Flying the Standard

What role do you think diversification will play in bringing Kazakhstan into the future, especially in terms of the government’s 2050 Strategy?

I think that all resource-based economies, whether it is Qatar, Kazakhstan, Saudi Arabia, or Norway for that matter, face challenges because of their heavy dependence on a few commodities, the price of which is market driven. This also makes these economies vulnerable to economic shocks if commodity prices go down. Since economic growth is so linked to changes in the price of oil and gas, or whatever commodity a country depends on, the question is how to sustain economic growth. How do you keep on providing services to your people while you are on a downward cycle? This is always a challenge. And different countries have different responses to this question. A diversified economy is perhaps the best guard against market volatility. Other countries have used the higher revenues earned during up-cycles and invested them wisely for rainy days.

How do you think public-private partnerships (PPPs) will be used to further leverage the advantage of the country?

There are two reasons to undertake PPPs, i.e. projects based on PPP: first, to supplement fiscal budgets and, second, to improve the delivery of public services. Kazakhstan epitomizes the need for PPPs. It is a vast, landlocked country, and faces challenges related to insufficient and aging infrastructure. Given its vastness and need for connectivity, it requires new and better infrastructure, including roads, railways, airports, airlines, power, and gas distribution networks. This requires a lot of money. So far, the infrastructure has been funded and provided by the government or public agencies. They all face fiscal constraints. Thus, PPPs should be seen not as a replacement or substitute for the government, but as an off-balance sheet tool to increase investments in infrastructure and other areas of interest. The second important reason, sometimes considered even more important than the first, is to improve the quality and efficiency of public services. That means that PPPs allow a country to not only improve the quality of public services, but also to build these services in the first place. Well-structured PPP projects not only help rationalize project costs, but they also help reduce project completion times. PPPs are a great mechanism to avoid the building of white elephants, since private sector investors seek a return on their capital. This is why nearly every country in today’s world has some sort of a PPP program, including Kazakhstan. So, you may ask, if PPPs are such a great tool, why there are only a limited number of examples of successful PPPs in the developing world? The answer is that PPPs work under stable and predictable frameworks and require strong commitment from governments. IFC intends to facilitate infrastructure development through PPP advisory work and direct investments with both private sector and sub-national sponsors. In fact, IFC, jointly with the EBRD, is advising the government on its first large-scale PPP project for the Almaty Ring Road, which we hope will open up another opportunity for private capital to invest in the infrastructure sector in Kazakhstan.

IFC is advising on corporate governance. How would you rate the enforcement of sound corporate governance locally?

IFC is committed to improving corporate governance as a way of promoting sustainable private sector investment and strengthening capital markets in emerging markets. We see that corporate governance development is a pressing issue for Kazakhstani companies due to many factors, including the intention of companies to go public, attract domestic and foreign investment, and enhance operational efficiency and image. The outlook for corporate governance standards implementation could be considered positive because both the government and the business community recognize the necessity for improving corporate governance practices in Kazakhstan. IFC is a recognized global leader in the promotion of corporate governance standards and has developed a globally respected and well-tested methodology for evaluating corporate governance practices, risks, and opportunities. In Kazakhstan, IFC, together with its two partners, offers corporate governance services for companies and financial institutions, including thematic training, tailored diagnostic reviews, consultations on specific corporate governance matters, and in-depth assessments with implementation plans. In our work with companies we apply the IFC Corporate Governance Methodology and its tools customized to the needs of companies, including for listed companies, family-owned businesses, financial institutions, privatized companies, and state-owned enterprises. This methodology provides a framework for an examination of the current state of corporate governance, followed by an identification of areas for improvement, and support in the implementation of key recommendations. Good corporate governance is about far more than minimum compliance with laws and regulations. When implemented, good corporate governance brings significant benefits to companies and their long-term sustainability. We therefore believe that it is important to develop practical ways of encouraging companies to do more than comply with regulations in order to bring them the very real benefits good governance brings. One way to assist companies in this regard is the Corporate Governance Scorecard, a simple tool developed by IFC that allows companies to conduct a systematic analysis of a company’s governance situation.

Where do you see the challenges in Kazakhstan when it comes to diversification and training?

The government here has many programs to improve education. When we think about education, we usually think about higher education, such as universities. They are very important aspects, but one of the challenges that we always face is with vocational training that is needed to improve people’s skills. I think partnerships between industry and education institutions are very important to find out what is required and what can then be taught at a university or an institute level, which then make these people employable as they go forward into the workforce.

Kazakhstan’s banking sector is stable, but there are issues with 30% of the loan book. What needs to be done to overcome this challenge?

A well-functioning financial sector and improved access to finance remains an important element of the growth and diversification agenda. Improved access to finance is essential for the growth of the non-oil sector growth in line with the government of Kazakhstan’s efforts on diversification. The government has done a number of things to restore the health of the banking sector. It has recently announced the privatization of the banks that needed to be rescued during the financial crises. A new legal framework governing bankruptcy and insolvency is also being developed to address problems of highly indebted firms—an essential foundation for the resolution of NPLs. Efforts are needed to ensure proper loan valuation and provisioning, and decisive actions are required to reduce bad loans and replenish bank capital where needed. An important challenge is the further development of credit infrastructure—pledge and real estate registries, microfinance, factoring, leasing, and venture capital—and the deepening of the local currency bond market so that multiple sources of financing for the private sector at competitive prices can be developed. The development of non-bank financial intermediaries (NBFIs) is also important. In Kazakhstan, NBFIs are significantly underdeveloped compared to countries with comparable income levels. NBFIs are usually more effective than commercial banks in market segments delimited by the characteristics of borrowers (smaller firms, rural areas) or by type of financial product. The use of financial instruments that can enhance access to finance, such as leasing, factoring, and trade-credit financing, could be further promoted by introducing a more conducive legal and institutional framework.

© The Business Year – February 2014