Acting Chairman of the Board of the Public-Private Partnership Project Monitoring Center LLP Aslan Bulatov:
NATIONAL HOLDING BAITEREK ENGAGED IN THE IMPLEMENTATION OF OVER A DOZEN PPP PROJECTS IN RECENT YEARS IN KAZAKHSTAN
At the time of low prices for main export commodities it is necessary to look for new ways and mechanisms for achieving the country’s economic growth. In President Nursultan Nazarbayev’s view, it’s necessary to put stakes on the infrastructure development, expand the Public-Private Partnerships (PPP) sector, attract more private foreign investments. In an interview with Interfax-Kazakhstan Acting Chairman of the Board of the Public-Private Partnership Project Monitoring Center LLP - a subsidiary of the National Holding Baiterek - Aslan BULATOV talked about which PPP projects will be coming up in the near future in this country, what problems private companies and state authorities face when implementing such projects and what solutions they find.
- Aslan Bulatovich, please, tell, for what purposes was the Public-Private Partnership Project Monitoring Center set up given that Kazakhstan’s Public-Private Partnership Center at the Ministry of [National] Economy is already active in our country?
- The idea of creating this Center as an authorized body in the PPP sector belongs to Kazakhstan’s Ministry of National Economy while the Coordination Council on PPP at the Kazakh government recommended setting up this legal entity in 2013. It was decided that the newly created center would function as part of the holding Baiterek. Currently the Center is operating in the form of the LLP and a 75% stake in it is owned by the holding Baiterek, 25% by Kazakhstan’s PPP Center. An objective is set for this center to help Kazakhstan’s infrastructure development by providing services on the structuring and monitoring of projects, including those, which are implemented through PPP mechanisms. The Center features some sort of a government consulting firm in the PPP field, we are providing consulting services to the state central and local bodies.
-Namely what services do you provide to the ministries and administrations in the course of creating such infrastructure projects?
- In the two years contact has been established with many state bodies. In particular, now the Center interacts with the Ministry of Investment and Development, Ministry of Health and Social Development, Ministry of Education and Science, Interior Ministry and Defense Ministry. Each of these ministries needs infrastructure. For example, the Ministry of Health and Social Development needs new hospitals, Ministry of Education and Science needs schools, day care centers, the Ministry of Investment and Development needs new rail and motor roads, airports To date, the center has 11 projects in its portfolio.
We provide consulting services on devising projects required to the ministries and administrations.
More concretely, our task is to implement the ideas of Kazakhstan’s ministries, agencies regarding whatever projects, namely: to make all evaluations on the project pay-back period, make analyses, put together all required documents, make sure contest procedures are held and so on. This is not an easy process that involves various spheres of competence: financial, legal, technical aspects … Before initiating a project, it is necessary to substantiate the need for its implementation. In most cases the need is superficial; everyone understands that a hospital or a road is needed, but the budgetary process requires a well-founded substantiation: why the hospital is needed, why with such and such capacity, why this area is chosen for its construction. In parallel with these questions it is necessary to proceed with a search for a private investor to implement the project.
The selection of an investor would not depend on who could give more money. There are many other criteria and in particular, this is requirements for the project construction and maintenance.
Everything depends on terms and conditions the state puts forward to each project, whether the state is ready and seeks to involve a private investor with this or that project.
- In the preparation of what projects has your center participated in, what projects are to be implemented?
- There are 11 projects in our portfolio to date, more projects will be added to it this year.
One of the first concession projects the Center participated in is the BAKAD (Greater Almaty Ring Road). The project value is 124 billion tenge (362.23 tenge/$1). We participated in the project design and finalization of the concessional offer, in particular, in the project financial and economic concept, in the drafting of bidding paperwork, the concession agreement. Late last year the receipt of bids from potential concessioners began, as a result, bids have been submitted from three international consortiums. Currently the bids are being assessed. The start of the project implementation is planned for the second half of 2016.
Under the terms and conditions, in addition to the financing of the road construction a private investor would be in charge of its further maintenance, including the installation of the road toll collection system.
A private investor would manage the road within 20 years.
The construction of a 300 bed multidisciplinary hospital at the Medical University named after Asfendiyarov is one of the first projects in Almaty jointly with the Health Ministry.
The project value is 38 billion tenge. Currently we are in the process of preparing a contest, there are already potentially interested companies.
The center is also participating in the implementation of a hospital construction project in the city of Karaganda, an out-clinic construction project in the city of Kyzylorda.
In the road construction sector, in addition to BAKAD, there is a 48-km long four-lane bypass road construction project in the city of Shymkent. Its value is nearly 12,5 billion tenge.
The Center is also participating in the implementation of project at the regional level. As one of the examples I can call the construction of a light rail transportsystem in Almaty. The provisional cost is 58.8 billion tenge. Currently consultants are drafting a concessional offer.
At our estimate, the PPP sector is developing at the fastest tempo in Kyzylorda region. Currently the regional administration is keen to implement five projects using the PPP mechanisms.
All the projects I have enumerated are ongoing and the work on them is in progress. There are also long-term projects.
- What problems did you have to face and still have to face in the process of the project implementation involving the PPP mechanism in Kazakhstan?
- Certainly, there are problems, they are available everywhere, und quite often solutions to them are based on compromises. The full-fledged necessary legislative basis is created for developing PPP in the country, there is the Law on Concessions, last October the Law on PPP was adopted. Some problems arise when we proceed directly with the implementation of projects involving the PPP mechanisms. To this end, it’s possible to say that the laws in the PPP sector evolve together with projects. One shouldn’t forget that one project may be completely different from another one.
There are various obstacles to raise funds. One of the obstacles is forex risks, which now arose from the current situation in our market and, in particular, in the global economy. Our national currency went for “free floating”, as a result of that the tenge significantly weakened against the dollar. Given that foreign investors normally embark on projects, who put in monies in conditional currency units, naturally, they will have a question whether the state will ensure forex risks. Under the BAKAD project parties managed to reach such a consensus, it was decided that the Kazakh government would cover forex risks in the implementation of the project and compensate investors for a forex rate difference if such necessity occurs.
There is another obstacle we are faced with in the course of the project implementation in the country’s regions, this is the absence of domestic investors’ required collateral. For example, currently the administration of North Kazakhstan region is holding bidding process for the construction of three kindergartens, two of them for 140 children, another one – for 90 children. The project overall value, the administration intends to implement with the help of the PPP mechanism is 1.2 billion tenge. In fact, the amount is 100-fold less than BAKAD, but there are certain obstacles here. The point is that Kazakhstani investors, willing to implement a project involving the PPP mechanisms, have no collateral required for getting a loan from commercial banks. Domestic commercial banks are ready to provide moneys to private businesses but against collateral. Practice shows that private businessmen do not want to mortgage their business. That’s why a question arises why not to put up those facilities to be built as part of the PPP project as collateral? But the legislation on concessions imposes a ban on concession facilities being put up as collateral. There is reason to do so because this is inexpedient from the point of view of national security.
Abroad this problem is resolved using project financing tools. The mechanism envisages putting up future money flows but not solid assets, in other words, the bank provides a loan under a guarantee that this project will bring some income shortly.
Unfortunately, for the time being this is not working with us. Kazakhstan Development Bank, which seemingly should finance such projects in terms of its nature, finances only against “solid” collateral. Now we are working with [this] bank, other financial institutions, Holding Baiterek in order to alter these approaches and implement this scheme.
- In light of the latest instructions of the head of state to focus on the development of PPP, attraction of investments what plans does your Centers have for this year?
- Since setting up the [Center] we have being forming the PPP project portfolio, have established interaction with the state authorities, consulting firms, defined for ourselves project in the next two years to deal with. Of course there will be new projects. I believe that this year will be marked with the Center transformation, which will help create new infrastructure projects in all of Kazakhstan’s regions. In the long term we position ourselves as a PPP project promotion center not only at the national but also at the regional level. Yes, currently the country’s regions have their own PPP regional centers operating there, but no tempo and quality of implementation is seen yet there such as at the national level. In our view, it’s also necessary to unify regional projects because each region has its vision of their implementation. We believe that nationwide experience of creating PPP projects can be projected onto the regional projects.
The Center’s priority objective is to complete the projects available currently in our portfolio.
In addition, Holding Baiterek, of which we are part, highlighted the year 2016 as the year of PPP and the PPP field for the holding will be one of the main development aspects. There is a complex objective ahead of us, on which we will continue working throughout 2016.
-Given that the PPP field just starts developing in Kazakhstan are there enough experts in this area and at your Center in particular?
- Our Center has small staff, only 15 persons work. If necessary we outsource consultants with required profiles. It makes no sense to retain staff from various sectors, for example, a medic, a road engineer… Our staff include financiers, economists and lawyers. If in the process of doing this or that project the need for single-discipline specialists arises, we outsource them. We work this way with consulting firms. There are the International Finance Corporation, part of the World Bank, companies from the “Big Four” among our partners.
One of the issues to be resolved in the PPP field in Kazakhstan – the financing of the project preparations. Consultants are needed for any project preparations, whose services make up 2% to 5% of the project value abroad. Here in Kazakhstan the overall cost of the project preparations does not exceed 1% of the total project value. In turn, the end product depends on the quality of the project preparations.
When investors come over, in the first instance they are interested who drafted a financial scheme, who prepared a forecast (of passenger traffic, schedule, demand etc). If a well-known and renowned firm did this job, which showed itself in the market, the level of trust in the project would rise. But if staff from a low-key firm are employed as consultants, investors doubt whether they should believe in evaluations, analyses and are forced to hire another consultants, and these are additional barriers to the project implementation.
There is best practice for attracting non-budgetary funds to prepare projects. This mechanism is called the success fee. The mechanism secures reimbursement of expenses for PPP project preparations and successful bidding process selecting a private partner on the part of the private partner (party to a concession agreement) upon conclusion of the agreement on PPP (concession agreement). Bidding process, which goes well, on selecting a private partner, is considered a success in providing consultancy services.
It should be noted that currently the "success fee" mechanism is set out in the bidding process terms on selecting a concession party to the BAKAD project as the concession party’s commitments to secure reimbursement of non-budgetary expenses for co-financing the project preparations after the conclusion of the concession agreement.
Thus, already at the stage of project planning the state and private sector jointly participate in pre-project works and this is also PPP of its kind.
- Thank you for the interview!
February, 2016
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