Is Privatisation The Panacea?

Five years ago, Kazakhstan’s first President Nursultan Nazarbayev unveiled The National Plan – 100 concrete steps on implementation of five institutional reforms.

Mark Beer

At its launch, during the Astana Economic Forum, President Nazarbayev said “One hundred concrete steps are a response to global and local challenges and, at the same time, it is a plan for the nation to join the top 30 most developed countries in the new historical conditions. One hundred concrete steps will give Kazakhstan a margin of safety that will help the country through a difficult period, implement the Kazakhstan 2050 Strategy and strengthen Kazakh statehood.”

It was noteworthy that, within the concrete steps, there were only two references to privatisations. One limited to land and the other to the healthcare sector.

Much has changed since 2015, and we saw earlier this week an announcement by the Kazakh National Economy Minister Ruslan Dalenov that the Kazakh Government and National Bank of Kazakhstan are set to elaborate a joint plan of action in case of the deterioration of the country’s economic situation. He said that the necessary amendments to legislation would be submitted to the Mazhilis in order to ensure stability for strategic investors and to build a stable environment for attracting direct investment.

We have also seen a renewed interest in privatising some of Kazakhstan’s most valuable State assets, a process which started with Kazatomprom, the world’s largest uranium producer. In 2018 it became the first large Kazakh company to undertake an IPO since 2008, raising $451 million on the London Stock Exchange and the Astana International Exchange (AIX), with fees to foreign advisors likely to be around $77 million.

Other companies that are said to be in the pipeline for privatisation include the national energy firm KazMunayGaz , Air Astana, telecoms operator Kazakhtelecom, KazPost, Samruk Energy and national railroad operator Kazakhstan Temir Zholy.

In total, the Ministry of Finance reportedly plans to sell 47 national assets worth $117.2 million, in addition to 246 communal property assets worth $170.5 million, 102 assets owned by national holdings worth $948.8 million, 78 corporate social entrepreneurship assets worth $15.9 million and 123 facilities.  Ultimately, the government aims to reduce state ownership of such strategic enterprises from 40 percent to around 15 percent.

There is no question that, when done well, privatisations can be beneficial, but equally, when done badly, they represent a loss to the national economy, and to the owners of the State assets, namely a country’s citizens.

According to the website of Sovereign Wealth Fund Samruk Kazyna, the reasons behind the push for privatisations are (i) optimisation of asset structure, (ii) transfer of technologies and capital into the companies, (iii) fostering development of Kazakhstan stock market, (iv) improvement of corporate governance, (v) transparency and performance of the companies, and (vi) incentives for development of small and medium enterprises.

But as the State plans to convert some of its most valuable assets into cash, assets that belong to each and every Kazakhstan citizen, how can the Government ensure that the sale will benefit the many, not the few.

It is certainly fair to say that, when looking at privatisations around the world that have done well, the privatised companies have become more economically efficient. The profit incentive allows inefficient businesses to cut costs, where Governments may, for political reasons, be comfortable with inefficiency: In practice, however, this often leads to job cuts, removal of worker protections and wage cuts, pushing the efficiency into the pockets of the private shareholders, and away from the workers.

It has also been suggested that privatised companies benefit from having less political interference, because governments are thought to make poor economic managers. However, for true economic efficiency, privatisation needs to come with deregulation, and the introduction of policies to allow more firms to enter the sector and increase the competitiveness of the market. It is this increase in competition that can be the greatest spur to improvements in efficiency, rather than the privatisations themselves. 

Indeed, without such systemic deregulation, privatisation doesn’t necessarily increase competition; it depends on the nature of the market. For example, there is no competition in tap water because it is a natural monopoly. There is also very little competition within the rail industry.

Lastly, it is said that privatisations are good because Governments raise revenue from the sales. However, this is a one-off benefit. On the flip side, it means Governments lose out on future dividends from the profits of public companies.

So Governments need to be sure, when cashing in on State assets, whether the net benefit to the citizen is positive or negative. 

History tells that sometimes a natural State monopoly is most beneficial for consumers rather than a private monopoly. A natural monopoly occurs when the most efficient number of firms in an industry is one. For example, tap water has very high fixed costs. Therefore there is no scope for having competition amongst several firms, in which case, privatisation just creates a private monopoly which might seek to set higher prices which exploit consumers. Therefore for some sectors, it is better to have a public monopoly rather than a private monopoly, and privatisation isn’t the best way to enhance economic efficiency. 

In addition, there are many industries which perform an important public service, such as education and public transport. In these industries, the profit motive shouldn’t be the primary objective of firms and quite often privatisations in these sectors have had adverse impacts on quality of delivery to the public. 

In addition, private firms are often motivated by short term gains. To please shareholders they may seek to increase short term profits and avoid investing in long term projects. For example, the UK is suffering from a lack of investment in new energy sources; the privatised companies are trying to make use of existing plants rather than invest in new ones.

So with privatisations being a double-edged sword, why do Governments become so enthused about their benefits. Sadly, in large part, it is a reliance on foreign advisors, generally financiers, lawyers and accountants: Advisors with no economic interest in the success of the privatisation in the medium to long term, or the benefit to citizens, but instead a significant short term interest in the substantial fees that the privatisations attract. 

I do believe that the 100 Concrete Steps, and its limited reference to privatisation, was visionary and correct. When a State sells assets that belong to its citizens, it must be sure that it is done for the right reasons, and in a way that generates the greatest economic advantage for all. Learning lessons from privatisations elsewhere, and applying them to the valuable assets in Kazakhstan will ensure that the next wave of privatisations delivers the maximum value for Kazakh citizens in the short, medium and long term. Kazakhstan must be wary of relying on advice from foreign financiers, lawyers and accountants that don’t have operations in Kazakhstan and employ Kazakh citizens, and it should insist on fee structures that don’t strip away the wealth of the Kazakh nation, but rather are interconnected with the long term success of the privatisation and the Kazakh economy.

The author is Mark Beer OBE, an expert on privatisations, having been involved with them since the UK’s rail privatisation in 1994. He is also co-founder of Seven Pillars Law in the Astana International Financial Centre, which provides advice that includes privatisation policy and how to maximise the economic gains from state fundraising.

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