Anatomy of Success and Evolution Points of Big Business in Kazakhstan
In 2011, the total revenues of 100 major domestic companies increased for 30% and achieved KZT 19.98 billion, which makes 72% of the total gross domestic product of Kazakhstan. These figures were represented at the fourth annual research work of Expert-100-Kazakhstan, and the final results of it were declared at the economic forum with the same name conducted in Astana on the 7th November.
The leader of domestic economy in the rating of Expert RA Kazakhstan is still Samruk-Kazyna SWF. In 2011 the revenues of the state megaholding were KZT 4.4 trillion and for the year they increase for 22%. At the same time, its part in the total volume of goods and services selling for 100 major Kazakhstan companies has dropped from 28% to 22%. The main revenues (60%) are brought to the Fund by oil revenues of KazMunayGas while by the results of 2011 the most dynamic subsidiary turned to be Kazakhstan Engineering (rate of increase at 112%) and Kazatomprom NAC (+39%).
Besides Samruk-Kazyna JSC the top ten companies in the rating include Tengizchevroil (leader by amount of revenues out of the “golden” hundred companies), ENRC, Karachaganak Petroleum Operating B.V., and PetroKazakhstan. SNPS-Aktobemunaygas, Mangistaumunaygas, Kazakhmys Corporation, ArcelorMittal Temirtau and Kazgermunay JV.
The top ten determined the leading positions of oil companies in the growth of the total revenue of the rating participants; their share is 57%. Another 12% was supplied by mining and metallurgical industry thought the share of all other branches made only 21%. This breakdown is first of all specified by revenues of representatives from extracting sector.
Only banking industry can fight with primary industry and the leaders are represented by Kazcommertsbank (12th position) and People’s Bank of Kazakhstan (15th) as well as cell operators – Kcell (17th) and KaR-Tel (24th). However, if the latter are steadily and continuously growing for the last several years, the earnings of seven second tier banks included into the top hundred dropped again for 4%. The positive dynamics was demonstrated only by kaspi bank (+34%) and Kazakhstani Sberbank (+58%).
Meanwhile, the most considerable growth by results of 2011 was showed by trading companies (+89%) and the agitation at the market only contributed to this. In addition, group of representatives from the sphere turned to be the most numerous after oil companies – 17 wholesale dealers and retailers were found in the rating list.
Representatives of the “new economy” (called so) were supplemented with the biggest companies by rating makers. The biggest companies were established for the years of independence in Kazakhstan. Non-primary enterprises are very few among them (over 40% of earnings in the group is from new oil projects). Also, 12 of 38 companies in the list are trade companies. All of the above witness on the lack of efforts made by the state to diversify the economy. It has to be recognized that the domestic entrepreneurs and overseas investors are still not willing to perform large-scale production projects in Kazakhstan. Probably, the country’s adjoining to the Customs Union and Common Economic Space will have a positive impact onto the list of major companies of Kazakhstan but at the moment the obvious dominance is possessed by the primary sector and our economy reflects it directly.
These very issues of steady development became the main subject of the forum. Expert RA Kazakhstan made a querying in order to generate the rating and the querying said that the biggest domestic companies most often disregard non-financial risks in their activity. As a result, problems emerge and they are accumulated and the problems are able to destabilize the situation not only in an individual branch but in the economy as a whole.
In the experts’ opinion, for the successful development of business on a long-term horizon the following is required: to improve their economic efficiency, reduce adverse impact to environment as well as to generate comfortable social relations with employees and local communities. Only such type of approach has a potential for upgrading of economy at all levels.
The start of discussions on the concept was initiated by the speech of Serik Akhmetov, a Prime Minister when he said that the national business is the most important element of the steady development for any state. In this regard the government of Kazakhstan is interested if the national entrepreneurs participate more actively in the processes of upgrading and implementation of innovations and advanced technologies. “The partnership of the state and business is extremely important and vital in the context of another crisis expected in the international economy therefore we need to come to mutual understanding and coordination of our activities.”
For these purposes the Forced Industrial-Innovative Development (FIID) Program is an efficient platform as it animated the diversification of economy and emergency of new spheres for domestic businessmen. “The share of manufacturing industry is growing in the regional gross output; new and interest enterprises are established, they produce goods with a high value added. I think that within the program frames a good trend was infused and the government will pay it a great attention.” In conclusion, Mr. Akhmetov emphasized that the state agencies are always open to cooperation and interest ideas which will form a basis for creation of conditions and further development of national business.
It should be noted that the Head of the Cabinet of Ministers had not to wait for long. The following speaker, followed the Prime Minister, was Nurlan Smagulov, a Chairman of Establishers’ Council of the Kazakhstan Millers – Astana Group LLP. He marked the key part of the state in support of business under the economic crisis and he also denoted several issues which prevent the development of private enterprise. One of the issues is the increasing presence of state in the economy exercised through quasi-public companies. “We would like to use this ground to appeal to the government and Samruk-Kazyna Fund: the businessmen are grownups now and we represent a certain power in the society, we are ready to talk with the government on large-scale projects in order to use our potential, economic capabilities and resources in favour of the state. Certainly, we observe Kazakhstani content and now we can see a dawn of Public Private Partnership, they are talked about, but my opinion is probably coinciding with opinion of someone else and the most part of entrepreneurs if I say that we are ready to participate in large-scale infrastructure projects.” As the businessman believes the quasi-public holdings should possess strategic assets but set all facilities of maintenance infrastructure for privatization. “If we speak of concession, of public private partnership as I think there would be a lot of businessmen who can use the resources efficiently possessed by national companies.”
The second thesis of Nurlan Smagulov stated that the government “shall not hesitate” supporting and actively lobby interests of national business especially within the frames of the Customs Union where Kazakhstan needs to compete with such a developed country as Russia and even more when the country join the World Trade Organization.
In his turn, though Kuandyk Bishimbayev, a Deputy Chairman of Samruk-Kazyna Sovereign Welfare Fund, agreed that the state participation in the economy was growing and the Fund is the most active player in this, he also said that this happens not only by the intention of the national companies or the government. “All of us witnessed the increasing influence of the holding as a result of the crises occurred in the private sector. The expansion of 2007–2010 starts from the measures that the government had to invent and implement adequately and promptly as a feedback to problems emerged in the sector residential construction, banking, insurance and pension saving funds.” In other words, it started from the problems in private business. Speaking of the Fund’s activity in the FIID Program this is the case, as assured by Mr. Bishimbayev, when the main function is to be an anchor-type investor in the highly risky projects.
Another proposal on behalf of all businessmen was represented by Umut Shayakhmetova, a CEO of People’s Bank of Kazakhstan JSC. She believes that it is necessary to use the National Fund to support the financial stability of national companies. “Today Kazakhstan invests over $50 billion from the National Fund into overseas companies and the state earns about $1 billion per annum due to these funds. However, we pay several times more in order to service external debt of our national companies, banks and corporate borrowers. We have enormous financial resources which are comprised of reserves from the National Fund, pension system possessing over $20 billion as well as the banking system and Samruk-Kazyna Fund. But the effectiveness demonstrated by the use of funds seems to be insufficient to me. It is necessary to search for an approach so that the funds can be used in the economy in order to support our businessmen.”
In opinion of Mrs. Shayakhmetova, in many ways the current situation is related with the conflict of interests when the National Bank takes care predominantly of inflation inhibition and the government set targets to raise economic growth and monetary injections into the economy. Here we need to come to a compromise as the average interest rate on loans in Kazakhstan is 10–15% for businessman which is much higher than in the global economic system, where the rate is 2–5%.
At the same time, Valery Fadeev, a General Director of Expert Media Holding, drew the attention to the fact that in Russia the medium-sized business “if it is not a trickster” is not able to obtain a loan facility at less than 16–18% and the regional figures can exceed 20%. “I think that our situations are similar and both countries are on the threshold of a new stage and new understanding how the monetary policy shall look like,” – emphasized he.
In his comments to the speech of Mrs. Shayakhmetova, Mr. Akhmetov reminded that the very banks insisted on the increase of interest rate from 12 to 14% within the Business Road Map Program. The state accepted these conditions and half of the interest rate is subsidized by the state. Thus, the final loan interest rate is only 7% for entrepreneurs. “But we moved even further. Our bankers perfectly know that the subsidies for small and medium business is 10% within the program on development of one-company towns. Could you name other countries where the actual interest rate for small and medium business is 4%?” – asked the Head of the Cabinet of Ministers quite reasonably.
A lot of claims were accumulated by representatives of state agencies to the business. In particular, the first Vice Minister of Industry and New Technologies, Mr. Albert Rau, reminded that none of the companies can be efficient without efficient management alongside the whole administrating vertical. However, many company keep on thinking now that personnel training does not require acute attention. “I have an example. Within the frames of our cooperation with Germany their party agreed to train engineers for mining industry at their own costs. With great efforts I managed to gather the first group after several calls to CEOs. Directors told me: How can I let him go? I will lose my money! But the case is that they will get management, they will be aware of the best technologie.” In this matter Mr. Rau said that since next year within the Bolashak Program the similar programs will be commenced in Germany for such branches as construction, engineering and chemistry. He was full of hope that the business will be more active considering that the state will pay for monthly training as well as flights and per diem expenses. The companies will have to ensure that their employees take two-weeks preparatory courses in Kazakhstan.
Mr. Serik Abdenov, a Minister of Labour and Social Protection, pointed the very acute reason of labour conflicts. According to his information, in 2011–2012 the number of such conflicts was 35 and 60% of them was related to the non-payment of salaries (mainly in the building and construction sphere) and the rest part was related to the dissatisfaction with salary’s size (first of all, in the oil and gas industry). Mr. Abdenov believes that the issues raised in the labour relations can be and should be solved between employees and employer in situ with no involvement of the state as it happens now. For this purpose, the business shall support a social dialogue and employees shall more actively participate in managing of companies. They should know the company’s interests and positions, what earnings it has, where the funds are directed to, how the production is upgraded, how much capacity increases and finally, what dividends it brings. In other words, how much and in what period the salary will be increased.”
Mr. Marlen Iskakov, a Vice Minister of Environment, in his speech drew attention to the last of the elements comprising the steady business development – ecological element. “Surely, we can say, that Kazakhstan successfully overcame difficulties related to the transfer period and has already achieved high indicators of economic development. But the raise of economy itself cannot guarantee the welfare of our citizens. The disbalance formed in the course of our history when the resources were consumed in a disproportion to the production of them and this is the most important problem in the way to the steady development of the Republic. Continuous patching of holes at out-of-date equipment in companies will not contribute to ecological stabilization and technological breakthrough.”
At the moment the growth of economy, increase of production capacities including those within the FIID Program impacts and increase emissions into environment. Emissions from industrial enterprises of Kazakhstan to the atmosphere annually make about 3 million tons and 85% of them are made by the biggest subsoil users while the discharges to water facilities are 2.5 million tons.
The second problem is the waste management. About 25 billion tons of wastes were accumulated by enterprises of our country and the figure includes 14 billion of industrial mineral mass, over 1 billion radioactive wastes and about 10 billion of industrial wastes. This amount grows annually for approximately 700 million tons. Herewith, only 20% of wastes are disposed and recirculated.
The third problem, which can be the most global of all ecological issues, is the changes in climate. “Today it is well know that increase of global temperature for more than 2 degrees of Centigrade compared to the pre-industrial period will lead to non-reversible and catastrophic changes at the whole planet. And in our country with its vulnerable ecological systems, the changed climate will bring extremely negative consequences.”
In the view of these and many other threats there is a necessity to revise the existing model of economy and transfer to the “green growth” strategy which will mean the ecological colour of taxation, redirecting of subsidies from brown to green fields projects, “green public purchasing”, etc. As a result, the unified approach will be provided to all norms of subsoil use, ecological standards and stimulating measures. In addition, the government intends to create such conditions that this will be profitable for business first of all. “This system will work efficiently if only it is mutually beneficial for all parties. In this process we need to show a united front joined with business society. We hope that the state is not the only party which understands the importance of the target but it is supported by the business society as well,” – summarized Mr. Iskakov.
