07ASTANA1243, KAZAKHSTAN: MERMOUD DISCUSSES PUBLIC-PRIVATE

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Reference ID Created Released Classification Origin
07ASTANA1243 2007-05-08 10:33 2011-08-30 01:44 CONFIDENTIAL//NOFORN Embassy Astana

VZCZCXRO8710
PP RUEHDBU
DE RUEHTA #1243/01 1281033
ZNY CCCCC ZZH
P 081033Z MAY 07
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC PRIORITY 9396
INFO RUCNCIS/CIS COLLECTIVE 0156
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC
RUEBAAA/DEPT OF ENERGY WASHDC

C O N F I D E N T I A L SECTION 01 OF 06 ASTANA 001243 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
DEPT FOR EB/ESC; SCA/CEN (O'MARA) 
 
E.O. 12958: DECL: 03/15/2017 
TAGS: ECON EPET ETRD PGOV KZ
SUBJECT: KAZAKHSTAN: MERMOUD DISCUSSES PUBLIC-PRIVATE 
PARTNERSHIP AND ASTANA,S PUSH FOR DIVERSIFICATION 
 
REF: A. A) ASTANA 1240 
     B. B) ASTANA 1122 
     C. C) 06 ASTANA 150 
     D. D) ASTANA 753 
 
Classified By: CDA Kevin Milas; reasons 1.4 (b) and (d). 
 
1. (C) Summary.  In April 24-26 meetings with Prime Minister 
Masimov, other Kazakhstani government officials, and private 
sector representatives, Special Representative for Commercial 
and Business Affairs J. Frank Mermoud discussed the 
Kazakhstani government,s fast-evolving approach to economic 
diversification and opportunities for bilateral engagement in 
the framework of the Public-Private Partnership Initiative. 
Masimov outlined the GOK,s latest plans to shift its focus 
away from further development of the oil sector toward 
domestically-driven diversification.  He presented the new 
&30 corporate leaders of Kazakhstan8 strategy, the GOK,s 
own public-private initiative, and expressed interest in 
exploring ways to create links with the proposed U.S. 
initiative.  Representatives of the private sector emphasized 
tax and customs administration, along with a rule of law 
deficit, as key obstacles to sustainable business and 
economic development.  They expressed hope that the 
Public-Private Partnership Initiative can become a vehicle 
for addressing these concerns.  Ref A reports Masimov,s and 
Sagadiyev,s remarks on the GOK,s current plans for the oil 
sector.  Please see action request in paragraph 25.  End 
summary. 
 
2. (SBU) Special Representative Mermoud met the following 
representatives of the Kazakhstani government and the 
business sector: 
 
April 24: 
-- Raimbek Batalov, President of the Forum of Entrepreneurs 
-- Arman Moldakhmetov, Vice President of the National 
Innovation Fund 
-- Courtney Fowler, Partner - Pricewater House Cooper 
-- Kenneth Mack, Partner - Chadbourne & Parke, President of 
the American Chamber of Commerce 
 
April 25: 
-- Serik Akhmetov, Chairman of the Association of Financiers 
of Kazakhstan 
-- Yerlan Sagadiyev, Advisor to the Prime Minister 
-- Nurlan Kapparov, President of KazInvest Bank 
 
April 26: 
-- Azat Peruashev, President of the &Atameken8 Union of 
Entrepreneurs 
-- Ulf Wokurka, Deputy Chairman & CFO of Samruk State Holding 
Co. 
-- Karim Masimov, Prime Minister 
-- Alikhan Smailov, Chairman of Managing Board ) &KazAgro8 
National Holding Co. 
-- Askar Batalov, Vice Minister of Industry & Trade 
-- Serik Akhmetov, Minister of Transport & Communications 
 
Shifting Focus Away from Oil( 
----------------------------- 
 
3. (C) On April 26, Prime Minister Masimov provided Special 
Representative Mermoud and the Ambassador with some 
background on the GOK,s current economic thinking. 
President Nazarbayev, Masimov said, attached a lot of 
importance to economic diversification even in the early days 
of Kazakhstani independence.  &Back then,8 Masimov mused, 
&we were hoping for a Marshall Plan.8  &Unfortunately,8 
he continued, Kazakhstan is &most interesting8 to foreign 
investors as a supplier of oil, not &other things.8  Now, 
the Prime Minister stated, the government has decided to take 
action into its own hands.  &Before, we focused on selling 
natural resources.  Now we want to sell products.8 
 
4. (C) In an earlier meeting, Masimov,s Advisor Yerlan 
Sagadiyev expressed the view that the GOK,s spending of its 
oil windfall is crowding out the desired private investment 
in the non-extractive sector.  Kazakhstan,s corporations, he 
said, are directing their investment abroad as they flee the 
uncertainty created by the GOK,s heavy-handed involvement in 
a wide range of sectors.  He explained that the challenge is 
to delineate the separation of the government,s and the 
private sector,s roles in the economy.  The idea, Sagadiyev 
stated, is for the state to inform the private sector what it 
will do and what the state expects from the private sector. 
 
ASTANA 00001243  002 OF 006 
 
 
 
And Toward a New Vision: the Thirty Corporate Leaders 
--------------------------------------------- -------- 
 
5. (C) The new plan, Masimov explained, rests on a 
Kazakhstani-driven pursuit of diversification.  The idea is 
to appoint 30 domestic corporations as &corporate leaders8 
or &national champions8 and entrust them with large-scale 
investment projects.  &Our financial system is strong and 
lets us take much of the risk ourselves,8 Masimov stated, 
&(what we need (from abroad) is the know-how.8  The three 
areas of focus, he said, are education, healthcare, and 
transportation infrastructure. 
 
6. (C) Sagadiyev provided some of the practical details.  On 
April 20, President Nazarbayev met with some of the top 
representatives of the Kazakhstani business world (Ref B). 
The meeting was
a prelude to the identification of 30 
large-scale investment projects to be assigned to these 
corporate leaders.  &Thirty,8 explained Masimov to S/R 
Mermoud and the Ambassador, &is because twenty is too few, 
and forty is too many.8  Vice Minister of Industry and Trade 
Askar Batalov told S/R Mermoud that each project will range 
in size from $500 million to $1 billion.  (Note:  According 
to a posting on the Presidential Administration website, each 
project will have a minimum implementation cost of $100 
million.  End note.) 
 
7. (C) The next steps, Sagadiyev explained, are for the 
government to identify the 30 corporate leaders and have 
relevant ministries sign memoranda of understanding with 
them.  &Not all ministries,8 Sagadiyev remarked, &are 
sincere in pursuing in this.8  The plan, then, is to start 
with two: Industry and Trade, and Agriculture.  Sagadiyev 
added that it was his job to find the corporate champions: 
&it has been five days, and we have been traveling 
heavily.8  He alluded repeatedly to using Britain,s 
privatization experience as a guide in pursuing this vision 
and, particularly, in drafting the MOUs: &we have a sample 
from Britain signed by Thatcher during energy 
privatization.8   The first MOU is to be signed in about a 
month.  U.S. consultants, Sagadiyev added, are being used 
extensively in implementing this vision, including on the 
issue of the public-private partnership. 
 
A Role for Foreign Investors? 
----------------------------- 
 
8. (C) While presenting his government,s new economic plan 
as partly a reaction to the failure of foreign investors to 
sufficiently embrace opportunities existing in Kazakhstan,s 
non-extractive sector, Masimov stressed the vision,s 
welcoming orientation toward foreign participation.  &We 
will have open, clean tenders,8 he assured S/R Mermoud and 
the Ambassador.  &If foreign investors are interested, they 
are more than welcome,8 continued Masimov, and &if not, 
that,s okay.8  But, he concluded, &conferences and good 
economic relations are not enough.8   Sagadiyev took the 
same results-oriented approach: &We are seeking specific 
projects.  We have passed the stage of understanding; we need 
to do things.8  Masimov cited GE,s locomotive-building 
operation near Astana and the Fed Ex operations in Almaty as 
the kind of &good projects8 the GOK is seeking. 
 
9. (C) Both Masimov and Sagadiyev expressed appreciation for 
the potential role that the U.S. technical expertise could 
play.  &We do not have enough experience and technology; 
this is where we are looking for Western participation,8 
stated Masimov.  He called the U.S. &number one8 in 
technology and economic development and pointed out two 
specific areas with particular promise for collaboration: 
agriculture (&very good discussions with Secretary 
Johanns8) and alternative energy.  Sagadiyev explained that 
current electricity tariffs, &a killer8 to alternative 
energy, will be increased.  &At 7-8 cents (per kw/hr),8 he 
mused, &alternative energy will make sense.8  The U.S., he 
added, is &quite advanced8 in this area. 
 
10. (C) Batalov also emphasized that the plan presents an 
invitation to foreign investors, describing the 
identification of 30 domestic leaders as a &signal8 to 
foreign companies of who their Kazakhstani partners should 
be.  He also mentioned the idea of creating consortia with 
the participation of international financial institutions 
(IFI,s) and the notion that private companies are better 
vehicles for conducting tenders than the government.  The 
 
ASTANA 00001243  003 OF 006 
 
 
thirty leaders will choose their partners among domestic and 
foreign companies.  Furthermore, Batalov stressed, 
Kazakhstan,s Law on Investments provides the same legal 
treatment to foreign and domestic investors.  Still, Batalov 
was clear about the strong domestic orientation of the GOK,s 
current vision: &This is about proposing to domestic 
companies projects that would, in the past, be offered to 
foreign investors(  The thirty will take the projects.  This 
is what protectionism is.8 
 
11. (C) Batalov was both candid and vague on the precise 
relationship the government will have with the corporate 
leaders.  He echoed Sagadiyev,s description of a quid pro 
quo arrangement in which the government provides 
&facilitation8 (e.g. engineering platforms, the legislative 
base, WTO accession), and the &leaders8 will commit to 
carrying out their projects.  He mentioned another reason for 
entrusting the &breakthrough projects8 exclusively to 
domestic companies.  &We cannot tell foreign investors,  go 
there and do this,,8 stated Batalov, &but we can say this 
to domestic companies.8   He summed up the philosophy of the 
vision as &ninety percent economics, ten percent national 
pragmatism.8  Batalov acknowledged S/R Mermoud,s cautionary 
note on the risk of creating monopolies.  &We are familiar 
with the experience of South Korean chaebols as well as the 
British experience,8 Batalov said.  Describing the South 
Korean scenario as &too extreme,8 he remarked, &we will be 
somewhere in the middle.8 
 
Business Climate ) the View from Within 
--------------------------------------- 
 
12. (C) The themes raised by GOK officials had little in 
common with the concerns S/R Mermoud consistently heard from 
representatives of the Kazakhstani private sector.  Raimbek 
Batalov, President of the Forum of Entrepreneurs ) an 
Almaty-based NGO which positions itself as the genuine 
national voice of small- and medium-sized business as well as 
regional and industry business associations ) outlined four 
government failures as the primary obstacles to economic and 
business development in today,s Kazakhstan.  The GOK,s key 
failures, Batalov said, are in the areas of tax policy, 
customs policy, rule of law, and trade policy.  (Note: 
Raimbek Batalov is not known to be related to Vice Minister 
Batalov.  His focus on trade policy appears to stem from his 
role as the CEO of a major retail chain.  End note.) 
 
13. (C) These policy and enforcement failures, according to 
Batalov, are driving an untold portion of the country,s 
economic activity into the shadow economy.  Much of the 
trend, Batalov explained, starts at Kazakhstan,s borders.  A 
regulatory loophole for small- and medium-sized businesses, 
combined with customs officials, notoriously corrupt ways, 
leads to a situation where most goods entering Kazakhstan do 
so &under the radar.8  Importers break up their wares into 
smaller portions and &misdeclare8 them at the customs 
control, relying on the customs officials, incompetence and 
venality.  Thus escaping the tariff system, such goods 
directly proceed to enter Kazakhstan,s shadow economy via 
bazaars, where they reach the consumer without ever being 
subjected to taxation, standardization or other regulations. 
(Note: In September 2006, Lubov Khudova, Chairwoman of 
Kazakhstan,s Light Industry Associat
ion, described to 
Econoff precisely the same phenomenon and partly blamed it 
for the spectacular decline of Kazakhstan,s textile 
manufacturing.  Ref C.  End note.)  Batalov concluded that 
the Business Forum,s research indicates that over 60% of all 
business activity in Kazakhstan takes place in the shadow 
economy, far above official estimates of 24%. 
 
14. (C) Courtney Fowler, Partner of Price Waterhouse Coopers, 
and Kenneth Mack, Partner at Chadbourne & Park and President 
of AmCham Kazakhstan, firmly confirmed Batalov,s emphasis on 
corruption as the key impediment to business development in 
Kazakhstan.  Fowler stressed that tax administration ) 
marred by corruption, incompetence, and a lack of proper 
accounting practices ) places a tremendous burden on 
business.  On the corporate side, she told S/R Mermoud, the 
situation is also troubling.  It is common for companies to 
keep two sets of (unmatching) books ) one for accounting 
purposes, the other for taxes.  Heads of auditing 
departments, Fowler added, are frequently not accountants, 
let alone auditors.  Echoing Batalov,s message on the shadow 
economy, she remarked that &no one bats an eye when you pay 
for something with $200,000 cash.8  Fowler lamented the 
GOK,s failure to address the &systemic8 issues and cited 
 
ASTANA 00001243  004 OF 006 
 
 
the rule of law deficit as a major problem: &if foreign 
investors cannot trust their Kazakhstani partners,8 she 
mused, &Kazakhstan will never achieve diversification.8 
 
15. (C) Serik Akhanov, Chairman of the Association of 
Financiers of Kazakhstan, presented to S/R Mermoud a rather 
optimistic view of the country,s financial system and 
macroeconomic situation.  He named inflation as a principal 
macroeconomic risk but stressed that the central bank remains 
watchful in guarding against it.  He stated that the 
Kazakhstani private sector,s mushrooming external borrowings 
are creating a vulnerability to external shocks, particularly 
to rising interest rates, but explained that Kazakhstan,s 
financial institutions are turning abroad due to a lack of 
long-term capital at home.  While lauding Kazakhstan,s 
banking sector as highly developed and operating on par with 
international standards, Akhanov said that the insurance and 
pension industries continue to lag.  He appeared largely 
unperturbed by the rapid expansion of the real estate sector, 
saying that only the &elite8 top 2% of the housing market 
was showing significant signs of speculative activity. 
 
Inside the State Holding Companies 
---------------------------------- 
 
16. (C) Arman Moldakhmetov, Vice President of the National 
Innovation Fund (NIF), briefed S/R Mermoud on the Fund,s 
approach to spurring diversification.  The NIF is a component 
of the Kazyna Fund for Sustainable Development, a state 
holding company currently encompassing 14 development 
institutions.  The NIF,s model is based on equity 
participation in high-tech, &knowledge-economy8 projects. 
This participation ranges up to 49% ownership, since ) 
Moldakhmetov explained ) &we do not want to manage.8  The 
NIF sees its key role as bringing together the government, 
the academia, and the corporate sector.  &Kazakhstan,8 he 
remarked, &is full of money.  The shortage is of good 
projects.8  Moldakhmetov mentioned the NIF,s involvement in 
three &technoparks8 established in Uralsk, Karaganda, and 
Almaty to provide infrastructure for entrants into the 
knowledge economy.  These, he said, &are not doing well. 
There is furniture, nothing else.  No one is working.8 
 
17. (C) Samruk State Holding Company CFO Ulf Wokurka briefed 
S/R Mermoud on Samruk activities within the framework of the 
holding companies, &three principal activities8: 
improving corporate governance, helping to develop 
Kazakhstan,s domestic capital market, and facilitating 
&select investment opportunities.8  Expanding on the third 
topic, Wokurka explained that in May, Samruk would establish 
a fully-owned &investment subsidiary,8 which would 
coordinate targeted infrastructure projects, addressing such 
issues as project finance, until the point in which the 
projects could be &handed over8 to interested private or 
state entities.  Wokurka mentioned the construction of a 
combined heat and power plant near Balkash (Ref D) as an 
example. 
 
18. (C) Wokurka explained that in order to facilitate 
development of a domestic capital market, the Prime Minister 
had directed Samruk, along with the other state-holding 
companies, to develop further candidate companies for IPOs, 
in accordance with the rules establishing the Almaty Regional 
Financial Center.   To this end, Wokurka said, Samruk was 
steering its companies toward financing by means of debt 
instruments, in addition to the more-customary commercial 
loans. Wokurka told S/R Mermoud that Samruk,s next IPO (of 
the Mangistau oblast electrical grid operator) would occur in 
late 2007.  The GOK had planned to transfer to Samruk another 
fifteen companies, Wokurka said, but Samruk had asked that 
the transfer be delayed while the holding company better 
assimilated its existing holdings.  Wokurka also confirmed 
that a new company, &Samruk Energy,8 would soon be 
established to manage Samruk,s five power generating 
companies. 
 
19. (C) Alikhan Smailov, Chairman of the Managing Board of 
the newly created state agricultural holding company 
&KazAgro,8 briefed S/R Mermoud on his organization,s 
plans.  KazAgro, he explained, currently incorporates seven 
of the GOK,s agricultural companies, whose missions range 
from intervention in grain markets to providing microcredits 
to rural communities to purchasing and reselling livestock 
products.  KazAgro,s overall mission, Smailov said, is to 
manage the state,s agricultural assets in accordance with 
corporate management standards as well as national goals. 
 
ASTANA 00001243  005 OF 006 
 
 
The plan, he explained, is to increase these assets, value 
by &taking some corrective measures to establish proper risk 
management, internal control, etc.8  The next step would be 
to privatize some of the holdings.  &This,8 Smailov summed, 
&is our approach, and it has been approved by the Prime 
Minister.8 
 
20. (C) Smailov spoke extensively about KazAgro,s plans in 
the ethanol market.  The vision is to construct bioethanol 
plants to produce ethanol for export and achieve production 
levels of 3 billion liters per year.  Large-scale beef and 
dairy farms are also planned, and KazAgro is expanding grain 
export infrastructure by building terminals on the Caspian. 
He noted that KazAgro is seeking foreign investors, interest 
in these projects, particularly in bioethanol.  What is 
needed from foreign partners, Smailov said, is &modern 
equipment at reasonable prices8 and help with marketing 
these products abroad. 
 
Prospects for the Public-Private Partnership 
-------------------------------------------- &#x000
A; 
21. (C) S/R Mermoud received wide-ranging input from his 
interlocutors on the possible directions of the bilateral 
Public-Private Partnership Initiative (PPPI).  Masimov 
expressed an interest in proceeding with the Initiative.  He 
named Sagadiyev as the primary Kazakhstani interlocutor on 
the issue and suggested that Sagadiyev travel to Washington 
in June to explore the avenues the PPPI may take.  Minister 
of Transport Serik Akhmetov told S/R Mermoud that his 
ministry has a great interest in developing international 
contacts and attracting foreign investment.  The $30 billion 
Transportation Strategy passed last year, Akhmetov said, 
provides for some of the funding to come from &non-budget8 
sources, such as foreign investment. 
 
22. (C) Business sector representatives ) Fowler, Mack, and 
the Forum,s Raimbek Batalov ) focused on the PPPI,s 
potential in addressing the &systemic8 issues (e.g. tax and 
customs administration, the rule of law) currently getting 
short shrift from the GOK.  Batalov and Mack, in particular, 
expressed a strong interest in establishing collaboration 
between the Entrepreneurs Forum and the AmCham.  Both Batalov 
and Mack held the view that organizing a discussion of ) and 
proposing solutions to )&systemic8 issues in a PPPI forum 
could spur the GOK to much-needed action.  Fowler suggested 
building links between U.S. and Kazakhstani business schools 
as a way to rectify the shortage of management expertise. 
The Financiers Association,s Akhanov likewise expressed 
interest in fostering exchanges among corporate leaders at 
varying levels.  The Innovation Fund,s Moldakhmetov offered 
to provide input on any future plans or ideas in the context 
of the PPPI.  Azat Peruashev, Chairman of the&Atameken8 
Union of Entrepreneurs, which purports to be Kazakhstan,s 
official national business association, expressed a strong 
interest in building links with U.S. counterparts. 
 
Comment 
------- 
 
23. (C)  The fact that the proposed bilateral PPPI coincides 
with the GOK,s own public-partnership program presents 
opportunities as well as potential challenges.   The GOK,s 
new approach is unapologetically focused on domestic 
companies and highly results-oriented.  Kazakhstani 
officials, underlying question seems to be: how can the PPPI 
fit into Kazakhstan,s own public-private program and what 
concrete results (i.e. investment commitments) can it bring 
in the foreseeable future?  The GOK,s intensity may be 
partly explained by practical considerations: Masimov 
recently told Ambassador Ordway that his government will only 
have two to three years to achieve its goals. 
 
24. (C) The GOK,s &30 corporate leaders8 program, while an 
outgrowth of the macroeconomically sound desire to diversify 
the economy away from the extractive sector, is fraught with 
risks.  Without proper safeguards, the vision may well lead 
to creation of more monopolies, a phenomenon already plaguing 
a range of key economic sectors such as telecommunications 
and civil aviation.  In any case, the policy signals the 
GOK,s continued adherence to a &top-down8 approach to 
economic diversification and an apparent lack of urgency in 
confronting the &systemic8 issues that are the main 
concerns of the business sector.  Notably, the business 
representatives, hopes for the PPPI were that the Initiative 
would specifically address the problems the GOK is continuing 
 
ASTANA 00001243  006 OF 006 
 
 
to ignore.  End comment. 
 
25. (SBU) Action request: Post requests Department guidance 
regarding next steps on the Public-Private Partnership 
Initiative, as well as clarification of which office will 
have the lead. 
 
26. (U) This cable has been cleared by S/R Mermoud. 
MILAS

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