The European Bank of Reconstruction and Development is Assuming the Role of an Engine of Reform in Kazakhstan's Mining Industry
Gaboury Suzanne, Principal Banker European Bank for Reconstruction and Development, answers the questions of Kazakhstan
Established in 1991, the EBRD was set up to support the development of market economies in central and eastern Europe and the Commonwealth of Independent States (CIS), following the collapse of communism. The EBRD supports the economies of its 27 countries of operations by promoting competition, privatisation and entrepreneurship. Taking into account the particular needs of countries at different stages of transition, the Bank focuses on strengthening the financial sector, developing infrastructure and supporting industry and commerce.
Working in both the public and private sectors, the EBRD encourages co-financing and foreign direct investment to complement its own investments. The EBRD works in close cooperation with other international financial institutions and promotes environmentally sound and sustainable development in all of its activities. The EBRD is careful to ensure that it is «additional» to the private sector, complementing rather than competing with other private sources of finance.
What is main role of the European Bank for development of mining sector in CIS?
The Bank’s principal role is to serve as a catalyst, not simply to provide money, but to do so in ways that encourage co-financing or help mobilise domestic capital. We have identified numerous actual or potential projects in all of the FSU. In addition to looking at the gold mining sector, we are actively looking at other metals and minerals, including such things as copper, aluminium, nickel, lead and zinc, mineral sands, and just occasionally, coal.
The project finance of individual mines is, somewhat naturally, the starting point for our activities, although the mining and minerals sector also involves transportation - port or loading/unloading facilities, downstream fabrication including smelting, and even such diverse things as speciality chemicals and reagents - sodium cyanide for the gold industry being an obvious example.
The European Bank undertakes projects on a sound commercial basis, and our projects are only of worth if they have a significant «demonstration effect», and our presence must be seen as a big attraction for other lenders, especially commercial banks.
As compared to other republics of former Soviet Union, Kazakhstan has not carried out any large project on gold. Did anybody carry out an expert estimation of the reasons of failures in the Republic?
Kazakhstan has a long history of being a country rich in mineral resources, both in oil & gas and mining. Over the last 10 years, a number of initiatives have taken place with regards to developing potential projects in the mining sector, and specifically in the gold sector. There have been a number of large gold investments, which have been pursued by foreign investors over the years, but due to various reasons these have not necessarily been finalised.
In the opinion of experts of the European Bank for Reconstruction and Development, what renders the greatest negative influence on development of gold mining projects in Kazakhstan?
Both the EBRD and the World Bank, along with the Kazakhstan Mining Association have been examining the Kazakhstan mining sector closely. As you appreciate, the development of the gold mining sector is closely tied to the price of gold. Over the last few years, the price of gold has been in the region of US$ 275 per ounce resulting in fewer gold projects being developed world-wide. However, those projects considered to have a low cost of production with an associated ‘acceptable’ risk level are still being developed.
Other conditions which hinder foreign investment include economic and legal barriers. For example, the current tax laws - current mining taxation in Kazakhstan is not attractive to the international investment community, majority ownership of the state in projects and state regulation of the prices of services of natural monopolies. On the legal side, there is still a high degree of state regulation in the economy, problems of political risks in the R?, the arbitration clause on realisation of arbitration outside Kazakhstan and executions of arbitrage awards of the international courts.
The perceived level of risk by foreign investors also includes the business environment, which encompasses the concept of validity of contract. In Kazakhstan there have been a number of international disputes with mining contracts which has left an impression in the international investment community. Overcoming these negative impressions, rightly or wrongly made, will require one or two demonstration projects in Kazakhstan.
In spite of the fact that legislation of the RK allows investors to conclude contracts such as PSA (production sharing agreement) on gold, no contracts have been signed. What is the reason for the absence of investors’ interest to PSAs? Are there are any successful examples of similar co-operation the world and in the countries of the CIS?
The mining sector is fundamentally different from that of the oil and gas sector. Therefore the ability to form a mining PSA does not necessarily mean that the option will be exercised. PSA legislation has been introduced in other jurisdictions, however it has yet to be determined whether this is the best way to develop the mining sector.
Given basic attention to conditions in Kazakhstan, would it be possible to develop small and average deposits of gold. These deposits can be developed quickly (6-9 months) with the benefit of returns on capital investments with Forward sales of gold. Is this possible in Kazakhstan?
In Kazakhstan there does exist scope for the successful development of small-scale gold projects, some of which have secured local bank funding. Projects of this size typically require small, rich deposits where little processing is required to extract the gold. However, it still requires both skilled people (both technically and financially) and start-up capital to begin the process.
The major factor in successful development of gold mining in any country is interest and ability of local banks to finance the gold mining enterprises. Successful experience of Australia offers the following kinds of financing except for «gold loans»: «to order», i.e. financing in view of specificity of needs (requirements) of the manufacturer, «from a shelf», i.e. granting of standard package deals: the equipment in leasing, drawing up of business - plans, financing of engineering development etc. Why do the commercial banks of Kazakhstan not develop these kinds of financing?
The ability of Australian companies to secure ‘gold loans’ is dependent upon the lending bank to hold gold or have an administrative relationship with a bank that does. Specific legislation is required to allow banks to offer these kinds of services, and specialised skills in the bank in question to implement this mechanism. Both real and ‘synthetic’ gold loans offer reduced lending rates as in theory the banks risk is mitigated by a pledge of physical gold. Many banks in Kazakhstan trade in gold such but to our knowledge have not gone a step further in providing gold loan type facilities.
What are some of the advantages of dealing with the EBRD?
(i) Commitment to the Region
The EBRD has been operating in the region for ten years and as a result has an expertise on the region. The Bank is made up of 62 shareholders 60 countries, including all 27 of our countries of operations, the European Union and the European Investment Bank. We have the knowledge and the expertise, and we are also the largest single institutional investor in the region. The EBRD lends and invests exclusively in projects or investment programmes in these countries, and has a triple A credit rating.
(ii) Preferred Creditors Status
Preferred creditor status brings significant political advantages to commercial banks working alongside us. Not least does it negate the need for commercial banks to dispense with their requirement to provision loans to difficult countries up front, but in addition, our member countries are prevented from rescheduling their debts to us, and our «lender of record» status ensures that these benefits accrue equally to commercial banks who lend alongside us within our so-called «umbrella».
(iii) Partnership Approach
We take a long-term view. As part of this, we are prepared to adopt a partnership approach to industry and not just look at individual projects, but at programmes with firms and other lenders over the longer term.
(iv) Widening the Product Base
It is important for us to expand our product base, and thereby make deals more attractive to other co-lenders. We are therefore prepared to consider not just regular, senior debt but also equity, subordinated debt (and a range of variables between the two), gold (and potentially other commodity) loans, and commodity and interest hedging products. The purpose of a hedging programme is to enhance the project and, through our triple A status, ensure the project benefits from the keenest market rates. We are also prepared to consider traditional forms of short-term (i.e. working capital and trade) finance, and possibly in time, the provision of guarantees to credit enhance third party lending.
(v) A Flexible Approach
A flexible approach is paramount, however, as a starting point, I would put forward several factors, which tend to govern our approach, namely:
(a) A 70/30 – 60/40 debt equity ratio;
(b) A maximum lending term of around 10 years (private sector);
(c) A maximum per project lending amount of EUR 150 million - around US$ 200 million; and
(d) On average a limit to lending 35% the total project costs in any one instance.
However, I would emphasis that flexibility and negotiability are our hallmarks. We do not insist on taking equity in each of the deals we finance, although an equity-type return on a portion of our loan may result in modifications to our lending criteria.
(vi) Wider Initiatives
The EBRD also provides technical cooperation funding to support project preparation and institution-building, and can provide expert financial and technical advice to governments in order to get projects moving. In the past we have helped the governments of Kazakhstan and Uzbekistan examine things like the gold sales and mining laws in those countries, to assist them prioritise and package suitable projects for international tender and thereby development.
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