Investment in Transport and Communications in Kazakhstan: Outcome and Outlook

KAZAKHSTAN International Business Magazine №2, 2003
Investment in Transport and Communications in Kazakhstan: Outcome and Outlook

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Investment in Transport and Communications in Kazakhstan: Outcome and Outlook

Editorial Overview

Globalization forces states to adjust their policies to the objectives of their economies and strengthen their position in international markets. The choice of a development strategy predetermines a country’s economic and social achievements. International practice shows that transport infrastructure is a key element of the strategy, since, when insufficiently developed, it results in too high costs of transport services in production and halts economic development as a whole.

This is why the recent tendency towards decreasing the share of transport and communications in the GDP of Kazakhstan from 13.9% in 1998 to 9.8% in 2002 is a troubling sign. This is mostly associated with growth in the share of mining. It is assumed, however, that the share of transport and communications will continue to reduce given a high rate of equipment wear and tear and insufficient investment.

The Statistical Agency of Kazakhstan reports decreasing investment in fixed assets in transport and communications. This demonstrates tight investment capabilities of enterprises engaged in the sector, which use their own funds to finance operations.

Realizing this, the Government has been paying special attention to the development of transport and communications. It has blueprinted the national transport policy to 2008, establishing the main development principles for several segments of the transport sector, which have a major bearing on the country’s economy. A large section of the document is dedicated to investment, particularly creation of financial and investment structures in the sector, using private (including foreign) capital. To assess the situation, the outcomes need to be measured.

Foreign direct investment

According to the National Bank, Kazakhstan’s transport and communications attracted US$416.3m in gross foreign direct investment from 1993 to 2002. As a result, the sector accounted for a mere 2% of overall gross FDI drawn into the country’s economy, which, in comparison with 51% taken by the oil and gas sector, demonstrates its poor attractiveness for investors.

Last year, FDI in the sector reduced by 1.7 times from the figure of 2001. The decreasing tendency continued in the first quarter of 2003 (only US$11m as compared with a similar period in 2002).

Pipelines dominate in the transport and communications sector in terms of FDI, which is explained by intensive development of oil and gas fields and expansion of the national pipeline infrastructure.

The USA remains the leader in terms of FDI, having invested US$185.7m from 1993 to 2002 in the sector. This is mainly due to the dominance of American companies in the oil and gas sector of Kazakhstan, who require high-quality communications for management of Kazakhstani companies and a developed pipeline network for oil export.

The Netherlands provided US$144.5m in investment (through offshore zones), followed by South Korea (US$100m). The Asian country has been seeking leadership in the international telecommunications services, hence its interest in Kazakhstan. Therefore, it is quite understandable that one of the largest projects implemented by South Korean companies in Kazakhstan calls for upgrading of telecommunications in the Almaty region.

Investment made by China and Russia in the sector are either insignificant or zero (they are possibly included in the Others column of the National Bank’s statistics), despite the fact that they are Kazakhstan’s neighbours. Through co-operation, Kazakhstan hopes to receive a maximum transit flow from these two countries.

Notwithstanding a 9.3% growth in export of transport services in 2002, the balance of international freight in the country’s balance of payments made up a deficit of US$3.1m against US$3.9m in 2001 (according to the National Bank).

Last year saw a 12.8% increase in income of domestic airlines from international passenger flights, and air navigation charges grew by 16.8%. These positive trends in civil aviation emerged after creation of Air Astana, a joint Kazakh-British airline.

It is a well known fact that joint ventures are one of the most progressive and effective steps towards integration with the world’s economy. Over the last two years, only one Kazakh-Chinese joint venture was established in the motor transport sector, which is a discouraging fact. Such poor interest shown by investors in the sector is probably explained by insufficient growth in transit and international traffic in Kazakhstan, just as hopes that were pinned on the Druzhba terminal, the largest junction in the region, have also faded.

Kazakhstan’s economic policy demonstrates a clear tendency towards formation of new, more sophisticated, management structures in transport and communications, i.e., national companies, such as Kazakhstan Temir Zholy for railways transportation, Air Kazakhstan and the International Airport of Astana in civil aviation, and Kazpost for postal services. As a rule, national companies possess a great intellectual potential to introduce principles of market economy into the sector, create more flexible and effective mechanisms of government control and represent the state’s interests in relations with foreign companies.

Kazakhtelecom, a national company, may be cited as a good example. The company has been expanding co-operation in international markets and is forming a state-of-the-art telecommunications network in the country using advanced technology and equipment. Joint ventures with foreign companies, such as Nursat, Katelco, Sa-Telcom, Ducat and others, are active rivals for consumers of communications and Internet services in the domestic telecommunications market.

However, even the active growth of telecommunications does not support its competitiveness in the international markets, which is also restricted by a backward legal framework. The result is shrinking investment. After an active rise before 2000, the inflow of foreign direct investment dropped to a record low value of US$3.7m over the following two years. Beginning in 2001, the net position of payments for international calls was outbalanced by increasing expenditure for non-resident network services and satellite communications. The negative balance of postal and telecommunications services rose from US$3.6m to US$18.7m.

The situation was caused by the absence of an adequate legal framework, which is currently under construction. Moreover, Kazakhstan has not yet ratified a number of international treaties, which, if ratified, would promote Kazakhstan’s services in the international markets. The government control of natural monopolies and competition in the transport and communications sector is far from perfect. This also puts additional obstacles to the inflow of private investment in the sector, including foreign financing.

Portfolio investment

However, transport and communications can boast a higher attractiveness for portfolio investment than other sectors of Kazakhstan’s economy. One third of all portfolio investment drawn to Kazakhstan from 1993 to 2002 has been concentrated in transport and communications. This is mainly due to international trends in the securities market. It is a well known fact that Kazakhtelecom and Kazakhstan Temir Zholy are public companies, whose securities are on the A listing at the Kazakhstan Stock Exchange and are in demand among foreign investors. Securities issued by transport and communications companies are mainly held by investors from United Kingdom (US$82.3m) and the USA (US$13.6m).

Foreign loans

Investors willingly render loans to Kazakhstan’s transport and communications companies. By the beginning of 2003, the sector had received US$782m worth of loans, with Switzerland being the leading creditor (US$124.4m). Russia and China, who are believed to be Kazakhstan’s strategic partners, seem to be reluctant lenders.

International financial institutions do not keep out of Kazakhstan’s transport and communications. Until recently, the World Bank has been the major donor in the country. On the back of economic growth and reduced requirements for external borrowing, the Kazakhstan government has shifted the priorities in co-operation with this organization towards a political dialogue and transfer of experience. The key sectors for long-term co-operation include the water industry, forest restoration, environmental protection and agriculture (transport and communications were excluded).

The World Bank is currently implementing a US$100m project for upgrading the road sector in Kazakhstan, which was commenced in 1998 and is expected to be finished in 2004. The project calls for improving the effective use of roads and motor transport by selective restoration of road sections and expansion of routine repairs in accordance with existing standards and codes.

The European Bank for Reconstruction and Development, another large donor, has invested US$44m and DM14.8m in upgrading the sea port of Aktau. Having accomplished a difficult implementation phase, the Bank considers the project as successful.

Another project financed by the EBRD provides for improvement of track repair procedures and commercialization of Kazakhstan Temir Zholy. The expected investment in this smoothly advancing project (eleven purchase agreements have been already signed, and one agreement is on a bidding stage) is estimated at US$65m.

Together with the Asian Development Bank, the EBRD is also carrying out a project for the development of Kazakhstan’s roads. Construction of a highway from Almaty to Bishkek will cost US$28.5m. In addition, US$25m will be spent for construction of the airport in Atyrau.

Under an agreement signed in 1999, the Bank rendered a US$50m loan to Kazakhtelecom to support privatization of this major telecommunications company in Central Asia. The EBRD is committed to provide further technical assistance to Kazakhstan in legal reforms in telecommunications, development of the sector-specific policy, licensing procedures, interconnections and tariffs, as well as the establishment of an independent regulating authority. The project has entered the second phase.

The EBRD also plans to offer technical assistance to the Kazakhstan government in reforming the transport and communications sector.

The Asian Development Bank is engaged in two projects implemented in Kazakhstan—rehabilitation of the highway from Gulshad to Akchatau, which was estimated at US$50m and was completed in 2002, and rehabilitation of the highway from Almaty to Bishkek (US$52m, 2006).

The Islamic Development Bank also contributes to development of Kazakhstan’s infrastructure. The Bank finances construction of roads from Karaganda to Astana (around US$20m) and from Almaty to Gulshad (around US$9.6m). In addition, this international organization will provide technical assistance and carry out a feasibility study into construction of roads from Almaty to Bystrovka, from Karaganda to Astana, and from Borovoye to Petropavlovsk via Kokshetau, and a feasibility study into improvement of postal services.

By 2006, Kazakhstan expects to invest over US$460m (grants excluded) in transport and communications with the help of international financial institutions. The government has changed its approach to external borrowing against the background of a stable economic growth and a shrinking budget deficit. External loans will not be used for financing technical assistance programmes aimed at drafting legal acts, concepts and programmes, training and upgrading of government officials, equipment of government agencies, feasibility studies and project documentation for investment projects. This has become possible thanks to an increase in assets of the national and local budgets.

Loans from Kazakhstan’s second-tier banks could be another source of finance. However, they are unwilling to expand their presence in the sector, despite problems they face with lending efficiency in the domestic market. On the whole, loans to transport and communications account for a mere 5% in the loan portfolio of second-tier banks. This figure dropped last year as compared to the base period. According to the National Bank, loans rendered by second-tier banks to the transport sector reduced from US$140m in 2001 to US$130m in 2002. The situation in the communications sector is more encouraging—loans provided in the sector over the last two years remain at US$80m. Transport and communications seem to imply more risks and promise low return on investment for second-tier banks.

When planning economic development, China and other countries of the Asia-Pacific region involved experts from the most developed countries and created free economic zones, having invested in infrastructure development US$30-50m per square kilometre. Simple calculations show that Kazakhstan suffers shortage of investment in the national transport and communications system.