Since 1991, Kazakhstan has had to rely on the deteriorating infrastructure it inherited from the Soviet Union. As a result, nearly every piece of public infrastructure (such as roads and hospitals) in Kazakhstan requires a different degree of upgrading or expansion.
Kazakhstan authorities that traditionally spurred economic growth through expansive public spending have come to recognize that they cannot finance the necessary investments in public infrastructure from current budgets anymore and that a major part of future financing must flow from the private sector to meet the demands of the immense infrastructure financing gaps.
The need for the inflow of private capital is becoming ever more pressing because of the sharp decline in commodity prices and wide-ranging spillovers from Russia’s recession, as well as the low demand from China that hurts Kazakhstan’s export revenues.
As a result, faced with gloomy growth projections and shrinking budgets, the government of Kazakhstan seems finally to recognize that it has only one effective method to finance its growing infrastructure needs: public-private partnerships (PPPs).
PPPs as a financing mechanism, if properly used, can be a handy tool for the Kazakhstan government to not only attract private sector funds to infrastructure projects, but also to address corruption problems in public procurements and to provide a proper legal framework for the ongoing privatization of state-owned assets.
Kazakhstan, in particular, should tap the huge potential of PPPs participating in China’s Belt and Road Initiative by promoting good PPP practices to ensure high quality at lower costs.
For instance, the light rail system project in Nur-Sultan city, which was not structured as a PPP with financing and investments coming from China, should have been implemented under the open tender PPP legal framework in the first place.
The failure to structure this project as a PPP from the outset is now causing this project to fail and be an embarrassment for the Kazakh government as well as a waste of state budgets.
There are special PPP laws and concession laws in place in Kazakhstan and as of July 2019, more than 500 PPP agreements have been concluded in Kazakhstan to the amount of KZT1.29 trillion (US$3.34 billion).
There are, however, certain hindering obstacles for further proper development of PPPs in Kazakhstan, including the following major ones:
1. Continuous and piecemeal changes to the PPP legislation.
2. Poor PPP project selection and preparation by state authorities, mainly because of a lack of competence in the regions and/ or a lack of relevant state officials who are ready to take over the responsibility for making the necessary decisions.
3. Uncontrolled growth of ‘fake’ PPPs and concessions in the provinces (for example, there is quantity, but there is no quality in the PPP projects).
4. Lack of long-term and cheap tenge financing (such as a dead local capital market, with Kazakh commercial banks not ready to finance PPPs).
The time has come, therefore, to revisit the state policy for PPPs in Kazakhstan. There shall be more real ‘infrastructure’ PPPs at the national level with involvement of international financial institutions and foreign investors and fewer local-level ‘fake’ service-type PPPs.
This article was first published in Islamic Finance news Volume 16 Issue 31 dated the 7th August 2019.