National Companies and Privatization: Sell the Subsidiaries, Not 10% Stakes

Oil is already at $44 a barrel, the exchange rate is 308 tenge to the dollar, and annual inflation is above 9%.

Where are we to find sources of growth in such market conditions, when hydrocarbons account for 70% of exports and the country's economy depends entirely on oil, gas and other minerals?

It is frustrating that over the past several years so much money has been wasted on projects that were supposed to deliver a breakthrough but have instead become dead weight and problem assets.

Where greenfield projects of this kind quickly died, the large projects built within state companies such as KazMunayGas (KMG), Kazakhstan Temir Zholy (KTZ), KEGOC, Samruk-Energo, Tau-Ken Samruk and Kazatomprom (KAP) will make themselves felt very soon, because the current operations of these companies simply can no longer sustain them.

The whole point of public administration has been to spend, not to earn.

We have no shortage of grand words, but when it comes to execution, they come to nothing or are simply sabotaged.

It is obvious that the safety cushion in the form of the National Fund is already beginning to run dry with nothing to show for it.

The refinery reconstruction, the petrochemical cluster based on the Atyrau refinery, the Balkhash thermal power plant, the logistics hub in Khorgos, the locomotive plant, bioethanol production, helicopter manufacturing, production of 20 models of cars, a low-cost airline, a consolidated chemical company, tomato paste production, solar panels, and so on and so forth.

The point is that decisions on such projects are in no way based on profitability. They are driven by image considerations or something else, but never by economics.

All of this is simply the result of distortions in management, whereby one project or another is handed down from above.

Yet if all this money had simply been channeled into the competitive environment of SMEs, the effect would have been far greater. SMEs, moreover, reinvest their profits in development.

I recently read that the government plans to privatize the national companies by selling 10% stakes in them. This is the Russian approach to attracting strategic investors, along the lines of Rosneft.

This does not resolve the question of control, and therefore of sound management decisions and corporate profitability.

Let us put it this way: if we decide to produce wind turbines, KAP will produce them even if it is unprofitable and uneconomic, because what matters, after all, is the green economy.

In general, the entire system of the Samruk-Kazyna state holding is very odd, and its structure raises questions.

Take KMG, for example. KMG is a holding company that is itself merely a shareholder in a host of companies and relays decisions on to Samruk. It is simply a duplication of functions. The bulk of production comes from RD KMG and Tengizchevroil, so what does KMG have to do with it?

On the other hand, Samruk directly owns an airport or a low-cost airline, with no national companies involved at all.

Or take Kazakhstan Engineering: it is owned by Samruk but managed by the Ministry of Defense, and everything still has to be approved by Samruk.

This convoluted system of national companies and a state holding produces only distorted decision-making, bureaucracy and unjustified costs of maintaining the national companies.

Here is a question: if KMG did not exist, would Tengizchevroil or RD KMG produce the same amount of oil, less, or more?

Or would the Atyrau, Shymkent and Pavlodar refineries produce less gasoline?

What is the national company's role in managing these assets?

Here the mindless duplication of functions between KMG and Samruk is plain to see.

Under Samruk's transformation strategy, it is to become a portfolio investor. Can an investor that owns 90% of a company be a portfolio investor?

According to the theory of corporate governance, no.

All of this makes it clear that there is no point in privatizing 10% of the national companies. What should be privatized is their subsidiaries. There it is more or less possible to see what should be handed over entirely to private owners, what should be privatized partially with control retained, and where a blocking stake should be kept. After such a privatization, the national companies can be painlessly eliminated, leaving only Samruk with its portfolio investments.

But the most pressing question is: who in this country will buy these assets?

Given the current state of liquidity, the banking sector, business activity and the investment climate, against the backdrop of impending tax increases and tighter tax administration, nobody.

Incidentally, selling the national companies piecemeal will be much easier than selling them whole, since some assets may be of interest to foreign companies.

Another problem is social vulnerability. The national companies carry a great deal of surplus staff, and it is clear that any private investor will shed many of them, which will create unemployment and social tension, especially in regions where there is no work other than at the national companies.

This calls for a more comprehensive solution to offset that risk.

Selling in parts would increase the variety of shares on the stock market and would help, at least a little, to revive it.