Development Institutions. Results and Plans of Kazyna
Kayrat Kelimbetov, chairman of the Board of Directors of the Kazyna Sustainable Development Fund, answers questions from our magazine
Mr Kelimbetov, your fund was set up one-and-a-half years ago. What have you managed to achieve?
Yes, indeed, our fund was set up more than 18 months ago. However, we only received shares in all of the development institutions a year ago.
Before I start naming projects and specifying figures, let me note that development institutions have fulfilled their main task – the process of public-private partnership has gathered momentum in the country. Moreover, we have solved the problem of closeness and non-transparency at development institutions. That is why I believe that Kazyna can be regarded as a pilot project launched by the government as part of the entire administrative reform. The first stage of our development – recruitment, market research and finding our own niche in the state governance system – has been completed. We have clearly defined two important aspects – building a regional financial investment infrastructure and implementing diversification programmes. As a result, cluster initiatives and breakthrough projects have changed business mentality. I want to note that without the direct involvement of the head of state this project would have dragged on for many years. It is him who has led us to understanding that projects in non-extractive sectors can be commercially attractive.
Corporate governance has been improved, procedures have been put in order and financial discipline has been beefed up at the development institutions. They have also significantly cut down time spent on considering applications, the number of necessary documents and red tape while approving, considering and endorsing projects.
We have also adopted a comprehensive system of strategic planning of the institutions’ activities, envisaging three-level timeframe for defining aims and tasks (one year, three years and five years).
The development institutions’ activities are now being regularly monitored to achieve key efficiency indicators. A standard system of budget planning and financial accountancy has been adopted, which includes organising the process of planning, accountancy and monitoring and a risk management system.
We have started to adopt the ISO 9001:2000 international quality management standards. Independent directors were introduced at boards of directors of the development institutions, who are appointed from prominent businesspeople, members of the Atameken movement and international experts, while the number of staff members in the institutions was cut by 28%.
The Kazyna fund started to attract foreign investors to its companies, for example the possibility of the European Bank for Reconstruction and Development’s involvement in fixed assets of the Investment Fund of Kazakhstan, the Development Bank of Kazakhstan and the Small Business Development Fund is being currently discussed.
Here are some figures: the investment portfolio of projects we have approved has grown to 183 projects worth $5.2bn, of which $1.8bn is the share of the development institutions. In the first half of 2007 alone, the portfolio grew by 46% (30% in the first half of 2006). Since the beginning of the year, the main financial development institutions (the Development Bank, the Development Bank-Leasing, the Investment Fund and the National Innovation Fund) have approved 30 projects worth $1bn, of which $0.3bn came from the development institutions. We intend to increase the portfolio of investment projects to $6bn by 2008 and $10bn by 2009.
What are your future plans? Will you find the right strategy to develop the system of development institutions?
At this stage of the fulfilment of the Industrial and Innovative Development Strategy, there is a need to adopt a comprehensive approach to the development institutions’ investment activities. However, each of them should be treated as part of a general system which will on behalf of the state be able to offer practically a whole range of investment instruments, from venture funds to bank loans. Key principles of the national development institutions’ activities will be the absence of competition against the private sector and the holding of an active dialogue between the public and private sectors with a clear sharing of risks in the future.
In this respect, we intend to carry out projects, including breakthrough ones, in close partnership with the private sector, adhering to the principle of joint funding. This will make it possible to reduce state investment to a third of the total investment and encourage investors to take part in modernising the economy, develop market approaches in the development institutions’ activities and expand the use of international governance practice by attracting private capital.
Optimising and structuring investment processes are acquiring particular significance. This will create an integrated system of investment, divide instruments and indicators clearly and strengthen the development institutions’ aim at a common result.
In order to solve these problems we intend to make institutional changes which will increase the investment portfolio, boost partnership with the business, optimise the number of personnel and administrative costs and develop new instruments.
What are Kazyna’s tasks and aims as an operator of the 30 Corporate Leaders Programme?
Based on the economic successes achieved by Kazakh companies, we aim to create a group of major regional or even global players. I believe that the state support in spheres such as human resources, energy, telecommunications and licensing will speed up this programme.
In order to turn Kazakhstan into a regional leader the state and private sector should combine their efforts. Another important aspect is that this project draws the government’s attention to growth points. I want to say that the problem of creating new jobs in the country is not only a problem for the government to deal with, but also one for business, which should start, with zeal, and together with the state, to generate employment opportunities.
The main aim now is to enable Kazakh companies to enter international markets. The state should support those companies which have interesting ideas, are ready to invest their own resources and attract modern technology to implementing production projects. Here the state acts as a partner, while the Kazyna fund as an operator and the government’s authorised agent.
In order to achieve this aim we have defined the following tasks: firstly, we should define breakthrough projects that will produce products which have high value added and are capable of competing on national, regional or global levels. Secondly, we will define companies that have potential to carry out such large-scale projects. Later, we will formulate measures of state support for boosting investment attractiveness and reducing the barriers to entry in promising sectors of the Kazakh economy and adopt a system of incentives and monitoring tasks set.
What do you understand as being “breakthrough projects”? What are the criteria to define them? What are priority sectors?
Breakthrough projects are, as a rule, the first projects of their kind, which employ new technology, create new productions and jobs, and make new products and new Kazakh brands. These are the projects which will embody the strongest and the most successful domestic companies – future corporate leaders.
We believe that these projects should have significant value added, a knock-on effect, export and resource-saving potential and ensure a visible contribution to improving the structure of the country’s economy, finding and filling export niches with their products, qualitative international integration and stage-by-stage contribution to developing the country’s stock market.
As breakthrough projects we regard those projects that are carried out in the non-extractive sector and cost at least $100m. The project’s export potential also plays a significant role – at least 30% of products which have high value added should be exported. The project should also ensure high returns on investment and profitability, whereas medium-term and long-term export earnings should have a positive trend and a positive impact on the growth of exports of finished products and their share in the country’s GDP.
We are living in the era of high technology and standards, which is why we need qualified specialists. An important criterion in selecting candidates is to increase the quality of professional training of labour resources and the balance of the labour market and to ensure high management and technical qualifications of specialists of all levels. Of course, it is also important that breakthrough projects should create modern scientific, engineering, technological and construction centres and use knowledge-intensive, technological, energy-saving and environmentally friendly production and equipment.
Spheres in which we intend to carry out breakthrough projects are oil and gas processing, power engineering and bio energy, metallurgy and metal processing, the mining industry and the geological prospecting of natural resources, producing and enriching rare metals, the uranium industry and nuclear power engineering. This also includes the services sector in the extractive industry, construction and construction materials production, agriculture, the financial sector, organic and inorganic chemistry, pharmaceuticals, the food industry, heavy machine-building, the transport and telecommunications sector and water-supply and irrigation infrastructure.
In addition to co-funding, the government has promised measures of state support to corporate leaders. What are these and what do you think will be in high demand by business?
Specific measures of state support are currently being discussed jointly by Kazyna, the state commission for modernising the economy and the Economy and Budget Planning Ministry. These measures will aim at long-term future (at least 10 years) and cover tax incentives, creating necessary infrastructure, providing land and access to natural resources, assistance to enter foreign markets, reduced tariffs for imports and coordinating and creating favourable investment conditions in foreign countries. At the same time, this will envisage an individual approach – the best package of state support will be developed for each project. It is worth mentioning that the maximum volume of state support should be equal to a sum of future budget payments during the entire lifetime of the project (or 10 years) reduced by the necessary profitability.
What are Kazyna’s functions as the programme’s operator?
We look in detail at and then assess promising aspects, companies and projects and monitor their fulfilment. We also ensure the fulfilment of the programme by cooperating with the state commission, government agencies and private companies at all the stages of its implementation. We have been ordered to draft the best package of state support, taking into account the effect that will be made by each breakthrough project.
In addition, we are responsible for assessing the feasibility study of a project and analyse measures of state support requested. The results of this are submitted to the state commission’s consideration for deciding on measures of support, the “cost of issue” of implementing the project and whether it is promising to conclude a contract between an entrepreneur and the government. Only after all this does the commission make a decision on the possibility of enlisting a project as a breakthrough project.
The activities of corporate leaders are monitored in line with the rules endorsed by the programme’s operator by collecting, processing and analysing statistical, reference and other information on the fulfilment of the programme’s steps and assessing the results achieved. Monitoring is carried out by an independent agency and its results are published on official websites. The ratings of corporate leaders are compiled taking into account the specifics of their activities.
The efficiency of corporate leaders is assessed on the basis of key indicators such as revenue, profitability, market capitalisation, share in export earnings, tax payments, share in local content and so on.
The 30 Corporate Leaders Programmeaims at macro-projects, whereas the “cluster initiative” aimed more at small and medium-sized businesses. Does this mean a change of state priorities in the sphere of diversifying the economy? How these programmes are inter-dependent?
One of the compulsory conditions of the 30 Corporate Leaders Programme is its ability to have a knock-on effect on all the sectors of the economy. It should have a positive impact on developing small and medium-sized businesses, boosting productivity and reducing the industry’s energy intensity.
It is clear that in order to receive quick results in the sphere of diversifying the economy and increasing the competitiveness of domestic companies on international markets, we need to focus on major projects. However, it is no less important to create a basis for growing future leaders from small and medium-sized businesses, which should become an example for developing this segment of the national business. Taking into account the flexibility of small and medium-sized businesses, this will also reduce the risk of inefficient use of public funds. That is why in the future we intend to draft programmes such as 50 corporate leaders of medium-sized businesses and 100 corporate leaders of small businesses.
You have suggested that the National Oil Fund’s money should be used to increase the fixed capital of development institutions. Could you please explain your position on this?
If some part of the National Fund is used to increase fixed capitals of development institutions, there will be an opportunity to use these funds more efficiently through using two main instruments: managing assets and funding projects.
The Kazyna fund includes two major backbone institutions – the Development Bank of Kazakhstan and the Kazyna Capital Management Company, whose activities should have the greatest effect on diversification processes. In addition, increasing the scale of processes of modernising the economy is only possible when the capitalisation of these development institutions is as high as possible. In this case, they will be able to provide financial support to major capital-intensive investment projects costing over $1bn: no financial institution is capable of doing this in our country now.
I want to note that this process, in turn, will be accompanied by attracting business to projects. For example, while funding major investment projects Kazyna targets to attract three tenge of private investment per each tenge allocated by development institutions.
If Kazyna manages funds from the National Fund, over the next 15 years a growth in the capitalisation of the National Fund will be six times higher on average than the current growth ensured by the Kazakh National Bank.
We have proposed to launch a process of funding and implementing major backbone investment projects based on market principles, when, on the one hand, the state, represented by development institutions, will be sharing financial risks with the private sector and, on the other, it will have adequate returns on its investment.
The first factor aims to ensure the confidence of private investors in the state’s intentions to help large-scale investment in the non-extractive sector of the economy, while the second will ensure the growth of the National Fund’s reserves.
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