Clare Nuttall in Bishkek -
The creation of Kyrgyzstan's Development Fund is a key element in the government's ambitions to grow the economy and stimulate priority sectors. With the appointment of a fund manager - MGN Asset Management - and the allocation of $285m in capital, it is now time to see how effective the project will be.
In addition to the initial $285m under management, part of the $2bn anti-crisis package provided by Russia earlier this year, the Development Fund's CEO, Alexey Eliseev, says the government and management team hope to attract money from other sources, such as private Kyrgyzstani investors or international financial organisations. "The main task of the development fund is to promote the development of priority areas in Kyrgyzstan through effective corporate governance of public assets," Eliseev told delegates at the Bishkek Interbanking Conference on September 24.
Getting to this stage has been a long process. The fund was initially set up in 2007. The following year, Kyrgyzstan President Kurmanbek Bakiyev urged the government to push ahead with making it operational, stressing the importance of transforming Kyrgyzstan from a consumption-based to an investment-based economy, with the Fund one of the key tools in achieving this aim.
While Kyrgyzstan has continued to achieve GDP growth this year, despite the international economic crisis, investment is needed across most sectors of the economy. Energy is a particular priority; the government hopes the Fund will support the rehabilitation of dilapidated infrastructure and the construction of new assets. In addition to energy, three other priority sectors have been selected: processing, the rural economy and tourism. According to Eliseev this initial list and is likely to be expanded and clarified in future.
On September 18, Bishkek-based MGN Asset Management was selected through a competitive tender process to manage the Development Fund's assets. "This is a milestone for us, because the Development Fund is going to be so important in the future economic growth of this country," MGN Group CEO Eugene Gourevitch told bne in an interview.
MGN will invest the funds into various asset classes on the local and international markets. It will also be responsible for protecting the principal and maintaining positive returns on the Fund's assets, as well as minimizing risks associated with trust asset management, MGN said in a press release. The Fund's capital will be invested primarily into real sector projects in Kyrgyzstan, while remaining funds will be used to purchase liquid assets.
Both Eliseev and MGN have stressed the importance of conservative asset management. "The placement of resources will be as conservative as possible, as it is necessary to minimise risks of the investments. We have agreed on selection criteria with the National Bank of the Kyrgyz Republic. There will be no investments in start-up projects or in physical persons, and it will not be used to provide funds for the government," says Elissev.
Adds MGN managing director, Michael Fox: "Preference will be given to forming conservative investment portfolios with moderate returns and low risks."
The Fund will pay interest on its capital to the Finance Ministry, and will aim to make a return on its investments. Rather than receiving a fixed fee for its work with the fund, MGN will receive commission based on the return on investments. Loans will be directed into the priority sectors through authorised banks. Direct investments will only be made into so-called national projects - at present just the Kambarata 2 hydropower project - and into public private partnerships, a structure the government is keen to encourage. "In future we have plans to establish a mortgage company to facilitate the sale of affordable housing to the population, as well as setting up a leasing company in partnership with private investors," says Eliseev. "We also want to manage bad debts on behalf of the Ministry of Finance to show that we can manage problematic assets."
Another financial company will be set up on Islamic financing principles. "There is a demand for this type of finance because a certain proportion of the population is religious and can't be involved in standard forms of investments and loans," says Eliseev. "As a development fund, we should not forget about that percentage of the population. Setting up this type of company will also help us to attract Islamic investors to the financial fund."
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