The Tree of Diversification: Prescriptions for Growth
Kazakhstan: New Horizons of Growth – this was the title of a major forum held in London in late June, at which government officials, investors and business leaders discussed prospects for further developing the Kazakh economy and the possibilities the country has opened for foreign capital.
New Format – New Possibilities
The conference combined two events that were held separately in the past – the Investment Summit of Kazakhstan, organised by the Adam Smith Conferences, and the annual conference “Oil, Gas and Natural Resources of Kazakhstan”, held by IBC Energy Conferences. The organisers said that, having become a joint event, this forum made it possible to offer a wider programme and excellent possibilities for establishing new business connections and international partner relations. The event, which was held at the Marriott Hotel Grosvenor Square in the centre of London over the course of three days, was attended by over 500 representatives of government and business structures, international organisations and the media from 20 countries. The Kazakh embassy in London provided official support to the forum and the WorleyParsons and Renaissance Capital companies were the main sponsors of this event.
In addition to plenary meetings, the conference programme included special sessions on certain sectors of the Kazakh economy, such as the property and construction market, power engineering, the metal mining and oil and gas sectors, transport and infrastructure, the financial sector and initial public offerings (IPOs) and the telecommunications and IT sector. Forum participants said that the cross-sectional format of the conference enabled foreign investors and Kazakh government officials to discuss very specific issues and achieve real results in their discussions.
Lord Fraser of Carmyllie (Deputy Chairman of the British All Party Parliamentary Group for Kazakhstan and Co-Chairman of the British-Kazakh Society), Jean Lemierre (president of the EBRD), Alderman John Stuttard (Lord Mayor of the City of London) and others were honorary speakers at the forum. They praised the forum highly as an important event in continuing a constructive dialogue between Kazakhstan and the investment community.
Among the Kazakh speakers were Vladimir Shkolnik (the Deputy Head of the Kazakh Presidential Administration), Natalya Korzhova (Finance Minister), Galym Orazbakov (Industry and Trade Minister), Kairat Kelimbetov (Chairman of the Kazyna Sustainable Development Fund), Uzakbai Karabalin (president of KazMunayGas), Zhanar Aitzhanova (Deputy Industry and Trade Minister), Bolat Akchulakov (Deputy Minister of Energy and Mineral Resources), Timur Nurashev (Chairman of the Industry and Trade Ministry’s Investment Committee), Arken Arystanov (Chairman of the Agency for Regulating the Activities of the Almaty Regional Financial Centre), Gani Uzbekov (Deputy Chairman of the Financial Control Agency) and others.
They gave reports on the social, political and macroeconomic situations in Kazakhstan and talked about the latest changes in the country’s investment legislation and fiscal policy, sharing their plans to ensure the further growth of the Kazakh economy.
Kazakhstan’s policy to increase oil and gas output has created conditions for its economy – at a stable 10% annual growth in recent years. In 2006, the country’s GDP totalled $80.4bn or over $5,000 per capita, whereas this figure will exceed $100bn this year and $300bn in 2015. The country’s financial sector is also booming. The combined equity capital of local banks has grown by 460% to $7bn over the past four years. A favourable investment climate has been created in the country – the World Bank estimates that Kazakhstan is among the top 20 countries in terms of investment attractiveness.
Kazakhstan’s modern economic policy, Vladimir Shkolnik said, is based on three tasks: joining the world’s top 50 most competitive countries, conducting administrative reforms and boosting the productivity of industrial enterprises. Government officials reassured forum participants that the country favoured the stability of investment contracts, improving corporate governance and boosting the transparency and efficiency of the judicial system. For example, a law on public procurement has been adopted to remove administrative barriers, and amendments have been made to customs and tax legislation. Talks on Kazakhstan’s membership of the WTO have entered the final stage.
The 30 Corporate Leaders programme has been drafted and it will be implemented by the Kazyna Fund. This programme aims to support breakthrough projects in agriculture, the water supply system, transport, building infrastructure, the electricity supply system and so on. Mr Kelimbetov said that the programme’s main aim was to create conditions for Kazakh companies to enter international markets. In this regard, the state is ready to become a partner for the private sector and support companies that have interesting ideas and resources. The state’s involvement will consist of offering a wide package of support, including funds and tax preferences, and creating infrastructure, among other offerings.
The country is continuing to set up clusters in the petrochemical, chemical, metallurgical, textile and bioenergy sectors. Industrial zones are expected to be used actively for this purpose. Pilot projects have already been launched in Astana (construction materials) and Temirtau (metallurgy and metal processing). Business incubators and technology parks of national and regional significance are being set up to carry out research and development. The Alatau IT City information technology park was opened in Almaty in 2006. The Aktau Port (transport and logistics services), the Astana – New City (construction and construction materials) and the Ontustik (a textile cluster in South Kazakhstan Oblast) special economic zones have already been put into operation.
In their reports, both Kazakh and foreign speakers compared Kazakhstan with Canada and Australia. These two countries, like Kazakhstan, have huge, sparsely-populated territories that are rich in natural resources. Moreover, once they made use of their geographical closeness to the world’s major markets – North America and Asia. Four major developing countries (Brazil, China, India and Russia) will continue to boom over the next decade and it should be kept in mind that closeness to these countries opens up great possibilities for Kazakhstan. For example, two-thirds of multinational companies have already decided to expand their businesses in Russia.
Generating cheap electricity and having potential in bio and gas power engineering, Kazakhstan can become a convenient region in which to build production lines to cater for the Russian, western Chinese and Central Asian markets, with a combined capacity of about 500 million people. That this process is already under way is proven by the activity of the Kazakh mergers and acquisitions market, which grew by 50% to $8bn in 2006. This demonstrates that international investors are seeking new points of growth and considering Kazakhstan precisely in this context.
Experts believe that if Kazakhstan manages to fulfil this plan, it will have all the chances of occupying a place in the global economy similar to that of Canada and Australia.
In order to occupy niches in the international system of specialisation, Kazakhstan hopes to attract multinational companies with new technology and know-how to diversify its economy. Since it was none other than multinational companies that played the chief role in developing Kazakhstan’s oil fields, the state wants to continue cooperation with these companies. The number of joint ventures has grown by 600% to 13,000 companies in Kazakhstan over the past seven years.
Mr Nurashev noted that the government and development institutions were currently holding talks on setting up joint ventures to fulfil a number of fundamental projects. Joint initiatives have already been started with world-famous giants such as Italcimenti, ThyssenKrupp, Man FerroStaal, Siemens, Volkswagen, Microsoft, Cisco Systems and Intel. Using their assistance, Kazakhstan intends to build an industrial economy that will not depend on raw material exports, and this will create a new system of economic values. Kazakhstan needs to create more favourable conditions than its neighbouring countries, which act as direct rivals. As a result, Mr Orazbakov said that priority would be given to corporate strategies and governance and strengthening cooperation between the state and private companies.
Mr Lemierre assessed the country’s measures as follows: “We witnessed the start of the real diversification of the economy in 2006.” To back up his statement, he showed the changes in the structure of the EBRD’s investment portfolio in Kazakhstan. The bank has already invested over €1.5bn in over 50 projects in the country. For example, the bank has funded several major projects in the agricultural sector, and it is refinancing the metal sector, investing in ensuring safety at industrial enterprises. Moreover, Mr Lemierre told the forum that his bank would allocate a six-year loan worth $42m to overhaul Kartsement, which will be the first enterprise to produce dry cement in Central Asia. The president of the EBRD believes that Kazakhstan is indeed offering excellent possibilities for long-term investment.
Infrastructure and Power Engineering: Potential or Risks?
The forum also discussed the state of the transport and communications infrastructure, which is vitally needed in Kazakhstan in the new economic conditions and should be developing at outstripping rates. For example, annual trade between Europe and Asia-Pacific has already reached $700bn and is expected to grow by 50% to $1,000bn by 2010. This creates preconditions for Kazakhstan to become a major interregional logistics centre. Building trade and logistics zones on the border with China and Russia is a very promising project from this point of view.
Taking into account these challenges and opportunities, Kazakhstan adopted the Transport Strategy, which will be executed until 2015. Under this strategy, reconstructing and modernising old and building new infrastructure facilities will demand $30bn over the next five or six years, 70% of which will come from investors. The country intends to achieve this by developing private-public partnerships, and has adopted the Law On Concessions. However, speaking of prospects for developing private-public partnerships, investors stressed the need to ensure the appropriate distribution of risks and premiums and the absolute transparency of the process of awarding concessions.
Another problem to which international experts drew attention is that of sufficient power generation and reliable power supplies. Mr Akchulakov said that in order to solve this problem the Ministry of Energy and Mineral Resources had drafted a programme to develop the power generation sector until 2015. It envisages restoring three idle power units at the Yekibastuz-1 regional power plant, building two power units at the Yekibastuz-2 regional power plant and completing the reconstruction of power units at the Aksu regional power plant. In addition, this strategy provides for building the following power facilities: the Karaganda-4 heating and power plant; the Balkhash thermal power plant; the Astana-3 heating and power plant; the Semei-3 heating and power plant; gas-turbine power plants in the country’s west; and the Moinak, Bulak and a number of other hydroelectric power plants in the country’s east and south. In total, by 2015 Kazakhstan will build power generation facilities with a combined capacity of 6,673 MW to the tune of $10bn. Bearing in mind this scale, Jean Lemierre urged foreign investors to pay close attention to this sector of the economy now, admitting that much is riding on the state’s tariff policy in this sphere.
Stability Above All
Creating new enterprises and building power generating and infrastructure facilities have always been regarded as capital-intensive and long-term projects. That is why the issue of ensuring stability and transparency by both the state and investors is becoming relevant now. Moreover, this is not only an economic, but also a political issue. In this regard, it is no accident that, for the first time, one of the forum’s sessions was devoted to political reforms. The recent amendments to the Kazakh constitution that boost the role of parliament drew particular attention. Daniel Witt, president of the International Tax and Investment Centre (ITIC), defined investors’ position on this issue. Having noted the significance of this step from the point of democratic development, he also recalled that there had been calls for a more protectionist investment policy heard among official Kazakh circles. Moreover, people who want more state control may come to the government in the future. This means political reforms may pose threats to the investment climate, especially if the new parliament decides to act more harshly in this sphere. In this regard, the continuity of government policy is very important to investors.
At the same time, Mr Witt said that in February 2007 Prime Minister Karim Masimov drew parliament’s attention to the fact that “provisions of some contracts signed with foreign partners are being implemented unsatisfactorily”. In this regard, the president of the ITIC, favouring mutual responsibility of both parties, urged investors to comply with the provisions of contracts from the point of administering, as Kazakhstan has in fact become a world-level player, and this should be taken into account.
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