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GOVERNMENT & BUSINESS   Growing Investment from Seed 
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Growing Investment from Seed

Kazakhstan’s leadership is seriously thinking about ways to boost foreign investment in the country’s agriculture. Despite massive support from the government, the sector remains extremely inefficient, using less than 10 percent of its potential. Possible solutions were discussed during the 28th plenary session of the Council of Foreign Investors (CFI) under the auspices of the President of Kazakhstan.


Growth Drivers

The speech of Agriculture Minister Asylzhan Mamytbekov at the CFI’s meeting laid the foundation for discussing the prospects of cooperation between the government and investors in agriculture. According to Mr. Mamytbekov, Kazakhstan’s agricultural sector has become an economically attractive industry thanks to transition to a market economy: over the past 10 years, agricultural output has increased almost fourfold from 695.8 million tenge in 2004 to 2.5 trillion tenge in 2014. Agricultural exports have tripled, while investments in fixed assets have almost quadrupled reaching 166.4 billion tenge. The output of the livestock sector and crop farming in the same period has increased by 3.9 times and 3.4 times respectively. “These figures are the result of a focused and balanced agricultural policy of the government,” the Minister said.

Yet, Mr. Mamytbekov still thinks that Kazakhstan’s agriculture has great prospects ahead of it and untapped growth potential. “Kazakhstan has 180 million hectares of grasslands and borders with two of the world’s ten largest importers of beef. I’m talking about Russia and China. In 2014, these two countries imported about one million tons of beef for a total of more than $4 billion.”

To take advantage of these opportunities in the context of integration processes, Kazakhstan needs to adopt international best practices, including direct foreign investment and establishing joint ventures.

There are a number of global and local contributing factors. The first global factor is population growth, meaning that by 2050 the world will need 60% more food than today.

The second global factor according to Mr. Mamytbekov is the depletion of the world’s agricultural potential: “The growing population and changing consumption patterns, on the one hand, and rapid depletion of natural resources, on the other hand, can make food shortage a much more critical issue. What makes things even worse is the lack of large reserves for increasing agricultural production.” Therefore, considering its relatively small population, Kazakhstan will play an important role in ensuring the world’s food sustainability.

According to the Minister, the local drivers include political stability, agriculture operating on the principles of market economy, as well as the measures taken to protect the rights of investors.

“Furthermore, all agricultural producers have tax benefits with the rates of four taxes – property, transport, welfare and VAT – cut by 70%. Customs duty and VAT rates are lower for products dispatched from free warehouses and produced in special economic zones. In addition, the last year’s reform reduced the tax burden for agricultural businesses.”

The Minister says that Kazakhstan offers foreign investors a favourable land tenure framework. “Last December, changes have been made to the Land Code so as to increase agricultural land lease period for foreigners to 25 years. It used to be 10 years.”

Another local factor is the establishment of the Eurasian Economic Union which imports agricultural products, both raw and processed, for a total of $44 billion.


Options

Speaking about the tools of government support for agriculture, the Minister first reminded about the implementation of the long-term programme Agribusiness-2020. It increases the government’s support for agriculture by 4.5 times and aims to bring investments worth up to $70 billion to the sector. In 2015, agriculture received almost $1 billion in subsidies which is twice as much as in 2013.

“Along with the current subsidizing of resources and activities in crop farming and livestock production, the programme contains a number of new tools to support the sector, such as financial restructuring, reduction of interest rates on loans and leases, subsidizing the costs of loan guarantees and insurance.”

According to the Minister, investment subsidies will become the new tool for supporting the agriculture, allowing entrepreneurs to have some of their spending on agricultural projects reimbursed: “Starting from 2014, there have been subsidies for purchasing raw materials that processing businesses could benefit from. The list of subsidized agricultural products includes the most import-dominated items such as sugar, milk powder, butter and cheese.”

These measures will provide easier access to funding, making domestic producers and processors of agricultural products more competitive.

According to the Minister, the best way to attract investment in agriculture would be to improve investment climate by lifting restrictions on circulation of agricultural land. This will require simpler procedures and conditions for the acquisition of land in private ownership, as well as removing restrictions on land transactions on the secondary market.

The second measure, Mr. Mamytbekov says, should be improving the legal framework: “Changes to grains legislation are on the way, with the expected introduction of electronic registry of grain receipts, which will improve their credibility and investment attractiveness.”

Thirdly, it is important to make changes to the seed production sector: “The nature of the state register of plant varieties is expected to be changed from compulsory to advisory. This will make seed production regulations more liberal. Such changes have already been made in livestock production.”

The fourth measure, according to the Minister, should be changing water rates by establishing reasonable market prices, which will help to attract investment in the restoration of irrigation systems. “As you know, advanced irrigation improves productivity and, consequently, gross output of crop farming. The sector suffers from infrastructure deterioration and limited use of modern irrigation technology. We believe that the main problem is the current pricing policy in the field of water resources.”

Automated subsidies in agriculture could be one of the measures helping to “eliminate the root cause for corruption associated with granting subsidies.”

Finally, Asylzhan Mamytbekov noted the need for better cooperation. Citing the experience of other countries, he said that transactions between cooperative members should not be taxed.


Bankers Agree

Suma Chakrabarti, President of the European Bank for Reconstruction and Development, was the first to speak on behalf of international investors, assuring that the EBRD will increase its participation in Kazakhstan’s agriculture. “Thanks to the support of your government, we are going to launch a new programme called Advice for Agribusiness. We are launching a programme of warehouse receipts, innovative programmes for farmers to allow them to use future crops as collateral to secure financing. Kazakhstan will be one of the first countries to adopt this model.”

Mr. Chakrabarti also said that food security and the issues facing agriculture are actively discussed at the international level. Which means that agriculture could become a bigger source of revenue for Kazakhstan and protect the country from shocks associated with oil prices.

“International experience shows that agriculture can flourish with the participation of foreign investors, because they bring new technology and best practices. Domestic agriculture needs to be reformed and attract international funding, including from the EBRD.”

Mr. Chakrabarti believes that to bring foreign capital into Kazakhstan’s agricultural sector, local companies need to become more transparent and improve their governance and financial management. “Frankly, we need to see more of such companies,” he said.

Peter Tils, Managing Director and Chief Executive Officer for Central and Eastern Europe at Deutsche Bank AG, said that his bank has been successfully working with three local microcredit organizations in Kazakhstan since 2006, lending them funds for multiple use. “As a result, our partners have issued more that 10,900 microloans for amounts ranging between $1,000 and $7,000 for a total of approximately $20 million.” Almost 70% of borrowers were women, while about 85% of all microloans were granted to borrowers from rural areas. Mr. Tils noted that past-due loans were extremely rare with the past-due loan ratio standing between 1.1% and 2.8%, a striking contrast with non-performing loan ratios of some of Kazakhstan’s second-tier banks.

Currently, Deutsche Bank AG is considering lending extra $5 billion to one of its partners for three years with the right for multiple use. These credit facilities are intended primarily for women in rural areas and will be granted in tenge for periods from 6 to 12 months.


Guidelines for Agriculture

Erik Scheer, Member of the Executive Committee of Baker & McKenzie, spoke about opportunities opened by precision agriculture. He reminded that Kazakhstan is mostly a prairie with a thin layer of fertile soil. “Land quality differs greatly by region, even within one region, and therefore techniques have to be customized to suit each particular area.”

Mr. Scheer lamented that most of Kazakhstan’s land with farming potential is not used at all or used for the wrong type of farming. “In many cases, the necessary resources (chemicals, fertilizers, irrigation) are not distributed in such a way as to ensure optimum use of the land. In other cases, the types of crops or livestock in a specific area are not the best choice.”

Mr. Scheer said that to realize its agricultural potential, Kazakhstan needed to embrace modern advanced technology to determine what types of chemicals, fertilizers and irrigation were best for rational use.

One of the methods is precision agriculture (also called satellite farming). “It means using advanced technologies to evaluate the characteristics of vast areas of agricultural lands. It involves a combination of tracking through the global positioning system, satellite-based technologies, the use of unmanned aerial vehicles and other technologies specifically designed for agriculture.”

According to Mr. Scheer, precision agriculture could help Kazakhstan to achieve two major goals. Firstly, it will help to diversify the Kazakh economy by stimulating its advanced technology sector: “Developing research centres, incubators, laboratories, small companies focused on precision agriculture (satellite farming) technologies will make Kazakhstan a leader in this field among the EEC countries.” Secondly, it will help to fully realize the agricultural potential by choosing optimal techniques for each square kilometre of agricultural land, as well as resources and support methods required.

To implement this type of agriculture in Kazakhstan, Baker & McKenzie suggests, firstly, including provisions on the introduction of precision agriculture in the Agribusiness-2020 programme and, secondly, issuing a decree stating that development and use of precision agriculture is the government’s major priority.

Mr. Scheer agreed to prepare a report on the introduction of precision agriculture for the next meeting of the Council of Foreign Investors and to form a special task force chaired by the Minister of Agriculture: “It could be composed of representatives of the Ministry of Agriculture, Aerospace Committee of the Ministry of Investment and Development, Civil Aviation Committee, as well as Nazarbayev University, KazAgro and the Development Bank of Kazakhstan.”


Learning from the Experience of Others

Ian Colebourne, Managing Partner of Deloitte CIS, said that Kazakhstan had good potential for developing organic production. “The country has the potential to increase yields through greater use of agricultural technologies, funding and insurance, as well as scientific research. To become one of the leaders on the international market, Kazakhstan will need additional investments to improve competitiveness and funding of its modernization projects.”

Mr. Colebourne stressed that subsidies in agriculture were common in many countries, yet, leading agricultural exporters preferred a combined approach to directly subsidizing producers.

He said that Canada and Australia were good examples, as they were similar to Kazakhstan in some respects and have already solved the challenges facing today’s Kazakhstan.

For instance, the Australian government helps farmers to overcome financial difficulties through a number of programmes aimed at protecting farmers against risks, improving efficiency and increasing yields. “One the most important programmes is the free financial advisory service, as well as tax incentives and annual investment of about $715 million in research in agricultural regions.”

Canada increases the effectiveness of agricultural investments by optimizing the use of agricultural resources and adoption of various technologies.

“The Canadian government supports agriculture, ensures its stable functioning and promotes research. To this end, there are a number of programmes under way, including Agristability aimed at stabilizing revenues despite declining profitability, Agri-innovation offering grants and interest-free loans for the introduction of innovative technology in agricultural production and food industry.”

Finally, Mr. Colebourne stressed that transparency was critical for achieving results in agriculture. He said it was a key factor for winning public confidence in the system of state regulation of food production.


Potential Without Results

Summing up the meeting, Kazakh President Nursultan Nazarbayev admitted that previous investments in agriculture were not effective in all cases: “Kazakhstan has never tried to adopt the new technology you have mentioned, let alone precision agriculture. This is very disappointing, since we are talking about a huge sector of our economy that is currently facing some serious challenges. 40% of our population live in these areas and 22% of them work in agriculture.”

And yet, according to the President, agriculture is becoming increasingly profitable and important for the economy of Kazakhstan: “Our efforts are focused on fully realizing the existing potential. A large-scale programme Agribusiness-2020 is under way with more than $16 billion to be invested in agriculture and food production. This is big money for our country. In the last 4 years alone, the government invested more than $5 billion in agriculture. Still, we are only using a small portion of the enormous potential that we have.”

The President admitted that food imports over the past 5 years have increased by 45% reaching $4 billion per year. “We import 50% of cheese and poultry, more than 40% of sausages and butter. This is not something we should be proud of.”

According to the President, Kazakhstan has all the opportunities and conditions to allow domestic producers to play a bigger role on the food market: “We need to increase output (of agricultural products – Ed.), process products, put them on the shelves and sell them here... It is a business opportunity you can only dream about: you can manufacture, process, sell and get money for your products at one place. We can do all this in Kazakhstan. For those who are ready to invest, there is a guaranteed market.”

In the long term, developing value-added industries will make expansion to foreign markets possible: “For example, today only 1% of grains is used for making pasta. Kazakhstan could greatly increase production and exports of its own branded products. I’m not even talking about meat and dairy, the sector that we have made our prime concern. We are importing a huge number of pedigree cattle for breeding, we are trying to start selling meat to Russia which imports more than 0.5 million tons of meat from Latin America, and we are right here and could as well produce and sell.”


Creating Better Investment Environment

After reviewing the opportunities for investing in Kazakhstan’s agriculture with foreign members of the Council, Nursultan Nazarbayev assured that the government considers creating a more investment-friendly environment as its major priority: “Investors in priority sectors are exempt from corporate income tax and land tax for a period of 10 years, and from property tax for 8 years. They have guarantees in terms of tax regulations. Furthermore, the government has decided to compensate 30% of capital investments once a facility is commissioned.” Investors are allowed to hire foreign staff for the whole period of the project implementation and one year after commissioning without any quota restrictions or permissions. All of these benefits fully apply to agriculture.

According to Nursultan Nazarbayev, the second priority should be attracting multinational corporations to develop agricultural production as a foundation for efficient, diversified and export-oriented value-added sector: “In meat and diary products, our goal is to become a big player on the domestic and export markets in three years as a manufacturer of high-quality and environmentally friendly products, achieving this through strategic partnerships with major international companies.”

The third priority is the development of science, innovation and training: “Today, we are working to improve our research and educational infrastructure. Kazakhstan’s three major agricultural universities will be merged into a single research and educational centre.” The President said that the mission of the new institution will be to solve challenges in the applied science, provide professional training and introduce modern technologies: “We intend to involve the best international partners, so that Kazakhstan has a leading regional agricultural research and educational centre five years from now. This would be a significant achievement for the entire region and all the post-Soviet states. The government should make these decisions.”

Nursultan Nazarbayev expressed his gratitude to those investors who are already making a practical contribution to the development of Kazakhstan’s agriculture: “For instance, Philip Morris created Agribusiness Centre in Almaty Region, where farmers can learn new technologies in crop farming, drip irrigation, greenhouses and fertilizer use. Such projects will be strongly supported by the government.”

Institutional reforms continue to be a priority for public authorities. “We have adopted a detailed National Plan 100 Definite Steps. It includes creating a transparent and effective agricultural land market, as well as active involvement of multinational corporations in the value-added sector. I strongly believe that effective implementation of the proposed changes will help to create a new efficient institutional environment and make Kazakhstan even more attractive for investors.”

According to President Nazarbayev, great work is currently under way in the field of infrastructure development: “As you can see, Kazakhstan is a landlocked country with no access to seas or oceans. But I have said repeatedly that our sea is China, that our large and great market are the countries that we border with. To develop all the transit opportunities, we focus on creating the transport infrastructure connecting the Pacific Ocean with Europe through Kazakhstan, the Caspian Sea, the Persian Gulf and Russia.

The President said that the Kazakh terminal in Lianyungang’s seaport is a perfect example: “The train crosses two passages through the Kazakh-Chinese border, goes through Russia to Europe and through the Caspian Sea to the South. This year, we had the first 20 container trains, and their number will increase to 200. I think that everybody could use this transit route.”

The President also noted that the construction of the West China – Western Europe highway would be completed this year. “We have built a new 1,500 km long railroad between the border with China and the Caspian Sea, we connected it with Bandar Abbas seaport that has access to all the Gulf states and reaches up to Western India.”

According to the President, all these transport projects are in line with China’s proposal to create a new Silk Road, with the Asian Infrastructure Development Bank (having a capital of about $100 billion) established as part of this initiative. “Kazakhstan is one of its founders. This opens up exciting opportunities for us, not only for agriculture but also the entire economy.”

In conclusion, Nursultan Nazarbayev told the members of the Council that EXPO-2017 would serve as a basis for creating Astana International Financial Centre. “More than ever, everything we do for EXPO-2017, all its fully occupied facilities, can be used for this complex, and it won’t take any time or money to do this. There will be nothing like this centre in the entire region. Therefore, I suggest that the next 29th meeting of the Council should be held in Astana and focus on the topic: “Astana as an International Financial Centre.”






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