Publication: Monitor Volume: 4 Issue: 38

Differences are said to be deepening between the government of Kazakhstan and the Belgian utilities company Tractebel regarding fulfillment of the terms of their contract. (See Monitor, February 20) The likelihood forms part of a recent series of disagreements between the government and foreign investors. On February 10, Prime Minister Nurlan Balgimbaev announced that Kazakhstan was temporarily suspending oil and gas privatization. In January, the London-based metals trading company Trans-World Group decided to suspend its activities in Kazakhstan after complaining that unauthorized managers had taken control of TWG’s assets in three Kazakhstani metal-processing plants. (Reuter, February 16) The government, for its part, has repeatedly expressed hopes that such disputes would not affect Kazakhstan’s attractiveness as a recipient of foreign investments.

Kazakhstan’s upgrading by the international rating agency Fitch IBCA on January 27 from BB minus to BB would seem to support the government’s assertions. (Delovaya nedelya, January 29). However, Kazakhstan’s recent problems with TWG illustrate a creeping uncertainty with regard to Kazakhstan’s management contracts. Such contracts, which multiplied during former Prime Minister Akezhan Kazhegeldin’s tenure, allow a foreign firm to take over the management of a large state-owned industrial enterprise and buy some of the equity, as long as it agrees to pay off the enterprise’s debts and back wages and to invest in new plant and machinery. In return, the foreign firm receives a share of the profits as a management fee and has first refusal when the enterprise is eventually privatized. (Economist Intelligence Unit Country Profile, 1996-1997)

So far this mechanism, although in some cases enabling back wages to be paid more quickly, has generated controversy. Although prospective mineral resources are likely to keep potential investors interested, these latest disputes raise questions about the integrity of the privatization process and lead to a return of state intervention in privatized concerns. This is partly because the tender process has rarely been carried out in a transparent manner — TWG reportedly acquired its management contracts at well below their market value, for example. Also to blame is the government’s failure to ensure good accounting.

The latter flaw may soon be remedied. The new government appears determined to exercise tighter regulation and to maximize the returns it receives through foreign involvement in the privatization process. Last month, Balgimbaev announced a tender for international accounting firms to conduct audits of the country’s blue chip industries. His seeks to ensure that the government gets the best possible price when it sells off the state’s remaining assets.

"Iranian Agents" Arrested in Almaty.