Factors of Modernization are Identified and Agreed
The 24th Plenary Session of the Foreign Investors’ Council (FIC) chaired by the President of the Republic of Kazakhstan was held on the 18th of May in Nazarbayev University, Astana. The problems of the forced modernization of Kazakhstan industry were in the center of discussion. Foreign FIC members have determined main barriers and presented their recommendations for their successful implementation, and Kazakhstan Leader applied to them with the proposal to become the “drivers” of this process.
Modernization and renovation of enterprises has been determined by the President as the agenda for the regular meeting with the investors as early as June 2010. During the 23rd Session of the Council the President has charged the government to conduct detailed audit of the efficiency of renovation of all large-scale enterprises basic production assets in the country, and on the basis of its results to start forced modernization of such assets. In addition to the aforesaid the Head of State demanded from the government to develop in cooperation with the investors and industrial associations the legal and economic instruments to encourage companies to accelerate their renovation.
Government Activity Report has been presented by Aset Issekeshev, the Deputy Prime Minister, the Minister of Industry and Innovative Technologies. Thus he declares that during the period from the previous FIC Session the Government in cooperation with the National Economic Chamber “Atameken” and World Bank technical support has carried out technology audit of 200 industrial companies. From audit results it has been revealed that the main problems of the audited enterprises are: wear of the basic assets, equipment in particular; underdevelopment of administrative and marketing technologies; limited access to financial resources; lack of qualified staff meeting the new technological requirements.
In this regard all industrial enterprises have been split into three groups from the point of view of their readiness for modernization. The first group is composed by the companies with perspectives for development and ready for modernization (20 % of large- and middle-scale companies). The second group includes companies with certain potential for development but owing the economic crisis currently experiencing difficulties with repayment and servicing of loans and bonded debts and therefore requiring financial recovery. And the third group is formed by the enterprises to be subject to bankruptcy proceedings.
According to Mr. Issekeshev most of the audited companies fall into the second category. The special Working Group under the supervision of the Prime Minister has been established and the Program for Post-Crisis Restoration (Recovery) for Large- and Middle-Scale Enterprises making provisions for interest rate subsidies and tax preferences, as well as assistance in search of strategic investors, provision of the guaranteed order and other measures has been adopted.
In the future the Government of Kazakhstan intends to carry on modernization activities in three main areas according to the size and scale of the companies.
The first area includes work with the strategic enterprises. This group consists mainly of energy, oil-refining and mining companies, of which 42 companies have undergone technology audit. They are characterized by the highest depreciation and physical deterioration of fixed assets, relatively low effectiveness and high energy intensity of production. By the end of 2011 the Government plans to develop comprehensive programs for modernization of the strategic companies, which shall place heavy demands on such criteria as increase in productivity and energy efficiency, environmental protection, development of processing depth and financing of Kazakhstan science.
The second area is the interaction with the medium-scale enterprises. In general, they represent engineering, chemical, pharmaceutical, light and food industries. Such companies have somewhat different problems, so the approaches to them will be different as well. In particular, the program "Productivity-2020" provides for the reimbursement of costs for attraction of highly qualified professionals, as well as the introduction of modern management techniques such as Lean, "Sigma 6" and others, in order to help such companies to optimize their production processes. To support technological re-equipment reimbursement of expenses for the purchase of new technologies (through innovation grants) and the involvement of design and engineering companies in selection, purchase, installation and start-up of production and processing facilities shall be reimbursed.
According to the Minister of Industry and Innovative Technologies, at least 50 large and medium-scale companies will get state support for the modernization this year.
The third area is the support to small businesses. The program "Business Road Map 2020" provides support for their new business initiatives aimed at modernization and expansion of production. Rates of remuneration for more than 230 projects with a total value of loans of $ 300 million are currently approved for subsidization. Construction of missing infrastructure for 130 companies will be financed by the state. Along with the financial support certain measure are currently taken to strengthen the entrepreneurial potential through the formation of modern and innovative business models.
In general, of all projects carried out today under the maps of industrialization, 68 projects with total investments amounting to $12 billion and creation of 84 thousand jobs are oriented at modernization of production.
The Minister of Industry and Innovative Technologies declares that the Government has developed and currently implements the programs of modernization, which are actively supported by "Samruk-Kazyna", national companies, "KazAgro", Development Bank of Kazakhstan. Besides they work in close cooperation with the World Bank, EBRD and ADB. Now it is important to involve large foreign investors and mining companies in the process of modernization of medium and large enterprises. According to Mr. Issekeshev, it can be achieved at the level of inter-sector cooperation through placement of the long-term order at the domestic market, provision of raw materials for processing by domestic enterprises, as well as support in improvement of product quality, technology transfer, purchase of technical documentation, certificates, licenses, etc. In this regard, the Government plans to "implement loyal policy of cooperation between major foreign companies and Kazakhstan small and medium business entities, abandoning the system of purchase of poor quality products."
To support the modernization of management, Mr. Isekeshev has proposed the following measures:
· each company represented in the Council shall send to newly organized branch Centers of Productivity and Innovation its specialists in planning, quality management, supply chain and lean manufacturing;
· system of cross-training of technicians shall be established.
As for the foreign members of the FIC, they also advanced a number of initiatives. The Head of State was presented the report of the ACFIC working group prepared with the participation of "Kazakhstan Institute for Industry Development" with 20 specific recommendations, which are critical to fully modernize the industry in Kazakhstan. Most of them were announced in the comments of foreign investors.
The overall tone of the speeches has been set by the President of the European Bank for Reconstruction and Development, Thomas Mirow, who among other factors that are crucial for successful modernization, highlighted access to finance and development of human capital, as well as introduction of the best management practices, and the application of critical technologies. In his view, it will be crucial to put the huge revenues the country can expect in the next years to best possible use. «Upgrading physical capital and technologies is of the utmost importance, but efforts should also focus on improving management skills, overall education and human capital and creating a strong and diverse financial system», – he summed up.
The separate block of comments made by FIC foreign members are dedicated to modernization of production, innovation, financial and educational infrastructure. And this is understandable. Multinational industrial companies, especially those that do not work in the oil sector, may experience serious difficulties in the implementation of new or expansion of ongoing investment projects without the basic guarantees of receiving regular and reliable services in infrastructure, they are accustomed to when working in other countries.
As it has been noted by the Vice-President of Asian Development Bank, Ms. Lakshmi Venkatachalam, in Kazakhstan, investment in industrial development is mostly concentrated in urban or peri-urban population centers where aging soviet-era infrastructure is often not capable of providing adequate service levels even to meet the current needs. In this regard, in her opinion, the government should focus on the following issues.
First, the growing power shortage can be solved through energy efficiency technology, power sector smart meters and loss management.
Second, the already overloaded power supply system in Kazakhstan is highly dependent on coal-fired power plants built during the Soviet era, many of which are located in close proximity to major population centers. High levels of NOx and SOx emissions from these power stations need to be reduced by urgently needed modernizations to introduce “clean coal” technology. Over time, natural gas and renewable energy needs to play a greater role in this sector.
Third, Kazakhstan should join the global process of rapid development water treatment and sanitation technology continues to experience major advances around the world, bringing about cost reductions and expansion of services. And the fourth recommendation is connected with the fact that since in the economy of our country foreign trade has accounted in recent years for most of the country's GDP, and Kazakhstan has a great opportunity to benefit from the introduction of new technologies in shipment and logistics to the country.
In this case, Ms. Venkatachalam says that all over the world, governments are turning to private infrastructure investors as a key means to upgrade technology, particularly in sectors which are experiencing major research advances in efficiency and cost reduction. Competing for the attention of the world’s leading infrastructure investors requires that Kazakhstan better evidences its capacity to implement efficient tendering processes along with short and efficient negotiation periods which are in line with the best international standards. Experience from other Asian countries indicates that this positive image can only be achieved with strong direction and coordination from the very top levels of the government.
John Ferraro, Global Chief Operating Officer of "Ernst & Young", recommends more active use of public private partnerships to facilitate this infrastructure development. This will not only help attract private sector investment, but will help Kazakhstan gain advantage from private sector efficiency and know-how. The government needs to further improve the regulatory regime, define the optimal risk allocation between public and private sectors, as well as offer forms of state support.
According to Mr. Ferrara, additional financing may be provided through creating an infrastructure fund with foreign investors and government to provide additional equity investment for infrastructure projects to motivate private investors and commercial banks to participate in PPP projects. However, when allocating state funds to sponsor these initiatives it is important to further develop the project evaluation criteria and techniques as well as continuously monitor these projects and assess implementation results.
Informatization as a factor
Koen Vanhaerents, a member of Executive Committee Baker and McKenzie International is sure that the modernization of the enterprises in Kazakhstan requires a lot more than just importing the latest equipment and advanced technologies from Germany, Japan or the United States. This process must be supported by a strong economy based on the information technology in which conditions the enterprises and citizens of Kazakhstan shall have an access to the best information resources.
In connection with this Mr. Vanhaerents recommended to make some changes in the state program aimed for the development of the information and communication technologies that make provision for an increase of Internet broadband subscribers’ density up to 24.2 per 100 people by 2014 which is an average index in the OECD countries. In order to achieve that Kazakhstan should promptly make certain changes in the legislation.
Among the offers of “Baker and McKenzie International” we can note the following measures that the government should take:
· all new buildings which size exceeds the set parameters must be built in such a way so as to provide access to broadband Internet;
· establish certain target indicators for the national communications services provider on the part of speed and access to Internet, as well as the requirement to all Internet providers to submit their broadband development programs to the appropriate state licensing authority;
· require all banks to ensure the provision of the payment accepting services over the Internet;
· release the Internet services from the VAT;
· provide tax rebates for the construction of new facilities intended for the expansion of the access to Internet;
· require the public facilities (including the higher education institutions, hotels, railroad stations and airports) to provide the population with a free access to the broadband Internet.
Michael Borrell, a Senior Vice President of the “Total” company in the Continental Europe and Central Asia told about the tax credit mechanisms that are practiced in France for the purpose of promoting the scientific research and development activities (SRDA).Despite the fact that the innovations is a much broader concept than the expenses on SRDA as they are, nevertheless, the international studies bring to a general conclusion that the main source of innovations is the exploratory development conducted within private companies. The government’s task is in supporting the private initiative.
In connection with this the French tax regulations stipulates the provision of a tax credit equal to 30 % of the expenses on the SRDA transactions in amount of up to 100 million Euros, annually. Above this ceiling the credit is limited to 5 %. The corporate income tax to which the French companies with such expenses are subject can be compensated with the tax credit for the SRDA. Any excessive credit can be moved to 3 years or paid in cash depending on certain conditions. Thanks to such tax motive the today’s large and small French companies successfully carry out the SRDA and other “risky” research works. Besides, the presence of tax credit mechanism makes France an attractive place for the creation of the SRDA centers by the foreign organizations.
According to Mr. Borrell such method can help influence the development of the innovative technologies and our country as well. For instance, it is possible to provide the tax rebates through the royalty and other means for the tax residents of Kazakhstan or enterprises with the participation of foreign companies that either develop the technologies within the country or import it. Another instrument can be the income tax credit, release from the payment of the CIT and VAT.
The Executive Director of the “Royal Dutch Shell” Matthias Bichsel reported a successful completion of the oil and gas industry technological development Contour plan development which was initiated by this oil company. The final report submitted to the government gives a comprehensive definition to the Priority areas of the technological development which include the construction of the geologic field model, field equipment, formation fluid processing, improvement of the production wells’ efficiency, industrial safety, and environment protection. According to the words of Mr. Bichsel a significant part of the set priority areas and needs are not new for the oil-and-gas sector, and people work on their solution in many other countries of the world. However, in Kazakhstan the combination of the technological complexities for certain fields is unique – “arctic conditions, unusually high pressure and high-sulfur gas. This means that when focusing on the development of certain solution at a local level by the specific technological complexities there is an opportunity to help the Kazakhstani companies gain a unique experience in these areas which shall give them the advantages before their competitors at the world market.
As the next step the “Royal Dutch Shell” representative has offered to develop a Road map for improving the local scientific and research potential. This shall ensure the coordination of the realized programs at the national level and allow for focusing on the cooperation with the oil-and-gas enterprises in the question of solving certain technological complexities. “We think that the best results can be achieved if this work shall be coordinated by a specially assigned Technological council which shall unite the representatives of the oil-and-gas industry and government”, – he outlined.
By summarizing the session the Head of Kazakhstan thanked the foreign members of the FIC for the meaningful speeches and valuable recommendations and promised that all of them shall be considered. In turn he brought everybody’s attention to the fact that the FIID program initiated last year has already started to pay off. “In 2010 152 projects of the Industrial development Map put into operation on the amount of over 800 billion tenge and creating 23 thousand permanent work places. This year we are planning to start about 200 new projects”.
Real shifts towards the non-primary economy sector development are observed. According to the results of 2010 the processing industry increased by 18 %, and its products export exceeded 67 % which is by 6.1 % more than in 2009. At that the labor capacity in this sector is creased by 1.5 times over the past year from $29,500 to over $44,000 per each employee. New unique productions and work places are created. Nursultan Nazarbayev brought everyone’s attention to the fact that the largest projects are implemented with a direct participation and financing of the foreign investors – members of the FIC.
At the same time this is only a beginning of the path towards the creation of a competitive country: “We have set ambitious strategic goals before us, identified the field of activity, and understood the problems”. And now, according to the President’s opinion, the government and investors together need to proceed to the solution of the following clear tasks:
First task. The large enterprises, national companies and users of the subsurface resources are the locomotive of the modernization program, and therefore the foreign investors must become the drivers for this process and then “you will be followed by the domestic companies”. At the same time he noted that the Kazakhstani content development policy is an important element of the economy’s modernization. “By following your requirements to the quality of the goods, work and services the domestic companies master the technology that is new for Kazakhstan and implement the modern management”. Alongside with that the President stated that such efficient modernization mechanism is yet not fully used. He supported his conclusion by particular digits: the share of the Kazakhstani content today is only 11.5 % for the users of the subsurface resources, 31 % for the strategic companies, and 38 % for the “Samruk-Kazyna” Fund group. Only 14 companies have completely performed their KC obligations in the oil-and-gas industry last year. For the other 130 companies the average performance rate does not exceed 25 %. In this regards Nursultan Nazarbayev asked the foreign investors to engage in the work on industrialization carried out by the government and make the necessary corrections in their plans for involving the Kazakhstani companies.
The energy efficiency is the next painful point that the Head of Kazakhstan named for almost all large companies of the country. “The mining and smelting production sector alone consumes more than a half of the power produced in the country. In the same metallurgy sector the companies’ power consumption is 1.5 and more times higher than in the leading global smelting companies and the labor capacity at all processing stages is lower by 1.5–2 times. The share of the material expenses in the products’ prime cost reaches up to 70 %. The companies’ generating capacity is characterized by a high deterioration level – the equipment at many of such companies has worked for 30 or more years”. And that is when the new projects introduced within the FIID shall require even more power and development of the energy infrastructure. In this regards he instructed the government to work out the systemic measures for obligatory implementation of the advanced power-saving technology and decrease the product’s power consumption at the country’s companies.
Second task. By the President’s opinion the modernization vanguard shall comprise the medium and small companies which effectively use the available resources and opportunities, strive for the renewal and leadership. For their purpose there was established a program “Productivity-2020” aimed for the solution of certain tasks on improving the managerial technology and technical re-equipment of the existing and new plants. Nursultan Nazarbayev has offered the foreign investors to actively facilitate this program and work out their support tools, share their opinions and experience in such matter in the FIC work groups. “it can be not only the financial assistance. It is necessary to develop a mechanism of involving your Kazakhstani partners and suppliers to participate in the program together with the National Agency of Technologic development”. The government in turn must stimulate this process, ensure a wide coverage, and develop clear regulations and good incentives. Such mutual work of the government authorities and investors should “sparkle the Kazakhstani society and business”.
Third task. The modernization is impossible without an intellectual basis and therefore its success shall first of all depend on the whole staff of the company starting from the management to each individual worker. The modernization is done by the staff and in elation to this the training and retraining process, employment and creation of the required social conditions require constant improvement. First of all, this concerns the engineering education. “I visit all your training locations established in the Western Kazakhstan, in the center and in the east of the country. I am very pleased by them. The highly qualified employees study engineering specialties there. However, we should not forget the top-management of the companies”, – outlined the Head of Kazakhstan. Within this task he ordered the government together with the foreign investors to submit specific offers regarding the matters of modernizing the education and personnel.
Fourth task. The basis for the modernizationis the innovations. The Nazarbayev University which shall become a world-class scientific center and source of pilot projects of the “future innovations” has been opened in Kazakhstan as a basis for the development of an efficient innovative economy. The second component of the system is the Park of information technology “Alatau” in Almaty which was transformed into the Park of innovative technology. It shall become a center of generation and practical implementation of the innovations. The Head of the country got the implementation of the strategic tasks of both innovative centers under control by taking the lead in their School boards.“I invite the foreign investors to become partners in their development, to be actively involved not only in the University’s endowment-fund but in their coordination centers as well”.
In his speech Nursultan Nazarbayev particularly noted the “Shell” company which provided the government with a significant support in the development of the Contour plan of the Kazakhstan’s oil-and-gas industry technological development. Similarly to this he ordered the government together with the foreign investors to refine the inter-industry science and technology development plan for other priority branches of the economy. Besides, the government and large enterprises should return to the question of making the technology and innovation agreements. “I am sure that the foreign investors have specific practices. Let us implement them together”.
Summarizing, the Head of the government has identified the subject for the next FIC session. Kazakhstan is aimed for the regional and global competitiveness and sequentially performs its work in the integration process. “In this relation I have set a task for the government to ensure Kazakhstan in becoming a global trade, logistics and business hub. We develop the transition potential; simplify the movement of the labor force and cargoes; create logistics and transport infrastructure. We implement such new projects as the road “Western China – Western Europe”, develop the business and financial center – the city of Almaty, and reclaim the tourism and service industry. The main motto of the work performed shall become “Kazakhstan is a country where you can live and work!”
Considering the set tasks, Nursultan Nazarbayev has offered to discuss the questions of creating an international hub in Kazakhstan as a trade, logistics, business and financial center at the next FIC session which shall take place in Astana on May 22nd 2012, before the V Astana Economic Forum.