ASIAN DEVELOPMENT BANK DIRECTOR LAYS OUT HIS PRIORITIES IN

UNCLAS SECTION 01 OF 02 ASTANA 002115

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, EEB

E.O. 12958: N/A
TAGS: PGOV ECON EFIN EINV KZ
SUBJECT: ASIAN DEVELOPMENT BANK DIRECTOR LAYS OUT HIS PRIORITIES IN
KAZAKHSTAN

REF: (A) ASTANA 2086 (B) ASTANA 2095

ASTANA 00002115 001.2 OF 002



1. (U) Sensitive but unclassified. Not for public Internet.


2. (SBU) SUMMARY. On October 24, Asian Development Bank (ADB)
Country Director Stephen Wermert briefed the Ambassador on ADB's
current priorities in Kazakhstan, touted the Central Asia Regional
Economic Cooperation Program and the Foreign Investment Council,
commented on the management and strategy of AES corporation, and
assessed the government's response to the current financial crisis.
END SUMMARY.

ADB FOCUS IS ON BANKING AND INFRASTRUCTURE


3. (SBU) During an introductory call with the Ambassador on October
24, ADB's Wermert, who has been in Kazakhstan for two and a half
years and also serves on the Regional Management Team of ADB's
Central and West Asia Department, informed the Ambassador that
Kazakhstan's level of GDP per capita excludes the country from
receiving low-margin loans from ADB. "Loans will not be a big
business for ADB in Kazakhstan," he said. Nevertheless, Wermert
disclosed that ADB is prepared to make its first loan to Kazakhstan
in five years for a major highway project that would reach to
western China. According to Wermert, the ADB's focus in Kazakhstan
will be on private-sector development in two main areas: support to
the banking industry, and private infrastructure projects in areas
such as water, electricity, and transportation, based on the
"Build-Own-Operate-Transfer" model. In banking, Wermert confided
that ADB's largest exposure to banks worldwide is in Kazakhstan,
"even greater than in China or India." In infrastructure, he
mentioned that the Government of Kazakhstan plans to conduct a
competition to build a new coal-fired power plant in the Balkhash
region. According to Wermert, Kepco (Korea),Datan (China),and
Matsui (Japan) will submit competing bids for a 75% stake in the
power plant. ADB considers that project its number one priority.
(NOTE: On October 13, President Nazarbayev was reported as saying,
"We have talked much about the construction of electric power
stations in Balkhash and in Kostanay, about the expansion of
Ekibastuz GRES (hydroelectric distribution station),hydro power
stations, and power transmission lines. The problem of power
engineering should be tackled. It is time to move from words to
action. This problem could slow down the entire country's economic
development." END NOTE).

CENTRAL ASIA REGIONAL ECONOMIC COOPERATION


4. (U) Wermert touted the Central Asia Regional Economic
Cooperation (CAREC) Program, initiated in 1997. (NOTE: The CAREC
Program operates in eight countries: Afghanistan, Azerbaijan, the
People's Republic of China (with a focus on the Xinjiang Uygur
Autonomous Region),Kazakhstan, the Kyrgyz Republic, Mongolia,
Tajikistan, and Uzbekistan. END NOTE.) To date, CAREC has focused
on financing infrastructure projects and improving the policy
environment in four areas: transport, energy, customs, and trade.
For Kazakhstan, the World Bank has the lead on energy issues (mostly
in the power sector),the Islamic Development Bank (IDB) has the
lead on trade, and the European Bank for Reconstruction and
Development (EBRD) has the lead on transportation. ADB's CAREC Unit
(CARECU) has served as the CAREC Program Secretariat since March

2000.

THE FOREIGN INVESTMENT COUNCIL


5. (SBU) Wermert briefed the Ambassador on the Foreign Investment
Council, a high-level body comprising 24 international companies in
Kazakhstan that meets twice annually and is chaired by President
Nazarbayev. He said that the EBRD President flies in from London to
attend and co-chair the meetings, along with CEOs or executive vice

ASTANA 00002115 002.2 OF 002


presidents from the companies. A major topic of discussion at the
June meeting was the investment climate in the power sector, while
the next meeting in December is expected to focus on Kazakhstan's
local-content requirements. The Ambassador suggested that there was
a natural synergy between the Foreign Investment Council and the new
Public-Private Economic Partnership Initiative (PPEPI),since many
of the issues and key players are likely to be the same. Wermert
agreed that the PPEPI could help to identify issues that could be
raised with the President at the Foreign Investment Council.

AES COULD USE AN IMAGE UPGRADE


6. (SBU) To support the development of Kazakhstan's power sector,
ADB considered making a loan to AES before it sold the GRES-1
coal-fired power plant in Ekibastuz to Kazakhmys (see ref A).
Wermert was directly involved in the negotiations and shared his
opinions about AES's management and conduct with the Ambassador. He
said, "An image upgrade for them would be useful" because they have
not been very successful in the region overall, noting AES's forced
withdrawal from the Georgia market and inability to enter the
Russian market. Wermert was surprised that AES did not distance
itself more forcefully from a negative June 2 Forbes article and
opined that AES's "Kazakhstani entity appears to operate
independently of the home office." He speculated that this was due
to the fact that AES's Kazakhstan operations do not require regular
infusions of cash payments. Wermert also suggested that AES "take a
more pro-active approach" to investing in Kazakhstan's
infrastructure and long-term development. He said that the public
impression of AES is similar to that of Western extractive
companies: they utilize Kazakhstan's natural resources to turn a
profit, which they use to pay internal dividends, and do not invest
in Kazakhstan's future growth. Noting that AES's corporate strategy
includes a strong emphasis on alternative energy, Wermert chided
their Kazakhstan office for not doing more in this area.
"Renewables are very popular in Kazakhstan," he noted. "AES should
be out in front on this issue, even if it won't be commercially
viable for several years."

KAZAKHSTAN'S RESPONSE TO THE FINANCIAL CRISIS


7. (SBU) When asked how he thought Kazakhstan had responded to the
current financial crisis, Wermert said, "Their performance has been
quite good." He noted, for example, that the government acted
quickly to provide liquidity to banks that suffered when the
Eurobond markets closed. Wermert did, however, raise two concerns
about Kazakhstan's response to the crisis: (1) whether Kazakhstan's
banks are properly and transparently disclosing the quality of their
assets; and (2) whether the new Samruk-Kazyna National Welfare Fund
has the management expertise and financial practices necessary to
make sound, long-term decisions. He suggested the government was
slow to set up Samruk-Kazyna and recommended that they recruit a
"mature, professional candidate" from the United States to manage
it. According to Wermert, Samruk-Kazyna's newly-appointed
Management Board Chairman, Kairat Kelimbetov, is trusted by
President Nazarbayev, but "he doesn't know how to run this kind of
an organization." Wermert had a higher opinion of Kelimbetov's new
deputy, Arman Dunayev, former head of the Kazyna Sustainable
Development Fund, which was merged with the state-owned Samruk
holding company to form Samrum-Kazyna. "Dunayev well understands
the financial industry," said Wermert, "and we can channel our
advice through him." (See ref B for the World Bank's more
pessimistic view of Samruk-Kazyna.)

HOAGLAND