Kazakhstan: Construction sector still reeling despite government's bail-out package
Kazakh government’s efforts to bail the country’s once booming construction sector are facing serious obstacles as cash-strapped banks and hard-pressed construction companies are at loggerheads over the government's rescue plan. Frustrated with the lack of progress, the government is pushing for more drastic measures.
Karim Massimov, Kazakh Prime-Minister, announced in early March that the government is planning to spend $3 billion to aid the real-estate and building sectors in 2009. Some of these funds will go to financing the completion of more than 150 unfinished residential housing projects. The plan also provides for mortgage financing and refinancing options for Kazakh residents.
The construction sector accounted for 25 percent of the country’s GDP and employed more than 500 thousand people. By 2008, the Kazakh banks have invested close to 1 trillion Kazakh tenge in various construction projects and provided close to $ 5 billion in mortgage loans. The financial crisis that hit Kazakhstan created a horde of cash strapped construction companies and scores of closed and half-built apartment blocs. According to government statistics, in Astana alone, there are more than 220 unfinished construction sites, most of which are residential housing projects. Hundreds of Kazakh residents who pre-purchased apartments cannot move into their apartments. Meanwhile, many more are unable to pay their mortgage loans.
The situation with “Kuat Corporation,” one of the country’s largest construction developers, epitomizes problems in the building sector. In 2006, Kuat employed 23 thousand people and boasted an annual turnover that exceeded $500 mln. In 2005 Kuat launched “Sairan,” a mega project that would provide residence to about 70 thousand people. It was financed jointly by Bank Turan Alem (BTA) and Kazkommertzbank. Now Kuat’s construction projects are stalled, including the "Sairan.” Residents who pre-purchased apartments in “Sairan” took Kuat to court to return their investments. In 2008, an Almaty court ruled in favor of 135 such lawsuits and obliged the company to pay close to 3 billion Kazakh tenge. In January 2009, several Kuat executives were charged with theft by another Almaty court.
Since 2007, the Kazakh government allocated roughly $1,5 billion to bail the construction sector. Under the initial plan, the government deposited funds at several Kazakh banks to be provided as loans to construction developers. However, the funds did not reach the hands of most construction developers because of high interest rates imposed by banks. Many construction companies also failed to meet the bank’s requirements for collateral. Of the two construction developers that received government loans, Kuat was accused by BTA of using the loan to repay its external debts.
Under a new government scheme unveiled in January by Kairat Kelimbetov, the chairman of the state fund Samruk-Kazyna, the embattled construction developers have to cede control over unfinished construction sites to private banks which financed them. Construction developers and banks have to form joint project companies that would be eligible to receive loans from state fund “Samruk-Kazyna.” Once the housing projects are completed, the banks and project companies can sell them in the market to retrieve the funds owed to them by construction developers.
The new scheme also provides for mortgage financing and refinancing options for private residents through the state-run Kazakh Mortgage Company (KMC). KMC's mortgage assistance, according to Kelimbetov, would only apply to the finished apartments which are sold at the fixed price of about $637 per square meter in Astana, and $796 per square meter in Almaty.
To ensure compliance with the new scheme, Kelimbetov on March 2 threatened construction developers with punitive action. "The law will be passed within a year. We will come to you -- the State, the fund Samruk-Kazyna -- the operator, and we will be bankrupting you, taking away these houses and completing their construction.”
The Kazakh officials are hoping that this scheme will help resolve problem, but there are already signs that the scheme is facing serious obstacles. Construction developers appear reluctant to accept the government’s new scheme. Kuat, for example, is now trying to find investors from abroad. Another problem is that the transfer of the ownership rights and assets by construction developers to project companies is hampered by the law-suits construction developers are facing from private residents. Kuat’s assets, for example, are either frozen or arrested by court rulings.
Some Kazakh observers are questioning the feasibility of the mortgage part of the government scheme as well. In an January interview to a Kazakh weekly “Deng i Vlast” Zauresh Battalova, the leader of a public campaign “Za dostoinoie Zhil’e,” [For Worthy Housing] told:
“KMC [Kazakh Mortgage Company] offers crushing terms for mortgage. This company was founded with noble goals in mind, but today, after we conducted an analysis [of the company], we have found out that KMC has the highest interest rate for mortgages. In addition, KMC pursues a very tough approach toward people who defaulted on their mortgage loan.”
The problems with the scheme is raising a debate within the Kazakh government about other options Some Kazakh officials support the idea of government buying up real estate in troubled sites. However, this approach is not favored by influential officials such as Umirzak Shukeev, deputy Prime-Minister, who want the construction developers assume responsibility for their failures.
“The example of corporations such as Kuat must be a warning for other construction companies: if you will not speed up [the completion of the unfinished sites], you’ll face the same situation. Construction sites will “slip” from you to banks, and this would be correct,” said Umirzak Shukeev, at a February 9 government meeting.
Alisher Khamidov - researcher at the School of Advanced International Studies (SAIS), Johns Hopkins University, Washington, D.C.