Assessing Kazakhstan’s new campaign to attract capital

ALMATY (TCA) — Following the so-called People’s IPO campaign, which is now widely considered to have been disappointing, a new “privatisation” scheme has been announced by the Kazakh government earlier this year. But as time goes by and timing remains uncertain, many insiders and sideliners start casting doubts on whether either domestic or foreign investors see any point of purchasing stock in companies due to remain out of their control. In other words: rather than contributing to structural economic reform this is considered just one more attempt to fill the dwindling reserves in the state coffers without giving much in return.

Enterprises to be “privatised” or in the State Fund’s words “transferred to a competitive environment” include the Kazakhstan Gharysh Sapary company, Kazgeology company, the International centre for cross-border cooperation Khorgos, the Astana international airport and the Korkyt Ata International Airport in Kyzylorda, the Kazakhstan Temir Zholy company (Kazakh railways), the KazMunayGas oil and gas company, the Kazatomprom nuclear company, the Samruk-Energy company, the Tau-Ken Samruk mining company, Kazpost JSC, Air Astana airline, Kazakhtelecom JSC, Qazaq Air airline, the international airports of Pavlodar, Aktobe and Atyrau, the Aktau international sea trade port, Astana Solar company, Kazakhstan Solar Silicon company, Caustic company, Housing Construction Savings Bank of Kazakhstan, Food Contract Corporation, and others.

Among Kazakhstan Temir Zholy’s subsidiaries, minority stakes in Kaztemirtrans JSC, Passenger Transport company, Tulpar Talgo company, producing passenger carriages, JSC Lokomotiv Kurastyru Zauyty, producing locomotives and JSC Electric Locomotive Kurastyru Zauyty are going under the hammer. Among KazMunayGas’s subsidiaries, KMG International N.V., which owns the assets in Romania, the Atyrau refinery, Pavlodar Petrochemical Plant, PetroKazakhstan Oil Products (Shymkent refinery), Kazmortransflot National Maritime Shipping Company and others are included in the plan.

It is here that the first trouble has already risen on the horizon. Earlier this year, KMG waged a buy-back scheme, offering existing shareholders $7.88 per global depository receipt (GDR) which most of them declined, deeming the price far too low and accusing the Kazakh party of stripping stock of its value, the Financial Times reported. The rift now returns in the “privatisation” proposal as shareholders fear that the government is planning to offer stakes in companies under the hammer at bottom prices, to the detriment of capital value.

There are a number of points to be made where the “privatisation” operation in store is concerned. First of all, virtually none of the assets are really being privatised, since the state, either directly or through parent companies, is keeping absolute majorities in the enterprises with stock on sale. In some cases, extra packages of preferred stock are being offered, but the voting shares to be privately owned are in no case more than 49 per cent.

Second, there is the question of stock valuation. Some of the subsidiaries are listed on the Almaty Stock Exchange (KASE), and others have their parent companies listed. But that stock market is denominated in local currency, the value of which against hard currencies has plummeted from 150 to more than 300 over the last couple of years. Moreover, virtually all enterprises listed on KASE were already heavily undercapitalised and the currency depreciation has only made it worse. This is what could be dubbed a “historic mistake”: When the petrodollars were pouring in lavishly, Kazakhstan has spent too much on drums and bells and next to nothing on business capitalisation, which has kept it dependent on external cash resources all the time and for some time to come.

This is the reason why stock and assets keep being undervalued, and market capitalisation is viewed with suspicion and frustration by domestic entrepreneurs – as signalled, for example, in a comment by Reuters April 7, which read: “Only two small listings emerged in four years, and the programme fizzled out.” This makes it clear that stock positioning on the local capital market remains underdeveloped and thereby unfit as an instrument to offer stakes in companies, listed or “planned” to be listed, to investors.

The worst problem, though, in the current private capitalisation scheme is that there seems to be no overall master strategy either in methods or time planning. Furthermore, there seems to be no connection between asset valuation and product sales perspectives. In all productive sectors, both former state enterprises and greenfield initiatives seem simply to forget to look at the map. Kazakhstan is a huge country with many blank spots representing hardly populated areas in each and every corner. This makes transportation costs unaffordable, especially in cases where either commodities or produce in demand can be obtained in a much cheaper way just across the border in Russia, China or Uzbekistan. All these things must be taken into consideration before targeting various kinds of investors. Judging by the documentation made public so far, all the stumbling blocks have been insufficiently asserted – let alone addressed.