Power firm finds land rich in resources but cash-poor people
When United States company AES bills customers of its giant Kazakhstan power station, it is offered payment in vodka, rice, wheat and watermelons.
Everyone is short of cash.
'But we cannot avoid using cash to pay tax and to pay our employees on time, which is very rare in Kazakhstan,' said Vitaly Lee, business development manager at AES Almaty.
'We try to be creative.' So it makes deals with its customers - the railway and water company receive power in exchange for delivering coal and water to the plant, while it delivers electricity to schools and hospitals in lieu of paying tax.
'People are not used to paying for electricity which used to be provided cheaply at a subsidised rate, as a service,' said Mr Lee.
Being a foreign investor in Kazakhstan is not easy. The problems AES face are typical - shortage of cash in an economy that has shrunk every year but two since independence in 1991, exchange risk, fast-changing laws and a complicated tax regime that investors complain is enforced too rigorously.
Based in Virginia, AES - one of the world's major independent power generators - came to Kazakhstan for the same reason as most other foreign companies - its abundant mineral resources.
Kazakhstan has reserves of more than 160 billion tonnes of coal and, during the Soviet era, produced 25 per cent of the USSR's coal, with 135 million tonnes from two major basins in the north.
In 1996 AES purchased for US$1.5 million one of the world's largest coal-fired power stations, at Ekibastuz, one of the two basins, close to the world's biggest open-pit coal mine, with installed capacity of 4,000 megawatts (MW) - but production of only 300 MW and no roof.
It took on the plant's liabilities and wage arrears and promised to invest US$500 million over six years. So far it has spent $80 million, raising production to 900-1,200 MW, for which it charges one to 1.3 cents a kilowatt hour, one of the lowest rates in the world.
But it is facing the same shortage of demand, at home and abroad, that plagues other foreign investors.
'Kazakhstan has a huge over-capacity of power and it is hard to find solvent customers,' said Mr Lee. 'Customers sign contracts for one week up to two months. Our average collection rate is 60-80 per cent and less than 10 per cent of that could be in cash.' The problem is that world prices of the country's major export products - oil, gas, copper, zinc and other minerals - have fallen, so demand for power from the plant's industrial consumers has fallen.
Close to the border with Russia, it was built, in the early 1980s, to supply customers there, not in Kazakhstan. With the collapse of the rouble, the plant has no Russian clients. It would like to sell to the mainland but this has not materialised.
Like other foreign investors, Mr Lee considers the tax regime too harsh. 'Since July 1997, Kazakhstan's tax authorities have used the accrual method of accounting - as opposed to the cash method - which means you are taxed on the service you provide whether or not you are paid for it. But non-payment is a huge problem,' he said.
AES has invested $150-160 million in Kazakhstan, in addition to the purchase in 1997 of two hydro-electric plants and four heat and electric power stations in the east of the country.
AES has set up a Kazakhstan Electricity Association which has 28 members, to advise the government on the power sector. Kazakhstan's economy shrank 2.5 per cent last year and a further 3.6 per cent in the first quarter of this year.
This means falling demand at home, as well as in Russia, and forces the government to try to raise more in tax from companies to reduce its budget deficit.