Economy Diversification: Investors Are Ready to Help
The State Program on Forced Industrial Innovative Development will get a start in Kazakhstan in 2010. Under government plans, this program is expected to eliminate drawbacks of the previous government's initiatives and will bring the Kazakhstan’s economy to a relatively new quality level. In its expectations, the government relies on help of the international institutions, both who invest and operate in Kazakhstan. Exactly the foreign companies’ participation in the economy diversification and technological development of our country will be the main topic of discussion at the twenty second plenary session of Foreign Investors Council (FIC) under the President of the Republic of Kazakhstan, to be held in Astana on December 4, 2009.
On the threshold of the session, we asked we asked some of the FIC companies' representatives to share with us their vision of potential interaction between the investors and the state in this area. The interlocutors were asked just two questions:
What should Kazakhstan do to increase the attractiveness of its non-extractive sectors of economy for investments?
How does your company contribute to the diversification and technological development of Kazakhstan?
Jay Johnson, Managing Director, Chevron Eurasia
1.Regardless of the sector, for any investor who is considering making a long-term investment in any country, they look at a variety of things. Specific criteria such as:
- Open markets: a level and transparent "playing field" to maximize the free flow of trade and investment – which would significantly attract international investment;
- Sound policies: in particular, stability and investment security are essential to ensuring that investment commitments continue into the medium and long term;
- Rule of law: uniform, consistent and enforceable laws will help create a stable commercial environment;
- An effective development strategy: applied technology and increased human capacity – education and training, job creation and health care – go hand-in-hand with increased investments.
These are just a few of the key elements that can help to attract long term partnerships and create sustainable economic development opportunities for any country.
2. Chevron prides itself on being a technology leader, and we continue to support Kazakhstan’s efforts to further develop and diversify its economy.
Bringing Chevron’s operational excellence in technology to the Tengizchevroil (TCO) Joint Venture, has paved the way for TCO to significantly increase production. The recent expansion at Tengiz was one of the industry’s largest and most technologically complex engineering projects. The Sour Gas Injection facilities boast the world’s highest-pressure and highest-percentage hydrogen sulfide injection compressor, and the Second Generation Plant is the world’s largest single train sour gas and crude processing plant.
Chevron’s business activities in Kazakhstan go beyond upstream. In 2003, Chevron invested $25 million in the construction of its Polyethylene Pipe Plant in Atyrau, the first of its kind in Kazakhstan. Our pipe plant is staffed and managed entirely by citizens of Kazakhstan and utilizes state-of-the-art equipment and innovative technologies. It can produce 15,000 tons per year of high-density polyethylene pipe with diameters from 25 to 1200 millimeters for use in building Kazakhstan’s infrastructure as well as for export.
Chevron is currently implementing two projects in Atyrau that will introduce new technologies and will offer products that are not currently produced in Kazakhstan or CIS countries. The first is the expansion of the polyethylene pipe plant which would allow production of the metal-plastic pipe to be used in heating and hot water supply.
Another project that Chevron is pursuing is the construction of a new plant in Atyrau that would produce modern, long-life valves with diameters from 100 to 400 millimeters for use in municipal infrastructure. Once fully operational, the plant is expected to produce up to 30,000 high-quality valves per year. Projects like these contribute to the country’s aspirations of continued economic development and diversification, and Chevron is proud to be part of this important process. Both projects will bring new technology to Kazakhstan and replace products currently imported from far abroad.
Jean Luc Porcheron, Managing Director, Total E&P Kazakhstan
1. There are several ways to increase attractiveness of non extractive sectors, including simplification of administrative procedures to create local branches, fiscal enablers, financial support… But I would like to emphasize one aspect, which is of primary importance to all new investors wishing to develop their activity in Kazakhstan particularly in the manufacturing and services sectors: the availability of a skilled workforce. Beyond basic education, strengthening skills acquisition should become a focus of local authorities educational policy. This requires a baseline survey of the education and training system, in parallel with an assessment of the future needs in sectors where investors are expected to develop activity.
Of course, best students can be sent abroad in reputable schools and universities, but it should also be considered to create in Kazakhstan post graduate schools in association with foreign universities. Skills acquisition by Kazakh professionals will enable investors to implement efficiently technology transfer which is often a critical factor of success for new industries.
2. Total is an active partner of Kashagan project, and strongly involved in the North Caspian Operating Company. In the frame of this huge project which pushes forward technological limits in numerous areas, all shareholders contribute to develop technological capacities of the Kazakh workforce directly employed, and to transfer technologies to all local companies which are involved in its realization.
Total is also willing to contribute to skills acquisition by Kazakh professionals, which is the cornerstone of efficient technology transfer. In this regard, Total is providing training opportunities abroad to some KMG staff, and also sponsors scholarships in French universities for some selected students. We are also considering different options to support Kazakh universities development.
Claudio Descalzi, Chief Operating Officer Eni E&P
1. Eni has been lucky enough to eye-witness the impressing economic and social progress that Kazakhstan has achieved over the last years. We are positive this advancement will continue in the future and eventually encompass the entire spectrum of industry sectors and society.
Kazakhstan can thrive on two natural assets: its hydrocarbon reserves and its geographical position, at the crossroads of the Euro-Asiatic continent. Leveraging on these two core assets will be the key to boost the entire economy and thus promote also of the non-extractive industries.
In order for this virtuous cycle to be sustained, cooperation with foreign companies will remain essential. Actually, to realize its full potential, the country will need to develop an efficient infrastructure base in key sectors, such as energy, transportation and communication. Foreign capital and know-how could dramatically facilitate and accelerate this process. Therefore, the country should maintain its “open door attitude” towards foreign companies and investors, by promoting a favourable political and economic climate and fostering stable and business-oriented legislation.
2. Eni has based its cooperation with Kazakhstan on the grounds of a mutually beneficial partnership of equals. In line with our distinctive business model, we have adopted an integrated approach, which is not limited to the extractive sector, but embraces projects along the entire energy value chain.
The recent collaboration agreement between Eni and KMG provides a fitting example. This agreement entails the study of a gas-sweetening plant, a gas-turbine power plant, a shipyard with a drydock, and the upgrading of Pavlodar refinery. We will combine these initiatives, aimed at optimizing Kazakhstan’s domestic resources and promoting diversification from the extractive industry, with the implementation of social and educational projects.
Technology and know-how represent core assets for any oil company to achieve safe, sustainable development. Due to the technical and environmental challenges associated with the development, exploitation and transportation of hydrocarbons, the experience in Kazakhstan is emblematic.
Conscious of these challenges, Eni devotes substantial resources, in terms of people and money, to R&D projects. To-date we have more than 80 projects of technology transfer in place worldwide, some of which in the Kashagan and Karachaganak fields. Reciprocally, technology deployment and know-how transfer lie at the foundation of the sustainable growth of any fast-progressing country. We promote the spreading of knowledge through the employment of local content combined with best-in-class educational programmes. For this purpose, Eni has established dedicated organizations like Eni Corporate University and Scuola Mattei, in which thousands of students from all over the world have been successfully trained. The Kazakh students who attended MEDEA - Scuola Mattei’s Master in Management and Economics of Energy and the Environment - represent an example we are proud of.
Lord Renwick of Clifton KCMG, Vice-Chairman, Investment Banking, JP Morgan
1. Over the past ten years, JPMorgan has had a lot of experience in helping Kazakh companies from both the extractive and non-extractive industries to raise capital internationally. There has been a very good response from the main international investment institutions, which are much better informed about Kazakhstan, its natural resources and the increasing potential of other sectors of the economy than they were a few years ago. International investors recognize that much has been accomplished by the Government of Kazakhstan in terms of developing a favorable business environment in the country. This is very important as investors above all are seeking continuity and consistency of government policies. For example, investors have welcomed a series of reductions in key tax rates, including value-added tax and corporate income tax. This is a major stimulus for investment activity in the private sector. But the application of tax rules remains complex. It is no less important, therefore, that the application of tax rules should be predictable from the point of view of investors, including in areas and projects that fall below the definition of ‘strategic’. Many such projects are found in the non-extractive sectors of the economy.
We also believe that the government can itself become a more active player in the investment field, for instance by co-investing alongside the private sector in projects that help to diversify the economy. Through various institutions, the government can help to deliver more cost-effective and long-term financing to such projects.
2. JPMorgan is in close touch with most of the large project sponsors in Kazakhstan. Thanks in part to our efforts, a number of companies have been able to raise hundreds of millions of dollars of capital internationally. In many examples, these funds were used for capital-intensive projects with high value-added and substantial technological expertise. Going forward, we will be continuing to help to facilitate contact between the global industrial players and the Kazakh authorities and business leaders.
Finally, we see our role as an innovator in the development of new financial instruments fitting the requirements of the Kazakh businesses. We are often able to unlock pockets of investor demand for Kazakh risk by offering new solutions to investors, which reflect our wide international presence as well as good understanding of domestic practices. An example of this was the recent very successful $500 million Eurobond issue for the Eurasian Development Bank, which mobilized a large amount of funding for development without recourse to guarantees by the Kazakh authorities.
Keith Gaebel, Managing Partner, Central Asia and Caucasus, Ernst & Young
1. Amongst other measures currently taken by the Government for the development of non-extractive industries, Kazakhstan should focus its attention on the development of human capital, in particular education and professional training in technology related sectors. Financing for both professional and higher education should be focused on non- extractive industry sectors such as professional education in colleges, aimed at a new generation of technical personnel educated and trained to work in engineering, modern agriculture and industrial construction, etc. Financing of higher education in local universities and overseas should be focused on the qualifications Kazakhstan most needs to develop, such as general engineering, IT, medicine, chemistry and renewable energy. Once Kazakhstan has developed new generation of young professionals educated and trained to start careers in these sectors Kazakhstan will create one of the key preconditions to improve the investment attractiveness of the non-extractive sector.
2. Ernst & Young’s key contributions to technological development and diversification of Kazakhstan are: human capital development, knowledge transfer and support of entrepreneurship. People are one of the key assets for professional services firms. Annually Ernst & Young invests over 5% of revenue in employee professional development. Our firm supports the tradition of hiring young people and providing them training and development, including international qualification programs at the company’s expense (e.g. ACCA, CIA, and others). We contribute to development of profession working with professional associations and supporting universities through relevant courses, e.g. Ernst & Young senior management regularly lectures on IFRS at KIMEP.
We also contribute to diversification by supporting Kazakhstan’s most innovative and dynamic entrepreneurs, including the SME sector, with Ernst & Young’s Entrepreneur of the Year program.
Finally, we are committed to the community in which we operate and we actively participate in a number of business and professional associations. We are honored to be a member of Foreign Investors Council and believe this is an excellent platform for knowledge sharing and effective dialogue between the government and foreign investors.