Innovations Are Required for Second Five-Year Plan

On August 1, the President signed a Decree on approval of the State Program of Industrial & Innovative Development of the Republic of Kazakhstan for 2015-2019. New program differs from the previous one not because of freeing from the prefix "forced", but because of a significant revision of the target indicators, priority sectors and methods of State support. The main document of the second five-year plan is quite voluminous; therefore, we prepared a summary of the most important parts.

Refined Priorities

Program of Industrial and Innovative Development (IID) for 2015-2019 is developed in accordance with the long-term priorities of Kazakhstan-2050 strategy, and it is considered as a logical continuation of the programme for the IID for 2010-2014. Being an integral part of the industrial policy of the country, it is focused on development of the processing industries. The program provides concentration of efforts and resources on a limited number of sectors, regional specialization with application of the cluster approach, as well as on the effective industrial regulation.

To identify priority sectors, their analysis was conducted with use of two-factor model. First of all, the following was considered: the market prospects (including the amount and growth of the local market and the macro-region market), as well as the potential economic impact. Secondly, the current level and prospects for development of an industry were considered.

As a result, the Program includes 6 priority processing sectors, including metallurgy, chemistry, oil chemistry, machine-building, construction materials and food industry.

The industry, in its turn, is divided into 14 sectors: iron industry; non-ferrous industry; oil refining; oil and gas chemistry; agricultural chemistry; chemicals for industry; motor vehicles, parts, accessories and engines; electrical machinery and electrical equipment; agricultural machinery; railway engineering; machinery and equipment for mining industry; machines and equipment for petroleum refining and petroleum industry; building materials; food.

With regard to innovative sectors, these include all the sectors of the so-called new economy, which development is largely based on scientific research and development, including the mobile and multimedia technologies, nano-and space technologies, robotics, genetic engineering, and search of an energy of the future.

Old Goal, New Indicators

The main objective of the Program is encouraging the diversification and competitiveness of the processing industry. In order to achieve it, it is required to ensure the priority development of the non-primary industries, to increase their efficiency and to raise the added value in the priority sectors. In addition, the expansion of markets for processed products, preservation of productive employment, promotion of entrepreneurship and SME development were provided, as well as giving a new level of technology and creating the basis for the development of the sectors of the future through the development of innovative clusters.

Comparing to the previous state programme, the new Programme stipulates a number of target indicators, reduced exactly twice (table 1). The year of 2012 is defined as a "point of reference". Therefore, by the end of 2019, the following economic indicators shall be reached:

• increase in volumes of processed products by 43% (in real terms);
• growth of gross value added in the processing industry at least in 1.4 times (in real terms);
• workforce productivity growth in the processing industry in 1.4 times (in real terms);
• growth in the value of non-raw export (and processed) less than 1.1 times;
• reduction of energy intensity of the processing industry for not less than 15%;
• employment rate increase in the processing industry for 29.2 thousand people.

The targets of certain priority sectors are presented in details in the Table 2.

Regarding the innovation sectors, by 2020, the share of so-called innovatively active enterprises should be increased up to 20% (in accordance with the OECD method), the share of innovative products in the total volume of GDP shall be up to 2.5%, and the share of domestic research and development costs-up to 2% of GDP.

Funding Model 

To meet the needs of the projects of the second five-year plan, a balanced funding model, built on three fundamental principles, will be used. First, it shall be possible to consolidate the resources of the State and private sector, under leadership of the integrator - the National Managing Holding Baiterek. Secondly,  the approach of financial leverage will be used: it is expected to attract 4 KZT of private investments per each Tenge of state investment. Thirdly, no less than 70% of the funds, allocated by the State, shall be provided to the processing enterprises.

The Program clarified all the issues regarding use of pension money. Therefore, Baiterek Holding will raise funds of the United National Pension Fund through issue and placement of theirs coupon bonds. The low liquidity of the domestic stock market will be improved through creation of new financial instruments, attraction the issuers from the real sector of the economy, as well as an increase of the level of financial literacy among the population.

Another source of affordable, long-term funding of the priority projects will be the loans from the National Fund, which Baiterek will also obtain by issuing the bonds.

At the same time, the program stipulates that the funds from the state sources will be developed on the revolving (credit and direct investment) and non-return (subsidies and service support) principles. In particular, financing the infrastructure of free economic and industrial zones, provision of guarantees and subsidising the interest rate for the second-tier bank loans shall be ensured on the non-refundable basis, through Damu foundation, providing the innovative grants and developing the innovation infrastructure. The investment subsidies in the form of compensation of the capital costs  to investors, including the transport and energy costs on the separate projects (compensation of up to 30% of the investment costs from the state after facility commissioning).

The budgetary funds will be provided on the return basis and the finances will be supplied by Damu Foundation to support the SME projects through conditional lending, as well as by the Kazakhstan Development Bank JSC - on the medium - and long-term financing for the projects in the processing sector. 

General Systematic Support

The Programme provides creation of transparent conditions for the management of infrastructural costs in the processing industry. So, a mechanism of formation of the long-term tariffs for natural monopolies will be launched and procedures of connecting to the additional energy capacities will be facilitated. In addition, the State assumes a greater throughput at certain sites of railways, providing the infrastructure to new facilities in the priority sectors, ensuring availability of the railway rolling stock, as well as the establishment of regional logistics centres.

In order to ensure the further development of the FEZ, it is planned to provide the guarantees for the tax benefits and privileges for their participants, to introduce the stabilization mechanisms in the event of the liquidation of FEZ, as well as an introduction of the single operator to manage and to develop the free economic zones.

Regarding to provision with the human resources, the focus of industrialization was made on an intensive growth of production through increased productivity (in 1.4 times). Therefore, the general systematic measures are focused not on the number of created jobs, but rather on the quality of training for the highly qualified scientific and innovative personnel.

So the investors who entered the investment agreements with Government, as well as the operators, implementing the projects on production of the basic products in the territory of SEZ, will be given the right for unlimited attraction of the foreign workforce in the entire project implementation period, plus one year after facility commissioning. In addition, the TNCs operating in the areas of processing, agriculture and geological exploration, will be able to employ the staff from their foreign subsidiaries, without obtaining a work permission for Kazakhstan.

Many measures are provided, intended to stimulate the competition and to limit the abuse of a dominant or monopolistic position in the market. In particular, the concerned issue is the development of trading petroleum products and electricity at the stock exchange, exclusion of the intermediaries in coal sales and possible introduction of a moratorium on creation of new entities of a quasi-governmental sector.

However, it is planned to ensure the simplification of licensing procedures for the wholesale and retail trading of liquefied petroleum gas, including a cancellation of the requirement of availability of a storage base, with capacity of 300 tons.

Clusters Again

The Program stipulates the cluster policy, which will be aimed at transferring the economy to the new technological platform, formation of industries with a high level of productivity, added value and processing level for the products and services. At the same time, creation of clusters will be based on the needs in developing the regions, as well as on the industrial specialization, formed with consideration of their industrial and social & economic potential.

During the second five-year plan of industrialization, the Government intends to focus on development of a national cluster in the main resource sector, three territorial clusters - in the market-oriented processing industries, as well as two innovative clusters in the "new economy" sector.

The pilot national cluster in oil and gas exploration and refining, petrochemistry, as well as the related machine-building and  service business, will be created in the western regions of Kazakhstan. A special managing structure, the cluster council will be created for its support, which will become a platform for approval and coordination of the vision, plans, programmes and strategies on its development. Functions of the cluster integrator will be ensured by the NC KazMunaiGas in partnership with the National Chamber of entrepreneurs and the KAZENERGY Association.

Three territorial clusters will be chosen by arranging a competition among all the regions of the Republic. However, as noted in the Program, the highest level of regional competition is concentrated today in food and construction material production, which is one of the factors of readiness to create the clusters. A key role in the development of territorial clusters will be played by the regional business associations and akimats (administrations). So-called cluster associations will become a centre for development of cluster initiatives and the members might include the industrial and service companies, research institutes, higher and secondary vocational training institutions, consulting and engineering companies.

As to the innovative clusters, the first of them is created in Astana, on the base of Nazarbayev University, with purpose to contribute to the development of fundamental and applied science. The scientific centers in the area of medicine, 3D-printing, geology, metallurgy, composite materials, energy-saving and building technologies will be formed here.

The second cluster is the Park of innovation technologies, created in Almaty. It is purposed to resolve the problem of transferring the advanced technologies and the commercialization of research results. The priority directions of its development are the space, information and communication, mobile and multimedia technologies.

Two Approaches to Support     

Support for the enterprises and their projects within the priority and industrial sectors will be ensured and applied at two levels.

First of them involves a provision of standard support package for all the subjects of small, medium and large enterprises, implementing the projects in processing industries. It means the use of the financial and service tools within the programs of Business Road Map - 2020, Efficiency-2020 and Agricultural Business-2020.

At the same time, all enterprises, regardless of size and form of ownership, will be entitled to obtain the service support, including certification, involvement of the investors, insurance and export promotion, innovation development, increase in efficiency, as well as the improvements in the technologies and human capital development. 

Considering the financial measures, they will be ranked based on the project costs and priorities. For example, tthe interest rate subsidy for the projects up to 750 million KZT,  under the loans or contracts of financial leasing, as well as the issuance of guarantees on the bank loans will be ensured only for the priority sectors and/or in accordance with the regional specialization. The exception will be the entrepreneurs in rural areas and single-industry towns, who are not subject to the set limits.

The projects with investment volume up to 4.5 billion KZT will use additional criteria:

• activities in 14 priority sectors and/or compliance with regional specialization;
• conformity of manufactured products to generally accepted international standards;
• workforce productivity and energy efficiency;
• expansion of markets for selling the non-extractive commodities;
• production, developing the added-value chain for production of the final goods.

In case if these criteria are met, the projects will be eligible for special conditions of subsidy of the rates on loans, financial leasing contracts and guarantees from the STB.

The second level of support provides an individual approach for large enterprises, implementing the large-scale projects in priority sectors of the processing industry. These projects will form the basis of a new map of industrialization, requiring the coordination at the national level and additional preferences. The decision to use this approach to one or another project was made by the Government in the frameworks of the Commission on Industrial Development of the Republic of Kazakhstan. In case of obtaining a positive decision, the applicant shall enter a relevant agreement.

The process of project selection for the Industrialization Map is built on the principle of integration, i.e., the list may be supplemented by new projects, at least, once per year. The main criteria for inclusion in the Map of industrialization are the

• industrial priorities. The projects shall comply with the list of 14 priority sectors;
• scale The Map includes only the large-scale projects, requiring coordination and support at the national level, with total investment exceeding 4.5 billion KZT;
• contribution to achieving the Programme’s strategic objectives. Project implementation shall have a direct impact on achievement of the target indicators;
• need in the State support.

However, the Commission keeps a right to take a decision on inclusion of the projects, implemented beyond the priority sectors. However, only in the case if they meet the other criteria.

Transferring the Map of Industrialization to the new approach will be performed within 2015. The new Map will include only those projects from the Republican and regional maps of the first five-year plan, implemented in the priority sectors and they will be put into operation in 2015.

Other projects, included in the regional maps of industrialization for 2010-2014, will provide the basis for so-called supporting maps for entrepreneurs of the regions, which selection and monitoring will be ensured by the regional chambers of entrepreneurs and regional akimats. At the same time, the advantage will be also given to the projects in 14 priority sectors on regional level, for which 80% of target budgetary financial resources will be allocated under the Program.

Need in Control

The main problems, identified in the State program of the IID,  include an inadequate control system of its implementation. In connection with this fact, an assessment, based on the facts, as well as the funding, based on performance, will become a key mechanism in the system of monitoring for  the new programme. The new types of analysis will be implemented for it, including the preliminary assessment of programmes and projects, evaluation of the results of their implementation in terms of used state resources.

The office of program management on the basis of the National Institute of Development in the Industrial Area will be created for an effective inter-ministerial coordination. It will assess the performance targets and implementation of certain activities. Such monitoring will identify the deviations and will propose the measures to eliminate them. In addition, program adjustment will be carried out on its basis.

Cost Issue

During five years of the Program implementation, the forecast needs in private and public investment for the processing industry will amount to 6.6 trillion KZT (Table 3). In its turn, the costs of the State budget are determined in amount of 643 909.6 million KZT, including 327 506.3 million KZT for 2015, 111 324.6 million KZT for 2016, 74 464.6 million for 2017, 64 785.3 million for 2018 and 65 828.8 million for 2019. At the same time, 80% of target budget financial resources will be used to support the priority sectors and the remaining 20%- to support the successful businesses from other sectors of processing industry.

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