Kazakh Selloff: Safe Speed or Reckless Driving?

ALMATY, Kazakhstan -- Kazakhstan's privatization campaign is nothing if not fast.

The Central Asian capital has sold off majority stakes in 30 of the country's largest state enterprises in the past year, including prime oil producers and metal smelters, coal mines and power plants, sectors that most former Soviet republics have kept under firm state control.

Unfazed, Kazakhstan will put a handful of major oil companies, the country's gas pipeline network, two mines and a dozen other enterprises under the block in the next few months. It also hopes to finalize a sale of 49 percent of its telecommunications monopoly to Deutsche Telekom.

Speed differentiates Kazakhstan's privatization from others more than anything else. One company asked a consultancy to submit a proposal for a three-week due diligence for a substantiated bid.

Two days later the consultancy found out that the company had already won the bid.

"Sometimes people might argue that fast is too fast," said Donald Templin, resident partner for Price Waterhouse.

"But I'd rather go fast then having to wait for a long time."

Privatization has brought Western cash and management skills to deeply troubled industries, such as the run-down network of power plants that keeps Kazakhstan's 17 million people from freezing to death in winter.

But this unrivaled wholesale has been marked as much by speed as by scandals. Some very large and viable enterprises were sold off quietly for as little as $23 million, giving rise to accusations that additional sums passed hands under the table. Some deals came undone as quickly as they were made, and even transparent tenders have fallen victim to a political tug-of-war, leaving investors frustrated and suspicious.

Officials earlier dubbed privatization revenues "commercial secrets," and a list of sales prices publicized recently explains why: A majority stake in KazKhrom, a conglomerate of two large ferro-alloy smelters and a chrome mine, sold for as little as $36.8 million last year in a closed tender without serious competitive bids.

Its new owner, Eurasiabank, told shareholders that KazKhrommade a profit of $143.5 million that same year. Eurasiabank, funded by Trans-World, a London-based metal trader, also bought majority stakes in the Pavlodar aluminum plant for $23 million, and in an iron ore mine for $46 million.

"That's filthily cheap," concluded Don Nicholson, a government adviser for Deloite & Touche, the accountants.

"These figures are very misleading," countered Hans Wolfgang Rubin, president of the Pavlodar smelter. "You should have seen what a shambles we took over. Overall we put in over $100 million."

Yusif Duberman, deputy chairman of Kazakhstan's privatization committee, explained that in the sell-off process the government put more emphasis on the investments into the enterprise and its social assets than the amount of money that wound up in the state coffers.

"We left ourselves vulnerable to accusations of selling the nation's wealth for pennies," Duberman said. "But if we don't sell the enterprises cheaply, they will go to waste -- and that means they are left completely valueless."

Eurasiabank pledged to invest $398 million into KazKhrom, but privatization experts object that the government has not hired an independent audit firm to check fulfillment of such investment pledges.

Duberman stressed that the purchase sum is also much smaller than the additional funds pledged to pay off old debts and outstanding wages. But in their rush to sell, officials often ignored the bad debts that drove the state enterprises into insolvency. The KarMet steel mills, for instance, owed more than $200 million when its assets, without the liabilities, were sold to London-based steel producer Ispat.

"The company was put into bankruptcy," Nicholson said. "The proceeds of an assets sale, by law, are supposed to go to the creditors. If $225 million was paid, why is it that no one has seen a penny?"

"Shedding more light on things like this," Nicholson added, "would be in their best interest. Every foreign investor is asking the same questions."

One thing the Kazakhs have learned is that transparent tenders attract higher bids than sales behind closed doors.

A highly public sale of the Yuzhneftegaz oil production association to Hurricane Hydrocarbons of Canada netted $120 million, plus $280 million in investments that will be monitored by independent auditors. Exxon and Texaco, the U.S. oil companies, are expected to bid even morefor the Atkyubemunaigaz association later this fall.

Prime Minister Akezhan Kazhegeldin recently told ambassadors that he would boost transparency by putting consultants as a buffer between investors and poorly paid officials.

But power struggles within the government put even these deals at risk. Consultants and oil executives said the Oil and Gas Ministry was negotiating a venture on a field controlled by Aktyubemunaigaz with Exxon before the bids for the whole company were due.

Many sales have taken months to materialize after a winning bid has been selected. "A bid is not the last and final offer here," Templin said. "The advisers were asked to clarify the bid -- try and get better terms. I don't know whether that's worse or better, but it's different from what the Western companies had expected."

Privatization experts in Almaty say that officials have become less frantic, more organized and more realistic in recent tenders.

"I don't think they ever really understood the concept of due diligence," one consultant said. "We've had a hard time teaching them that a share purchase agreement is more than four pages long."

The biggest drawback for Kazakhstan, but not for bidders, has been lukewarm interest by foreign investors. Even some open tenders, such as for the Shimkent refinery, drew only one serious bid. Large firms have stayed away.

To Duberman, that is the best justification for the low prices fetched at the auctions.

"People are very hesitant to invest here. That's why our tenders are often held with very few bidders," he said. "It's not ideal, but it's the minimum we could accept."