Since 2008, President Bakiev has embarked on a privatization mission. Lessons from around the world and most recently other former Soviet countries, including Russia, Kazakhstan, and others, clearly illustrate that privatization is not an end to itself. Rather the process of privatization is the key to successful transition from a centralized to a market economy. With this goal in mind, Kyrgyz civil society, with the business community at its helm, continues to sound alarms over speedy privatization that ensues in Kyrgyzstan with little transparency and much public skepticism. Opaqueness in the privatization process, combined with drastic increases in utility costs, undermines the public’s trust in the government and leads to a potential further consolidation of economic power in the hands of the elite. Kyrgyz civil society is rightly concerned regarding today’s decisions that damage tomorrow’s economic prosperity.
Especially controversial are the recent sales of SeverElectro (Kyrgyzstan’s electrical distribution company) and KyrgyzTelekom. At the heart of the matter are two issues that the civil society sees as highly problematic: (1) the grossly undervalued sale prices of these companies to the nation’s detriment and (2) lack of justification for the selection of the buyer with questionable ownership and little proven management history. Kyrgyzstan’s electrical distribution company SeverElectro, for example, is reported to have privatized/sold for $3 million (see article in Russian), while according to local experts and civil society leaders, its value had been estimated in a range between $300 million and $137 million.
In a letter to the Prime Minister on February 10, 2010, a respected civil society leader and Parliament Deputy Roza Otunbaeva (she was also former Minister of Foreign Affairs and Kyrgyzstan’s ambassador to the U.S. and the U.K. under the previous government) accused the government of bankrupting national assets through mismanagement, corruption, nepotism and unconstitutionality. Ms. Otunbaeva says that the public is well aware that on any given day SeverElectro’s worth exceeds $3 million, given the excessive investment it has received over the years and the value of its equipment around the country. Ms. Otunbaeva and other civil society leaders are asking the government to justify the sale of this public asset for a price that is at least 45 times less than its lowest valued worth.
In addition, SeverElectro was sold to a local buyer, pushing aside viable international bidders. This is highly problematic, as the ownership of the Kyrgyz buyer remains rather obscure: the company was founded only a few years ago with no demonstrated management experience and no prospects to improve the operationability of the vital utility provider. Local grassroots outcry points to a likely degradation of electrical services, which already follows on several years of regular black outs and brown outs with soaring prices, causing millions of dollars in losses for businesses and immeasurable hardships for the population, particularly in the impoverished rural areas. An European international buyer with proven management experience would have not only substantially improved the management of SeverElectro, but would have also brought new technologies to Kyrgyzstan with international standards of excellence.
In another blow to the government’s credibility in managing the privatization process, the day before announcing the privatization/sale of its main telecom company, KyrgyzTelekom, the government changed the company’s fee structure causing its customers’ fees to skyrocket and fueling the suspicion of fraud and corruption. Like in the case of SeverElectro, the public is questioning the buyer’s credentials and ownership.
KyrgyzTelekom was sold to a consortium of one local company, two off-shore companies and one Kazakh company, all recently formed entities, again, pushing aside viable international bidders, including such giants as Russia’s RosTelekom and Turkey’s TurTelekom. It was sold for a mere $40 million, while its recently acquired equipment alone is worth hundreds of millions of dollars, according to some Kyrgyz experts. Ms. Otunbaeva says in her letter that in her former position as Minister of Foreign Affairs she was personally aware of the tens of millions of U.S. dollars invested into KyrgyzTelekom.
Local opposition leaders point to soaring corruption as the result of the consolidation of the nation’s assets in the hands of the government elite to the detriment of the Kyrgyz public. Due to lack of viable information and trustworthy sources, speculations abound that the true owners of these and other major national assets are members of the President’s family and other elite families.
If President Bakiev’s privatization plan intends to serve as a basis to attract foreign investors, it is important to note that international indicators point elsewhere. Kyrgyzstan ranks 162nd out of 180 countries in the perception of the level of corruption, placing it on par with Venezuela and Guinea-Bissau in the 2009 CPI report. While the World Bank’s Doing Business Database placed Kyrgyzstan among the top 10 reformers of 2009, it was in the same ranks of Belarus, Azerbaijan and Rwanda as a country that undertook most reforms in a given year – not that it has actually reached the levels of international investment appeal.
A privatization process that is not rooted in transparent and credible procedures, protected property rights, strong rule of law, free media and independent judiciary has been proven time and again to result in detrimental consequences to the business owners and country as a whole. This is particularly harmful if the business shareholders are the taxpayers and citizens themselves and when the businesses are monopolies or near-monopolies in utility provision.
These lessons have been made clear on numerous occasions in Kyrgyzstan, where the rule of law remains weak, viable democratic institutions are lacking, and property rights are frail and unprotected. To this end, it is in the best interest of investors/businesses to ensure that transparent, credible acquisition processes are practiced in order to secure long-term property protection for the companies, ensure shareholder satisfaction with services, and uphold viable management standards. In the case of utility companies, shareholders are in effect customers as well as taxpayers. A transparent, responsible, accountable and credible privatization process is crucial to instituting a long-term market-based democracy. Unfortunately, Kyrgyzstan still hasn’t learned that lesson.
Published Date: February 24, 2010