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 KAZAKHSTAN International Business Magazine №3, 2013
 Investors and the state: Focus on innovations
Investors and the state: Focus on innovations
On May 22, Astana hosted the 26th plenary meeting of the Foreign Investors Council under the President of Kazakhstan, devoted to the prospects of innovative and technological development of the country until 2020. Speaking at the event, the President promised special support to those investors who will be actively introducing innovations into the national economy. In their turn, representatives of multinational corporations shared their views, suggestions and opportunities in this area.
What we have ...

Opening the meeting, Nursultan Nazarbayev emphasized that in the condition of growing technological advancements in the world, the ability to innovate is a key factor in the competitiveness of national economies. Kazakhstan does not want to remain on the sidelines of global processes and, therefore, relies in this issue on active assistance of its foreign partners.

Continuing this topic, the Minister of Industry and New Technologies Asset Issekeshev shared what Kazakhstan has already achieved, as well as outlined the areas the government is focused in further innovative development of the country. According to him, the first steps in the field of innovations were taken back as early as in the mid of 2000s. It was exactly the time that laid the foundations of the national innovation system (NIS): the basic legislation, development institutes and infrastructure as well as the first instruments of financial support were developed. Along with this, during that period, it became clear that the transition to an innovative track is a very challenging and complex task.

With the adoption in 2010 of the AIID Program, Kazakhstan moved to the second stage of its innovation policy: the NIS was rebooted. There had been adopted the new laws of good quality "On Science" and "On Support for Innovation", which introduced new instruments to support innovation. Institutional changes took place as well. On the basis of the National Innovation Fund (a purely financial institution) and other agencies operating disintegratively and not always effectively, a specialized institute for technological development was set up. The experience of Finland, France and South Korea was taken as a basis.

Today National Agency for Technological Development JSC acts as an integrator of support measures for all participants of the NIS, including the regions. In particular, with the assistance of the said agency, SEZ "Park of Innovative Technologies", 8 regional techno parks, 4 sectoral design offices, also the Kazakhstan-Korean and Kazakhstan-French Centers for Technology Transfer, 12 venture capital funds, and 15 offices for commercialization, the latter within the structure of higher educational institutions, were established and are actively developing.

As a result of the measures taken, certain results were achieved. Only within the scope of MINT alone, more than 2,500 ideas and projects were reviewed. Of them, 520 were provided practical help in implementation. Among the initiators, there are 152 industrial enterprises, 123 small innovative companies and 245 Kazakh scientists.

Talking about the key indicators for development of innovations that are specified in the AIID Program, it is worthy of noting that Kazakhstan reached historic highs on the majority of them in the past year. Compared with 2009, costs of enterprises for technological innovation increased by more than 5 times, reaching $2 billion. The volume of innovative products increased by more than 4-fold to $2.5 billion, and its contribution to GDP was 1.3%, versus 0.51% in 2009. At the same time, labor productivity in the manufacturing sector rose by 34%, reaching the level of $51 thousand per worker. Kazakhstan made significant achievements in WEF global competitiveness ranking – we were moved to a group of countries driven by "management efficiency" and "innovation." Countries such as Brazil, Malaysia, Turkey, Russia, etc are among this group as well.

…and what we want

Today Kazakhstan is on the threshold of the next stage. The Government has developed a new Concept of Innovative Development until 2020, which comprises of three main groups of challenges: The first one is connected with the need to upgrade traditional sectors of the economy (such as oil and gas, oil refining, mining & metallurgy, geology, power engineering, construction, agriculture, etc.) and to lead them to a new level of competitiveness and technological development.

According to Mr. Issekeshev, the key challenge here is the increase of productivity and efficiency. In many respects, this challenge is for foreign investors and national companies. "It is very important that the process of modernization will be accompanied by partnership with Kazakhstani science, small- and medium-sized businesses on a cluster basis. Such assignments were announced earlier, but no systemic changes have yet been observed. So we propose to develop jointly with investors clear and measurable indicators and to introduce an appropriate ranking."

The second group of challenges involves innovations in the social sector. The priority here is the introduction of new technologies in medicine, education, housing and utilities, and provision of public services.

An example of work in this area is the Smart City project, in the framework of which a modern system of governance of the city is being introduced in Astana.

The third group involves new technological challenges of the third industrial revolution. Among the key trends in this area, the Minister of Industry and New Technologies named automation of production, including intelligent manufacturing systems, the use of new materials, such as bio-components, metallography and capillary structures, the logistics of the new generation, and new energy technologies. "This is a long-term task. But it is the time now that we have to prepare the domestic industry for the new conditions. To do this, centers of competence, which will become the spots for distribution of knowledge among industrial enterprises and universities, are being established on each of the new areas listed."

Given the above challenges of the Concept, the three main areas of further innovative development of the country were determined.

First, we have to develop our own scientific competence. Here, the right approaches are available. The new Law "On Science" was adopted, research universities were set up, and the grant system of funding and independent international expertise were introduced. Along with that, the forming of a critical mass of local researchers and scientists who would ensure the emergence of Kazakhstani absolute innovations will take at least 10–15 years.

In this regard, in the near future a focus will be made on the second area – the strategy of smart transfer of technologies. We are talking about the transition from just simple purchase of equipment and technologies to more complex forms of their transfer and adaptation to local conditions. Along with the transfer of "mature" technologies oriented to the operating industrial base, we have to solve a more complex task as to the ensuring of inflow of advanced technologies, which are now in the early stages of development. In this regard, Kazakhstan has to actively participate in the international network of technology transfer.

The third area is the formation of an innovative environment. According to Mr. Issekeshev, today, not those who invent will win, but those who are able to find these developments, to create the conditions for their implementation and transformation into a competitive product. In this regard, Kazakhstan has to do a lot to solve problems such as administrative barriers to innovation, the lack of effective mechanisms in ensuring the demand for innovations, and the weak participation of the private sector.

In his presentation, the Minister of Industry and New Technologies introduced the key indicators which have to be achieved as a result of implementation of the Concept. Thus, by 2020, Kazakhstan aims to rank 40th in the WEF rankings and be in the list of countries with an innovative type of the economy. The percentage of innovative products domestically should be brought to 2.5% of GDP, while the number of innovation active enterprises should rise to 50%. Also the goals are by the said time to attract 50 foreign high-tech companies to the country, to implement ten of Kazakhstan’s world-class innovative projects, and to be granted 100 international patents.

The set goals are quite ambitious, and thus, it is important for the state to outline the basic contours of innovation cooperation with foreign investors, which have the necessary technical knowledge and expertise. In view of this, Mr. Issekeshev offered four specific areas of cooperation to the representatives of multinational corporations.

"First of all, following the example of Shell and LG, we offer every investor to develop at least one target technology program as part of its activities. Second, we ask to provide support to the ministries, development institutes and national companies in the creation of technology transfer centers in Silicon Valley and other centers of the world. Third, it is important for us to clearly understand the programs of innovative development of your companies in Kazakhstan until 2020, including the issues of modernization... We ask with respect to the projects implemented in our country, to transfer part of the research to Kazakhstan and to attract Kazakhstani scientists to take part in them. Fourth, the Kazakhstani laws already prescribe for the mineral producers to allocate 1% for R&D, and 1% for training of the personnel. So we offer to effectively use these instruments in the framework of the declared initiatives."

Summing up his speech, the Minister said that the first five-year plan of action of the AIID Program was more industrial and infrastructural by nature, while the plan of action for the second five-year period that is now under development will focus more on the innovative component. "And we hope that investors will take an active part in it and will implement high-tech innovative projects."

Proposals of investors

In their speeches, foreign members of the FIC raised quite a wide range of issues, from general methodological recommendations to practical experience in implementation of innovative projects. In particular, the new President of the EBRD, Sir Suma Chakrabarti, presented the five main challenges, which the bank considers the most important for further development of Kazakhstan’s economy based on knowledge. According to him, in the area of human capital, the country should revise the educational programs and migration policies, making them more flexible.

The second challenge problem is the access to specialized finance. Speaking as a minority investor, the state can be a catalyst to attract private venture capital, providing overall tolerance to risk and improving access to finance.

The third challenge is to create a favorable business environment. Innovative firms are more focused on exports, since it makes it possible for them to distribute the high fixed costs in the area of R&D. They also more often than the others import equipment and new technologies. In this context, the optimization of export and import procedures can significantly reduce the cost of implementing innovative technologies not only for foreign companies, but more importantly for local businesses, especially SMEs.

The fourth challenge is to build a closer relationship between science and industry. To do this, it is necessary to provide greater clarity regarding the intellectual property rights, as well as to increase the role of grants in project financing of applied research.

Finally, the fifth challenge is the ability to attract global intellectual resources through mobile information technologies and the Internet.

In his turn, President and Chairman of the Board of Sberbank Russia OJSC Herman Gref said that Kazakhstan, like Russia, is on the "modernization stage of development". And therefore, as a priority, Kazakhstan should focus not on development of its own know-how, but attraction of well-working technologies, which will help diversify the economy of Kazakhstan. According to him, companies around the world do not like to invest in innovation, as it is associated with very high risks and high costs: "The one who is the first to create a product unfortunately loses too much." The only thing that can stimulate the creation of innovation is the tough competition. In the condition of a monopolized economy innovations do not emerge.

Mr. Gref also proposed to focus on improving the quality of human capital. In particular, this concerns pre-school and school education, since in the condition of developing distance learning systems, getting the best higher education is no longer a problem. One more aspect that is often neglected is innovation in the area of management. "If a country uses the most modern governance models, starting from the government and ending with the municipality, then the question of involvement of scientists, entrepreneurs, and so on remains applicative... This is exactly what might compensate for the lack of all other elements of the innovation system, such as the legal environment, the education system, the availability of scientists, the attraction of innovative companies, and so on" – the head of Sberbank said.

Shareholder of Eurasian Natural Resources Corporation Alexander Machkevitch agreed with the thesis of Mr. Gref as to the effectiveness of transfer of "mature" technologies. He cited as an example a new ferroalloy plant in Aktobe that ENRC plans to launch this year. Along with that, he drew the attention of the President of Kazakhstan that investors are faced with "difficulties common to all the projects providing introduction of foreign technologies".

"An Innovations project contractor offers technological and construction documentation prepared in accordance with the standards existing in their country. And this is natural. To implement such a project in Kazakhstan we need to adopt it to the national standards. Therefore besides the main foreign contractor, Kazakhstani project institutes will be involved during project implementation. But their number and capabilities are limited. Companies simply have to queue for their services and submission of design works are often delayed due to projectors’ excessive workload.”

In the opinion of Mr. Machkevitch, both functions – adaptation of project documentation in accordance with Kazakhstan’s standards and project management – can be provided by technology transfer centers following their relevant development.

Along with that, some foreign investors believe that Kazakhstan can be integrated into innovative processes even in the earlier stages of development of new technologies. In particular, the President of Total Exploration & Production Yves-Louis Darricarrere proposed to install and test in Kazakhstan the innovative platform for concentrated solar cells called C7, which was developed by SunPower, the subsidiary of Total. According to him, the maintenance, and monitoring of the equipment, as well as the analysis of the results can be carried out in cooperation with the Nazarbayev University Research Center with the scientific support of experts from Total. "The success of this experiment would pave the way to a larger scale project, at pre-industrial or industrial scale, to be developed under the leadership of Kazakhstan authorities and with the support of investors. During the process from Research to Sustainable Production, Total would be able to provide its scientific and technical expertise as well as its experience in Project Management."

Lorenzo Simonelli, President and CEO of GE Transportation, drew attention to the fact that, in the achieving of the set goals, Kazakhstan should take into account the global trends of development of energy efficient and "green" technologies. He reminded that with the assistance of General Electric, a plant for the production of modern energy-efficient locomotives was built in the country. Besides, the projectfor manufacturing of the environmentally friendly diesel engine Evolution is currently under implementation that will make it possible to raise the overall level of localization of locomotives to 65%. In addition, this year the company is to put into operation a plant for treatment of municipal waste water in Khorgos. The membrane treatment technology used in this project is considered the best in the world at the moment, and it can be applied to upgrade municipal water treatment systems in all the cities of Kazakhstan.

Managing Director and Chief Executive Officer of Central and Eastern Europe, Deutsche Bank AG, Peter Tils, urged Kazakhstan to use the experience of the German system for financing of innovative projects and technologically advanced industries. The matter concerns a two-tier approach combining funding sources and expertise from both the state-owned bank KfW and privately-owned banks in Germany. It implies that a private relationship bank will screen and evaluate the applications from the borrowers, while experts of KfW (providing co-financing in the amount of to 80% of the loan amount) are entitled to rely on the opinion of their colleagues from private commercial banks, since the latter are interested in the success of the investment project.

In his turn, Chairman at JPMorgan Chase International, Dr. Jacob A. Frenkel, believes that in the implementation of the innovative development concept, Kazakhstan needs to expand the role of Kazakhstani development institutions. To do this, the state should stimulate "the development institutions in diversifying their funding sources by accessing the international capital markets", and this will reduce the pressure on the state budget.

According to the financier, "at present, the liquidity pressures in the global markets have eased, and as such the state-owned development institutions run minimal risk of squeezing out the private sector". For its part, the Government of Kazakhstan should pay more attention to the implementation of international standards of corporate governance, control and compliance indevelopment institutions so as to make them more attractive to foreign investors, even in the absence of direct government support.

In addition, domestic development institutions are mature enough to move on to the next level and to use in certain sectors in addition to lending more sophisticated strategies for investment in equity capital, including venture capital type investments. "Granted, this strategy is not without risk – but equally, comprehensive diversification of the economy towards more technological sectors cannot be achieved without significant capital flows being directed accordingly." Today, Kazakhstan has the lack of private sector sponsors who possess sufficient expertise, capital and risk appetite towards investment in start-ups and innovative undertakings. In this context, the Government should be ‘leading by example’.

Three sevens from the President

By tradition, Nursultan Nazarbayev delivered the closing speech, in which he thanked the investors for their proposals and their long-term commitment to the partnership. "We highly appreciate your time, your thoughts and your willingness to work with us." Further he said that in a 20 year period of Kazakhstan’s independence, the first part of the Kazakhstan development program has been successfully implemented. We have built the state, which is at the forefront of the world’s politics in many issues. Now, with the available instruments, opportunities and trained personnel, the authorities of the country turned to the second part of the program, aimed at industrialization.

"At the first phase, the activities will be concentrated around the large companies which you represent, developing our national resources. We will be building up industrialization by developing the processing of raw materials in the oil and gas, metals and mining sectors. At this stage, any things that could give us the primary productivity growth of 20–30% we would consider an innovation."

In addition, the President stressed the need for the search of absolute innovations. Of course, it is difficult to achieve them, but it is possible. Exactly for this, the concept of innovative development of Kazakhstan until 2020 and the concept of transition to a "green economy" were developed. EXPO-2017 will be one of the catalysts for the latter.

According to the President of Kazakhstan, for the successful implementation of these strategic documents, a number of systemic measures have to be taken.

The first one is to tune up the education system to the needs of innovation. "We have to meet the demand for engineering and technical personnel that have the expertise of an international level. This should be done jointly with the businesses." As examples of such cooperation, he cited the experience of Total and TCO. The first of the two mentioned has been providing grants for education of its employees in French and advanced Kazakhstani universities for several years, and is the founder of the Kazakhstan Institute of Welding. The second of the mentioned is the sponsor of the first Kazakhstani Naval Academy, established under the auspices of KBTU. In the opinion of the President, this practice should be extended to all large enterprises in the framework of the dual system of education, effectively applying the experience of Germany.

In this regard, he suggested considering the issue of transferring part of the state-owned educational institutions in trust management to foreign investors’ consortiums and domestic companies. These should be autonomous educational institutions, following the example of Nazarbayev University and the Intellectual Schools. The businesses will take part in development of curricula and methodology and will attract leading foreign tutors. The government, for its part, will continue to fund these institutions through grants.

The second measure is the implementation of Kazakhstan's scientific potential. Higher educational institutions play a key role here. In 2010 they performed 33% of overall scope of scientific and technical programs; today they account for 67% of all the approved projects. Thus, the government will continue setting up the applied and scientific research divisions in the structure of higher educational institutions. The government should pay attention to how to attract and encourage scientists, especially young ones, so that they make a certain progress in this area. In addition, a set of measures needs to be developed to attract foreign talented scientists, as well as to promote the returning of Kazakhstani scientists, who migrated abroad, back to the home country.

To this end, the country has already started establishing the International Science and Technology Center to take part in EU research programs. Programs of innovation cooperation with the CIS countries, the European Centre for Nuclear Research, Beijing Institute of Genomics, Universities of Yale and Cornell, and the Max Planck Society are under implementation.

However, for the growing needs of the economy the state has to ensure the effective transfer of technologies. "We already have developments on a number of promising projects with technologically advanced countries such as the U.S.A. and Japan. For example, a project of creation of innovative workshops for 3D printing with the Autodesk and TechShop Companies, also the Center for Automation of Production jointly with the Shinko firm.” Nursultan Nazarbayev urged foreign investors to set up corporate research centers in Kazakhstan which will engage in geology, medicine, 3D printing, metallurgy, energy saving and building technologies, and composite materials.

Citing the example of Nazarbayev University, where the implementation of a "triple genetic helix" – business, science and the state – is already in progress, the President assigned the government with a task to work out in collaboration with investors the issue of setting up a world-class research university in the field of agriculture. "The Kazakh Agro Technical University named after Seifullin can be the basis for its establishment. The university is seen to combine the three components: the university itself, the regional research institutes, and test farms. Similarly, the state can create other educational and research clusters: the energy cluster on the basis of the Almaty University of Power Engineering and Communication, and the chemical cluster on the basis of the Kazakhstan-British University."

In addition, President Nursultan Nazarbayev announced his decision to establish the State Prize named after Al-Farabi for breakthrough research and implemented innovations. The prize will be awarded annually to scientists in seven categories. The amount of the premium at the initial stage will be $100,000, with the prospect of further increase.

The third task is to create demand for innovation. For this purpose, foreign investors and domestic enterprises should place their orders for research and development in Kazakhstan. "Maybe this should be prescribed by laws. Businesses already take the first steps in this direction. For example, I would like to mention the Shell Company. A Road Map of scientific and technological development of the extracting sector of the oil and gas industry until 2025 was developed with assistance of Shell, coordinating this issue... For local entrepreneurs and scientists this has huge potential and a guaranteed order... Shell is ready to work on its own one of 15 areas of focus of the Road Map. I urge foreign investors to take part in implementation of other areas of focus of the program."

The President promised that the government will take systemic measures so as to stimulate demand for innovation, including the development of a regulatory framework for the creation of an effective system of intellectual property protection, as well as the creation of specialized laboratories. "We also need to solve the problem of nonconformity of Kazakh engineering and construction standards to international ones. Today they are a barrier to technology transfer. I entrust the Government with a task before September 1, 2013 to conduct an audit of all domestic standards and to prepare a plan of action to bring them to the best foreign analogues. Full transition to them has to be completed by 2015."

Talking about the issue of risk financing, the head of Kazakhstan gave an assignment to the Government to examine the proposals of Deutsche Bank as to the application of the German experience. Here he made one more proposal to foreign investors. "You know that under the law, mineral producing companies have to allocate 1% of their profits for R&D. But not every company has progressed with that. I think that due to these funds we can set the Venture Innovation Fund with an initial capital of $200 million with subsequent increase of it to $1 billion. With the active participation of foreign partners, it can be a key source for funding of innovative projects."

Nursultan Nazarbayev promised that those who implement innovations will be given a priority in support from the state. "I call on you to help our business, education and science to regroup and to aim at innovation. This will increase the effectiveness of production in your companies. Then the local content will be innovative."

Not to delay with the given collaborative work, the President proposed "the initiative of three sevens" which should be implemented during the year. First, it is necessary to draw at least 7 world-renowned scientists to Kazakhstan, second, to ensure seven domestic companies with high-tech orders, and third, to support the creation of seven innovative start-ups.

The results of the presidential initiative will be announced in May next year, at the 27th meeting of the Foreign Investors Council, the agenda of which will be the discussion of the concept of the second industrial five-year period in Kazakhstan.

Table of contents
· 2016 №1  №2  №3  №4  №5
· 2015 №1  №2  №3  №4  №5  №6
· 2014 №1  №2  №3  №4  №5  №6
· 2013 №1  №2  №3  №4  №5  №6
· 2012 №1  №2  №3  №4  №5  №6
· 2011 №1  №2  №3  №4  №5  №6
· 2010 №1  №2  №3  №4  №5/6
· 2009 №1  №2  №3  №4  №5  №6
· 2008 №1  №2  №3  №4  №5/6
· 2007 №1  №2  №3  №4
· 2006 №1  №2  №3  №4
· 2005 №1  №2  №3  №4
· 2004 №1  №2  №3  №4
· 2003 №1  №2  №3  №4
· 2002 №1  №2  №3  №4
· 2001 №1/2  №3/4  №5/6
· 2000 №1  №2  №3

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