EBRD Director for Kazakhstan Agris PREIMANIS:
WE HOPE TO INVEST MORE IN PRIVATE COMPANIES
Kazakhstan is purposefully going to increase the role of the private sector in the country's economy. In the medium term, the volume of investments, including foreign ones, in private companies will boom, Director for Kazakhstan of the European Bank for Reconstruction and Development, Agris PREIMANIS, believes.
- What is the EBRD project portfolio in Kazakhstan to date?
- Currently the EBRD portfolio in Kazakhstan is about $ 3 billion or this is 121 projects. About 80% [of them] are projects in the sectors of infrastructure and transport, as well as energy and mining, the corporate and financial sectors account for 20%.
- What is the largest project?
- There are a lot of important projects that we have implemented in Kazakhstan. And, probably, not always the issue is about the amount. For example, last year the largest project was worth $ 180 million - a project to improve irrigation systems in southern Kazakhstan. A very important project. Here the issue is not as much as about irrigation itself but about that opportunity, which the implementation of this project will provide for the southern regions. It is planned that it will help both local farmers and entrepreneurs create a better environment for their business, and this is really just something key - the creation of an entire private entrepreneurship ecosystem in the region. This will help the economy in the region and help improve the social situation in the region.
- Of 80% stated by you, how much covers energy and extraction? Anyway, Kazakhstan is a predominantly raw material producing country.
- If we look at the current portfolio, then about 40% of projects are in transport, infrastructure and logistics and about 40% are projects in the energy sector, including renewable, extraction. The new EBRD strategy, which was adopted in July 2017, includes the four key areas. The first is to work on improving management and commercialization of state-owned companies and on strengthening the role of the private sector companies in the economy. Secondly, improvements to capital market and the financial sector. Thirdly, improvements to intra-country, intra-regional and global integration of Kazakhstan's infrastructure. And the fourth area is the development of the "green" economy in the country. We are also working on the issues of inclusiveness in all areas.
A very important aspect for working in Kazakhstan is the framework agreement, which we signed in 2014. It was a platform created for the government to work with international organizations, a very innovative platform. Under its aegis, the government allocates money for investment projects, technical assistance projects. There is also the coordination council chaired by the prime minister. If we look back at the period from 2014 to 2017, the document played a key role in the EBRD activity in Kazakhstan. At the end of last year, we extended this framework agreement for another three years. And in addition to the previous priorities - work with the municipal sector, with the holding Samruk-Kazyna, assistance in improving corporate processes, assistance in privatization - a very strong focus will be placed on the development of the private sector in the country. We see that all the work done by both the government and the EBRD on creating an environment for the private sector is beginning to bear fruit. And if we look at the medium-term prospect of three or four years, we believe that the EBRD will be able to invest more and still more in private companies. This includes the corporate sector, renewable energy, and PPP projects. So such a focus is very important for the EBRD.
- What are the most important or attractive sectors for the EBRD’s investments?
- The work being carried out by the EBRD in the infrastructure, energy sectors, work with state-owned companies will continue as its importance for Kazakhstan is still of interest. But, let me repeat, the work done will create more prerequisites for investment in private companies, to attract foreign investment, strategic investors to Kazakhstan. Logistics remains a very interesting area. The issue of renewable energy, to be precise, the topic of "green" investment is very pressing as Kazakhstan remains one of the least energy efficient countries, not only in the region, but throughout the world. Although I see this as a great potential not only for investment, but also for improving competitiveness through investments in energy efficiency. If we look at the year 2017, we classify about 40% of the EBRD’s investments in Kazakhstan as "green". These are investments in renewable energy, projects that finance new technologies that are more energy efficient or for more efficient use of water and other resources. This is also an irrigation project that improves the ecosystem of water use. And we see and prove with our projects that there is opportunity in Kazakhstan to invest in the so-called "green" projects. Looking at the potential of renewable energy, one can see that all the work done by the Ministry of Energy, including liaison with us and other organizations to improve the regulatory framework, starts bearing fruit. The existing regulatory framework provides opportunity for commercial projects. Last year we invested $ 50 million in the project Burnoye Solar-2, this is about solar energy. This year’s first project for the EBRD was a small but very important project on solar energy worth $ 8.8 million with the major French company Urbasolar. This proves that Kazakhstan is interesting even for such large sponsors, namely investments in renewable energy. Looking through the portfolio of potential projects in the renewable energy sector, we are very upbeat about further investments and opportunities in this sector.
Already this year the project development according to a new methodology will start - auctions. The Ministry of Energy already announced a schedule of tenders for production of 1 GWe of green energy. We back very much this approach, we think that it is correct and will help attract both large investments and lower the price of electricity. We expect an increase in investment, the arrival of strong sponsors, both European and Asian ones, who are interested in the opportunity to invest in renewable energy.
- How do you assess the future of "green" projects in Kazakhstan given that there is more scepticism in this respect than optimism? How realistic is it to achieve the 3% share of renewable energy in 2020? How soon can we talk not about pilot "green" projects, but about permanent ones?
- I think the target is achievable, ambitious, but correct, that’s why the Ministry of Energy approved the relevant document. When it comes to RES, it is important to understand that this is not about full transition to alternative energy. There will always remain a mix of various energy sources. But at the same time global trends show that such energy is competitive - there are countries where the cost of 1 MW of solar energy costs 2 cents. I do not think that there will be such prices in Kazakhstan at once, but globally the downward trends are observed. And there will be no such pressing issue that in the name of ecology we need to pay more.
Of course, the countries will have to reckon with the renewable energy market trends, and there must be energy balance.
I think, for the time being we are not saying that we will be very active in the field of renewable energy. For now there are only pilot projects. But some work has been done for creating a regulatory framework. What, in the end, do we and Kazakhstan want? To attract investment in the RES projects. There must be a suitable regulatory framework, available parameters, including costs for an investor. Investors must believe in the regulatory framework that risks will be understandable. Then they will begin to invest more. I think pilot projects are very important. It’s necessary to talk about those projects, which already attract serious sponsors, who invest exclusively for commercial reasons, proving that this sphere is already of interest to them.
Observing this interest and how many potential investors contact us and discuss the opportunity for investing in Kazakhstan, I am sure that in the next two to three years we will see a much higher level of investment, major projects, including investments in solar and wind power.
- How do you assess the interest of other development institutions in RES besides you?
- Last year we invested $ 700 million in Kazakhstan's economy. 40% of this amount fell on "green" projects. And this is investment in renewable energy, and in improving energy efficiency, new technologies and so on.
As for the other investors, the main thing is how much the regulatory base and the economy of projects are of interest to them. In addition to the willingness to invest in such projects, they must have a proven track record of their implementation. We see growing interest from such sponsors, and if they come over, then for our part we will deal with solutions to the issue of additional financing. But the main thing is to attract serious players to Kazakhstan.
- Do you plan to increase the project portfolio and what projects do you plan to finance in 2018 and in the next three years?
- The EBRD is a project finance bank and the volume of projects depends on market opportunities in various sectors, to which extent there are projects that meet the EBRD's commercial criteria. We, of course, have both the will and the resources.
Kazakhstan remains a priority for the EBRD but we do not target concrete amounts. It depends on project opportunities in the country. We are not a planning organization. We continue to work very actively on projects. I am sure that in 2018 and in the following period there will be very large investments by the EBRD in the country’s economy. The discussion of concrete amounts will depend on the existing market opportunities.
It is very important to note that all the work done and changes in the economic situation in Kazakhstan, which we see, give us cause for optimism when looking at new opportunities for investment namely in private companies. We discussed the renewable energy topic: I said that we are not against our annual investments in this sector and in private projects being increased. There is also a topic on PPP. With the signing of the concession agreement on the BAKAD [Big Almaty Ring Motorway] project, the arrangements for which took more than 10 years, and which is the first major project created entirely to meet international standards, there has been confirmed interest from major investors who are keen to work. The signing of this concession agreement will give a great impetus to the development of such projects in Kazakhstan. Also in the medium term we see that there will be more major PPP projects that are created according to international standards and where the EBRD will not only advise but also invest.
Also, all that work, that has being done in the financial sector, especially in the last two years, on systemic improvements to the situation in the sector, will gradually begin to bear fruit. I would like to believe that in the medium term there will be more opportunities for working in the financial sector. Again this is private investment. I see that within the next three to four years there will be opportunity to increase this type of investment in private projects. The EBRD sees its role not so much in joint investment along with state-owned companies, but in helping Kazakhstan change the economic situation in such a way so that private companies dominate. And I see that in the near future a shift in the EBRD investment activity will begin, which will reflect changes in the country's economy.
- When do you expect the financial closure on the BAKAD?
- The agreement between the concessionaires and the government was signed in February 2018. In terms of duration the financial closure of the project is expected by the end of this year.
Another topic that we did not touch upon is privatization. It is closely related to the growing shift of the EBRD's investment activity and the country's economy to the private sector. For our part, we are working closely with IFCA [International Financial Center Astana], helping work on the stock exchange creation on "green" bonds, and so on. At the same time, our work with subsidiaries of the state fund Samruk-Kazyna is aimed at improving the efficiency of these companies, improving corporate governance and in some cases privatizing the assets of these companies. If we look at the plans, we very much hope that the first three companies of Samruk--Kazyna (Kazatomprom, Kazakhtelecom, and Air Astana) proposed for privatization will be privatisized. For our part we support this very much, because we believe that this will be important not only for the companies but also for the image of Kazakhstan among the global investors. All the investors are actively monitoring the privatization of these assets. And not only because they are important assets. For them privatization is proof of the serious approach by the government and the head of state to the reforms in the country. We know that there were several privatization stages and if we speak about concrete results, I think that the successful privatization of these three assets will be a good signal for global investors.
So I think that in the next 12 months we will closely follow this process and help with privatization.
- Is the EBRD's share in financing the Saryarka gas pipeline determined? According to a statement from the Ministry of Energy, the construction will begin already in the summer. When will the final project participants and their share be determined?
- If we talk about the project structure it is still under development and the work is being carried out by the government, Samruk-Kazyna and Baiterek. It's a little early to talk about the concrete financing structure to be used. On the part of the EBRD, this is a strategically important, social project, given that impact the pipeline will have on people's lives in Astana, in the other northern cities and regions, and also on the environment. So we support the project all out and are glad that the head of state voiced it as one of the priorities.
The project should be worked yet out in detail. The work is underway, of course, everyone is set in order for the project structuring to be completed faster, but so far there are no concrete deadlines.
- It is known that financing will be split up in a ratio of 30% own funds and 70% borrowed funds. What share can the EBRD provide for?
- It's too early to talk about that. The bank has big capabilities and experience in financing large-scale infrastructure projects. So it is important to hammer out the structure that fits best for the needs of Kazakhstan and the project itself, and, on this basis, agree on equity participation in financing. But I do not see any restrictions on the potential amount of the EBRD’s financing. The amounts can be different, they can be substantial and everything depends on the structure.
- In your opinion, who could provide co-financing for the project?
- Perhaps I will also say that it's too early to talk about this. Development Bank of Kazakhstan was mentioned in public, as for the other investors’ interest it is necessary to work on the structure of the project itself, its financing and then we will be able to talk about the concrete names and participation of the EBRD. I expect that the issue will be resolved fairly soon.
- Are you planning to revise the forecast for Kazakhstan's GDP for this year and the medium term period?
- We forecast 3.8% GDP growth for this year, 3.5% for next year. We review the forecasts twice a year, they will be announced in May this year for Kazakhstan. Although the work is not over yet, I do not expect very strong changes in these forecasts because Kazakhstan is developing dynamically. The level that is reached, from 3.5% to 4% provides a stable basis for growth. In particular, we see a decline in inflation, stabilization of the macro-situation in the country. I always ask myself a different question. The stable base has been created, but now the key issue is how to increase the growth not by 4%, but by 5-5.5%. This is the very growth that is needed to improve the level of the country's economy and for moving towards the developed countries. This is not an easy issue, the issue of growth levers on all the work that is done regarding innovation, the introduction of digital solutions and technologies. And here the issue is not so much about the creation of another Silicon Valley, but rather the issue of using these technologies in the institutional sectors. There are areas such as the mining sector, transport logistics, on which Kazakhstan’s economy is based. But this potential can be developed using new technologies, innovations, digital technologies. Initially, as a lever for improving the efficiency of these sectors, and possibly more innovative sectors around these sectors could also be gradually developed, which could also give ground for exporting these innovations to other countries. This, say, one aspect.
The Silk Road is another issue. Ten years ago Kazakhstan’s residents looked at the location of the country dejectedly - it is located very far away from large business and trade centers, significant transport costs, etc. Now the situation is changing. Kazakhstan is the first country on the Silk Road, when we are traveling from China to Europe. The concept of the Silk Road itself is not just a matter of transport and logistics. This is an issue of Kazakhstan’s global and regional integration. And the country can become closer both to China, India, Pakistan and so on, and to the European countries.
Now the very pressing issue arises - how best to use this integration? Of course, it opens up opportunities for export, but at the same time, competition within the market will increase. All the ongoing work on innovation, improvements to the investment environment will become even more important with these changes. And indeed this integration of Kazakhstan will be one of the levers that can help the country increase its growth above 4%. For me, this is more important than the nominal GDP growth rate.
- How do you assess the ongoing reforms in Kazakhstan’s economy?
- Additional reforms are always required for any country in the world, which are aimed at improving competitiveness. In Kazakhstan’s context, I can voice five areas on which the EBRD works very hard. These are the tariffs of natural monopolies. A lot of work has been done in the last two years [jointly] with the Ministry of Economy to determine the tariffs of companies providing water, electricity, etc. At the end of last year, the draft law on natural monopolies, which included the issue of tariffs, was submitted to the Majilis [the upper chamber of Kazakhstan’s parliament]. The second aspect is renewable energy. For many years the work was carried out, and now we believe that the regulatory framework corresponds to those parameters that are needed to attract investment in this sector. The third theme is the development of capital markets, International Financial Center Astana [IFCA]. IFCA is not important in itself, but as an example of those standards of international English law that will then improve the standards of the economy in general. The fourth topic is PPP. The BACAD project will be key, we believe that it will prove that such projects are possible in Kazakhstan. The fifth one is privatization. A lot of work has been done, and now we expect that, in addition to small and medium-sized assets, some of which we have already invested in, namely Mangistau Distribution Power Grid Company, the privatization of Samruk-Kazyna’s large companies will follow. We are working in these areas, and we have concrete results. It would be correct, when speaking about reforms in the country, to look at concrete results. By concrete results I never mean the adoption of a law, but changes in companies, new investments, privatization, sales of shares, which they promote. I think that's the way to assess the reforms in the country.
- Thank you for the interview.
April, 2018
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