KZBlog

From the Kazakhstan Embassy in the US comes the announcement that a new holding company will be established. Samgao (which means ‘to soar’, I think!) National Science and Technology Holding is charged with improving management in these areas. This follows from comments made by the President and more recently, his Address to the People, in which he called for development of Kazakhstan’s scientific potential. One discussion of Kazakhstan’s strategy for science development can be found on Kazakhstan.Neweurasia.net, including the need to tie science with Michael Porter’s evaluation of competitive clusters in Kazakhstan three years ago. Among others, he identified biotechnology and nanotechnology, as well as oil and gas related technology. In short, Kazakhstan can use good scientists and good scientific research. It has a well-educated population, high ambitions, and the money to fund a new biotechnology center, a new science fund, as well as equip universities and institutes with excellent equipment.

Nonetheless, many people’s reaction on hearing of a new State holding company was: another one?

Samruk and Kazina were formed last year. Samruk holds most of the high-profit government companies like KazMunaiGas (the state oil and gas company) and KazTelecom as well as the power companies. Kazina holds the development institutions such as the National Bank for Development (which funds and invests in various industrial and business projects), and the Innovation Fund (which is a venture fund for new businesses). Since then, an agricultural holding company has been created, KazAgro. Then there was talk of a holding company to go above all the holding companies! Some critics also have given reason to believe that KazMunaiGas is a holding company already, now under Samruk Holdings (One recent analysis of KMG can be found at Central Asian Voices). And now a science and technology holding company.

At this point the population is highly suspicious. Many people feel that clearly someone has figured out how to make a profit on holding companies and for that reason there is a mania for them. In Astana, working for Kazina or Samruk is very prestigious and, what is more, well-paid! The two glittering yellow towers on the Left Bank, footsteps from the Parliament and the Prime Minister’s office, overlooking Ak Orda itself, are Kazina and Samruk’s offices. Others think that some powerful person has relatives or friends he needs to employ. The cynicism derives from a couple of valid points.

In the usual understanding, a holding company is a company that owns the controlling share in more than one company. In other words, it’s a big company that owns more than one smaller company, usually keeping those companies separate rather than merging them into the larger company. Sometimes they are used to consolidate profits–i.e. I buy a bunch of companies and I want all the money to go to one place, so I create a holding company. It makes it more convenient and also I can then invest all the profit together, or distribute the profits among the different companies as I see fit. Holding companies make money-management easier. They can also be used to set management standards and policies across the boards. As controlling shareholders, Holding companies can appoint and remove directors and influence the board of directors to adopt policies. It seems that this is one area that Kazakhstan is particularly interested in–improvement of management of state companies. And holding companies do make it easier to do that. But they are neither necessary nor sufficient. So while holding companies are being touted as if they offer a solution simply by existing, in fact holding companies do not inherently make the world a better place. Holding company just means BIG company. The question will be monitoring what the holding companies actually DO.

This is the second reason for cynicism. Samruk has set some ambitious goals for itself and works with international partners, but the results have not at all been clear. Meanwhile, Kazina has yet to accomplish much and the head of the Fund, Kairat Kelimbetov, former Minister of the Economy, has been running it like a government department, with all of the bureaucracy and paper. While Kazina and Samruk may emerge to be quite successful, it seems that the formation of new holding companies should be held off until the existing ones do hit their stride. Samgao can learn from Samruk’s mistakes once Samruk gets up and running well. It also must be noted that while Kazina and Samruk both have projects, they have been mostly government-granted. The President’s address and subsequent program charged both companies with various roles. Kazina, for example, will manage construction of 100 new schools and hospitals in the nation. But if the purpose of these holding companies is to introduce efficient management, and if the country is looking toward the West for good management, why is the government 1) subsidizing the holding companies by giving them work and 2) interfering with their operations by assigning them tasks as if they were a Ministry or Government Agency? And again, holding companies do not traditionally execute tasks. They hold things. Furthermore, one of the biggest problems the Kazakhstan government has is overloading people and institutions. The purpose of Kazina is to manage funds, not construct schools! Construction, management of construction, and management of money are three separate spheres.

All that being said, Kazakhstan may be on its way to inventing a new type of holding company, one that can blend the passive role of holding funds and influencing management with a more active role in government projects. But until it proves that it can do that, it will be subject to some skepticism. Samgao will have the additional problem that it cannot take over many of the most important scientific institutions in the country. Research institutes are not joint-stock companies, they are more or less state property. They cannot be owned by anyone but the government. I suppose it could take KazKosmos and maybe the new biotechnology center. But who else will be under them? Any guesses?