Diversification of Investment
Last year, the FDI inflow reduced to $14.8 billion, which was the lowest result since 2007. At the same time, against the background of a catastrophic 60% drop in investors' interest in base material sectors, the processing industry proved to be more resistant to external shocks. This means that the focus on industrialization of economy is generally justified.
A series of fruitful years started in 2008, when the annual gross foreign direct investment in Kazakhstan amounted to not less than $20 billion, seems to come to an end. According to the statistical data of the National Bank, the last year figure of $14.8 billion was 37.5% less than the figure of 2014 ($23.7 billion) and almost 2 times lower than the record value of 2012 ($28.8 billion). Of course, primary influence factors were the global prices for hydrocarbons and metals, slowdown in economic growth of China and Russia, as well as geopolitical shocks of the region. Transnational corporations started winding down their investment programs, and during the year the amount of investments in the oil and gas production in our country decreased by 62% (from $7.3 billion to $2.8 billion), in the mining industry – by 58% (from $8.3 billion to $3.5 billion), and in trade – by 47% (from $2.8 billion to $1.5 billion).
In such conditions, a 30% decline in FDI in the processing industry (from $3.7 billion to $2.6 billion) is rather favorable than sad. All the more so given the fact that the highest negative impact was made by the metallurgical industry, which was also dependent on commodity prices (–41% to $1,754.6 billion). On the other hand, investment in the production of refined petroleum products increased by 81% to $118.4 million, investment in the manufacture of transport vehicles increased 7 times to $64.1 million, in the food industry – by almost 30% to $218.1 million.
As a result, at the last year end, a share of processing industry in the total FDI volume of Kazakhstan did not reduced but increased from 15.4% to 17.3%. In general, over the period of six years of implementing the industrialization program foreign investors have invested in the production of finished goods the amount of $20.1 billion. This amount was spent on the construction of new enterprises under the Industrialization Map, which, during the past year, manufactured products in the amount of 1.4 trillion tenge, which was equal to 15.3% of the total volume of the processing industry. Currently, 29 transnational corporations are operating in non-energy sectors with 46 implemented projects totalling $2.5 billion. A new package of incentives and preferences, introduced by the government of Kazakhstan for projects in priority sectors, has contributed to the preservation of investors' interest in the processing industry. According to the Ministry of Investment and Development, last year, 30 investment contracts were signed with a total investment volume of about 100 billion tenge, which was 1.5 times higher as compared to 2014.
Nevertheless, the analysis of the structure of FDI accumulated over the period of eleven years (and this is as much as $222,388.6 million) indicates that it will take much time to its cardinal change. Thus, 59.1% or $131,543 million are still accounted for base material sector, including 32.7% ($72,725.3 million) for the performance of geological exploration and survey and 26.4% ($58,817.7 million) for extraction of mineral resources. A share of processing industries increased to 11.8%, or $26,202.8 million, of which $20,469.4 million were spent on metallurgical sector. Investment of transnational companies in trade does not exceed 8.6% ($19,251.5 million), financial activities – 5.3% ($11,822.8 million), construction – 3.5% ($7,735.2 million), information and communications sector – 1.9% ($4,176.8 million), transport and warehousing – 1.7% ($3,742.2 million). The amount of investment in agriculture is also insignificant – 2,059.2 or 0.9%.
Who will become new investors?
The composition of leading countries in terms of gross FDI inflows into our country remains quite stable. In 2015, among 112 countries that invest in Kazakhstan, the highest contribution was made by the Netherlands – 38.8% ($5.7 billion at the end of 2015), the USA – 18.7% ($2.8 billion), Switzerland – 12.6% ($1.9 billion), France – 6.4% (almost $1 billion) and Belgium – 4.6% ($0.7 billion). Next major investors are Russia and China – 3.8% ($0.6 billion) and 2.9% ($0.4 billion), respectively.
The cause of constant leadership of the Netherlands is quite explainable. According to expert estimates and data of the Integrative Research Center of the EDB, this state is traditionally a "transshipment base" of third-party transnational companies for making direct investment in the CIS. Besides, businesses from the Netherlands make investment independently. However, sometimes it relates to joint ventures and not only in the context of a traditional tandem of Dutch and English businesses (in case of Royal Dutch Shell and Unilever). In particular, we have examples of an alliance with the Chinese business (Sino-Science Netherlands Energy Group). In general, at the end of 2014, the "real" FDI made by the Netherlands and accumulated in CIS countries monitored by the EDB exceeded $16.7 billion. Basically high rates provided investments in the fuel complex, but there are very significant projects in the chemical and agricultural industries (first of all, due to the Dutch brewing giant Heineken).
EDB analysts called China the real investor No.1 in the Eurasian Economic Union. At least in recent years, Chinese investors demonstrate the highest dynamics of making FDI in EEU countries. Thus, since 2008 till 2014 the amount of Chinese FDI accumulated in the region increased more than two times (from $11 billion to $27.1 billion), and $23.6 billion out of this amount were invested in Kazakhstan, which is almost 7 times higher as compared to investment in the Russian economy. In particular, $17.1 billion were invested by China in the production of hydrocarbons, and $6.2 billion were spent on the transport complex of Kazakhstan.
It seems that this trend will only strengthen with a greater focus on non-energy sectors. Today, the largest package of potential investment initiatives has been formed within the framework of the Kazakh-Chinese industrial program. The point at issue is about agreements on the development of 52 projects worth $24 billion, which were reached during a visit of the Minister of Investment and Development Asset Issekeshev to Beijing in January of this year. The most interesting areas for Chinese companies were agro-industrial complex, chemical industry, machine building and others.
Iran can become another interesting partner for Kazakhstan. In connection with the lifting of sanctions Iran is ready to invest in our economy and provide a sales market for many Kazakhstan companies. Thus, following the visit of Nursultan Nazarbayev to Teheran our countries have concluded 50 agreements totalling about $1 billion, including for the construction of a soda ash plant in Kyzylorda region totalling to $200 million. Iranian partners are ready to invest in chemical and petrochemical industries and to export agricultural and engineering products. In particular, Alageum Electric Company has signed an agreement with the Iranian company Niroo Nransfo Co. for the supply of transformers and transformer oil to Iran.
In the area of special attention
However, both Chinese and Iranian projects are only preliminary agreements so far. And taking into account the global geo-economic situation, they can remain only on paper. For example, in February of this year, chairman of the management board of KAZNEX INVEST Borisbiy Zhangurazov announced the suspension of the project of construction of a metallurgical plant with a cost of $900 million with the participation of Chinese investors in South Kazakhstan region. The reason for that was the unfavorable situation in the global metals market. "We hope that some time later objective circumstances will be more favorable and this project will be implemented".
The facts are that, despite all the efforts aimed to create favorable conditions for investors, the attractiveness of Kazakhstan has seriously fallen for them. It is not surprising that during the review of preliminary results in November of the past year, the President criticized the government's work in this area. "I participated in personal meetings with major businessmen in the world. They all expressed interest and called concrete objects, for which they would work. In real circumstances, no one has such opportunities. There is a lot of money in the world and we need to be able to take them and to catch their interest. All the skills of the Government and qualifications of our competent staff should be focused on this. We need to work on each of these issues".
The correctness of Yelbassy is confirmed by the calculations of experts of the UN Conference on Trade and Development (UNCTAD). According to their recent report, at the end of the last year, the total volume of foreign direct investment throughout the world "suddenly" grew by 36% and amounted to $1.7 trillion, which was the maximum figure after the global economic and financial crisis of 2008–2009. At the same time, the USA took again their traditional first place in terms of the volume of received foreign investment and left behind China and Hong Kong. In 2015, the club of countries being the most attractive for investors also included the Netherlands, Great Britain, Singapore, India, Brazil, Canada and France. The main factor of FDI growth was cash inflow in advanced industrial countries, which increased almost two times, while the dynamics of FDI attraction to developing countries decreased to +5%. Countries with transition economies were among the outsiders and the greatest reduction was observed in Russia and Kazakhstan – by 92% and 66%, respectively.
In this situation, the President of Kazakhstan used the practice which was already proven during the crisis of 2008. During the last year, he made a number of official visits to Italy, France, UK, USA and China, as a result of which more than 130 agreements were signed with investors in the amount of more than $46 billion.
It is understood that the main thing now is to achieve the implementation of these agreements, and therefore, during the meeting with the Cabinet of Ministers the Head of the state raised again the issue relating to the quality of project administration. "I have a thought – do we have a person who coordinates this investment? We need this person so that investors could come and apply to certain officials in the Government instead of running from office to office, and this person should provide necessary services to investors". The President also criticized the work of Kazakh diplomats abroad: "The Ministry of Foreign Affairs should perform this work.. What else to do? We are not the state that defines the global policy. Wherever you go, our ambassadors do not know what they do. They neither know their duties nor the economy as a whole. We will talk about this during the meeting of the board: embassies interfere in all areas regardless of whether it is necessary or not. We need to have representatives in those places where Kazakhstan has its interests".
This year, correction of errors has resulted in strengthening a three-level investor support system, which was established as part of the industrialization program.
Thus, starting from 2016 special advisers will be in charge of the functions for promotion of investment opportunities of Kazakhstan entrusted upon our Embassies in ten countries, which have the highest priority for us (USA, UK, Italy, South Korea, Iran, Japan, Germany, France, China and India). In addition, a diplomatic business club was established under the auspices of the Ministry of Foreign Affairs. The club will hold meetings between representatives of embassies and foreign companies with the participation of heads of our regions.
At the central level, the Investors Services Centre started operating in the building of the Ministry of Investment with the aim to provide advice and receive applications rendering assistance in obtaining public services and to issue their results to investors involved in implementing a priority project. In addition, in May of this year, the work of the Ministry in the field of investment was strengthened by adding a position of an individual deputy minister represented by the former CEO of the Investment Committee Yerlan Khairov.
At the local level, regional Chambers of entrepreneurs and regional investors' councils established on the model of the Council supervised by the President of the Republic of Kazakhstan took part in the interaction with and support of investors. In addition, 19 service sectors were established within the system of the State Corporation "Government for Citizens" JSC for provision of services to investors on the principle of a single window. The latest innovation was the rating assigned to regional akimats in terms of quality of their work with foreign companies, which is currently made on a monthly basis.
Systematic problems are resolved within the framework of a detailed plan for improvement of the investment climate in accordance with 12 recommendations elaborated by OECD experts. They include issues relating to land access for foreign individuals, protection of intellectual property, improvement of customs and tax legislation, access to arbitration proceedings and transfer pricing. The government expects that this work will be completed as early as 2017.
Example and practice
A new and quite logical source of emergence of new projects is the encouragement of investing profits earned by investors who are already operating in our country. Such investors include as much as 168 companies operating in the processing industry only. According to international statistics, a global share of such reinvestment amounts to 65% of the whole FDI volume.
According to KAZNEX INVEST, at the present time, about one third of all investors operating in Kazakhstan are in the process of expanding their production activities, or are planning to re-invest in the development of new production facilities.
In particular, last year Lotte Group made investment in the confectionery factory located in Shymkent, and LG Electronics set up the production of central air conditioner on the basis of Almaty ventilatory plant. Turkish companies BTM Group and Galaksi Group launched the enterprises in Almaty region for the production of roof waterproofing membranes, plastic window sills and glazing mouldings under the Rossi brand, and Coca Cola started a soft drink plant in Astana. In turn, a French company "Danone" has expanded the product line of its enterprise located in Almaty by adding two new types of fermented-milk products. In total, these 6 companies reinvested $113 million and created 525 new jobs. According to the Investment Committee's estimates, this year this list will be added with at least 11 projects totalling $137 million.
It should be added that the focus on the existing investors will allow public officials to kill two birds with one stone. First, working with them is much more complicated than making beautiful presentations for newcomers. These companies already have real experience of work in our country and know exactly what they should demand from the state so that new projects are not constrained at all stages of implementation. This means that during a dialogue with them the government will have a clearer picture of necessary "climatic" improvements. On the other hand, these "old men" can become the most effective promoters of the investment image of Kazakhstan. Indeed, only those who have visited a paradise can appreciated it in the right way.