Sovereign Wealth Fund Samruk-Kazyna plays a key role in the AIID program implementation. Today, it manages state assets with a value of over $80 billion while it is constituted by about 500 subsidiary and affiliated companies that generate over half of the annual GDP in the republic. Meanwhile, there recently have been events, able to radically change the principles and model of the Fund operation.
The first in the line of events was the switch of the Fund’s management. On December 26, 2011 Timur Kulibayev handed in a written application to the Prime-Minister with the request to free him from the position of Chief Executive Officer and Chairman of the Management Board of SWF Samruk-Kazyna. Umirzak Shukeyev, previously holding the position of the first deputy Prime-Minister, was appointed to his position. The reason why Mr. Kulibayev, a member of the Fund’s management since 2006 and the Chief Executive Officer since April of last year, left was undoubtedly the riots that took place in Zhanaozen on December 16. It is common knowledge that the riots were reasoned by the strikes by the workers of Ozenmunaygas production branch of KazMunayGas EP company and the followed up mass dismissal of oil company workers.
On December 22 during his meeting with active citizens of the city in Aktau the President of Kazakhstan Nursultan Nazarbayev said that his assignment on timely resolution of the labor issue had not been performed and that was the reason for aggravation of tension. "Overall, the demands of the company workers to the employers were reasonable. Even if there were violations of workplace discipline by the workers, the employers should not have forgotten that they are our citizens and not coming from the moon. They should have been listened to and, as far as possible, given maximum support. Unfortunately, this was not done."
According to Umirzak Shukeyev, the situation in Zhanaozen demonstrated full incompetence of the Fund and its structural companies to solve the labor conflicts. Instead of building a dialogue, there were wrong steps from the viewpoint of social-labor relations that only complicated the issue. "We have many thousands of staff members in our companies. Therefore, the right conclusions are important… We must take systematic measures not to allow labor conflicts while in case of their emergence we need to resolve them in a civilized manner. Our task is to do everything possible in order to nullify the possibility of emergence of similar situations in the future."
In this concern, SWF Samruk-Kazyna established the working group on analysis and development of social and labor relations that is already working on situations in key production companies of the Fund in order to identify the risk zones and preparation of timely preventive measures. The Fund established the Center for social partnership, headed by Nurlan Erimbetov, a prominent public figure. The goals of the Center are to maintain contact with the regions, run necessary sociological researches, keep an eye on the social feeling of the employees in the group companies.
Umirzak Shukeyev hopes that this way it would be possible to build a new system of social and labor relations management that will allow to flexibly respond to challenges and not to allow the emergence of tensions.
At the beginning of February the President of Kazakhstan signed a new law On national welfare fund that essentially changes its operation model. First of all, the goals of Fund operations have been clearly identified. In the previous version of the law they were as follows: first of all, facilitation in ensuring the sustainable development of economy; secondly, facilitation to modernization and diversification of economy; and, thirdly, raising the efficiency of subsidiary companies operations. The new formula is marginally pragmatic: "Enhancing national welfare of the Republic of Kazakhstan through increasing long term price (value) of organization, included in the Fund’s group, effective management of assets, included in the Fund’s group". In fact, Samruk-Kazyna may now concentrate on only two major issues – increasing the market price and enhancing the quality of corporate management in its subsidiaries".
The law also assumes certain systematization of functions of government as the body, representing the executive branch of power and the sole shareholder. From now on the government will manage SWF only directly through the Board of directors. At the same time, the Fund and its subsidiary organizations will gain the opportunity of independent decision making on current economic operations, based on transparency and precision principles, while excessive interference in the group operations by the state agencies is limited.
In the opinion of Umirzak Shukeyev, this will allow to significantly expedite the process of decision making. "The Fund had the experience where the decisions were taken in 5–6 months while three times the coordination was agreed with the same people in the ministries. The documents went around in a circle, being agreed in the state commission, government and Board of directors. Same people put signatures at all phases."
Along with this the Board of directors gains higher authorities; its competence now includes the definition of the order for development, approval and evaluation of Fund’s development plan implementation. At the same time the number of independent directors increased (from 33 % to 40 %) that meets the OECD recommendation and the experience of leading global corporations.
Moreover, in accordance with the law, the Fund is not any more the subject for regulations of Typical procurement rules, approved by the government. The process of amending the procurement rules will be simplified that will allow spending less time on procedural issues. Meanwhile, strict control over the procurement process will be maintained. It will be ensured based on procurement Rules, approved by the Fund’s Board of directors headed by the Prime-Minister of Kazakhstan and consisting of managers of line ministries. This mechanism will not only guarantee the state interests but also will raise the market mobility of the companies.
The new mechanism of controlling the Fund’s financial operations is backed up by the law. The document assumes the inclusion of the audit committee representative in the specialized committee under the Board of directors that will be also constituted by the representatives of other controlling and law enforcement bodies. It will ensure the control of use of not only state but also commercial funds (commercial operations revenues) of any company in the Samruk-Kazyna group. At the same time, the funds, allocated by the state from the republican budget, will be inspected by the Audit committee, based on the Budget code.
The new law clearly and unambiguously says that the major work of SWF Samruk-Kazyna management must be concentrated at raising the value of the subsidiary companies. According to the new head of the Fund, this means that his management must first of all ensure the efficiency of the investment projects. "We studied the investment programs of key subsidiary companies. I will say that the situation is controversial. Overall, 160 projects are being implemented. Of them, Samruk-Kazyna considered only about 50. This means that on more than 100 projects we have no clear understanding about their necessity. Perhaps, the majority of these projects are quite effective, the return on many of them is not clear to end. There are also horizonless and loss making projects."
In this concern, Mr. Shukeyev instructed the Fund’s Committee for investment to analyze already launched investment projects to compliance with the company profile, volume of financing and their significance. Unprofitable projects will no longer be financed. Moreover, all new projects of the subsidiary structures will have to go through a mandatory analysis in the Fund.
Speaking of unprofitable projects that companies are forced to implement due to their social importance, a separate accounting principle will be applied there. "It will no longer be possible to hide inefficient work behind the allegedly high level of social responsibility", Mr. Shukeyev warned his subordinates.
The special control will be put on implementation of seven megaprojects, assigned to the Fund, from the total amount, articulated by the President of Kazakhstan in his new message. The detailed events plans were already prepared for them with definition of personal responsibility and certain implementation terms.
Overall, under the framework of AIID the Samruk-Kazyna group of companies implements 24 large investment projects for total amount of $15.3 billion that are represented in nearly all sectors of the economy and have strategic importance in reaching the goals of new industrialization.
According to Asset Abdygapparov, the managing director of the Fund, at the moment SWF has already finished 5 projects, including the Industrialization Map. Specifically, SWF finished the construction of the Moynak hydropower plant with a capacity of 300 MWatt. Kazakhstan temir zholy launched the working motion at two railroad lines: Zhetygen – Korgas and Uzen – state border with Turkmenistan. SWF also started a freight wagon producing plant in Ekibastuz and Talco passenger wagon plant in Astana.
SWF is also actively running projects on modernization of the Shardarin hydropower plant as well as the expansion of capacities of Ekibastuz-based SDPP-1 and SDPP-2. JSC KEGOC is running the modernization of national power networks (II phase) and construction of the Alma 500 kilovolt electrical substation to ensure a reliable power supply to the Almaty region.
In the oil and gas industry SWF is building the Beyneu – Shymkent gas pipeline while in the petrochemical industry SWF is constructing an aromatic hydrocarbon producing plant at the Atyrau oil refinery. The construction of an integrated gas chemical plant in the Atyrau oblast, modernization of a sulfuric plant with the capacity of 180 thousand tons in the Stepnogorsk city of the Akmola oblast, establishment of road bitumen production at the Aktay plastic mass plant targeted at strengthening the export potential of the republic of movement of enterprises into a higher level of production.
In the telecommunications sector JSC Kazakhtelecom implements the construction of FTTH (Fiber to the Home) project that will enable to ensure the average speed of broadband access to internet at 16 megabit/second in Astana and Almaty by 2012 and in the oblast centers by 2016.
Among the innovative initiatives of the Fund under AIID program, Mr. Abdygapparov highlighted the project on producing the photovoltaic modules, based on Kazakhstani silicon (Kaz PV), implemented by JSC NAC Kazatomprom.
It is clear that this wide-ranging investment program of SWF Samruk-Kazyna requires substantial financial resources. At the same time, the significant part of needed funds is attracted thanks to foreign loans. As a result, on October 1, 2011 the foreign debt of the Fund and its subsidiary companies (not including banks) reached $21.4 billion (17.4 % of gross foreign debt of Kazakhstan).
In this concern, on February 4, 2012 during the expanded board session of JSC Samruk-Kazyna Umirzak Shukeyev informed his subordinates that the issue of financial sustainability is a matter for everybody’s attention. "Now we need to monitor the financial indicators of our companies and review them critically. We are not allowed to let this debt accelerate. The Fund established a special committee that will regularly consider the information about financial sustainability of the companies."
On March 2 there was a session of the Board for management of National Fund, headed by the President, which made a number of strategic decision, directly affecting the improvement of the financial condition of the Samruk-Kazyna group. Specifically, it was defined that the start of the key investment projects, announced in the President’s message, including the modernization of the Atyrau oil refinery, construction of the first integrated gas chemical plant and the Balkhash thermal electric power station, affordable housing construction program implementation and other large projects of the Fund will be financed by another use of anti-crisis funds in 2012.
In addition, it was decided to extend the terms and lower the interest rates on loans to the total amount of 850 billion tenge, previously allocated by SWF from the National Fund for implementation of anti-crisis programs that will, overall, substantially lower the financial burden on Samruk-Kazyna. Specifically, the debt will be reduced by 329 billion tenge that will be spent on increasing SWF capital. Meanwhile, the annual expenses of the group on servicing the loans will be reduced by 2.4 billion tenge.
And with it, JSC NC KazMunayGas will receive a new $4 billion loan from the National Fund. It will be used in two tranches in 2013 and 2015. This measure will allow the company to reduce the size of its foreign debt, maintain the sustainability to the problems in the global economy and continue participation in the biggest project on the development of the Kashagan field with no damage to its investment program. At the same time, a qualitatively new approach is going to be applied for structuring a KMG loan in the form of international format bonds that will ensure an additional rate of return and high liquidity of the National Fund’s investment.
It has to be mentioned that BTA Bank remains a heavy burden for the SWF Samruk-Kazyna balance sheet. It is common knowledge that the Fund supports the proposal on a second restructuring of the part of its liabilities, but a compromise solution, which would fit all interested parties, is still not found. In this situation the companies in the group will have to continue supporting BTA through placement of deposits and opening new accounts. Mr. Shukeyev gave a clear comment on that: "I address the attention of the companies. There should be no contradictory actions in relation to BTA Bank. This is a clear instruction".
To support Kazakhstani content
The important issue, listed in the Fund’s agenda is raising the Kazakhstani content (KC). As the leaders of the domestic economy, the group companies procure over 70 thousand goods, works and services. As a result of last year the total sum of signed contracts reached 3 913 billion tenge. It is clear that most of the procured items could have been produced by Kazakhstani enterprises.
The significant progress in the support of local content was reached by JSC NC Kazakhstan Temir Zholy. Today, the entire work wear and textile production as well as the track superstructure materials (not including the rail-tracks and some types of attachments) are procured by the company from domestic producers. It signed long term contracts with Kazakhstani enterprises for supply of rolling stocks for the sum of 530 billion tenge. The establishment of this direction of machine building is done by KTZ through the technologies transfer in cooperation with leading global companies, including General Electric, Alstom, Siemens, Talgo and Transmashholding. At the same time, every project assumes the localization of components and parts production. The plants, producing diesel locomotives, passenger and freight wagons, already discuss this issue with 40 local machine building companies that will allow to reach their localization level to 50 % by 2015.
Thus, until the end of 2012 it is planned to launch the output of a large car casting at JSC Vostokmashzavod (Ust-Kamenogorsk), KMZ after Parkhomenko LLC (Karaganda), Simplex Mash LLC (Temirtau) and Format Mach Company LLC (Pavlodar) as well as track switching equipment and wheels at Prommashkomplekt LLC (Ekibastuz). Rail-tracks production is a matter of strategic importance for KTZ: the company already signed the memorandum with JSC ArcelorMittal Temirtau on the establishment of a joint venture in Karaganda for manufacturing rails and special sections. In accordance with reached agreements, the launch of the enterprise is scheduled to 2014.
Similar work, albeit in the field of development of oil and gas machine building, is conducted by JSC NC KazMunayGas group of companies: only in 2011 KMG started 16 new plants. The company is planning to implement another 6 investment projects, the investment volume in which will account of 1 350 billion tenge and will create over 4.2 thousand jobs.
The major potential for further growth of Kazakhstani content is the procurement of large oil and gas project operators. In this concern, KMG and the Machine builders Union of Kazakhstan established 3 joint working groups with participation of JV Tengizchevroil, NCOC and Karachaganak Petroleum Operating B.V. Their task is to define the list of oil and gas equipment that could be potentially produced in Kazakhstan as well as a circle of foreign producers – potential partners for establishing joint machine building enterprises.
The strategy for development of Kazakhstani content in large projects will be implemented in 3 phases. First is the increase of procurement of goods, whose output is already set in Kazakhstan. Second is active facilitation to the production of non-highly technological goods, based on current or new enterprises. Third is the establishment of JV with foreign companies for production of highly technological production. Thus, the construction of the KAZ M-I drilling fluid plant with a capacity of 84 thousand tons per year was completed at the end of last year. The enterprise will cover the needs of operators, running works at the offshore fields, including Kashagan. Overall in 2012 it is planned to start new plants on 54 commodity items.
The projects in the field of local content development are also implemented by other companies of the Fund, including JSC NAC Kazatomprom, JSC KEGOC, JSC Samruk-Energo and others. However, recently we have been observing the downgrade of this figure throughout the group. In 2009 the share of Kazakhstani content in the Fund’s procurement was 70 % while in 2010 (considering the growth of total volume of procurement by more than twice) it dropped to 50 % while by the end of 2011 it fell by another 2 %.
In this concern Umirzak Shukeyev instructed to go back to the previous level of 70 %. For this purpose the Fund established a new department of Kazakhstani content that will monitor and report the situation personally to the head of SWF on a monthly basis. "We need to start an electronic procurement process. We already have some developments. In the near future (quarter, first half of the year) we must introduce electronic procurement. All procurement operations will be run at the same pace", he said.
The second direction, to be followed by SWF under KC development, is the implementation of small and medium network projects of Kazakhstani content around large industrial enterprises of the group, located in the regions. "For this purpose we need to start a partnership with private sector. We consolidate the work of the development institutes that will provide the entire necessary support. Samruk-Kazyna Invest will also be working with private structures and direct investment in capital".
We would like to pay special attention to the innovations that were reasoned by the President’s critics, addressed to SWF, which was announced during an expanded session of the government on January 27 of this year. "Here Umirzak Estayevich just took over the position and witnessed many zingers, not working people that present papers for large paychecks." In this concern, the President instructed to propose measures on optimization of national holdings, companies and state enterprises until April 15.
Mr. Shukeyev affirms that certain work on optimization is already conducted. Thus, the new structure of the Fund clearly divides the functions and eliminates their duplication. Overall, SWF will be split into four blocks. The first is the finance and economic block that supervises all the issues of economic planning, finance and regulation of the second-tier banks. This block, headed by Elena Bakhmutova, will have a separate treasury department, which was strengthen in order to raise the efficiency of managing free funds.
The second is the strategic block, managed by Kuandyk Bishimbayev. He will make decisions on strategic development, innovative policy, investment projects and special sector programs – residential development and national IPO. This block formed the new department of Kazakhstani content. It will include SK Kontract, SK Farmacia and SK Invest. "We in fact have all necessary institutes for the development of a public-private partnership and running so-called medium-size investment projects: development institutes, analysis and funds. This all needs to be united in one block", Mr. Shukeyev commented on the innovation.
He will personally manage the third operations and production block that controls three basic sectors – oil and gas, mining and smelting and energy.
Finally, the fourth supporting block includes legal service, corporate governance service, risk management service, audit and control and HR.
Moreover, four committees (credit, evaluation and planning, investment and innovation, human resources) were established for ensuring systematic work and energizing the Fund’s operations. Under their competence once every two weeks they will consider the indicators of all subsidiary companies, give recommendations and conclusions. In order to monitor and control subsidiaries’ operations a number of certain criteria were defined, whereas on a monthly basis each company will report to the Fund for compliance to these criteria.
Also there are services that will have a vertical transparent structure on the scale of the group. These are legal and human resource support, security service, corporate governance and risk management, audit, public relations, business planning, financial reporting, treasury, procurement, innovation and investment, strategic planning and document management.
"This linear scheme of structure building by blocks mostly meets the current tasks and, in the opinion of experts, reflects the world’s experience. I recommend all subsidiary companies to carefully evaluate their structures and make corrections, ensuring maximum efficiency and consider the vertical layout of the mentioned structures. This means that from us to subsidiary companies, from subsidiary companies to their companies vertically", the head of SWF underlined.
Speaking of optimization of staff amount, in the opinion of the Samruk-Kazyna manager, this issue was quite effectively solved in the corporate center. "Some time ago 210 people worked in the Fund while now we have only 140. This means two-three employees per department. This is normal for a company that manages the group with total amount of staff members of over 320 thousand people".
Meanwhile he sees big optimization reserves in the subsidiary and second-tier subsidiaries of SWF. "There are over 500 enterprises in the system – where does this go? A special customer company is established to construct the building. Later on we have the contractor company. And then we have the incorporated technical supervisor… We have everything! Therefore, we need to get rid of non-core business assets". The serious nature of upcoming optimization of personnel capacity is demonstrated by the plans of NC KazMunayGas that is going to cut 25 % of its employees while the same indicator of its subsidiary KMG EP will reach 50 %. In the next two years KTZ is also going to optimize its staff capacity by 17 %.
Needless to say that the problem of optimization of the structure and the number of national companies as well as their "inflated" staff capacity is not a new one. This issue has been regularly considered from the very first days of Fund’s operation. We can only hope that the new management of Samruk-Kazyna will be able to produce significant results in resolution of mentioned problem.