|                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | KAZAKSTAN PRIVATIZES POWER GENERATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             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|**BISNISHome PageSearchBISNISEmbassyReportsCountryReportsIndustryReportsPublicationsSourcesof FinanceLeadsand EventsExchangeRatesState ExportsOtherSources** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | by Kevin LyonsAugust 1997U.S. and other
Western companies are playing a major role in privatizing electric utilities in
Kazakstan.  During the past year, more than half of Kazakstan's generating capacity has been sold
and Western companies are lining up to bid on the remaining state-owned power plants. 
Although there have been some problems, a pattern is being set for the eventual privatization of
the country's regional power distribution companies and the national power transmission grid. 
While existing power plants will continue to rely on Russian-made parts for their Soviet-era
equipment, the market for Western equipment is likely to grow as existing facilities are renovated
and new plants are built.Photo: e-primeThe Privatization Pattern
Privatization is being conducted by closed tenders from pre-selected bidders who usually have
established good relations with the Government of Kazakstan and are able to bring in additional
partners.  Two major U.S. investors, AES and e prime, were brought into Kazakstan deals by
foreign partners with good connections.  After selection, the winner puts down a small percentage
of the total value of the acquisition in the form of a "bonus," usually $1-5 million, and
immediately takes over management and operations--along with responsibility for all outstanding
debts.  The successful bidder must also commit to an investment schedule (usually one to five
years) for modernization of the acquired facilities.  As the foreign company invests, it acquires an
increasing stake in the Kazakstani utility, eventually resulting in ownership.Virginia-based AES became the first U.S. company to acquire a power plant in Kazakstan in
August 1996, when it purchased the giant Ekibastuz-1 power plant for a bonus of $5 million and a
commitment to invest $500 million over the next six years.  AES signed a power purchase
agreement with the Kazakstani Government as part of the deal, but this has not been honored,
according to Jim Ellison of AES's Almaty office.  AES  now believes that the only way to enforce
payment on its customers is to purchase a regional electric company.  Another U.S. firm,
Denver's e prime, together with the UK's Independent Power Corporation (IPC) and
Samsung of South Korea, bought a 70 percent stake in the 600-megawatt Karaganda-2 power
plant in March.American companies are also building new power plants in Kazakstan.  New Century Holdings
recently established Erem Aktobe, a joint venture with two Kazakstani companies to build a new
$80 million 150 megawatt gas turbine power plant in Kazakstan's northwestern Aktyubinsk
region, with equipment manufactured by General Electric.Regional Electric Companies
The Government of Kazakstan has focused so far on power plants and not distribution systems,
and privatization of the country's regional electric companies (RECs) has moved slowly.  Western
firms have also been wary of RECs due to the difficulty of collecting revenue from individual
consumers, as well as from hospitals, schools, and other public institutions.  RECs that have
industrial clients, however, such as the railroads and factories, are seen as much better prospects.Only one regional power company, Almatyenergo, has been sold to date.  The process has been
difficult, both for Kazakstanis and the Belgian utility which acquired it, Tractebel.  While the
company maintained electricity supplies throughout the winter of 1996-97, it was able to collect
only 60 percent of its billings.  To boost revenues, Tractebel hiked its rates on April 1, 1997,
particularly for residential consumers.  While this step provoked considerable controversy, the
price hikes have remained in place, partly due to strong support from then-Minister of Energy and
Natural Resources Viktor Khrapunov.  Customer collections for Tractebel have now reached 85
percent.AES' Ellison feels that, "The distribution business is quite a good business to be in because of the
direct connection with the customer."  While AES had been told by the Kazakstani officials that
there would be no problem acquiring distribution assets, the company has encountered pockets of
resistance in the government opposed to a single company obtaining generation and distribution
enterprises and fearful of a monopoly by a Western company.  Subsequently, AES's efforts to
acquire an REC have been blocked.  AES says it would welcome government input on tariff rates,
stating, "Please regulate us, just don't block our acquisition of distribution assets."The selection of a foreign manager for Kazakstan's national power distribution system has also
been  difficult.  Britain's National Grid group was initially selected in March after a competitive
tender.  National Grid proposed to pay a $30 million bonus for a 25-year management contract
and agreed to invest $1 billion over the next 10 years.  Negotiations quickly broke down,
however, and the government invited "runner up" ABB to enter negotiations.  Reportedly, neither
side could agree on a contract and in late May ABB's $1.4 billion framework agreement was
annulled.  The government has welcomed revised offers from National Grid and ABB as well as
proposals from other interested parties.Looking Ahead
Although the Kazakstani Government wants to privatize the entire power sector by year's end,
few believe this goal will be achieved.  Opinions differ on the number and quality  of the remaining 
assets available.  Nevertheless, U.S. and other Western utility companies are pursuing additional
deals in both power generation and distribution.  In order to attract foreign investors, the State
Investment Committee recently named power generation as one of the Kazakstan's priority
sectors for attracting investment and has offered tax breaks and other incentives to encourage
purchases.  For more information on doing business in Kazakstan, visit BISNIS Online at
www.iep.doc.gov/bisnis/country/cntasia.htm.  For information on upgrading Russian-made
power generating equipment, visit BISNIS Online at
www.mac.doc.gov/bisnis/isa/isa43.html.Kevin Lyons covers Kazakstan for BISNIS.  The U.S. Embassy in Almaty contributed to this
article.This report is provided courtesy of the Business Information Service for the Newly
Independent States (BISNIS)
|                                                                                                                                                             | U.S. and other
Western companies are playing a major role in privatizing electric utilities in
Kazakstan.  During the past year, more than half of Kazakstan's generating capacity has been sold
and Western companies are lining up to bid on the remaining state-owned power plants. 
Although there have been some problems, a pattern is being set for the eventual privatization of
the country's regional power distribution companies and the national power transmission grid. 
While existing power plants will continue to rely on Russian-made parts for their Soviet-era
equipment, the market for Western equipment is likely to grow as existing facilities are renovated
and new plants are built.