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Kazakhstan: A Case Study Of Privatization Problems

Almaty, 7 January 1997 (RFE/RL) -- Kazakhstan, like most of the other emerging economies, has just finished a difficult year characterized by efforts to make progress in transformation.

The problems of transition show clearly in that country's efforts to revitalize industries through privatization, particularly involving foreign participation.

Most of Kazakhstan's industrial giants were privatized in 1996, with foreign interests being the buyers or joint venture partners in most cases. Among the complexes sold were key facilities such as the Qaragandy metal plant, which produces ferrous metal items, and which was one of the biggest such plants in the Soviet Union.

There was also the Sokolov-Sarbay iron ore developing factory; the Yuzhneftegaz oil company's Kumkol field; the heating and power system of Almaty city and others.

In all, 70 percent of all enterprises were sold into private hands, raising 19,000 million tenge (about $263 million) for the state treasury.

The involvement of foreigners in the process to such a great degree was not popular with a public raised in an atmosphere of hostility to foreign capitalists. And workers who had been told that sale to foreign owners would solve the chronic problem of unpaid salaries soon learned that the outsiders had not brought any magic formulas with them.

The situation was made more acute by the fact that in Kazakhstan many of the smaller towns were established in the Soviet era specifically to serve as housing areas around a major plant. Therefore any economic problems with the local plant produces a catastrophic impact on the town.

And so it has turned out. The realization among workers that sale to private ownership would not immediately improve their situation was a contributing factor in the mass protest actions and hunger strikes which broke out in central Kazakhstan in 1996.

One foreign takeover shows some of the pitfalls. A year ago the head of Global Mineral Reserves Incorporated, a joint venture including Western partners, signed an agreement with the local Committee on State Possessions taking over the Shubarkol Coal Mine in the central Qaragandy region. In the agreement were clauses that Global would take a number of steps to improve living conditions of the mine workers. But it Global was not able to meet those obligations because of lack of finance.

Other sell-offs have run into stormy weather politically. The former mayor of Almaty, Zamanbek Nurkadilov, complained in Parliament about the South Korean Samsung Corporation, which bought the Jezkazgan Non Ferrous Metals plant in Central Kazakhstan. Nurkadilov said that Samsung had not been using its own money for the development of the purchased plant, but was using finance provided by the Kazakh government. Nurkadilov also criticized the owners of the Qaragandy Metal Plant, a joint venture called Ispat-Karmet on the same grounds, saying they had not brought in real investment from abroad. His statements heightened rumors about corruption among government members.

One foreign company which had a particularly lively time in 1996 was the Belgian firm Tractebel, which took over the Almaty electrical and heating supply system. As part of an efficiency drive they cut staff. That led to worker demonstrations. They announced increased fees. That led to consumer resistance. They cut off supplies for a few days to some suburbs of the capital as a reminder to local authorities to take the payment of bills seriously. That led to further uproar.

Tractebel's aim was to put the supply company on a rational economic basis, thus in the long run ensuring efficient service to the client. But its efforts were widely misunderstood. Tractebel is however persisting, and has issued assurances that 1997 will be a better, smoother year. It has reached agreement with trade unions on paying wage arrears.

The Kazakh government also has issued assurances that the privatization process will start to bear fruit this year and next year in the form of re-invigorated companies.