Chairman of the Agency of the Republic of Kazakhstan on Investment, answers questions of our magazine
Mr. Dulat Kuanyshev
Dulat Orazbekovich, tell us about the basic results of the Eurasia Economic Summit. How did its participants evaluate the investment potential of our country?
First of all, I should say that it was the first time that the World Economic Forum (WEF) held an event of this kind and scale in Central Asia. The Summit’s participants commented that the overall impression was that investors showed an increased interest in Kazakhstan and the entire region, after a two-year respite due to the Russian and Asian crises.
It is remarkable that the WEF President, Professor Klaus Schwab, personally conducted a number of sessions, including the plenary one with the participation of the heads of the Kazakhstani, Kyrgyz, Georgian, Azerbaijani and Tajik delegations. This session obviously became the centrepiece of the forum. Naturally, it was the leader of Kazakhstan who set the mood of the discussions. Nursultan Nazarbayev’s reflections about the place and role of Eurasia in the third millennium were his finest address to an audience during recent years. The Summit has in practice confirmed the understanding that this is Kazakhstan, and its leaders are the ‘engine’ of integration in the Eurasian area.
According to numerous expert assessments and presentations made by the participants, Kazakhstan is displaying a fairly high pace of development. Deputy Managing Director of the IMF, Mr. Sugisaki stated at the Summit that the economic situation in the country is stable. The economic policy being conducted by Kazakhstan’s leaders is well-grounded and correct. The IMF is expecting a further improvement of the situation in Kazakhstan. Kazakhstan’s realities have become a kind of representative cut of the Central Asian tree, where the «rings» show both difficulties and successes, and all the possible ways forward.
The Eurasia Economic Summit has exclusive importance not only for future financial ‘injections’ into Kazakhstan, but also for the country’s image as a whole. The majority of representatives of the world’s leading companies and banks, a number of famous political and public figures, heads of international organisations, and the mass media have supported the idea of making such economic forums a regular event.
I would like to note that ARKI, a co-organiser on behalf of the Kazakhstan Government, has directly participated, alongside the World Economic Forum’s Secretariat in Geneva, in organising and conducting this largest investment event. For us, the Summit has become a real examination which, I believe, was passed with an excellent grade.
In your opinion, what should be done to improve the investment attractiveness of Kazakhstan?
First of all, we need to complete institutional reforms. Work should be done by institutions, rather than individuals, since the definition of institutions includes not only governmental bodies, but also the interrelations between them and the perfection of procedures within and between the bodies. We are working in several directions, mainly targeting the creation of a system of administration and power distribution which would be able to meet economic realities; namely, the fight against corruption and the establishment of a legal framework; plus the improvement of an institution of state service.
The current economic policy being pursued by the Government of Kazakhstan is aimed at performing only regulative functions in economic processes. The main objective is to ensure equal rights for all businesses and economic agents.
We have conducted opinion polls among domestic entrepreneurs, who are trying to invest their own or borrowed funds in certain projects, and also among representatives of foreign companies. Our aim has been to find out why they are afraid of signing contracts in Kazakhstan.
The first reason for their reluctance is the legal vagueness caused by frequent amendments to laws and by various authorities’ contradicting interpretations of them. Second, the different interpretations result in an arbitrariness amongst the tax and customs officials. The third reason is the human factor. In any country in which a great deal depends on the knowledge of local realities, foreign companies have to rely on local partners. In our country they believe that local partners quite often abuse investors’ confidence. Those polled have said that as soon as business starts getting developed, the local partners try to force the foreign representatives out of it, usually with the complicity of governmental authorities.
I must say that this is an exaggeration. This opinion does not match our investment policy. I can name a lot of foreign companies that are successfully operating in the Kazakhstani market. This means that there are certain factors outweighing all the risks. Such factors undoubtedly include political stability, which makes the development of the system predictable; the progressive nature of the economic policies; a realisation of the importance of the market economy; the adequate legal environment; the rapidly developing market infrastructure; services and telecommunications meeting international standards; and the financial infrastructure, including banks and a developing insurance market.
Together with the World Bank, we are now formulating a system of insurance from political and regulative risks arising from the activities of the government. This will increase the number of investment projects.
Another contributing factor to the investment attractiveness of Kazakhstan is its geopolitical and regional location. This, however, has its advantages and disadvantages. The latter include the dispersed nature of the population, which entails high transportation expenses. The advantages, however, are prevailing. Kazakhstan is situated at the heart of Central Asia, with a population in excess of 50 million people. This is a good market for any transnational company which, for example, could choose to launch chemical production based on our enterprises and the phosphor produced here. This market, however, lacks unity due to the different monetary, customs and economic policies pursued by its member countries in encouraging corresponding markets, as well as principles of state. This is why the creation of a common market is a top priority for today.
The Eurasia Forum has given impetus to the discussion of pressing problems. It is natural that the countries of the region should compete for investment. Thinking globally, however, we are not just competitors with each other, but with other regions of the world. Our competitiveness with other regions, and in the whole world, will be increased after the solution of intraregional problems, and such solutions depend on our states and governments.
What are the main fields of effort for the Agency in attracting domestic and foreign investment?
At present the Agency is working on four large groups of problems. The first group includes the so-called priority sectors of the economy. We consider the current flow of foreign investment there extremely insufficient. We need to change the raw material orientation of the economy in order to provide balanced economic growth. This is obvious. World experience has shown that progress and economic growth are achieved only when the economy is based on the manufacture of finished products. This is why the priority sectors of the economy are of great importance to us.
The second group covers problems related to subsoil use. The government needs to formulate an adequate policy in this sector. It is a well-known fact that the mineral sector, which gives the largest inflow of materials and finances, has become the basis for social and economic growth. There have been repeated attempts to make the sector serve economic progress. Laws and regulations have been developed, and the powers of governmental bodies have been distributed on this basis.
Today, we have changed our position, prioritising the principle of support to solvent and effective enterprises. This will serve to eradicate the problems caused by attracting an excessive number of junior companies to the sector, who have obtained licences in the hope of success. The method is interesting, but not exhaustive. Therefore, we are now replacing the licence-contract system by a contract system. The new laws provide for a one-stop system which will eliminate red tape and the various difficulties faced by investors when registering documents and signing contracts. Importantly, we should make provision for contributions to be made by mining operators to the social and economic development of the regions in which they operate.
The third area is the development of a legal framework. Our top priority is to develop a single law on investment which would grant equal rights to domestic and foreign investors and maintain the investment attractiveness of the country, plus existing investment regimes, and the unity and internal consistency of the policies in order to maintain previously-signed contracts.
The last group of problems covers work with investors. On the one hand, it is an interactive communication through the Council of Foreign Investors and its working groups; and on the other, it works through the consideration of applications and complaints from investors. Any questions unsolved by us are passed on to the Interdepartmental Commission of the Government. We are a working body, acting on behalf of the Government in both the Council of Foreign Investors and the Interdepartmental Commission. Our task is to minimise the number of unsettled conflicts between the Government and investors. Kazakhstan has officially acknowledged International Arbitration. However, a case brought before it leaves an indelible negative mark, and one negative fact revealed by the international mass media may spoil ten positive events. This is plainly undesirable.
To which of your activities do you attach the greatest importance?
Today, the main attention is given to the activity of investors in the priority sectors of the economy. This has become even more important, taking into account the fact that our head of state has approved, through his edict of 6th March 2000, the new rules for the provision of privileges and preferences when making contracts with investors in the priority sectors of the Kazakhstan economy. In accordance with the order, ARKI has developed and distributed a table of standard tax privileges for all the projects regardless of the investment amount. This prevents secretiveness and ensures transparency when a decision is made on privileges and preferences.
In its activity related to privileges and preferences to investors, ARKI is governed by the law of the Republic of Kazakhstan «On state support to direct investment» dated 28 February 1997. In accordance with the law, investors in the priority sectors of the economy can be provided with privileges and preferences, including exemption from income, land and property taxes, with state grants in-kind. Moreover, they can also be exempted from customs duties on goods imported for the realisation of an investment project. In this situation, the major requirements for an investor is the provision of direct investment in fixed assets (fixed capital) of a Kazakhstani legal entity and the availability of the financial, technical and organisational means to meet its commitments under the project.
Nevertheless, despite the heavy support, the amount of foreign and domestic investment in the priority sectors is still insignificant. In 1999, the amount of investment declared to be provided in the priority sectors of Kazakhstan’s economy was 988.3 million dollars, or 64% of the actual level of the direct foreign investment in the oil and gas sector of the country. Although the investment flow was more than three fold higher than that in 1998, the number of contracts signed fell to 65. The explanation for the increased number of direct foreign investments and, at the same time, the reduced number of signed contracts, was the conclusion of two large deals in the telecommunications sector involving the GSM Kazakhstan and Kar-Tel companies to the total amount of $650.1 million.
Last year the domestic investors were the most active, concluding 44 contracts. Another 17 contracts included the participation of foreign capital. Companies which are Kazakhstani partners in joint ventures come from Turkey, China, Pakistan, and Lebanon. Only four contracts were concluded for the establishment of businesses with 100% foreign ownership.
Despite the fact that the domestic entrepreneurs are more active, the major part of the declared investments belongs to foreign investors, mostly involving Turkish capital ($662m). South Korea invested 10 times less ($63.7m) followed by China ($13.8m). Turkey is among the leaders due to the signing of the two above-mentioned contracts with Turkish telecommunication companies.
In general over 40 new enterprises began operating with ARKI assistance in 1999 (25 companies in 1998). Kazakhstani people now actively use their products. What is very important is that the newly established companies mean not only jobs (13,109 new and 14,440 preserved), but also real Kazakhstani goods in the market, as well as taxes and revenues for the national budget.
In 1999, thirty five new companies paid over 588 million tenge in taxes and other payments to the budget. The privileges granted to these companies (who concluded contracts in the priority sectors in accordance with the law) amounted to 87 million tenge. Therefore, the taxes they paid are 6.7-fold higher than the privileges they received. It is worth mentioning that the tax receipts from the newly established companies, as well as the additional receipts from the old companies, have not been planned for in the national budget.
Our Agency has proposed making changes in the laws to accommodate a new principle for attracting investment: concessions such as «Construct – Operate – Deliver». The Government will provide the right for a future production to be developed by a private consortium for a specified period of time. The company constructs the facilities, operates them, returns its expenses and passes the facility on to the Government within several years. An attractive feature of such projects is that, given the limited opportunities of external borrowing, Kazakhstan will have the possibility to finance large infrastructure projects without involving money from the state budget.
14th April 2000, the Agency of the Republic of Kazakhstan on Investment passed an order establishing a new list of priority sectors. The list has been considerably expanded to include the following branches: production of fine organic synthesis items, alloyed steel, items of domestic alloyed steel brands, zinc for galvanic cells, titanium sponge based on local raw materials, explosives and explosion accessories, ceramic items, etc.
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