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 KAZAKHSTAN International Business Magazine №5, 2009
 Is it the time to put the screws on?
Is it the time to put the screws on?
Sergey Smirnov

After the long and inefficient appeals to business to increase the share of local content the government intends to replace the carrot by the stick. It is going to use administrative methods in order to make "Support the domestic producer!" slogan work. This purpose is reflected in "The Concept of Kazakhstani content development", presented to the Kazakhstani parliament at the end of September, 2009.

The government has been discussing the plan to establish the domestic industry, servicing the needs of subsoil users, for a few years now. Thus, special attention to the "Kazakhstani content" (hereinafter – KC) issue was paid in the Strategy of Industrial-Innovation development, approved in May of 2003. After the President’s address to the people of Kazakhstan in 2006 the following documents were prepared: the Memorandum on development of local content at the subsoil use service market and the Memorandum on subsoil business transparency initiative in the field of purchases (signed by Industry Ministry and the group of subsoil users). Also since 1998 KazMunayGas has been annually developing and implementing new types of the oil and gas equipment adoption program at plants in the Republic of Kazakhstan.

Obviously, the importance of developing the Kazakhstani content is hard to overestimate. KC means the establishment of competitive, highly technological production for domestic service markets, introduction of international quality standards and preparation of domestic qualified experts.

Nevertheless, up until recently the state and the investors have practiced a quite formal approach to the problem of raising KC share. Thus, according to Vladimir Shkolnik, ex-Minister of Industry and Trade, out of 575 subsoil use contracts, signed by the end of 2008, 500 had a general commitment on KC without indicating certain volumes, 72 reflected KC at 50% while the three biggest contracts (with Tengizchevroil, Agip KCO and Karachaganak Petroleum Operating), amounting to over 43% of the total procurement volume, never mentioned the KC requirement.

Only now the government started clearly identifying the tasks and criteria, developing and approving the conditions and rules, not even talking about taking real steps in interaction with domestic producers.

Relapse of absence 

Current indicators, characterizing the KC share, continue to remain low. Moreover, the KC share is decreasing.

The Presidential decree #733, dated February 27, 2009, did not improve things although it had set a task to increase Kazakhstani content during the implementation of investment projects.

Thus, the monitoring reports of subsoil users on procurement activity in 9 months of this year proved that import volume exceeded the share of Kazakhstani products purchase by 13.5 times; this means that the share of domestic products consumption reached only 6.9%.

According to Lyazzat Kiinov, the deputy Energy and Mineral Resources Minister, "last year Kazakhstani content in the subsoil using companies reached only 12% while this year it is down by half. We know that 33 big subsoil users had almost zero KC in January-September. 17 companies have KC at less than 1%. The KC share in the other 46 enterprises does not exceed 10%".

Meanwhile, the biggest specific weight in purchase from domestic producers is represented by exploitation and communication services as well as construction-and-assembling operations. The indicator for the remaining groups remains quite low.

Overall, the market, to be developed by domestic companies, is estimated by experts at $18 billion (25% of which is represented by goods and the remaining 75% by works and services). Nonetheless, the volume of production and, therefore, procurement of domestic goods, works and services is insignificant in comparison with imported volume. This is mainly reasoned by the absence of the majority of demanded goods and services in the domestic market as well as the low competitiveness of local companies.

The subsoil users note that the inferior quality of local goods forces companies to allocate additional funds for the substitution on repairs and, ultimately, this increases the costs. For example, Kazakhstan does not have the necessary production capacities, ensuring 100% satisfaction of needs of the highly technological equipment for the oil and gas industry. Today, the domestic enterprises produce about $30 million output for this sector (while the foreign procurement volume reaches $3-3.5 billion) and the list of products includes little more than 300 items! As a result, our producers supply only 1% of the equipment, demanded by the domestic oil and gas industry.

There can be no other outcome. Today, the share of machine-building enterprises, which used to be 15% of GDP in the Soviet times, does not exceed 3.5%. In the 2000-2007 period the contribution of this industry into the economic growth of the country dropped by 2.7 times while in the last ten years the number of workers decreased from 350 thousand to 17 thousand people. In 2008 the import volume of machines reached $15.5 billion or 87% of its total consumption.

The raw material set of our economy continues to intensify: in 2003-2008 (since the adoption of IID Strategy) the portion of the processing industry shrank from 43% to 33%. The parameters, reflected in the Strategy, became unreasonable while "the development institutes" made no investment in innovation projects, but opened deposit accounts in the second tier banks. The activity of the Investment fund was exemplary: according to the counting board, in 2003-2005 the Investment fund made only 1.6 million tenge in profit from the investment project implementation while the revenue, generated by minor assets reached 3 billion tenge!

The conclusion is reasonable. According to the Agency for statistics, in 2006 and 2007 4.8% of domestic enterprises were classified as innovative while in 2008 this figure dropped to 4%. In the first half of this year things have not changed. We still face the urgent issues of technical and technological re-equipment of enterprises and modernization of their plants. In the opinion of Ivan Dudin, Honeywell CEO in Kazakhstan (the enterprise that worked on the automation of the Atyrau oil refinery plant; today, it also participates in the development of a feasibility study for the oil refinery modernization project in Shymkent), the automation level of most companies in the republic "is as low as it was 10-15 years ago".

The transfer of technologies could have been implemented by foreign investors, but they have no interest in the development of processing capacities in Kazakhstan. The National Bank reports that 16.4% of the total volume of attracted foreign direct investment was directed to this sector.

There are a number of other problems. Specifically, we frequently observe mistakes in calculation of the economic necessity for plant development and implementation of the investment projects in certain regions. Sometimes this is driven by affiliated relations between banks, the operators of financial resources distribution, and their borrowers, implementing these projects. The example is the 30 Corporate Leaders program with the non transparent and closed process of such leaders selection.

Human resources are another issue. Thus, nobody researches the regional industrial demand for technical experts. The Training system does not comply with the real economic needs. The preparation of personnel at enterprises has a local impact. As a result, in the first half of 2008 the portion of attracted foreign workers with higher education reached 37.8% while in the same period of this year this figure went up to 65.3%.

The absence of balanced state personnel and industrial policy produces a quantitative discrepancy between the human resource training system and the goals of economic growth and development. Today, about 76% of the economically active population, not including self-employed people, works in industries, oriented at the consumer markets. 

Second take

In the time of crisis the stimulation of domestic production through the purchase of goods, works and services from a local producer has special importance. Therefore, the government hurried up to initiate a new Made in KZ campaign.

At the end of September session the government approved the draft Concept of further development of Kazakhstani content in the medium term period, presented by the Industry and Trade Ministry. The major objective of the Concept is to establish a condition, ensuring the development of the domestic non-raw material industry through stimulating Kazakhstani producers of goods, works and services to increase the volume of competitive goods.

Assumingly, the adoption of the Concept allows to identify the single conceptual base in KC, divide the competences of authorized bodies, set obligations on priority procurement of goods, works and services, produced in Kazakhstan, as well as to force the subsoil users to conduct procurement only in Kazakhstan and define responsibility for non-observance of legislative requirements.

The government believes that the concept implementation will let the Kazakhstani producer receive information from a single source on planning the demand in the market of goods, works and services. It will facilitate "to offering the preferences on privileged loans, leasing operations for the acquisition of key assets of innovation technologies, establishment of transparency in the procurement of goods, works and services, signing long-term contracts by clients and state support for personnel training".

Also a Single KC design procedure was developed for the purchase of goods, works and services. For coordination of attempted actions the entire procurement is divided into four directions: 1) by state enterprises, 2) national companies, 3) subsoil users and 4) backbone companies.

A separate block of the concept is dedicated to the issues of task-oriented intensive state support for domestic producers of goods. It assumes privileged loans for the acquisition and update of key assets, purchase of new technologies through the Damu fund and Kazakhstan’s Development Bank as well as leasing programs. The government introduces a new instrument – innovation grants – so that small and medium enterprises are able to digest the newest technology.

The concept implementation is scheduled to 2010 while it is expected to be finished in 2015. The KC development mechanism is going to be launched step by step. At the initial phase it is planned to establish a necessary legal base as well as information and marketing support. At the second phase it is expected to run modernization of existing plants and establish new factories as well as to organize intensive work on developing human capital. The Third step assumes raising the competitiveness of the domestic output with the purpose to saturate the domestic market and access new ones.

In accordance with the forecast parameters, reflected in the concept, by 2014 the specific weight of KC must reach 90% on works and services and to 50% on goods. By 2012 this will allow increasing the volume of industrial output by 37% while the number of people, employed in the processing industry, will grow by 20 thousand.

Knout of the law

It has to be mentioned that the problem of the Kazakhstani content development has two sides – technical and legislative. The government started a new attempt to increase the KC portion with the help of a legislative mechanism, using the common approach of raising administrative pressure.

By the end of 2009 we expect a new law On subsoil use that will oblige the producing companies to purchase the goods and services of domestic producers and organize tender only within Kazakhstan.

Moreover, the government proposed the draft law to the parliament with amendments in some legal acts on the Kazakhstani content issue. The officials believe that the amendments will clearly divide the authorities of state bodies in this area. The draft also assumes administrative responsibility for violation of the state procurement law "on application of criteria, influencing the competitive price offer". In this case, the public officials will have to pay a fine in the amount of 40 to 50 minimum calculation indexes.

However, all these measures will hardly help significantly increase the real share of KC even in the medium term. For example, the members of Samruk-Kazyna National Wealth Fund (KazMunayGas, Kazakhstan Temir Zholy, Kazakhtelecom and others) do not have to comply with the law on state procurement; they are subordinate to Single rules of JSC Samruk-Kazyna procurement. As a result, the procurement by national companies became less transparent. Specifically, following these rules, KazMunayGas paid 40 million tenge for the rental of a hunting area to KMG-Service, its subsidiary. Needless to say, this increased the KC share in the procurement of KazMunayGas; however, what is its relation to KMG’s major business?

On the other hand, some experts expect that the law will be applied to new agreements exclusively, while the procurement contracts, signed earlier, will not be reconsidered.

Perhaps, the new legislative initiative of the government may produce the same result as amendments, introduced in October of 2005 in the Law On oil that prohibited casing head gas flaring. 2009 is almost over while the utilization problem has not been resolved yet. Thus, according to official data last year 1.8 billion cubic meters of casing head gas was flared in the country while expert opinion says it was almost four times as much. Therefore, it is clear that it is nearly impossible to solve the problems that need a systematic approach (especially in technological field) only by putting on administrative pressure.

CT-KZ certificate

With the purpose of identifying the goods of Kazakhstani origin the CT-KZ certificate of domestic producer was introduced in Kazakhstan on March 31, 2009. It is issued for goods, designated for domestic circulation within the republic, for a 1 year term. The certificate reflects the KC percentage share in the ultimate goods. For each goods there are certain criteria of sufficient processing (remaking), specifically, the conditions and technological operations that need to complete its components so that eventually the expert could write the conclusion that this good is of Kazakh origin. The entrepreneurs must pay only for the work of experts while the certificate is issued free of charge.

The problem of definition

The draft law On amendments in some legal acts on the issues of developing Kazakhstani content assumes a new definition of the Kazakhstani content term. From now on, a Kazakhstani producer is the resident of Kazakhstan, with at least 95% of employees who are citizens of the republic. KC is a defined percentage share of the total value of the agreement for the performance of goods, expressed in percentage of Kazakhstani content value in the goods, used for the performance of work or compensation for labor of employees, residents of the country, in the salary pool of the employer.

At the same time, the current legislation and the draft, prepared by the government, consider those companies as domestic that are established in Kazakhstan by citizens and legal entities of any other state. The local entrepreneurs disagree with the last part since they are afraid that this will allow foreign companies to displace 100% Kazakhstani enterprises from the domestic market.

Zamir Temirtasov, the Director of Kazpremservice, noted at a session of public commission for monitoring and control of Kazakhstani content at state procurement under Nur Otan party that "it is necessary to introduce the following definition of a Kazakhstan producer of works and services in the law: Kazakhstani producer of works and services are individuals, RoK citizens or RoK legal entities, that have more than 50% of voting shares".


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· 2008 №1  №2  №3  №4  №5/6
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· 2000 №1  №2  №3

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