Investors and the State: to Revive the Silk Road
The 25th plenary session of the Foreign Investors’ Council chaired by the President of the Republic of Kazakhstan that took place on May 22 in Astana addressed the development of Kazakhstan as an international trade, logistics, business and financial hub. In his speech at the event, the President had urged the transnational corporations to actively participate in the New Silk Road megaproject, and in response the foreign investors presented their vision of the given initiative.
The above topic for the anniversary meeting of the FIC was not chosen by chance. Indeed, today Kazakhstan has this unique opportunity to become both a business hub in the Eurasian region and a transcontinental economic bridge between the economic systems of Europe and the Asia-Pacific region.
Firstly, our country has a favorable geographical location: The transcontinental routes such as North-South, West-East, South-East Asia – Central Asia region go through Kazakhstan. Located in the heart of Eurasia, we are able to connect the markets of China, Europe, Russia, the CIS, and the Persian Gulf states.
Secondly, the continued growth of freight traffic between the EU and China will add to that. The annual volume of trade between them already exceeds $500 billion with average annual growth of 8%. With this, the transit route from China to Europe via Kazakhstan has a distinct advantage: it is comparatively shorter than the route by sea through the Suez Canal.As a result, we expect that by 2020 the trade operations between the countries neighboring to Kazakhstan will increase by 1.5 times to $1 trillion.
Thirdly, the above is Kazakhstan's integration policy, which provides direct access to the markets of the Customs Union. At the FIC meeting, Nursultan Nazarbayev told the investors that the Single Economic Space will start operating at its full pace in July 2012, while by the year 2015 the SES members will approach the creation of the Eurasian Economic Union. According to him, all this will contribute to free movement of capital, goods and human resources.
The other important factors that are seen to add to raising international capital into the development of Kazakhstan’s hub are a favorable investment climate and the political and economic stability of the republic.
In this regard, the President resorted to the FIC members with a proposal to launch a joint large-scale project "New Silk Road". "Kazakhstan will have to reinstate its historical role and become the largest business and transit hub in the Central Asian region, a "bridge" between Europe and Asia. As a result of implementation of this megaproject, by 2020 the freight transit through Kazakhstan is likely to increase almost twice with the further increase of to 50 million tons, as the minimum."
The President believes that to implement this large project, it is necessary to combine efforts to create integrated international hubs at the key transport corridors of Kazakhstan – a trade and logistics hub, financial and business hub, innovation and technology hub, and tourism hub. As a result of their territorial and functional connectivity, a synergistic effect is expected to emerge which will implement the Four “S” Principle – Speed, Service, Safety, and Stability. This exactly is seen as the main source of competitive advantage of the New Silk Road.
According to Mr. Nazarbayev, the core element of the New Silk Road, the transportation and logistics hub, will be developed on the basis of the following projects and directions:
First, a national multi-modal transportation and logistics company of world class is already being set up on the basis of Kazakhstan Temir Zholy JSC. Its goal is to create a system of multi-modal traffic and high speed corridors for delivery "from door to door". This will provide the technological interaction between all modes of transport.
Second, Kazakhstan is actively developing its "eastern gates", the International Center for Boundary Cooperation Khorgos on the border with China. According to the Minister of Economic Development and Trade, Bakytzhan Sagintayev, ongoing construction of a multi-functional logistics hub of A Class is already in progress, which will involve cargo handling terminals that will perform also commercial and production functions, to service the container freight turnover. To create an industrial and logistics hub at Khorgos, Kazakhstan engaged international advisers – Deloitte and AECOM. The projects to expand the seaport of Aktau and to build a logistics center in the city of Aktobe will be implemented in the west of the republic. They will become the "Western Gate" of the country, giving access to the borders of the Caspian states, Russia and further to Europe.
Third, the creation of the transcontinental corridor Western Europe – Western China is going at its full pace. The project with a deadline of 2015 will help to reduce by almost 3.5 times the time of delivery of cargo from China to Europe by land transport, compared to the routes by sea.
Fourth, work will continue to increase the carrying capacity of the national rail network. In addition to the already built railways Uzen – Turkmenistan – Iran – Persian Gulf and Korgas – Zhetygen – the second railway border corssing to the Caspian Sea, this year Kazakhstan will launch projects of construction of the Zhezkazgan – Beineu and Arkalyk – Shubarkol railways with total length of 1,200 km.
Fifth, multi-functional logistics centers and warehousing centers of A Class will be built along the entire route from China to Russia, namely in the FEZ Khorgos – Eastern Gate, in Almaty, Aktau and Aktobe. This will add to expanding the potential of Kazakhstan's contract logistics market, which, by estimate of the Ministry of Economy, will reach $800 million in 2015.
President Nazarbayev believes that the development of those business activities and the service sector focused on foreign nationals in Almaty will to the full extent provide the conditions for creation of the tourist hub. With this, the greater portion of investment will be directed for development of ski resorts for winter recreation activities and of the Kapshagai beach for summer recreation. The territory of the Lakes Balkhash and Alakol, located in relative proximity, has also great potential for the region. Along with that, the development of an oilfield services cluster and infrastructure of the seaport of Aktau in western Kazakhstan will give impetus to the construction of nearby sea resort area Kenderli. At present, to provide comprehensive support to tourism, the Ministry for Foreign Affairs is considering the elimination of visas for citizens of 34 countries.
Concerning the international innovation and technology hub, Kazakhstan has plans to set it up before 2020 on the basis of the already operating free economic zone "Park of Innovative Technologies." There are 120 innovative enterprises having registered on its territory to date; moreover, national companies are planning to place their research units there. "We will continue to invest in the development of world class infrastructure and will apply extra benefits and guarantees, in particular, through placement of a state order for carrying out R&D", – the President promised.
A key role in the New Silk Road project is given to Almaty; the latter, in the opinion of Nursultan Nazarbayev, will have to become the republican leader in implementation of the "technologies of the future", in safety, environmental friendliness and convenience for foreign nationals.
Thus, the principle of "one-stop shop" for foreign businessmen and investors will be introduced in Almaty. "We will provide a comprehensive package of services on a simplified basis – starting with obtaining visas and various permits, contacts with government agencies, and ending with the registration of companies. Using Almaty as the pattern, such large-scale transformations will have to be implemented throughout the country, in every city." The southern capital, in partnership with the stock exchanges in Asia and Europe, is planning to establish an international commodity exchange, which will service all freight traffic going through Kazakhstan. The increase in trade operations and freight turnover should give impetus to the development of the Regional Financial Center of Almaty.
Having presented his vision, the President then gave an order to the government to work together with members of the Foreign Investors Council to discuss the above directions and before the end of the current year to develop a comprehensive plan of action on implementation of the New Silk Road project.
Recommendations from the Investors
In their turn, the foreign members of the FIC presented a number of practical observations and recommendations on every direction of the Kazakhstan’s project.
In particular, the Vice President of the Asian Development Bank, Ms. Lakshmi Venkatachalam, put emphasis on the importance of Kazakhstan’s role in building an important multi-modal transport corridor through the Caspian Sea and South Caucasus connecting China with Southern European, the Middle Eastern and North African markets. Such an undertaking would require concerted collaboration, not only among government partners – China, Turkey, Azerbaijan and Georgia – but more importantly among private sector counterparts who are in the best position to be able to integrate key transportation modes along the corridor. Building the transport corridor would require not only attracting major infrastructure investments but also eliminating often softer bottlenecks to ensure the involvement of the private sector. According to Ms. Venkatachalam, the government of Kazakhstan and the National Company Kazakhstan Temir Zholy should closely interact with the companies which have extensive expertise and good reputation in the area of "logistics integration". "Moreover, world class logistics companies should be given the opportunity to manage and market entire block trains in Kazakhstan and not just individual wagons. A good example of this is the APL-run IndaLinx express container train which connects gateway Indian ports with major north Indian Industrial Centers". Finally, according to the ADB representative, "the right to control and / or concession Aktau sea port to pass to a world famous international operator, who could bring to the corridor of major customers". In this regard, she referred to the experience of the Black Sea port of Poti in Georgia (another important site of the corridor), which is now owned by a well-proven port operator.
For the other part, Chairman of the Board of Directors at JP Morgan Chase International Dr. Jacob Frenkel proposed to Kazakhstan to consider the possibility of establishing a specialized organization for infrastructure development, which will deal solely with projects in this area, from initial planning through to completion. In his opinion, through combining the intellectual and financial resources within one organization that has adequate experience in implementation of infrastructure projects at all stages, the government could achieve maximum efficiency in their implementation. Such a "national champion in the field of infrastructure" would be the only contractor to the government, investors and end-users, in charge of the achievement of social and economic goals.
The shareholder of Eurasian Natural Resources Corporation (ENRC) Alexander Mashkevich drew attention to the fact that under the Forced Industrial and Innovative Development program the industrial enterprises in the country invest heavily in expanding the production facilities, increasing the range of manufactured products, diversification of business, raising export potential, and entering new markets. In this context, the priority requirement is the rapid development of the transport and logistics sector in a way so that it will not constrain the growth of industry and national economy as a whole. To do this, Kazakhstan should be integrated into the international transport system and ensure the integrity of the entire production and supply chain.
In the opinion of Mr. Mashkevich, the fact that Kazakhstan is a landlocked country is compensated by the country’s geographical proximity to China. Therefore, the development of transport facilities between Kazakhstan and China is of great strategic importance. In particular, in 2011 ENRC exported to China some 5 million tons of iron ore. Taking into account the measures to increase the throughput capacity of the border terminals and the solving by the Chinese side of the issue to provide empty wagons for transshipment, ENRC will soon be ready to increase by double the supply of this raw material to China. In this regard, the company asked to maximize the efforts of Kazakhstan’s Temir Zholy to eliminate physical and non-physical barriers to increase freight traffic. Among the major measures Mr. Mashkevich called on the modernization of dispatcher control systems and introduction of an innovative system of interval traffic control of the trains, enabling to increase the throughput capacity of the sites almost twice. Among them, he also listed the implementation of the Dostyk – Green Corridor project and the organization of shuttle trains departing for China according to fixed time-tables.
Chief Operating Officer of the Metro Cash & Carry Company, Jeroen de Groot, listed the transport-and-logistics and administrative barriers that are currently impeding the development of a national network of wholesale trade. The first one is the irregular adequacy of the road infrastructure. Taking into consideration development of the Customs Union, he drew attention to the required improvements to the North-South highway (Yekaterinburg – Almaty), which is often closed in winter time. He believes that a “big challenge is also the non-availability of class A warehouses, as well as the lack of warehouse managing companies. Unfortunately, these services are often concentrated in the big cities, in particular in Almaty”. In his opinion, this service niche should be marked by the government as a priority activity with the provision of benefits and preferences, or it should be included into the Forced Industrial and Innovative Development Program. He told that the same preferences and state support should be made available for the transportation vehicle sphere, where there is still a lack of adequate resources.
In his turn, John Ferraro, Chief Operating Officer at Ernst and Young, told that apart from rail and road transit potential, Kazakhstan has a unique position as a regional node for air passenger and cargo transit. However, the challenge to preserve a competitive position and attract more investment would require solving a number of issues. The first is – the cost-effectiveness and availability of fuel. To solve this the representative of Ernst and Young encouraged the Government to consider investing in the production of jet fuel. The second issue – the quality of infrastructure and air transport, logistics and warehousing, as well as ground handling and customs services. It can be solved with the help of companies that have relevant experience in airport management and are able to attract investment to improve infrastructure and training of qualified personnel. The third task is to develop effective mechanisms for compliance with the Civil Aviation program, designed to comply with international safety standards.
Cohen Vanharents, a member of the Executive Committee at Baker & McKenzie International, proceeded on the issue raised by Mr. Ferraro. He proposed to make Kazakhstan the center of the Customs Union for warehousing of imported goods. According to him, in the Customs Union member countries the warehousing of goods on the territory of one of the states before selling the goods in the local market is still poorly developed. This is due to the fact that local laws deter many foreign manufacturers that have no presence in the Customs Union. For example, a foreign manufacturer who wants to store goods in Kazakhstan before they are sold is considered to have a "permanent establishment" under local law. When the manufacturer then wishes to take the goods out of the warehouse and sell them to a local customer, it must pay 20% corporate income tax on the sale price, as well as 15% net income tax. As a result, the foreign manufacturers prefer to sell the goods directly from abroad and, therefore, they do not pay taxes in Kazakhstan at all. According to Mr. Vanharents, by making simple changes to its legislation to permit foreign manufacturers to store goods intended for sale in the Customs Union countries after clearing customs procedures without incurring any additional taxes as a result of that sale, Kazakhstan can create warehousing hubs at its principal international airports.
President and CEO of the company TeliaSonera, Lars Nyberg, believes that Kazakhstan has a high potential for developing mobile Internet services. Moreover, it is a global trend. For example, in Sweden, TeliaSonera forecasts that in 5 years from now an average smartphone user will consume 10 times more data than today. In this regard, he expressed confidence that 3G services will support Kazakhstan’s ambitious development plans to become a transportation, information and technology hub in Central Asia. Along with that, the technology development is on going. Therefore, in the opinion of TeliaSonera head, the government should consider issuing 4G licenses to the mobile operators in Kazakhstan at the earliest convenience and in the same equal, open and fair manner, as was the case with 3G licenses.
Speaking about the prospects of forming a regional financial hub Kazakhstan, the EBRD head Thomas Mirow emphasized that although the banking system of our country was seriously affected by the economic recession and is still affected by it, the republic still has the most developed banks in the region. Moreover, our country is the leader among the CIS countries in the field of pension reforms, both in terms of regulation and the growth of pension fund assets. Now, for Kazakhstan to implement its potential role as a real financial center in the region, two conditions have to be met. The first one is to ensure the health of the domestic banking system. It is necessary to accelerate the resolution of issues related to troubled loans. Second, the local capital markets will have to become deeper and more liquid before they will be able to start playing a greater regional role. According to Mr. Mirow, the planned People's IPO is likely to become the main catalyst for this process, subject to further institutional reforming of the tariff regulations for potential candidates.
Deputy Chairman of Board for Business Development at PricewaterhouseCoopers, Don Almeida, told that for successful implementation of such a program three areas will be particularly important. They are the increase in awareness and interest of the investors in the People's IPO, raising standards of corporate governance and transparency of reporting, and bringing the legislation in line with best practices to ensure investor confidence.
Summarizing the session with the investors, President Nazarbayev congratulated the participants with the twenty-fifth anniversary meeting of the Board and thanked them for their active involvement and ideas. "We are a young country and we continue learning from you, our friends, in all these years of independence, we were openly discussing problems, removing barriers for business, so that business would feel safe calm here."
Along with that, the President of Kazakhstan proposed to introduce a new practice of holding meetings of the FIC. From now on, at each of them, two extra topics will be in the agenda. The first one is the progress of implementation of the investment policy and the protection of the investors' interests. The second one will cover the development of local content. "We dedicated the twentieth plenary session of the FIC to this issue already. But, given its importance, I propose to discuss this issue at every meeting. With this, the emphasis will be on development of technologies. As for the local content policy, we would like to see more high-tech and knowledge-intensive goods and services." In this regard, he proposed to devote the next meeting of the FIC to the Concept of Innovative Development of Kazakhstan till 2020 which the Government of Kazakhstan is currently developing. "I want to say to you frankly what we want. The largest mineral deposits are the important strategic resources of our nation, and for the first time in its history, it built an independent state that has become a respected country in the world. So, we will ask all these investors who operate on these strategic resources as well as local steel companies to invest in creation of an alternative economy, i.e. in our industrialization. We will give you such proposals."
Nursultan Nazarbayev warned that further provision of deposits for development and the increase in the term of operation of the deposits under development will involve the participation in construction of new facilities. Moreover, the government will invest jointly with the investors. "This will be your enterprises that will operate with the focus on extraction and processing of oil and gas resources and metals, will create new jobs and new technologies in Kazakhstan. For example, the Chevron Company is a good example of that; they are now building at my request specialized plants for manufacture of pipes. I think they will be developing. The other example is the proposal from the Total Company to set up the Institute of Welding, and so on. But, dear friends, this is not enough. We ask for greater involvement. This is the subject of negotiations, and we have to jointly solve it to make it beneficial both to Kazakhstan and you."
The President urged the investors to assist in outlining the right approaches to the technology development policy and at the next FIC meeting that will be held on May 23, 2013, to share their views as to practical implementation of the policy concept.
A ceremony of awarding the winners of The Best Foreign Investor in Kazakhstan 2012 contest took place as part of the anniversary meeting program. ENRC won in nomination For Direct Investment, BG Group in nomination For Long-Term Strategic Cooperation, and Metro Cash & Carry was selected as the most socially responsible investor. The Grand Prix of the contest and the title The Best Foreign Investor was awarded to Tengizchevroil.