Kazakhstan has drafted a national plan for attracting foreign investment, under which it proposes to achieve 15% growth in the amount of foreign investment in the processing sector by 2015 through giving major investors additional tax breaks. Antonio SOMMA, Acting Head of the OECD Eurasia Competitiveness Programme, has told Interfax-Kazakhstan about the OECD recommendations for Kazakhstan and advantages that some sectors of the national economy possess.
- What are the OECD recommendations regarding Kazakhstan’s national plan for attracting investment?
- There are two sets of recommendations. The first one refers to investment policy as such. The second one deals with organizational methods of boosting investment. As for the investment policy, some things needed to make Kazakhstan more attractive for investors have already been done. For instance, the administrative burden has been reduced; financial channels for taking profits out the country have been established. On the other hand, if you look at the OECD’s Regulatory Restrictiveness Index for foreign direct investment, Kazakhstan is classified there as a country with heavy restrictions. Kazakhstan is ranked 12 among 51 countries with a large amount of regulatory restrictions.
So what is the problem? Why is this happening? Firstly, this is due to official restrictions on foreign investment. Foreign companies have no right of owning agricultural lands and forests in Kazakhstan. Some restrictions apply to the whole of the economy and not just particular sectors. For example, the fact that the country has a lot of state companies and the management of those companies is not always transparent is a limiting factor for investment. Another example is that the access to loans for small and medium business is not very simple.
Nonetheless, Kazakhstan has potential. The potential is based on your country’s richness in natural resources, large amounts of agricultural land, highly qualified workforce and convenient geographic location.
How Kazakhstan may attract investment? The OECD Eurasia Competitiveness Programme is helping the government of Kazakhstan solve investment policy problems in certain sectors and set priorities for investment over the long term.
- What sectors of Kazakhstan have competitive edge? What sectors need more attention to bring in additional investment?
- Besides the traditional extractive industries, these sectors include agriculture, the chemical industry, logistics and the information technology, which is rapidly growing around the world. The selection of sectors should be carried out in a manner to best utilize the country’s potential.
To simply determine priority sectors is not enough because each sector possesses its own internal and international dynamics. One should understand how the dynamics work in order to raise the sector’s investment appeal. Each sector has internal barriers that are easier to remove than global barriers. Once the problem areas are identified, investment policy should be adjusted accordingly.
For example, farming is just one element of the broader picture that is the agricultural sector. Agricultural production is heavily influenced by international price fluctuations. Therefore, in order to attract long-term interest to the sector one should pay attention to food processing and retail sales. Then we should identify the rest of the problems. Those are the difficult access to loans and lack of professional workforce.
When we have pinpointed the problems, we should start working to eliminate them and that is what the OECD program is for.
- How successful, in your opinion, were Kazakhstan’s reforms launched to improve the business climate?
- Much has been done, but not enough to make the Kazakh economy open.
The OECD has identified three priority areas. First, improvement of foreign investment climate, in other words, turning to international practices related to investment security and investors’ easy access to land. Second, improving business climate – better quality of corporate governance in public companies and wider access to financing for small and medium businesses. Third, according to OECD recommendations, fostering a responsible business behavior in the country, which entails fighting corruption and raising responsibility of the resource sector.
- The current investment pace is an estimated $18 billion a year. How much Kazakhstan could bring in investments above that, if improves its economy competitiveness?
- Kazakhstan receives more foreign investment than all Central Asian countries put together. The problem is to ensure consistent results, since 75% of the total foreign investment goes into the mining sector. The agriculture attracts a small fraction of the foreign investment inflow. A lot could be done to develop this sector through raising its investment appeal. If only one sector increases its added value, it will not improve the investment climate, as a whole, but if this practice is extended to other industries, it may help to get investors’ attention.
- Kazakhstan intends to achieve a 15%-growth in foreign direct investments in the manufacturing sector by 2015 through granting additional tax rebates to major investors. The tax preferences, however, will be available only for the projects with over $50-million investment. The tax breaks and other incentives that may be offered are as follows: exemption from CIT, as well as property and land taxes, a state order or order from a national company. How do you feel about this initiative?
- I must tell you that I am not a fan of direct or indirect subsidies, and tax breaks do represent subsidies. Suppose, I am a foreign investor and the state allows me to pay less in taxes, but over time the tax policy may change. Second, if the tax policy remains stable, I will still be seeking tax breaks, as an investor. As soon as the tax benefits are over, I will immediately leave the country.
- What would you recommend to the Government of Kazakhstan in terms of diversifying investments and identifying new sources of growth?
- First of all, the government should revisit the efforts undertaken together with the OECD in the last three or four years. In other words, you need to analyze indices and indicators of all non-extractive industries to determine two things: what are the current and potential benefits of this sector to the economy and what are the current or potential benefits the sector may hold for foreign investors.
Let’s go back to the agricultural sector and why this sector holds current and potential benefits for the country. First of all, this sector is based on the national wealth, and second, when the sector shifts its focus from agriculture to agribusiness, it may create many jobs. It holds the same appeal for foreign investors, as the national wealth, the land, cannot be syphoned off. What could the government do to bring in foreign investments? The easiest way is to provide financial support through tax incentives and subsidies, but it’s not the right strategy. Kazakhstan has to replace the finance-based approach with the one based on better government services to investors.
- What about the joint projects with the National Agency for Export Promotion and Investment Kaznex Investments aimed to raise more investments?
- The joint projects are carried out at different levels and financially supported by the governments of Kazakhstan, the European Union and the United Kingdom. We assist Kaznex Invest in clarifying the issues that might interest a potential investor. First, if this is an investor-friendly country and second, which industry is the best to invest in? To deal with those issues we have a program on “Improving Competitiveness of Sectors.” The third question: How easy is it for an investor to set up a company in a remote region, where such industry is presented. For this purpose, we launched the project “Enhancing Regional Competitiveness” two weeks ago. The fourth issue: “What may the government offer to the investors now and in the future.” Two weeks ago, we launched another project, which focuses on improving the quality of services that the state provides to specific industries. Along with Kaznex Invest, we are also engaged in refocusing the investment promotion policies from the geography-based to industry-focused ones.
-Thanks for the interview!