It is necessary to study potential investment markets and make practical steps toward investors
Banu Babaeva, Kazakhstan Investment Promotion Center KAZINVEST
Kazakhstan, alongside other states, is pursuing an active policy of attracting foreign investment to the country. Large-scale arrangements to present the investment opportunities in Kazakhstan, both inside the country within the framework of the annual investment summit and abroad, are making a considerable contribution to creating a positive image of the nation within the international investment community.
However, being a fairly attractive country to invest in, Kazakhstan has to compete with the markets of other developing countries. Political and economic stability, the predictability of reform conducted by the state, the stability of the legal foundation, no corruption, and a friendly attitude toward investors - these are all important factors which influence the principal decision of a potential investor whether to bring money to a specific country. Therefore, today’s accomplishments of Kazakhstan will survive as long as the policy toward investment is consistent and predictable.
Currently, the most important task faced by Kazakhstan is to build new production and rehabilitate the old facilities inherited from the Soviet period (the wear-and-tear level of facilities in the chemical, petrochemical, light and food industries, ferrous and non-ferrous metallurgy, and in the power industry is from 30% to 60%). It also needs to saturate the domestic market with high quality goods and services, and to cut the unemployment level. Since the accomplishment of these tasks is beyond the country’s strength, the accent is put on attracting direct foreign investment, which is accompanied by a transfer of advance technology, management, and know-how. Another serious argument in favour of such investment is that the state does not provide any guarantees.
However, such a form of attracting outside financial resources does not free the state from the responsibility of securing normal conditions for investors. Nobody would deny the existence of political and entrepreneurial risks, risk of changes in laws, aggravating the situation in which investors find themselves, and red tape problems in our country.
The laws providing state support to direct investment have been changed and improved with time. Considering the amount of attracted investment from the viewpoint of changes in laws and improvements in the procedures for granting privileges, some positive trends can be observed. Taking into account the law passed on 28 February 1997, and the approval of the list of priority sectors on 5th April 1997, plus the obligatory and time consuming procedure for checking whether a project meets all the 20 criteria for granting privileges and preferences, it is worth noting that 18 contracts worth $74.2 million were concluded within the 17 months, 139 jobs were preserved, and 1613 new jobs were established.
In accordance with the contracts, the investors were given privileges and preferences in income, property and land taxes, customs duties, and state grants in-kind. Since the Regulation on the Size and Procedure of Standard Privileges was passed on 7th August 1998, only two criteria have been applied: a project should belong to the priority sectors of the economy, and investment should not exceed $10 million. Projects which envisaged a larger investment have had to undergo examination as previously, but could count on considerable privileges in the form of grants in-kind and exemptions from customs duties on equipment, plus raw and other materials brought in the country.
Thus, the procedure of concluding a contract has been simplified, bringing about an increase in the number of contracts and in the amount of investment attracted. Some 140 contracts worth $2,050 million have been concluded within the subsequent 17 months, 11436 jobs have been created and 14792 jobs have been preserved.
Returning to the issues of state support to direct investment, it should be mentioned that the tax privileges granted to investors have given rise to polemic. There is an opinion that the privileges contradict the principle of common application of tax legislation. However, the matter concerns not investors in general but only those who provide capital for industries of the most vital importance for the country. An examination of investment projects and polling of investors has shown that many projects have no way of being realised: a negative NPV value in the first years of the project and IRR not reaching the industry average level which ensures a project’s profitability.
Furthermore, the projects implemented in the priority sectors of the economy solve the problem of production infrastructure in the processing industry and agribusiness. They also promote the development of import substitution and export-oriented production, and create new jobs alongside preserving the old ones. According to monitoring data on certain contracts in the priority sectors, the related budget revenues exceeded the privileges from the state 6.7-fold.
The act on state support for direct investment was amended once more on 2nd August 1999. The amendments concern the content of the state support securing investors against political and regulatory risks. As for the new rules on privileges and preferences, tax privileges are provided for 5 years (the act of 1997 provided up to 100% exemption for the first five years, and up to 50% exemption for the subsequent five years). Income tax privileges are considered expedient if they are provided not from the time when a contract is concluded, but from the time when taxable income is received. The probability of this privilege not coming into effect was very high under the old privilege regulations.
In accordance with the new provisions of the law, new rules on the provision of privileges and preferences for contracts concluded with investors in the priority sectors of the economy were developed and then adopted through the Presidential edict of 6th March 2000.
However, we can not assert that the regime of preferences is the sole and major factor resulting in growing investment. Counting on the attractiveness of Kazakhstan’s vast areas and huge natural resources is groundless without adequate legal and information support to investors.
In our opinion, we shall not wait until the investor comes to request a privilege from the state. Preparing the implementation of a project could take a year or two, even more. It is necessary to study potential investment markets and make practical steps toward investors.
Of course, local and foreign consulting companies can provide significant practical assistance to investors in receiving information on any business matters. However, the major purpose of these companies is not to attract investments, but to provide high-quality services. The efficiency of their operation is measured by the number of clients attracted, and not by attracted investment. The «Big Five» - the largest consulting companies having a good history of working with foreign companies - can offer alternative investment solutions.
The matter is the goal set by the state and the tasks to be resolved while attaining this goal. If the state is interested in attracting investment, it certainly has to create favourable conditions for potential investors and those who have already brought capital to Kazakhstan. It also has to be aware of their needs and problems, and to assist in solving them. A smooth mechanism of practical interaction between the state on the one hand and an investor on the other hand is, therefore, necessary.
The «one stop shop» concept is well known in the world. It is not new in our country either. However, a vehicle for delivering information services to investors which would cover all the business issues does not exist in the country. The example and proof of the need to introduce the one stop shop concept can be found in the experience of the industrially developed countries, which have effective and successfully functioning agencies for the attraction and promotion of investment.
For example, the Invest in Britain Bureau was created in 1977 in order to provide assistance to companies in all matters related to establishing or expanding business in Great Britain. The Bureau renders information services to companies, covering advice on the best location of business taking into account specific project requirements, on local infrastructure, markets, qualification of labour force, suppliers and consumers. This Bureau alone accounted for 196.4 million pounds brought into the GB economy in 1998, 74340 jobs being preserved and 44413 jobs created that year. The activity of this and other similar bureaux in other countries is supported and financed by the government, international organisations, and by the private sector interested in new partners and customers.
The Kazakhstan Centres for Support to Investors, an organisation whose purpose is to stimulate and attract investment, is implementing a new project, Information & Consulting Services. Its scope of activity covers information support to potential and current investors, marketing research, searching for local partners, priority projects, qualified staff, assistance in receiving licenses, approvals, permits, opening bank accounts, registering companies, purchasing or renting real estate, land parcels, equipment, information on invitation of tenders, recent changes to laws, and other matters which are important during the preparation of an investment project.
Currently, Kazinvest has been providing services to several companies who are expected to open businesses in Kazakhstan.
The presence of such a body in our country would promote the creation of a friendly environment for investors and, therefore, would significantly ease the appearance of new companies on our market, companies which are able to organise production up to international standards.
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