REVIEW

A Tale of Production

A powerhouse of economic activity, Kazakhstan’s industrial sector is fueling job creation and GDP growth as the state develops programs to boost value-added and innovation.

The year 2011 saw record-breaking growth for Kazakhstan’s industrial sector, as its share of GDP grew and production expanded. Meanwhile, improved ratings have attracted new investments in the oil and gas sector, as well as the non-extractive segments of industry, such as steel and non-ferrous metals processing. State programs have spurred this growth and continue to determine the country’s direction as the government works toward diversifying its product lines, supporting SMEs, and developing innovative and accelerated initiatives.

THE FIGURES

Approximately 37.9% of Kazakhstan’s GDP is generated by its industrial base, which also employs 11.9% of the workforce. In 2011, Kazakhstan’s industrial production grew by 6.7%. The share of the processing industry in GDP increased from 10.5% in 2009 to 13% in 2011. The Kazakhstan Statistics Agency noted that during the first four months of 2012, growth was recorded as 2.7%, ranking third after trade and communications, which grew 14.3% and 7.1%, respectively, compared to the same period in 2011.

As a result of Kazakhstan’s improved ranking—the country advanced 11 spots to 47th position in the World Bank’s Doing Business report—the number of investments in Kazakhstani industry sector is expected to rise. Outside the extractive industries, the steel and non-ferrous metal processing segments stand out as attractive investment destinations, provided that the country’s large-scale infrastructure development program and large deposits of minerals such as iron, zinc, and copper remain accessible. The Kazakhstan Statistics Agency noted that $7.6 billion was invested in fixed capital in April-May 2012 alone, which is 4.1% higher than the 2011 values for the same year. Some 55% of the investment was aimed at businesses developing their own production lines. While external and internal borrowing account for the lion’s share of financing, foreign capital and national budget funds financed 20% and 15% of investments, respectively.

STATE PROGRAMS

The country’s industrial output and export bases are concentrated in the extractive industries, which make up about 80% of Kazakhstan’s exports. While oil and related products as well as ferrous metals are the main export items, major imports include machinery and equipment, metal products, and foodstuffs. With a trade surplus exceeding $45 billion, Kazakhstan is able to comfortably acquire its needs from abroad. Astana is pursuing ambitious industrial programs to strengthen the country’s non-extractive industrial base and self-reliance through the recycling of the capital generated by its extractive industries. In this regard, city officials have established a diversified and sustainable industrial model “in order to achieve all we have worked for to diversify the economy, stimulate the production of innovative components, and support export-oriented industries,” President Nazarbayev told TBY. “These projects should stimulate the development of SMEs and new technologies. This is the basic idea of the industrial policy; the state sets the initial momentum, and the task of the private sector is to pick up and develop the first initiative.”

ACCELERATED INDUSTRIALIZATION

One such initiative is the State Program for Accelerated Industrial Innovative Development for 2010-2014, which functions as a guideline tailored to strengthen the country’s non-extractive industrial base. The program seeks to position new centers of diversified economic activity across the country, boost Kazakhstan’s non-extractive industrial base, and expand the nation’s capacity to bring value-added to its natural riches; all with a view to increase global competitiveness. The prioritized areas include

oil processing and oil and gas sector infrastructure, the mining-metallurgy complex, and the nuclear and chemical industries, which include the transition from basic manufacturing to higher production levels. Moreover, the government is pursuing the development of the engineering, building materials, and pharmaceuticals sectors, as well as new approaches to agriculture equipment, power generation, ICT, and space activities.

Meanwhile, other aspects of the program target an increased share of industrial processing, with the goal of 12.5% of GDP, and aim to raise non-commodity exports to 40%. Since the launch of the program, investments in the processing industry have increased to $1.5 billion, which corresponds to 35% growth. The most attractive areas are the production of electric and electronic equipment, the automotive industry, and food processing, such as plant oils and alcoholic beverages. The Ministry of Industry and New Technologies reported that negotiations with 209 foreign investors from 42 countries are being carried out with the aim of drawing foreign attention to Kazakhstan’s non-extractive industries and eventually sparking more investment.

The program also strives to acquire 60% of goods and 90% of work and services from local providers in public procurements, reduce transport expenditures by 8%, and reduce the energy costs in terms of GDP by 10% compared to the same levels for 2008.

The new industrialization program foresees the implementation of 705 projects worth $75 billion, which are estimated to create 892,000 jobs during construction and 191,000 jobs throughout exploitation. Approximately 70% of these projects focus on attaining a high level of technological conversion, while the remaining 30% are geared toward the agro-industrial agenda. Askar Yelemessov, Chairman of the Board of Directors at Troika Dialog explained to TBY that “the industrialization program will be able to convert some investments into steel and cars with more jobs for local people. If the government finances transportation and agriculture, there will be even more growth.”

PRODUCTIVITY 2020 & SMEs

SMEs constitute an undeniable pillar of the economies of industrialized nations, generating a majority of economic output. Hence, Kazakhstan pays special attention to the development of its SME base to ensure sustainable economic growth and diversification. The “Productivity 2020” program prioritizes the modernization of existing production and management cycles, as well as support for new businesses with a view to gain global competitiveness. The program’s targets include doubling labor productivity in the processing industry by 2020 and reaching an average operation rate of 80% for participating companies. In 2012, 100 Kazakhstani industrial enterprises will be involved in the program. An additional 50 enterprises will receive subsidies for expertise expenditures incurred while carrying out the government’s plan. The Ministry of Industry and New Technologies reported that in 2011 labor productivity in the processing industry increased by 20%. Furthermore, the chemical (58%), engineering (38%), and metallurgy (29%) sectors showed the highest rates of growth in labor productivity. Companies such as SAP have taken an active role in this statewide progression, focusing on the growth acceleration of SMEs. “During 2011, we expanded our footprint within the subsoil sector, made significant progress within the public sector, and formulated a structured and pragmatic program to address the SME sector, which has started to gain momentum,” Nick Malone, Managing Director of SAP Kazakhstan and Central Asia, told TBY in an interview.

POST-CRISIS RECOVERY PROGRAM

Kazakhstan has maintained its industrialization agenda in line with the realities of the global economy. The government has enacted a post-crisis recovery program to assuage the effects of the slowdown, which has hampered the competitiveness of certain enterprises. The program provides financial support to boost production and maximize the number of available jobs. The target is to restore the paying capacity of the program’s participants, while preventing the loss of more than 30% of each company’s jobs. The Ministry of Finance reported that since the program’s enactment, about $11 million was allocated to 22 participants of the program, ensuring a secure future for many of the building blocks of the industrial sector and the health of the economy in general. Through these conscious state activities, the state is providing a wider range and greater number of jobs as well as opening the sector up to increased investments and technological advancement.