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Kazakhstan 2013
Unlocking value
Attractiveness
Cover: The Bayterek monument and observation tower reflecting in the singing fountains of Astana, Kazakhstan.
Contents
Kazakhstan 2013
02 Foreword
03A strategic gateway on the New Silk Road
Kairat Kelimbetov, Deputy Prime Minister of the Republic of Kazakhstan
www.ey.com/attractiveness
04 Executive summary
06
How is Kazakhstan's economy performing and what is its place in today's global economy?
10 22 30
Perception
A safe place to grow What are Kazakhstan's key economic strengths, how does its economy compare with regional competitors, what improvements are investors seeking and what are their immediate investment plans for the country?
Future
Mining new opportunities How do investors perceive Kazakhstans future attractiveness and what sectors are set to act as the country's engines of growth?
Actions
The path to prosperity What steps can Kazakhstan take to help it realize its potential as an investment destination?
38 Methodology 40 EY in Kazakhstan
Unlocking value
Foreword
Foreword
Strength in stability
Welcome to the third edition of EYs Kazakhstan attractiveness survey. In this new edition, we continue to analyze the latest foreign direct investment (FDI) trends in Kazakhstan and explore what investors think about the countrys investment climate, as well as its potential. This year, the countrys macroeconomic, social and political stability have taken over as the key driver of investment. This represents a shift from our previous two surveys, which showed that the countrys low labor costs and productivity gains on offer were its most appealing features. This change can be attributed in part to the ongoing instability of the global economy. It is this uncertainty that has led investors to look to countries such as Kazakhstan as a safer place to grow. The reality of foreign investment in Kazakhstan confirms this perception. While global FDI inflows declined by 18% between 2011 and 2012, Kazakhstan remained a stable destination for investors, receiving US$14b in FDI inflows. Investors continue to perceive Kazakhstan as a treasure trove of natural resources, while they also value some knowledge-based, high-value-add sectors that hold considerable promise. The Kazakhstan Government remains committed to reducing the country's dependence on extractive industries and developing a more balanced, knowledge-driven and investor-friendly economy. It continues to improve the competitiveness and productivity of priority sectors, such as agriculture and agro-processing; construction and construction materials; oil refining and support services; metallurgy; chemicals and pharmaceuticals; transportation; automotive; telecommunication; biotechnology; and alternative energy. However, our survey findings reveal a wide perception gap between foreign investors who are already established in Kazakhstan and those who are not. Current investors are much more aware of the countrys environment and are willing to explore further possibilities in the market. Conversely, Kazakhstan needs to change the widely held perceptions of potential new investors. Most seem not to have Kazakhstan on their investment radar or remain unaware of the countrys attractive features, locations and sectors that present opportunities for growth. To overcome this challenge, it is important that the Kazakhstan Government intensifies its efforts to communicate the countrys potential to the rest of the world. Even in a challenging global environment, the message can get through that Kazakhstan is building a solid framework for moving up the value chain and is developing a welcoming business culture that is conducive to innovation and growth. As we present our third Kazakhstan attractiveness survey, we would like to thank the investors who have taken the time to share their thoughts with us. We hope the report makes a positive contribution to the development of Kazakhstans investment climate, and provides useful insights for companies, as they prepare their future investment plans.
Jay Nibbe
Area Managing Partner, EMEIA Markets, EY
Erlan Dosymbekov
Managing Partner, Kazakhstan and Central Asia, EY
www.ey.com/attractiveness
Kairat Kelimbetov
Deputy Prime Minister of the Republic of Kazakhstan
Kazakhstan is becoming a critical part of the emerging New Silk Road that connects the East with Europe, Turkey and the Middle East. An advantageous geographical position, regional integration initiatives and an improving business climate are three key reasons why Kazakhstan is emerging as an attractive investment destination.
With the introduction of the Customs Union and Common Economic Space, the single market of Belarus, Kazakhstan and Russia contains nearly 170 million people. International trade within the Customs Union was expected to reach US$125b in 2012 compared with US$92b the year before. Russia and Kazakhstan both experienced a 37% increase in trade in the Union from 2011 to 2012. And, of course, Kazakhstan also looks forward to joining the World Trade Organization (WTO) in the near future. Kazakhstan has an increasingly business-friendly environment. The World Banks Doing Business 2013 index ranks it 49th, up from 56th place in 2012. We are 10th in protecting investors, 17th in paying taxes and 28th in registering property. There are still some challenges in terms of dealing with construction permits and import-export trade requirements, but we are working hard to speed up procedures and streamline documentation so that requirements are brought closer to OECD averages. Overall though, Kazakhstan was named as one of the 10 economies improving the most across three or more areas of doing business between 2011 and 2012. And the World Bank has included Kazakhstan in its list of the worlds 20 most attractive investment destinations. By 2016, GDP per capita in Kazakhstan is expected to reach US$15,000, compared with the current level of over US$12,000 and the country will be classified by the World Bank as a high income economy. All in all, these are significant achievements for a country that only became independent just over 20 years ago.
China and Russia are among Kazakhstans three largest trade partners.
Two of the four BRIC countries, Russia and China, share a border with Kazakhstan. China and Russia are among the top three largest trade partners of Kazakhstan. Thanks to its mineral endowment, Kazakhstan has become Chinas most important economic partner in Central Asia. Bilateral economic ties should expand even further, given each countrys strong growth rates and Chinas growing demand for Kazakhstans rising exports of oil and gas. Currently, 20% of Kazakhstans oil is exported to China. As part of our overall industrial diversification process, we are also making efforts to cooperate further with China in non-resource areas.
Unlocking value
Executive summary
Executive summary
1
RGMs World
11.6 2010
13.9 2011
+1%
14 2012
Source: Ernst & Young's Rapid-Growth Markets Forecast, April 2013; World Economic Outlook, IMF, April 2013.
Source: World Investment Report 2013, United Nations Conference on Trade and Development (UNCTAD), June 2013.
Kazakhstans stable macroeconomic environment is viewed as its most attractive feature by 84% of investors currently established in the country. Having recorded ongoing growth over the last few years, the country is climbing up the ladder to become one of the top three fastest-growing economies in 2015 and, in the eyes of international investors, is a stable place in which to invest.
For more on Kazakhstan in the world economy, turn to p.6
Despite a sharp decline in global FDI in 2012, FDI inflows in Kazakhstan registered a modest increase. The country attracted US$14b in FDI inflows, second only to Russia in the Commonwealth of Independent States (CIS) region. The reality is in line with investors perception of Kazakhstan as the regions second-most attractive investment destination.
For more on CIS FDI inflows and attractiveness, turn to pp.8 and 11
4
12%
45%
Doing business in Kazakhstan Not yet established in Kazakhstan
Source: EYs 2013 Kazakhstan attractiveness survey (total respondents: 206 64 established in Kazakhstan; 142 not established in Kazakhstan).
Source: EYs 2013 Kazakhstan attractiveness survey (total respondents: 64 established in Kazakhstan).
Investors prioritize Kazakhstan's strong fundamentals as its most attractive feature. Beyond Kazakhstans political, social and macroeconomic stability, they highlight its telecommunications infrastructure and corporate taxation as most attractive. However, the countrys critical weaknesses are found in its innovation capacity as well as the transparency and predictability of its business environment.
For more on Kazakhstan's strengths and challenges, turn to p.14
The three As Astana, Almaty and Atyrau are the only cities in Kazakhstan that seem to be known to foreign investors, while the majority of non-established investors were not able to name an attractive city in Kazakhstan. Similarly, potential investors lack clarity about the countrys strengths and challenges; the impact of WTO membership; the introduction of the regional Common Economic Space (CES); and the sectors that offer growth opportunities. However, foreign companies already established in Kazakhstan displayed a good understanding of the countrys current investment climate and the challenges that must be overcome in order to improve it.
For more on locations and need to increase awareness, turn to pp.18 and 31
www.ey.com/attractiveness
EYs 2013 Kazakhstan attractiveness survey analyzes: a) The real attractiveness of Kazakhstan among foreign investors, based on the World Bank, the World Economic Forums Global Competitive Report 20122013, reports from fDi Markets and UNCTAD as well as government sources, such as the National Bank of Kazakhstan b) The perceived attractiveness of Kazakhstan among foreign investors, based on a representative number of interviews conducted with a panel of international business leaders For more on the methodology, turn to p.38
Life sciences
Agriculture
Bordering countries Land area Population (January 2013) Proportion of urban population in total (2013) Age structure (2012 est.) Languages President Prime Minister Nominal GDP (2012) GDP growth (% per year) (2012) GDP per capita PPP (2012) GDP composition by sector (2012)
Source: EYs 2013 Kazakhstan attractiveness survey (total respondents: 206 64 established in Kazakhstan; 142 not established in Kazakhstan).
Nearly three-quarters of investors expect the historically powerful energy and mining sectors to attract the most FDI in Kazakhstan in the next three years. However, Kazakhstans Government acknowledges the need to diversify its economy, and is promoting initiatives and policies to improve knowledge-based industries so that they become more competitive. As a result, investors are finding that a more diverse range of sectors, including private and business services, life sciences, real estate and construction, are beginning to emerge as attractive investment options. As diversification efforts intensify, the importance of these sectors is set to grow.
For more on sectors driving growth in Kazakhstan, turn to p.24
6
Spread the word
Five steps
Move up the value chain Remove regional disparities Enhance the business environment Foster innovation
Public debt (January 2013) Labor force (2012) Unemployment rate (2012) CPI inflation (% per year) (2012) Stock Exchange Central Bank Corporate income tax rate Individual income tax rate
To unlock its growth potential, Kazakhstan must do more to make international investors aware of its strengths. To bring about sustainable and balanced growth, it is critical for the Government of Kazakhstan to reduce its reliance on the oil and gas sector. To address the countrys wide regional economic disparities, the social infrastructure and health care system require development. To improve the business climate, Kazakhstans regulatory environment needs to be made more transparent and predictable. And to boost innovation, incentives are required, along with better education and training in new technologies.
For more on actions to realize Kazakhstan's potential, turn to p.31
Annual average exchange rate (2012) US$1=KZT149.11 EUR1=KZT191.67 RUR=KZT4.80 CNY1=KZT23.64 Sources: Official site of the President of the Republic of Kazakhstan, www. acorda.kz, accessed 8 July 2013; National Bank of Kazakhstan; The Agency of Statistics of the Republic of Kazakhstan; Ernst & Youngs Rapid-Growth Markets Forecast Spring Edition, April 2013, Ernst & Young, 2013.
Unlocking value
Kazakhstan in context
Kazakhstan in context
A new world order
Real GDP growth rates
(%) 2.2% Poland 2.2% 1.9% 3% 1.9% Kazakhstan -0.5% -1.2% Czech Republic 2.2% 3.5% Turkey 4% 0.9% Brazil 5.1% 6% 2.5% 2.8% South Africa 4% India 4.4% 5% 5.2% 5.4% China 7.2% 1.5% 2.8% How is Kazakhstan's economy performing and what is its place in today's global economy?
3.4% Russia
2.7%
3.4%
5%
6%
7.5%
United States
3.2%
3.3%
3.1%
World 4.7%
RGMs
Source: World Economic Outlook, IMF, April 2013; Ernst & Youngs Rapid-Growth Markets Forecast, April 2013; Global Economic Databank, Oxford Economics, accessed on 31 May 2013.
2012
2013
2014
Mature economies grow slowly, but still account for half of global GDP
In contrast to RGMs, the major advanced economies performed disappointingly in 2012. This was driven by the recession in the Eurozone and Japan. Their recovery is set to remain weak in 2013. Nevertheless, improving bank balance sheets and stronger consumer finances have brought the US back on track. Overall, the advanced economies should play a reduced role in the global recovery, growing at 1.2% in 2013 and 2.2% in 2014.3 Although growth in the major advanced economies has been much slower than in RGMs, they still hold 50.1% of world GDP (in terms of purchasing power parity).4
3. Ernst & Youngs Rapid-Growth Markets Forecast, January 2013. 4. World Economic Outlook, IMF, April 2013.
www.ey.com/attractiveness
by just 0.1%.6 Looking ahead, Kazakhstans GDP is expected to accelerate at 6% in 2013, 7.5% in 2014 and 7.1% in 2015. Over the next two years, its economy is expected to outperform most of the other RGMs. According to Ernst & Youngs Rapid-Growth Markets Forecast, only India and China are set to grow quicker over the next two years. Strong growth projections for Kazakhstan are predicated on high commodity prices, strong infrastructure spending and improved grain harvests. Kazakhstans oil production and exports are set to get a boost from the giant Kashagan oil field coming on stream in the near future.
6. Ernst & Youngs Rapid-Growth Markets Forecast Spring Edition, April 2013, Ernst & Young, 2013.
2013
China Kazakhstan India Vietnam Nigeria Indonesia Qatar Ghana Malaysia Thailand Mexico Chile Colombia Russia UAE 8.5% 7.5% 7.2% 6.9% 6.1% 6% 6% 5.9% 5.1% 4.9% 4.8% 4.6% 4.4% 4% 3.9%
2014
China India Kazakhstan Vietnam Qatar Indonesia Thailand Nigeria Ghana Malaysia Mexico Chile UAE Colombia Russia 8.2% 7.7% 7.1% 7.1% 6.1% 5.6% 5.5% 5.5% 5.5% 4.6% 4.5% 4.5% 4.1% 4.1% 4.1%
2015
Unlocking value
Kazakhstan in context
11.6 6.5
13.9 7.2
14 7.8
2010
2011
2012
www.ey.com/attractiveness
Unlocking value
Perception
How Kazakhstan is viewed by foreign investors p.11 p.13 p.14
Russia leading in the CIS Natural resources driving growth Seeking shelter in stability
p.18
p.20
In this section ... How FDI in Russia compares with Europes investment trend, key investors, favoured sectors, key activities and destination cities.
10
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Key findings
of investors consider Russia as the most attractive country in the CIS region. think of Kazakhstan as a country rich in natural resources. of established investors commend the country's macroeconomic stability. believe it has an entrepreneurial culture. of them view the local business environment as unattractive. of non-established investors could not name a city in Kazakhstan.
Russia
Kazakhstan
Established in Kazakhstan
Total respondents
* Georgia is not a CIS member, but is included in the reference group for the purpose of this survey. Sources: EYs 2013 Kazakhstan attractiveness survey (total respondents: 206 64 established in Kazakhstan; 142 not established in Kazakhstan).
According to our survey results, Russia remains the most attractive investment destination in the CIS region, also reflected in the reality of foreign investment in the region. It is the first-choice country for 44% of our survey respondents. The countrys huge domestic market of 143 million people,8 its burgeoning middle class (nearly 55% of the population9) and rising disposable income underpin its appeal. It also enjoys vast natural resources, a solid telecommunications infrastructure, a well-educated workforce, and strong connections between its regions and neighboring countries.10 While the countrys doing-business ranking is much lower than Kazakhstans, the sheer size and opportunities in Russia outweigh the difficulty of doing business.
8. Ernst & Youngs 2013 Russia attractiveness survey Shaping Russias future, June 2013. 9. Consumers to power Russian economy, stock market-study, Reuters, 5 February 2013, via Dow Jones Factiva 2013 Reuters Limited. 10. Ernst & Youngs 2013 Russia attractiveness survey Shaping Russias future, June 2013.
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11
Perception
Kazakhstan was the preferred destination for 9% of our respondents, putting the country a distant second in the region. However, investors continue to remain divided in their outlook for the country. There is a large gap between the preferences of investors with a presence in Kazakhstan and those who have yet to establish interests. Only 3% of non-established investors perceive Kazakhstan as the most attractive CIS country, while they remain largely unaware of it strengths and potential. However, 24% of existing investors have Kazakhstan as their first choice.
Ukraine was rated as the third-most attractive destination, with a first-choice score of 7%. With a population of 46 million people,11 Ukraine is the secondlargest domestic market in the CIS region. However, the current macroeconomic situation in Ukraine dampens investor optimism. After growing at 5.2% in 2011, the country recorded GDP growth of 0.1% in 2012.12
11. Ukraine: Investment Attractiveness, International experts website, www.internationalexperts.com, accessed 12 February 2013. 12. Ernst & Youngs Rapid-Growth Markets Forecast Spring Edition, April 2013, Ernst & Young, 2013
Investor perception is in line with the overall FDI reality, where UNCTAD revealed that for 2012, Russia attracted the highest FDI inflow (US$51.4b) in the CIS region, followed by Kazakhstan (US$14b) and Ukraine (US$7.8b).13
12
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Source: EYs 2013 Kazakhstan attractiveness survey (total respondents: 206 64 established in Kazakhstan; 142 not established in Kazakhstan).
Unsurprisingly, Kazakhstans vast natural resource base is its key asset, according to investors. The country ranks 12th in the world in terms of oil reserves and 19th for natural gas reserves. It currently holds approximately 30 billion barrels of proved crude oil reserves, making it one of the worlds top 15 oil-producing countries.14 At present, Kazakhstan is a leading global producer of coal, copper, zinc, bauxite, uranium and chrome ore.
14. BP Statistical Review of World Energy June 2012, BP website, www.bp.com; Ernst & Youngs Mining Tax Guide 2012, June 2012, Ernst & Young, 2012.
The awareness of Kazakhstans position as a RGM is also climbing up the ladder in the minds of investors. The Government of Kazakhstan has been able to maintain macroeconomic and political stability during times of global crisis. Its GDP growth has outperformed that of major CIS countries over the last few years, making it the most stable economy in the region. The countrys competitive geographical location at the junction of Asia, Europe and the Middle East enables access to the rapidly growing markets of Russia, India and China, creating unique opportunities for investors and local companies.
However, less than 5% of our respondents acknowledged Kazakhstans diversity, the quality of its labor force, R&D capacity, entrepreneurial culture or business environment. A focus from government and business leaders on improving these characteristics and working toward sustainable and balanced growth would therefore appear to have a positive impact on increasing its attractiveness.
Unlocking value
13
Perception
Kazakhstan's ranking
16 18 26 59
Score
6.1 5.9 5.3 4.7
Attractive
Macroeconomic stability Telecommunication infrastructure Corporate taxation Sustainable development 84% 78% 68% 63% Stable political and social environment 80%
Sources: EYs 2013 Kazakhstan attractiveness survey (total respondents: 64 established in Kazakhstan).
with the share of non-performing loans (NPLs) exceeding 36% in the end of 2012.15 Nevertheless, the economic fundamentals that have kept the country on track remain in place. The economy is expected to grow by 6% in 2013,16 more than most other emerging markets. Political and social stability Our survey reveals that 80% of existing investors place their trust in Kazakhstans political and social stability. Economic Intelligence Units Political Instability Index 2009-10, ranks Kazakhstan as one of the 50 most politically stable countries in the world. To improve the economic and social environment, the Government has launched a number of large-scale initiatives, including: K azakhstan 2050 Strategy: become one of the 30 most competitive nations in the world by 2050.
15. National Bank of Kazakhstan. 16. Ernst & Youngs Rapid-Growth Markets Forecast Spring Edition, April 2013, Ernst & Young 2013.
14
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G reen Bridge Partnership: create a vast market for green goods, services and new technologies to embed environmental sustainability in rapid economic development. G -Global forum: join efforts of G8 and G20 forums to develop a more comprehensive global economic policy toward growth, innovation and prosperity. Telecommunication infrastructure Seventy-eight percent of established investors find the telecommunication infrastructure attractive, while only 9% express the need for significant improvement. Telecommunication infrastructure has improved substantially since the 1990s, with reports of stable growth in mobile phone and internet penetration. The WEF Global Competitiveness Report 201213 ranks Kazakhstan 20th out of 144 countries for mobile telephone subscriptions. The country had a mobile penetration of approximately 130% in 2011 and a broadband penetration of 53.4% in 2010.17 Furthermore, Kazakhstans Ministry of Transport and Communications intends to achieve 100% broadband
population coverage by 2013.18 The liberalization of the telecom sector in 2004 opened doors for private players, both local and foreign, to capitalize on the untapped market opportunities. Competitive tax rates Corporate taxation is thought attractive by 68% of established respondents, while 13% of them do not find the regime attractive. Corporate and individual income tax rates in Kazakhstan are low by international standards, at 20% and 10%, respectively. Sustainable development Sixty-three percent of respondents established in Kazakhstan find the countrys performance in sustainable development positive. Sustainable development has been a key priority for the country and remains at the heart of its agenda. It aims to manage natural resources responsibly, promote the use of clean energy, and use economic and social policy to promote the well-being of the nation. The country has set an objective to ensure that, by 2050, no less than half of the energy it consumes is produced from alternative and renewable sources.
18. Kazakhstan aims to achieve 100% broadband coverage by 2013, Telegeography website, www. telegeography.com, accessed 11 February 2013.
17. Number of internet users increases by 20% in Kazakhstan, Tengri News website, en.tengrinews. kz, accessed 11 February 2013; Kazakhstan Telecom, Mobile, Broadband and Forecasts, Market Research.com website, www.marketresearch.com, accessed 11 February 2013.
Mixed views
Size of the domestic market Although Kazakhstans population is not very large, the introduction of the Customs Union and CES promises the opportunity to reach nearly 170 million consumers in a market comprising Russia, Belarus and Kazakhstan. According to our survey, 62% of existing investors describe the domestic market size as attractive, while 29% think it unattractive. Labor costs Kazakhstans labor costs are seen as an attractive feature by 55% of established respondents, while 35% express discontent. Unlike last year, labor costs are not seen as Kazakhstans most attractive feature. The average monthly nominal wage totaled KZT106,286 (approximately US$690) in May 2013, up 7.4% on the previous year.19 Skill set A total of 53% of investors already established in Kazakhstan express satisfaction with the skill set of the countrys workers, while another 40% express a need for more training. The local population is well educated, with a literacy rate of 99.6%.20 However, low workforce productivity and a large skills gap are impeding Kazakhstans competitiveness. Workers with technical
19.The Agency of Statistics of the Republic of Kazakhstan website, www.eng.stat.kz, accessed 7 July 2013. 20. Educational system, Embassy of The Republic of Kazakhstan to the United States website, www.kazakhembus.com, accessed 1 February, 2013.
Not attractive
29% 35% 40% 36% 39% 35%
Sources: EYs 2013 Kazakhstan attractiveness survey (total respondents: 64 established in Kazakhstan).
skills, management expertise and marketing capabilities are in short supply in Kazakhstan, so foreign workers are brought in to fill the void. According to the Global Competitive Report 201213, an inadequately skilled workforce is the most serious concern among investors considering starting operations in Kazakhstan. Also, in his State of the Union speech in 2010, Kazakhstan President Nursultan Nazarbayev said that a worker in Kazakhstan produces approximately US$17,000 worth of goods every year. This is compared with US$90,000 in developed countries.21
21. Kazakhstan Partnership Program Snapshot, World Bank, April 2013.
Unlocking value
15
Perception
In 1993, President Nursultan Nazarbayev established an international scholarship program, called Bolashak. Since then, more than 8,100 young Kazakh students have been educated in the best universities around the world.22 More recently, the Government has launched a number of initiatives to align learning, training, teaching and research with the requirements of Kazakhstans industry and labor market. In 2010, a new innovative research institution, Nazarbayev University, was established. Its academic processes are based on the best international educational standards, and were developed in partnership with the worlds leading institutions.23 To improve the productivity of the workforce, enhance technical skills and meet the requirements of key industries, the Government has been paying special attention to raising the standards of technical education. In cooperation with the World Bank, a Technical and Vocational Education Modernization Project was launched in 2011. The same year saw the Government establish a professional technical education program, Kasipkor, to attract young Kazakhs to the technical professions that are critical to the countrys development. The aim of these educational programs is to boost the relevance, quality and efficiency of technical and vocational education by improving the policy framework; expanding institutional capacity and knowledge transfer; and developing new technologies.
22. Statistics of the scholarship program, The Center of International Programs website, www. bolashak.gov.kz, accessed 20 March 2013. 23. Nazarbayev University website, nu.edu.kz, accessed 19 March 2013.
Labor regulations While half of the respondents who already do business in Kazakhstan are satisfied with labor flexibility in the country, 36% express concerns. In the view of some respondents, the current labor regulations in Kazakhstan give too much protection to local employees, but do not sufficiently balance the rights of employers and employees. At the same time, international talent is vital for bringing in knowledge and the latest technology, and sharing it with local talent. Trade policies Nearly half of established investors find Kazakhstans trade policies conducive for international business. According to the Most Favored Nation Tariff Trade Restrictiveness Index, Kazakhstan is more open to trade than many Central Asian and European countries.24 The country has concluded a number of bilateral trade agreements with neighboring countries. Furthermore, likely accession to the WTO will further promote stable and transparent trade policies; and foster efficient, reliable cross-border trade procedures. However, the country needs to enhance border trade procedures. The World Banks Doing Business report 2013 ranks Kazakhstan 182nd out of 185 economies on trading across borders. The number of days-to-export in Kazakhstan is 81, compared with 26 days for Eastern Europe and Central Asia and 10 for OECD countries. And at US$4,685 per container, the cost-to-export is double that of Eastern Europe and Central Asia.25
24. Kazakhstan Trade Brief, World Trade Indicators website, info.worldbank.org, accessed 25 February 2013. 25. Trading Across Borders,The World Bank website, www.doingbusiness.org, accessed 25 February 2013.
Challenges
Difficult operating environment In recent years, Kazakhstan has improved its legal and regulatory environment. This is evident from the countrys steady advancement up the World Banks Ease of Doing Business Index from 56th position in 2012 to 49th in 2013.26 However, 59% of respondents who are already established in Kazakhstan, consider the level of legal and regulatory transparency and stability as one of its least attractive features. Instances of inconsistent interpretation of the law and its selective application are reported regularly by foreign investors operating in Kazakhstan. Respondents share concerns about the ability of different layers of government to implement strategic initiatives consistently. They call for more efficiency in state governance institutions. Furthermore, the countrys court and arbitration system appear to be ineffective in resolving disputes involving investors. Respondents raise concerns over respect for property rights and security of investments.
26. Doing Business Kazakhstan, The World Bank website, www.doingbusiness.org, accessed 8 February 2013.
Lack of research and development capabilities Fifty-one percent of respondents established in Kazakhstan find the availability and quality of its R&D unattractive. The country spends just 0.2% of GDP on science and research. This is lower than Russia (1%) and below the level recommended for countries at a similar development stage (1%1.5% of GDP).27 The WEF Global Competitiveness Report 201213 ranks Kazakhstan 108th out of 144 countries on the quality of scientific research institutions and 92nd on its innovation capability.28 Unlike developed economies, R&D activities in Kazakhstan tend to be carried out by public organizations rather than private businesses. Underdeveloped transport and logistics infrastructure Fifty percent of established investors expressed the need for enhancing Kazakhstan's transport and logistics infrastructure. The countrys road and rail networks are, on the whole, more developed than those in other Central Asian countries. However, there are inconsistencies across regions, with poor road quality in
27. The Global Competitiveness Report 20122013, World Economic Forum, p. 116. 28. The Global Competitiveness Report 20122013, World Economic Forum, p. 217.
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remote areas, which mostly house production facilities. The WEF Global Competitiveness Report 201213 ranks Kazakhstan 117th out of 144 countries on road quality.29 Complex tax administration and compliance The attraction of Kazakhstans low tax rates is undermined by complex tax administration rules and high compliance costs. Nearly half of respondents who already do business in Kazakhstan are not satisfied with the current tax administration and compliance laws. Our findings support the view expressed in the World Bank Enterprise Surveys that investors in Kazakhstan have to engage in more visits and meetings with tax officials than their counterparts in other Central Asian and East European countries.30 While respondents recognize progress in the tax administration system in particular, the move to an electronic platform the business community expects more constructive dialogue. It wants the authorities to take a more consultative approach to taxpayers and decriminalize some economic offenses.
Entrepreneurship deficit Almost half of investors that are established in Kazakhstan believe that the country does not sufficiently develop entrepreneurship. They cite weak corporate governance, a lack of transparency in business practices and unsustainable operations as factors that hamper partnerships with local companies. Recognizing that entrepreneurship is the foundation of sustainable economic development, the Government has established several programs. For example, the Entrepreneurship Development Fund DAMU, which was established in March 1997, aims to increase the number of enterprises in non-extractive sectors and boost the resilience of existing small and medium-sized businesses. In the period from January 2009 to October 2012, almost 62,000 entities were supported by a total amount of financial aid equal to US$11b.31 Another government institution, the National Agency on Exports and Investments (KAZNEX INVEST), helps existing Kazakh enterprises by promoting export-oriented strategies and inflow of foreign investments.
31. Entrepreneurship Development Fund (DAMU) website, www.damu.kz, accessed 20 March 2013.
29. The Global Competitiveness Report 20122013, World Economic Forum, p. 217. 30. World Bank Enterprise Survey Kazakhstan 2009, The World Bank.
Not attractive
59% 56% 51% 50% 49% 47%
Sources: EYs 2013 Kazakhstan attractiveness survey (total respondents: 64 established in Kazakhstan).
Unlocking value
17
Perception
75%
of investors not yet established in Kazakhstan, could not name an attractive city in the country.
22% 25%
Almaty contributes 25% to Kazakhstans tax revenues. new jobs were created in Atyrau in the past 10 years.
50,000
Sources: EYs 2013 Kazakhstan attractiveness survey; Prime Minister of Kazakhstan official website, www. primeminister.kz, accessed 27 March 2013; Almaty Akimat signed memoranda of cooperation with 9 major banks of the country, Official Almaty city website, almaty.kz/page, accessed 16 February 2013; Atyrau, Kazakhstan, World energy cities partnership website, www.energycities.org, accessed 16 February 2013.
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Average monthly wage (July 2013) KZT145,541 (US$946) Major industries Transport, communication and construction
10%
Almaty
Average monthly wage (July 2013) KZT189,591 (US$1,232) Major industry Oil and gas
Average monthly wage (July 2013) KZT143,133 (US$930) Major industries Transport, communication and construction
facilities and incomparable wildlife provide a wide choice of outdoor activities. To build on existing capabilities and generate new ones, the Government is developing the Park of Innovative Technologies Alatau IT City, which has preferential tax and regulatory regimes.
What are the most attractive cities or locations in Kazakhstan for investors? City Established in Kazakhstan
66% 54% 40% 26% 9% 2% 19%
Source: EYs 2013 Kazakhstan attractiveness survey (total respondents: 206 64 established in Kazakhstan; 142 not established in Kazakhstan).
Unlocking value
19
Perception
Source: EYs 2013 Kazakhstan attractiveness survey (total respondents: 206 64 established in Kazakhstan; 142 not established in Kazakhstan).
A quarter of investors have plans to increase or establish operations in Kazakhstan, compared with 17% a year ago. The majority of respondents are eyeing organic growth. Almost half are looking to expand their existing operations, while 30% plan to increase their headcount. Joint ventures have also become popular in Kazakhstan. In many instances, the Government establishes joint ventures with foreign firms and co-finances projects. Foreign investors benefit from the limited capital exposure and knowledge of a local partner, while the Government or domestic firms get much-needed capital and technological know-how. Established investors are much more optimistic about Kazakhstans future than potential investors. More than two-thirds plan to increase their operations in the country, while 18% plan to maintain their current level. However, only 6% of respondents with no presence in Kazakhstan are considering setting up activities in the country, whereas two-thirds are unlikely to enter the country.
10%
7%
67% 20% 8%
If you had a chance to reconsider your investment in Kazakhstan, would you still decide to invest there?
6%
Yes
Has your company been successful in achieving its business objectives in Kazakhstan over the past ve years? Neutral No Cant say
Source: EYs 2013 Kazakhstan attractiveness survey (total respondents: 64 established in Kazakhstan).
Investment activities
Expansion of facility Increasing labor force Greeneld investments Acquisition Can't say 48% 30% 13% 11% 17%
How are you planning to invest? (Respondents could mention several possible answers)
The divergence of opinions among the two sets of investors can be attributed to their level of experience in terms of conducting business in the country. Investors that have yet to move into Kazakhstan continue to be cautious and largely unaware of the investment opportunities that the country presents. On the other hand, existing investors, particularly in the business services and high-tech telecom sectors, are confident about their investments (83%) and successful in achieving their business objectives in Kazakhstan (67%), numbers that reflect investor satisfaction and faith in Kazakhstans potential.
Source: EYs 2013 Kazakhstan attractiveness survey (total respondents: 52 planning to invest in Kazakhstan).
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Future
Kazakhstans future attractiveness p.23 p24
Optimism prevails
p.27
Toward integration
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Optimism prevails
Future attractiveness
68% 41% 30% 33% 29% 22% 9% 11% 6% Decrease 26% 20% 5% Cant say
Total respondents
Key findings
Over the next three years, do you think the attractiveness of Kazakhstan as a place to establish activities will...
of respondents expect Kazakhstans attractiveness to improve over the next three years. believe that the WTO accession would positively impact the countrys investment appeal. expect a rise in opportunities from the CES and potential Eurasian Economic Union. think that the future of Kazakhstan will be driven by oil and gas, mining and metals, reflecting an overdependency on extractive industries.
Improve
Established in Kazakhstan
Individual values are rounded and may not total 100%. Source: EYs 2013 Kazakhstan attractiveness survey 25% (total respondents: 206 64 established in Kazakhstan; 142 not established in Kazakhstan).
Forty-one percent of investors expect Kazakhstans investment attractiveness to improve over the next three years. This optimism can be attributed to proven political and macroeconomic stability, and the commitment of political leaders to improve the environment for foreign investors. The country has made impressive progress in the last decade. GDP per capita (in constant US$) rose from US$5,982 in 2000 to US$11,245 in 2011, and the poverty rate dropped from 46.7% to 6.5% over the same period.38 Integration processes such as the creation of a regional Customs Union and accession to the WTO
38.Economy, Embassy of the Republic of Kazakhstan to the United States website, www.kazakhembus.com, accessed 25 February 2013.
are expected to accelerate the countrys development by boosting competition and aligning business practices with the best international standards. The gap in the perception of those investors who already do business in Kazakhstan and those who do not is pronounced yet again. Having firsthand knowledge of the Governments efforts to improve the business climate, 68% of established respondents are optimistic about Kazakhstans future. Yet, just 30% of investors not established in the country think that Kazakhstan will become a more attractive place in which to establish operations. They largely expect conditions to remain the same.
Only 9% of respondents (6% established in Kazakhstan; 11% not established in Kazakhstan) think that the investment climate in the country will deteriorate. These investors have concerns over Kazakhstans rule of law, labor skills and innovation capabilities. The future attractiveness of Kazakhstan remains central to the Governments efforts to diversify its economy, reduce regional disparity, and improve the innovation and entrepreneurial climate.
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Future
Which business sectors will attract the maximum foreign investments in Kazakhstan over the next three years? (Respondents prioritized up to three sectors) Energy and heavy industry Mining and metals Private and business services Life sciences Real estate and construction Agriculture High-tech and telecommunication Consumer products Automotive and transportation 45% 29% 15% 12% 11% 10% 6% 6% 5%
Energy and heavy industry: oil and gas, heavy industry, power and utilities and alternative and renewable energy, and cleantech. Private and business services: business services, hotels and tourism, nancial services, logistics, human capital and media and entertainment. Life sciences: chemicals and allied products, biotechnology, health care, chemical and pharmaceuticals. Real estate and construction: infrastructure (roads, highways and ports) and real estate and construction. High-tech and telecommunication: electronic and electrical equipment, aerospace and defense, information and telecommunication. Consumer products also includes retail. Source: EYs 2013 Kazakhstan attractiveness survey (total respondents: 206 64 established in Kazakhstan; 142 not established in Kazakhstan).
The oil and gas sector has been the cornerstone of Kazakhstans growth, with its share of the countrys GDP growing steadily from 3.7% in 1997 to 14.7% in 2006, and up to 25.8% in 2011.39 Oil production stood at 79.2 million tons in 2011. The development of new oil fields and an increase in production capacity will enable it to produce 130 million tons of oil by 2020. Such progress would position Kazakhstan among the world's top five oil-producing nations.40 The countrys natural gas production stood at 40 billion cubic meters in 2012, an increase of 2% from 2011. It aims to increase production to 110 billion cubic meters by 2030.41 Similarly, the mining and metals industry plays an important role in Kazakhstans economic growth, accounting for approximately 27% of Kazakhstans GDP.42 The country has 30% of the worlds reserves of chrome ores, 25% of manganese ores and 10% of iron ores. It
39. Energy Sector, Embassy of the Republic of Kazakhstan to the United States website, www.kazakhembus.com, accessed 13 February 2013. 40. The Ministry of Oil and Gas of Kazakhstan website, www.mgm.gov.kz, accessed 20 March 2013. 41. The Ministry of Oil and Gas of Kazakhstan website, www.mgm.gov.kz, accessed 20 March 2013. 42. Mining Industry, Embassy of the Republic of Kazakhstan to the United Kingdom website, www.kazembassy.org.uk, accessed 25 February 2013.
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Many global high-technology companies Cisco, HP, LG, Microsoft and Samsung, among others are already present in the country. Many of such companies help develop the local IT industry, cooperate with local technical universities and bring the latest IT trends and innovations to Kazakhstan. However, business services firms often cite the lack of necessary skills among the labor force as a major hindrance to growth in this sector. The technical qualifications offered by universities and colleges do not reach industry requirements. According to the WEF Global Competitiveness Report, Kazakhstan ranks 103rd out of 144 countries for the quality of its management schools. Only a small portion of IT firms in Kazakhstan seem to innovate effectively. This shortcoming is demonstrated by the lack of patents filed by these firms. According to the OECD Country Capability survey,45 the majority of ICT firms in Kazakhstan have not filed a patent since 2006. In order for this sector to develop and become more competitive, Kazakhstan needs to unlock the potential of its human capital, stimulate innovation, and improve its institutional environment. Life sciences According to the Ministry of Industry and New Technologies, the pharmaceutical industry produced US$198m worth of products in 2012, which is about 0.2% of the total GDP for that year.46 However, the expanding middle class and a developing health care system are set to increase pharmaceutical demand in Kazakhstan. As of 2009, Kazakhstan imported 90% of the total drugs consumed in the country, indicating a substantial fund flow out of the country.47 In order to support the development of the sector and increase the share of locally produced drugs, the Ministry of Industry and New Technologies is implementing the
45. Competitiveness and Private Sector Development, Organization for Economic Co-operation and Development (OECD) website, www.oecd.org, accessed 10 February 2013. 46. The Ministry of Industry and New Technologies website, www.mint.gov.kz, accessed 20 March 2013. 47. Pharmaceutical industry, Invest in Kazakhstan website, invest.gov.kz, accessed 8 July 2013.
Pharmaceutical Industry Development Program 201014. It also intends to create jobs through diversified growth and keep health care costs in check. A number of global pharmaceutical companies entered the growing Kazakhstan market in the last few years. Among them are Poland-based Polpharm, Turkish-based Abdi Ibrahim and Nobel Ilac, and French-based Sanofi.
Highlights
90%
6.3%
6.742 9th
Kazakhstan is the worlds ninth-largest country and more than 74% of its territory is suitable for agricultural production.
Sources: Pharmaceutical industry, Invest in Kazakhstan website, invest.gov.kz, accessed 8 July 2013; Agency on Statistics of Kazakhstan website, www.stat.kz, accessed 20 March 2013 and 10 July 2013; Official Site of the President of the Republic of Kazakhstan, akorda.kz, accessed 10 July 2013; US-Kazakhstan Business Association website, www.uskba.net, accessed 10 July 2013.
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Future
Real estate and construction Poor transport and logistics infrastructure is often cited as a barrier to operating in Kazakhstan. However, the rapid development and modernization of transport infrastructure has been underway since 2010. The Government plans to spend around US$19b on transport infrastructure by 2014, especially on links from China to Europe, which will be crucial to facilitate cross-border trade. Further, Kazakhstans state railway monopoly, Kazakhstan Temir Zholy, expects to invest more than US$40b in domestic railway expansion projects by 2020.48 The residential construction sector is also growing. In 2012, 6.742 million square meters of housing space was commissioned, an increase of 3.2% on 2011. The Government initiated the Housing and Utilities Sector Modernization Program 20112020 to repair condominium facilities. It also launched the Affordable Housing 2020 program in 2012.49 Agriculture One in 10 respondents are confident about the agricultural sectors future FDI prospects. Agriculture contributes 5.5% to Kazakhstans GDP and employs more than 20% of the labor force. Kazakhstan is already among the worlds major wheat and flour exporters.50 The country is also among the largest grain exporters in the world and exports to over 70 countries, including those in the CIS, the Middle East, North Africa and the European Union.51 Despite the potential and opportunities offered by the sector, it is weighed down by low productivity. There is little knowledge of modern farm management and marketing techniques, and low labor efficiency. According to the World Bank, Kazakhstans labor efficiency in agriculture is lower than in Eastern Europe, Russia and Ukraine.52 The Government has adopted the Agribusiness-2020 Program and plans to invest US$20b from 2013 to 2020 to reform the sector. The Government aims to boost agriculture production
48. Kazakhstan rolls out new roads, CNN, 13 September 2012, Building products quarterly briefing, Ernst & Young, February 2013. 49. Committee for construction, Housing and Utilities of the Ministry of Regional Development of the Republic of Kazakhstan website, www.ads.gov.kz, accessed 20 March 2013. 50. Agriculture Sector, Embassy of the Republic of Kazakhstan to the United States website, www.kazakhembus.com. 51. Invest in Kazakhstan website, www.invest.gov.kz, accessed 7 July 2013. 52. Agriculture Sector, Embassy of the Republic of Kazakhstan to the United States website, www.kazakhembus.com, accessed 25 February 2013.
by 150%, improve labor productivity by 300% and increase agricultural exports by 20%.53 Kazakhstans vast arable land gives it the opportunity to produce natural, ecologically sound food. It is, therefore, well placed to benefit from the boom in global demand for food. The share of GDP provided by its agriculture sector could rise fivefold by 2050. With increasing development in agri-business, the demand for modern equipment and logistics facilities is likely to increase, offering opportunities to manufacturers and distributors. Furthermore, the need for credit availability is expected to increase, opening doors for a wide range of financial institutions as well. Automotive and transportation Automotive vehicle production in Kazakhstan grew by 260% in 2010 and 112% in 2011, and sales increased by 14% and 31%, respectively. Lada cars assembled in Russia and Kazakhstan lead sales figures, with more than 40% market share. Despite a morethan-threefold increase, domestic production volumes remain relatively low, with more than 80% of the demand for light vehicles in Kazakhstan met by imports.54 Car imports to the country dropped almost 75-fold in 2012, as 119,809 cars were imported to Kazakhstan in 2011 compared with only 1,599 from January to November 2012.55 This decline is linked directly to higher custom duties, which the governments of Customs Union member states imposed in a bid to limit car imports and improve the local car manufacturing industry. Furthermore, the Government of Kazakhstan is making efforts to attract large automobile manufacturers with the most advanced technology and management. This would help create new production lines in the country. Toyota signed a Memorandum of Understanding (MoU) with the Government of Kazakhstan to begin manufacturing of its Fortuner SUVs in 2014 at the Saryarka Avtoprom automobile plant in Kostanay city.56 Renault-Nissan, together with Russia's largest automaker OJSC AvtoVAZ, is also considering the possibility of assembling cars in Kazakhstan.
53. Ministry of Agriculture website, www. mgov.kz. 54. An overview of the Russian and CIS automotive industry February 2012, Ernst & Young, 2012. 55. Car import dropped 75-fold in Kazakhstan, Tengri News website, en.tengrinews.kz, accessed 14 February 2013. 56. Toyota signs deals to make SUVs in Kazakhstan, The Astana Times, 12 February 2013.
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Toward integration
Accession to the WTO
22% 26% What impact would the WTO accession have on increasing Kazakhstan's investment appeal? 24% 10%
18%
Cant say
Source: EYs 2013 Kazakhstan attractiveness survey (total respondents: 206 64 established in Kazakhstan; 142 not established in Kazakhstan).
WTO accession
After almost 14 years of negotiations, Kazakhstan is expected to become a member of the WTO in 2013. Nearly half of survey respondents think that accession would have a medium-to-high impact on the countrys investment appeal. These investors believe that the move could allow better market access, and ensure predictability and transparency in trade policy and Kazakhstans legal system. Membership would also remove trade barriers and unfair treatment in the trade of Kazakh goods. Kazakhstans accession to the WTO would not only increase the volume of trade between the rest of the world and Kazakhstan. It would also make indigenous products more competitive in the world markets. Given that the country would now have to compete with international markets, the path to enhanced production and job creation could open up. According to estimates, in the medium term, accession to the WTO would result in gains of around 3.7% of GDP and real income gains of 6.7% of consumption. In the long run, the gains should be about 9.7% of GDP and 17.5% of consumption.57
57. World Trade Organization website, www.wto.kz, accessed 12 February 12, 2013; The impact of Kazakhstan accession to the World Trade organization, The World Bank website, www.doingbusiness.org, accessed 12 February 2013.
However, 28% of respondents expect the WTO entry to have little or no impact on Kazakhstans investment appeal. WTO membership might place significant limits on state support for industries and state regulation of projects with foreign capital participation. Accession might also bring risks to domestic producers that fail to be competitive under new market conditions. On the other hand, the increase in competition could act as a further stimulus for these companies to intensify innovation.
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Future
Integration
How does the CES between Russia, Belarus and Kazakhstan, and a likely Eurasian Economic Union by 2015, affect your perception of Kazakhstan's attractiveness? 47% 28% 17% 8%
Improve
Deteriorate
Cant say
Source: EYs 2013 Kazakhstan attractiveness survey (total respondents: 206 25% 64 established in Kazakhstan; 142 not established in Kazakhstan).
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Actions
How to improve Kazakhstan's attractiveness p.31 p.33 p.34
Spread the word Move up the value chain Remove regional disparities
p.35
Foster innovation
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Key findings
of potential investors lack awareness of Kazakhstans prospects.
Majority 38%
55% 36%
of the respondents established in Kazakhstan view the country as a leader in R&D and innovation.
19%
14%
of respondents believe that developing the social infrastructure and health care systems will help address regional disparity.
Kazakhstan in 2030
35% 11%
think that a transparent and predictable regulatory environment will improve Kazakhstans investment climate. call for better education and training in new technologies.
Sources: EYs 2013 Kazakhstan attractiveness survey (total respondents: 206 64 established in Kazakhstan; 142 not established in Kazakhstan).
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Actions
While these measures are noteworthy, a lot more needs to be done to bridge the perception gap. An ongoing and constructive dialogue with foreign investors is vital for the Government to better understand and address the operational challenges that they face. Also, adopting a proactive approach to hosting sporting and cultural events is an effective way to raise awareness about the country, and would help improve infrastructure. The countrys attractiveness is influenced not only by tangible assets, such as natural resources and infrastructure, but also by the rising importance of intangible assets, such as culture and values.60 Soft power can be manifested in, for example, cultural exports, performance at the Olympics, CO2 emissions or global integration.
Kazakhstans achievements in this regard are significant, and include ethnic and religious integration; taking a lead in the non-proliferation of nuclear weapons; chairing the Organization for Security and Co-operation in Europe; focusing on clean energy and sustainability; hosting the Asian Winter Games; and winning performances at the 2012 Olympics in London. International integration remains at the top of the countrys agenda, with the recent establishment of the Customs Union, Kazakhstans active role in the Shanghai Cooperation Organization, and its aspiration to become an OECD member state. In 2017, Astana will host EXPO 2017, when the country will welcome five million visitors and secure investment projects worth 1.5b. Preparations for the EXPO and the investment that is set to flow from it will boost SMEs, create jobs and bring upgrades to physical and social infrastructure.
60. Ernst & Youngs Rapid-growth markets soft power index, Spring 2012, Ernst & Young, 2012.
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On the ground
A stana Solar has established a PV module plant. G E has established a locomotive plant in Kazakhstan. K AF is opening a meat processing plant in West Kazakhstan. S alzgitter is building a pipe insulation plant in Atyrau. T oyota is opening an assembly plant near Karaganda.
Sources: GE, Kazakhstan to build locomotives in partnership, The Herald, 24 May 2012, via Dow Jones Factiva 2013Reuters Limited; Astana Solar opens PV module plant in Kazakhstan, Central Asia news, 7 January 2013, via Dow Jones Factiva 2013 Reuters Limited; Kazakhstan to set up manufacturing plant of fresh and chilled lamb, Central Asia News, 4 February 2013, Dow Jones Factiva 2013 Reuters Limited; French and German pipe firms to invest $100 million is western Kazakhstan, The Times of Central Asia, 4 October 2012, Dow Jones Factiva 2013 Reuters Limited; Toyota to open assembly plant in Kazakhstan, 8 February 2013, Embassy of Republic of Kazakhstan to the United States website, www.kazakhembus. com, accessed 1 February, 2013.
Source: EYs 2013 Kazakhstan attractiveness survey (total respondents: 64 established in Kazakhstan).
Thirty-eight percent of respondents already established in Kazakhstan expect the country to be a global energy leader in 2030. The oil and gas sector has been the backbone of Kazakhstans economy and has done much to lift the countrys growth and well-being of its people. However, the sector remains vulnerable to the volatility associated with fluctuating global commodity prices. Nearly 20% of respondents think Kazakhstan risks being surpassed by competition from more dynamic countries. Meanwhile, a quarter of investors based in Kazakhstan are confident that the country will manage to reduce its dependence on energy and will be on the way to becoming a highly diversified economy by 2030. These investors acknowledge government programs that will drive diversification. Kazakhstans diversification mission also receives financial support from international institutions and investors. In the period from 2001 to 2011, the European Bank for Reconstruction and Development (EBRD) invested 11b in 152 projects in Kazakhstan to aid economic
diversification. It plans to support the Governments economic diversification program through equity and debt investments in corporate, energy, financial institutions and infrastructure sectors.61 Twelve percent of investors expect Kazakhstan to be a leading export market by 2030, and 11% see it leading in manufacturing. Growing investments, coupled with increasing demand, have played a crucial role in the ongoing expansion of manufacturing activities in Kazakhstan. The sectors share of overall GDP has grown to 11.4% in 2011, compared with 11.3% in 2010 and 10.5% in 2009.62 Manufacturing activity in Kazakhstan is concentrated on oil and gas, chemicals, metals, equipment and tools, and construction material. Recently, there has been a shift in this trend. Competitive labor costs and an improving business environment, along with a rising domestic market, have encouraged a number of
61. EBRD in Kazakhstan website, www.ebrd.com, accessed 20 March 2013. 62. Weekly Review. Kazakhstan to provide citizens with affordable housing, Kazworld website, kazworld.info, accessed 14 February 2013.
global companies to set up manufacturing projects in the automotive, chemicals, pharmaceuticals, defense and steel sectors. In order to move up the value chain and ease dependence on natural resources, Kazakhstan should develop and enhance the competitiveness of its knowledge-based and non-extractive sectors. With input from the corporate sector, the Government should better define and identify clusters that are competitive. It can work with private sector players and strategic foreign partners that have the requisite knowledgeintensive technology and know-how. None of the respondents established in Kazakhstan think that by 2030 it will have a high-value labor market, will be a leader in knowledge-based industries, or will be a leader in R&D and innovation. So these are the areas on which the Government needs to concentrate.
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Actions
Adopt a proactive approach to attract investors with target region-specic campaigns 24%
Source: EYs 2013 Kazakhstan attractiveness survey (total respondents: 206 64 established in Kazakhstan; 142 not established in Kazakhstan).
According to investors, the top priority of Kazakhstans Government should be providing proper social and physical infrastructure and a health care system. A consistent and improving standard of living across the country is the leading indicator of well-being. However, in Kazakhstan, there is a wide gap in income distribution, and between rural and urban areas. The concentration of investment projects in a few Kazakh cities is indicative of the countrys regional disparity. To spread growth and development, the Government has to work on reducing the attractiveness gap between regions. It should attempt to formulate plans for the regions that lag behind based on their competitive advantage, available industries and workforce. In January 2013, President Nazarbayev established the new Ministry of Regional Development to manage projects and social infrastructure in regions, as well as develop entrepreneurship. The ministry will analyze the factors that hamper social and economic development in the regions, and develop
long-term centers of economic growth integrated with regional and international markets. Priority industries will be specified
for each region, and industrial satellite towns will be developed to improve living standards and provide job opportunities.
Main sectors
Business services; construction and construction materials; food processing; public services Business services; construction
Region
Akmola Aktobe Almaty Atyrau East Kazakhstan Karagandy Kostanay Kyzylorda Mangystau North Kazakhstan Pavlodar South Kazakhstan West Kazakhstan Zhambyl
Main sectors
Agriculture and agroprocessing; chemical and pharmaceutical; construction materials; mechanical engineering; uranium and gold mining Industry (ferrous metal industry; mechanical engineering; oil) Agriculture and agroprocessing Industry (oil and gas; mining) Nonferrous metal industry Mining (ferrous and nonferrous metals; precious and rare metals) Agriculture and industry (iron ore production and processing; asbestos) Oil and gas; mining Oil and gas Agriculture and industry (food processing; mechanical engineering) Industry (aluminum; coal; ferroalloys; power) Agriculture and industry (processing; uranium production) Natural gas Agriculture and industry (food processing; chemicals)
Sources: Ministry of Regional Development of the Republic of Kazakhstan website, www.minregion. gov.kz, accessed 8 July 2013; Astana city website, www.astana.kz, accessed 8 July 2013; Almaty city website, www.almaty.kz, accessed 8 July 2013.
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Develop venture capital and other nancial tools dedicated to support of entrepreneurship 9%
Source: EYs 2013 Kazakhstan attractiveness survey (total respondents: 206 64 established in Kazakhstan; 142 not established in Kazakhstan).
have complained regularly that compliance with these measures makes it difficult to find suitable local suppliers and qualified staff. Although content regulations benefit both local and international businesses, their implementation should be realistic and flexible and must be accompanied by suitable policies to support innovative and highly technological businesses. In the view of some respondents, Kazakhstans court and arbitration system is not consistently capable of resolving disputes involving foreign investors. This perception is supported by the WEF Global Competitiveness Report 20112012, which indicates that courts are subject to political influence by government, citizens and companies. Our respondents want to see the court system become much more independent.
costs are high. This damages the competitiveness of goods. Insufficient airport infrastructure and railroad connectivity, and an inadequate number of high-quality logistics centers, hamper the countrys export potential. Better infrastructure could attract more investors, given Kazakhstans strategic geographic location at the crossroads between China, Europe, the Middle East and Russia. Modernization of infrastructure remains high on the political agenda. In a speech on the 2050 vision, Kazakhstans President noted the need for modern transport and logistics infrastructure in order to boost economic growth, international integration and internal connectivity. The country aims to double transit through Kazakhstan by 2020 and increase it 10-fold by 2050 (compared with current levels). The Government is also working to develop a global infrastructure integration program. This aims to link infrastructure to export routes, with the focus on the long-term competitive potential of Kazakhstans products and services.
Develop infrastructure
Thirty percent of investors said that Kazakhstan should invest in infrastructure and urban projects to increase its investment appeal. Kazakhstan is a vast territory with low population density. A lack of proper transport and logistics infrastructure means that transport
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Actions
Foster innovation
Proposed actions
What are the main areas of reform to make Kazakhstan a leader in innovation? Improve education and training in new technologies Develop entrepreneurship Develop a culture of innovation and creativity Promote vocational learning courses Develop joint research programs Develop infrastructures Can't say 27% 20% 18% 13% 13% 1% 36%
Source: EYs 2013 Kazakhstan attractiveness survey (total respondents: 206 64 established in Kazakhstan; 142 not established in Kazakhstan).
Twenty-seven percent of respondents highlight the need to develop highly skilled human capital that is focused on innovation and business needs. Innovation fuels business growth and could help Kazakhstan move up the value chain and create a more balanced economy. Therefore, building an environment that is conducive to innovation should be at the forefront of policy-making. When asked about reforms to improve the innovation climate, 27% of investors called for an improvement in education and training in new technologies. Kazakhstan needs to encourage university and industry partnerships, and technology transfer. Furthermore, 24% of investors believe that the Government should increase incentives for companies in the innovative and knowledge-based sectors. Such measures would encourage firms to bring
in new technologies and increase their R&D spending. Governments can use supplyside tax credits and demand-side fiscal incentives as tools to stimulate innovation. Young companies, together with SMEs, are widely seen as leading innovators. This view is shared by 20% of respondents, who think that Kazakhstan should develop entrepreneurship; and a further 18%, who believe that the country should develop a culture of innovation and creativity. Investors cite lack of transparency, bureaucracy, inefficient human capital base and inadequate infrastructure as the key impediments to entrepreneurship in the country. Difficulties in obtaining bank loans and prohibitive interest rates also hamper the expansion of enterprises in the region. To deal with this, the Government of Kazakhstan has launched a Business
Roadmap 2020 program, which offers support in the form of lower interest on loans, improved industrial infrastructure and personnel training to educate entrepreneurs. The Government has also set up the Industrial and Innovation Development Strategy and the state program on accelerated industrial and innovative development to strengthen innovation in the non-oil sector. It plans to increase public funding on science and research to 1% of GDP by 2015.63
63. Kazakhstan Country Report, INCReast website, www. increast.eu, accessed 11 February 2013.
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Actions
Methodology
EYs 2013 Kazakhstan attractiveness survey is based on:
Our evaluation of the reality of FDI in Kazakhstan is based on international reports from the World Bank, WEFs Global Competitive Report 20122013 as well as reports from fDi Markets, UNCTAD and government sources, such as the National Bank of Kazakhstan.
We define the attractiveness of a location as a combination of image, investors confidence and the perception of a countrys or areas ability to provide the most competitive benefits for FDI. The field research was conducted by CSA Institute and EY via telephone interviews and direct one-to-one meetings. Overall, 206 international business leaders from 27 countries were interviewed between December 2012 and January 2013.
3%
Turnover
Less than 150m
1%
3%
7%
Western Europe
25%
More than 1.5b
43%
14% 14%
Asia
North America
39%
15%
36%
150m1.5b
Job title
Others
Sector of activity
Transportation and automotive
6%
1%
4%
4%
11%
Financial director
44%
25%
8%
7%
8% 18%
Life sciences
8% 8%
Chairman/President/CEO
Individual values are rounded and may not total 100%.
Director of investments
16%
16% 16%
Consumer
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Unlocking value
39
EY in Kazakhstan
EY in Kazakhstan
In 1992, EY became the first international assurance and advisory services organization to open an office in Kazakhstan. And we have been with the country every step of the way since it has opened its economy and embarked on reform. We very much look forward to being part of the countrys growing success in the years to come.
Encouraging investment
EY continually supports key investment and economic forums. We organize a variety of professional events and knowledge-sharing sessions in order to promote international best practices and industry expertise, as well as to advise the investment community on the most recent or anticipated changes to the regulatory environment. EY is involved in the work of the Foreign Investors Council, chaired by the President of the Republic of Kazakhstan, and co-chairs its working group on Investment Policy. EY is also actively involved in a number of business, professional and industry associations in Kazakhstan, including the American Chamber of Commerce, EUROBAK and the Association of Financial Institutions.
Supporting entrepreneurship
We launched Entrepreneur Of The Year in Kazakhstan in 2007, an EY program that runs in more than 50 countries around the world to recognize and honor the outstanding achievements of entrepreneurs in developing local and global economies. The Kazakhstan program has recognized nearly 60 finalists, representing diverse industry sectors and regions. The national winners represent Kazakhstan at the annual World Entrepreneur Of The Year award in Monte Carlo.
40
Publications
Doing business in Kazakhstan
The Doing business in Kazakhstan booklet offers useful, practical advice on the legal and tax issues that face investors when they start and build a business in Kazakhstan. It helps investors to plan so that they can avoid common pitfalls.
Contacts Marc Lhermitte Partner, Ernst & Young Advisory Global Lead Attractiveness and Competitiveness Tel: + 33 1 46 93 72 76 Email: marc.lhermitte@fr.ey.com Sandra Sasson Marketing and Communications Director Emerging Markets Center, EMEIA Marketing Tel: + 30 210 2886 032 Email: sandra.sasson@gr.ey.com Bijal Tanna EMEIA Press Relations Tel: + 44 20 7951 8837 Email: btanna@uk.ey.com Natalya Kozlenkova Associate Director, Marketing and Communications Leader Tel.: + 7 727 258 59 60 Email: natalya.kozlenkova@kz.ey.com
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