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Changing approaches to attracting investments, or how investment industry of Kazakhstan adapts to challenges of the pandemic

Friday, 02 October 2020, 11:12:49

In Kazakhstan, from year to year, work is being actively carried out to attract investments to the country. During the years of independence, $330 billion of foreign investment has been attracted from more than 120 countries of the world. The global pandemic, which globally affected the development of the economy of almost all countries, did not bypass the investment industry. In an exclusive interview with primeminister.kz, Vice Minister of Foreign Affairs Almas Aidarov spoke about the change in approaches to attracting investments to Kazakhstan in the context of the pandemic.

— Almas Aidarovich, crises are a profitable time for investments, because the prices of shares and business always fall at this time. But the risks of bankruptcy in the context of economic turbulence are also great. How is the investment sector doing? How did the pandemic and quarantine measures affect the investment market in Kazakhstan?

— Today the world is experiencing one of the most serious recessions in the last century. According to the World Bank, the global economy will contract by 5.2%, the IMF forecasts are not much better — they predict a decline of 3%. The global market saw the bankruptcy of a large number of companies, at the same time, all countries are under pressure on the budget, when it is urgently necessary to provide financing for the health care system and social security, stimulating measures for business, not to mention the unfavorable situation in financial and commodity markets, the background of escalating trade relations and other socio-economic processes in almost all countries.

Analysts at the United Nations Conference on Trade and Development (UNCTAD) have revised forecasts of global direct investment flows, and instead of a fall of 15%, which was announced at the beginning of the year, we are now talking about a predicted 40% decline in global FDI.

In the first quarter, we recorded a decline in the gross inflow of direct investment, which is quite expected. At the same time, the Government has taken a number of timely measures to minimize the negative effect on existing plants, ongoing projects and projects for which agreements have been reached with investors to start implementation.

— How many investments have been attracted since the beginning of the year, and mainly in what areas and what projects?

— The investment decision-making process is quite lengthy and varies depending on the industry, donor country, corporate procedures of companies have a great influence. If we talk about the statistics of foreign direct investment, then according to the National Bank of Kazakhstan, in the first quarter of 2020, the volume of gross FDI inflows amounted to more than $3.5 billion, while most of the traditionally attracted by the mining industry — 65%. The manufacturing industry accounts for 9% of the total volume of foreign direct investment, the transport and warehousing sector accounted for more than 5%.

Today, with the participation of foreign investors, about 200 investment projects are being implemented in the country in non-resource sectors of the economy: agro-industrial complex, mining and metallurgical complex, mechanical engineering and production of components, petrochemical and chemical industry, renewable energy sources, transport and logistics and others.

If we talk about specific projects, in 2019, 40 large projects were implemented with the participation of foreign investors in the amount of $1.1 billion, with the creation of about 3.5 thousand jobs.

This year, despite the crisis, we expect foreign investors to commission 35 large projects for a total of $2.5 billion, of which 12 projects worth $799 million have already earned. These are projects with the participation of such companies as the German Linde Gas, the French Total Eren and Urbasolar, the Japanese Hitachi and others.

Among the projects under implementation I would like to note one of the most important projects — the construction of an international airport in Turkistan. This will be the first international airport built in Independent Kazakhstan, as they say, "in an open field", from scratch. Turkish investors from YDA Holding are investing about $206 million and creating 400 permanent jobs. Turkistan annually receives about 1 million tourists, with the construction of the airport, their flow will increase. A five-star hotel of the international hotel chain Rixos is also under construction in Turkestan. It is planned to be commissioned by the end of this year.

Despite the crisis, we have new projects. In July, Allur and Tatneft agreed to jointly produce 3.5 million passenger and truck tires a year in Kazakhstan. Production is expected to start in 2022.

— Of course, the current crisis is changing many things globally. Approaches to business, economic and political regulation, and the way of life are changing. Will investment priorities change their direction?

— Data for today and forecasts for the near future are disappointing. We are already seeing rapid economic downturns, rising unemployment and inflationary pressures across the world. All companies on UNCTAD's list of 100 Largest TNCs lowered their profit expectations by an average of 39%. Technological and pharmaceutical TNCs suffered the least, some, on the contrary, changed their forecast upward. In general, in the near future we will observe a serious regrouping of companies and their strategies.

In the conditions of the coronacrisis, elements of economic "egoism" are increasingly manifested in politics in both developing and developed countries. Countries will try to keep investments at home. In addition, politicization and regulation of the release of investments to other countries is possible. Everyone also felt strongly the negative effect of the collapse of production chains during the first months of the pandemic, when the "domino principle" played due to the disruption of supplies, covering various industries and slowing down the economy as a whole.

We, in turn, being a developing country, must retain our leadership in the region and maintain the established level, ensuring the implementation of existing agreements, dialogue with existing investors, revision and creation of the most attractive conditions for investment and business.

— What measures are being taken today to increase investment in the country?

— In his Address on Sep. 1, 2020, the Head of State Kassym-Jomart Tokayev clearly outlined measures and priorities for implementing the investment policy.

Full disclosure of the industrial potential of the economy of Kazakhstan remains at the forefront. That is, the focus remains on the diversification of the economy with the transition to the next level and adaptation to new conditions dictated by the time and the market.

We pay special attention to attracting investments in such sectors as basic for the Kazakhstani economy as petrochemistry, metallurgy, automobile and mechanical engineering, agro-industrial complex. These industries have a significant multiplier effect, are the basis for the natural formation of a cluster, develop related business areas, and provide jobs.

For example, in Almaty by the end of the year it is planned to start production of Hyundai small-unit assembly cars. At the first stage, 30 thousand units will be produced per year, at the second stage — up to 45 thousand. Today, the total investment amounted to more than 28 billion tenge. Subsequently, the localization of production will be increased to 51%, auto components will also be produced in Kazakhstan.

The President announced the introduction of a new instrument — investment agreements with strategic investors, which will fix the agreements between the state and the investor. These are investment preferences, concessional financing, partial guarantees, export support mechanisms, reimbursement by offset against tax liabilities, guaranteed procurement of the state, quasi-state sectors and subsoil users. The main provisions and conditions for the conclusion of such agreements are now being worked out. Personally, I am in favor of this tool becoming a very flexible investment document, not a template. Then, following the example of a commercial contract, we will be able to fix the conditions of his entry with the investor very quickly, and not try to adjust his needs to our stencils.

I would like to note that the pandemic forced to change approaches and transfer the signing of investment contracts entirely to the online platform. Since the beginning of the year, more than 20 investment contracts have been concluded through www.egov.kz for about 300 billion tenge.

In addition, we have completely revised the approaches of Kazakhstan's foreign missions to work with investments. Taking advantage of these months, we have developed three-year investment programs for 66 foreign institutions. This is a plan that determines the volume of investments we expect from this country, with which specific companies we want to work during this period, which industries to cover.

With our colleagues from line ministries, we have done a great job to reload the investment order. By this we mean a clear statement of the needs of the industry: where the industry wants to see its investor.

— What do you think the major investors are interested in in Kazakhstan now?

— In my opinion, there is great interest in agriculture, but the potential is far from being revealed, since there are constraining factors. For example, insufficient stability of legislation, changes in regulation rules, subsidies, etc. Our farmers cannot always keep their finger on the pulse, let alone foreign investors. But without building agriculture, it is impossible to build industrialization. This connection has been proven. For example, in Kazakhstan, agriculture accounts for only 4.4% of GDP; in the first half of 2020, the figure dropped to 2.8%. At the same time, the industry employs 40% of the working-age population, that is, almost half. The disproportion is obvious. The demand for the products of industrial enterprises will directly depend on income in agriculture. Having satisfied domestic demand, having learned to compete in the local market, Kazakhstani products will be successful with foreign consumers, that is, the volume of exports will increase.

Of course, for large players, interest in the mining and metallurgical complex remains unchanged. Here I do not mean the oil and gas sector, but solid minerals. To date, over 1,000 licenses have been issued and are in private hands. It is very important to introduce them into circulation. This is a great opportunity for new investors who can fully realize the potential of the mining and metallurgical complex, including in its processing and export of finished products.

I will cite as an example the project of the Russian company EuroChem for the production of mineral fertilizers in the Zhambyl region. The products of this enterprise will not only satisfy the needs of the domestic market, but will also be exported to the Russian Federation, China, countries of Central and Southeast Asia, and the Middle East. Negotiations on the implementation of this project moved to a new level, literally in July 2020. Kazakhstan and Russia signed a corresponding intergovernmental agreement.

The third area is the transport and logistics sector, interest in which is provided by the transit potential and the readiness of the basic infrastructure. We have launched a multimodal Eurasian transport corridor. Five railway and 6 automobile international routes now pass through Kazakhstan. In the coming years, the construction of all major highways and seaports will be completed, the necessary infrastructure conditions have already been created for overland transit between Europe and Asia. Thanks to this, we observe a progressive growth in the volume of freight traffic through the territory of Kazakhstan.

Let me give an example of container transportation. For us, the further development of this area from China towards the countries of Central Asia, Russia, Europe, as well as to Iran and the countries of the Middle East is urgent. Container transportation China - Kazakhstan - Europe is the most profitable route for the transportation of goods. At the same time, if at the initial stage the wagons returned from Europe half empty, now we already see the additional loading of containers on the opposite direction of the EU - Kazakhstan - PRC more than 70%.

Investors understand that routes through Kazakhstan can become even more competitive and are ready to consider infrastructure projects.

At the same time, transit concerns not only cargo, but also digital data. Infrastructure is a fairly broad concept that also covers infocommunications. The transit of Internet traffic between Europe and Asia has great potential. It is necessary to switch on in time and develop fiber-optic communication lines, international route corridors aimed at servicing digital transit. I would also like to point out the possibilities of developing data centers. We have the necessary conditions for this in the northern regions: competitive electricity costs, climate, low seismic potential.

Fourth area is the sectors of the service economy. Education and healthcare are turning into a huge commercial niche, not to mention the crazy demand for these services.

— Are there enough government guarantees in the field of investment activities in Kazakhstan?

— In my opinion, our legal infrastructure for investment activities is satisfactory. It meets international standards. Almost all spheres of the manufacturing industry, agriculture are provided with preferences.

But at the same time, one must understand that investors are ready to pay taxes and incur operating expenses. Moreover, all large foreign investors are distinguished by high social responsibility and make a significant contribution to the development of production locations. That is, the availability of preferences is not the most important issue. The issue, as a rule, is in the stability of legislation, since there were risks of volatility of the business model. The Head of State also drew attention to this: by the end of this year, the corresponding changes will be adopted.

Considering that competition for investments all over the world is increasing, and developed countries are implementing an active policy of repatriating investments, we must offer the most interesting conditions for investors. The implementation of the measures voiced by President Tokayev, I am sure, will contribute to the implementation of the V-shaped scenario of the current crisis and the achievement of the initial targets for increasing the share of investments in fixed assets in total GDP by 30% by the end of 2024.

— What should an investor, entering Kazakhstan, evaluate and understand first of all?

— As a rule, an investor first of all evaluates the level of protection of his investments, and this is ensured by the rule of law, the institutional environment and the stability of legislation. At the same time, changes for the better are only welcome. We understand that the legislation is not completely perfect in every sense and there is room for improvement. A good tool in this case was the English law in the AIFC, which is closer and more understandable for foreign players.

In addition, the country's leadership has always prioritized the needs of investors, for this there are dialogue platforms at all levels: for 22 years, the Foreign Investors’ Council has been functioning under the chairmanship of the Head of State, and the Council for Improving the Investment Climate under the Prime Minister. In addition, we have an investment ombudsman institute as a tool for pre-trial and out-of-court dispute settlement.

But nothing stands still, the world is evolving, conditions are changing, we need to be flexible and not be afraid to adapt to them. Business quickly adapts if we do not keep up with the pace, that is, there is a risk of losing both existing ones and not attracting new investors.

— Thanks for the interview!

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