Sponsorship for Innovations in Kazakhstan: Are We in Full Sail?

KAZAKHSTAN International Business Magazine №2, 2008
Sponsorship for Innovations in Kazakhstan: Are We in Full Sail?

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Sponsorship for Innovations in Kazakhstan: Are We in Full Sail?

Editorial

The initial stage in forming Kazakh National Innovative System (NIS) reached completion in 2007. What results have been achieved during the course of its implementation? What are the prospects for its development in Kazakhstan? These questions were the main themes at the fourth Innovation Congress held with the backing of the National Innovation Fund in May 2007 in Almaty.

The distribution of technological expertise in production and equipment accounts for 70-85% of GDP (Gross Domestic Product) growth in developed countries. It is certainly a factor in the formula which determines their ability to be highly competitive. Alongside this, the poor development of the NIS within our country may be inhibiting Kazakhstan’s ability to rise to the competition and causing to lag behind the 50 most competitive countries. Over the last year our ranking in this area has dropped from 65 to 75. There is a lack of personnel in engineering and scientific disciplines (we are ranked 98) and collaboration between our research institutions and industry is inefficient (ranked at 71). Technological availability does not enable Kazakhstan to rate as a developed country, and in a ranking of 131 countries, Kazakhstan has dropped from 70 to 77.

Judging from its activities and comments, the Government of Kazakhstan is well aware of the risk from this situation. As early as 2003, a strategy covering 2003-2015 was published to provide guidance for industrial and innovative development within the country. It advocates a switch from an industry oriented economy towards the production of raw materials, to a more innovative economy. The National Innovation Fund (NIF) was established in the same year, along with other state development institutions. The main duty of the NIF was identified as the implementation of the innovative policy in partnership with private capital. Currently the NIF forms part of the Kazyna Sustainable Development Fund, a management company established in 2006 with the aim of coordinating the activities of all development institutions in Kazakhstan.

Available results

Since 2005 the NIF has been running an organisation and development programme for NIS, which continues until 2015. The basic elements of the NIS were determined as:

· Development of scientific potential

· Organisation of financial instruments in the form of venture capital

· Creation of technoparks and business incubators

· Development of innovative enterprises.

Plans to achieve the programme have been divided into four stages, with the first stage to establish key elements of the NIS having already being accomplished in close partnership with the state. NIF Board Chairman, Nurbek Rayev, presented the results of the task to delegates at the Congress. According to Mr Rayev, the NIF has directly financed the introduction of innovations by contributing to the capital of participating companies. Over a five year period the NIF has already provided finance for 80 projects in different sectors of the economy. Currently the NIF is supporting 65 projects which include 21 innovation projects with a total value of 31 billion tenge, of which the NIS contributes 16 billion tenge. A joint initiative between the NIF and private businesses accounts for a further 15 projects worth a total sum of 2.8 billion tenge. In addition, the NIF has assigned 44 grants with a value of 506 million tenge for development, which resulted in 28 submissions for patent applications.

Today up to 60% of the NIF financial investment is in information technology, food processing, the oil and gas sector, bioengineering, pharmacy and engineering technology for alternative power. Projects are selected in line with market demand and potential payback; an approach which has resulted in significant financial outcomes. In 2007 the NIF completed a joint manufacturing project with the Geofizicheskiye Issledovaniya Skvazhin company (of which the NIF owns a 25% share) in Aktobe Oblast, to produce the innovative Geoscan log recorders. In the spring of 2007, 75% of the Company (including NIF's 25% interest) was purchased by Weatherford, a multinational company, thus providing the state with a net income of 96.4 million tenge.

According to Mr Rayev, equity financing becomes more and more attractive in today’s market. At the time when banks have tightened their lending policies an increasing number of entrepreneurs are seeking funding from the NIF, and in 2007 alone, the NIF increased the volume of investments up to $100 million. As result the NIF is planning to withdraw from direct project financing after three years. At that time it is estimated that venture funds created by the direct contribution from non-state capital will be able to meet the demand. Within the context of this financial infrastructure, the NIF is acting as ‘venture funds fund’ in a similar way to practices in South-East Asia, Israel, Finland, Germany and other countries.

Since 2004, NIF has participated in the establishing of five venture capital funds in Kazakhstan, such as Centras, Areket, Advant, Аlmaty Venture Capital and Glotur Technology Fund. During the Congress it was decided to establish a 6^th venture fund, Logycom Perspective Innovations, with shareholders Logycom (51%) and the National Innovation Fund (49%) and a capital of $20 million. The new venture fund will be managed by Seven Rivers Capital. As Sergey Shvalov, President of Logycom indicated, fund shareholders will use their experience to help entrepreneurs in the development of information technologies and telecommunications projects.

Currently the total capital of Kazakh venture funds is valued at $130 million, of which the NIF constitutes a $60 million share. According to Mr Rayev the method of forming the venture industry is gradually changing. Whereas earlier venture funds were jointly established with financial and economic groups (predominantly the large banks) they are now being established with technology development partners (e.g. Logycom, Glotur) and professional management companies, which are able to attract private financial investments. As a result plans are in place to increase the average volume of new capital funds to between $60 and $100 million. NIF believes that collaboration with management companies (currently numbering over 60) will enable a significant increase in the volumes of venture financing, whilst the number of the funds will be increased to a minimum of 15.

Mr Rayev states that NIS was initially conceived as an unrestricted system, so that knowledge could be developed using both internal expertise as well as technologies obtained from external sources. In this connection NIF is actively investing in foreign venture funds where the majority of international leading innovative developments are grouped. Mr Rayev goes on to say “After assessing foreign venture funds projects we began investing in new highly technological companies in 2007”. Today NIF is a shareholder of five foreign venture funds: Wellington III Tech VC (Germany, Europe), Flagship Ventures Fund (USA), Vertex III Fund L.P (Israel), Mayban-JAIC ASEAN Fund (South –East Asia) and CASEF (Central Asia). The NIF total investment sum into these venture funds exceeds $40 million, with their capital amounting to $1 billion. NIF is shortly planning to sign documents relating to investment in Atlas Venture, an international venture fund (USA, Europe), valued at $2 billion.

Alongside financial infrastructures NIF is also developing its physical infrastructure, with laboratories, technoparks, and technological business incubators at universities. These plans are intended to provide an ideal environment for both large enterprises as well as individual scientists. They will be able to access tax preferences, reduced rent for manufacturing and office sites, modern laboratory equipment and professional advice on marketing and patenting. Currently the NIF's subsidiary, Centre of Engineering and Transfer of Technologies, controls three regional technoparks, Algoritm (Uralsk), UniScienTech (Karaganda) and Almaty Regional TechnoPark (Almaty). NIF is also planning to establish four additional industrial parks in Astana, Ustkamenogorsk, Shymkent and Petropavlovsk. Alatay Information Technology Park, established as a platform for the development of domestic information technology industry, is functioning at a national level.

Teething troubles

The task on establishing the basic elements of the NIS seems to have been achieved. The Ministry of Education and Science, together with the recently established Science Fund and Samgau National Scientific and Technological Holding are now re-establishing the scientific potential which was badly damaged during the transition period following independence. The NIF has successfully organised industrial undertakings and an innovative infrastructure, using both the administrative resources and powerful state financing method. So, despite all these achievements, why does our ability to compete keep declining in the area of innovation?

According to the estimation from Darryl Hadaway, a Managing Partner for the Caspian regionat Deloitte, productivity and effectiveness in the Kazakh economy have declined rather than improved. Added to that, costs for conducting the business are constantly increasing, as demonstrated by the higher wages for Deloitteemployees in Kazakhstan compared with those of the Company's employees in Norway, Denmark or Finland. The establishment of innovation technologies should result in cost and time savings together with the improvement in the quality of products and service provided.

With these ideas in mind participants at the Congress outlined a range of issues to be resolved if innovative processes in Kazakhstan are to work effectively. In particular, Arman Dunayev, Chairman of the Board of Kazyna Sustainable Development Fund, believes the main role of the state is to create an appropriate regulatory framework. “The business community must clearly understand what is, and what is not, permitted within law. However, within the same context, we must create a favourable environment for private enterprises to access venture capital funds. This question is already being discussed by the Parliament”.

Mr Rayev has also identified shortcomings in our legislation. “According to existing law, our universities cannot finance start-up companies. However large amounts of finance are not required in these circumstances as the projects represent development projects rather than scientific research, which the universities can either finance independently or by the creation of venture capital funds with us”. In addition, Mr Rayev believes we need a common framework for laws concerning innovative activities, thus promoting the integration of science and innovation.

All speakers agreed on the need to develop human resources within the country. Currently there is an acute shortage of skilled engineers, marketing professionals, innovation managers, etc. According to Eldar Abdrazakov, Chairman of the Board for Centras Securities, we have to establish social awareness of the essence and significance of industrial undertakings. The formation and promotion of innovative industries should be a key factor in achieving the aim. Another issue is that the development of domestic venture capital funds in Kazakhstan is not associated with the development of the stock market, unlike the situation in Western countries. Venture capital funds in Kazakhstan emerged earlier than direct investment funds, which in theory, should have been be the main purchasers of venture capital projects.

Azat Betekbayev, President of the Centre of Engineering and Transfer of Technologies, considers that the main difficulty in developing an innovative infrastructure is the absence of coordination between science and industry. Mr Betekbayev backed up his statement with statistics for the period from 2003 to 2006, which showed there were four engineers and only one pilot scale production specialist alongside twenty five scientists, whereas in developed countries the ratio for the same period was 1: 2: 4.

According to Mr Betekbayev, the shortage of assets needed for innovations is explained by the organisation of Kazakh enterprises. Analysis of the companies' capital indicate that the percentage of outdated fixed assets has reached 20%, of which plant and equipment aging constitutes over 30%. Companies allocate 40% of their capital to overhaul. As a result spending on research and development or acquisition of innovative technologies significantly exceeds the net income of the companies.

It is necessary to acknowledge that all the problems of Kazakh NIS are explained by the lack of demand for innovations from the industrial sector. In an environment where there is a lack of competition most large and medium sized domestic companies are not interested in additional investment in new development. Under such circumstances, directives from the state are unlikely to be as effective as they were during the introduction of the new infrastructures. As Mr Dunayev noted, if Kazakhstan is the sailing vessel and Kazyna is the sail, then the work of wind must be carried out by private initiative.

NIF Interest in Venture Capital

Advant, Venture Fund

Jointly established in 2004 with Lancaster Group Kazakhstan

Fund Capital: 2.7 billion tenge

NIF Interest: 1.3 billion tenge (49%)

Areket, High Technologies Fund

Jointly established in 2004 with TuranAlem Securities

Fund Capital: 3.8 billion tenge

NIF Interest: 1.3 billion tenge (33%)

Centras Venture Fund, Investment Fund

Jointly established in 2004 with Centras Capital Ltd.

Fund Capital: 2.7 billion tenge