New Challenges. New Horizons
The 22nd regular plenary session of the Foreign Investors Council under the President of the Republic of Kazakhstan that took place at the beginning of December 2009 in Astana became illustrative evidence of the fact that the relationship format between our country and transnational companies has seen significant changes in the recent period. Earlier FIC sessions mainly discussed the elimination of barriers; now official Astana introduces new agenda issues, first of all related to the needs of Kazakhstan. The 20th session of the Council was dedicated to the issues of raising local content level while in December TNC called on certain actions in the field of diversification and development of the republic’s technological potential.
New "rules of the game" were personally announced by the President of Kazakhstan Nursultan Nazarbayev at the Council session who noted that successful and long term cooperation with the state can involve only those companies that will support priority vectors of national economic policy. "You know that in the most challenging years we offered many assets to you with very attractive conditions. This enabled us to make profit on invested funds. This was also beneficial to you all. We welcomed this process. Now we have a right to urge you to invest money, raised in Kazakhstan, into the economy of our republic".
The head of the state defined the tasks, to be resolved by the republic in cooperation with TNC. "Very soon we expect to finish working on Kazakhstan’s Development Strategy – 2020 that will define the strategic development vectors for our country in the next decade. We are finishing the draft of a 5-year program on the accelerated industrial innovative development of the republic, the implementation of which will be launched next year… The foreign companies must participate in this unprecedented initiative".
Aset Isekeshev, the Industry and Trade Minister, explained the specifics of the President’s proposal. He shared about four cooperation vectors with foreign investors that were defined by the government under AIID program implementation.
The first one is the development of infrastructure, including the implementation of investment projects in the energy, transport and telecommunications sector. In this area there are 22 large infrastructure projects for a total sum of $19.5 billion. According to the Minister, the state is aware that it is going to play key role here, and major operator functions will be transferred to NWF Samruk-Kazyna and national companies. At the same time, besides the financing from state budget the government is going to actively develop alternative sources and, specifically, the mechanism of public-private partnership.
The second vector is the development of deeper conversion of raw material. "We are going to use our raw material and energy resources with maximum efficiency, i.e. ensure maximum volume processing within Kazakhstan and start producing basic items, identified in the master plans". Overall, about 40 big projects for a total amount of over $40 billion are being implemented in this sector.
Bearing in mind the shifts in long term priorities of the government and TNC, the first and most important step, expected to be taken by FIC members, is offering access to the raw material, produced by them, on the best conditions. "This will allow us establishing the base for attraction of new investment and implementation of new projects by new investors’ money. Today, upon the accessibility of basic raw material, we are able to attract special-purpose companies (Lanxess, IPIC and other), interested in the coordination of the downstream projects", the Minister noted.
The third direction is the development of high and medium technology sectors. These are mainly interfacing fields, related to the raw material sector and the needs of national development, whose potential is defined by the domestic market – oil and gas, transport and agricultural machinery building, pharmaceutics and other. "Only the oil and gas sector gives the opportunity to raise added value through the development of the service companies, offering high-tech services from 3D modeling of beds to production of complex appliances and chemical reagents for oil output under higher complexity conditions".
The fourth direction is technological development, firstly oriented at satisfaction of the existing enterprises’ needs on higher productivity, energy efficiency and integrated processing. "Each of the companies, represented here, has developed independent technological projects. We know that ExxonMobil invests in new technologies on raising the efficiency of geological survey works. Shell concentrates on raising the oil production rate. Chevron focuses on technologies that raise the efficiency of oil processing". Therefore, Mr. Isekeshev offered the investors to involve Kazakhstani scientists and Research Institutes in joint researches. The promising directions of technological partnership may become the establishment of an appropriate infrastructure in the republic, represented by science and technology educational centers, pilot plants and labs, as well as transfer of technologies and introduction of Kazakhstani products.
The Kazakhstani President also expects TNC to make real steps: "Today, I am sending a clear signal to the investors, including domestic ones. We will cooperate only with those who offer the implementation of certain projects, targeted at diversification and deeper conversion of raw material. This means that we will search for new partners in the industries, where there are no internally-demanded solutions, through offering beneficial conditions and resources for the project. I believe that the practical launch of this thesis must be clearly implemented under the national industrial development program – 2020. We are going to pass laws that will obligate all investors, developing the mineral resources of Kazakhstan, to closely cooperate with us under the program".
It has to be mentioned that FIC members showed up at the session with already prepared solutions. Specifically, George L. Kirkland, Chevron Corporation Executive Vice-President for Upstream and Gas promised to implement two projects. These are the capacity expansion of the Atyrau polyethylene pipes plant, fueled by the production of reinforced plastic composite pipes for hot water supply systems and heating as well as the construction of the pipeline shutoff valves producing plant, designated for the water and gas supply utility systems.
Malcolm Brinded, the Executive Director of Shell Company, proposed to consider the experience of the Norwegian government in the field of scientific and engineering potential development in the oil and gas sector. Among the priority directions for Kazakhstan in this area he mentioned the sulphur utilization, high pressure reservoir management and raising the oil recovery. At the same time, at the initial phase Shell is ready to support the design of the outline plan with the purpose to select the priority areas of technological development in the sector.
Frank Chapman, the Chief Executive Officer of BG Group Company, believes most effective interaction between the investors and state may be ensured through the following scheme. The investors must define the priorities and provide support to the development of local content in the industries, which they are involved. Meanwhile, Kazakhstan may use the revenues, generated by these industries, for step-by-step expansion of the economic activity scope. In this concern, he proposed to collectively prepare the local content development program, assuming the transfer of knowledge and technologies in the oil and gas sector as well as to define clear targets for successful evaluation at each phase.
Alexander Mashkevich, the shareholder of Eurasian Natural Resources Corporation (ENRC), promised to launch a number of new plants by 2014, including the production of high added value goods and integrated processing of metallurgic wastes. According to him, the launch of the ENRC Company innovative projects will produce a multi-level multiplier effect since the high-tech plant will generate the opportunities for creation of new small and medium enterprises around big business.
Vagit Alekperov, the President of LUKOIL, is ready to share company developments in the field of hydrocarbon raw material intensification technologies. Specifically, Kazakhstan may successfully adopt the drilling of multilateral wells and radial drilling, coil tubing, hydraulic fracturing, non-steady water flooding and so on. Today, LUKOIL is implementing a special program that assumes the establishment of new Kazakhstani enterprises, manufacturing goods and service for the oil and gas industry in the field of drilling, major repairs of wells, running geological surveys and, specifically, geophysical works.
Yves-Louis Darricarrere, the Executive Vice-President of Total Company and the President of Total Exploration and Production, proposed to establish a National Institute of Welding in Kazakhstan, similar to the French Institute de Soudure. "Kazakhstan lacks highly-qualified welders in the oil and gas industry; this is critical work force welding operations that demands the performance of millions of reliable welded joints within a short period of time". The project will allow the republic improving the certified industrial and technical center that will meet international standards. It will satisfy the needs of oil and gas, chemical, steel, construction, railroad, shipbuilding and energy industries. Such a Center will be independently involved in research and development of modern welding technologies; it will also be able to provide such integrated services as control of welded structures, material compliance tests, education and preparation of human resources. The project will enable Kazakhstan to enter the IIW club (International Institute of Welding) that currently has 54 member states, including Russia and Ukraine.
James Mulva, the Chairman and Chief Executive Officer of ConocoPhillips Company, talked about the conclusions of the research, conducted by his company in 2007. According to him, having the additional state support, Kazakhstan may launch a regional gas supply hub. The project must include the development of pipeline systems and launch of new export routes, expansion of domestic gas consumption, fueled by construction of environment-friendly power stations as well as the construction of new gas storages. The ConocoPhillips representative believes that as a result, Kazakhstan may achieve deeper vertical integration of the oil and gas industry.
Another part of the investor presentation had a recommendation (although quite important) nature. FIC members hit the bull’s eye. According to EBRD President Thomas Mirow, the experience of western countries shows that small and medium enterprises sector was the pioneer in the field of diversification and modernization. Meanwhile, the SME share in Kazakhstan’s GDP steadily goes down. In 2005 it reached 40.5% while in 2007 went down to 35%. Considering the financial crisis, in 2008 SME share dropped to 31.2%.
"The absence of prosperous local medium-size companies means that Kazakhstan does not enjoy all benefits of the large FDI. There is a lack of the necessary number of enterprises that could perform sub-contractor roles and, therefore, create jobs and adopt transferred know-how", Mr. Mirow noted. He also believes that the SME potential can be strengthened by development of infrastructure, reduction of administrative procedures, establishment of an equal rights regime for all companies as well as regulation of registration procedure, based on a "one window" concept.
John Conroy, the head of Baker & McKenzie International, also highlighted this principle as a key to work with foreign investors. "One of the most popular methods, used by the governments to attract new foreign small and medium enterprises, is the establishment of state investment agencies that adopt a "one window" principle. Such bodies assist the potential investors in nearly all their needs both at the investment decision making process and following phases". Mr. Conroy reminded that today Kazakhstan has three agencies, serving the investor needs: KAZNEX, Kazinvest and the Investment Committee under Industry and Trade Ministry. At the same time, most of their functions duplicate each other and their volume is very limited. Besides, none of these bodies operates in full compliance with a "one window" service. In this concern, Mr. Conroy recommended to establish a new single agency in order to support SME investors, not involved in the raw material sector.
Karl Johansson, Ernst & Young CIS Managing Partner, believes it is necessary to revise the priorities in the field of the electronic government and concentrate efforts at demanded projects with high added value. The current e-government program assumes the simultaneous offer of the electronic government service to both corporate clients and individuals. However, in the current conditions and considering financial limits, re-allocation of business-oriented project efforts may produce more rapid and clear results. Moreover, it is necessary to ensure dialogue with representatives of business "to get better understanding of their preferences and expectations from the program and, specifically, provided services, volume of document work, priorities in the launch of certain projects, as well as their adaption level to the requirements in various industries".
Zhao Xiaoyu, the Vice-President of the Asian Development Bank, focused his presentation on infrastructural supply for an industrialization Program. In his opinion, today, large industrial investors demand the expansion of the list of infrastructural services, including electricity, gas, water and information technologies. Therefore, NWF Samruk-Kazyna ministries and companies must have the special foundation for the quickest possible satisfaction of such needs. In order to meet the needs of small and medium investors the government may create special industrial parks with much less investment in infrastructure and subscription of park clients to the utilities system. In addition, the ADB representative proposed to amend the Law on Concession, authorizing the Oblast Akimats to sign contracts on construction and provision of infrastructural services with application of the PPP model. The long term agreements of sale will expand the investor opportunities both on the supply and the demand sides.
All moves are recorded
The last accent of the FIC session became the speech of the President, stating that the major barrier for ensuring the diversification is the fact that the government does not have a clear understanding of technological problems in the sectors of economy along with framed tasks and mechanisms of their solution. As a result, today’s science works for the name of science while the research conclusions are not demanded by Kazakhstani entrepreneurs. The technological issues in the industries are supervised by various ministries. There is no cross-industry coordination of research, state and private companies. This leads to inefficient state purchases, expensive unfinished projects, absence of achievements; this discredits the idea of innovative development in general. The industry-specific state bodies, national companies and research institutes are not competent enough to successfully implement technological tasks. There is no efficient mechanism for practical adoption of scientific developments. The foreign investors also do not put enough efforts into developing technological competence in Kazakhstan.
The President assigned to respond to all these challenges while the government must play a crucial role here. "Bearing in mind that at this moment we are at a new industrialization phase we have a good opportunity to improve the current situation". In order to carry out this function the republic must build a technological development management system, based on the following major elements:
· Planning and setting clear technological tasks, based on important economic needs.
· Mobilization of financial and human resources for the solution of technological tasks, the establishment of appropriate research centers and organizations and the concentration of resources etc.
· The coordination of all parties, involved in the implementation process: research institutes, industrial enterprises and state bodies.
· Constant evaluation and control over the performance of technological tasks and their launch in the economic system.
In this concern, the head of the state assigned a number of tasks to the government and NWF Samruk-Kazyna. Specifically, in the first quarters of 2010 the Ministry of Industry and Trade must carefully prepare and discuss the cooperation vectors with the foreign investors under the implementation of the AIID Program, define certain projects and their parameters. The government has three months to run negotiations and sign technological agreements with foreign investors, related to technological development issues, where it is necessary to define clear conditions of their operations in Kazakhstan.
Moreover, the Cabinet Council has to prepare comprehensible technological tasks on priority sectors in Kazakhstan for 5 and 10 years, unite them in a single national cross-industry technological plan with clear consolidation of phases and resources (institutes, human resources, investments). The last one must become the component part of the RoK socio-economic development Strategy – 2020. The plan needs to be coordinated with the operations of national companies and implementation of technological agreements with foreign investors.
The President instructed to establish a high-level working group with the attendance of industrial Ministers and managers of the Samruk-Kazyna holding. At the same time, Erbol Orynbayev, the deputy Prime-Minister, will coordinate the work of the government in the field of technological policy.
In conclusion, Nursultan Nazarbayev focused the attention of the investors on the opportunities of the created Caspian energy hub that must become the center of the technological potential in the oil and gas industry of the republic through integrating industrial, education, applied science and research facilities in energy sector. He also asked FIC members to support the establishment of a new international university in Astana. According to the Kazakh leader, it will combine educational research and projects in the field of natural sciences, engineering, energy and medicine. There will also be an Industrial council, designedly established under the University for cooperation with real sector of economy. "The members of this board should be represented by current investors, attending this session that would place orders for the needed number of engineering and technical experts, participate in the joint scientific research projects and pilot testing at their own production areas".
Thus, the priorities are set and the tasks are defined. The Council members are ready to promote technological development in their companies. Moreover, this is a matter of their own interest. Perhaps, here is the major stumbling block. Today, FIC has very few members, not representing mineral resource and financial sectors. Such representation of foreign investors characterizes the situation across all the domestic economy.
According to Mr. Isekeshev, today there are about 8000 foreign companies in Kazakhstan. 270 of them are listed in the Fortune Global 500. Most of them are trade missions, branches, subsidiary companies and only 25 are real investors (again in the oil and gas, mining and financial sectors!).
The real discussion of integrated economic diversification will become possible only when FIC members and investors are altered along with the topics in the agenda. It will only be possible when the pool of international companies, concentrating the core business in the processing fields of economy, come to Kazakhstan.