Does Kyrgyzstan need another state management company?

BISHKEK (TCA) — The share of industry in Kyrgyzstan’s GDP remains at 8.7% and is not increasing, the State Committee for Industry, Energy and Subsoil Use reported.

The industry is not the locomotive of the economy now, but rather is a platform for the provision of jobs. It will take about ten years to restructure enterprises, the Committee said.

Unprofitable state enterprises

The profitability of many state-owned facilities remains low, and their net profit decreases.

Of the 106 state-owned enterprises (SOEs), 51 remain unprofitable. Of 52 joint-stock companies with state share, 22 do not generate profits. In general, almost half of them do not operate, Prime Minister of Kyrgyzstan Mukhammedkaly Abylgaziyev said.

This applies to Alfa Telecom JSC (MegaCom trademark), Dastan Transnational Corporation, Entrepreneurship Development Fund, Naryn hydroelectric power plant (HPP), Naiman HPP, and others. Spending plans of the Bishkek Machine-Building Plant OJSC and the Guarantee Fund OJSC increased by 206% and 162.3% respectively compared to the previous year.

Managers of state-owned enterprises did not take concrete development measures and did not put forward any initiatives, Abylgaziyev said.

MP Jyrgalbek Turuskulov drew attention to the reduction of budget revenues from the Issyk-Kul-Aurora Sanatorium SE. In 2018, the sanatorium paid only 1.3 million soms in taxes to the state budget, while there are opportunities to increase the company’s revenues.

Over the past three years, 258 criminal cases have been initiated against SOE officials, which indicates significant financial violations and corruption there, Turuskulov added. The greatest violations were found in the Kyrgyzpochtasy (postal enterprise) SE, Kyrgyz Temir Jolu (railways) National Company and the Asker Kurulush (construction) SE.

Lack of strategic planning

MP Marlen Mamataliev offered to transfer the management of state-owned enterprises to private entrepreneurs.

“No matter how good facilities are, including boarding houses at Issuk-Kul, when transferred to state administration, they become bankrupt. Meanwhile the number of tourists is increasing. The indicators in their financial plans and reports are distorted due to corruption schemes there,” he believes.

The current state property management system is inefficient in Kyrgyzstan. Internal contradictions between the functions of the state as an owner, the inconsistency of management entities’ actions, the lack of strategic planning and effective control, as well as other problems accumulated over the years, including shortcomings in personnel policy, have caused irrational use of state assets in key sectors of the economy.

The MPs suggested to liquidate unprofitable state-owned companies or transfer them to trust management and develop them in the framework of public-private partnerships. To assess the activities of all state-owned companies, it is necessary to introduce electronic document management there.

The Prime Minister has ordered the Economy Ministry and the State Property Management Fund to draft a list of state property facilities to be transferred to trust management with the development of appropriate mechanism to attract highly qualified professionals to the management of state-owned companies. The introduction of the outsourcing principle will create opportunities for the efficient use of private sector resources, he said.

Reforming state property management

The Economy Ministry proposed to reform the state property management system by creating a National Management Company (NMC).

The Government drafted a law “On National Managing Companies in the Kyrgyz Republic” aimed at transferring several enterprises with a state share to the NMC.

The National Management Company Open Joint-Stock Company has been established with 100 percent state participation in its authorized capital set at 10 million soms divided into 100 thousand ordinary registered shares with a 100 soms nominal value each. It will contribute to more effective decision-making aimed at attracting additional investments in SOEs in the interests of the country’s economy, Prime Minister Abylgaziyev said.

The State Property Management Fund has to switch from total privatization to effective SOE management and leave strategically important enterprises in state ownership, said Renat Tuleberdiev, the Fund’s head.

The NMC should become the only channel of interaction between the Government and state-owned companies and act as an active shareholder. The NMC will improve corporate governance and the work of the boards of directors, Tuleberdiev said.

The management company aims to create additional value for state assets by managing them in accordance with corporate governance standards adopted in the private sector, he added.

Not a single Kyrgyzstan’s state-owned company has been listed on international exchanges so far because they do not meet certain criteria. “Management of SOE companies should be based on market principles. We want companies to earn more,” Tuleberdiev said.

According to him, the National Management Company and the State Property Management Fund will work in parallel. The State Property Fund will conduct privatization and state property accounting, and will work with state-owned enterprises. The NMC will work with joint-stock companies. With the lapse of time, 106 state-owned enterprises should also become OJSCs, Tuleberdiev said.

According to Tuleberdiev, the World Bank and the Asian Development Bank expressed interest in cooperation with the NMC.

Expert opinion

The creation of the National Management Company is a good idea, but there are several conditions for its effective operation.

There are situations when the State Property Management Fund, as a state body, cannot interfere in the economic activities of enterprises, and the state-owned management company could work but only if there are competent specialists with good experience, economist Tolon Abdyrov told

For instance, after experienced managers came to the Manas International Airport JSC, the company’s income has exceeded 4 billion soms and contributions to the state budget have increased.

Many state companies could resume their activities. But if the authorities appoint “their own people”, the companies would collapse once again, he said.

Practice has shown that the State is not the best manager. For several years now, the State has been trying to sell a controlling stake in Alfa Telecom OJSC, since the company’s revenues are declining.

If managed effectively, the National Management Company would be of great benefit to Kyrgyzstan. But experts doubt that there are good managers among government officials.

Inefficient national holding

In Kyrgyzstan, there is already an example of an inefficiently operating state management company, the National Energy Holding.

Since its establishment in 2015, the holding has been constantly criticized. In 2018, the Government was going to close out the company but then it abandoned this idea. In February 2019, Prime Minister Abylgaziev again promised to liquidate the holding if it does not find financing sources within two months.

In May 2019, the Respublika—Ata-Jurt parliamentary faction demanded the Government liquidate the National Energy Holding because it had not justified its creation. Instead, MPs proposed to reinstate the Ministry of Energy.

The Energy Holding includes nine largest energy companies in the country, which keep the holding financially.

The newly appointed Chairman of the National Energy Holding Board, former MP Aitmamat Nazarov promised to carry out reforms, attract competent managers, reduce the company’s costs within one or two years and begin to pay off external debts in a timely manner.

The energy sector is among the strategic industries in Kyrgyzstan but projects designed to “give a new breath to the country’s economy” are not being implemented. It is often said that there are corruption and gray schemes in the sector.