KNG Failed Plans

The Kazakhstanskaya Pravda newspaper has recently published a conceptual article of KazMunayGaz board Chairman Saunat Mynbayev called “From Optimization to Increasing Effectiveness and Transparency”. In it, the author outlines the company’s action plan for the next few years. 

 Mynbayev cites Nursultan Nazarbayev’s presidential address “The Third Modernization of Kazakhstan: Global Competitiveness”. Mynbayev recalls that “decreasing the state share in the economy to 15% of the GDP (the OECD countries level) will provide a new impulse for the economy to grow”. It is in this direction, the article states, the KMG management will lead the company.

Here are some quotes from Mynbayev’s article.

“The KazMunayGaz Group is an enormous system that has been built over a period of 15 years. Now, it consists of oil-and-gas, oil-service, marine, ship operator, avia companies, research institutes, educational facilities, and other specialized departments. Overall, it has 199 companies and 90 thousand employees. Therefore, it desperately needs to simplify its operational model, optimize the assets, increase the effectiveness and transparency to the maximum”.

“As you know, in 2915, KazMunayGas joined the Samruk-Kazyna National Welfare Fund transformation program. First, the transformation team experts had analyzed the logic of the company organizational and asset structure, the effectiveness of the asset management and the management of the company in general. They took into consideration international practices. As a result, they had created a project portfolio based on the three key transformational directions – improving the business processes, the organizational and structural corrections, and changing the auxiliary business processes in the company. So, for instance, two projects had been initiated based on the second direction – the transition to a new operational model and the creation of the general service center”.

“In 2016, the initial implementation of the new operational model approved by the board on June 30 was one of the main transformational achievements of the company. The model stipulates that the number of the management levels should be decreased through including the subsidiaries into the national company. We are talking about the head offices of KazMunayGaz – Pererabotka I Marketing (Refining and Marketing), KazTransGaz, AktauNefteServis, KazMunayTeniz. In particular, KazMunayGaz – Pererabotka I Marketing is joining the company at full speed. The new operational model suggests only two levels of hierarchy – first, the corporate center (management), second, the subsidiary organization (production). The KazMunayGaz legal structure will now become more simplified thanks to the termination and transformation of the subsidiaries into limited liability partnerships. The board of directors will remain only in the head company and those subsidiary companies where it is required by law or other participants”.

“One of the key changes is the creation of the KazMunayGaz general service center on the basis of KMG Global Solutions. The center will perform some of the supporting functions such as accounting and tax bookkeeping, treasury, information technologies. For a number of subsidiary companies, we started to provide IT-services last year – KMG Global Solutions provided the IT-services to KazMunayGaz and two affiliated companies, KazMunayGaz Refining and Marketing, and Exploration and Drilling Technologies Research Institute. In the near future, we plan to move the three aforementioned functions from another 22 subsidiaries, and, in the long-term perspective, – all the KazMunayGaz subsidiaries will be serviced by the Center. Apart from that, in January 2017, on the basis of Samruk-Kazyna Corporate University, they opened HR Qyzmet office that oversees some of the HR-processes including the reward system, education, and the KazMunayGaz social program. As of today, HR Qyzmet provides its service to seven Samruk-Kazyna companies. Before the end of 2017, a number of the HR-management functions will be moved from KMG and its subsidiaries KazMunayGaz Onimderi, Pavlodar Petrochemical Plant, Oil Service Company.

 Thus, the biggest national company in Kazakhstan is improving itself and it is quite possible that the expected results will be partially achieved. Sauat Mynbayev speaks about it in the following words.

  • “In general, this model will enable us to directly influence the production, to concentrate our resources on the core business. With the help of the clearly-defined hierarchy, we will be able to establish an effective and centralized decision-making system and to manage all the elements of the production chain, from development to product realization”.
  • “What do we really expect to gain? The general service center will enable us to dramatically decrease the costs of the aforementioned functions, to perform them based on the single standard and methodology, to implement the automatization program more effectively. Therefore, the companies will be freed from managing the non-core businesses and may concentrate exclusively on production. At that, the labor contribution will decrease by 20-25% compared to the current number of the working hours required to performed these functions”.  

The problem, however, lies in the fact that simplifying the organizational structure, centralizing some of the management functions, and decreasing labor contribution has nothing to do with Nazarbayev’s order to “decrease the state share in the economy to 15% of the GDP (the OECD countries level)”.

These changes are important for KazMunayGaz management and for Sauat Mynbayev personally because they enable them to strengthen their influence in the group. Note that managing the 199 companies divided into several levels of dependency is difficult in itself. And considering the Kazakh realia, namely the interest of the elite clans in receiving unofficial control over the quasi-governmental agencies and redistributing contracts in favor of the affiliated businesses, the corruption, the low quality management (particularly, at the initial and middle levels), the large-scale abuse of authority by the state managers and officials responsible for the audit and control of the business, managing a company becomes a gigantic problem.

Therefore, the reorganization of KazMunayGaz will enable the management to do the following.

  • To decrease the number of the subordinate structures
  • To renew their management by letting go of the undesirable figures including those who took their positions under the previous leadership
  • To bring their own people into the management apparatus
  • To redistribute the control over the business processes and cash flows to their advantage.

As for decreasing the state share in the economy to 15% of the GDP (in other words, the privatization of the assets), even though it is indeed happening, there is still no real effect. Again, we quote Sauat Mynbayev.

“Striving to increase the effectiveness of its operational model, KazMunayGaz has started to solve this difficult problem and, as of today, it has freed itself from a number of its assets. 17 assets amounting to about 18 bln tenge have been realized. Some of them have been moved to the competitive field, some of them have been reorganized or terminated”.

For a state company, this is close to nothing.

And even though Mynbayev states that the termination of the non-core assets will continue, it is evident that it will hardly have any influence on decreasing the state share in the economy, mostly, because they will sell those assets that have been created for servicing the core business. The latter, with the exception of KMG International, will remain under the control of the state.

The crucial problem lies in the fact that increasing the number of KazMunayGaz subordinate companies happened mostly by the virtue of the objective causes – because of the absence on the Kazakh market of the commercially viable businesses able and ready to provide their core production with goods, labor, and services. At that, even though the private interest of certain persons had played its role, given the tense competitiveness inside the ruling elite, it was not the crucial factor.

Thus, getting rid of many auxiliary businesses, the KazMunayGaz management is de-facto complicating the situation. Of course, it is trying to solve the problem by toughening the conditions of the privatization in order not to lose the suppliers immediately.

In the words of Mr. Mynbayev, “KazMunayGaz strives to not simply realize the non-core assets and receive the maximum profit, but to sell the businesses for fair prices and complying with a number of conditions. For example, when selling Euro-Asia Air, KazMunayGaz requests that the company current core-business will be preserved during the period of 5 years minimum. Besides, the airline company have signed long-term contracts for providing aero services to the major clients such as KazTransOil, Intergaz Central Asia, and NCOC which, experts believe, constitutes an additional incentive to buy the asset”.

However, given the narrowness of the Kazakh domestic market, such a policy is open to the hazard that, after a period of time, when the privatized companies will simply start “dying” or de-facto change their core-businesses, KazMunayGaz will be forced to increase the expenditures to pay for their services or to create these companies anew. This can happen because the environment has changed only in the sphere of the financial resources the state has.

In other words, it means that KazMunayGaz current policy based on following Nazarbayev’s order and not the situation on the market is, first, doomed to fail and, second, is, to a large extent, senseless from the point of the corporate interests.

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