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Report: Concern at rush to privatize in Kyrgyzstan

While the president insists quick sales of state assets are the only way to attract investment, critics fear the process will be handled poorly. There is growing concern at the latest phase of privatization in Kyrgyzstan, with analysts warning that transparency could be sacrificed in the rush to sell off key assets. – report by Elina Karakulova and Jyldyz Mamytova.

In recent years, parliament has acted as a check on privatization of the power industry, in particular. But the new legislature elected in December is dominated by loyalists of President Kurmanbek Bakiev, and is unlikely to exercise the same kind of scrutiny, still less try to block the process. At a February 13 session of parliament, President Bakiev reiterated his determination to complete the privatization process as a way of injecting cash into moribund sectors of the economy such as the electricity industry. He referred to figures that suggest the power industry misses out on as much as 40% of its potential revenue, in part due to defects on the transmission network and malfunctioning meters. “Until private individuals interested in cutting commercial losses get involved, we shouldn’t expect improvements,” news agencies cited Bakiev as saying.

In consequence, the government plans this year to sell off a number of key energy-related businesses, or grant concessionary management rights to them. They include electricity distributors Severelektro in the north of Kyrgyzstan, and Oshelektro and Jalalabadelektro in the south. Also up for sale is Bishkekteploset, which pipes hot water to the capital Bishkek, and the carbon fuel-fired power station that supplies both the heating for this system and the city’s electricity. These sales are expected to go through before summer, and in the autumn it will be the turn of the state telecoms and gas retail enterprises, Kyrgyztelecom and Kyrgyzgaz. Suyerkul Bakirov of the Committee for Managing State Property, the government’s privatization agency, told IWPR the freezing winter had brought home the need for new investment in the energy sector. He said the Severelektro company alone required $60 million to replace old equipment, lay new transmission lines and build transformers. “The cold weather led to maximum energy consumption and completely overloaded the sector,” he said. “We need to accept that the existing capacity is not designed to cope with massive consumption of electricity by a population cooking food and heating homes.”

The current plans to sell off power companies is in fact only the final stage of a prolonged denationalization process launched in 1998 which saw the monolithic Kyrgyzenergo divided into several component companies - one to run the power stations, another the national grid, and others distributing electricity to consumers. Bakirov said independent experts would shortly be invited to draft a program for the fourth and final phase of privatization. Bakyt Beshimov, an opposition Social Democratic deputy, said he feared the process would see many of the mistakes made in previous phases being repeated. Much of the criticism in the past has revolved around lack of transparency and mismanagement which has left the restructured power companies performing worse than before This year, Beshimov fears that the sheer haste with which the sell-off is being pushed through could lead to failure. “The government hasn’t clearly defined the aims and objectives of privatization or the form it will take.” He recalled that during previous privatizations, officials made very similar-sounding promises that the government budget would reap billions of dollars from sales and revenues. But this never happened. Last year, for example, the government earned only about 14 million dollars from the sale and use of state property.

Outside the power industry and a few other big monopolies, Kyrgyzstan has largely completed the denationalization process which it embarked on soon after it became independent in 1991. Between 1991 and 2007, more than 7,000 enterprises – about three-quarters of all state-owned property – went into private hands. However, the effect was not to create a vibrant, diverse private sector, but simply to create a new kind of monopoly where key assets passed into the hands of a few privileged regime insiders. Accusations of corruption, lack of transparency and unequal distribution of property were a key driving force behind the so-called Tulip Revolution of 2005, which forced former president Askar Akaev to flee. “Years later, it became clear there had been no real privatization, merely a process that people began calling ‘grab-itization’ [prikhvatizatsia],” said Beshimov. “I fear that the next phase of privatization will see a repeat of the same scenario,” he said, explaining that this meant privatization for a lucky few, while the majority of the population was excluded in the absence of lack of mechanisms to ensure accountability. “Unfortunately, we don’t have the conditions to conduct privatization successfully, such as an independent judiciary or free media,” he added.

Other observers and politicians note that the domination of parliament by Bakiev’s Ak Jol party will mean crucial decisions are made without discussion. The party took 70 of the 90 seats in the Kyrgyz parliament in the December election despite being created from scratch only two months beforehand. Bishkek businessman Sergei Semenov told IWPR he did not believe the process would be conducted in anything like an open manner. “Despite the government’s loud assurances, I don’t believe the privatization process will be transparent because there are too many interested parties,” he said. Semenov said that in addition to public scrutiny, privatization would only work when there were coherent laws on taxation, customs regulations, company rules, and guarantees that the law was supreme and that investments were protected. He might also have mentioned a degree of probity in government. A recent World Bank study rated Kyrgyzstan among the 20 most corrupt states in the world. The same study said the country also had one of the least attractive tax regimes for investors.

Askar Oskombaev, the current deputy minister of economic development and trade, insists things have to be different this time. “If denationalization results in assets simply falling into the hands of a group of individuals, then privatization will have been pointless,” he said. Oskombaev says the government will need to ensure it has cast-iron contractual guarantees that the new companies will not suddenly bump up charges for consumers as a way of recouping costs.

Sabyrbek Moldokulov, a former trade minister, told IWPR that before the latest sales got under way, Kyrgyzstan should reflect on the mistakes made in previous phases. “We should not allow the kind of ‘grab-itization’ that we’re all so familiar with,” he said. “Only if investors abide by Kyrgyzstan’s terms, including observing certain social requirements, should the process go ahead.” Moldokulov does not agree with the kind of out-and-out privatization the government is planning, arguing that the state should retain a controlling share in these enterprises. One independent economist who did not wish to be named went further, saying effective management did not require privatization to take place at all. On the contrary, he said, losing control of strategically important sectors such as the hydroelectricity industry might turn out to be highly disadvantageous to the Kyrgyz state. “For a state that lacks oil and gas, it is shortsighted from both a political and economic point of view to place its electricity companies entirely in private hands,” said the economist. “Kyrgyzstan should try to make use of the one advantage it has over other states - its water resources. The demand for energy is growing tremendously. For that reason, Kyrgyzstan shouldn’t cede its control.” (IWPR)


Jyldyz Mamytova is an IWPR contributor in Bishkek. Elina Karakulova is an IWPR editor in Bishkek. IWPR = Institute for War and Peace Reporting