Industrialization
Second Five-Year Plan As Response to Crisis
Governmental expenditures are increasingly turning into the main economy driver.
The first five-year new industrialization plan is over and today its evaluations differ considerably. The skeptics refer to the individual failed projects and unmet indicators, but the optimists argue that the program has given its results and we need to work on. Meanwhile, the macroeconomic situation at the beginning of 2015 is developed in a way that start of the program second phase cannot be called otherwise than as an anti-crisis phase.
The general results of the first five-year period of the SPAIID (State Program of Advanced Industrial and Innovative Development) were announced by the President of Kazakhstan at the end of December, during the ceremony of awarding the Paryz and Altyn Sapa awards. For instance, he said that the industrialization process brings the benefits systematically. The required legislative base has been created; about 50 laws have been modified and adopted, and the master plans have been designed for all priority sectors. Tens of business support tools have been introduced; work of development institutions have been returned, the business and investment climate have been improved, and the necessary financial resources were allocated.
"The costs incurred by us are already returning back to the state budget in form of trillions of tenge. In fact, a new model of production, social and labor relations was created, which is relevant to the demands of the XXI century. We have made a decisive step to change the economic structure. Diversification in Kazakhstan is real, and not rhetorical. We have reached the growth pace in the processing industry that are much higher than those in the traditional extractive industries", – said Nursultan Nazarbayev.
As a result, the share of primary industries in the GDP has decreased to 16.5%. During the first five-year period, the processing sector has received about 70% of all the foreign investments into the Kazakhstani economy since its independence. In 2010–2014, 770 of 1024 projects as a whole have been covered by the Industrialization Map, thereby, creating 75 thousand of permanent jobs. At the same time, 80% of the commissioned facilities have already reached the designed capacity, and 56% of them are operating at 100% of their workload. 3 trillion KZT have been invested in the establishment of these enterprises, while the cost of their products has already exceeded 4 trillion KZT, including 628 billion KZT received in form of export revenues. The share of the Industrialization Map projects was equal to 12.9% of total processing output, while their contribution to GDP growth was 0.79 percentage points of 4.3% (based on 2014 data).
More important thing is that Kazakhstan begun producing about 400 brand new products. Production output in the machine building area increased almost in three times, production of cars increased in 11 times, and the railroad technologies increased in 26 times! In addition, the infrastructure base for industrialization expanded in ten times. About 4 thousand km of roads and 1,700 km of railways were built and reconstructed. “Nowhere in the world such an extensive transport network was built over the past few years", - highlighted the President.
SPAIID enterprises also passed a powerful impulse to the regional development. For example, they have provided one third of the production output in the Akmola and Mangistau regions, and a quarter in Kostanai region and Astana over the five-year period.
Significant results have been achieved at the level of individual program targets. For example, the labor productivity in the processing sector has increased by almost 60%, i.e., in average, each worker produces by $20 thousand more than in 2008. Moreover, the share of the innovative enterprises has increased twice, and the power consumption of the Kazakhstani economy has reduced by almost 19%.
Sure, not all items declared at the beginning of five-year plan became reality, and the domestic economy still depends on exports of raw materials. However, the President asked to keep the courage. "I know that not everything is going well. I have repeatedly criticized the ministers, akims and national companies. But no one promised us the "easy way." International experience shows that the successful industrialization is a difficult process that takes the time."
Before the Final
The last thought, shared by the President is quite understandable when you look at our achievements not in five years retrospective, but if you focus solely on the results of previous year. According to the preliminary estimates of the Ministry of National Economy, the GDP growth in 2014 has slowed and amounts only to 4.3%. Moreover, the largest contribution to this figure (3.3 percentage points) was from the service sector, where growth reached 6%. Against this background, the industrial production output increased by only 0.3% since the extractive industries ended the year with negative results (-0.3%), while the processing sector has grown by only 1%.
Rapid deterioration is most worrying in those sectors, being the leaders of the industrialization process during previous years. The machine building decreased by 0.5% with reduced output of mining equipment, agricultural machinery and locomotives. The domestic automobile industry, after reaching almost 100 % growth in 2013, has ended the last year with the result of -0.5%. Indicators of Kazakhstan's metallurgical industry were affected by the weakened external demand for the products of our enterprises from China and Russia.
Situation in the domestic demand is not better. Last year's devaluation has seriously affected the purchasing power of Kazakh people – the growth rate of household consumption has reduced from 12.6% in 2013 to 0.4% in 2014. This is moreover despite the fact that their share in total consumption is about 44% of the country’s GDP.
Due to the slowing of credit growth, another important source of long-term economic growth lost its momentum. Therefore, the volume of investments has increased by only 4.1%, in the last year against 8.7% in a previous year. One of the reasons is a fallen demand in imported investment equipment, which also became more expensive due to the decline in a KZT.
We have to note that in 2014, our economy, in particular, processing industry, deprived of its traditional development drivers, such as high prices for basic export commodities and growth of consumption by the population and business.
No optimism is added by forecasts for 2015, especially since external factors have deteriorated markedly. A global economic slowdown has occurred and geopolitical instability has risen. Introducing the mutual sanctions between Russia and Western countries led to a decline in the ruble and, consequently, to the destabilization of the macroeconomic situation of our main partner in the Customs Union and the Common Economic Space.
In addition, the situation on world commodity markets has worsened this year. As a consequence, international experts predict the maintaining of the average annual price of oil at a level no higher than $50 per barrel due to the increase in its proposal. Such conditions leading to lowering in export revenue and income to the state budget can result in a further slowdown in production output and growth in processing industries first, and then in the service-related sectors.
Therefore, as in the case with the first five-year plan, our country starts again the second phase of the industrial-innovative development program implementation on the next wave of crisis.
This is despite the fact that the objectives stated for the next five years are even more ambitious. Therefore, the main goal of the program was announced to stimulate the diversification and competitiveness of the processing industry primarily through the advanced development of non-extractive industries, improving their efficiency and increase the added value in the priority sectors. Moreover, the expansion of markets for processed products, the preservation of productive employment, promotion of entrepreneurship and SME development is envisaged. The economy must reach a new level of technology and provide a basis for the development of the future sectors by forming innovative clusters.
It is expected that, in comparison with 2012 (which is taken as a reference point) the production output in the processing industry will increase by 43% until 2020, its gross added value and labor productivity is not less than 1.4 times, and the value of non-oil exports is not less than 1.1 times. At the same time energy consumption shall reduce by 15%, while employment in the processing industry shall reduce by 29.2 thousand persons.
As for the innovative sectors, according to results of 2019 the share of so-called innovative companies shall be brought up to 20% (in accordance with the OECD methodology), the share of innovative products in the total GDP – up to 2.5%, while the share of domestic spending on research and development – up to 2%.
According to the Minister for Investment and Development Asset Issekeshev, only this year within the framework of the Industrialization map it is planned to commission about 75 projects amounting to 600 billion KZT, which will create 7 thousand permanent jobs. In addition, in 2015 the construction of 100 industrialization projects will be continued, including 18 national-level projects. Only within these 18 projects, 500 billion KZT shall be spent.
Save and Redistribute
A question how to make sure that the current situation did not affect the start of the second five-year plan was discussed at the enlarged government meeting held on February 11 in Astana. Nursultan Nazarbayev chairing hereon, has immediately dismissed the idea of "internal diseases" presenting in the country, emphasizing that there is no any "individual crisis" in our economy. It's another matter that external calls exist, as the fall in export prices of oil and the exchange rate of the Russian ruble, and therefore these conditions will have to be adapted in Kazakhstan. In this regard, the President proposed to the Government to focus this year on austerity and support of domestic demand and producers.
"We will postpone new initiatives and proposals until better times, and brought to an end what we have already started. This applies to all government agencies, local government offices, national holdings, national companies and state enterprises. I instruct the Government to reduce the expenditures of the republican budget for 2015 to 700 billion KZT, or by 10% of total expenditures. This should not affect the social state obligations to the people. Akims of regions, cities of Astana and Almaty and districts shall also perform work on tight fiscal policy. "
Similar measures shall also be taken by national managing holdings. Expenditures of the "Samruk-Kazyna" will be reduced by 337 billion KZT, or nearly by 7%, and capital expenditure of the group will be reduced by 240 billion KZT, or 18%. Baiterek Holding is instructed to optimize the administrative expenses and capital investments by 3.8 billion KZT, or 11.8%. In turn, "KazAgro" Holding shall adjust their plans for 196 million KZT, or 12%. "This will be under strict control and demand", – Nursultan Nazarbayev warned. As a result, the savings within the ministries, agencies, holdings and local executive bodies will amount $4 billion.
As for measures to stabilize the economic situation, the Head of Kazakhstan expects the regions to update the proven "Employment Roadmap-2020". In addition, the Government has adopted the Action Plan for the spot support of the largest industrial enterprises for this year.
Nursultan Nazarbayev also reminded that in late 2014, he announced the launch of the new economic policy "Nurly Zhol", which is aimed at the infrastructure development. Within its frameworks, in 2015–2017 about 500 billion KZT will be allocated from the National Fund, 180 billion of which will be spent this year. However, as international experience shows, the implementation of major infrastructure projects is a major source of business and economic activity, creating the greatest multiplier effect. All this makes "Nurly Zhol" as a good anti-crisis tool.
In this regard, the President proposed to complement this program with new business supporting measures. "They include support of domestic engineering and exporters, adjustment of the infrastructure for small and medium businesses, increase in the state support for agriculture, measures to protect the domestic market and other areas. The Government shall create a provision for urgent operational measures in the amount of 250 billion KZT. I instruct to finalize the program and submit it for approval within one month.
"The President also acknowledged that the current weakening of the Russian ruble and growing pressure from Russian goods to domestic producers causes significant damage. However, he has immediately warned that this has nothing similar with the Eurasian Economic Union. "Such fluctuations are common for the global market economy, which we exist in. This is a temporary situation whose solution will be found. Reduced demand in Russia is an incentive to strengthen the work on diversification of Kazakhstan's exports. In addition, depreciation of energy sources, accessories and spare parts is good for the other sectors. We must use this opportunity to increase the processing industry. "
At the end, the Head of the state has requested clear and operative solving of problems by the officials. "Today, citizens expect clear and effective work of the executive branch. The task of each member of the government and every akim is leather away on the job. It is the moment of truth for you. You must spent funds, create jobs or otherwise leave," – he warned.
Taking the President's address, the Government has promptly submitted the draft amendments to the Law "On Republican Budget for 2015–2017", which has already been approved first by the Parliament in the beginning of March, and then, by the Senate of the Parliament. Within its framework it was proposed to reallocate a total of 101 billion KZT, which will be sent for implementation of new anti-crisis measures. Therefore, 17.3 billion KZT from 30 billion KZT are purposed for creation of the social infrastructure this year, will be spent for the construction of educational facilities, and 12.7 billion KZT – for provision of the state order to the pre-school educational institutions within the framework of the Balapan program.
71 billion KZT from the National Fund will also be spent this year, which was supposed to spend in 2016 to co-finance the projects of microfinance institutions, household and public utilities, construction of roads and rental housing. In particular, 20 billion KZT was allocated to support the agricultural industry, 10 billion to adjust the infrastructure for the projects under the "Business Road Map-2020", 5 billion to protect the internal market through the development of technical regulation, 6 billion to intensify exploration and 30 billion for housing construction.
The most of the bonded loan to the Baiterek Holding (75 billion from 100 billion KZT), was also transferred to the current year, which was planned to issue from the National Fund for the financing of the business in 2016. 20 billion KZT from this amount will be submitted by the holding to support the domestic automakers, 10 billion for the production of helicopters, 5 billion for the production of passenger cars, and 35 billion to support the exporters. Another 5 billion KZT will be received by the Baiterek in form of special-purpose transfer for capitalization of the deposit insurance fund.
Therefore, in 2015 the total amount of special-purpose transfers from the National Fund will be additionally increased by 76 billion KZT and will amount to 783.5 billion KZT.
Expand into a New Market and Foster the “Mediums”
The Government intends to conduct certain adjustments within the framework of the Industrial-innovative development program. They relate mainly to sectors such as food processing industry, mechanical engineering and building materials. That is understandable. Cause these market-oriented industries play the role of the driver to increase exports of finished products. According to Asset Issekeshev, the Government initially relied on the markets of the EEU, including Russia. However, the current geo-economic problems of our neighbor, on the one hand, and the weakening of the exchange rate differences due to the competitiveness of our products, on the other hand, suggest that the realism of these plans is highly questionable at least in the next two years.
In this regard, the MID has hastily developed a new export policy, which provided both funding mechanisms for the foreign trade participants, and reorientation issues of Kazakh goods supply to the markets of Central Asia, the Caucasus, Iran, Mongolia and other Asian countries.
"By the order of the President, it was decided to allocate 35 billion KZT for the export and pre-export financing, as well as leasing for the foreign trade participants. Today, we have formed new approaches and mechanisms to promote the exports to the south. Initial negotiations indicate that the potential amount of financing exports in these countries is 160 billion KZT. Now we must turn it into export contracts related to the goods such as helicopters, harvesters, pumps, fans, batteries, transformers, metal pipes, fertilizers, as well as the food products," – shared Mr. Issekeshev. The officials must perform these activities through special trade missions, as well as by opening offices of the Investment and Export Agency KAZNEX INVEST in the priority countries.
A new program of state support, initiated by the Baiterek holding will be the next know-how in 2015. It is targeted at medium businesses and aims to foster the leading companies that can compete on equal terms with their counterparts on the Eurasian Economic Union.
When introducing the draft program, Kuandik Bishimbayev, Chairman of Board, National Management Holding Baiterek JSC said that the holding primarily wishes to select about 30 promising companies in three priority areas – food industry, machine building and construction materials. Provided the support of state development institutions, they will be able to increase production, to come with their products to foreign markets, and in the future to become "champions of the processing industry in Kazakhstan."
In turn, Asset Issekeshev emphasized that this project cannot be regarded as a separate spot measure. "This is part of an industrial policy that allows us to foster the medium businesses. It shall not be a one-time measure, and if we officially announce, it should be considered, at least until 2020, because two years is not enough to foster the enterprises. We need to support them without the demand for quick results." So he is not exclusive of that upon the results of the pilot year, we can expect for the expansion of the list of special-purpose sectors to be included in the program in 2016–2017.
As for the main criteria for the selection of the participants, they shall be presented by Kazakhstani enterprises with a staff at least of 200 employees and assets of 2 billion to 30 billion KZT, which over the last three years show a dynamic, at least 10%, business growth. Moreover, they already shall be export and import substitution oriented, and their business model must be sustainable and have the scaling potential.
As it turned out, there are many companies, matching these criteria in Kazakhstan. This is evidenced by the list of orders, placed at the holding site that includes more than 300 companies from all the regions of Kazakhstan.
The interest of medium businesses in the new program is quite understandable, since the developing institutions promise those who qualify a set of tools to support in three main areas.
First is the financial tool, that provides direct loans from the Development Bank of Kazakhstan (the loan value is not less than 4.5 billion KZT for up to 20 years at 5–7% per annum), interbank lending through second-tier banks with the participation of the DBK and the DAMU Fund (up to 4.5 billion, 5–10 years, 6–11.5%), as well as financing of leasing transactions (from $1 million, at least 3 years at 5% per annum). This includes interest rate subsidies (up to 4.5 billion KZT for 3–10 years, 10% – state subsidies) and credit guarantees (up to 50% of the total loan amount of up to 360 million and for the projects in the processing sector –up to 20% at the amount of up to 1.85 billion), which will be provided by DAMU.
In turn, KazExportGarant promises to help with export insurance (up to 100% of the coverage amount at a rate of 0.4–3.2%), as well as pre-export and export financing of trading transactions. In addition, each of the program’s participants can expect for 150 million KZT from the National Agency for Technological Development as a grant for training employees and external consultants.
The second area provides consulting support directly by the development institutions. Participating companies will be able to familiarize with the best practices in the field of management, get practical advice, access to industry and market analytical reports, as well as support in the selection of partners and negotiation.
Finally, as a third step, Baiterek promises to provide the closest interaction with the government agencies in order to eliminate the administrative barriers.
The holding expects that, due to the complex of these measures, 20–30 companies will appear able, firstly, to provide revenue growth and above-the-industry-average profitability; secondly, to increase their productivity by an average of 10% a year, and thirdly, to bring the share of exported products up to 30%.
At first glance, it may seem that the new initiative is like a scrapped program "30 Corporate Leaders of Kazakhstan". The same 30 "selected" companies, the same problem of competitiveness in foreign markets. However, the main difference is that it is focused on medium businesses in the processing industry. Whereas, the demand for the 30 "corporations" according to 2007 data were only within the power of large oil and steel enterprises.
Moreover, as Baiterek noted, the concept of the new program takes into account the experience of existing supporting programs in countries such as New Zealand, Malaysia, Singapore, Germany, France and the United States. There, they have already proven their efficiency. For example, in New Zealand, the export value in half of the companies participating in the national program has increased by 25%. The Malaysian Government currently provides support to 50 medium enterprises, and all of them become export oriented already at the first stage.
Today it is difficult to say will this experience be successful in the context of Kazakhstan. One thing is clear: Baiterek has enough candidates to foster the "new champions".
One More Obstacle Still Exists
The solutions are found, the resources – allocated, and the programs are clarified. Everything could be well in this quite standard creation, except for one issue. Today, it shall be noted that the government expenditures are increasingly turning into the main economic driver. Therefore, upon the last year results, their share in GDP exceeded 30%. It is not surprising, because in the conditions, when the ordinary consumers, banks and businesses are expecting the devaluation, it is unlikely to have any significant increase in the area of private initiative and business activities.
Sergey Gakhov
