In September 2015 Kazakhstani Government announced that in furtherance to large-scale privatization program being realized in Kazakhstan over the last couple of years, 60 major state-owned companies will become private before 1 January 2018.
New wave of privatization in is being realized over the last several years, and it includes hundreds of companies owned by largest holdings controlled by the state, such as National Welfare Foundation “Samruk-Kazyna” JSC (“Samruk”), National Management Holding “Baiterek” JSC and other, as well as companies owned directly by state. Many of these companies (most of which are rather minor) have already become private. At the same time, the intent of the Government to sell 60 major state-owned companies (the “Top-60”) might be of particular interest to investors, since the list of companies will include basically the largest state-owned companies in Kazakhstan working in the area of extraction of natural resources, energy, banking, transportation and infrastructure.
Below we provide some general information about key principles and legal framework of privatization, as well as about the companies included to the privatization list.
Key Facts about New Privatization Initiatives
While the list of Top-60 has not been formally published yet, it is known that 34 companies out of the list will be subsidiaries of Samruk. It is expected that the list will include the shares of the following companies (percentage rate indicated below shall not be considered as a share in a specific company, but rather as a share in all assets and enterprises of a holding company):
• 10% share of national uranium producer “Kazatomprom” JSC (it is expected, however, that only non-core assets of Kazatomprom, such as production of solar batteries, will be sold);
• 10% share in national railroad company “Kazakhstan Temir Zholy” JSC;
• 49% share in the National Company “Kazakhstan Engineering” JSC, providing technical solutions for top companies in the area of subsoil, national defense, transportation etc;
• Airports of Astana, Kyzylorda, Pavlodar, Aktobe and Atyrau;
• 29,9% of shares in KazZinс LLP;
• Several energy-producing facilities, including Ekibastuz GRES-1 LLP and Ekibastuz GRES-2 Station JSC;
• Pavlodar and Atyrau oil refinery plants, and many other.
It is also expected that the companies to be privatized will include energy distribution companies, transportation companies, including airlines; banks and other major enterprises.
The Government has announced its intent to make the privatization process transparent by creating an independent project office with participation of international consultants. Privatization process in relation to Top-60 will probably start since the beginning of 2016.
Certain Legal Aspects of Privatization Process
The new wave of privatization in Kazakhstan is being realized based on the Decree of the Government of the Republic of Kazakhstan on Approval of Complex Privatization Plan for 2014-2016 dated 31 March 2014 (the “Decree”). The Decree has defined the list of companies owned, directly or indirectly, by state, as well as the procedure of their privatization. The key method of privatization being used within the frameworks of the Decree is electronic sales (realized by several procedures which may vary depending on nature of the asset). Privatization is generally open for any Kazakh or foreign investor.
The new privatization initiative was, in fact, based on Yellow Rages Rule of Singapore, there the key principle is to privatize only those companies which have at least one major private competitor, to support competition at local market. Privatization is generally based on further key principles:
• Shares in an enterprise shall be sold as a single lot (i.e. cannot be sold by parts). At the same time, in case of strategic importance of a privatized asset for national security etc., the seller (state or state-owned enterprise) shall keep the controlling interest (not less than 51%);
• Priority is given to the sale of non-core assets;
• As mentioned above, a company to be privatized shall have at least one major private competitor. At the same time, it is understood that for many companies this condition may not be performed in full;
• Absence of high strategic or social importance (this is also conditional – investor would normally be required to keep working places and support social balance in a region, and sale and purchase agreement will normally provide a condition that a contract could be terminated in case of non-compliance with such requirement);
• Investor would also normally be required to perform certain other requirements in addition to the above, in particular, requirements on environmental protection. Investor would also be expected to keep core activity of an enterprise unchanged.
Due to specific status and role of Top-60, the Decree and related regulations may not reflect all requirements applicable to the sale of major companies such as mentioned above. Some of our practical comments on questions which may require changes in law or shall be taken into consideration by a potential investor, are outlined below:
• Certain companies of Top-60 are relating to so-called “strategic objects”, i.e. objects having strategic importance for the national economy and defense. Normally, sale of shares in a strategic object would require approval of the Government. It is not clear at the moment whether such approval would be issued prior to privatization (which might happen in case privatization will be realized through stock exchange), or with respect to a particular investor based on results of privatization. It is also not clear what should happen if such approval will not be given to a particular investor following results of privatization;
• Certain companies of Top-60 are performing activities in the area of telecoms. According to national security regulations, foreign companies cannot own more than 49% of shares in a telecom operator, and acquisition of more than 10% of shares in such operator by any company (local or foreign) shall require approval of the authorized state body (with all the consequences described above);
• Taking into consideration that the majority of companies in Top-60 are joint stock companies, we believe that they might be privatized not by way of electronic sales, but through the stock exchange.
Conclusion
In current economic conditions Kazakhstan is taking major steps to increase flexibility of economy, including privatization as a first priority. We believe that privatization of Top-60 shall attract interest of major local and foreign investors. At the same time, it is to be noted that the legal framework for that kind of massive privatization is not yet finalized, and certain legal developments will probably take place in the near future.
ABOUT THE AUTHOR: Yerzhan Yessimkhanov
Yerzhan has extensive experience in the areas of Construction and Infrastructure, Real Estate and Telecommunications. Prior to joining GRATA International, Yerzhan worked in the Kazakhstan Investment Fund group, in a major Kazakh development company, and in the largest international law firm. Yerzhan acted as a consultant on a number of large infrastructure projects realized over the last decade in Kazakhstan, including work as a head of the legal team of Kazakhstani largest ski resort reconstruction project realized within the frameworks of Asian Games 2011; leader of the team of consultants working on reconstruction of the largest electrical energy producing enterprise in Kazakhstan with overall project value of approximately US$ 700 million; and leader of the team of consultants representing Kazakhstan’s largest infrastructure construction company in several judicial proceedings with overall value of the claims of approx. US$ 70 million.
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