Transformation of Samruk-Kazyna: Strategy, Corporate Governance, Reengineering

Last year, the transformation of Samruk-Kazyna's (SK) main subsidiaries was announced.

I would like to share my views on it. Until now, I have written about individual cases: gas station attendants being laid off, the wrong people being hired, and so on. In truth, these are minor quibbles, and their share in the overall inefficiency is not that large. Some cases concern far more global matters, with a much greater impact on the fund's performance. One example is the impairment at KazMunayGas Exploration Production (RD KMG) of KZT 250 billion in 2014 and by KZT 60 billion in 2013. The main causes were the term of the subsoil use contract, which does not allow the company to fully recoup its investment in field development, along with high customs duties and the fall in oil prices. Another is the KZT 74 billion impairment of assets in Europe (the Rompetrol Group). We wanted to conquer Europe and follow the strategy of SOCAR, yet we cannot even sort out our own gas stations, let alone European ones. Naturally, the reasons for such an impairment need to be examined in more detail. But these are individual cases. They have to be dealt with, but more systematically, through a transformation of the entire fund's operations, which is exactly what the fund now intends to do.

I skimmed the holding's transformation document on the SK website. It is, incidentally, a fairly good and substantive document. In brief, its essence is to turn SK's subsidiaries into portfolio companies, manage them in line with best corporate governance practices, and reengineer business processes. To that end, the plan is to create boards of directors that actually work, with 50 percent of their members being independent non-executive directors (NEDs). To provide external stimulus for corporate governance, some assets are to be taken public through IPOs, and non-core assets sold to private owners.

In principle, all of this is correct and sound from the standpoint of corporate governance.

In corporate governance, the most important thing is the ability to manage and make decisions. According to SK's plan, the chief executives of the national companies are to be appointed by boards of directors in which independent directors make up 50 percent. If that is how it works, I will be the first to write that Samruk-Kazyna is doing the right thing. If it turns out to be a mere fiction, then the money spent on independent directors and consultants will have been thrown away.

Transformation implies both a strategic transformation and a change in operations.

Strategic transformation is aimed at organizing strategic decision-making so that decisions genuinely serve to increase the company's value. Strategic decisions include, for example, the acquisition and sale of assets, various reconstruction projects, new investments, and so on. Strategic decision-making is currently one of the weakest areas of management at Samruk-Kazyna. The inefficiency of RD KMG and Rompetrol, the reconstruction of the Atyrau refinery, BTA Bank, Ekibastuz GRES-1, the locomotive plant and so on all belong to the strategic aspects.

Operational transformation is aimed at improving the efficiency of operations. The concept used for this is business process reengineering. In a nutshell, business process reengineering means analyzing a company's existing processes and turning them into more efficient ones. Take an example for clarity. The path from identifying a need for a material to purchasing it is one business process. In more detail, it consists of the annual budget, tenders held for the year within the budget, a monthly requisition for inventory items, purchasing, delivery to the production unit, release from the warehouse, release into production, write-off in production and its recording in accounting, and its reflection in reporting. That is a business process. The task of reengineering is to make this process work better, which includes budget accuracy, purchasing efficiency, logistics efficiency, and the speed and accuracy of accounting.

Analyzing each segment and redesigning it is a big job that will require very large spending on consultants and more. The key here is not to make a mistake in choosing consultants. The greatest opponent of any transformation is production staff. Changing their paradigm is very hard, and if they sense that a consultant is out of his depth in the production process, they will simply not take him seriously as a consultant. I remember a case at a petrochemical plant, where, before I arrived, consultants had been hired who wanted to introduce budgeting and make production staff write off materials daily, so as to obtain actual data promptly and establish control over inventory. Nothing came of it. None of their write-off forms or the various modifications to 1C ever worked, and a considerable sum was paid. Afterward, the guys and I implemented it all, because the main thing is to explain to production staff why they need it and to prove that it makes their life easier, not harder. As a result, we got online inventory balances in the warehouses and actual write-offs of materials into production.

Within operational controlling, all problems should be divided into two parts:

• Eradicating corruption in the procurement of goods, works and services. In other words, we need a good budget, analysis and transparent procurement.
• Improving the efficiency of decisions on current production matters, for example, timely delivery of raw materials and supplies, selection of competent personnel, control of construction, control of production, and so on.

If all business processes are fine-tuned, then in theory the efficiency of existing assets should rise across the board.

So we will wait for the results of the holding's transformation and see what comes of it. We will see the first results in the 2015 financial statements. The most important thing is that all these transformation processes do not remain on paper. We know how to write, but implementation always lags behind.