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Kazakhstan wooing foreign investors at a breathtaking pace this year

31 july 2014, 15:27
0

Kazakhstan has been engaged in a whirlwind of activity to increase foreign investment since Karim Massimov returned to the prime minister’s position in early April.

The hard work during those three months has paid off, with international companies and development banks pledging tens of billions of dollars toward creating infrastructure and diversifying the economy.

A new co-financing arrangement between the government and three development banks – the European Bank for Reconstruction and Development, the Asian Development Bank and the World Bank – is so innovative that it has generated headlines around the world.

The most intriguing component of the innovation is that the banks’ planners – rather than Kazakhstan officials – will identify the development projects Kazakhstan should pursue.

Another component of the innovation is that Kazakhstan will give each of the banks billions of dollars to increase the number and scope of projects and the speed with which they’re implemented.

In addition to forging a new kind of partnership with the development banks, the government’s steps to ramp up investment have included:

- Enacting legislation that makes foreign investment in Kazakhstan more attractive than ever. The provisions, which took effect in June, include tax exemptions, manufacturing-facility subsidies, and easier rules for bringing in foreign staff.

- Convincing Russia’s biggest financial institution, Sberbank, to finance $3.6 billion worth of modernization at the national railway company, Kazakhstan Temir Zholy.

- Convincing Malaysia, which has been a global pioneer in Islamic banking, to help Kazakhstan re-energize its sleepy Islamic-banking system.

- A commitment to privatizing most of the 400 companies in the portfolio of the sovereign-wealth fund Samruk Kazyna. A key reason for privatizing is economists’ long-standing contention that non-government-owned companies do a better job of creating wealth and sparking the economy.

In its 20 years of independence, Kazakhstan has attracted more foreign investment -- $190 billion – than any former Soviet country except Russia.

Why is it putting even more effort into the campaign this year? Because President Nursultan Nazarbayev and other government officials are concerned about the pace of development slowing in recent months. They want it to return it the pace of the go-go years in the first seven years of the 2000s, when economic growth averaged 10 percent a year.

Economic growth was minimal during the global-recession years of 2007 to 2009, but it’s rebounded to 6 percent annually.

That’s not 10 percent, though. So on April 1, President Nazarbayev replaced Prime Minister Serik Akhmetov with Massimov, who had previously displayed a knack for attracting foreign investment.

The new co-financing arrangement between the government and the development banks holds great promise for increasing development.

One reason is that having the banks select projects should reduce the role of politics and officials’ self-interest in the development equation.

In addition, if the new model is successful, it could be used in development efforts around the world.

Each of the development banks has lent Kazakhstan billions of dollars since independence. But until recently the country had put up little of its own money to co-finance projects.

Now it’s pledging to give the development banks a whopping $2.7 billion from its National Fund, which it created from oil and gas taxes both to move the country forward and to deal with emergencies such as the recent global financial crisis.

That huge chunk of co-financing will mean more development more quickly.

“Kazakhstan has contributed to our projects before, but this is billions over years, not a few millions,” Olivier Deschamps of the European Bank for Reconstruction and Development said in a recent interview.

“This is a different scale,” he enthused. “We believe it will be a game changer in increasing the impact of the bank (on Kazakhstan’s development) and scaling up our investment.”

Deschamps is the bank’s managing director for Turkey, Eastern Europe, the Caucasus and Central Asia.

Although the development banks will draw up lists of projects under the new arrangement, they won’t be given carte blanche to do as they please.

A national council consisting of Massimov, government ministers with economic responsibilities, and representatives of the development banks will approve projects.

But the banks have known Kazakhstan’s needs for two decades, so few of their proposals are likely to fizzle.

Kazakhstan has worked hard to promote itself as a country with an investor-friendly business climate, but the reality hasn’t always matched the hype, international companies say.

The legislation that Parliament passed this summer offers generous bottom-line incentives for corporations to set up shot in Kazakhstan and addresses some gripes of international businesses that are already here.

The bottom-line incentives include a 10-year exemption from corporate taxes, an eight-year exemption from property taxes and a 10-year exemption from most other taxes.

In addition, Kazakhstan will reimburse a company 30 percent of what it spent to create a manufacturing facility once it’s operating.

The legislation also allows companies to bring in workers from their homelands to construct a facility and run it for the first year.

Foreign corporations in Kazakhstan have long chafed over “local content” rules that force them to spend considerable time and money training Kazakhstan workers rather than hiring workers from abroad with state-of-the-art skills.

Foreign corporations have also complained about government heavy-handedness after they’ve established operations here, including costly rules changes, tax problems, and huge fines for environmental and other violations.

The new legislation created a national ombudsman’s office to address such concerns. How effective it will be in addressing foreign companies’ complaints of unfairness remains to be seen.

The legislation has even done away with a visa requirement for citizens of 10 countries that have invested heavily in Kazakhstan since independence. It will make it easier for their nationals to come to Kazakhstan in search of business.

President Nazarbayev was personally involved in Sberbank’s agreement to help Kazakhstan’s rail company, meeting bank president German Gref a day before the deal was signed.

Kazakhstan has “ambitious goals pertaining to diversification of the economy that require a substantial amount of investment,” Gref said at the agreement signing ceremony.

Kazakhstan Temir Zholy needs tens of billions of dollars to build new rail lines, to modernize Soviet-era tracks and facilities, and replace antiquated locomotives, freight cars and passenger cars.

Sberbank is also ready to help finance other transportation infrastructure, including roads, port facilities and logistics centers, Gref said.

Malaysia has agreed to help Kazakhstan revise its Islamic banking legislation and establish an Islamic banking center in Almaty.

The pledge came from the top – Prime Minister Najib Razak – when he visited Kazakhstan in May.

Islamic banking has played little role in Kazakhstan’s development since taking root here five years ago. But President Nazarbayev believes it has major potential long term. That’s why he and other government leaders want new life breathed into it – and the sooner, the better.

The president also believes that the companies in the sovereign wealth fund can have a bigger economic impact on Kazakhstan if they’re privatized.

That’s why Samruk Kazyna plans to privatize most of the businesses in its portfolio as soon as possible.

Because international as well as Kazakhstan companies will have a chance to acquire the businesses, privatization is not just a chance to increase economic efficiency but also a foreign-investment opportunity.

The few companies that will remain in government hands, government officials have said, will be those that are considered vital to national security.

The foreign-investment-promotion steps I’ve mentioned are some of the important Kazakhstan has taken in the past few months – but far from a complete list.

I expect the breathtaking pace of reaching out to international companies to continue this year and next.

Author:
Hal Foster

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