Public Policy for development of non-oil sector of economy: Kazakhstan case

Baku, October 24, 2013

Table of Content

• The Structure of Public Investment Policy Elements • Astana – new city: first non-oil sector project • Development of Special Economic Zones

• National Oil Fund: Funding source for Public Investment

Programs • National Holding “Baiterek”: Managing the network of

Development Institutions • State Program for Industrial and Innovative Development

Structure of Public Investment Policy elements

State

Development

Budget

Special Economic

Zones

Natural

Monopolies -

National Holding

“Samruk – Kazyna”

Development

Institutions -

National Holding

“Bayterek”

Regional Social

Entrepreneurship

Corporations

State Program for

Industrial and

Innovative

Development

National Oil Fund

ASTANA- New City (SEZ)

• In 1997 Astana became a capital of the Republic of Kazakhstan. It is one of the first

national project for promotion of non-extraction sector development.

• In 2001 the Special Economic Zone “E) Astana – New city was established to

stimulate private investments in municipal and industrial infrastructure. It consists of

new administrative - business part of the city and industrial zone.

• Since the creation of Asta a – New city “E) , total attracted investments amounted

to over $12 bln., including $2,8 bln. of the state investments in infrastructure and

social projects.

• At the moment 49 companies are registered in SEZ, operating in machinery and

processing industries. Among the largest projects are following: loco otive’s assembling plant, EC-145 helicopter’s assembling and service plant, concrete and

metals construction aterial’s plant.

The development of SEZ became an important part of Public Investment Policy and expanded across all the territory of the country.

The SEZ activity is regulated by Law “On Special Economic Zones”, Tax Code” and an “Agreement on SEZ regulation on the territory of the Custom Union”.

• Companies, which are involved in extraction sector, implementing special tax regime and investment tax preferences; producing alcohol and tobacco, working in gambling business (casino) are not authorized to register in SEZ.

• Registered in SEZ companies have a wide range of tax incentives, including a 100% corporate income tax discount, exemptions from land tax and property tax, and partial access to a free customs zone.

• In 9 acting SEZ there are about 140 registered and operating companies, which

attracted more than $10 bln. of private investments in following priority sectors of economy:

• Construction and construction materials

• Machinery

• Petrochemical production

• Chemical production

• Metallurgy and metal processing

• Transport, trade and logistics

• Textile Industry

• IT –Industry

Principles and incentives set for SEZ

National Oil Fund

• The National Oil Fund of the Republic of Kazakhstan (NOF) was created in 2001 and is governed by a Council, including representatives from President Administration, Parliament, Ministry of Finance, Ministry of Economy and Budget Planning and National Bank of the Republic of Kazakhstan.

• By the end of 2012 total assets of the National Fund of Kazakhstan amounted to $68.9 billion (34 per cent of GDP). The National Oil Fund is an important element of the Fiscal Budget’s financial stability. In 2009 Kazakhstan used NOF for anti-crisis programs which helped to smooth effect of the banking crisis and decline in foreign capital inflows.

• NOF is divided into savings and stabilization portfolios, and its minimum level is set at 20% of GDP, while annual transfers to state budget, focused on development of infrastructure and non-extraction industries, are limited to $8bn.

.

GROWTH OF NATIONAL OIL FUND, US $, bn

• The implementation of the Public Investment Programs is a challenging process in a volatile market environment, while the State Budget revenues are dependent on oil prices.

• To eliminate instability of discretionary Budget procedures and to push the development of no-extraction sectors of economy Kazakhstan Authorities started to create the Development Institutions in 2001. The Government continuously provides additional capital injections and budget loans to development institutions to protect their financial stability.

• Development Institutions also operating their borrowing activity on international capital markets within pre-set debt limits.

• The range of the instruments of the Development Institutions include Debt and Equity financing, Insurance of Export Credits, subsidized lending to SME, promotion of Kazakhstan non-extraction sector products at international markets, incentives for construction savings and mortgage lending guarantee system.

• Investment Projects used to be financed in a cooperation of Development Institutions with a private commercial banks on a risk-sharing terms and financing structures. Thus commercial banks were mandated to finance working capital of the borrower, while the Development Bank provided subsidized medium and long term loans for purchases of technologies and equipment (fixed assets).

Development Institutions: main principles

JSC NMH "Bayterek"

“Development Bank of Kazakhstan"

"Investment Fund of Kazakhstan"

"Construction Savings Bank of Kazakhstan"

“Kazakhstan Mortgage Company "

"Kazakhstan Mortgage Guarantee Fund"

Entrepreneurship Development Fund "Damu"

"Kazyna Capital Management"

"Distressed Assets Fund"

"Export Credit insurance Corporation "KazExportGarant"

National Agency for Technological Development

JSC NMH “Bayterek”: managing the network of Development Institutions

State Program for Industrialization and innovative Development (GPFIIR)

GPFFIR is a long-term program based on a Strategy for development of Kazakhstan up to year 2020

3 main targets of GPFIIR include:

• maximization of returns from natural resources (deepness of raw materials processing);

• increase of efficiency of human capital (involvement of ineffectively employed population, increase of labor productivity)

• realization of geo-political potential ( the Custom Union market with population 170 mlns. people).

Industrialization Map • Number of projects- 872

• Investments -KZT 11,5 trlns.

• Creating new jobs - 228 000 during construction period and 192 000 jobs – for the period of project explotation

• According to NBRK statistics if for the period 1993-2012, foreign investments in Kazakhstan economy amounted to $171,2 bln, where 48% or $81,6 blns. was made during GPFIIR implementation period 2009-2012

• In 2013 146 projects with total amount of KZT 555,9 blns and with creation of 14100 new jobs are planned to start explotation

State Program for Industrialization and innovative Development (GPFIIR)

16.20%

10.60%

8.30%

5.90% 5.60%

-1.50% Machinery Construction

materials

Light Industry Chemical

Industry

Farmacutical

Industry

Metallurgy

Annual growth rate of production volume in manufacturing industries for the year 2012, %

• For the first time the GDP growth is achieved mainly not only by the growth of extraction sectors of economy.

• With the overall real GDP growth in 2012 compared to 2008 (22.6%), the highest

growth was achieved in manufacturing industry (19.4%.) • The annual growth rate of FDI in the Republic of Kazakhstan from 2009 to 2011 was

14%.

Thank you!