Privatisation drives fail to shift state out of Kazakh economy

Privatisation drives fail to shift state out of Kazakh economy
The government in Astana (pictured) has struggled to commit to the free market, and the state is in control of a large share of the economy.
By Nizom Khodjayev in Tashkent May 4, 2018

The Kazakh state remains in control of a large share of the economy — though the exact level of state control is unclear — despite the government’s launch of large scale privatisation programmes. Under the latest programme seven state-owned companies will be IPO’d starting from this year, while a significant chunk of the privatisation drive covers small and medium-sized companies with the aim of boosting competition and decreasing the role of the state within the economy. However, Kazakhstan is not known for having well organised government initiatives — a fact that becomes especially clear when government initiatives are combined with the post-Soviet country’s inability to commit to free markets.

The privatisation plan, which covers 904 companies, was originally set for a four-year stretch between 2016-2020. The government supposedly wants to lower the state control in the economy to 15% by the end of the privatisations and IPOs. It’s not clear what the starting point is though. Back in 2014, Kazakhstan’s finance minister said that state control in the economy was estimated at 40%, but also admitted that the government doesn't know the exact size of state control in the Kazakh economy. 

The latest figures reported by the Kazakh authorities in February 2018 show the current programme is 71% complete. It covers 622 companies but so far only 367 have been sold, while the remaining 255 facilities were put up for liquidation or reorganisation in 2016-2017. These figures suggest that nearly half of the companies may never make it into private hands.

Mounting privatisation failures

The government’s privatisation failures can be traced back to the previous 2014-2016 attempt, when it set out to sell off 782 state-owned organisations but only succeeded in pushing 254 of them or 32% of the total. As a result, the 2016-2020 initiative was born to right the wrongs of the previous attempt. 

There are further questions regarding the funds raised through sales of companies in the last four years. The proceeds from sales of state-owned entities amounted to KZT256bn (€643.7mn), which amounts to less than 1% of state budget revenues in the four-year period, according to figures cited by Kazakh economist and lower house of parliament member Aikyn Konurov in February. 

The results appear even more dubious when the benefits of the programme to the Central Asian nation’s economy are evaluated. According to Konurov’s figures, 54% of the companies sold so far are municipal services companies, mostly focused on utilities distribution to residential areas. If the goal of the drive was to stimulate competition, it seems doomed to fall flat on its face as municipal services companies in Kazakhstan are bound by infrastructural and other limitations that prevent them from competing with one another. That leads to another question, the answer to which remains unknown: by what criteria has the government structured its list of companies set for privatisation?

More importantly, the aforementioned goal of decreasing the state’s role in the economy is not achievable with such a minor scale of privatisation. Despite the formal reduction of the number of state entities, Kazakhstan has in fact seen an increase in the state’s presence in the economy, for example with the creation of large scale national companies such as Kazakh Invest and Kazakh Tourism in 2017, Konurov’s figures indicate. Both companies were established for the sole purpose of attracting foreign investment into the country as the government recognised the need to push for economic diversification amid low world oil prices. Kazakh Tourism, for instance, is specifically geared towards drawing foreign investment into tourism development, though its plans remain vague aside from being tasked to help the authorities raise the share of tourism in Kazakhstan’s GDP to 8% by 2025 up from 1% at present. 

Lack of transparency

The denationalisation efforts have also been generally marked by murky deals. Most tender offers in 2016, for example, mainly involved one or two participants, where often preferential rights for  the purchase of a stake in a given company were held by an associate of the company, Aydin Bikebayev, founder of Kazakh legal firm Sayat Zholshy & Partners, was cited as saying by ZONA KZ news agency in 2016. 

Nearly 75% of the 114 subsidiaries of national holding companies sold as of February 2018 were subject to sales without any competitive procedures or were sold in auctions at below the starting price. Only the remaining 25% (just 29 companies) were sold at above the starting price.

"The units should be sold only at public auctions, where the winner should be the one who offers the highest price,” Bikebayev said. “Targeted sales, e-tenders and tenders should only be used in exceptional cases, because with these sales methods many potential buyers may [end up] not participating in the bidding process,” he added, noting that the winners of such sales are not the highest and that “the procedure itself is not sufficiently transparent".

In the light of these details, some Kazakh analysts posit the programme is a facade designed to hand over the companies from official to unofficial state control. They allege that at least some of the private entities and individuals buying the stakes have a long history of receiving state support or have been indirect owners of the properties all along, though insufficient transparency concerning the deals would make it difficult to confirm such allegations. If true, however, this would mean that officially transferring the companies into private hands is unlikely to inspire a more competitive environment. As in all post-Soviet Central Asian countries, personal ties and familial associations often stand as a primary determinants in both business ownership and political power in the country.

Reports regarding the sales of stakes in specific government-owned companies have been rare. One of the latest examples featured the sale of 100% of Euro-Asia Air, an Atyrau-based Kazakh airline that operates passenger flights to Russia, Turkey and the United Arab Emirates as well as between Central Asian countries. No information about the buyer of Euro Asia Air, owned by state oil producer KazMunaiGas prior to the sale, was publicised. The company was sold for KZT11.8bn in a two stage bidding process — significantly lower than the KZT15.5bn price offered for the airline in 2016

IPOs to perform better?

As part of the privatisation initiative, the authorities previously said they planned to sell stakes of at least 25% in 45 large state-owned companies, including the seven IPOs. The Kazakh government expects the IPOs to yield between $3.5bn-$5.5bn by the end of the drive. If successful, the amount would certainly surpass the funds raised from sales of smaller state-owned entities.

While what happens to the smaller companies earmarked for sale should not impact the IPOs, the lack of clear direction demonstrated within the privatisation plan does not bode well for them either. Signs of disorganisation have already been clear for a while now. The IPOs were originally set to launch in 2017, but Kazakhstan’s sovereign wealth fund Samruk-Kazyna has continuously postponed its goals or has been unclear about its future deadlines. It seems to have settled on floating two companies in the fourth quarter of 2018 — national carrier Air Astana and the world’s second largest uranium miner Kazatomprom, though reports citing anonymous sources suggest international listing for the latter company might get postponed again.

Other IPOs of large state-run companies possibly planned for this year include Kazakhtelecom, the country's largest telecom operator. The rest of the IPOs — namely of KazMunaiGas, Kazpost, Samruk Energy and Kazakhstan Temir Zholy (KTZ) railway operator — are tentatively set for 2019-2020.