kazakhstan and the new silk road - pwc в … and the new silk road the importance of aligning goals...

Kazakhstan and the New Silk Road

The importance of aligning goals and how to reach them

PwC KazakhstanSeptember 2017

Foreword

The New Silk Road – A unique opportunity

Few anticipated the revival of the ancient trade routes that once spun the Eurasiancontinent. In the 15th century, the discovery of new sea routes and development ofmodern vessels by European empires all but extinguished a network that at one pointcrossed all of Eurasia. Even less envisaged what the One Belt, One Road initiativeentailed after it was announced by President Xi Jinping in Astana in 2013. Slowly butsurely, the governments of 65 states currently partaking in the initiative, have graspedthe importance and the development opportunities that trade and infrastructureinvestment present. The network connects Asia, Europe and Africa, and promises tofurther integrate the 4.4 billion people in its sphere into a global network, facilitating theexchange of goods and ideas.

Kazakhstan and its role

As the 9th largest state in the world, and the largest landlocked one, Kazakhstan has notbenefitted as much from the rise of transcontinental trade followed by the industrialrevolution as other nations. The Soviet Union’s political ideology and Southern bordersalso presented little opportunity for commerce in the 20th century. The rapid revival ofthe Silk road, and massive infrastructure spending over the next decade, however,forebode the re-emergence of Kazakhstan as a trading hub in Central Asia. With tradebetween China and Europe increasing yearly, and the distinct trend of smaller, high techgoods increasing in value, the balance of trade seems to be shifting towards faster, albeitcostlier, railways. More than 90% of trade between China and Europe occurs by ships,and only less than 5 % passes by rail. Continuing investment of political and financialcapital can increase trade by rail to 10% by 2025. Kazakhstan is set to gain significantlyas the geographic centre piece of the land part of the New Silk Road. Opportunities fortrade and industry are countless as local businesses can benefit from cheaper costs ofexports and imports, and by providing services to freight forwarders and railwaycarriers.

Preparing for success

The key to fully exploiting the opportunity presented to Kazakhstan is to adapt its biggeststakeholders and their business model to the One Belt One Road initiative. This meansfocusing on international transit and the client. It also means developing a digitalculture, capable of adjusting to new challenges and possibilities given an adequateinfrastructure. For now, Kazakhstan is falling behind its partners on the New Silk Roadin terms of digitizing and the benefit it entails. But still Kazakhstan has a window ofopportunity and needs to act fast.

Rahul Gupta

Senior PartnerPwC Kazakhstan

Evgeny Orlovskiy

PartnerPwC Russia

PwC │ Kazakhstan and the New Silk Road │1

The New Silk Road can transform Kazakhstan’s role in Central Asia

In September of 2013, President XiJinping presented China’s vision forengaging the world in re-creating thehistoric “Silk Road” during a speech inKazakhstan at Nazarbayev University.This effort is alternatively known as “OneBelt, One Road” (OBOR) or “Belt and RoadInitiative”. The aim is to develop closereconomic ties, deepen cooperation, andexpand development in the Euro-Asiaregion. This speech and subsequentannouncements officially set the stage

for the establishment of a sprawlingnetwork of railroads, highways, gas andoil pipelines, ports, cities, andinvestments in modern infrastructure torecreate successful ancient Silk Roadtrade routes but with a 21st-centurystrategy. By early 2015, Beijing’s specificstrategy began to emerge as China’sleadership laid out a plan for OBOR. Theland strategy runs through Central Asia—with Kazakhstan playing a key role.

Railway connections between Duisburg and Shanghai, through Kazakhstan

The One Belt, One Road initiative’s investments aim to develop the infrastructure for transcontinental trade in Eurasia. In the long term, a significant share of trade between China and Europe may pass through this route, nearly twice faster than by sea. The opportunities for businesses in Central Asia to capitalize on new trade routes are countless

By 2022

$186 Billion

$700 Billion

By 2017

Source: United Nations conference on trade and development (UNCTAD), World Investment report 2016National Development and Reform Commission, Belt & Road Forum, 2017


Infrastructure investment and the subsequent benefits have been key growth factors for both transcontinental trade and Kazakhstan’s economy

Significant investments have been made inKazakhstan to strengthen its capabilitiesas a transit corridor. This includes over$3,5 bln in Khorgos Eastern Gate, a dryport on the Eastern border with China.COSCO Shipping, one of the world’slargest logistics service providers, andLianyungang Port Holding, have recentlyacquired stakes in the project, making it atransnational endeavor and allowing theKazakhstani side to benefit from theimmense experience of its counterpart.

Other significant investments include theShalkar-Beineu railroad, the Zheskazgan-Saksaulskaya railroad, and the Kurykferry terminal. The resulting increase incorridors and capacity will cementKazakhstan’s role as a transit region.Samruk Kazyna estimates thatinfrastructure investments will contributebetween 0.1% and 0.2% annually toKazakhstan’s economic growth over thenext decade.

Asia-EU-Asia transit container traffic via Kazakhstan, ‘000 TEU

Source: KTZ, McKinsey & Company, Samruk-Kazyna


Kazakhstan Temir Zholy and its parent company Samruk Kazyna hold a central role in Kazakhstan’s development as a Silk Road transit point

As is the case with most supply chains,OBOR is only as strong as its weakest link.For Kazakhstan’s national railwayoperator and its parent company, it meansmoving at an equal pace with themodernization of their infrastructure andbusiness model as their foreigncounterparts.KTZ’s role in this should be focused onimproving processes to create a reliable

platform for transiting cargo throughKazakhstan, while Samruk Kazyna shouldsupport the long term objective ofdeveloping a multimodal transportsystem, which includes significantinvestments in energy distribution andtransportations infrastructure, as well asusing its influence to cut regulations toease the bureaucratic processes necessaryfor transiting Kazakhstan.

• Transparent pricing• Simplified Tariff• Unified policy/regulation• Efficiency in traction use

• Infrastructure (signalling, safety)• Billing system• Customs declaration• Transport documents

• Digital union within EAEU• Smart logistics• Easy to order services• Customer orientation

Open Tracks

Innovation

Standardization

Open tracks


Instruments for the successful implementation of OBOR

Next critical steps of Kazakhstan Temir Zholyand Samruk Kazyna to capitalize on OBOR

Without this crucial step, theorganization runs the risk of not beingaligned with the strategy outlined by theOBOR as well as the ability to keep pacewith the developments of the investors,customers, and the customers’ customers

Develop a digital culture within Samruk Kazyna and at KTZ

Move away from analogue culture

Move towards digital culture

• Driven by policies and procedures

• Push products into market

• Pull – customer driven products

• Response – change based on economic and client needs

• Strong hierarchy & slow decision making

• Process, task orientation

• Employees with pre-defined work (“do your task”)

• Status quo and accept barriers

• Flat hierarchy & fast decision making

• Rapid decision-making

• Results, product orientation

• Empowered employees (“find a way to achieve a goal”)

• Innovate and try to overcome barriers

Customers & Demand

Organization & Decision-Making

• Good understanding of analogue customers & learning from the past

• Experience and stability

• Homogenous teams & department silos

• Working within tasks and silos

• Career progression in predefined paths

• Good understanding of digital customers & trends

• Vision, curiosity, motivation, flexibility

• Mixed teams &work in communities

• Strong collaboration

• Rapid, unpredictable career progression

• Rapid launch and learn

Culture, Ways of Working

Digital abilities and capacities begin withthe leadership and people. The speed ofdecision-making and productdevelopment is critical. Senior leadersaspire to succeed against their dreamsand not just their peers. Digital leaderssource ideas from many sources and notJUST from respected experts. Digital

having a digital footprint and architectureallows Kazakhstan to further the goals ithas been pursuing with the World Bankand the UN to move up the ladder of beinga place to do business successfully.

leaders are consummately focused ondata, data analysis, and continuousprocess improvements. By prototypingdigital leaders allow for failures so thatthey can experience success sooner. Ideasmatter more than just experience, andcommunications and transparency are keytraits that allow all to succeed.


Strike a balance at KTZ with a focus on OBOR and focus on the client

The OBOR is focused on transportation,supply chain, logistics, and freightmanagement through successful andprofitable management of the railroad.The faster KTZ can implement changes toits business model, the sooner it cancapitalize on the investments Chineseand international financing institutionshave planned in Kazakhstan and beyond.

Balanced

Domestic

Transactional

Functionally Focused

Conventional Wisdom

Risk Avoidance

Global

Customer Centric

Collaborative & Cross-functional

Analytics & Insight

Growth & Value Focus

Market Focus

Culture & Organization

Business Architecture

Decision Management

Governance

Current state Target state

The impact on KTZ and the value toKazakhstan are significant in manyrespects. Modernizing governance, targetoperating model, and the operations ofKTZ also will draw the attention of freightforwarders, third party logisticscompanies, and distribution and inventoryhubs.


Kazakhstan can benefit from OBOR in significant ways by capitalizing on transit revenues and gaining new export markets

Revenues from providing transportation services

New export markets and surplus cargo capacity on Europe – China route will benefit local industries

With a 10-fold increase in transit container traffic over thenext years, new significant revenue streams can becapitalized on by KTZ and private companies. Whenbureaucratic hurdles are removed, foreign rolling stock willbe able to rent track from KTZ while making the journeyacross Kazakhstan.

Private logistics providers are closely watching OBOR’sdevelopment and the increase of Kazakhstan’s capabilitiesas a transit corridor. Its central position within the Asia-EUroute makes it an ideal place to set up shop fortransportation services, such as rolling stock renting,logistics solutions, and cargo transportation. Transitoperations generate by far the most income per ton/km forKTZ. We therefore expect transit to become a significantsource of income for Kazakhstan, and if the rail services aresimplified and regulations cut, a dynamic and profitabledomestic logistics industry will arise to emulate ancientnomadic merchants who connected East and West in thepast millennia.

20152014 2016

43.3

59.6

46.1

60.2

49.6

59.1

EU - ChinaChina - EU

Trade between China and the EU28, in Mln tons


Trade between the EU and China in terms of weight andvalue is increasing annually. OBOR will allow highervalue goods, such as electronics and premium foodproducts to be delivered to clients quicker. Trains willcross Eurasia in increasing volumes, and improvedinfrastructure will allow them to carry more containers.

A new major trade artery will form on the territory ofKazakhstan. An improved logistics ecosystem will allowKazakhstani producers of food stuffs, machinery, leatherproducts and any other nascent industry to accessforeign markets quickly. The weight trade surplus Chinaholds over the EU means that many trains will returnfrom the EU with their containers empty. Unused returncargo capacity can be acquired at sub-standard cost,which will allow Kazakh producers to export cheaperthan ever before. A new ecosystem of industries maygrow in the new silk road and truly benefit the peoples ofCentral Asia.

Freight transport demand is increasing worldwide

100

200

300

400

500

600

700

World

China

India

USA

EU

2010 2020 2030 2040 2050

Growth for freight transport demand (2010=100)

Source: International Energy Agency

The opportunities don’t end here. As freight transportdemand increases around the globe, new players willemerge, and Kazakhstan’s central position will furtherestablish it as a transit hub. Most notably, Indian freighttransport is expected to increase nearly sevenfold by2050.

The role of OBOR as part of global trade will increase,and with it, Kazakhstan’s opportunity to benefit from it.



Kazakhstan is falling behind in key metrics that impact economic performance, governance and OBOR’s successful implementation

To fully capitalize on OBOR, Kazakhstan must take advantage of new sources of economicgrowth and efficiency. It currently ranks as constrained in terms of digitization whileRussia and China have made significant gains over the last decade. New reforms andapplied best practices can narrow the gap between Kazakhstan and its partners on OBORin terms of economic performance, transparency, and access to government services.

Impact

EconomyGovernanceSociety

• GDP Growth

• Job creation

• Innovation

• Transparency

• E-government

• Education

• Quality of life

• Access to basic services

Source: Strategy& analysis

Stages of digitization0

10

20

30

40

50

60

70

Constrained Emerging Transitional Advanced

Kazakhstan Kyrgyzstan

Uzbekistan Nigeria

China

Azerbaijan

Ukraine

Latvia

Georgia Iran

Russia

Poland

BelarusEgypt Mali

Lev

el o

f d

igit

iza

tio

n

Stages of Digitization

Constrained Emerging Transitional Advanced

Edgard Kramer

Analyst

Тel.: +7 778 999 4686

[email protected]

To have a deeper conversation:

Torsten Thieme

Director

Тel.: +7 701 543 4936

[email protected]

Rahul Gupta

Senior Partner

Тel.: +1 703 362 4917

[email protected]

Evgeny Orlovskiy

Partner

Тel.: +7 495 223 5176

[email protected]

OBOR provides Kazakhstan with the opportunity to emerge once more as a keyregion connecting global trade. When Zhang Qian, a Chinese imperial official ofthe Han Dynasty, and founder of the ancient silk road, first embarked on theroute West, he was met by Central Asia’s people with desirable goods andtradable silver. For over 1500 years, this trade artery grew until Vasco da Gamadiscovered the shipping route to the Orient around Africa. Modern market andgeopolitical trends promise to revive the ancient arteries. This is Kazakhstan’sgreatest growth opportunity since independence. Its national companies are thebiggest stakeholders, and must ensure that they are ready to support theenormous transit volumes in the years to come. They must understand theimportance of the New Silk Road, and award it the attention it deserves. Thismeans major changes need to be made soon.

Conclusion


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kazakhstan and the new silk road - pwc в … and the new silk road the importance of aligning goals...

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