Kyrgyzstan: why sell profitable state-owned mobile operator?

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BISHKEK (TCA) — Kyrgyzstan’s major mobile operator Alfa Telecom CJSC (MegaCom trademark) will be sold in the near future, Prime Minister Sapar Isakov said at a press conference in Bishkek on December 7.

The State Property Management Fund of Kyrgyzstan (SPMF) could not check a potential buyer, and the Government will hire a foreign law firm to deal with the sale of the company’s assets. The State owns 100% of MegaCom shares.

Unsuccessful deal

After unsuccessful attempts to sell the company through auctions, on September 25, 2017, the SPMF held a tender for the sale of 100% of Alfa Telecom. Only one application was submitted by a Russian citizen, Elena Nagornaya. She agreed to buy the company for 13.5 billion Kyrgyz soms plus 7 percent commission (14.5 billion soms or more than $200 million in total) and assume responsibility for the company’s possible lawsuits.

A special commission confirmed her payment capacity. However, local journalists found out that Nagornaya was engaged in the import of tea and coffee from Africa to Russia and her own companies do not show impressive results. Nagornaya visited Kyrgyzstan with her lawyers, then asked for some time to think, and disappeared.

The SPMF did not conclude any contract on MegaCom with Nagornaya. Later it turned out that she wanted to take the company in trust management, and buy it in three years only. According to the SPMF, privatization of the company should be conducted through direct sale, and the law does not allow accepting Nagornaya’s terms. On November 15, the SPMF officially announced that negotiations with Nagornaya on the sale of MegaCom were terminated.

There was an opinion that Kyrgyz authorities were not interested in selling MegaCom to foreign investors, but wished to sell it to someone from their entourage. Alfa Telecom is one of the largest companies in Kyrgyzstan. Since the beginning of the year, the company’s profit was 1.27 billion soms.

However, experts disagree with this opinion. They believe that Kyrgyzstan has not improved the investment climate to attract foreign investors. Perhaps investors waited for the results of the presidential election (of October 24), because they need political stability and confidence in the safety of their investments.

Negotiations with international companies

The Government will not lower the price of MegaCom set in March, Chairman of the State Property Management Fund Duishenbek Zilaliyev told MPs on December 5. Earlier, at his farewell press conference as the head of state, then President Almazbek Atambayev said that the price of MegaCom should be reduced by 25-30 percent.

There are no companies willing to buy MegaCom now, but the SPMF is negotiating with international companies ready to act as intermediaries in its sale, Zilaliyev said.
The starting price for the auction scheduled for June 5, 2017 was 13.5 billion soms (about $195 million) and was decreased by almost 1 billion soms since the previous auction in December 2016.

However, the auction did not take place, as did the previous ones.

The initial price of MegaCom shares was 19.7 billion soms (about $306 million) in May 2016. The price was reduced to 14.255 billion soms for the next auction scheduled for December 16, 2016, but no applications were submitted.

The Government will discuss what to do with MegaCom when considering a new privatization program, Deputy Prime Minister of Kyrgyzstan Tolkunbek Abdygulov said.

The sale of the company is included in the privatization program for 2017, which will expire on December 31 this year. The Economy Ministry is developing the Privatization Program for the following years.

Penwell disputes with Kyrgyzstan

At the end of August, Penwell Business Limited submitted a letter to the Government of Kyrgyzstan on pre-trial settlement of the issue on MegaCom, the State Property Management Fund said. Penwell, as the investor and lender of MegaCom, demanded $200 million compensation in an investment dispute with Kyrgyzstan. The company applied for compensation for the expropriation of its investments in the telecommunications operator MegaCom.

Kyrgyzstan’s Government confirmed the international arbitration, adding that the position of Kyrgyzstan in this dispute is good. The case was submitted to the Center for Judicial Representation. Since Penwell did not file a lawsuit in court but appealed to the Government with a letter, there is a pre-trial hearing.

According to Penwell, MegaCom was established in 2006 on the basis of BiMoCom LLC fully funded by Penwell. After the raider seizure in 2008, Maxim Bakiyev’s entourage re-registered the share of Penwell, and the assets of the mobile operator were transferred to a clone, Alfa Telecom CJSC. Even after the 2010 ouster of Kyrgyz President Kurmanbek Bakiyev, Maxim Bakiyev’s father, Penwell failed to regain the company’s ownership.

Former Prime Minister of Kyrgyzstan, Temir Sariyev, believes that it is necessary to return to negotiations with Penwell to avoid the risk of international litigation.

Revenues decreasing

Some politicians oppose the sale of “a goose that lays golden eggs”, but the Government stressed that MegaCom revenues are decreasing every year.

The decision to sell the company was not connected with the financial difficulties of the country, the Government explained. Profits from voice traffic are currently falling in the world cellular market and the competition between telecom operators is increasing.

Although MegaCom is now leading in terms of profitability and other criteria in the local cellular communication market, the current legislation does not allow the state owned companies, including Alfa Telecom, to develop at a proper level and compete with private telecom operators.

The Law “On public procurement” provides for disclosure of information on the planned amounts and subjects of procurement, and the company is forced to open the specifications and purpose of the purchased equipment and services on the public website of the Finance Ministry, which allows market competitors to monitor the company’s strategic development plans and play ahead of time. At the same time, this requirement does not apply to private companies.

There are currently four cellular companies operating in the Kyrgyz market, and only one of them, MegaCom, is in unequal conditions compared to private companies.

Kyrgyz MP Dastan Bekeshev suggested transferring the company to trust management, so that the company’s profit could increase due to staff cuts and introduction of new technologies. The SPMF is considering this option, Zilaliyev said.

In the market conditions, the state should not have commercial assets in the areas with tough competition. The state presence is necessary if the private sector cannot create a competitive market. The private sector and competition are highly developed in the telecommunication sector of Kyrgyzstan.