Industrial-Innovation Activity: the Legal Mechanism of State Support
Recently, the Parliament enacted a new law “On state support of industrial-innovation activity”, aimed at creating legal, economic and organizational principles of incentives, as well as the definition the measures of state support for industrial innovation in the Republic of Kazakhstan. With its adoption the domestic industrial innovation system, which has been more or less formed over the past few years and was mainly regulated by various government programs and regulations, has received its final consolidation on the legislative level.
According to the new Law the Industrial-innovative system of Kazakhstan consists of the entities executing state support for industrial innovation activity, as well as industrial and innovation infrastructure and tools.
The following national institutions for development such as the National Agency for Technical Development (former JSC “National Innovation Fund”), JSC “Kazakhstan Institute of Industry Development”, JSC “National Agency for Export and Investment “KAZNEX INVEST” and JSC “Kazcontract” were defined in the Act as entities executing state support for industrial innovation (hereafter – IIA). We believe that such consolidation of the status at legislative level should have a positive impact on the activities of these institutions and allow them to consistently and effectively implement assigned tasks without looking back and risk of possible reorganizations and abolitions.
As for the industrial and innovation infrastructure, almost all of its elements, existing today, found its reflection in the Law: free economic zones, industrial parks, investment funds, design offices, etc. As a relatively new element, the international centres of technology transfer can be noted. They will be created to assist in implementation of projects executed by entities of IIA, together with foreign partners. Earlier in the National Innovation Fund the Centre for Engineering and Technology Transfer operated, seemingly, these international centres will be created on its base.
As the tools of industrial and innovation system the Act assigns technological forecasting and integrated map of priority goods and services, a map of industrialization, as well as assessment of efficiency of implementation of measures of state support for industrial innovation.
Furthermore, it should be noted that the Government of the RoK will be formed new advisory bodies – the Coordinating Council for accelerated industrial-innovative development and the Council for Technology Policy. The status and positions of those bodies will be approved by the Government. Certainly their compositions will include foreign experts, scientists and public members.
Perhaps, the key element of the Act is measures of state support for entities of industrial innovation described therein. They cover:
·submission of warranty policies and securities for loan;
·subsidizing rate of remuneration on loans granted by financial institutions, and coupon interest on the bonds;
·providing engineering and communication infrastructure;
·Development and marketing of export of domestic processed goods and services.
It must be recognized that most of these measures are not new, and have been used in some or other way in various policy documents and laws.
For example, the financing, including co-financing and lease financing of IIA entities in the medium and long term will be executed by the Development Bank of Kazakhstan and other national development institutions determined by the government, as defined by law. Note that until now, the funding of investment projects and decision making on the implementation of leasing activity by the Development Bank of Kazakhstan was carried out under the conditions and in the manner and terms defined in the Memorandum of credit policy of the Development Bank of Kazakhstan approved by the national managing holding. Now, conditions and facilities will be determined by the government, which will also determine the financial agents engaged in the provision of warranty policies and securities for loans of second-tier banks granted to the IIA entities, as well as the conditions and mechanisms for provision of the warranty policies.
At the same time, the Act sets a deadline for lease financing of IIA entities, which shall not exceed ten years.
A measure of state support provided in the Act in the form of investments in the authorized capitals of the industrial innovation activity entities will allow to share the risks of business with the state, to apply the so-called Public Private Partnership (PPP) mechanism. Moreover, the capital of the entities may include both development institutions (as did the Kazakhstan Investment Fund) and local executive bodies, subject to compliance of the project with the certain criteria.
In our opinion, an important novelty of the law is such a measure as a guaranteed order. National holdings and companies will place a guaranteed order among domestic entities for the supply of goods, works and services. However, this measure should not contradict the international obligations of the Republic of Kazakhstan in the framework of economic integration within the Customs Union and the forthcoming accession to the WTO.
Also its sound reason as a measure of state support has found a budgetary funding of construction (reconstruction) of engineering and communication infrastructure.
Investors should be particularly interested in the such measure of state support as the provision of land and subsoil use rights to the entities of industrial innovation activity, which is carried out through: 1) the allocation of land under the right for temporary land use in accordance with the Land Code of the RoK; 2) granting subsoil right to carry out operations on exploration, production, combined exploration and mining, related to the industrial activities, without tendering process, on the basis of direct negotiations in accordance with the Act of the RoK “On Subsoil and Subsoil Use”.
Corresponding amendments to the Land Code and the Act “On Subsoil and Subsoil Use” are already provided in the auxiliary law. Thus, local authorities will be empowered to provide land, construction of engineering and transport communications, while the implementation of the function of granting subsoil use rights will be assigned to the Ministry of Oil and Gas, the Committee for Geology of the Ministry of Industry and New Technologies and local authorities. An additional requirement for such entities of IIA, besides those provided in the Law “On Subsoil and Subsoil Use”, will be the availability of industrial, including technological programme containing information about the technologies proposed for use.
The Act also provides for the provision of service support for entities of industrial-innovative activities to promote domestic manufactured goods, works and services in the domestic market. It will be implemented through: 1) free registration of legal entities and individuals in the database of products, works and services and their providers; 2) placement of information about potential customers, domestic producers and providers of works and services on the web-site of the National Institute of the Development in local content. Today, these measures are already being implemented – a database works on the site www.ks.gov.kz. However, the Act assumes an approval of regulated procedures for establishing and maintaining of database of products, works, services andproviders by the Government.
Perhaps, there is a very interesting measure of state support such as partial reimbursement of expenses of the entities of industrial and innovation activity (costs of services of consulting organizations involved in the development or review of a comprehensive plan of industrial-innovative project and the costs of promotion of domestic processed goods, works and services in the domestic market). Within the framework of this measure, the adoption of the new Act by the Government of the RoK – Rules of partial reimbursement of expenses of IIA entities on promotion of domestic processed goods, works and services in the domestic market is provided. This measure (as well as a guaranteed order) should be considered as a state measure that is established in order to protect domestic producers. During its introduction the international obligations of Kazakhstan should be taken into account , since, from the perspective of importers, these actions would be perceived as government “subsidies”.
As already mentioned, together with the Act was passed an auxiliary legislative act, which amends the following laws:
·Land Code. As related to the update of the competence of local executive bodies in the form of right to provide land for projects of IIA entities.
·Tax code. Among other things, in reduce of the size of the taxpayer's taxable income through the adjustment for 50 % of the amount of accrued expenses spent on research, scientific-technical and development works. In this case the right to receive such an adjustment will be acquired only if there is a protection document for industrial property, issued by the authorized government body in the field of intellectual property protection, as well as in the case of introduction of the result of specified works in the territory of the Republic of Kazakhstan. Meanwhile, the list of works attributed to the research, scientific-technical and (or) development works, the procedure of confirmation of introduction of their result in the territory of Kazakhstan, as well as a form of resolution and the procedure of its issuance will be affirmed by the Government of the RoK. In addition, the Act provides benefits for land tax and property tax for legal entities implementing investment strategic project specified in the List of Investment strategic projects approved by the Government under a contract entered in accordance with the legislation on investment of the RoK.
·The Act “On Investment”. With regard to the providing benefits for land tax and property tax for legal entities implementing investment strategic projects as well as commercial benefits for legal entities implementing investment strategic projects in localities with the low socio-economic development.
·The Act “On local government and self-government in the Republic of Kazakhstan”. As related to the exclusion of making decisions that impede the realization of industrial and innovation policies in the regions.
·The Act “On Joint Stock Companies”. With regard to the placement of state-guaranteed order by the companies of quasi-public sector.
·The Act “On subsoil and subsoil use”. In granting right of subsoil use to the IIA entities on the basis of direct negotiations, as well as deduction of expenses of subsoil users, which would be required to allocate at least 1 % of the total annual income to fund research, scientific-technical and development work.
·Other legislations related to issues of local content, including Acts “On Public Procurement”, “On Concessions”, “On the National Welfare Fund”, “On Subsoil and Subsoil Use”, “On the regulation of trading activities”, “On local state administration and self-government in the Republic of Kazakhstan”.
In general, after analysis of the provisions of the Law, we have come to the conclusion that it is the result of already proven in practice state support measures that were included in various program documents and regulatory legal acts and applied in practice and who have now found a stable, distinct reflection in the provisions of the Act. And if the laws are often adopted first, and then being approved in law enforcement and corrected, then with this Act there was all the opposite. Since it was preceded first by the Strategy of industrial-innovative development, and then State program of forced industrial-innovative development. In the course of their implementation has already been formed tools, infrastructure, and the entities of industrial-innovative development, and also used various measures of state support. Therefore, we do not consider this Act as something crucially new. Its main task is to systematize and consolidate all that already contained in the rules of general effect.