In 2014 the gross foreign direct investment (FDI) in Kazakhstan showed another slight decline. Compared to a record high of $28.9 billion in 2012, only $24 billion and $23.9 billion of investment were attracted in 2013 and 2014, respectively. In contrast, the FDI in the manufacturing industry rose by as much as 48% to $3.7 billion in 2014, which is a record high over the past decade. Given the current priorities of Kazakhstan in relations with the foreign investors, such result is rather promising.
The launch of the first five-year plan of a new industrialization program in Kazakhstan was accompanied by a full-scale revision of Kazakhstan’s policy in the area of attracting foreign investors. In order for the announced plans to become a reality, the country had to shift the interests of the transnational corporations towards the manufacturing sector and to find new partners who would invest their money and bring their technology in those sectors which are claimed by the state as a priority in terms of diversification of the economy.
Today, when the first five-year plan is over, one can assess what has been done and how successfully.
First of all, a three-tier system to work with investors was created. Responsibilities to promote investment opportunities of Kazakhstan abroad were laid on the embassies of Kazakhstan to other countries. Besides, the plans provided for the opening of representative offices of the KAZNEX INVEST agency in those countries which were chosen as a priority. True, the progress of the initiative was stuck for a long time at the stage of coordination of budgets. So, now such a representative office is available only in China, and the operation of the agency in other countries mainly involved the organization of road shows, participation in forums and PR work with foreign media. The result is as such that over the past five years 31 road shows were held, and the number of broadcasts of video clips amounted to more than 7,000. Regarding the expansion of the agency’s activities abroad, according to KAZNEX INVEST Vice Chairman, Kairat Karmanov, new representative offices are to be open already this year.
At the second level, the mid-level, involving the participation of the government, national companies and the private sector, a database on 946 investment projects was formed. About 800 foreign investors, which the Ministry of Investment and Development and the KAZNEX agency work with, showed their interest to it.
Given the focus of the industrial-innovative development program, six priority countries were selected in terms of industry specialization. These are Germany (mechanical engineering, mining & metallurgy, and chemistry), France (mechanical engineering, nuclear energy, aerospace industry, and pharmaceuticals), the USA (innovation, pharmaceuticals, and petrochemicals), Japan (electronics and robotics, transport engineering (car manufacturing, shipbuilding, and machine-tool building), South Korea (mining & metallurgy, IT, mechanical engineering, electrical engineering, and chemistry), and the UK (innovation, chemistry, and mining & metallurgy).
After consultations at the mid-level, transnational corporations are then forwarded directly to the regions where service centers for the investors were set up. The operation of the centers is supervised by special deputy akims.
Taking into account the increased risk of investing in the manufacturing industry, the system of incentives and preferences has been considerably strengthened. In particular, for the projects implemented in the priority sectors of the economy the law now provides for in-kind grants and exemption from customs duties on the importation of components, raw materials and spare parts. Strategic investors were provided exemption from land and property taxes for a period of 7 years, as well as reimbursement of costs for gas, electricity, purchase of land, buildings and structures.
Now let us see what result we have got in the end. In view of the last year's $23.9 billion, over the past ten years more than $207.6 billion in total has been invested in Kazakhstan’s economy. This means that starting from 2008 against the backdrop of global cataclysms shaking investment markets we annually raise not less than $20 billion of investment.
According to KAZNEX INVEST Chairman of the Board, Borisbiy Zhangurazov, the objective set for the first five-year plan was to bring major investors in priority sectors of the economy so that they will become a drive for the formation of industrial clusters. Basic enterprises with their participation were set up for the SKD assembly of cars, railway locomotives and harvesters in the field of mechanical engineering and for the production of products with higher added value of the second and third tiers in the sector of metallurgy. For example, investment from General Electric was raised in the railway locomotive construction industry, from Alstom in the production of electric locomotives, from the Hyundai Motor Company and even Toyota in the automotive industry.
In the framework of selective work with transnational corporations included in the list Global 2000, 29 such corporations operate in Kazakhstan today, and they have launched 46 projects worth $2.5 billion.
According to the Kazakhstan Institute of Industry Development, FDI attracted in the manufacturing sector over the past 5 years of implementation of the FIID program is 2.9 times more than those raised in all previous years of Kazakhstan’s independence. Moreover, the year 2014 for the manufacturing industry was remarkable: FDI increased by 48% to $3.7 billion, compared with the previous year. This is a record high for the last ten years. As a result, the share of investment in the manufacturing industry increased from 7% to 16%.
The analysis of the structure of the FDI raised over the decade casts a pall over the given achievement. In particular, 59.1%, or $122,756.1 million was raised in the raw material sectors of the economy; of these, 32.4%, or $67,317.9 million, in geological exploration and survey, and 26.7%, or $55,438.2 million, in mineral production. The share of manufacturing industries is still 10.9%, or $22,683.2 million, of which $18,126.1 million were raised in metallurgy. Investment by transnational corporations in trade does not exceed 8%, or $16,583.9 million, in financial activities – 5.1%, or $10,640.1 million, in construction – 3.3%, or $6,908.7 million), in information and communication – 1.9%, or $4,038.2 million, in transport and warehousing – 1.2%, or $2,533.1. FDI in agriculture and food production looks like a drop in the ocean – $1,736.9, or 0.8%.
The geographical structure of the gross FDI inflows has not changed so far. Of 123 countries currently investing in Kazakhstan, the major contribution has been made by the Netherlands – 29.2%, or $6.9 billion as of the end of 2014, the United States – 17.1%, or $4.1 billion, Switzerland – 9.6%, or $2.3 billion, China – 8%, or $1.9 billion, and Russia – 6.3%, or $1.5 billion. Very interesting is the situation with Belarus, whose investors have increased their investments in Kazakhstan 5 times to $202 million compared with 2010, although these figures are hardly comparable with those of the top five investor countries.
Officials responsible for the shift of investment towards the manufacturing industry believe that they have managed to do it, in principle. Now let us see what investors themselves think about that. According to a recent survey of investment attractiveness of Kazakhstan conducted by EY in the last year, 47% of the transnational corporations already operating in our country perceive our market as the most interesting one among the CIS member countries.
Investment campaign conducted by the government among potential investors was not in vain. Last year, only 21.8% of the total number of companies participated in a pall found it difficult to assess the attractiveness of our country for FDI. For comparison, last year more than half of their total number had a vague idea about the potential of Kazakhstan.
81.2% of operating investors call the macroeconomic stability the strongest point of our country. 79.6% call the political and social stability our strength, 72.8% – the high level of development of telecommunications infrastructure, and 63.4% – the size of the domestic market, however, taking in view the creation of the EAEC.
The tax system in Kazakhstan is attractive for investors for its low rates of corporate and personal income taxes. At the same time, they noted frequent and unjustified inspections by the regional and central tax authorities.
Both operating and potential investors point to the need for further improvement of transport and logistics infrastructure in Kazakhstan. The large landlocked area and the heterogeneous density of the population add to high transport costs, the share of which now accounts 8% (for transportation by railway) to 11% (by motor transport) of the final cost of the product. This is much higher than the average in developed countries (4%–4.5%).
74.3% of investors are not ready to call the administrative environment our strength. Despite the high level of political stability, the country faces some problems such as corruption and bureaucracy. Although in recent years the business environment of the country has improved significantly, it remains still much ahead to be done, especially in terms of fighting corruption.
Compared with the previous poll, investor confidence in Kazakhstan economic outlook has increased considerably. Almost half of the respondents predict that in the next three years Kazakhstan will become even more attractive from an investment point of view. Operating investors (55%) and potential investors (42.6%) demonstrate a rare unanimity on this issue.
More and more investors expect the rise of agricultural business in Kazakhstan. The level of domestic demand and the export potential of the country evidence good prospects for the industry. In view of the above, the government has developed a program "Agricultural Business 2020", which provides for an increase in government subsidies to farmers by 4.5 times. It is expected that Kazakhstan will also benefit from the new opportunities for the export of agricultural products to the Central Asian countries and China.
Along with that, 17% of the respondents say about toughened competition Kazakhstan can face. According to forecasts, the interest of investors will be primarily focused on consumer markets of the BRIC member countries and other rapidly developing countries, including Turkey. Considering this factor, Kazakhstan should pay increased attention to the development of the domestic market, mainly by stimulating the domestic demand. As for the businesses, they should understand which products will be in need to the growing middle class tomorrow in order to start offering them at affordable prices today.
The list of the regions where urgent improvements are needed, in the opinion of investors, remains the same. Among them is the creation of stable conditions for business, the further development of infrastructure, the uncovering of human capacity, and the ensuring of independence for the judiciary.
What investors should expect from the second five-year plan
As is known, a bundle of amendments were introduced in Kazakhstan's laws last year, providing for new measures from the state to support investors. A number of these measures came into force on January 1st of this year.
In general, all the incentives offered under the second Five Year Plan can be divided into three packages. The first of these provides for exemption from customs duties on imports of equipment and raw materials. In addition, investors are given in-kind grants from the state, including land. To obtain these benefits you need to invest in one of 283 priority types of activities, with the exception of gambling, mineral production, as well as the production of excisable goods.
The second and third packages were developed specifically for the implementation of projects with the value of at least $20 million in the six sectors which were selected as priority ones under the second Five-Year Plan (food production, building materials, machine building, metallurgy, chemical industry, and oil refining). A company, which claims to preferences, has to be registered with the bodies of justice no earlier than one year prior to applying for preferences. That is, in fact, we are talking about new projects and new investors. Those who meet these requirements can be provided tax incentives: exemption from CIT (for 10 years), land tax (10 years) and property tax (8 years). In addition, the investor is given the right to attract foreign labor. Moreover, the state guarantees stability in the change of tax rates and in the alteration of the laws in the field of attracting foreign labor.
Finally, the third package provides for investment subsidies in the form of compensation by the state of to 30% of the costs of the investor for construction and installation works and equipment; however, in order to make use of them, a relevant resolution of the government is required.
In general, we can say that in terms of incentives for the moment, our country can truly be considered a leader, not only regionally but also globally.
The Plan of the Nation did not forget about the investors: it contains 100 steps to the implementation of the five institutional reforms announced by Nursultan Nazarbayev after the early presidential elections in May of this year.
The quite important thing for the TNC is the decision to set a separate trial on investment disputes. In particular, further steps will be taken to organize within the Supreme Court an investment board to deal with disputes involving large investors, as well as to set up an International Arbitration Centre in Astana, following the Dubai experience. This center will be part of an international financial center of Astana (AIFC), which will be given a special status enshrined in the Constitution of Kazakhstan. According to the plan of the President, having its own independent judicial system and jurisdiction, which will operate on the same principles as the English law, AIFC could become a financial hub for the CIS countries and the West and Central Asia.
In the framework of the industrialization program, it is planned to attract in the manufacturing sector at least ten TNCs that are capable of launching the production of goods that will be traded globally. Strategic partnerships with the "anchor investors" (for example, Air Astana, Tengizchevroil, and Kazakhstan Temir Zholy plant for the construction of locomotives) will be established in the priority sectors of the economy. In the future, the share of the state in these joint ventures will be placed for the IPO. We are talking about such areas as the development of tourism clusters, maintenance and development of transport infrastructure, and energy saving.
The agricultural sector, particularly the processing and production of meat and milk and dairy products, is also waiting for its strategic investors to come. The main objectives there are the development of a raw material base and the trading of finished products for export. The plans for the next three years with regard to the dairy products production are to ensure sales of at least a half of the total produced volume to the CIS countries. In this regard, Kazakhstan's government focuses on the development of cooperative production in rural areas, using the experience of New Zealand’s Fronterra and the Danish Arla.
Global and regional trends
At the end, following the tradition, let us synchronize the "investment clock" of Kazakhstan with global and regional trends. According to the World Investment Report 2014 made at UNCTAD in 2013, the global FDI flows increased by 9% to $1.452 trillion. It is expected that this figure will increase to $1.7 trillion in 2015 and to $1.8 trillion in 2016, at a relatively faster growth in the developed countries. Along with that, the unstable situation in some emerging markets, and risks related to political uncertainty may adversely affect the alleged revival of FDI.
In their study, UNCTAD experts pointed out a number of investment trends in the global economy. First of all, it is clear that the poorest developing countries have become less dependent on natural resources in terms of attracting FDI. In their opinion, it is a sign of economic diversification and a more active position of non-governmental organizations in their incorporation into the international division of labor. With this, today developing countries and economies in-transition compose half of the list of the 20 largest recipients of FDI.
The second point is that private investment companies continue to take a wait. As a result, the amount of unallocated funds that can be invested have reached a record high of $1.07 trillion, and their share in cross-border M&A accounted for only 21%, which is 10 percentage points below the peak in 2007. Such caution of the large private investors shows the distrust to the governments of the recipient countries and the unpredictability of macroeconomic policy.
Against this background, state-owned TNCs take a more active position. By estimate of UNCTAD, today in the world there are at least 550 state-owned transnational corporations with more than 15,000 foreign branches, having foreign assets of over $2 trillion.
Concerning efforts in the field of investment policy, the greater part of them still continue to focus on promoting and liberalizing investments. So, Kazakhstan is not an exception in this case. Experts point out that investment incentives are primarily aimed at reaching the economic growth and to a lesser extent at the sustainable development, which is a negative trend. Governments widely use incentives as a policy tool to attract investment, despite the constant criticism of such efforts as cost-inefficient and causing the misallocation of public funds.
Talking about regional trends, we can conclude that it is likely that for Kazakhstan now, it is the moment of truth. According to the recent data of UNCTAD, in 2014 FDI flows to the economies in-transition declined by more than half to $45 billion. Foreign investors, especially those from the West, were constrained by factors such as the geopolitical conflict, anti-Russian sanctions and negative forecasts for the economic growth of our region. As a result, according to experts, FDI in Russia fell by 70% to 19 billion; Ukraine went into the red by $0.2 billion, while investments in Kazakhstan and Azerbaijan remained at a high level. In this situation, if our country indeed manages to retain its status as a land of economic stability and simultaneously retain access to neighboring markets, we will have every chance to pull over a substantial part of the regional investment blanket.