Tajik Industrial Giant May Go on Sale

Sunday, 20 November, 2005

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IWPR staff

Speculation is growing that the struggling aluminium manufacturing giant, TADAZ, which the government has held back from privatising it because it accounts for such a big chunk of the economy, is finally going to be sold off, two years ahead of schedule - with most observers believing it will be bought by the Russian industrial conglomerate RUSAL.

Tajik officials remain tight lipped in public, but in private some admit that a quick privatisation of the currently state-owned plant is the only way out.

The TADAZ plant, near the town of Tursunzade, sits like a hulking beast in the otherwise rural Hissar valley, close to Tajikistan’s western border with Uzbekistan. Smoke belches out with only minimal filtering, and the only mitigating factor on air pollution is the fact that the plant operates well below capacity.

The plant – the third largest in the former Soviet Union – might look like an absurdity in economic terms, because although Tajikistan is rich in all sorts of minerals, from gold to a range of base metals, it lacks bauxite, the raw ingredient for aluminium. So ever since the smelter started up in 1975, it has been dependent on bauxite mines thousands of kilometres away, primarily in Ukraine.

But the Soviet planners who conceived it chose the location for one powerful and overriding reason: Tajikistan has the high mountains needed to run hydroelectricity schemes on a scale to feed the smelting process, which is extremely energy-dependent. In other parts of the world, such plants are often located closer to electricity supplies than to mines.

As a side effect, the planners clearly felt that such a major industrial unit would boost the Tajik republic’s agriculture-based economy and soak up excess labour.

DECLINING FORTUNES

In the cross-subsidised planned economy of the Soviet era, such decisions could be made without considering costs, as everything came effectively free of charge.

That all changed after the USSR broke up in 1991, when buying and transporting alumina (or aluminium oxide trihydrate, the intermediate substance refined from bauxite) began to cost market prices.

However, it was worth the Tajik government’s while keeping the plant going as it was a major employer, and most of all because aluminium is an easily saleable commodity on world markets and brings in much needed hard currency revenues – almost all the product is exported. The government’s ability to offset running costs by laying on electricity at heavily subsidised prices helped keep the business profitable.

The plant’s political importance as the country’s prize asset increased during the five-year civil war, as the rest of the economy disintegrated.

Tursunzade, about 60 kilometre west of the capital Dushanbe, saw pitched battles between rival militias seeking to control export revenues. The fact that these clashes involved factions notionally on the government side, rather than opposition guerrillas, only underlined the relationship between central political power and the plant.

OBSOLETE PLANT REMAINS ATTRACTIVE PROPOSITION

The plant was designed to produce 517,000 tonnes of aluminium annually at full capacity, although it never quite achieved that. The disruption in bauxite supplies from other republics, coupled with the general instability created by conflict, meant that production plummeted by more than half so that in 1996-98 it was well below 200,000 tonnes a year.

Production has since recovered steadily to reach a respectable 368,000 tonnes last year. But the now aging technology means the smelter is unlikely to reach its full capacity without substantial investment in an upgrade.

Ugly and obsolete it may be, but the smelter is not some Soviet-era dinosaur waiting to die just as soon as politicians summon up enough courage to sack the workforce.

World demand for aluminium looks set to continue growing, and Tajikistan’s potential for producing electricity means the plant is an attractive proposition for external investors. Russia’s top aluminium producer RUSAL looks like a strong contender for a takeover and its behaviour indicates it is seriously interested. Its rival, the Urals- based SUAL, has also expressed an interest.

PRIVATISATION CREEPS ONTO THE AGENDA

The government in Dushanbe has so far kept the aluminium plant out of the privatisation process because it’s so pivotal to the national economy, and also to keeping the central budget afloat. Aluminium accounts for at least half of exports, with cotton sales providing much of the rest. There is also the workforce of some 10,000 (on paper at least; the actual figure may be less than 8,000) to be considered, in a country where employment is in such short supply that hundreds of thousands of men go to work as migrant labour in Russia.

Officials have insisted that a privatisation is not imminent, and continue to do so.

"TADAZ will not be privatised before 2007,” Ismoil Nasirov, the deputy head of the state property committee, told a press conference in early July. “ Before that happens, TADAZ and another 37 state enterprises will simply undergo restructuring. "

But there is now talk in some quarters that the plant will be sold off sooner rather than later.

The first step may be to declare it bankrupt, and only then put it out to tender.

In formal terms, bankruptcy should be easy enough to arrange, since the smelter naturally runs up huge electricity bills, and has been slow in paying them. In February, energy industry minister Jurabek Nurmahmadov announced that the aluminium plant owed more than 20 million US dollars in electricity debts dating as far back as 1996.

In a hint as to where salvation for the bankrupt institution could lie, Nurmahmadov added, “I hope RUSAL and TADAZ will resolve this problem jointly.”

In reality, since both aluminium and electricity are state owned, it is hard to see how the debt is anything more than a cross-subsidy between two government agencies, one a supplier and the other a producer.

IWPR has been told by an official involved in the plans for the TADAZ smelter, who did not want to further identified, that “in the next few months, TADAZ may be declared bankrupt and put out to tender”. He said that the plant had suffered such “enormous losses”, that there is “no doubt” it would be put up for sale.

Some analysts are concerned that the plant could be sold off at well below its true market value. According to economist Umar Kamolov, "If one analyses all that’s going on with TADAZ, it becomes clear that the plant is being prepared for bankruptcy proceedings and sale at a discount”.

Other observers think the Tajik government will retain a controlling stake even after privatisation.

TOP RUSSIAN PRODUCER AT FRONT OF THE QUEUE

The main contender, RUSAL, has grown from its creation in 2000 to become one of the world’s top three producers.

RUSAL has been involved with Tajikistan since 2003, when it replaced Ansol Ltd, an offshore company, as the primary supplier of alumina to Tursunzade. RUSAL’s alumina comes from its refinery at Nikolayev in Ukraine, while Ansol’s came from Pavlodar in Kazakstan.

Ansol’s involvement with Tajikistan ended acrimoniously, with court cases in both Dushanbe and London. The former concluded this July with an agreement by Ansol to pay 145 million dollars to cover losses incurred by the plant, according to the head of the Tajik State Committee for Financial Control, Matlubkhon Davlatov.

Last year, RUSAL announced a massive investment package for Tajikistan worth in excess of one billion dollars, including the provision of two new “pots” or smelting chambers at Tursunzade with a price ticket of 160 million dollars. These production lines should be ready in 2008 and will increase output by 100,000 tonnes annually. In addition, RUSAL will build a completely new 600 million dollar smelter in the south of the country, in Khatlon province, with a projected output of 200,000 tonnes.

All this will require more electricity - and with that clearly in mind, the Russian firm plans to invest in finishing work on the Roghun power station, at an estimated cost of 560 million dollars. Civil war, lack of funding and worries about seismic instability around what will be the world’s highest dam have meant that the construction project has lain neglected since 1991. A feasibility study is expected as soon as October. RUSSIAN BUSINESS MIXED WITH POLITICS Russia’s number two producer of aluminium, SUAL, has also expressed an interest in taking on the TADAZ smelter after privatisation. In February 2004, Eduard Rossel, the governor of Sverdlovsk region, visited Dushabe to lobby for the SUAL group, which is based in his province. He even spoke of SUAL winning a controlling, rather than minority, stake in the Tajik plant. But SUAL’s hopes appear to have been dashed by the linkage between the Russian government’s political and economic interests in Tajikistan, in which RUSAL appears to be Moscow’s favoured firm. RUSAL’s package for Tajikistan was agreed during a ground-breaking visit to Tajikistan by Russian president Vladimir Putin in October 2004. Company chairman Oleg Deripaska, a powerful figure in Russian business, followed that up with a meeting with Tajik president Imomali Rahmonov in February.

Moscow has significant security interests in the country, the only Central Asia republic where it retains a military base with substantial ground forces. These complement its strategic economic interests in minerals and energy, and Putin’s visit cemented the various relationships in what he called Russia’s new "comprehensive approach" to its post-Soviet neighbours.

RUSAL’s pledge to finish the Roghun hydroelectric station was complemented by a deal under which Russia’s Unified Energy Systems will finish off Sangtuda-1, another half-built hydropower unit by December 2008. The Russian government is converting 50 million dollars in debt into Tajikistan’s official contribution, and is expected to find another 200 million dollars in loans and investment funds.

The contract to build Sangtuda-2, that second stage of the hydroelectric dam scheme, is likely to go to Iran. The two countries’ energy ministers signed a memorandum of understanding in June 2005 in which Iran agreed to find most of the money.

However, this deal should not be seen as going against Tajikistan’s fundamental political and economic reliance on Moscow. Iran has close cultural links with Tajikistan but has been careful to work with rather than against Russia here.

ECOLOGICAL ISSUES

Any future investor will have to reckon with the significant concerns raised by environmentalists. TADAZ spews out carbon emissions, sulphur dioxide, fluorides and other harmful substances, as was pointed out in the Tajik government’s own report to the United Nations’ climate control committee.

Air pollution filters were installed in 1998, but further “green” measures will cost much more money.

Talk of a possible takeover by RUSAL has made local environmental activists worry that increased production can only make the ecological situation worse.

RUSAL has been quick to insist that it will observe international standards when it builds the two new production units at TADAZ and the complete new smelter in the south of the country.

"A great deal of attention will be paid to ecological issues in the construction process,” RUSAL deputy director Sergei Annenkov told a press conference in Dushanbe in late June. “Wherever RUSAL implements a projects, ensuring ecological safety is a top priority.”

Tursunzade is situated close to the border with Uzbekistan, where people have also been affected by pollution. In February this year residents of the Surkhandarya region held a demonstration outside the Tajik embassy in the Uzbek capital Tashkent. They demanded that the Tajik government abandon plans to increase the smelter’s capacity.

The Uzbeks’ fears are real enough, but the fact that such protest meetings are rarely allowed in Uzbekistan suggests that the hostility to the plant may be a useful way for the government to put pressure on its smaller neighbour, with which its relationship is uneasy.

LABOUR FORCE CONCERNED ABOUT FUTURE

Tursunzade follows the classic Soviet model where one industrial plant provides jobs for a whole town, so everyone who lives there is naturally concerned for the future. As well as the 10,000 workers at the smelter and associated factories making aluminium products ranging from cutlery to bicycles, thousands more jobs are created indirectly to service this labour force.

At the moment, no one really knows what privatisation and sale would mean for the plant’s employees.

“I’ve heard that after the workshops have been rebuilt, RUSAL will create better conditions for the workers than before,” said TADAZ employee Habib, who did not want to give his last name. “So I’d only welcome it if they become the owners.”

Another worker, Rahmatullo Sharip, was less optimistic, saying, "I’m afraid that once RUSAL arrives at the plant I’ll be left with no job. A few of my mates lost their jobs when they closed down the Teflon kitchenware unit. They told us RUSAL wants to get rid of the ancillary production units.

“Rumour has it that when RUSAL takes over ownership of the plant, they’ll cut half the staff.”

“I don’t care who owns our plant,” said local resident Umar. “As long as it doesn’t stand idle, and as long as wages get paid on time and aren’t lower than before.”