Industry Trend Analysis - Development Finance And Privatisation To Diversify Competitive Landscape - FEB 2017

BMI View: A combination of de velopment funding inflows and an expansive government privatisation initiative will facilitate a significant diversification of Kazakhstan ' s competitive landscape in the coming years.

The stage is set for a continued diversification of Kazakhstan's infrastructure competitive landscape in the coming years. On the one hand, we expect that the financial backing and technical expertise of institutions like the World Bank and the European Bank for Reconstruction and Development (EBRD) will serve to mitigate the risk profile of Kazakh infrastructure projects in the eyes of international investors. On the other, we expect that a planned privatisation programme will offer the necessary avenue for international investors to gain exposure to Kazakh infrastructure assets.

Privatisation Plan Opens Door To International Investment

We view Kazakhstan's plan to offer equity stakes in over 60 state-controlled companies with measured optimism (see, ' Privatisation Programme: Upside Obscured By Risk, ' December 14, 2016). Significant icons like national airline Air Astana, oil and gas company KazMunaygas (KMG), mining company Tau-Ken Samruk, railway operator Kazakhstan Temir Zholy, and utility Samruk Energy all slated to float shares in the coming years. Allowing private investors to purchase equity stakes in state-owned companies will incentivise additional capital investment in an effort to maximise return on infrastructure assets, which we expect to translate into heightened project activity.

We expect that the fundamentals underpinning the country's infrastructure market will render such projects attractive to a diverse array of European and Chinese investors. That said, we caution that Kazakhstan's planned privatisation is not without downside risks, including a subpar operating environment, a poor track record with regard to previous privatisation schemes, and possible Russian resistance on national security grounds.

Select Projects Backed By Development Institutions
Development Institution Project Name Sector Value (USDmn) Companies Status
Source: BMI Key Project Database
EBRD, World Bank Kurty-Buribaytal Road Upgrade, Astana-Almaty Highway Roads & Bridges 688 Government of Kazakhstan[Sponsor]{Kazakhstan}, European Bank for Reconstruction and Development (EBRD)[Financier]{United Kingdom}, World Bank[Financier]{United States} At planning stage
EBRD, International Finance Corporation Almaty Ring Road Project (BAKAD) Roads & Bridges 680 Korea Expressway Corporation[Construction]{South Korea}, SK Engineering & Construction Co. Ltd[Construction]{South Korea}, Ministry of investments and development of the Republic of Kazakhstan[Sponsor]{Kazakhstan}, International Finance Corporation (IFC)[Financier]{United States}, European Bank for Reconstruction and Development (EBRD)[Financier]{United Kingdom} Contract Awarded
Asian Development Bank Beineu-Shetpe-Zhetybai-Aktau Road Reconstruction Roads & Bridges 500 DOHWA ENGINEERING CO LTD[Construction]{South Korea}, Government of Kazakhstan[Sponsor]{Kazakhstan}, Asian Development Bank (ADB)[Financier]{Philippines} Under construction
EBRD Astana Airport Modernisation and Expansion Project Airports 324 European Bank for Reconstruction and Development (EBRD)[Financier]{United Kingdom}, Airport Management Group[Operator]{Kazakhstan}, Kazakhstan Temir Zholy[Sponsor]{Kazakhstan} Under construction
EBRD, Asian Development Bank Shymkent (South Kazakhstan) - Uzbek Border Road Upgrade Project Roads & Bridges 231 Asian Development Bank (ADB)[Financier]{Philippines}, European Bank for Reconstruction and Development (EBRD)[Financier]{United Kingdom}, Ministry of Transport and Communications of the Republic of Kazakhstan[Sponsor] Project finance closure
State Development Bank of China Shelek Wind Power Station, Yenbekshikazakh, Almaty Power Plants & transmission grids n/a State Development Bank of China[Financier]{China}, Development Bank of Kazakhstan[Financier]{Kazakhstan}, Samruk Energy[Operator]{Kazakhstan} Project finance closure
World Bank Temirlan Bypass - Lot 8A Roads & Bridges n/a Government of Kazakhstan[Sponsor]{Kazakhstan}, World Bank[Financier]{United States} Under construction
EBRD Shymkent Wastewater Modernization Project, South Kazakhstan Water n/a T Vodnye Resursy Marketing[Operator]{Kazakhstan}, Government of Kazakhstan[Sponsor]{Kazakhstan}, European Bank for Reconstruction and Development (EBRD)[Financier]{United Kingdom} Under construction

Development Funding Will Help Allay Risk Concerns

External funding from international financial institutions like the Asian Development Bank (ADB), European Bank for Reconstruction and Development (EBRD), and the Islamic Development Bank (IDB) will be integral to facilitating increased diversification in Kazakhstan's competitive landscape (see, ' Central Asian Infrastructure: Development Funding Key To Sustaining Growth, ' November 9, 2016).

Development institutions will lay the foundation for increased international investment by improving the risk profile of Kazakh projects. Firstly, they will provide substantial upfront equity to projects the private sector would be unwilling to finance on their own balance sheets, allowing riskier projects to move forward. Secondly, they will lend their institutional clout and proven expertise in the delivery and management of infrastructure projects in challenging operating environments, shoring up the confidence of international investors. According to our Key Project Database (KPD), 34% of infrastructure projects in Kazakhstan are supported by the involvement of a development institution, with the China Development Bank, the EBRD, the World Bank, and the Asian Development Bank (ADB) representing four of the top five infrastructure financiers in the country. In light of our conviction that such institutions will play a decisive role in delivering infrastructure projects in the coming years, we expect that they will continue to serve as a magnet for international investment.

Development Finance Most Crucial In Transport
Transport Sector: Market Share By Company Nationality
Source: BMI Key Projects Database

Transport: Chinese Investment To Complement Development Finance

The footprint of development finance institutions is most pronounced in Kazakhstan's transport sector, with development funding supporting 31% of projects according to our Key Project Database. The Asian Development Bank, the World Bank, and the EBRD are particularly involved in the sector, financing projects spanning the transport spectrum, such as the USD324mn Astana Airport Modernisation Project (EBRD), the USD231mn Shymkent Uzbek Border Road Upgrade (ADB), and the Almaty - Khorgos Road Upgrade Project (World Bank).

The private sector currently has a more limited presence, reflecting the residue of Kazakhstan's Soviet past which prioritized national ownership of transport assets under the umbrella of state companies like Kazakhstan Temir Zholy (KTZ). Having said that, a diverse array of private sector players based in both emerging and developed markets are making inroads into the country's transport industry, with Italy-based Salini Impregilo reconstructing the USD127mn Almaty-Ust-Kamenogorsk Road, Dubai-based DP World enhancing container capacity at the Port of Atkau, and South Korean companies Korea Expressway Corporation and SK Engineering & Construction constructing the USD680mn Almaty Ring Road using a PPP model. We note that Chinese companies at present have only a modest presence in Kazakhstan's transport space, with a 3% market share as measured by our KPD.

However, we expect Chinese companies in the coming years to increase their exposure to Kazakhstan's transport sector in line with the Chinese government's 'Belt and Road' policy of facilitating greater East - West overland trade by investing in logistics infrastructure throughout Eurasia (see, ' China - Europe Trade Supporting Rail Investment, ' July 4, 2016).

Increased Chinese/Russian Investment Reflects Geopolitical Considerations
Energy & Utilities: Market Share By Company Nationality
Source: BMI Key Projects Database

Energy & Utilities: Geopolitical Considerations Key

State-owned enterprises like KazMunayGas and Samruk Energy continue to retain significant market share in Kazakhstan's energy and utilities space, which accounts for roughly 54% of project value moving through the country's broader construction pipeline. We note, however, that the government has increasingly entered into financing partnerships with state-owned Chinese and Russian companies, a fact which reflects the geopolitical imperatives associated with energy sector and pipeline investment in the region. Accordingly, Russian companies (including state-owned enterprises like nuclear company Rosatom, Rosneft, and Vnesheconombank) and Chinese entities (like China National Petroleum Corporation and the State Development Bank of China) have emerged as increasingly active players in Kazakhstan's energy infrastructure sector, securing respective market shares of 5% and 7% (as measured by our KPD).

Although the footprint of the private sector remains fairly limited, we note that water and power projects like the Aktau Seawater Desalination Plant (which is sponsored by France-based Veolia), the USD4.3bn Balkhash Coal-Fired Power Plant (with Germany-based Siemens providing equipment), and the USD350mn Ust-Kamenogorsk Thermal Power Plant (which will be operated by Czech-based North Trade Energy) are moving forward with the involvement of private contractors. Looking forward, the prospective privatisation of state assets in the energy and utilities space informs our expectation that the private sector is poised to build upon its current footprint.

Construction Sector Fairly Well Diversified
Residential & Non-Residential: Market Share By Company Nationality
Source: BMI Key Projects Database

Residential & Non-Residential: Greater Developed Market Involvement

The EBRD is the most active financier of non-residential infrastructure in Kazakhstan, with our Key Project Database indicating that the development bank is currently supporting over USD2.7bn in project value. Reflecting China's continued interest in Kazakhstan's energy resources, Chinese companies are particularly prominent in the construction of industrial infrastructure assets relating to the oil sector and account for 9% of wider residential & non-residential market share. We have seen Chinese companies like China Petroleum Engineering and Construction and Sinopec Engineering Co active in the modernisation of the Shymkent Refinery and the USD1.7bn aromatics production facility at the Atyrau refinery.

We note that private sector companies from developed markets firms tend to be more heavily concentrated in design, project management, consulting, and other ancillary roles -- companies like Adrian Smith + Gordon Gill Architecture (United States) are currently constructing the Astana EXPO, while Switzerland-based Foster Wheeler is providing equipment to the Shymkent Refinery and France-based ECM Technologies is providing project management and design services to the USD233mn Astana Solar Panel Manufacturing Plant.