Most recent Incentives Package
12 June Rixos Borovoe hosted a meeting of the Council of Foreign Investors at the President of the Republic of Kazakhstan, which dealt with the program of the second five-year period of industrialization. During the event, the head of State announced a new package of investment incentives, motivating international partners to engage actively in the implementation of the next stage of the State Program of Accelerated Industrial and Innovative Development (SPIIAD).
Magnet for Investors
Opening the session, President Nursultan Nazarbayev emphasized that signed on 29 of May the Treaty on establishing the Eurasian Economic Community (EAEC) laid the foundations for strengthening business and trade relationship. EEMA with total economies of $ 2.5 trillion presents unique opportunities for investment in local projects focused on the markets of the countries participating in the new Union.
The State program plays an important role in this process of forced industrial-innovative development. Launched in 2009 year, in difficult conditions of the global economic crisis, it has allowed not only to preserve the existing and create new jobs in manufacturing industries. In its first stage in the Republic 651 project totalling 2.5 trillion KZ tenge ($ 15 billion) were realized. And every seventh project carried out with the help of foreign direct investments. FIID program, in fact, formed the basis of the new economic policy of the Government to focus its attention on the wholehearted support of investors.
In the same way the second five-year plan was developed. As President declared, the implementation of the second programme should become a magnet for investors, making Kazakhstan as one of the leading industrial and logistics and financial hub on the route between Europe and Asia. This industrialization will be aligned with the goals of all the components of economic policy, including monetary, fiscal and tariff policies.
In connection with this, the head of the State announced the basic principles of building partnerships with foreign investors. First of them he called the stability of the macroeconomic environment. "In the global competitiveness index for this indicator, we already are in the top 30, taking 23-th place in 2013. Not every country in Central Asia and the former Soviet Union has a stable credit rating, low level of government debt, inflation and unemployment, the high level of Foreign Exchange Reserves and, that not less important, successful experience in confronting global crises. "
Stressing, that today Kazakhstan has “adopted progressive legislation base”, Nursultan Nazarbayev assured that the Government will continue work to create more comfortable conditions for business. So, according to the Decree of the head of the State, since January 1, 2015, scheduled inspections of entrepreneurs will be completely cancelled. Now they will be appointed on the basis of qualitative risk assessment framework. In addition, there will be clearly regulated the future list of permissions and notifications.
"Soon we are going to enter the World Trade Organization. It will also create additional conditions for investors. In Kazakhstan generally accepted international regulations in trade, investment, protection of property and other spheres will be applied ".
The second incentive for investors in the new program is that its implementation will be fully provided with the necessary funding. For these purposes in the next five years about 600 billion tenge of budget funds, including 1 trillion tenge from the National Fund of Kazakhstan will be directed. In addition, framework agreements with the World Bank, EBRD, ADB and Islamic banks were signed and they will invest in the economy of Kazakhstan about $ 7 billion.
Under these agreements, within three years it is expected to attract investments in the amount of 1.3 trillion tenge. It The Coordinating Council has already created which consists of representatives of the Government and international financial institutions. In its frames special subgroups developed programmes in various sectors of the economy, on the basis of which a specific list of projects for funding will be designated.
The third item, made pointed by Nursultan Nazarbayev, concern to the unilateral imposition of Kazakhstan visa-free regime for citizens of the ten States that have shown the highest investment activity in our country. These are the United States, the Netherlands, United Kingdom, France, Germany, Italy, Malaysia, U.A.E., Korea Republic and Japan.
Another requirement for successful implementation of the second five-year industrial plan, the head of State considers the establishment of the foundations of an innovative economy and training qualified personnel. And here, the President also looks forward to the active participation of investors. "I call for you to build corporate-scientific research, development centres and arrange them on the territory of Science Park “Astana Business Campus" at Nazarbayev University. I know that the University is cooperated with BG, Total and Chevron, and Samsung, Hewlett , Microsoft, Philips, General Electric, etc. become the relatively recent partners . We will do our best to support them. " Accordingly, he instructed the Government to attract foreign investors to the management of local educational institutions.
As the fifth item, the President instructed to introduce the principles of public-private partnership to boost the transfer of the concession companies in those sectors where traditionally attended only the State, including education, health, water supply, etc. "I invite foreign investors to participate in the planned privatization of at least 700 new companies, as well as to review approaches to purchasing products and services. For example, to provide information on planned purchases in advance (at least two years before) and to enter into contracts with local companies, so they will have time to prepare."
From his part, Nursultan Nazarbayev promised that the Republic in the closest time would remove a number of barriers to implementation of PPP projects. So, by 2015 the majority of functions on expertise in the field of construction will be transferred to the competitive environment, and in five years, the proportion of non-State expert works should reach 90%. "Before the end of this year, it is necessary to radically simplify the procedure of granting of lot lands for building, expanding the terms of lease, including plots for agricultural purposes."
In closing, the President announced the decision to introduce new large-scale package of incentives and preferences for investors in priority sectors. First of all, they will be exempt for a period of 10 years from the payment of corporate income and land tax and as for property tax - for a period of 8 years. In addition, the State is ready to compensate them for up to 30% of capital cost after plant start-up.
Within the framework of the concluded contracts, investors now have the right to attract foreign labour without permission and without quotas for the entire period of construction and for one year after start of objects. In addition, for a period of 10 years the "stability" of all tax rates and payments, with the exception of VAT and excise duties is fixed.
As additional support measures the principle of "one window" when dealing with government agencies, as well as the Institute of investment Ombudsman is introduced. New companies will also be able to count on support in obtaining a guaranteed order with the Kazakhstan side.
"The measures I have mentioned above provide for amendments to the Law on investments. The corresponding bill was drafted by the Government and recently adopted by our Parliament. Today I have a good opportunity to sign this document, giving it the status of law. I hope, that this is a good news, and, of course, we are waiting for your response and initiatives”, said the President.
Plan details
Details about what segments of the economy, the Government is counting on investor activity, participants are told Aset Isekeshev, Minister of industry and new technologies. According to him, as a result of a detailed analysis of the different scenarios of development of the industry the Cabinet has identified the six most promising sectors of the manufacturing industry: production of food, building materials, machinery, non-ferrous and ferrous metallurgy, oil refining, chemicals and petrochemicals. Just they will be in the focus of the State support.
So, for development of “the Six” 80% of the allocated budget and only the remaining 20% will go to projects in other industries, such as pharmaceuticals, light industry, etc will be directed. And even then subject to high efficiency of them. However, the Government relied on the use of “financial leverage” - for each tenge, invested by the State, it is expected to attract at least 3-4 m. of private investment.
Especially for TNCS in the program it has been identified promising project niche, taking into account their added value chains. For example, as a result of the analysis, more than 300 products derived on the basis of deep processing of oil and gas, 36 of them has been identified as a priority. "Up to 2020 year it is expected to launch 15 new products. Realization of the major projects with companies such as LG Chemical, Eurochem, Linde, and others is going on. All of these will attract to the industry more than $ 7 billion of private investments. And by 2020 year in Kazakhstan a new industry with significant export potential will be created ", said Mr. Isekeshev.
Similar work has been done in each of the six industries. At that in total 227 priority product groups were identified. 100 of them will learn the results of the first five-year plan, remaining in the second one.
Additional know-how of the second five-year period will be the use of the cluster approach in deepening the economic specialization of regions. In particular, in Kazakhstan it is planning to support three types of clusters: national, territorial and innovative. At the national level, the pilot cluster must be oil and gas cluster in Western Kazakhstan (on the basis of Atyrau, Mangistau and West Kazakhstan regions). It will focus on exploration, refining, petrochemical analysis, as well as the oil and gas engineering and maintenance services for the OGC.
With regard to the territorial clusters, their support will be carried out on a competitive basis. In the first phase, the Government, in conjunction with the National Chamber of entrepreneurs of Kazakhstan will select the three most clusters formed in priority sectors, to try out their specific instruments.
Innovation clusters will develop in two major cities – in Astana and Almaty (based on the Nazarbayev University and the Park of information technologies Alatau IT City). In addition, in the regions, taking into account their specialization will be revised work zones to serve as points of growth for investors. "To their management were involved companies of international renown, such as Jurong from Singapore and Dubai World Port from the U.A.E. Present day, in the special economic zones 85 projects are implemented, and 72 are under implementation”.
In conclusion, Mr. Iseksev thanked the foreign investors for their assistance in developing the program, noting that many of their proposals have found their reflection. He also stressed the importance for the successful implementation of the second five-year period will have the participation of oil and gas and mining industries enterprises in supply of raw materials for the petrochemical and metallurgical industries as well as in the purchase of production of domestic producers.
What do investors
Having received such a nice present from the President, the foreign participants of the meeting have highly appreciated Kazakhstan's plans for a second five-year plan for industrialization. "Today we can say with high confidence that the base values of investment projects are realistic, set goals are ambitious, and that the proposed combination of public and private sources of financing is quite innovative", - made response compliment Peter Tils, Chief Executive Officer of Deutsche Bank AG on Central and Eastern Europe. According to him, over the next five years in our country, with the participation of German companies over 60 new projects for a total of $ 3.7 billion will be implemented.
And such optimism is understandable, since under the intergovernmental agreement Germany will gain access to the Kazakhstan raw materials in exchange for their investment and new technologies. So, the Federal Institute for Geosciences and Natural resources (BGR) released last year database of geological information on all 15 fields, which the Kazakh side proposed to German partners. As a result, today realization at least of 10 joint mining projects is planned ,.
In his turn, Karl Johansson, partner of E&Y Company in developing markets in the EMEIA region believes that the implementation of the new comprehensive plan with the assistance of leading TNCS have a positive impact on economic and social development of our country, as well as its innovation and industrial potential. The results of the latest survey of investment attractiveness of Kazakhstan, which annually holds E&Y, show increased interest of investors to the mechanical engineering and related industries. In these circumstances, the Government's package of stimulus measures would contribute to the increase in the number of investment projects in this sector of the economy.
In addition, Mr. Johansson presented a number of practical recommendations. In his view, Kazakhstan needs to develop a national system of career management to ensure the competitiveness and efficiency of the labour market. Сomplex approach can predict the labour market, identifying the needs of the economy in the medium and long term, that will reveal the human resources capacity and reduce social risks associated with unemployment.
The second proposal concerns to increase the transparency and efficiency of the public administration system, which should provide establishment of an effective institutional environment through interactions with business subjects. In particular, mechanisms are needed to control quality performance of strategic initiatives aimed at improving the business environment and stimulation of investment activity. So, for example, investors have questions in respect of the resolution of tax and customs disputes between taxpayers, participants of foreign economic activity and Government agencies.
In conclusion, Karl Johansson as well noted, that foreign investors are interested in the development of the business environment, since it plays an important role in the successful localization of their business. This means that the Government must constantly work on improving the system of enterprise support.
From his part, President of TeliaSonera Johan Dennelind said, that for telecommunication operators the program of the second five-year period is more relevant than the previous one. This is due to the fact that one of its priorities is the creation of an innovative infrastructure and intellectual-innovative clusters, where the quality of communication and access to the Internet can play a key role. "We see that the Kazakhstan industrial enterprises have a great demand for telecommunication services, new technologies and modern efficiency. The huge size of the country is already are a prerequisite for rapid development of high-speed mobile Internet. This will help in the development of the complex mechanisms of the supply chain, which in turn can significantly improve logistics - one of the most important factors of competitiveness of production ".
In this regard, Mr. Dennelind paid attention to the need to create equal competitive conditions on the telecommunication market. "Next big step for Kazakhstan will be 4G/LTE. From the point of view of job creation, it will benefit the country's economy. For example, in the United States, according to the research, in the first four years in the transition from 2G to 3G created 1.6 million jobs. So the sooner Kcell and all other operators will receive licenses to deploy advanced mobile technologies, the better for Kazakhstan and Kazakhstan population".
Yves-Louis Darrikarrer, President of Total Upstream, paid attention to the problem of development of local content. According to him, the possibility of major commodity projects in this area are often limited due to a lack of local companies with the necessary product range and an appropriate level of professional experience. There are two quick ways to solve this issue. First, it is an approach that has been applied by Total at training of welders and certification of training centres. It should be used for training labour force in areas such as engineering, maintenance of electrical equipment and heavy lifts, as well as safety and protection of labour. Secondly, it is necessary to create on a parity basis JV between local firms and major international suppliers.
At the same time, Mr. Darrikarrer emphasized that the most obvious way to help the process of industrialization is the increase in the number of developing projects. "The growth of local content ultimately depends not only on the specific share of individual projects, but also on the number of completed projects in general ... It would be more beneficial to Kazakhstan: to implement three new projects with the level of local content in 35% or one with a share of 60%? We believe that the first option would create many more jobs and better contribute to industrialization".
Alexander Mashkevich, shareholder of the Eurasian Group (ERG), believes that in the context of the difficult situation on the world markets, the adoption of a package of new incentives is very timely for investors. However, he paid attention to the fact that this package does not include support measures for those who invests in the renewal and development of existing productions. "It does not take into account that the large metallurgical enterprises built in the last century, and therefore it is required theirs extensive renovation. This is the only way to remain competitiveness. The volume of investments in modernization of existing production is comparable with investment in the construction of new large plants". As an example, he cited an amount of $260 million, which the ERG is planning to invest in the reconstruction of two workshops of the Aksu Plant of ferroalloys.
According to Mr. Maszkiewicz, unequal conditions for the granting of tax incentives reduce interest in the modernization and expansion of existing productions. In that regard, he asked the President to extend the new preferences for this category, and for large strategic projects that are currently underway or will be launched before the end of the year.
He also believes it is important to set the upper limit in the tax code of tax burden for industries, after which the total of all tax payments by enterprises must not exceed the required limits. "And it must be planned for 10-15 years. For the investor, it is essential that the tax burden was predictable and not stifled the development of enterprise".
The President of Sberbank of Russia German Gref said that Kazakhstan initiatives could become an example for creating a more favourable investment climate throughout the Eurasian Union. "Formed a very clear priorities at the territorial and sectoral clusters. For the first time, it seems to me, in detail elaborated system of financial security, as well as talent management system and competence development".
At the same time, he believes that our country needs to do the next step, as is obvious "splines worn" structure of GDP of Kazakhstan. Over the past four years, despite the implementation of the first phase of the GP FIID, dependence from commodity sector only has grown due to its early development. And while the new five-year plan to partly help equalize the situation, the head of the Sberbank advised the Government to consider establishing such a programme in the field of development services. "Despite the low volume of industrial production in GDP and, seemingly, a relatively high proportion (around 50%) of services, we can see that a key driver in economic growth may be just them". Kazakhstan can be a leader in this sector in regional markets, including Russia, China and Europe. Moreover, it is physically easier to provide services, and the barriers to their exports much less. “The Benefits are obvious: the services sector generates more jobs with high multiplication effect, it can grow double digits, which can't the industry. And the most important thing that gives this sector is innovation. In particular we are talking about the sector of social services - health, education, etc.". As an example, Mr. Gref cited Singapore, whose GDP by more than 70% consists of services. While such industries as education, research and medicine, produce for export "much more" than for domestic needs.
In conclusion, the President thanked the investors for their suggestions and comments, saying that without them, our country has achieved the success it is today proud. With regard to the next meeting of the Council of Foreign Investors, it will be held in Shymkent and will focus on agrarian business.
Askarbek Makhmutov
