KFICA. Investors' Council at Work
Shortly before the 29th plenary session of the Foreign Investors' Council chaired by the President of the Republic of Kazakhstan, we have traditionally asked Chairman of the Management Board of KFICA and Head of the Representative Office of Deutsche Bank in Kazakhstan Ulf Wokurka to tell our magazine about the objectives, progress and plans of the Council for 2016.
Please, tell us about the results of work of your Association for the last year. Have you fulfilled all the objectives?
You know, if we fulfilled all the objectives in 2015, we would be able to close easily our association, go home and live happily ever after. But, alas, it happens only in fairy tales, and we live and work in the conditions of real life with its real challenges that pose new challenges every day and do not allow us to snooze or sit idle as we are an association of the largest foreign investors in the country.
Speaking more seriously, last year we did a lot of useful, both for the country and its investment climate as a whole and for each individual company of our association. As an example, I can refer to the fact that we had an opportunity to raise any issues, our members and observers were interested in, during meetings arranged by our association both at the working level and with the participation of ministers, the Prime Minister and even the President of the country. As a result of such meetings, these issues have always been resolved at a quickened pace, and in most cases in favor of entrepreneurs, foreign or Kazakh investors.
For example, we were able to make a number of proposals and recommendations agreed upon with our Kazakh partners, which have either already been accepted and executed or are under consideration by relevant departments, with the aim to find mutually acceptable solutions or change the previously existing practices.
The process of constant adaptation relates also the Foreign Investors' Council. Within its framework, in collaboration with our partners from Administration of the President, the Ministry of Investment and Development and the Investment Committee we restructured slightly the format of our interaction by moving the focus of activities of joint working groups as we thought appropriate. Within the same groups, during the discussion of specific problems we ensured the involvement of the necessary expertise from both sides and increased the overall efficiency of the whole system supporting an active and constant dialogue between major investors and governmental authorities of the country, as it was entrusted by the President of the country.
I would also like to remind you that last year we started close cooperation with the National Chamber of Entrepreneurs "Atameken", which is currently in progress as part of the relevant Agreement. This document is accompanied by annually approved plans of joint activities and thereby we create another dialogue platform, and the NCE "Atameken" and KFICA invite other business associations of Kazakhstan to participate therein.
How has the investment climate of Kazakhstan changed over the last year?
As you probably know, in 2014, the President signed the Law on improvement of the investment climate and opportunities for the development of investment projects with a capital exceeding 20 million US dollars with minimal obstacles. This document came into force in January of last year, except for the tax incentives, previously provided by this law. I can say with confidence that the law facilitates considerably the work of foreign and local investors who wish to invest in business development in the country.
As I mentioned above, the process of issue of visas for many foreign investors and work permits for foreign specialists has been simplified. Investors are provided with tax preferences, stability of the tax legislation, exemption from certain taxes during the period of project formation and many other benefits.
I believe that the state holds the right direction in the field of support of investors and develops thereby the country's economy. Another important thing is social aspects. After all, with the opening of plants and enterprises we create new jobs, and this improves the social climate of the country.
I can also add that in 2015, the Government developed a number of laws that protect the property of foreign investors through the provision them legal guarantees of their rights in case of nationalization. In addition, there was an opening of the Investor Service Centre, which is operating on the principle of "a single window", which significantly facilitates the process of collection and processing of documents and provides legal advice to potential investors. The Investment Committee invited me to the opening of the first "single window" in Astana, and I was able to see how competently and quickly investors' requests are processed there.
How did the devaluation of the tenge affected the foreign investors' interest in projects in our country? What do you think is more important for TNC: cheapening of labor forces or elimination of bureaucratic moments?
Last devaluation of the national currency, which started in the middle of August of last year, was absolutely different as compared to previous devaluations that took place in 2009 or 2014. Currently, tenge is in free flotation and this allows the participants of the currency market to respond on a daily basis to the changing financial environment. Tenge is no longer in any narrow or wide corridor, which is defined in advance on the basis of political rather than economic considerations of the National Bank and the Government, and thus it can conflict with the market realities.
At the present time, the national currency rate can respond flexibly to changes in the external market environment, which, in turn, allows entrepreneurs to respond flexibly to trends in its fluctuations. Over the last 3-4 months there has been some stabilization of the exchange rate, which certainly improves the situation of domestic entrepreneurs and foreign investors, when they plan their budgets both for current operating expenses and for mid-term and long-term investments.
The transition to a free-floating regime eliminates virtually a risk of a sharp one-day correction of the exchange rate, which in the medium term will allow investors to make their investment plans in terms of foreign trade on the basis of mid-term and long-term forecasts of the exchange rate. This are extremely important changes, both for the financial and real economy sectors. Such innovations in the monetary policy of the National Bank are encouraged by the majority of businesses of the country.
Last year, at the meeting of the Foreign Investors' Council you recommended to expand the list of countries with visa-free regime, as well as to develop proposals for decriminalization of tax violations. Have these recommendations been adopted by the Government?
As for visa-free regime, on April 7 of this year the Government adopted a resolution, according to which visa privileges of the original twenty countries have been extended to 35 countries-members of the Organization for Economic Cooperation and Development.
This is a good progress, but being a citizen of the European Union I wish these privileges would apply to all countries of the EU without any exceptions. For example, my colleague, Chairman of the Management Board of the Business Association EUROBAK, who is a citizen of Lithuania, is currently experiencing certain difficulties in organizing his business trips to Kazakhstan and neighboring countries. He has to obtain visas in every country despite the fact that he leads a subsidiary of the largest German concern in Kazakhstan, which also carries out its activities in other markets of Central Asia. Therefore, I support the proposal to extend the visa privileges to all employees of resident companies of of OECD or EU, if they come to Kazakhstan in the interests of their employers.
On the initiative of the Investment Committee, KFICA and other foreign business associations numerous meetings were held with the participation of all institutions involved in the issues relating to stay of foreigners in Kazakhstan with the aim to explain new rules of visa-free regime and other improved conditions for entry and stay in the country. During the last meeting I submitted a proposal for visa-free entry to Kazakhstan for all employees of resident companies of OECD or EU countries, but it seems to me that this idea will have to be explained during the following similar events.
However, it should be noted in general that the dialogue is continuing and our Association expects that finally we will be able to reach an agreement with these institutions with respect to all issues relating to further improvement of the investment climate in the country.
If we talk about decriminalization of tax violations, this principle is a basis of the development of a new tax code, in the discussion of which the KFICA is actively involved through a joint working group on investment policy. Until the approval of this principle, we will repeat our recommendation relating to this issue.
This is particularly relevant due to the fact that at the present time the practice of investigation of legal entity’s activities by tax authorities has often a negative impact on activities of other companies, which previously had business relations with this legal entity. For example, bank accounts are arrested, and in order to unfreeze them the companies have to prove that their business relations with the counterparty under investigation were impeccable. In my opinion, this situation can be solved only through re-thinking of a legal concept of "presumption of innocence" in the business sphere and we know that this question is raised not only by KFICA but also by the National Chamber of Entrepreneurs “Atameken” and other business associations.
Last year, the President Nursultan Nazarbayev invited foreign investors to invest in the development of the agricultural sector. What work is being performed by the KFICA in this field?
For Kazakhstan, which has huge land resources and potential for becoming a country with a strong agroindustrial economy, the issue relating to the development of the agroindustrial complex has been and will always be relevant.
In this context, It is worth mentioning the work of a member of our association - Philip Morris International. Acting jointly with the KFICA, the company has founded an innovative agricultural business center in Almaty region for the development of fruit and vegetable production through the use of technologies such as drip irrigation, use of greenhouses, production of vegetables using mulch, low and high tunnels.
A distinctive feature of the program is that the aid is aimed directly at small farm enterprises. Farmers are not just trained but also provided with assistance in implementing the acquired skills in practice through non-repayable start-up grants from the Philip Morris International.
This company has also addressed an issue relating to agricultural cooperation with farmers and direct sales without intermediaries to Almaty hypermarkets, where prices for vegetables are cheaper by 25% as compared to market prices. There are simple but very effective technologies that really help farmers become economically successful, i.e., earn twice as much due to new approaches and knowledge. For example, investments in the right management and fertilizers in the amount of 50 thousand tenge have provided 1 million tenge of profit from one hectare of peppers and tomatoes.
Thus, we aimed to prove that agriculture can be both sustainable and successful. The KFICA and Philip Morris hope that these approaches will have wide replication and support from the state.
According to our data, in 2015, investment in fixed assets in the agricultural sector amounted to 167.1 billion tenge, which was only 0.4% more as compared to the previous year. This is the lowest growth indicator over the last five years. The maximum value was achieved in 2012, when an increase was about 28%. It seems that there is still a lot of work to be done to ensure more rapid development of the agricultural sector of the country. Probably, there will be necessity for closer work coordination between KAZNEX INVEST, KazAgro holding and relevant ministries in order to attract new investors.
A topic of the next meeting of the Foreign Investors' Council is the development of the International Financial Center in Astana. How do you assess the overall prospects of this project? What points should be taken into account in the course of its implementation based on the global practice?
Among the 35 KFICA members, about 20% of companies are associated directly or indirectly with the financial markets in Kazakhstan and in the region. And of course, not only these companies but also enterprises operating in the real sector have encouraged the initiative for establishment of the International Financial Center in Astana as this Center will provide new possibilities for the arrangement of financing of investment projects both in Kazakhstan and in the region as a whole.
International experience gained over the last twenty years indicates that not every financial centre can assert with confidence that all the goals set during its creation have been achieved. But in any case, changes for the better have occurred everywhere: simplification and extension of access to capital, own funds or investments and successful placement of certain debt obligations, shares and derivatives.
In other words, not the achievement of any intermediate goal but the decision to start a long and sometimes painful way of improvement of financial markets in Kazakhstan is the most applaudable thing in this initiative.
I am sure that not only the KFICA members but also our domestic banks and other financial institutions will be actively involved in the establishment and activities of the International Financial Center in Astana, whether as issuers of securities or broker-dealers, asset managers or arrangers of transactions for their clients, but anyway as users of investment privileges offered by the International Financial Center in Astana to its participants.
It seems to me that a very important factor for the successful development of the International Financial Center in Astana is that from the very beginning the initiative is closely linked to the domestic financial market and that the center does not preclude domestic players from participating therein, but conversely could involve them as the most prominent supporters. Our Association and members of the Foreign Investors' Council are going to present specific recommendations for the development of the International Financial Center in Astana at the plenary meeting to be held at the end of May in Astana.
It is expected that facilities of EXPO-2017 can serve as a basis for creation of the International Financial Center in Astana. Will participants of the International Financial Center in Astana obtain secondary benefit from investments in infrastructure of EXPO-2017?
Yes, it is possible to a certain extent that this will happen, if we are able to transfer smoothly the exhibition center for use to future participants of the International Financial Center in Astana, who are, first of all, brokers-dealers, banks and asset management experts.
However, it seems to me that "conversion" of assignment and renovation of buildings and other structures in a quick, thorough and efficient manner over such a short time as 3-4 months (at the end of 2017) would be impossible. For example, requirements for information-technology infrastructure of a modern bank already differ very much from those imposed upon the exhibition center, and by the year of 2018, when the International Financial Center in Astana is planned to be launched, this difference will be even greater as a result of the rapid development of financial technology throughout the world, which does not pass and the future center.
I should say right now, I am not an architect or "IT guy", but even being a non-specialist I can imagine a situation where the splendiferous exhibition center fails to be the most suitable for the installation of infrastructure for high-speed trading in securities.
At the same time, it should be understood that in order to compete with dozens of other developed financial centers, a future trader (broker-dealer or assets manager) operating in Astana will need to provide the shortest time of execution any of a client's order for purchase or sale of any asset, which is not necessarily issued in Kazakhstan. And this will be difficult without the appropriate infrastructure.
Anyhow, let's look first at what will be built for EXPO-2017 and only then we will be able to think how International Financial Center in Astana would take further advantages from the future energy.