Development Institutions: An Instrument to Boost the Economy
International practices show that the government’s role in economic development is not so much about policies, macroeconomic stability and regulation, as about strategy and coordination. The so-called “development institutions” are a means of fulfilling these functions. As a special financial gear, they have already boosted socioeconomic development in many countries. This includes the Development Bank of Singapore which helped build Singapore’s economy and Bank Rakyat Indonesia, whose small-business lending programmes have set an example for the whole world.
The first development institution in our country – the Development Bank of Kazakhstan (DBK) – was set up in 2001. Its aim is to support the private sector and the government through providing long- and medium-term low-interest loans (export credits in particular) and guaranteeing their obligations to other creditors.
The need for DBK arose because, due to high risks, private banks could not meet the national economy’s demand for long-term, low-interest loans. When commercial banks become fully capable of fulfilling this mission, DBK is expected to increasingly focus on infrastructure, social and regional projects. In addition, the bank is allowed to finance projects abroad.
The next phase in developing national development institutions was the 2015 Industrial-Innovation Development Strategy adopted in 2003. It targets the sustainable development, diversification and modernisation of the national economy, and raising local production and exports.
The key objectives of the strategy are to achieve an 8-8.4% average annual growth in processing industries; triple labour productivity and halve GDP energy dependence by 2015 (compared with 2000); enhance the efficiency of processing industries’ assets; improve the business climate; and integrate the national economy into regional and global innovation processes.
To fulfil these objectives, a number of institutions were founded in 2003, including the Investment Fund of Kazakhstan (IFK), the National Innovation Fund (NIF), the State Export Credit and Investment Insurance Corporation (SIC), and the Marketing Research and Analysis Centre (MRAC). Each of these institutions has its own purpose. NIF’s aim is to build an “innovation infrastructure” by promoting innovations and venture funds. NIF purchases shares in existing and newly established companies to finance high-tech production. SIC insures and reinsures political and regulatory risks to back the national manufactures’ exports. It also conducts market research and distributes information on potential markets. IFK finances private sector’s initiatives in non-primary industries. To this end, the fund purchases minority interests in investees.
All these efforts are expected to help overcome difficulties such as the underdeveloped stock market, low capitalisation of domestic companies, and a lack of the flexible market mechanisms which would reorientate investment to processing industries.
The national development institutions were expected to become an “end-to-end chain” to support innovations. This concept works as follows: each innovation rests on an idea or a “model” of the future “commodity”; then a production technology needs to be set up; and, finally, an enterprise needs to be established to market the “commodity”. So it was expected that MRAC would study the “models” in terms of their marketability and, if the “model” is found marketable, NIF would develop a pilot “technology” to put the same into production. Then the project would be taken up by the Engineering and Technology Transfer Centre (a NIF’s subsidiary), which would conduct pilot tests and prepare a feasibility study. The players at the final stage are IFK and DBK.
In 2003-2005, some 400 projects were implemented in the non-primary sector in Kazakhstan. 136 of these were co-financed by development institutions and were worth $3.3 billion, including $1 billion invested by these institutions. At the same time, the investment demand of the national non-primary sector exceeded $10 billion.
The national institutions have presented not only advantages (cheap and “long” credits, support to investment initiatives, etc.), but certain major drawbacks. The “end-to-end chain” has not proved its efficiency yet, as institutions failed to agree on the “inputs” and “outputs”. More than that, everyone had a different opinion on the process, hence disruption rather than consolidation. First, some institutions and DBK in particular showed an overlap in their activities with commercial banks and began financing projects traditionally financed by second-tiers. Second, they started to compete with each other. Finally, they failed to follow their initial mission: many institutions rejected important long-term projects in favour of those with quick payback. Financial institutions strove to quickly commercialise the state budget moneys they had been allocated. The building industry being among the most dynamic (and construction of small-sized plants among the most profitable), there is no surprise that financial and service institutions focused on this sphere.
Thus, the first stage of the Industrial-Innovation Development Strategy showed that Kazakh development institutions pursue different aims, although they should have one and the same target – economy diversification. To remedy this situation and improve their coordination, the government resolved to set up a “management company”.
The Kazyna Sustainable Development Fund established this March is intended not only to foster the development of Kazakh institutions, but to enhance their efficiency and achieve synergy in their efforts. To this end, the fund intends to improve coordination and corporate governance in development institutions and employ professional managers. The government hopes that Kazyna will become a leading holding group in the region and provide a wide range of investment solutions and world-class services for both national and international businesses.
Kairat Kelimbetov, the fund’s CEO, assures that Kazyna is not supposed to consolidate the government’s position in the economy and that development institutions will not compete with the private sector. Both the fund’s and development institutions’ activities are aimed at developing business initiatives.
According to Mr Kelimbetov, Kazyna will become a proactive shareholder in development institutions and appoint chairs and the majority of their boards. From 26 September 2006, the fund became the sole shareholder in all development institutions, including DBK, IFK, NIF, SIC, MRAC, as well as the Kazinvest Investment Promotion Centre and the Small Business Development Fund. At the same time, each institution remains an independent entity – it is intended that no one will interfere with their operating activities. Kazyna’s role will be to set objectives for each of the institutions and approve their plans and budgets. The entire structure and relations between the institutions will be subject to revision. “We intend to build a business development chain. First, we will select priority industries and investment areas and then the most promising initiatives from the private sector. Then a venture project will be prepared. We will have a share in, and finance these projects. Development institutions will link this chain and complement each other. This system will work as a single, large-scale project,” said Kairat Kelimbetov at the development institutions forum held in Astana this summer.
The fund will focus on “breakthrough” projects capable of moving the economy, an industry or an enterprise on the brink of a new development. This is a question of not only private initiative, but the leadership of the fund, because people who can come up with new ideas often lack the knowledge or skills to structure and implement them. Kazyna must become a partner for major investors, including foreign ones, so that they could make their proposals immediately to the fund and not the development institutions. Furthermore, the fund will promote national brands on foreign markets and help domestic businesses enter international projects and purchase shares in foreign high-tech companies.
In September 2006, the Kazakh Majlis (lower house) discussed the draft law on the 2007 national budget. According to the government, the development budget will total 650,469 million tenge next year, 768,504 million in 2008 and 905,587 million in 2009. Kairat Kelimbetov, Kazyna’s CEO, forecasts that during these three years development institutions will contribute some $10.5 billion to the development projects.
So, Kazyna’s and the development institutions’ tasks are very clear, although not easy. This will be painstaking work with no immediate results: at least two or three years are needed to see whether development institutions have really been given an added impetus.
To model the future is an intricate strategic task, which has nevertheless been solved by many countries now boasting diversified and competitive economy. Will Kazakhstan manage to do the same? Foreign experts insist that the country needs to choose benchmarks and start achieving them. And although the government still has to nurse the business, e.g. through development institutions, there are chances that the country will see the results it wants to see.
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