Sander Thoenes Award - ArticlesGoing once, gone, as the Kazakhs say. Kazakhstan has sold off 30 of its largest state enterprises in the past year, including prime oil producers and metal smelters, coal mines and power plants, sectors that took European governments years to sell - if they dared touch them at all. Another handful of big oil and gas companies, two mines, and a dozen other enterprises are to go under the hammer in the next few months.
“This is not a government afraid of major steps,” said Mr Michael Wilson, resident partner of Baker McKenzie, the law firm. “Business can be done, if at times at frightening speed.”
Speed differentiates Kazakhstan’s privatisation more than anything. One company asked a consultancy to submit a proposal for a three week legal and commercial investigation for a bid. Two days later the consultancy found out that the company had already won the bid.
The sales have provided a life-saving injection of cash into many comatose enterprises, such as the rundown network of power plants that has left Kazakhstan’s 17m people in the cold and dark in recent power failures.
“Our energy sector is in deep trouble,” said Mr Yusif Duberman, deputy chairman of Kazakhstan’s privatisation committee. “When they are sold to private companies with deep pockets, they revive. People get their salaries paid, production revives.”
The sales have been marked as much by speed as by scandal. Some very large and viable enterprises have been sold off quietly for as little as $20m, giving rise to accusations that additional sums passed hands under the table. Some deals have come undone as quickly as they have been made, and even transparent tenders have fallen victim to a political tug-of-war, leaving investors frustrated and suspicious.
“In the end it’s probably a plus,” one western lawyer in Almaty, the capital, said. “Privatisation is lurching along. But progress is greased by bribes, chaos and threats of violence.”
A majority stake in KazKhrom, a conglomerate of two large ferro-alloy smelters and a chrome mine, sold for as little as $36.8m last year in a closed tender without serious competitive bids. Its new owner, Eurasiabank, told shareholders that KazKhrom made a profit of $143.5m that same year. Eurasiabank, funded by Trans-World, the London-based metal trader, also bought majority stakes in an alumina plant for $20m, and in an iron ore mine for $46m.
“That’s filthily cheap,” said Mr Don Nicholson, a government adviser for Deloitte Touche, the accountants. “It does not smell right.”
“We don’t put great value on the sum that ends up in the budget, but on the investments into the enterprise,” Mr Duberman said. “We left ourselves vulnerable to accusations of selling the nation’s wealth for pennies,” he added. “But if we don’t sell the enterprises cheaply they will go to waste - and that means they are completely worthless.”
Eurasiabank pledged to invest $398m in KazKhrom, but privatisation experts object that no audit firm has been hired to keep track of investments. “What independent body will verify whether the money pledged is actually invested?” Mr Nicholson said.
“Shedding more light on things like this,” Mr Nicholson added, “would be in their best interest. Every foreign investor is asking the same questions.”
One thing the Kazakhs have learnt is that open, transparent tenders attract higher bids than sales behind closed doors. A highly public sale of the Yuzhneftegaz oil production association to Hurricane Hydrocarbons of Canada netted $120m, plus $280m in investments that will be monitored by independent auditors. Exxon and Texaco, the US oil companies, are expected to bid even more for the Atkyubemunaigaz association when bids are due on November 1.
Power struggles within the government put even these deals at risk, however. When Samson International, a US oil producer, won a tender for Yuzhneftegaz, the ministry for oil and gas, which opposed the sale, insisted that existing Yuzhneftegaz joint ventures which were pumping at the northern half of the field be excluded from the sale. Samson walked out; Hurricane is still negotiating with the venture partners.
At times, officials took months to negotiate a contract after they had selected a winning bidder. “A bid is not the last and final offer here,” said Mr Don Templin, resident partner for Price Waterhouse. “The advisers were asked to clarify the bid - try to get better terms. I don’t know whether that’s worse or better, but it’s different from what the western companies had expected.”
Privatisation experts in Almaty say that officials have become less frantic, more organised and more realistic in recent tenders.
“I don’t think they ever really understood the concept of due diligence. We’ve had a hard time teaching them that a share purchase agreement is more than four pages long,” one consultant said. “They now understand that once they sell a company they sell the whole thing - assets and liabilities - and they understand they no longer have control over what goes on there.”
The biggest drawback for Kazakhstan has been the lukewarm interest among foreign investors. Even some open tenders, such as for the Shimkent refinery, drew only one serious bid.
“They could have got better bids,” one western lawyer insisted, “by making the process more defined, by adhering to the few rules that exist.”
