Crossroads Asia

Kazakhstan Prepares Roadshows as Privatization Lags Behind

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Crossroads Asia

Kazakhstan Prepares Roadshows as Privatization Lags Behind

Both the schedule and prospects for selling state assets in Kazakhstan seem as unstable as ever.

Kazakhstan Prepares Roadshows as Privatization Lags Behind
Credit: Flickr / aitormontana

Kazatomprom, the state-owned uranium miner, will kick off a road show for its listing in the London Stock Exchange (LSE) and the Astana International Exchange (AIX) on October 31, the company said, in what could be the first real attempt to sell off part of Kazakhstan’s state assets.

Privatization has been discussed in Kazakhstan for years, but its timeline became more uncertain and unpredictable when crisis struck emerging markets and hydrocarbon producers in the second half of 2014. Kazatomprom, owned by the country’s sovereign wealth fund, Samruk-Kazyna, said it would try to place up to 25 percent of its shares in the LSE and AIX in the form of global depository receipts (GDRs).

Should the company’s attempt be successful, it would represent a significant step toward achieving the goals of Kazakhstan’s privatization program. Its sluggish pace to date has raised questions on the overall feasibility of the drive. Slow privatization even had a negative effect on budget planning, which was evident when the government had to revise its budget for 2018, as it failed to cash in the sales it planned for this year.

“This year we had planned [to earn from sales related to Samruk-Kazyna’s privatization program] 120 billion tenge ($330 million). Instead, we now expect revenues to be 17 billion tenge (around $46 million),” Ruslan Dalenov, first deputy minister of economy, told the press.

Credit Suisse and JPMorgan were selected as global coordinators for the placement of Kazatomprom’s GDRs. Their role would be to fend off skepticism from international investors. Foreign capital will in fact be crucial for the success of the privatization wave, since the country’s economy and financial sector are still grappling with the consequences of the 2014 crisis.

“As there is not enough capital in Kazakhstan to absorb the bulk of the planned listings; the government will have to sell shares mainly to foreign buyers. This will require convincing investors with potentially minimal voting rights that the companies will not be run like personal fiefdoms,” Kate Mallinson, director at the consultancy Prism Political Risk Management, wrote.

Mallinson’s comment referenced the fate of Eurasian Natural Resources Corporation, a mining giant that listed in London in 2006 and was pushed to de-list in 2013 amid corruption allegations and opaque corporate governance. Tainted by the previous experience, Kazakhstan’s assets need to regain a reputation for transparency before becoming palatable for investors.

Kazakhtelecom, a large player in the country’s communications sector, and Air Astana, the flagship carrier, should also sell off shares within the privatization plan. Kazakhtelecom recently planned to buy out Kcell, a large competitor, in a move that would give the state-owned company overwhelming control of the market. Air Astana is 49 percent owned by Britain’s BAE Systems, but its profitability is under pressure with the resurgence of oil prices and a plateau in the company’s expansion.

So far, the jewel remains Kazatomprom. The world’s largest producer of uranium has partnerships around the globe and is a steady supplier for many nuclear reactors around the world. In mid-2016, Kazatomprom agreed with Canada’s Cameco to restructure their joint venture and become a majority shareholder in Inkai. In January 2018, the changes became effective and Kazatomprom became a 60 percent owner of Inkai, with Cameco controlling the remaining 40 percent. As uranium prices jumped in the past months, Kazatomprom said it planned to significantly reduce production between 2018 and 2020. In 2018, the company plans to produce 21,600 million tons, a 20 percent reduction on the previous year, according to chief commercial officer Riaz Rizvi. The company expects similar production cuts in the next two years.

For the IPO, the company is following the government’s privatization program, Galymzhan Pirmatov, CEO of Kazatomprom, told Bloomberg TV. In the interview, Pirmatov denied any speculation that the  timing was related to the period of high uranium prices.

“This is a government decision,” Pirmatov said. “This is not about timing, although we do think this is a great time for investors. Uranium prices are up 50 percent since the low of one year and a half ago.”

Critics have argued that GDRs, rather than shares, will be useful to raise cash, but will fail to attract significant foreign participation into Kazatomprom. Betting on a portion of a company cannot be compared to sharing ownership and governance.

Hence, Kazatomprom’s decision has a flare of a privatization-lite, James Kilner, editor at The Conway Bulletin, said.

“Despite the fanfare and the general upbeat notices from Kazakh officials, the anticipated IPOs have failed to materialize this year,” Kilner wrote in a recent editorial. “Kazakhstan and its companies need to shift up a gear if they are going to hit the expectations that they have drummed up.”

At center stage in this privatization drive, the newly established Astana International Financial Center (AIFC) should serve as the broker for several of these deals. The government wants to exploit the opportunity of the international listings to promote its own brainchild, a state-of-the-art international stock exchange governed by English common law, but located in Kazakhstan’s capital city. AIX, the stock market, is part-owned by Nasdaq and the Shanghai Stock Exchange.

Should the ambitious $70 billion privatization plan succeed in raising cash for the government coffers and launch the AIFC into international fame, Astana’s goals would be half-fulfilled. For this operation to be called truly successful, the deals need to bring in high-quality international investors and open up the companies’ management to independent supervision.