A Solid Blueprint

Over the next 18 months, the European Bank for Reconstruction and Development (EBRD) intends to invest over $1 billion in Kazakhstan. What are its investment priorities?

There are three basic areas that we will be focusing on in Kazakhstan. One is diversification in support of the non-resources sectors; we are already the largest investor in this area and will continue to support it through financing projects that enhance corporate sector productivity, in particular those that improve the business environment, modernization in the agro-business sector and the entire value chain, and that facilitate growth in the SME sector. We will also work intensively with the banking and non-banking financial sectors, particularly with micro-credit and SMEs. The second pivot of the strategy is balancing the role of the state and the market by supporting the growth of private enterprises. We will also be working with public enterprises to help commercialize them, boost efficiency, and bring the private sector into what was state dominated, primarily through policy instruments like PPP and fair and transparent procurement policies. The third pivot of our strategy is the green economy, through the promotion of low carbon growth and energy efficiency. We worked very closely with the government of Kazakhstan and the Ministry of Environment and Water to put in place the new energy strategy, and we will be supporting this as the top priority through projects in energy renewables, agriculture waste, waste management, transport, and other sectors.

With the support of the EBRD, in 2013 Kazakhstan adopted a feed-in tariff law supporting the use of renewable energy sources. How important is the law for furthering Kazakhstan’s planned transition to a green economy?

We consider this to be a big success and we are really quite impressed with the way the government has moved forward in a very responsible direction. I think that with Astana 2017, there are a lot of areas where Kazakhstan can really be an example, not just to the surrounding countries but also to the Western world. The ministry has done a superb job of getting the movement off the ground and gauging the best consultants globally for the project. The EBRD is also contributing to the green economy’s transition through numerous projects across transport, urban municipal transport, district heating, wastewater, power, and more. It all fits very nicely under the green economy theme, and it’s very timely with Expo 2017 coming up. We have seen a lot of interest from foreign investors in all of these projects. I recently met with delegations from Spain, France, Germany, and the US, and quite a few of them are particularly gearing their trade missions toward renewable projects and infrastructure development around green economy themes. Green energy is really gaining traction because Kazakhstan is one of the few economies where GDP is growing relatively rapidly and there are large infrastructure projects to undertake. We are highly optimistic about the opportunities available to foreign investors here in Kazakhstan.

In which non-energy sectors do you see the greatest opportunities for foreign investment?

I’d say the infrastructure sector because of the massive size of the country. There are huge road projects underway. The EBRD has financed a portion of the Shymkent-Tashkent road, which is part of the West China-to-West Europe project. In terms of airlines, I believe there is room for a regional firm to complement Air Astana on routes that airlines do not cover. There are huge opportunities in the agribusiness sector, too, that I think have not yet fully been exploited. In the southern part of the country, there have been quite a few agricultural missions from Western Europe related to irrigation systems, green houses, and other projects. In terms of manufacturing, the key for Kazakhstan will be the ability to open up the market to surrounding countries; Kazakhstan has just 17 million people, but if you start to include countries like Uzbekistan and the surrounding Central Asian countries into its market dynamics, then you have a much broader base for production. Many people also overlook the services sector. Kazakhstan has a highly educated populace, together with over 10,000 people who have gone through the Bolashak program and have studied at the best universities in the US and Western Europe. In Almaty, you will find the big four accounting firms, and each has between 400 and 600 people on staff. This country is used as a service center for many of the other Central Asian countries, as well as Mongolia. Combined with the solid air transport offered by Air Astana, there is a real potential to make Almaty into a services center.

How could Kazakhstan further leverage PPPs to its advantage?

To be successful in PPPs, you really need open and transparent international tendering, a balanced contract between the government and the operator, and the engagement of both local and international consultants for the tender and PPP preparation. In Kazakhstan today, the key issues really are—and there has been considerable progress with new legislation that came into effect in 2012—the inability to pursue international arbitration. For PPPs to truly be successful, one needs recourse to international arbitration, and also less state support. Projects essentially need to be commercially viable. What we have suggested to the government is to take two or three of the large projects that would particularly appeal to international attention and then work through the remaining issues with those projects. I think that the first real test for PPPs could well be a project like the Almaty Ring Road (BAKAD), which is something that will really attract the big international players—we need proof that Kazakhstan is seriously open for PPPs and then the investors will come themselves.

What steps need to be taken to make Kazakhstan’s capital markets more attractive?

The first thing needed is trust amongst the banks. Right now, there is a real problem in terms of tenge liquidity, rendering medium- or long-term borrowing very difficult, and of course the successful growth of SMEs requires longer-term funding available to finance the investments. First of all, by cleaning up the banking universe, the banks will establish trust amongst themselves, enabling the healthy growth of a real money market among the banks. Then, the ability of companies to raise funds in tenge is absolutely critical. What we are finding now is that many companies are primarily borrowing in dollars, which is unsustainable in the long term due to exchange rate risks.

Central to the government’s 2050 strategy is transforming Kazakhstan into one of the world’s 30 most-developed countries. What do you consider the key steps in realizing this?

It is quite an ambitious goal, but not impossible. None of the economies that the bank operates in currently rank within the top 30, but several are now actually just outside that group and in the top 40; that would include the Czech Republic and Slovenia. If you look at the tables, Kazakhstan has actually made quite a lot of progress over recent years. In terms of per capita income, it now ranks between 55th and 70th in the world, depending on the metrics. Investments in oil and gas production and the rising price of hydrocarbons have contributed to Kazakhstan’s rise; however, it cannot reach the levels of Qatar or Norway due to population and reserve size, which makes it all the more important that Kazakhstan works to diversify its economic matrix, and not just diversification in terms of production away from non-oil and gas, but also in terms of regional diversification. Currently, there is a huge disparity between what you find in Astana and Almaty and in the regional centers, so it is critical to develop Kazakhstan more evenly.

What opportunities are there for private investment in Kazakhstan’s regions?

Places such as Shymkent are growing rapidly—there are around 1 million people in the city and the surrounding areas. Were you to open up border controls and make import/export to Central Asia easier, I think there would be even more growth in the Shymkent area. There are quite a number of multinationals already in the region, for instance in the cement segment. Another region, for example, is Kyzylorda, which has a very progressive mayor who was previously in Aktau and who has set up a foreign investor center to actively promote the area. CNPC and PetroChina are located there, too, and there are huge opportunities in the float glass area because of the sand necessary for glass making. The region also boasts half of the minerals on the periodic table, while the Baikonur Cosmodrome is a tourism boon. Kazakhstan has a lot of opportunities for attracting tourism to the region. Delhi is only a three hour and 20 minute flight from Almaty, and currently the only place close to India for skiing is Kashmir. If a second ski area were opened up, I truly believe it could attract regional Asian skiers.

What is your outlook for the EBRD and Kazakhstan’s economy as a whole?

On the economy, we recently moved up our forecasts for the year. Over the medium term, we expect growth in the 5%-6% range over the next couple of years. And we believe it can be sustained at least in the medium term by future developments in oil and gas; Kashagan is coming online soon. The risks are, of course, a possible drop in oil prices and a continuing overhang of non-performing loans. But, in general, we are quite optimistic, and our outlook for both Kazakhstan and the EBRD is particularly positive.

© The Business Year – January 2014