New law leaves field clear for Kyrgyz privatisation agenda

By bne IntelliNews July 21, 2008

Clare Nuttall in Almaty -

Kyrgyzstan has adopted a new law that will allow the government to decide on most privatizations without waiting for the parliament to give its approval. By taking the politics out of privatization, the government hopes to speed up the process and attract more foreign buyers for Kyrgyzstan's state-owned assets, such as KyrgyzTelecom's sell-off set for August.

The impetus for speeding up the process comes right from the top. President Kurmanbek Bakiyev has put increasing emphasis on attracting foreign investment, as a cure for the cash strapped economy. At the beginning of this year, he told the government to make the sale of Kyrgyzstan's power companies a priority, arguing this would be the only way to attract investment for the country's crumbling infrastructure. Three laws relating to privatisation were then approved in April.

Bypassing parliament is a controversial move - or would be had the pro-Bakiyev Ak Zhol party not won a landslide victory in the December elections. The remaining seats are divided between the Social Democratic Party and the Communist Party, both of which are reasonably close to Bakiyev, allowing his government to push through the measure. It does have the caveat that the parliament's approval will be required for strategically important assets, but with a Bakiyev supporter in every seat, in the current parliament, this is academic.

By contrast, after the 2005 revolution it had been difficult to get the parliament to approve planned privatizations. "Confrontations between the main legislative body of the country with the government slowed down the decision-making process, in particular where it concerned the privatisation of strategically important objectives like Kyrgyztelecom," says Bakai Zhunushov, director of iCap Investment.

The changes, Zhunushov explains, will allow the government to independently define privatization priorities and accelerate the process. Aida Satylganova, a corporate lawyer at Bishkek-based law firm Kalikova & Associates, agrees: "Changes made to the privatization process will be important, as it facilitates the privatization process for certain state property objects. We consider that it is likely to speed up the process for the assets that are included in the government programme."

Satylganova also anticipates greater interest from foreign investors. "In general, taking into consideration the recent activities of the government on the improvement of the investment climate in the Kyrgyz Republic, we expect more interest from international investors in Kyrgyz companies," she says.

Calling the market

KyrgyzTelecom is a case in point. The sale of the national telecommunications operator has been in the works for several years. Back in 2003, Swedtel was selected as a buyer, but the Kyrgyz government failed to reach an agreement with the Swedish company. A new round of offers was invited; this time Arex-tech and Detecon International were the winners, but the parliament subsequently decided to call a halt to the tender process.

KyrgyzTelecom is now up for grabs again and this time there is greater confidence that the process will actually result in a sale. A decree on its privatization was adopted in May last year, and the State Property Committee has invited potential buyers to submit their proposals by August 27. The eventual buyer is most likely to be foreign, since few, if any, Kyrgyz companies would be able to meet the requirements. Among interested parties is German investment firm Axos Capital Partners, which is reported by the Kyrgyz press to have been in Bishkek recently checking out the company.

A full list of companies to be privatized in 2008-2012 has been drafted by the State Property Committee, and is awaiting approval by the government. The provisional list includes the electricity distribution companies Severelectro, Vostokelectro, Jalalabadelectro and Oshelectro. It also comprises Bishkektelepost, Kyrgyzaltyn and Aviacompany Kyrgyzstan (Kyrgyz Airlines). KyrgyzGas is due to be split into smaller gas distribution companies; a joint venture between KyrgyzGaz, KyrgyzNefteGaz and the Russian gas giant Gazprom is also planned.

The government is also pushing ahead with plans to attract private investment for the Kambarata-1 and Kambarata-2 hydroelectric power stations on the Naryn River near the border with Tajikistan. EDF and PricewaterhouseCoopers have been commissioned to carry out an investment study for the two HEP stations.

The privatisation of major companies, especially those in the energy sector, has historically been a source of concern to opponents of the government. With these companies currently crippled by outdated infrastructure and unpaid bills - resulting in frequent service blackouts across the country - the price the government gets is likely to be low.

iCap Investment's Zhunushov lists several concerns - the possibility of a small group of investors buying up assets resulting in an absence of competition and the creation of private monopolies, the loss of state control over energy policy, and the fear of selling state assets off too cheaply or to an incompetent investor. In the energy sector, there is also the risk of miscalculations leading to a steep increase in tariffs. "That can worsen the position of the needy, who make up almost 60% of the population, and can lead to a social crisis," he warns.


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