Kazakhstan Investment Policy: Time to Change Priorities

KAZAKHSTAN International Business Magazine №3, 2000
Kazakhstan Investment Policy: Time to Change Priorities

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Kazakhstan Investment Policy: Time to Change Priorities

Dulat Kuanyshev, Chairman of the Agency of the Republic of Kazakhstan on Investment

Kazakhstan President Nursultan Nazarbayev, in his speech at the extended meeting of the Government on 11th August 2000, stated that the country’s economy currently finds itself at the beginning of a new stage of development, characterized by sustainable economic growth. In this connection, both the investment climate and the priorities of the national investment policy are essentially changing. Therefore, the centre of gravity will be transferred from the quantitative to the qualitative features of attracted foreign investments.

To date, the total foreign investments stand in excess of $10bn. In 1999, for example, the country attracted over $1.5bn making Kazakhstan the first among the CIS countries (table 1) according to data from the European Bank for Reconstruction and Development.

It is obvious that investment activity will be re-oriented in such a direction that investments made in a certain industry promote the development of related industries, stimulating the economic need for the introduction of up-to-date equipment and technologies, in order to create new jobs and to reach a general multiplicative effect.

Economic growth also promotes qualitative improvements in the investment climate. The present move makes it necessary to reject the former practice of granting privileges to foreign investors, and to guarantee equality for all business units.

The Agency has developed, and is currently submitting to the Government, a draft law On Investments. This draft is based on the laws currently in force in Kazakhstan, On Foreign Investments and On State Support of Direct Investments. The goal of the draft is to optimise state guarantees regarding both foreign and domestic investments for further reforming the national economy without any significant disturbance of investors’ interests. If the bill becomes law, it will mobilize the population’s domestic savings, providing an additional incentive for the development of small and medium-sized business in the country.

The draft’s cornerstone is the absence of guarantees against changes in legislation, which are stipulated in Article 6 of the law On Foreign Investments, currently in force. In our opinion, these guarantees - a point of dispute between the state and foreign investors - not only negatively influence the country’s investment climate, but also result in significant economic losses for both the national and regional budgets. The main point is that these guarantees call into question the principles of equal rights for business units provided in the Constitution. Nevertheless, striving to avoid a sharp deterioration in the investment climate, the draft covers transient provisions which ensure stability in respect of contracts signed previously.

Retreating step by step from Article 6, the state propose to turn to the establishment of an insurance system for political and regulatory risks based upon the international experience. The country’s government has conducted negotiations with leading western insurance companies on establishing an insurance pool using the new scheme. Proposals for the implementation of this project have already been submitted for consideration by the governing bodies. This step will promote the inflow of foreign capital to Kazakhstan.

Forming a legal basis and a mechanism of risk insurance, Kazakhstan is on the one hand making a further step towards civilized investment methods, and on the other hand is decreasing the likelihood of future conflicts.

In addition to creating an insurance system for political and regulatory risks, it is sensible to apply a tax remission system. In this case, the experience of 52 countries will be taken into consideration, whereby tax exemptions and preferences are in use, as well as such investment inducements as the co-financing of projects or state share holding. The economic success of such projects depends on the availability of advanced governmental institutes and highly qualified domestic managers. However, other alternatives and incentives for investors are also possible, for example, the application of accelerated depreciation, and increases in loss transfer, etc. The Agency has always supported the active attraction of investments with a balanced system of investment inducements.

For example, the BOT (build-operate-transfer) scheme has lately become widespread throughout the entire world. The advantages of this scheme are especially noticeable in the construction of social works, since the state would not need to allocate large sums of money, while the investor bears all the risks.

Moreover, the Agency is developing a program for attracting direct investments in 2001-2002, which is aimed at bringing about further improvements in promotion of investments in the country’s economy.

The Head of State set us with the task of attracting investments in the large-scale production of raw material, which could serve as a basis for new productions with higher refining levels. Efforts will be also concentrated on increasing the share of Kazakhstani goods and services in the implementation of major investment projects. In June 2000, some 208 hydrocarbon projects were under implementation in Kazakhstan (including 82 projects for development, and 126 projects for exploration and development). Some 336 projects for the production and exploration of minerals, such as gold, coal, complex ores, iron, manganese, uranium, etc. were signed, including 172 for production, and 164 for exploration and production.

Though nowadays a significant share of large fields is being developed, the stock replenishment through exploration in recent years indicates a decreasing trend in comparison with used stock. In the future this could result in a depletion of the country’s mineral and raw material resources.

For the last few years investments in exploration have sharply reduced. For example, in 1997 investments in exploration comprised 14% of the total investments in mineral and raw material industry, in comparison to 5% according to the results for 1999. Only 3% (of $121,7m allocated for exploration during the first six months of 2000) are invested in mineral exploration.

Therefore, emphasis will be shifted to creating additional incentives for attracting investments in geological exploration. In this connection, a program for the development of mineral and raw material industries, which has been designed by the government, is of notable importance.

One of the Agency’s main remaining tasks is to provide information on investment opportunities in the Republic of Kazakhstan. We maintain positive relations with the Kazakhstani Ministry of Foreign Affairs. Moreover, the embassies of Kazakhstan are playing an important role in building up the country’s investment image. We understand that in order to succeed we shall co-operate with the embassies in those countries where potential investment resources are concentrated. Certain positive results from such co-operation have already been obtained.

This year, with the support of the Kazakhstani Embassy in Israel, an investment conference has been held in Tel Aviv. The coordinated efforts of the Kazakhstani Embassy in Switzerland and other states have enabled the first top level Eurasian Economic Summit to be conducted, which was held in April 2000 in Almaty. A specialized investment conference has also been held in Madrid in association with the Kazakhstani Embassy in Spain.

The work of the Foreign Investors Council under the President of the Republic of Kazakhstan, whose working body is the Agency, has gained special significance. According to the results of three meetings held by the Council, many of its recommendations have been reflected through the development of diverse normative and legal acts, in the order and form of giving licensing and approval visas and documents, which significantly simplifies investors’ activities in Kazakhstan.

For example, based on the recommendations of the Council, and in compliance with Presidential decree, the Information and Consulting Service was established with the main aim of providing free comprehensive assistance to investors in running their business in Kazakhstan.