The Monument to the Great Kazakh Corruption
Author: Gulmira Imanova
Every day on their way to work and returning home, hundreds of residents of the capital of Kazakhstan, Nur-Sultan (formerly known as Astana before 2019), pass near the enormous grey concrete-pier trestles in the middle of the new shiny city center. They are a part of the infamous Astana Light Rail Transportation (LRT) project stalled when its construction has barely begun. They are hard to hide behind the fencing because of their colossal height and scatteration along the main street road. But people seem not to notice them. They had come to terms with these four-meter-high ugly columns calling them ironically "the monument for great Kazakh corruption." Just like they did with the corruption itself, which has permeated all aspects of their lives.
Hell is Paved with Good Intentions
The idea of building light rail transportation was born in the mid-2000s in anticipation of rapid population growth in the capital. In 2006, to execute the order of President Nursultan Nazarbayev, the city akim (mayor) Umirzak Shukeyev adopted the New Transport System of Astana program. According to this program, it was planned to connect the new Left Bank district with the old city by means of the ground express tram. The construction was supposed to begin in 2008 and end two and half years later. The estimated cost of the project was 262 million US dollars. The European Bank of Reconstruction and Development was identified as a possible loan source to finance the project. However, seven akims changed since that time. The initial project changed beyond recognition and rose ten times in cost.
In 2008, the new akim Askar Mamin proposed implementing BRT (bus rapid transit) project instead of light rail. This initiative would cost the city about 564 million US dollars. However, next akim Imangali Tasmagambetov returned to the idea of LRT (light rail transportation) in the form of the elevated viaduct. He created a specialized company, "Astana LRT," with 100% participation of the akimat (city administration) to act as the project administrator. This time, the government of France agreed to become the major investor committing a 570 million euro grant. French company Alstom was named the main contractor of the first stage of the construction together with two local companies.
In July 2011, President Nazarbayev laid the capsule in honour of the start of the LRT construction. The new light rail route began from the city airport to the planned tallest skyscraper in the Left Bank, Abu-Dhabi Plaza, and the new Nurly Zhol railroad station. Its announced cost was 2.3 billion US dollars and required additional financing sources. In 2013, Asian Development Bank considered the project but refused to participate in it, saying it was too expensive. Nazarbayev ordered to find an alternative solution. Tasmagambetov remembered about the BRT project, but this project was destined to be shelved again.
In 2014, another akim Adilbek Zhaqsybekov revived the LRT project once again. The reasons are unclear, but this decision coincided with the appointment of Nazarbayev's grandson Nurali Aliyev as the deputy mayor of the city. He presented this project and positioned it as "an ideal solution for the capital eliminating the load on the traditional transport system." The light-ground metro was supposed to be launched before Astana EXPO 2017 international exposition. The overland metro should have covered 22.4 kilometres and have 18 stations, 19 light rail trains, and a depot in the airport area. The project was given the green light despite its high cost. Investors too, were also found.
Chinese Factor and the "Five Baits"
In 2015 Nazarbayev and Chinese President Xi Jinping signed the first part of the EPC contract (Engineering-Procurement-Construction) and loan agreement for financing the project. A consortium of Chinese companies "China Railway Asia-Europe Construction Investment Co., Ltd," "Beijing State-Owned Assets Management Co.," and "China Railway No.2 Engineering Group Co., Ltd", as well as the China State Development Bank became active participants of LRT construction in Astana. Under the agreement, Chinese companies must carry out work for 1.6 billion US dollars which was 80% of the project cost. The Kazakh side must pay the remaining 20% (over 200 million US dollars).
The China Development Bank provided Chinese part of the project financing as a loan for 20 years at an annual rate of 2.5% in exchange for a sovereign guarantee. Such a guarantee means that all obligations will be satisfied by the Kazakh government when and if the primary borrower fails to fulfill his obligations. For the first time in the history of Kazakhstan, such a guarantee was issued to back up a quasi-governmental company – Astana LRT. Also utterly unusual was the fact that the China Development Bank transferred money to the Astana LRT bank account. As a rule, the Chinese have strict control – Chinese money stays in Chinese companies: payments are deposited to Chinese contractors directly.
The project was included in the Chinese grandiose international infrastructural The Belt and Road Initiative, first announced by President Xi in 2013 within the walls of the Nazarbayev University in Astana. Since 2013, Nazarbayev has met 20 times with Xi Jinping personally, not counting dozens of working visits between high-ranking officials of two states. Every high-level meeting is accompanied by signing a cooperation agreement snowballing Kazakhstan's external debt and increasing the amount of Chinese direct investment in the country.
Chinese interests in Kazakhstan are mainly related to its transit potential. Kazakhstan is a bridge for trade between China and Europe. To fully benefit from Kazakhstan's transit potential, China is ready to invest in the modernization of Kazakhstan's transport infrastructure. China also generously provides long-term loans that help the Kazak leadership close gaps in social spending and maintain political stability. Asking for Chinese assistance became habitual after the 2009 financial crisis, especially later after a sharp decline in revenues due to a steep fall of the global prices for hydrocarbons that make up to one-third of the country's GDP.
In return, Chinese companies have exclusive access to acquire a significant stake in local oil and gas and mining companies or rights to buy Kazakhstani raw materials at well below market prices. This way, gradually, all oil production in the Aktobe region of Kazakhstan moved under the control of Chinese investors. More than half of the board of directors of the Kazakhmys company, a monopoly producer of copper, gold, zinc, nickel, chromium and aluminum in the country, are Chinese citizens. The company received a 1.5 billion US dollars loan from the China Development Bank to develop the Aktogay field in 2015. More than 80% of Kazakhmys products are exported to China at below-market prices.
Another significant Chinese interest is also related to Kazakhstan's location. Kazakhstan borders with the troubled Xinjiang Uygur Autonomous Region (XUAR), where the Uighur Turks live. Xinjiang has developed separatism and religious extremism, which Beijing is trying to suppress. Beijing needs to integrate the XUAR and reduce its ties with the extremist groups in the entire region. To do this, he needs a stable and secular Kazakhstan.
Chinese investments and financial assistance carry no political implications. To get them, it is not necessary to meet democratic standards, to maintain a certain level of human rights or freedom of speech, which is essential for Western partners. China has a two millennia-old "five baits" strategy well described in a book, On China, written by Henry Kissinger, the Secretary of State under US President Nixon. This strategy is based on corrupting their opponents to achieve their goals:
"To give them elaborate clothes and carriages in order to corrupt their eyes; to give them fine food in order to corrupt their mouth; to give them music and women in order to corrupt their ears; to provide them with lofty buildings, granaries and slaves in order to corrupt their stomach … and, as for those who come to surrender, the emperor (should) show them favor by honoring them with an imperial reception party in which the emperor should personally serve them wine and food so as to corrupt their mind. These are what may be called the five baits."
In February 2016, the daughter of the President, Dariga Nazarbayeva, who then held the post of deputy prime minister of the republic, said at a meeting of the expanded board of the Ministry of Education and Science that China is the fate of the republic, and its citizens need to learn a new foreign language. In the same 2016, the government made significant changes to the country's land code. It was decided to sell 1.7 million hectares of agricultural land through auctions, and foreigners could lease land for up to 25 years. Immediately, mass protests were held across the country where activists openly opposed selling land to China and Chinese economic expansion in Kazakhstan. According to various estimates, Kazakhstan's debt to China reached 20 billion US dollars.
In March 2016, Nurali Aliyev left the post of the deputy akim. It was announced that LRT would not be launched till EXPO 2017. Despite this fact and amidst anti-Chinese sentiments, in 2017, Chinese contractors began erecting supporting concrete structures for the elevated light rail. They planned to complete construction by December 31, 2019.
From the very beginning, the LRT project was accompanied by financial scandals. In 2014, the National Anti-Corruption Bureau found that Astana LRT transferred about 2 million US dollars to the account of one of the contractors, exceeding the set limit two times. A year later, new financial violations in the amount close to 50 million US dollars have been identified. Surprisingly, no prosecution was announced.
In 2017, when construction works were about to begin, the new akim of the capital Asset Issekeshev attempted to revise the agreement's main provisions with the Chinese partners. He proposed changes in the cost of the project, the expansion of the track gauge and the reduction of the territory of the depot. Issekeshev first reprimanded the director of Astana LRT, Talgat Ardan, and then dismissed him from office. A new company, "LRT Construction Directorate," was created to monitor the construction process. Chinese contractors complained to Nazarbayev that the new terms of the contract were unacceptable. The "LRT Construction Directorate" actions were perceived as an obstacle to the start of construction. They threatened to break the contract and apply penalties due to the unfulfilled obligations of the previous management. At the same time, a pre-trial investigation was launched in a criminal case against Talgat Ardan. He was put on the international wanted list. Nevertheless, construction began.
By April 2019, five hundred fifty-five supporting poles were finished when the construction site had to be frozen due to the collapsed Bank of Astana, in which $ 257 million allocated for LRT were stuck. The National Bank revoked the license of this bank because of its financial problems, which is another story. As a result, 15 percent of construction and installation works were completed. The consortium of Chinese companies provided services for 313 million US dollars in total, of which only 86 million US dollars were paid. Thus, the indebtedness to Chinese contractors constituted 203 million US dollars.
In March 2019, Nazarbayev resigned. The same year, new president Kassym-Zhomart Tokayev heavily criticized the project and ordered the anti-corruption agency to check if Astana LRT project expenses were reasonable. It turned out that the existing passenger traffic on a similar route from the airport to the new railway station is 2,000 people per day, which is only one seventy of the planned LRT project capacity of carrying 146,000 passengers daily. At this low-capacity rate, the project would pay back in 600 years. On top of the sunk costs, the annual maintenance costs of LRT will be 10 million US dollars from the state budget. Critics of the project calculated that each of the supporting columns of the Monument for corruption costs 559 thousand US dollars. The cost of four columns equals the cost of construction of one secondary school in Kazakhstan.
Meanwhile, Kazakhstan refused the loan from the China Development Bank due to the high cost of the project. The number of stations was reduced from 18 to 11, and the project's cost shrank to 1.5 billion US dollars. The government of Kazakhstan is seeking alternative sources of financing the project. To this end, Astana LRT issued bonds for 1.5 billion US dollars. The securities worth 525 million US dollars have been offered at the Astana International Exchange. The People's Bank of Kazakhstan purchased these securities for 400 million US dollars after selling 5 percent of its shares on the market. The remaining bonds were offered to Baiterek National Management Holding, which includes all Kazakhstan-based development institutions such as the Development Bank of Kazakhstan, the Investment Fund of Kazakhstan, etc. The loan of the China Development Bank of 343 million US dollars was fully repaid out of 420 million US dollars received after the placement of bonds.
Two of three Chinese contractors remained. One of the three Chinese companies in the project contractors' consortium, to which the Kazakhstan party had claims regarding the quality of works, was replaced with the Kazakhstan-based Integra Construction (former Zhol Zhondeushi, a subsidiary of ENRC Logistics). It was announced that the construction of LRT would be completed by 2023. The country can not withdraw from the project as the penalties are enormous. New akim Altai Kulginov never dared to name the amount, only referring to the fact that international arbitrage would entail considerable costs. Moreover, the reputation of the country as a reliable borrower and partner is at risk.
The Show Must Go On
In October 2020, the Nur-Sultan court began to consider the case of embezzlement in Astana LRT. The investigation revealed the fraud scheme organized by earlier mentioned Talgat Ardan and Kanat Sultanbekov, who served as deputy akim of Astana in 2009-2014. Both of them escaped the country. The reported damage to the state budget is about 13 million US dollars. The fraud also involved several mid-tier officials who approved the overestimated LRT construction costs.
Less than a month ago, in May 2021, this scandalous case was over. Everyone knows how business is done in Kazakhstan. Thus, nobody is surprised about the outcomes of the high-profile trial on embezzlement of public funds accompanied the project on construction of Astana LRT. Seven scapegoats have been sentenced to up to ten years in jail, while the main organizers who know too much escaped the country. The investigation is accused to be conducted superficially and the trial was held with numerous procedural inconsistencies.
At the end of the day, the mid-tier officials and a handful of business representatives were held accountable in this case. Primary beneficiaries from the mightiest Kazakh family and their accomplices remain above the law and out of reach. International consulting firms from the USA, UK, France, Spain and Turkey who participated in the grand scam and in fact, helped steal the funds have been excluded from the list of defendants in this case. Their reputation remains clean. Chinese financial institutions that funded the project received their money back at the expense of future Kazakh generations. Chinese contractors are well protected by the EPC contract terms with enormous penalties if the Kazakh side fails to fulfil its obligations.
Hundred million dollars have already been buried in construction so far. The project is obviously not cost-effective. Instead of admitting the mistakes and refusing the project, the authorities announced that the project would be finished to save face. Most probably, it will be done at the expense of 1.2 billion of budgetary money. The project was re-branded, and now it is called City Transportation Systems (CTS). Life in the country goes on as usual. Only gloomy supporting elements of LRT have been left like a scar on the face of Nur-Sultan.
The question is now whether the capital needs this costly mode of transportation after all? Unfortunately, nobody is concerned about holding public hearings to discuss this question. Nobody asks the people who pass the monument for grand Kazakh corruption on their way to work and back home. People also do not ask questions as long as they have a home and work.