bne:Invest in Astana - May 2014

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May 2014 www.bne.eu

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Top story

Kazakhstan to outsource part of KZT1 trillion

investment drive to EBRD

The Kazakh government has agreed with the European Bank for Reconstruction and Development (EBRD) on a radical deal that will see the state effectively outsource part of its diversification drive to the multilateral bank.

The plan involves a possible KZT1 trillion (¤4bn) of investment being pushed into every part of the economy, with the EBRD taking charge of a significant part of the decision-making and implementation process. In the first stage of the

cooperation, international financial organisations (IFIs), led by the EBRD, will be given $2.75bn to supervise of a $5bn state-run investment programme. "It's a totally out-of-the-box idea. It's never been done by the EBRD before," says Janet Heckman, director of the EBRD Kazakh office, who will be point for much of the work.

The Kazakh government will allocate the money to the EBRD-led team of IFI specialists, which will then get to "choose the projects we want, and design

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them," says Olivier Deschamps, managing director for Turkey, Eastern Europe, the Caucasus and Central Asia in an interview with bne. "The state then comes in as a co-financier, providing grants and technical assistance, or as a revenue back-up when it comes to PPPs [public-private partnerships]."

For investors, the key point is that the projects will be selected on the basis of their economic and commercial merits only, shorn of the oligarchic or political considerations that often interfere with the commitment of government investment funds.

Memoranda of understanding have already been signed with the European Investment Bank and Asian Development Bank, and the EBRD expects to sign off on its leading role on the deal before the end of May.

Perhaps one of the motivations for reaching out to the EBRD is the disaster that has been the development of the massive Kashagan oilfield. After almost a decade of delays and huge cost overruns, production was finally launched in September last year only for it to be immediately shut down again due to pipeline corrosion from hydrogen sulphur gas. A flagship project for the country, the $50bn project highlights, among other things, the operational difficulties that continue to stymie the government's ambitious plans.

The EBRD's Heckman says there are many synergies to be gained, as much of Kazakhstan's development strategy mirrors the EBRD's own goals. But until now the development bank has operated in parallel with the government's efforts to diversify the economy away from natural resources, acting more like a private equity fund and concentrating almost exclusively on the private sector.

The new deal envisages the bank working hand in glove with the state to tap international best practices to get the reforms working faster and more efficiently. "Our strategy is exactly along the lines of what the Kazakh government wants to promote and work on the most. It is an exciting development because they

want to use the best experts in class globally, which is what the IFIs will be assisting them with," says Heckman, speaking on the sidelines of the EBRD's annual general meeting in Warsaw on May 14. "What they want to do is kick-start reforms."

The idea came from the Kazakhs: after taking over as prime minister at the start of April, the first thing Karim Masimov did was go to the EBRD to suggest joining forces, according to bne sources.

The idea is borne out of several needs. Kazakhstan has been become increasingly liberal in its approach to economic reforms and focused on the need to diversify the economy, in part to provide jobs to its young population. However, the effort is going slowly.

The root problem that this new scheme is attempting to address is the lack of human resources available to the government when it's trying to push through deep, difficult and painful reforms, say the EBRD officials involved with the plan.

The Kazakh government is not intending to hand over complete control of the investment projects, as the ministries will retain an important role and oversee each project together with the IFIs. "All of the projects will be managed by a joint 'council of control' that will include the key ministers and the heads of the IFIs," says Heckman, adding that the EBRD will play a leading role in the day-to-day operations of most of the investment projects.

New modelThe Kazakh experiment could well produce a new model for cooperation between development banks and governments in Central and Eastern Europe and the Commonwealth of Independent States. Many of the countries in the CEE/CIS region suffer from the same problems: they operate largely as a closed shop; there are market practices, but there's also nepotism, insider dealing, corruption and simple inefficiency. This new model is an attempt to fling open the

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windows and let the sunshine of transparency illuminate state investment projects.

"Typically many of these governments have good ideas and have adopted suitable policies, but where they all always fall down is on the implementation," says one EBRD official working in Kazakhstan. "One of the key benefits of tying up with the EBRD is the access to its sophisticated and extensive resources, making use of the EBRD's large team of expert bankers who collectively have centuries of experience. So it's not just about the money. It's about leveraging what we know to see what's needed. An important part is the increase accountability and transparency that agrees together with the government. That will give us the ability to monitor the progress of the project."

Still, there is significant money involved. In addition to the $2.75bn that the Kazakh government is committing to what is in effect a pilot programme, the EBRD says that it will commit its own money and expects to "significantly increase investments into Kazakhstan," says Heckman.

More importantly, the EBRD usually brings in private investment to match its own money, up to a ratio of 80:20 in private money-EBRD money, says Heckman. Just how the money is spent will depend on the specifics of each project. "The money can be used for project financing or for technical advisory in other key areas. The value of the projects could be anything. We work from very small projects for $10m up to $100m," says Heckman.

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Interview

Change to ‘efficiencies of national companies’

Kazakhstan's Samruk-Kazyna sovereign wealth fund is currently undergoing a restructuring process known as a transformation programme which aims to transform the fund from an "anti-crisis operator" a proactive investor. Last month the Kazakh government endorsed a list of assets Samruk-Kazyna should pass on to the private sector by privatising them fully or partially. These are subsidiary companies currently owned and managed by Samruk-Kazyna through national companies in which it holds state-owned stakes.

Samruk-Kazyna says it has analysed 599 companies and enterprises owned by national companies and identified 106 entities that will be put on sale in 2014-2016. The list includessubsidiaries of state oil company KazMunaiGas and other major companies in the energy sector.

A total of 94 non-core subsidiaries of national companies: 28 subsidiaries of railway operator Kazakhstan Temir Zholy, 23 subsidiaries of oil and gas giant KazMunaiGas, 21 of Kazakhstan

Engineering, 10 of Samruk-Energo, seven of uranium producer KazAtomProm, and two subsidiaries of the power grid company KEGOC will be partly or fully privatised in 2014-2016. Stakes in gold-producing Maikainzoloto, the Chokin power-engineering research institute and property-managing FN Management are also planned for sale.

As part of initial and secondary public offerings, stakes of 10% minus a share in KEGOC and of 25% plus one share in Mangistau Power Distribution Company will be sold on the stock exchange in 2014. The following year a stake of 20-25% in Samruk-Energo and in 2016 stakes of 10% minus one share in Kazakhstan Temir Zholy and KazAtomProm, will also be floated. Eight companies owned by Kazakhstan Temir Zholy and four subsidiaries of KazMunaiGas will be fully or partly privatised after 2016.

"Work to privatise assets will be as transparent as possible and we intend to regularly publish information on the sale of our assets to the private sector," Samruk-Kazyna's Financial Director Nurlan Rakhmetov says. Samruk-Kazyna is carrying out a restructuring programme to transform itself from an administrator of state-owned assets into a proactive investor. Thegovernment believes that the privatisation of state-owned assets will boost transparency at state-owned companies and improve competition.

While privatising these assets, the government says it will resurrect plans to float stakes in the parent companies. The "People's IPO" programme, designed to help revive the Kazakh Stock Exchange and encourage the population to invest in stocks, has struggled to gain traction in recent years. "We will put all efforts in implementing this programme within the deadlines set, but there may be delays depending on

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a number of factors: for example, companies' IPOs will depend on market conditions, while the sale of assets on the private sector's readiness to buy these assets," says Samruk-Kazyna's Chairman Umirzak Shukeyev, maintaining caution.

Adamas Ilkevicius, the fund's chief business transformation officer, says the programme of transformation will bring about positive changes in how the fund and national companies are run and push their activities to a higher level. He dismisses the scepticism surrounding these changes and reassures sceptics within the fund that Samruk-Kazyna doesn't aim to achieve the goals at the expense of its workforce. "The main cause of sceptical attitudes to changes is the personnel's conviction that this will inevitably lead to redundancies," Ilkevicius says. "We don't set this aim for ourselves." Instead, he notes, the restructuring programme will boost the value of national companies, diversify Kazakhstan's economy and help maintain social stability. "We want capital to work for the welfare of the country, ensuring social stability and diversifying the country's economy."

Moreover, the business transformation supervisor says, the fund's objective is to create a pool of talent, which is open to innovation and then train and retrain people in it so they can realise their potential. This will help the fund to become a "locomotive of progress" by assuming the role of a proactive investor: "If we look a few years back, Samruk-Kazyna performed the job of ‘anti-crisis operator’, he says. "Now the fund is readying to become a catalyst of growth of national welfare," Ilkevicius explains.

However, Ilkevicius admits, it'll be hard to measure the financial outcome of the

transformation programme because "we expect tangible and non-tangible results."

"We expect that national companies will become more structured, more agile, more resilient and open to change," Ilkevicius tells bne. "That means they will be more competitive on the markets and, of course, this will yield some financial results."

By comparing Kazakhstan's national companies to their foreign counterparts, Samruk-Kazyna has identified their weaknesses and potential for improvement. "We did some previous benchmarking to understand where economic efficiency can be found in the activities of these companies," Ilkevicius says. He cites the findings of the evaluation of Kazakhstan Temir Zholy, conducted by a Western consultancy, which suggest that the company could save up to KZT20bn a year after the transformation. "We have some indications that give us some confidence that this is a right direction for our work," he tells bne.

Ilkevicius explains that growth rates at national companies don't meet the shareholder's expectations, which is why "the fund has assumed the role of methodologist that sets the tone and pace of transformation at the companies". As a proactive strategic investor the fund will now give national companies freedom of action and will get involved only when they fail to achieve set objectives, Samruk-Kazyna's director of restructuring says: "All the assets which are national companies mainly need to be managed more actively. That doesn't mean operational intervention into the daily activities of the companies because they have their own boards of directors and executive management teams."

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Kazakhstan will host one of the biggest events in the world of agriculture business, the Agricultural Investment Forum of Kazakhstan in June. The event will be organised by KazAgro National Management Company and Adam Smith Conferences, with the full support of the Ministry of Agriculture of Kazakhstan.

This event will showcase opportunities to invest in the agricultural sector of Kazakhstan, which are being created through the implementation of the Agribusiness 2020 national programme. Agribusiness 2020 is a wide-ranging and ambitious government programme intended to introduce unprecedented measures of support for the development of the agro-industrial complex in Kazakhstan with the aim of increasing competitiveness while at the same time lowering risk and raising the investment appeal of the sector. The four key dimensions of the sector envisage:

• The financial support of the sector, introducing new financing mechanisms and instruments, such as investment subsidies, insurance and loan guarantees;

• Improving access to and affordability of products and services for companies within the agricultural sector;

• The development of the state system for support of agricultural producers;

• Raising the efficiency of the system of state management of the agricultural sector.

Key agrarian officials and leading agricultural producers and related companies, both state-run and private, will attend the forum on June 17-18. In addition to presenting their strategic priorities and the opportunities for cooperation, Kazakh participants will hold one-to-one meetings with journalists and foreign investors attending the event.

Kazakhstan is one of the world's top grain producers and exporters. It produced 18.9m tonnes of grain last year, including 14.5m tonnes of wheat. The country is also a major producer of oil seeds, and exports them to Europe, Russia, China and Central Asian countries.

Meat production is one of the main agricultural sectors in Kazakhstan. KazAgro has developed a programme to boost beef exports, which will be carried out until 2020. By 2020 it expects to increase meat output and export 60,000 tonnes of beef, mainly to Russia.

Kazakhstan's landmass is the ninth largest in the world, of which 80% is of agricultural use. With the growing global demand for food, the Kazakh agricultural sector offers vast opportunities for investment, including from foreign countries.

The Abgrobusiness 2020 programme also envisages government support to investors interested in developing projects in Kazakhstan. The incentives

Feature

Kazakhstan to host agricultural investment forum in June

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include investment subsidies worth between 20% and 50% of total investment, subsidies for interest rates on loans and the lease of agricultural vehicles and equipment and subsidies worth up to 50% of forage, veterinary preparations, fuel, seeds and pedigree livestock. Under the Investor 2020 programme, investors will receive government support in the form of up to 70% reductions in corporate, social, land, property and transport taxes, and exemptions from customs duties on equipment and spare parts imported as part of an investment project.

In April, Economy and Budget Planning Minister Yerbolat Dossayev announced a package of incentives for investors and said that the government would cover up to 30% of investors' costs after they put their facilities into operation.

The government will also exempt investors from corporate tax for 10 years, he said. That offers them the chance to save on the reduced rate of 10% agricultural producers pay now.

Kazakhstan is also keen to reassure investors that it plans no nasty surprises: tax, migration and environmental protection legislation will remain intact for 10 years. Investors will also be forewarned about long-term changes to government-set tariffs and prices.

The package of incentives also includes 90-day visa-free travel for investors from OECD countries and top managers of their projects. They will be free to import foreign labour during project development, plus a further year after commissioning.

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Kazakh uranium output better than expected in Q1

Kazakhstan produced 5,380 tonnes of uranium in the first quarter of 2014, which is 2% above the target. The country produced 4,979 tonnes of uranium in January-March 2013.

The KazAtomProm national company, a world leading uranium producer, produced 2,980 tonnes of uranium in between January and March against 2,785 tonnes in the same period of last year. The figure includes the output of KazAtomProm's subsidiaries, the company said.

The Ulba Metal Plant, a subsidiary, produced 411.8 tonnes of beryllium and 23.1 tonnes of tantalum products against 606 tonnes and 54 tonnes respectively.

The MAEK-KazAtomProm power plant generated 1,368m kWh of electricity and 1,088 GCal of thermal power for consumers in the city of Aktau and Mangistau Region (1,242m kWh and 983 GCal in the first quarter of 2013). It also desalinated

292m cubic metres (cm) of water, including 2.41m cm of potable water (267m and 2.24m cm). This meets the region's demand for power and water, the company said in a press release.

In line with the company's programme, KazAtomProm continued work in the sphere of conversion, enrichment and production of nuclear fuel, the company said without elaboration.

KazAtomProm's another subsidiary, Astana Solar, produced 9,011 panels with a capacity of 2.1 MW, the company said. The panels received certificates of conformity with IEC 61215-2005, IEC 61730-1 and IEC 61730-2 standards from the International Electrotechnical Commission.

The company said that Kazakh solar panels had an efficiency of 32%. The efficiency of doubled-sided panels is 34%, which translated into a 28% efficiency for customers.

The first quarter production figures for KazAtomProm came as a location near Lake Balkhash was mentioned as the site of a new nuclear power plant.

Tengrinews cited Mazhit Sharipov, chairman of the Committee of Nuclear Energy, as saying that the lakeside village of Ulken was the “most favourable place to accommodate a nuclear power plant as it is located in an area of power shortages and at the same time has an extended grid to transmit the power to other places.”

President Nursultan Nazarbayev has committed Kazakhstan to a nuclear-energy future saying that “natural gas is a waste of resources” while “nuclear is a clean energy we have to take advantage of.”

Sector

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ICD and EBRD sign Memorandum of Understanding to support SMEs in Egypt, Jordan, Morocco and Tunisia

The European Bank for Reconstruction and Development (EBRD) and the Islamic Corporation for the Development of the Private Sector (ICD) signed a Memorandum of Understanding developing joint collaboration to support SMEs in Egypt, Jordan, Morocco and Tunisia. Under the terms of the memorandum the EBRD and the ICD will aim to establish a $120m investment fund, to develop and to financially support SMEs across the southern and eastern Mediterranean region (SEMED) through innovative transaction structures. Under the Fund, various financing products will be used such as equity and quasi-equity. Leveraging on their expertise, the two institutions will contribute to the SME Fund and will explore additional institutional investors and donors to provide adequate resources to support SME financing in the region and the technical assistance needed.

The EBRD President Sir Suma Chakrabarti said: “We are delighted to launch our collaboration with ICD based on their knowledge of the region and on our successful track record in SME financing.

Hildegard Gacek, the managing director for the SEMED region, will lead the implementation of this vehicle, which will improve access to finance for SMEs – the backbone of the economy and fertile ground for job creation. The CEO and General Manager of ICD, Mr. Khaled Al-Aboodi said on this occasion: “ICD has put its mission statement in practice for the SME sector by engaging in innovative strategies and alliances that will serve to strengthen SMEs in the Middle East and North Africa, thereby enhancing the impact of socio-economic development. The SME Funds Program, focusing on launching and managing investment vehicles with a successful track record, is also providing technical assistance to financial institutions and investee companies. The programme is not only supporting access to finance but also favoring inclusive growth.”

About ICDICD is a multilateral organization and a member of the Islamic Development Bank (IDB) Group. The mandate of ICD is to support economic development and promote the development of the private sector in its member countries through providing financing facilities and/or investments which are in accordance with the principles of Shari'a. ICD also provides advice to governments and private organizations to encourage the establishment, expansion and modernization of private enterprises. The SME Funds Program of ICD, managed by a dedicated team of experts, is supporting ICD’s SME development strategy across member countries.

Corporate statement

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ICD contact: Nabil El-AlamiTel : [email protected]

About the EBRDThe EBRD is investing in changing people's lives and environments from central Europe to central Asia and the southern and eastern Mediterranean. The EBRD invests in projects, engages in policy dialogue and provides technical advice that fosters innovation and builds sustainable and open-market economies.

The EBRD provides funds for well-structured, financially robust projects of all sizes (including many small businesses), both directly and through financial intermediaries such as local banks and investment funds.The Bank works mainly with private sector clients, but also finances municipal entities and publicly owned companies.

EBRD contact: Nibal Zgheib Tel: +44 7841504995 [email protected]

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Chart

Kazakhstan, Russia and Belarus created the Customs Union in 2010, which is expected to be transformed into the Eurasian Economic Union in 2015. The Kazakh government presents the integration project with Russia and Belarus as advantageous for Kazakhstan, stressing how much the country's exports to these countries has increased since the creation of the Customs Union. However, in promoting the Customs Union and now the Eurasian Economic Union Astana

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Imports on the rise.

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has failed to draw attention to the dynamics of the country's imports from these countries or the trade deficit with them. The chart shows that while exports are still somewhat higher in 2013 than they were in 2010, they started falling in 2013, but imports from both countries have rocketed since the establishment of the Customs Union. The trade balance with Russia and Belarus is not in favour of Kazakhstan and the gap is widening.

Kazakhstan's foreign trade with Customs Union member states Russia and Belarus in 2010-2013

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Kazakhyms Group sells stake in powerplant The Kazakhyms Group announced the completion of a transaction with Samruk-Energo JSV on the sale of 50% of shares in the Ekibastuz TPP-1 for around $1.25bn.

Ekibastuz TPP-1 is the largest coal-fired power plant in Kazakhstan. The enterprise has launched a modernization programme, which will improve the performance of the plant to the design capacity of 4,000 MW compared to 2,500 MW at the time of purchase. Currently, the power plant's capacity is 3,000 MW.

Kazakhyms acquired Ekibastuz TPP-1 in 2008 for $1.26 billion. In 2010, the company sold 50% of its shares to the Samruk-Kazyna welfare fund for $681 million. Later the Samruk -Kazyna fund handed shares in Ekibastuz TPP-1 on to its subsidiary Samruk -Energo.

Two nuclear plants instead of one There is a possibility that two nuclear power plants will be built in Kazakhstan instead of the long-awaited one. Chairman of KazAtomProm, Kazakhstan national nuclear company, Vladimir Shkolnik, talked about the plans to Astana TV channel.

"Yes, it is possible. But, then as you understand, there is a financing issue to it that needs to be addressed. It is a serious and long term investment," Shkolnik said.

The committee initiated by President Nazarbayev has identified two possible locations for the construction: in Kurchatov and near Lake Balkhash. Research and designing work is at the completion stage. "And all the subsequent procedures will go in

hand with the IAEA standards. All the requirements will be met and the decisions will be made adhering to the best international practices," the head of the atomic company said.

He added that despite the earlier planning to construct the plant in Aktau, in the country's west, the region had been dropped as a possible location. "We are not considering Aktau for the moment, but it is still on our list,” Shkolnik said.

Vladimir Shkolnik is among the 17 professionals from all over the world who have been selected to consult the organizers of the next nuclear security summit that will be held in Washington D.C. in 2015.

New law on media restrictions in time of crisis introducedkazakhstan has legalized the use of tightened control and temporary restrictions of the media during a state of emergency, Tengrinews reports citing Interfax-Kazakhstan.

The regulation was based on Clause 1 of Article 16 of the Emergency Situations Law that legalizes "control of the media via demanding compulsory provision of copies of materials for approval prior to their release" in case a state of emergency is declared in relation to an emergency situation of social nature.

Emergency situations of social nature include wars, local or regional conflicts, famine, large strikes, mass disorders and violence.

The new rules allow the command centre in charge of the emergency site to "exert control over media outlets." To do so the centre is supposed to send out requests to owners of media outlets during one day after the emergency-

News in brief

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related limitations are introduced asking them to compulsory provide copies of printed articles, radio and TV programmes prior to their publication and obtain the centre's approval.

“After receiving the request, owners of media outlets are obliged to provide the command center with copies of printed, radio and TV materials one day prior to their release for approval of their content during the whole period of the state of emergency. In case it is impossible to provide the materials one day before their release, like in case of breaking news, the copies have to be provided immediately before their release,” the document reads.

Government aims to boost economy with cash injectionThe president decided to allocate from the National Fund KZT 1 trillion to support the economy of Kazakhstan.

"Owing to instability is deepening in the global economy, it is necessary to find new measures in the implementation of the economic policy. New approaches, new teams are needed for effective actions both domestic and international. At the moment most of the external financial markets are closed to us, so it is necessary to use more internal capabilities. I have decided to allocate from the National Fund KZT 1 trillion to support the economy," said the president.

Initially there will be allocated KZT 500bn and then another KZT 500bn. It will revive economy and business, continued the president.

Pension funds become one Kazakhstan-based pension funds have united to form a state-run Single Pension Fund, a Tengrinews.kz journalist reports, citing Ruslan Erdenayev, vice chairman of the Fund’s Managing Board as saying at a round-table discussion.

All the savings (including the investment income) of all depositors have been transferred from privately-held funds to the single entity. Depositors are already able to obtain a statement on their savings at any of the Fund’s outlets.

Altogether, there are 9.7 million accounts, with the overall savings amount standing at $21.3bn. Kazakhstan’s Central Bank manages the assets.

Tengrinews.kz reported, citing the country’s Central Bank Governor Kairat Kelimbetov as saying in the Majilis (lower chamber) November 13, 2013 that all the pension assets would be united into the state-run single pension fund before April 2014.

Kazakhstan’s President Nursultan Nazarbayev instructed the Government late January to merge all the pension funds into a single government-owned entity.

As of December 1, 2012 there were 11 pension funds operating in Kazakhstan, with combined savings standing at around $21bn.

Before the decision on merging all the country’s private pension funds, PM Serik Akhmetov said that “the current service fee rates applied by the country’s pension funds have been reducing the people’s pension savings by 26%”.

“According to experts, within the average saving period, the applicable service fee rates have been slashing people’s savings by about 26%. It is an excessively high rate. Given all that, the decision to launch a single pension fund [to replace all the pension funds operating in Kazakhstan] was very reasonable on the part of the Government”, the PM said May 5.

“This scheme of managing has brought about a number of problems … It’s obvious that private pension funds have failed to cover all working people with saving plans”, the PM admitted at that time.

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bne:Invest in Astana - May 2014

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