring in foreign investment, as well as buying international assets. Recently, co-investing with the European Bank of Reconstruction and Development (EBRD), it launched the Kazakhstan Growth Fund with a target of $125m. According to Kazyna's deputy chairman Gani Uzbekov, this will be increased to $1bn by the end of 2008.

There is also growing speculation that Kazyna could take over Kazakhstan's National Fund from the National Bank. The fund's assets are expected to exceed $100bn within five years, assuming oil prices stay above $70 a barrel - according to Global Insight it is the world's third fastest-growing sovereign wealth fund. Uzbekiov recently said that Kazyna could become responsible for managing the National Fund's assets.

Investments by Kazyna have not been limited to Kazakhstan, with the fund taking on an increasingly international role. As by far the largest economy in Central Asia, Kazakhstan - via Kazyna - is taking something of a regional development role in neighbouring economies.

Among its international initiatives is the Kazakhstan-Tajikistan Investment Trust, which was finalized on August 28 and is due to start its activities in October. Kazyna Capital Management and Tajikistan's state committee on investments will co-manage the 10-year, $40m fund, which will later be increased to $100m, and will finance investment projects in Tajikistan in areas such as hydroelectric power, mineral extraction, light industry and agriculture. A similar fund - the $100m Kazakh-Mongolia Direct Investments Fund - is being launched in Mongolia, following Kazakh President Nursultan Nazarbayev's visit to Ulaan Bataar this summer. Investments will be made in "commercially compensated, economically effective" infrastructure and investment projects, Kazyna said.

On a much larger scale, Kazyna will channel international funds into both Kazakhstan and the wider CIS economy through the $1bn Ithmaar Kazyna CIS Energy Fund. The fund is being jointly managed by Kazyna and Bahrain-based investment bank Ithmaar Bank, and will invest in energy and related sectors; it is expected to become the catalyst for total investments of up to $10bn. The fund "offers regional investors the opportunity to participate in the tremendous growth the CIS energy sector is currently experiencing," Ithmaar's CEO Michael Lee said on the launch of the fund in May 2008.

Future plans

It is early days to make any real assessment of Kazyna's performance. But less than three years after its creation, it's certainly been effective in putting a lot more money to work than its constituent parts did previously. In the four years before the fund's creation, its daughter agencies invested in projects worth $3.3bn in total; in Kazyna's first year of operation, it backed projects worth no less than $5.1bn.

However, money is not the only ingredient when it comes to developing the economy. Kazakhstan has huge supplies of natural resources, but a comparative shortage of human resources. From mega projects like the Aktau City development to high-tech start-ups, finding skilled people is a great challenge. In the industrial sector, ensuring power supplies and effective transport and logistics to get their products to market is also an issue, and the investment in infrastructure development is necessarily long term.

Since its creation, Kazyna's role has continually widened. In the most recent move in early September, it was given the status of a financial agency by Kazakhstan's financial regulator AFN. This will both allow Kazyna to provide financial services aimed at the development of Kazakhstan's economy, and help it to borrow on domestic and international markets.

Earlier this year, Dunayev outlined new investment priorities. "In order to utilize our financial resources in the most effective way, we have decided to revise our investment priorities," he announced in April. "When financing investment projects in the future, Kazyna will focus on the following priorities: infrastructure, transport and logistics, energy, metallurgy, chemistry and petrochemistry, and entrepreneurship."

By 2010, these priority areas will account for 75% of Kazyna's investment portfolio, with the remaining 25% being made up of investment projects in other areas, Dunayev said. In particular, the fund will increase its investments in the industrial and infrastructure sectors.

The current development plan for Kazyna will take the fund through until 2015. Outlining its longer-term plans, Dunayev said: "By 2015, Kazyna will become an independent investment fund after partial or full privatization of the institutes for an adequate premium. The fund will focus on management of the assets in order to diversify the sources of income for the republic."

Speaking at the Renaissance Capital Central Asia Investment conference on September 9, Uzbekov confirmed that, "We hope that by 2012 most of the subsidiaries will have been privatized and Kazyna Sustainable Growth Fund will turn into an independent investment fund."

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