Generating much heat but no Kazakh profits
Kazakhstan is far from developing a transparent business climate
The New York Times, 13 May 2001

By Douglas FRANTZ

ALMATY, Kazakhstan -- Nearly five years ago, when Kazakhstan was hailed as a new democracy with great potential wealth, an American energy company bought one of the world's largest coal-fired generating plants in the northern part of the country and started to modernize it.

Today, some people in Kazakhstan are prospering from its oil resources, though the country's credentials as a democracy are in doubt. But the American multinational, the AES Corporation, is struggling to turn a profit on an investment of more than $200 million.

"It's a very tough operating environment, especially considering the low income of the general population and the regulators' desire to keep the rates low and ignore the needs of the company to invest in upgrading," Vitaly Lee, the AES country director, said in an interview in his office here.

AES has plenty of experience in difficult environments. Much of the growth that turned the company into one of the largest independent energy providers has come in locales that others considered too risky, like Colombia, Tanzania and India.

The challenges in Kazakhstan range from bartering with customers for goods like cars, eggs and vodka to trying to persuade people to pay for electricity. AES has also tried to persuade tightfisted regulators to raise rates and dodged constant demands for bribes, company officials and Western diplomats said.

Obstacles are common. The promise of riches from oil and gas resources attracted billions of dollars in foreign investment. But despite progress, Kazakhstan is far from developing a transparent, Western-style business climate.

"There are still some sticking points for foreign investors, and bribery is as big a problem as it ever was," said an American business executive, who insisted that his name not be used because Western companies signed an agreement with the government not to criticize it in the press.

Bribery is a widespread problem in the developing world. Central Asian nations fare poorly on the annual ranking of corrupt countries by Transparency International, an organization trying to fight corruption.

In a widely publicized case, the United States Justice Department is investigating whether James Giffen, an American lawyer, transferred $30 million in commissions from foreign oil companies to bank accounts controlled by President Nursultan Nazarbayev of Kazakhstan and other government officials.

Mr. Giffen, an adviser to Mr. Nazarbayev, has denied wrongdoing, and Kazakh officials have called the accusations false and malicious.

In a lesser-known case that reflects many of the hazards of doing business here, prosecutors in Belgium and Switzerland are investigating $55 million paid to Kazakh business partners by Tractebel, the energy arm of the French conglomerate Suez.

Tractebel's former chief executive acknowledged in a radio interview last year that he had authorized the payments as commissions to win projects in 1996 and 1997. A company spokesman said Tractebel was cooperating with the investigation, but declined to comment further.

The Tractebel case is interesting because the payments did not protect the company once it started providing electricity to Almaty, the country's largest city, and operating a 6,000-mile network of gas pipelines.

"They gave a very large commission payment up front and didn't pay after that," Anthony Mansfield, a former Tractebel executive in Almaty, said in an interview. "The authorities made it virtually impossible for the company to operate."

Regulators refused requests to raise electricity rates. The regional governor, a self-described former boxer, said in a local TV interview that he had threatened to beat up a Tractebel official at a reception. At one point, Tractebel asked an international arbitration court to force regulators to increase the rates.

While the electricity business was losing money, Tractebel was making a profit transporting gas through the pipeline. But when it got rid of the local partners, Kazakh banks froze its accounts and the government started a public campaign against the company.

Mr. Nazarbayev criticized the company as not investing enough in Kazakhstan, and Tractebel soon began negotiations to withdraw from the country. Last December, it sold its holdings to a state-owned company for $100 million, about half the amount invested.

The president's criticism was part of a perceptible shift in attitude toward Western companies and governments evident in some Central Asian countries. A decade of assistance and investment has not produced prosperity, and there is growing impatience in some quarters. In Kazakhstan, for instance, Mr. Nazarbayev recently questioned some financial benefits accorded foreign companies, and government officials reacted sharply to the recent State Department human rights report, which was critical of Kazakhstan.

Martha Brill Olcott, an expert on the region at the Carnegie Endowment for International Peace, said the Tractebel episode demonstrated the risks of doing business where laws were undeveloped and governments could be fickle.

"Payments get you in the door, but it doesn't create the business environment that a Western firm needs," she said in a telephone interview from Washington.

AES has yet to earn anything in Kazakhstan. When the company started selling electricity in northern Kazakhstan, even big commercial customers did not have the cash to pay. AES agreed to barter arrangements, trading electricity for cars used by its staff, rail transportation and, in some cases, vodka and other products that could be sold by middlemen.

"That was the only way to do business," Mr. Lee, a Kazakh national, said.

AES needed all the revenue it could muster. The huge coal-fired plant in Ekibastuz was only 16 years old, but the roof had fallen in, and the turbines were in poor shape. It was built to supply electricity to vast regions of the Soviet Union, but AES spent $90 million to approach 25 percent capacity.

The company also bought the rights to operate two thermal plants and four hydroelectric plants near Ust-Kamenogorsk, in eastern Kazakhstan. Mr. Lee said additional money had been invested there.

AES prides itself on providing clean, safe energy at reasonable prices. In Kazakhstan, it sells electricity for 0.6 cents a kilowatt hour, one of the lowest rates in the world. Still, Mr. Lee said, the company could not persuade regulators to let it raise rates and pass on to customers the cost of revenue-generating improvements like new meters.

Part of the problem is that customers are unaccustomed to paying for electricity.

"The mind-set in Kazakhstan is that electricity is a right, not a privilege that you have to pay for," a Western diplomat in Almaty said.

In Kazakhstan, the company has been criticized as not investing enough. "They have not fulfilled a series of conditions," Kanat Berentayev, a government economist, said in an interview.

Before increasing its investment substantially, AES officials said, the company needs the assurance of a better revenue stream. Still, Dennis W. Bakke, the company's chief executive, refused to complain about the business environment.

"I think Kazakhstan wants us, though it is not always easy to tell," Mr. Bakke said in a telephone interview from AES headquarters in Arlington, Va. "Business can be risky everywhere."

The New York Times, 13 May 2001