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The Current State of the Sovereign Wealth Fund Samruk-Kazyna

13.03.2017 | Comments | Economy | 219 Daniyar Nurbayev

Sovereign Wealth Fund Samruk-Kazyna (SK) was established in October 2008 by the Decree of the President of Kazakhstan “On some measures on competitiveness and sustainability of national economy”[1]. The SK was created by a merge of the Holding for the Management of State Assets Samruk and the Kazyna Sustainable Development Fund. Both companies were focused on the development of the country’s economy, but they had different functions. The Kazyna Sustainable Development Fund was a financial development institution, and its functions were to support the development of the economy through investments in its subsidiary companies such as Development Bank of Kazakhstan, Investment Fund of Kazakhstan, Kazakhstan Investment Promotion Center and etc. The Holding for the Management of State Assets Samruk was focused on real production and owned strategically important companies (for example, Kazakhstan Temir Zholy, KazMunaiGas, KEGOC and Kazakhtelecom etc.), and its goal was to maximize the efficiency and competitiveness of these companies in world markets in the long run. Therefore, the newly merged company had two functions: to support the development of the economy through financial investments; and to maximize the efficiency and competitiveness of strategically important companies in the world markets in the long run.

However, this merged company had some conflict of goals. The problem was that on the one hand, the company was a financial institution that had to focus on the social-economic development of the country, meaning that most investments would not be highly profitable. While on the other hand, the company had to try to maximize the efficiency and competitiveness of its subsidiary companies in world markets in the long run, which means that it had to gain higher returns. Therefore, the SK had two conflicting goals: to gain profit and to support social economic development instead of gaining profit. Because of the conflict between these two goals in 2011, the merged fund started to transfer the management of its subsidiary companies, which are actually financial institution (such as Development Bank of Kazakhstan, Investment Fund of Kazakhstan and Entrepreneurship Development Fund" Damu), to different ministries (for instance, the Ministry of Regional Development, the Ministry of Industry and New Technologies), but the SK kept the ownership of these institutions.

On 22 May 2013, the President of Kazakhstan signed a Decree “On some measures to optimize the management system of development institutions, financial organizations, and development of the national economy[2]”. According to this Decree, the government had to establish a new development institution that would take the function of the SK on supporting social-economic development. The new institution was the Baiterek National Management Holding, and companies, such as Development Bank of Kazakhstan, Investment Fund of Kazakhstan, Housing Construction Savings Bank, Kazakhstan Mortgage Company, Entrepreneurship Development Fund Damu, were transferred to this Holding from the SK.

After the creation of the Baiterek, the SK started to focus mostly on its main goal which is to maximize the efficiency and competitiveness of its subsidiary companies in world markets in the long run. However, the fund still has a conflict of goals. Along with the support and modernization of its existing assets, it has to support social projects in the country. As we mentioned above, these two goals conflict with each other.  Moreover, if the country has already established Baiterek, which is a development institution, there is no need for the SK to focus on social development because the Baiterek already focuses on it.

According to the SK’s financial report for 2015, it comprises 545 companies, 23 of which are direct subsidiary companies[3]. These subsidiary companies mostly carry their functions in sectors, such as oil and gas; power energy; metallurgy; and transportation. Top 5 biggest subsidiary companies of the fund are National Company KazMunayGas, KMG Kashagan B.V., Kazakhstan Temir Zholy, Kazatomprom, and Samruk-Energy.

Overall, the consolidated assets of the company as for the end of the third quarter of 2016 was 22.33 trillion tenge, which is 6.99% more than the amount in the same period of 2015. The biggest assets of the fund are properties, plants, and equipment, accounting for 66.15% of its total assets. While oil and gas assets (oil and gas reserves) account for 42.56% (4.57 trillion tenge) in properties, plants and equipment assets, they account for 20.45% of the total assets. The second biggest assets in the properties, plants, and equipment assets are machinery, equipment, and vehicles (2.44 trillion tenge) which are followed by the assets that are categorized as construction in progress (1.13 trillion tenge).

The consolidated financial report also shows that the SK is highly liquid. The fund has 4.92 trillion tenge of liquid assets 1.45 trillion tenge of which are cash and cash equivalents. Meanwhile, the SK has a very low level of current liabilities - 2.13 trillion tenge, indicating that in near future the fund will not have any problems to cover its short-term obligations.

Along with high liquidity, the fund has a very high level of equity. The share of total equity to its total assets is 48.33% (10.791 trillion tenge), indicating that the company is not only strong in the short term, but it will not have any financial problems in the long term. However, it does not mean that the subsidiary companies of the fund do not need borrowing. The subsidiary companies borrowed 5.37 trillion tenge of long loans with 4.48% weighted average interest rate. It is important to note that the borrowings of the companies are in terms of foreign currencies (4.69 trillion tenge).

For the nine months of 2016, the fund gained 2.76 trillion tenge of revenue, which is 27.90% higher than the revenue of the same period of 2015. However, net profit grew with much slower pace, increasing only by 0.48% (to 397.64 billion tenge) during the first three quarters of 2016 in comparison with the same period of 2015.

The fund gained its highest revenue from railway cargo transportation in the first nine month of 2016 (499.12 billion tenge). It is followed by the sales of crude oil, oil and gas transportation, sales of uranium products and the sales of oil refined products, with 398.25 billion tenge, 231.07 billion tenge, 221.51 billion tenge and 207.50 billion tenge respectively.  Similarly, in the same period of 2015 railway cargo transportation gained the first place in the fund’s revenues with 448.81 billion tenge. However, in the same period of 2014 and 2013, when oil prices were high, the sales of crude oil were gaining the highest revenue.  For example, in the first three quarters of 2014 and 2013 the revenues from the sales of crude oil were 1.53 trillion tenge and 1.30 trillion tenge, while the revenues from railway cargo transportation were 536.25 billion tenge and 532.12 billion tenge respectively. These data show how low oil price affect the profitability of the fund.

However, it is worth mentioning that the fund’s expense are gradually decreasing. In the first nine months of 2016, the general and administrative expenses were 242.33 billion tenge, while at the same period of 2015 and 2014 the general expenses were 246.77 billion tenge and the administrative expenses were 266.64 billion tenge.

Overall, the financial data show that despite the decreased oil prices, the fund still has a very strong financial position. The possible growth in oil prices might further improve the current financial state of the SK. However, we should not expect that the assets of the fund would significantly grow in the future. The reason is that, according to the message of the President of Kazakhstan in 31 January 2017, the government’s share in GDP should be decreased to 15% until 2020. Hence, until 2020 the SK plans to sell 215 of its subsidiary companies, and plans to sell 23 of these companies. Therefore, in 5 years, the structure of the SK will change significantly.


References

http://adilet.zan.kz/rus/docs/U080000669_/links

http://online.zakon.kz/Document/?doc_id=30352842

http://adilet.zan.kz/rus/docs/U1300000571

https://sk.kz/section/8169


[3] https://sk.kz/section/8169


Note: The views expressed in this blog are the author's own and do not necessarily reflect the Institute's editorial policy.

Tags: Kazakhstan, Samruk-Kazyna, Economy

Author

  • Junior Research Fellow

    Daniyar Nurbayev

    Daniyar Nurbayev is a research fellow at the Eurasian Research Institute. Daniyar completed his bachelor’s degree in Finance in the Kazakh-British Technical University in 2013. In addition, he holds Masters degree in Finance from the Kazakh-British Technical University (2015).