Meeting the Country's Long-Term Goals
Askar Sembin, President of the Development Bank of Kazakhstan (DBK), answers questions from our magazine
Mr. Sembin, do the development institutions have any serious influence on the process of diversifying the local economy?
This is exactly what we discussed with our foreign and local counterparts at the Eurasian Forum of Development Institutions on 31 May 2006. DBK was five years old on that day and we decided to celebrate the anniversary in a pragmatic fashion, trying to answer the question: 'Do development institutions meet the country's long-term goals?'
In the course of the discussion we agreed that not only do they meet these goals, but also that they play a crucial part in sustainable economic development and social and political stability.
Under the Strategy for Industrial and Innovation Development of Kazakhstan in 2003–2015, the first, preparatory stage was implemented in 2003–2005. During this stage, the infrastructure of development institutions (DI) was created. A dialogue was launched between the government and the private sector on the joint action needed for diversifying the local economy.
It was then that our bank shaped its strategy and embarked on implementing pilot projects. The first thing we did was to make our interaction with national companies in the sphere of infrastructural development as effective as possible. As a result, almost all of DBK's infrastructural projects were praised by the professional financiers' associations as the best in the Asia Pacific region.
Another direction taken by our work in the first stage was the in the sectors where financial structures couldn't work successfully three or five years ago due to limited funds. These included farming produce, textile and paper industries, construction materials, and agricultural engineering. In total, we completed 40 investment projects in various economic sectors, including the launch of 15 enterprises that are now turning out competitive products, more than 40% of which are exported.
One more result of our activities over the five years, probably the most significant, has been improving the conditions of loans provided by second-tier banks. Not long ago no commercial bank would risk lending more than $5m to industrial production in a non-raw materials sector for more than one year. Even if it did, the interest would have been not less than 18-20% per year. DBK set the new parameters: longer-term loans to non-extractive sectors.
Moreover, we have succeeded in making the management of borrowing enterprises more open to investment and bringing on a whole host of high-class banking experts specialising in investment projects.
Now that the managing company – the Kazyna Sustainable Development Fund – is set up, the new stage in DI's era begins: promoting the process of making our country one of the 50 most competitive nations through diversification of the economy and sustainable development.
Do you sense any competition from second-tier banks?
There is competition for ideas, professionals and banking technologies above all. As to competing for projects, the situation is as follows. Today there are 34 banks in Kazakhstan, ten of which are large and actively growing. Given these figures, 25–30% of industrial investment loans accounted for by DBK is not that small a share. We will be happy if the commercial banks take some of this. Our goal is to foster activity in the private sector in the manufacturing industry and to attract commercial banks. We will go further, investing in inter-regional infrastructural projects, expanding into the neighbouring markets.
Our new picture of DBK is that of an internationally recognised provider of infrastructural projects' services, investment financing and trade operations in the Central Asian and Caspian regions. At the present time, almost all of the international financial organisations operate in Kazakhstan. DBK is a kind of host bank that shares the risks and helps implement projects. Thanks to that the bank meets the requirements of these institutions, the money issue in project funding is not a problem. We can implement projects worth billions of dollars, still keeping DBK's share to a minimum. Take the reconstruction of the Bautino Port. It cost $10m, but served as the gateway for huge projects such as Kashagan which is estimated at $30 billion. It helped to fulfil plans of a larger scale.
How can a foreign investor co-operate with DBK?
Our projects always imply co-operation with local commercial banks and foreign partners. We target breakthrough infrastructural and high-tech projects. If a foreign investor is ready to offer up-to-date equipment, technology, managerial and engineering expertise, is willing to observe the local legislation and make all business processes totally transparent, we are ready to offer our loans, reputation and risk-sharing opportunities.
Some of the local businesspeople do not meet these requirements and complain about the red tape in DBK. We shouldn't forget that DBK is not just government money, this is Kazakh pension funds' and foreign investors' money. If we lower our requirements to the borrowers or ignore certain 'shortcomings' in a project or accompanying documentation, we will have higher financing risks and lower rating. This will lead to more expensive loans. Over the five years of the bank's operation, our portfolio has had no hopeless loans, which is something.
Currently, we approve about 20% of the projects we receive for consideration. At the same time I believe that if we don't accept a project, this rejection is objective. The point is that businesspeople are not always objective about the status of their enterprise and their own readiness to implement large projects. Often, a businessperson would go to a foreign country, visit a couple of successful enterprises there and decide that he or she can easily launch a similar project in Kazakhstan. But our legislation, workforce skills and costs are different. An investment project in the industrial sector means large burdens and responsibilities.
Can a previously rejected project be approved for funding after some improvement?
Yes. We offer this opportunity. We even have special rates for checking this type of project. If more reliable partners are found, property assessment is realistic and effective technologies are employed, we might be willing to approve such a project.
How are the relations with DI's from other countries developing?
From the beginning, DBK has been establishing contacts with foreign counterparts. We have signed memoranda of understanding with major institutions, and these memoranda are supported by specific projects. This is not a mere formality. For example, the practice of signing such agreements was not accepted by the EBRD. However, thanks to mutual understanding, support from Kazakhstan's government and embassies, we are implementing energy, farming, engineering and infrastructural projects jointly with the EBRD.
This year, together with Kazyna we held the Eurasian Forum of Development Institutions that I mentioned earlier. Colleagues came from tens of institutions with which we are co-operating. We discussed the outlook for developing non-extractive sectors and infrastructure in Kazakhstan and the entire Central Asia, the Kazakh financial system's ability to support diversification of the national economy and the applicability of various investment instruments.
How can we improve the sovereign and corporate ratings? What are the limitations to foreign capital's participation in the economic diversification? Do investors face any risk when lending to the non-extractive sector? Are foreign financial institutions interested in issuing financial debt instruments for Kazakh investors? We answered most of these questions with our guests. This will help us to solve strategic tasks in the near future.
The excess of monetary funds is a topical problem for Kazakhstan. How can it be solved?
True, both the National Bank and National Fund have concentrated a large volume of money at the present time. Will it be placed abroad or should it help our own economy? On the one hand, it should be invested in Kazakhstan. On the other hand, unlimited financing will lead to higher inflation rates. Specialised DIs are good indicators in this regard. If procedures are built correctly, the economy receives as much money as needed. Therefore, public agencies become the most reasonable mechanism for using the profits from the mineral resources sector.
The capitalisation of DBK is built on the principle of gold and foreign exchange reserves accumulation, but the assets management policy may be reviewed in the near future. The money should be safe and managed wisely. We are considering placement of some of the funds abroad.
I think that extra conservative capital management allows us to attract additional funds from foreign markets, enjoying good ratings and lending projects from borrowed funds only. This makes us very disciplined. We are always guided by the foreign markets, making forecasts of interest rates and never forgetting about our responsibilities to international creditors. At the same time, we are retaining a pool of funds that Kazakhstan will need if the situation in the foreign markets changes.
Does it mean the government's interference with the economy is growing?
The government has to support the private sector by effectively distributing money between sectors. It is supposed to prevent or regulate the crises through corresponding measures. The US is just one example of how it can be done. Any statement by the Federal Reserve System is always well-considered and supportive of the domestic economy. We need to build a similar model; it makes people aware of government support. In Kazakhstan, we have the Kazyna Sustainable Development Fund, the Samruk State Assets Management Company and the Agency for Regulating the Activities of Almaty, the Regional Financial Centre. The current ratio of government to private in the economy is approximately 50:50. I believe this ratio to be the safest for private business development. We need to receive the maximum benefits from this phase without trying to quickly switch to another model of development.
By the way, the World Bank is also praising the co-ordinating role of the Kazakh government in creating conditions for an economic boom similar to those in the Asian tiger economies. The essence of interaction between the private and public sectors is the division of functions. Companies undertake production and sale of goods, whilst the government ensures soundness of infrastructure, pursues the fiscal policy, introduces energy-saving technologies, ensures transparency and fights corruption. Everybody does what he does best.
Askar Sembin. Born 29 January 1972. 1994 – graduated from the Law Department, the Kazakh Al-Farabi National University, specialising in jurisprudence; 1996 – graduated from the Markets Institute, the Kazakh State Academy of Management, specialising in finances and credit. 1997 – graduated from the Kazakhstan Institute of Management, Economics and Strategic Research, specialising in state administration. Occupied various posts at the National Bank, the Finance Ministry, the Kazakh Savings Bank (Halyk Bank) and the KazTransOil national company. 2002 – managing director, the Development Bank of Kazakhstan; August 2003 – first vice-president, the Development Bank of Kazakhstan; January 2005 – president, the Ordabasy Corporation; January 2006 – deputy chairman, the Kazakh Agency for Regulating the Activities of the Regional Financial Centre in Almaty; June 2006 – president, the Development Bank of Kazakhstan.
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