TBY talks to Rau Albert Pavlovic, First Vice-Minister of Industry and New Technologies, on the government’s role in providing incentives to investors in all spheres of the economy in line with the Industrialization Map.
TBY What are the main characteristics of Kazakhstan’s new industrial policy?
RAU ALBERT PAVLOVIC The global economic crisis has shown that the high-tech processing industry constitutes the most profitable investment for private domestic capital, as it guarantees a stable economy. Through unprecedented measures to support domestic producers and through the implementation of an effective crisis management program, the government managed to mitigate the crisis and minimized its effects.
At this moment of revival and expansion, President Nazarbayev has articulated the principles of economic development. His ideas are the basis for the state program of accelerated industrial-innovative development. Under this program, government efforts have focused on developing several priority areas. First of all, it has focused on traditional industries, such as oil and gas, mining and metallurgy, nuclear, and the chemical industry, followed by the transition from primary production to higher value-added products. The second segment is that of companies serving sub-soil users, domestic companies, and the state as a whole. Such areas of activity encompass engineering, construction, building materials, and pharmaceuticals. The third direction is export-oriented production, such as agriculture, light industry, and tourism. And the fourth group—the economy of the future—refers to areas that will play a dominant role in the global economy over the next 15 to 20 years, such as ICT, biotechnology, alternative energy, and space-related industries. In 2010-2011, all traditional industries experienced a rise compared to previous years.
For the development of priority sectors of the economy, the government is providing a comprehensive support program for business. Thus, the Business Road Map 2020, aimed at developing entrepreneurship in the target spheres, provides interest rate subsidies and loan guarantees. Another program aimed at increasing the productivity of existing enterprises and the creation of new high-tech industries is “Performance 2020”. “Investor 2020” is a support and encouragement program aimed at creating an enabling environment for FDI in non-primary sectors of the economy. “Export 2020”, on the other hand, is being utilized to promote domestic products on foreign markets. Moreover, attention is focused not only on the major players, but also on the activity of SMEs.
In which export-oriented sectors do you see investment and partnership opportunities?
Any area in Kazakhstan’s industrial base, whether it’s textiles or petrochemicals, has great potential for development. The investment policy of Kazakhstan in the sphere of sub-soil use has undergone some changes in light of the goals and objectives the accelerated innovative industrialization program has set. The new formula of cooperation is defined by sub-soil use in exchange for investment, new technology, and higher productivity. Kazakhstan will not agree with the previous/usual mechanism regarding the production and export of raw materials or concentrates. Access to sub-soil deposits will be provided only if it involves the complex processing of raw materials, access to subsequent processing, and partnership with Kazakhstani producers of goods and services. This is the usual practice worldwide. The key mechanism for implementing the state program is the Industrialization Map, which includes all the significant projects in Kazakhstan’s economy. Particular importance is attached to the implementation of niche projects that involve production that have not yet been established in Kazakhstan. So far, we have identified more than 80 niche projects involving the production of more than 400 products worth over $40 billion. For example, in mining and metallurgy, niche steel projects include the production of special steel and other related products, such as pipes, profile products with increased strength, ferro-alloys, and polycrystalline silicon. In non-ferrous metallurgy, attractive areas include the production of rolled steel products and aluminum, zinc, copper, gold refining, and rare metals for redistribution. Projects in the mining and metallurgical complex must be at least $5 billion in size. As for the chemicals industry, some of the most promising areas include the establishment of gas processing facilities and petrochemical plants for the production of fertilizers, concentrated soda, methanol, ammonia, urea, and sulfuric acid. According to preliminary estimates, the realization of these projects requires at least $6 billion. Engineering is of particular interest to foreign investors. The market size is more than $13 billion, and machinery and equipment imports account for 85% of total imports. In this industry, priority is given to the production of agricultural machinery (tractors and related equipment), railway engineering (passenger and freight cars, solid-rolled wheel sets), as well as the automotive industry (passenger cars and commercial vehicles). In the construction industry, in which 43% of building materials are imported, promising areas include the production of glass, ceramic products, basalt fibers, industrial construction materials, and clinker cement terminals. The implementation of such projects requires at least $600 million. And this is just a small part of the identified industry niches that need foreign investment, equipment, and technology.
What advantages does Kazakhstan have when trying to attract investors, and how can the numbers be increased?
Our main advantage is the solid investment climate, which is characterized by a number of positive aspects. First of all, according to scientific estimates, Kazakhstan ranks sixth in the world in terms of natural resource reserves. In general, our country has more than 5,000 open but undeveloped mineral deposits, of which only 280 are oil and gas. Secondly, Kazakhstan has a favorable geopolitical position, which provides investors with a consumer market of almost half a billion people in Central Asia, China, and Russia. And finally, the business climate is supported by favorable investment laws and attractive measures tailored with a view to support investment and economic and political stability. Kazakhstan today holds a leading position in the region as an investment destination. Stable macroeconomic conditions in the country allow Kazakhstan to be one of the most attractive countries for foreign investors. According to the National Bank of Kazakhstan, FDI inflows into the country in 2010 amounted to $10 billion, and in the first quarter of 2011 the economy brought in an additional $3.2 billion. Based on earlier data, it is noted that from 1993 to 2010, Kazakhstan’s economy attracted $126.6 billion, primarily from European investors. In 2010, growth in investment in the non-primary sectors of the economy amounted to 21.6% and exceeded the growth rate of investments in the mining and oil and gas industries (12.6%).
What are some highlights from your work on improving the investment climate in Kazakhstan?
We conducted a large-scale project that primarily focused on the legislative framework. The law on investments in its current form provides full protection for investors. According to international experts, it meets all standards for international investment legislation practices. In addition, Kazakhstan signed the Agreement on the Mutual Promotion and Protection of Investments with 44 countries and one agreement within the framework of the Eurasian Economic Community, which provides additional safeguards to protect investors’ rights, in particular: protection from discrimination, requisition and nationalization, and the right to resolve investment disputes at international arbitration courts in the absence of an arbitration agreement. For investment projects in priority sectors of the economy, there are investment preferences. In particular, the law on investments provides for the exemption from customs duties on goods, equipment, and components imported for investment projects and offers state grants. On January 1, 2009 we enacted a new tax code that significantly reduces the tax burden in the non-commodity sectors of the economy. It should be noted that in 2009 the corporate income tax rate was reduced from 30% to 20%, and by 2014 will be set to 15%. For SMEs, this removes the requirement for the advanced payment of corporate income tax. It also reduces the tax base for the payment of property tax. Also, among other incentives, the new tax code will see the value-added tax rate fall from 13% to 12%.
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