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  • 1. Growing Beyond EY's attractiveness survey Kazakhstan 2013 Unlocking value
  • 2. Attractiveness EY’s attractiveness surveys EY’s attractiveness surveys are widely recognized by our clients, the media and major public stakeholders as a key source of insight on foreign direct investment (FDI). Examining the attractiveness of a particular region or country as an investment destination, the surveys are designed to help businesses to make investment decisions and governments to remove barriers to future growth. A two-step methodology analyzes both the reality and perception of FDI in the respective country or region. Findings are based on the views of representative panels of international and local opinion leaders and decision-makers. Emerging Markets Center The Emerging Markets Center is EY's “Center of Excellence” that quickly and effectively connects you to the world’s fastest-growing economies. Our continuous investment in them allows us to share the breadth of our knowledge through a wide range of initiatives, tools and applications, thus offering businesses in both mature and emerging markets an in-depth and cross-border approach, supported by our leading and highly globally integrated structure. For further information on emerging markets, please visit: emergingmarkets.ey.com Cover: The Bayterek monument and observation tower reflecting in the singing fountains of Astana, Kazakhstan.
  • 3. Kazakhstan 2013 Contents www.ey.com/attractiveness 02 Foreword 03 A strategic gateway on the New Silk Road Kairat Kelimbetov, Deputy Prime Minister of the Republic of Kazakhstan 04 Executive summary 06 A new world order  How is Kazakhstan's economy performing and what is its place in today's global economy? 10 Perception 22 Future 30 Actions 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? Mining new opportunities How do investors perceive Kazakhstan’s future attractiveness and what sectors are set to act as the country's engines of growth? 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 1
  • 4. Foreword Foreword Strength in stability Welcome to the third edition of EY’s Kazakhstan attractiveness survey. Jay Nibbe  Area Managing Partner, EMEIA — Markets, EY Erlan Dosymbekov  Managing Partner, Kazakhstan and Central Asia, EY In this new edition, we continue to analyze the latest foreign direct investment (FDI) trends in Kazakhstan and explore what investors think about the country’s investment climate, as well as its potential. This year, the country’s 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 country’s 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 2 EY’s attractiveness survey Kazakhstan 2013 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 country’s 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 country’s 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 country’s 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 Kazakhstan’s investment climate, and provides useful insights for companies, as they prepare their future investment plans.
  • 5. www.ey.com/attractiveness A strategic gateway on the New Silk Road 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. “China and Russia are among Kazakhstan’s 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 China’s most important economic partner in Central Asia. Bilateral economic ties should expand even further, given each country’s strong growth rates and China’s growing demand for Kazakhstan’s rising exports of oil and gas. Currently, 20% of Kazakhstan’s 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. 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 Bank’s 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 world’s 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$12,000 — and the country will be classified by the World Bank as a “high income economy.” All in all, these are significant achievements for a country that only became independent just over 20 years ago. Unlocking value 3
  • 6. Executive summary Executive summary 1  2  Stability amid global uncertainty FDI on growth trajectory FDI inflows in Kazakhstan (US$b) Real GDP growth (%) 2011 2012 2013 2014 Kazakhstan 7.5% 5% 6% 7.5% RGMs 6.4% 4.7% 5.1% 6% World 3.9% 3.2% 3.3% 4% 11.6 2010 Source: Ernst & Young's Rapid-Growth Markets Forecast, April 2013; World Economic Outlook, IMF, April 2013. Kazakhstan’s 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 +1% 13.9 2011 14 2012 Source: World Investment Report 2013, United Nations Conference on Trade and Development (UNCTAD), June 2013. 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 region’s second-most attractive investment destination. • For more on CIS FDI inflows and attractiveness, turn to pp.8 and 11 4  3  Lack of awareness hampering FDI growth Investors prioritize strong fundamentals Most attractive features of Kazakhstan, according to established investors Attractive feature +20% Awareness gap of foreign investors Average % of “can't say” responses for parameters on Kazakhstan's attractiveness Not attractive feature Macroeconomic stability 84% 80% 10% Telecommunication infrastructure 78% 9% Corporate taxation 68% 13% Performance in sustainable development 63% 45% 10% Stable political and social environment 27% Source: EY’s 2013 Kazakhstan attractiveness survey (total respondents: 64 established in Kazakhstan). Investors prioritize Kazakhstan's strong fundamentals as its most attractive feature. Beyond Kazakhstan’s political, social and macroeconomic stability, they highlight its telecommunications infrastructure and corporate taxation as most attractive. However, the country’s 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 4 EY’s attractiveness survey Kazakhstan 2013 12% Doing business in Kazakhstan Not yet established in Kazakhstan Source: EY’s 2013 Kazakhstan attractiveness survey (total respondents: 206 — 64 established in Kazakhstan; 142 not established in Kazakhstan). 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 country’s 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 country’s 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
  • 7. www.ey.com/attractiveness EY’s 2013 Kazakhstan attractiveness survey analyzes: a) The real attractiveness of Kazakhstan among foreign investors, based on the World Bank, the World Economic Forum’s Global Competitive Report 2012–2013, 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 5  Diversification boosting confidence Kazakstan’s fact sheet Diversifying for the future Capital Land area • For more on sectors driving growth in Kazakhstan, turn to p.24 6  Five steps How to improve Kazakhstan's attractiveness Spread the word Move up the value chain Remove regional disparities Enhance the business environment Foster innovation Source: EY’s 2013 Kazakhstan attractiveness survey. 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 country’s wide regional economic disparities, the social infrastructure and health care system require development. To improve the business climate, Kazakhstan’s 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 16.9 million Proportion of urban population in total (2013) 55% of total population Age structure (2012 est.) 0–14 years (24.4%); 15–64 years (68.7%); 65 and above (6.7%) Languages Kazakh (official language), Russian (inter-ethnic communication) President Nursultan Abishuly Nazarbayev (since 24 April 1990) Prime Minister Serik Nygmetovich Akhmetov (since 24 September 2012) Nominal GDP (2012) US$202b GDP growth (% per year) (2012) 5% GDP per capita PPP (2012) US$12,259 (2012 est.) Agriculture (5.2%); Industry (37.9%); Services (56.9%) 12.2% 8.975 million 5.3% CPI inflation (% per year) (2012) 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, Kazakhstan’s 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. Population (January 2013) Unemployment rate (2012) Source: EY’s 2013 Kazakhstan attractiveness survey (total respondents: 206 — 64 established in Kazakhstan; 142 not established in Kazakhstan). 2,724,900 sq.km Labor force (2012) Agriculture Russia, Uzbekistan, China, Kyrgyzstan and Turkmenistan Public debt (January 2013) Real estate Transportation and and construction automotive Bordering countries 5.1% Stock Exchange Kazakhstan Stock Exchange (KASE) Central Bank National Bank of Kazakhstan Corporate income tax rate 20% Individual income tax rate Life sciences Kazakhstan is divided into 14 provinces and 2 cities of national significance: Astana and Almaty GDP composition by sector (2012) Metals and mining Astana Administration Energy 10% State value-added tax 12% Major cities Almaty, Astana, Karaganda, Shymkent, Atyrau, Aktau Time zone Astana and Almaty time: GMT +6 Currency unit Kazakhstan Tenge (KZT) 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 & Young’s Rapid-Growth Markets Forecast Spring Edition, April 2013, Ernst & Young, 2013. Unlocking value 5
  • 8. Kazakhstan in context Kazakhstan in context A new world order How is Kazakhstan's economy performing and what is its place in today's global economy? Real GDP growth rates 3.4% (%) 2.2% 1.5% 2.8% 1.9% 3.4% Russia 5% Poland 2.2% 2.7% 6% 2% 1.6% 1.4% 7.5% Japan 1.9% 3% 7.8% Kazakhstan -0.5% -1.2% Czech Republic United States 2.2% 3.5% 8.2% 8.5% 5.4% China Turkey 3.2% 3.3% 4% 3.1% 4.4% Brazil 5.1% 7.2% 0.9% World 4.7% 5% 5.2% 6% 2.5% 2.8% 4% India South Africa RGMs 2012 2013 2014 Source: World Economic Outlook, IMF, April 2013; Ernst & Young’s Rapid-Growth Markets Forecast, April 2013; Global Economic Databank, Oxford Economics, accessed on 31 May 2013. Rapid-growth markets keep to a safe path After the economic setbacks of 2011, 2012 saw the global economy in recovery mode. However, 2013 is expected to witness a pickup in global economic momentum. Global growth is set to accelerate moderately from 3.2% in 2012 to 3.3% in 2013 and 4% in 2014.1 The uptick in world growth is, initially at least, fueled by rapidgrowth markets (RGMs). Growth in Asian RGMs is set to accelerate from 6.4% in 2012 to 7.4% in 2014, while that in Latin American RGMs should progress from 2.6% in 2012 to 4.5% in 2014. Growth in Middle Eastern RGMs is set to remain robust. In contrast, RGMs in Eastern Europe are expected to lag behind their Asian and Latin American counterparts. Poland is expected to grow by 1.5% in 2013 and 2.8% in 2014 while the Czech Republic is estimated to contract by 0.5% in 2013 and grow by 1.9% in 2014.2 1.  World Economic Outlook, IMF, April 2013. 2.  Ernst & Young’s Rapid-Growth Markets Forecast, April 2013. 6 EY’s attractiveness survey Kazakhstan 2013 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 & Young’s Rapid-Growth Markets Forecast, January 2013. 4.  World Economic Outlook, IMF, April 2013.
  • 9. www.ey.com/attractiveness Kazakhstan in the world economy Kazakhstan was one of the fastest-growing economies in the world between 2000 and 2010. While many parts of the world were reeling with the effects of the 2008 global financial crisis, followed by sluggish growth, Kazakhstan continued to deliver impressive results. However, a combination of factors, including subdued external demand, weaker metal prices and a decline in agricultural output, have resulted in slower growth of 5% in 2012.5 Nevertheless, Kazakhstan was the front-runner in the CIS region. Growth in Russia last year was 3.4% and Ukraine expanded by just 0.1%.6 Looking ahead, Kazakhstan’s 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 & Young’s 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. Kazakhstan’s oil production and exports are set to get a boost from the giant Kashagan oil field coming on stream in the near future. 5.  Ernst & Young’s Rapid-Growth Markets Forecast Spring Edition, April 2013, Ernst & Young, 2013. 6.  Ernst & Young’s Rapid-Growth Markets Forecast Spring Edition, April 2013, Ernst & Young, 2013. GDP growth rates − RGM’s 2012 2013 2014 2015 China 7.8% China 8.2% China 8.5% China Ghana 7.1% Ghana 6.9% Kazakhstan 7.5% India 7.7% Nigeria 6.5% India 7.2% Kazakhstan 7.1% 6.1% Vietnam 6.9% Vietnam 7.1% Nigeria 6.1% Qatar 6.1% Saudi Arabia 6.8% 8.2% Nigeria 6.5% Indonesia Thailand 6.4% Kazakhstan Indonesia 6.2% Vietnam 5.5% Indonesia 6% Indonesia 5.6% 6% Thailand 5.3% Qatar 6% Thailand 5.5% 5.2% Ghana 5.9% Nigeria 5.5% 5.5% Qatar 6% Malaysia 5.6% India Chile 5.5% Qatar 5% Malaysia 5.1% Ghana India 5% Malaysia 5% Thailand 4.9% Malaysia 4.6% Vietnam 5% Chile Mexico 4.8% Mexico 4.5% Kazakhstan 5% Saudi Arabia 4.3% Chile 4.6% Chile 4.5% Colombia 4% Colombia 4.9% 4.2% Saudi Arabia 4.6% Mexico 3.9% UAE 3.7% Colombia Russia 3.4% Mexico 3.5% Russia UAE 3.3% Russia 3.5% UAE 4.4% 4% 3.9% Saudi Arabia 4.3% UAE 4.1% Colombia 4.1% Russia 4.1% Source: Ernst & Young’s Rapid-Growth Markets Forecast, April 2013. Unlocking value 7
  • 10. Kazakhstan in context Uncertainty hampers global inflows The global picture The United Nations Conference on Trade and Development (UNCTAD) estimated that global FDI inflows totaled US$1.4t in 2012, a fall of 18% compared with 2011. After rising in 2010 and 2011, the 2012 slump can be attributed to weary investor confidence amid macroeconomic and political uncertainty. Developed economies bore the brunt and accounted for 86% of the US$301b decline in global FDI. While investments in developing economies also lost some momentum, the decline was moderate at 4.4%. FDI inflows by region (2012 vs. 2011) 5.1% Africa -2.2% Latin America and the Caribbean -6.7% Asia -26.1% United States -41.5% European Union -41.7% Europe Source: World Investment Report 2013, UNCTAD, June 2013. The CIS reality The CIS region received US$82.3b of FDI in 2012, down 6.5% from the previous year. Russia, the largest country in the region, accounted for more than 60% of the total FDI amount in the CIS area. Kazakhstan was second, with a 17% share, and Ukraine was third with 9.5%. While Russia’s FDI value declined by 6.6% since 2011, foreign investment in Kazakhstan and Ukraine increased by 0.9% and 8.7%, respectively.7 7.  World Investment Report 2013, UNCTAD, June 2013. FDI inflows in the CIS region (US$b) 43.2 11.6 6.5 55.1 51.4 13.9 7.2 14 7.8 Russia Kazakhstan Ukraine 2010 2011 Source: World Investment Report 2013, UNCTAD, June 2013. 8 EY’s attractiveness survey Kazakhstan 2013 2012 Developing countries overtake traditional counterparts The year 2012 was significant for economic historians, because it was the first year in which developing countries overtook developed nations as the leading generator of foreign investment. Foreign investors kept their eyes on the BRICs, which continued to integrate with the global economy. In 2012, Brazil, Russia, India and China attracted US$263.3b in FDI value. Although this represents a drop of 6.6% on 2011, it forms a better picture when compared with the global decline. Africa received US$50b in FDI in 2012, an increase of 5.1% on 2011. It was the only major region to register a year-on-year increase in 2012. High inflows from China, investments in exploration and exploitation of natural resources, and good economic performance improved the continent’s overall FDI picture. That said, while FDI inflows increased in North Africa, Central Africa and East Africa, investment declined in West Africa and Southern Africa. Latin America and the Caribbean attracted FDI inflows amounting to US$244b, only a slight decline of 2.2% on 2011. However, there was a significant difference in the sub-regional performance. While FDI inflows to South America grew 12% to US$144b, Central America and the Caribbean witnessed a 17% decline over 2011 to US$99b. The increase in FDI inflows in South America were driven primarily by factors such as natural resources, strengthening commodity prices and expanding middle classes in Chile, Colombia, Argentina and Peru. Source: World Investment Report 2013, UNCTAD, June 2013.
  • 11. www.ey.com/attractiveness Unlocking value 9
  • 12. Perception How Kazakhstan is viewed by foreign investors p.11 Russia leading in the CIS p.13 Natural resources driving growth p.14 Seeking shelter in stability p.18 Limited knowledge of regional investment opportunities p.20 Established investors remain confident Image: Bridge over Ishim river in Astana, Kazakhstan. 10 EY’s attractiveness survey Kazakhstan 2013 In this section ... How FDI in Russia compares with Europe’s investment trend, key investors, favoured sectors, key activities and destination cities.
  • 13. www.ey.com/attractiveness 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? Russia leading in the CIS Key findings Most attractive CIS market for investment 44%  of investors consider Russia as the most attractive country in the CIS region. (Respondents prioritized up to three locations) 45% 44% 39% 24% 18% 9% Russia 7% 3% Kazakhstan Established in Kazakhstan 3% 2% 2% 2% 3% 2% Ukraine Belarus Georgia* Armenia Can't say Total respondents * Georgia is not a CIS member, but is included in the reference group for the purpose of this survey. Sources: EY’s 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 country’s 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 country’s doing-business ranking is much lower than Kazakhstan’s, the sheer size and opportunities in Russia outweigh the difficulty of doing business. 31%  think of Kazakhstan as a country rich in natural resources. 84%  of established investors commend the country's macroeconomic stability. 34%  believe it has an entrepreneurial culture. 59%  of them view the local business environment as unattractive. 75%  of non-established investors could not name a city in Kazakhstan. 8.  Ernst & Young’s 2013 Russia attractiveness survey “Shaping Russia’s 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 & Young’s 2013 Russia attractiveness survey “Shaping Russia’s future,” June 2013. Unlocking value 11
  • 14. 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 its strengths and potential. However, 24% of existing investors have Kazakhstan as their first choice. 12 EY’s attractiveness survey Kazakhstan 2013 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 & Young’s 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 13.  World Investment Report 2013, UNCTAD, June 2013.
  • 15. www.ey.com/attractiveness Natural resources driving growth What are the first two things that come to mind when thinking about Kazakhstan? A country rich in natural resources 31% A rapidly growing economy 17% Stable political environment 12% Favorable location 10% The CES with Russia and Belarus 9% High purchasing power 8% An LLDC (landlocked developing country) 6% WTO accession candidate 5% Investment-friendly business environment 4% Research and innovation capacity Can't say 3% 29% Source: EY’s 2013 Kazakhstan attractiveness survey (total respondents: 206 — 64 established in Kazakhstan; 142 not established in Kazakhstan). Unsurprisingly, Kazakhstan’s 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 world’s 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 & Young’s Mining Tax Guide 2012, June 2012, Ernst & Young, 2012. The awareness of Kazakhstan’s 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 country’s 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 Kazakhstan’s 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
  • 16. Perception Seeking shelter in stability Investors prioritize Kazakhstan's strong fundamentals as its most attractive feature. They rate Kazakhstan’s political, social and macroeconomic stability above labor costs and corporate taxation. The world was shaken by political and economic uncertainty in 2012. In this context, business leaders are looking for investment destinations that offer stability and assurance. Kazakhstan’s consistent GDP growth demonstrates its resilience to tough global conditions. It is important to note that investors not yet operating in Kazakhstan seem to have little knowledge of its profile. On average, 51% of these investors replied “can’t say” when asked about Kazakhstan’s attractive features. Macroeconomic environment Kazakhstan's ranking Score 2012–13 16 6.1 2011–12 18 5.9 2010–11 26 5.3 2009–10 59 4.7 Source: The Global Competitiveness Report 2012–2013, WEF. Most attractive features • Stable macroeconomic environment  Among investors already established in Kazakhstan, 84% think that macroeconomic stability is the country’s most attractive feature. The Republic has not been left unaffected by the global financial crisis. In 2009, its economic growth rate decelerated; the amount of credit made available to business by the banking system declined; and its liquidity deteriorated. The same year, the Government launched economic stimulus measures covering recapitalization of banks; support for the real estate and agriculture sectors; targeted support for small and medium enterprises (SMEs); and investment in industrial projects and infrastructure. The Government’s initiatives, and its ability to maintain a stable macroeconomic environment, are viewed by many respondents as a sound achievement. Despite a substantial economic slowdown, Kazakhstan achieved positive GDP growth of 1.2% in 2009 and returned to significant growth during the last three years. GDP increased by 7.3%, 7.5% and 5% in 2010, 2011 and 2012, respectively. The World Economic Forum’s (WEFs) Global Competiveness Report 2012–2013 ranks Kazakhstan’s macroeconomic stability 16th out of 144 economies. And in November 2012, the international agency Fitch Ratings upgraded Kazakhstan's sovereign rating to BBB + with a ‘stable’ outlook. This upgrade reflects the measures undertaken by the Government to strengthen the state foreign balance, reduce the level of national debt and aid the recovery of the banking system. Meanwhile, only 10% of established investors are not confident about Kazakhstan’s macroeconomic environment. Kazakhstan’s overdependence on extractive industries though, exposes the country to greater external risks. Banking problems also persist, 14 EY’s attractiveness survey Kazakhstan 2013 Most attractive for establishing activities Evaluation of criteria on how attractive Kazakhstan is by established investors Attractive Macroeconomic stability 84% Stable political and social environment 80% Telecommunication infrastructure 78% Corporate taxation 68% Sustainable development 63% Sources: EY’s 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 Kazakhstan’s political and social stability. Economic Intelligence Unit’s 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: • Kazakhstan 2050 Strategy: become one of the 30 most ► competitive nations in the world by 2050. 15.  National Bank of Kazakhstan. 16.  Ernst & Young’s Rapid-Growth Markets Forecast Spring Edition, April 2013, Ernst & Young 2013.
  • 17. www.ey.com/attractiveness • Green 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 2012–13 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, Kazakhstan’s Ministry of Transport and Communications intends to achieve 100% broadband 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. 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 country’s 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. Mixed views • Size of the domestic market  Although Kazakhstan’s 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  Kazakhstan’s 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 Kazakhstan’s 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 country’s 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 Kazakhstan’s 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. Mixed views for establishing activities Evaluation of criteria on how attractive Kazakhstan is by established investors Attractive Not attractive Size of the domestic market 62% 29% Local labor costs 55% 35% Local labor skills 53% 40% Labor law flexibility 50% 36% Open trade policies 49% 39% Government incentives for FDI 38% 35% Sources: EY’s 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 2012–13, 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
  • 18. 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 Kazakhstan’s 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 world’s 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 country’s 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 Kazakhstan’s 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 Bank’s 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 country’s steady advancement up the World Bank’s 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. • 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 2012–13 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. Furthermore, the country’s 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. • Underdeveloped transport and logistics infrastructure  Fifty percent of established investors expressed the need for enhancing Kazakhstan's transport and logistics infrastructure. The country’s 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 26.  “Doing Business — Kazakhstan,” The World Bank website, www.doingbusiness.org, accessed 8 February 2013. 27.  The Global Competitiveness Report 2012–2013, World Economic Forum, p. 116. 28.  The Global Competitiveness Report 2012–2013, World Economic Forum, p. 217. 16 EY’s attractiveness survey Kazakhstan 2013
  • 19. www.ey.com/attractiveness Banking sector challenges The banking sector in Kazakhstan has not yet recovered from the aftermath of the financial crisis. The banks' balance sheets are still burdened with significant levels of NPLs. Discussions between the National Bank and the tax authorities on taxation of NPLs and their provisioning are still going on. While some banks have started setting up subsidiaries for managing problem loans, as enabled by new legislation, it is difficult under current legislation to remove such loans from the banks' balance sheets. The tax legislation discourages banks from selling problem loan portfolios to collectors. Foreign banks operating in Kazakhstan face a number of challenges, which stem primarily from changes in the legislative environment. Restrictions on the use of foreign parent bank guarantees in assessing credit risk exposure have harmed foreign banks' competitive position. Foreign investors are concerned by proposed limitations on the placement of deposits by state companies in banks with foreign ownership. They are also apprehensive about recent legislative changes limiting off-balance sheet positions, interest rates hedging rules, and a Supreme Court decision regarding mortgages. remote areas, which mostly house production facilities. The WEF Global Competitiveness Report 2012–13 ranks Kazakhstan 117th out of 144 countries on road quality.29 • Complex tax administration and compliance  The attraction of Kazakhstan’s 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. 29.  The Global Competitiveness Report 2012–2013, World Economic Forum, p. 217. 30.  World Bank Enterprise Survey — Kazakhstan 2009, The World Bank. The Kazakhstan Government has taken several measures to address the issue of growing NPLs in the country's banking system. It altered the tax code and permitted local banks to set up subsidiaries to manage bad loans linked to real estate. It also established a special Distressed Assets Fund, to where banks can transfer some of their bad loans. While these are positive steps, they have not been enough to improve the condition substantially. The Government needs to ensure that asset quality is thoroughly evaluated. Sources: "Kazakhstan Country Assessment," European Bank for Reconstruction and Development website, www.ebrd.com, accessed 1 July 2013; "Kazakhstan unlikely to pull off bank merger in 2013 - S&P," 23 April 2013, Reuters website, accessed 1 July 2013. • 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. Challenges for establishing activities Evaluation of criteria on how attractive Kazakhstan is by established investors Not attractive Transparent and stable legislative, regulatory and administrative environment 59% Visa and work permits regime 56% R&D availability and quality 51% Transport and logistic infrastructure 50% Tax administration system 49% Entrepreneurial culture and availability of local entrepreneurs to partner with 47% Sources: EY’s 2013 Kazakhstan attractiveness survey (total respondents: 64 established in Kazakhstan). Unlocking value 17
  • 20. Perception Limited knowledge of regional investment opportunities Highlights 75%  of investors not yet established in Kazakhstan, could not name an attractive city in the country. 22%  SMEs account for 22% of Astana’s GDP. 25%  Almaty contributes 25% to Kazakhstan’s tax revenues. 50,000  new jobs were created in Atyrau in the past 10 years. Sources: EY’s 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. 18 EY’s attractiveness survey Kazakhstan 2013 When asked about the most attractive cities in Kazakhstan, investors could only come up with three: Astana, Almaty and Atyrau. In fact, three-quarters of respondents not established in Kazakhstan had trouble mentioning even one city, suggesting limited knowledge of the country’s regional opportunities. The EIU Benchmarking global city competitiveness 2012 report backs this hypothesis. According to the report, Almaty was ranked 100th on the list of the top 120 cities, and was the only Kazakh city to appear on the list. Investors believe that the Government should intensify its efforts to develop its social infrastructure and health care system. The development of physical infrastructure and investment in urban projects should also be prioritized. Astana: the capital With its modern infrastructure and excellent business opportunities, Astana is progressing quickly. Thirty-four percent of respondents think Astana is the country’s most attractive city for investment. Their opinion is reflected in the statistics. In the last 10 years, the city’s GDP has increased by a factor greater than 50, implying that its contribution to the country's GDP has increased from 1.5% to 10%.32 Astana is a leader in the production of construction hardware, including ready-touse concrete and concrete building blocks. To encourage investors to develop new competitive industries in the city, the Government has established Astana-New City, a special economic zone (SEZ). Projects worth nearly US$1b are under way in the city’s industrial park that lies within the SEZ.33 The Government plans to open more such SEZs in the city by 2014 to attract investments in the non-resourcebased and high-tech industries. This, again, is part of the Government’s move to diversify its largely oil-based economy, by fostering technology and innovation. 32.  “Astana remains central to Kazakhstan's development, says city's mayor,” FDI Intelligence website, accessed 16 February 2013. 33.  “Astana plans to attract more investment,” Central Asia Online website, centralasiaonline.com, accessed 16 February 2013.
  • 21. www.ey.com/attractiveness Most attractive cities in Kazakhstan for an investment project The three “A’s” (Respondents prioritized up to three cities) 1% 34% Pavlodar Astana Karaganda 13% 10% Can't say 57% Average monthly wage (July 2013) KZT145,541 (US$946) Major industries Transport, communication and construction 4% Atyrau 22% Aktau 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 Source: EY’s 2013 Kazakhstan attractiveness survey (total respondents: 206). Almaty: the business and tourism hub Almaty, which contributes 18% to Kazakhstan’s GDP,34 is seen as the best city for investments by 54% of investors already established in Kazakhstan. Given its favorable investment climate, the city is widely recognized as the country’s financial and economic center. True to its reputation, the city houses headquarters of the majority of second-tier banks, insurance companies, pension funds, professional services firms, brokerage companies and the Kazakhstan Stock Exchange. Smallscale and medium-size businesses are also growing in Almaty, with over 80,000 companies registered in the city. This is an increase of 20,000 since 2008.35 The city is also Kazakhstan’s tourism hub. Its geographical location, at the foot of the Tien-Shan mountain range, offers world-class skiing facilities. Furthermore, the mountain vistas, alpine-style lakes, winter sports 34.  “Official internet source of Almaty City,” Almaty website, www.almaty.kz, accessed 16 February 2013. 35.  “Official internet source of Almaty City,” Almaty website, www.almaty.kz, accessed 16 February 2013. 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 Not established in Kazakhstan With major domestic and international oil and gas companies concentrated in the city, Atyrau is known as Kazakhstan’s energy capital. Oil and gas drives the city’s economic welfare, with its production accounting for 40% and 60%, respectively, of the country’s total production.36 In the next five years, National Company KazMunayGas and its foreign partners plan to construct and commission a number of petrochemical and refinery projects for a total sum in the region of US$9b.37 66% 19% Almaty 54% 7% Atyrau Atyrau: the energy capital Astana 40% 1% Aktau 26% 3% Karaganda 9% 1% Pavlodar 2% 1% Can't say 19% 75% Source: EY’s 2013 Kazakhstan attractiveness survey (total respondents: 206 — 64 established in Kazakhstan; 142 not established in Kazakhstan). 36.  “World Energy Cities Partnership — Atyrau, Kazakhstan,” World Energy Cities Partnership website, www.energycities.org, accessed 18 February 2013. 37.  The Ministry of Oil and Gas of Kazakhstan website, www.mgm. gov.kz, accessed 20 March 2013. Unlocking value 19
  • 22. Perception Established investors remain confident Investment plans Is your group considering establishing or developing activities in Kazakhstan over the next year? 49% 25% 19% 7% Yes No Keep operation at the same level Can’t say Source: EY’s 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 Kazakhstan’s 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. Investment activities How are you planning to invest? (Respondents could mention several possible answers) Expansion of facility 48% Increasing labor force 30% Joint venture or alliance 26% Greenfield investments 13% Acquisition 11% Can't say 17% Source: EY’s 2013 Kazakhstan attractiveness survey (total respondents: 52 planning to invest in Kazakhstan). 20 EY’s attractiveness survey Kazakhstan 2013 Measuring investors’ success 83% 10% 7% If you had a chance to reconsider your investment in Kazakhstan, would you still decide to invest there? 67% 20% 8% 6% Yes Has your company been successful in achieving its business objectives in Kazakhstan over the past five years? Neutral No Can’t say Source: EY’s 2013 Kazakhstan attractiveness survey (total respondents: 64 established in Kazakhstan). 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 Kazakhstan’s potential.
  • 23. www.ey.com/attractiveness What it means for businesses In the context of the current global conditions, Kazakhstan’s stable macroeconomic, political and social environment, coupled with its rapid growth, offer both comparative safety and good returns on investment. However, before making a decision to invest, foreign investors should consider the operating challenges of doing business in the country. While it is not difficult to start a business, established investors are challenged by inconsistent regulatory and legal standards and complex tax administration. Furthermore, the lack of appropriate skills and a limited R&D environment can make it difficult for foreign companies to recruit the right talent and innovate. Although the telecommunications infrastructure has seen great improvements in recent years, easing the path for foreign investors, underdeveloped transport and logistics infrastructure can result in high transportation costs and lengthy delays in the transfer of goods and services. Investors must be prepared to bear these costs. Proper due diligence and a strategic cost-benefit analysis are imperative to ensure that long-term returns more than offset the costs incurred. Unlocking value 21
  • 24. Future Kazakhstan’s future attractiveness p.23 Optimism prevails p.27 Toward integration p24 Beyond natural resources Image: Close up of the Bayterek tower, symbol of Astana, Kazakhstan’s capital. 22 EY’s attractiveness survey Kazakhstan 2013
  • 25. www.ey.com/attractiveness Mining new opportunities How do investors perceive Kazakhstan’s future attractiveness and what sectors are set to act as the country's engines of growth? Optimism prevails Key findings Future attractiveness Over the next three years, do you think the attractiveness of Kazakhstan as a place to establish activities will... 68% 41% 33% 30% 29% 22% 26% 11% 9% Improve Established in Kazakhstan Stay the same 20% 6% 5% Decrease Can’t say Not established in Kazakhstan Total respondents Individual values are rounded and may not total 100%. Source: EY’s 2013 Kazakhstan attractiveness survey 25% (total respondents: 206 — 64 established in Kazakhstan; 142 not established in Kazakhstan). Forty-one percent of investors expect Kazakhstan’s 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 country’s 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 Government’s efforts to improve the business climate, 68% of established respondents are optimistic about Kazakhstan’s 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. 41%  of respondents expect Kazakhstan’s attractiveness to improve over the next three years. 48%  believe that the WTO accession would positively impact the country’s investment appeal. 47%  expect a rise in opportunities from the CES and potential Eurasian Economic Union. 68%  think that the future of Kazakhstan will be driven by oil and gas, mining and metals, reflecting an overdependency on extractive industries. 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 Kazakhstan’s rule of law, labor skills and innovation capabilities. The future attractiveness of Kazakhstan remains central to the Government’s efforts to diversify its economy, reduce regional disparity, and improve the innovation and entrepreneurial climate. Unlocking value 23
  • 26. Future Beyond natural resources Unsurprisingly, a large majority of respondents think that oil and gas, and mining and metals will dominate future FDI inflows in Kazakhstan. Attractive sectors for FDI 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 45% Mining and metals 29% Private and business services 15% Life sciences 12% Real estate and construction 11% Agriculture 10% High-tech and telecommunication 6% Consumer products 6% Automotive and transportation 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, financial 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: EY’s 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 Kazakhstan’s growth, with its share of the country’s 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 country’s 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 Kazakhstan’s economic growth, accounting for approximately 27% of Kazakhstan’s GDP.42 The country has 30% of the world’s 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. 24 EY’s attractiveness survey Kazakhstan 2013 is the 3rd-largest producer of titanium in the world, 7th in zinc production and 13th among global iron ore producers.43 With only 10%–15% of Kazakhstan’s explored reserves currently in operation, its metals and mining industry has huge potential for further growth. The Government promotes the sector’s development by encouraging FDI and maintaining direct and indirect interests in large mining companies. In 2010, it included the mining sector in the state program on accelerated industrial and innovative development. The program aims at attracting increased FDI inflows and creating a substantial number of new jobs in the sector by 2014. Sectors on the rise Kazakhstan’s 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 are beginning to emerge as attractive investment options. Respondents highlight private and business services, life sciences, real estate and telecommunication as sectors that will offer opportunities in the future. As diversification efforts intensify, the importance of these sectors is set to grow. A good example in this regard has been set by the Gulf Cooperation Council (GCC) countries, which have solid experience in diversification efforts. Here, government attempts to ease their reliance on the volatile oil and gas sector have led Investors to see beyond energy projects. In the region, there is a clear shift toward more strategic and knowledge-driven sectors. The governments in GCC countries have created an environment that allows these sectors to flourish. For instance, they have established financial free-trade zones, health care cities and e-government initiatives. The result is a substantial inflow of foreign capital into knowledgedriven sectors.44 Between 2003 and 2011, the services activity attracted more than half of total FDI projects in the Middle East. • Business services and technology Fifteen percent of investors expect business and private services to be key contributors to FDI in Kazakhstan in the next three years. Hi-tech and telecommunications is seen as a sector that will drive future FDI growth by 6% of respondents. A higher level of broadband penetration and mobile connection than its neighbors, makes Kazakhstan a potential platform for IT and business services in Central Asia. The banking and insurance sector is expected to recover after suffering from the effects of the world financial crisis. 43.  “Mining-and-Metallurgical Sector,” Invest in Kazakhstan website, invest.gov.kz, accessed 25 February 2013. 44.  Ernst & Young’s 2012 Middle East attractiveness survey “Shifting perspectives,” October 2012, Ernst & Young, 2012.
  • 27. www.ey.com/attractiveness 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 2010–14. 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%  Kazakhstan imports 90% of the total drugs consumed in the country. 6.3%  Kazakhstan's construction sector accounted for 6.3% of GDP in 2012. 6.742  Kazakhstan commissioned 6.742 million square meters of housing space in 2012. 9th  Kazakhstan is the world’s 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. Unlocking value 25
  • 28. 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, Kazakhstan’s 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 2011–2020 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 sector’s future FDI prospects. Agriculture contributes 5.5% to Kazakhstan’s GDP and employs more than 20% of the labor force. Kazakhstan is already among the world’s 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, Kazakhstan’s 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. 26 EY’s attractiveness survey Kazakhstan 2013 by 150%, improve labor productivity by 300% and increase agricultural exports by 20%.53 Kazakhstan’s 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.
  • 29. www.ey.com/attractiveness Toward integration Accession to the WTO What impact would the WTO accession have on increasing Kazakhstan's investment appeal? 22% 26% 24% 18% 10% High impact Medium impact High/medium impact: 48% Low impact No impact Low/no impact: 28% Can’t say Source: EY’s 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 country’s investment appeal. These investors believe that the move could allow better market access, and ensure predictability and transparency in trade policy and Kazakhstan’s legal system. Membership would also remove trade barriers and unfair treatment in the trade of Kazakh goods. Kazakhstan’s 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 Kazakhstan’s 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. Likely WTO accession benefits • Enhanced economic ties with other markets and increased opportunities for foreign investors who are looking to export from Kazakhstan. • Reduced tariffs on goods to improve domestic resource ► allocation and increase the range of imports in imperfectly competitive sectors. • Removal of barriers that deter multinational service providers, ► increase the number of services available in Kazakhstan, and improve productivity in sectors that use business services. Unlocking value 27
  • 30. Future The Customs Union and CES  The recent creation of the Customs Union and CES with Russia and Belarus are some noteworthy examples of Kazakhstan’s focus on deeper economic integration. In November 2011, Russia, Belarus and Kazakhstan also signed an agreement to form the Eurasian Economic Union by 2015. Nearly half of respondents expect these integration initiatives to bring additional opportunities. They believe that integration will help Kazakhstan to increase its potential in neighboring markets and tap international markets. This could translate into opportunities to reach a market of nearly 170 million people and GDP of US$2.3t (at current prices), achieve US$900b of aggregate trade, and build capacity for approximately 120 billion barrels of proved oil reserves.58 The CES is designed to facilitate business among investors and entrepreneurs from the three countries by enabling the free movement of goods, services, capital and labor. The move is expected to allow participating countries to gain equal access to internal infrastructure. Furthermore, by joining the Customs Union, Kazakhstan would re-establish access to Russia’s considerable industrial and technological capabilities. 58.  World Economic Outlook database, April 2013, IMF; BP Statistical Review of World Energy, June 2012, BP website, www.bp.com, accessed 20 March 2013. 28 EY’s attractiveness survey Kazakhstan 2013 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 Neither improve, nor deteriorate Deteriorate Can’t say Source: EY’s 2013 Kazakhstan attractiveness survey (total respondents: 206 — 25% 64 established in Kazakhstan; 142 not established in Kazakhstan). Likely Customs Union benefits • Enhanced market opportunities with access to nearly 170 million consumers. • Easier, or abolishment of, customs procedures, resulting in reduced costs and increased competitiveness. • Equal access to internal infrastructure, which is especially important for a landlocked country such as Kazakhstan. • Diversified FDI inflows due to an enlarged market. • Closer cooperation in research and innovation. ► • Access to the industrial and technological capabilities of member states.
  • 31. www.ey.com/attractiveness What it means for businesses Foreign investors already operating in Kazakhstan are optimistic about the country’s future. While extractive sectors are set to dominate future FDI inflows, opportunities are now arising in strategic sectors such as agriculture, private and business services and life sciences. However, lack of knowledge about the local market often makes it challenging for potential investors to innovate and implement the right strategies. An entry strategy that involves joint venture with local businesses and government, as well as a partnership with local vendors and research firms can help foreign companies to overcome these challenges. Recent integration initiatives, such as the CES between Belarus, Kazakhstan and Russia, and likely accession to the WTO, are also set to have a visible impact on Kazakhstan’s business appeal. These developments would help to provide companies with better market access, a larger consumer base, access to technological capabilities, predictability and transparency in trade policy, and a robust legal framework. Unlocking value 29
  • 32. Actions How to improve Kazakhstan's attractiveness p.31 Spread the word p.33 Move up the value chain p.34 p.35 Enhance the business environment p.36 Foster innovation Remove regional disparities Image: The Akorda presidential palace in Astana, Kazakhstan. 30 EY’s attractiveness survey Kazakhstan 2013
  • 33. www.ey.com/attractiveness The path to prosperity What steps can Kazakhstan take to help it realize its potential as an investment destination? Spread the word Key findings The survey clearly reveals that non-established investors lack awareness of Kazakhstan’s business prospects and the opportunities it offers, reflected by the fact that a majority of them replied “can’t say” to a number of questions. For instance, when asked about the most attractive cities or locations in Kazakhstan, 75% could not name any city. Similarly, they were not aware of the strengths and challenges, the impact of integration and growth areas. Contrary to that, foreign companies that are already doing business in the region have a good grasp of Kazakhstan’s strengths, the Government’s diversification drive and the challenges for maintaining its accelerating growth trajectory. Foreign investors not aware of "on-the-ground" situation Percentage of “can't say” responses for parameters on Kazakhstan's attractiveness. 75% 55% 36% 19% Most attractive cities or locations in Kazakhstan for investors 14% Kazakhstan in 2030 36% 35% 12% 11% First things that come to mind when thinking about Kazakhstan Established in Kazakhstan Business sectors driving future growth 9% Impact of CES and likely Eurasian Economic Union 27% 16% Impact of WTO on investment appeal Majority  of potential investors lack awareness of Kazakhstan’s prospects. 38%  of respondents established in Kazakhstan see the country as a leader in energy in 2030. None  of the respondents established in Kazakhstan view the country as a leader in R&D and innovation. 35%  of respondents believe that developing the social infrastructure and health care systems will help address regional disparity. 32%  think that a transparent and predictable regulatory environment will improve Kazakhstan’s investment climate. 27%  call for better education and training in new technologies. Not established in Kazakhstan Sources: EY’s 2013 Kazakhstan attractiveness survey (total respondents: 206 — 64 established in Kazakhstan; 142 not established in Kazakhstan). Unlocking value 31
  • 34. Actions A key mechanism for development The 2010 ot 2014 state program on accelerated industrial and innovative development was established to promote stable and wellbalanced economic growth. The program targets diversification of the economy and improved competitiveness by developing priority sectors and supporting industrial development. An industrialization map is the key mechanism used to implement the program. The Government and the business community work together to identify specific projects that meet the program’s requirements and plot them on the industrialization map. Currently, the industrialization map includes 779 projects, which have a combined value of KZT11.2t (US$74.7b). These projects will create approximately 220,000 jobs during their construction period and around 181,000 jobs when they are put into operation. The perception gap: a closer look The Government recognizes how important it is to reach out to investors. It formed KAZNEX INVEST in 2010 to attract and better educate foreign investors. Since 2010, this agency has conducted 38 international business forums in the country and abroad, and has signed 275 memoranda and agreements worth over US$16b. It has also conducted eight roadshows, which were attended by more than 490 local and foreign companies.59 Results for the first three years (2010 to 2012) of the program: • Number of projects put into operation: 537 • Total investment: KZT2.1t (US$14b) • Jobs created: 57,000 Amount of products produced by these projects: • 2010: KZT110b (US$747m) • 2011: KZT501b (US$3.4b) • 2012: KZT913b (US$6.1b) • First three months of 2013: KZT235.5b (US$1.6b) Contribution of these projects to GDP: • 2012: 1.3% Source: Ministry of Industry and New Technologies website, www.mint.gov.kz, accessed 8 July 2013. 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. Furthermore, after studying global investment trends, the Government is seeking to implement a strategy for knowledge-intensive sectors. It includes key performance indicators (KPIs) for government officials and promotional campaigns aimed at international media. The country’s 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. 59.  “KAZNEX INVEST summed up the efforts to attract foreign investment in Kazakhstan for 2012,” Kaznex Invest website, www.kaznexinvest.kz, accessed 20 February 2013. 60.  Ernst & Young’s Rapid-growth markets soft power index, Spring 2012, Ernst & Young, 2012. 32 EY’s attractiveness survey Kazakhstan 2013 Kazakhstan’s 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 country’s agenda, with the recent establishment of the Customs Union, Kazakhstan’s 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.
  • 35. www.ey.com/attractiveness Move up the value chain Kazakhstan in 2030 How do foreign investors already established in Kazakhstan see Kazakhstan in 2030? (Respondents provided two possible answers) A leader in the energy energy 38% A highly diversified economy 25% Surpassed by competition from more dynamic countries 19% A leader in agri-business 14% A country with highly developed technological infrastructure 13% A leader in exports to international markets 12% A leader in manufacturing 11% 8% A country with one of the best education systems A country with one of the highest-value labor markets - None of the respondents view One of the world leaders in knowledge-based industries - knowledge-based industry, - and R&D and innovation A leader in R&D and innovation Can't say Kazakhstan as a leader in 14% Source: EY’s 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 Kazakhstan’s economy and has done much to lift the country’s 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. Kazakhstan’s 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 Government’s 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 sector’s 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. On the ground … • stana Solar has established a PV A ► module plant. • E has established a locomotive plant G ► in Kazakhstan. • AF is opening a meat processing plant K ► in West Kazakhstan. • alzgitter is building a pipe insulation S ► plant in Atyrau. • oyota is opening an assembly plant T ► 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. 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. Unlocking value 33
  • 36. Actions Remove regional disparities How to develop Kazakhstan's regions What do you think are priority measures to address regional disparities and enhance attractiveness of specific locations? (Respondents provided two possible answers) Develop social infrastructure and health care system, improve quality of life 35% Invest in infrastructure and urban projects 30% Adopt a proactive approach to attract investors with target region-specific campaigns 24% Direct education and training in line with prospective economic needs of the region 23% 9% Host sport and cultural events to enhance awareness of the region 30% Can't say Source: EY’s 2013 Kazakhstan attractiveness survey (total respondents: 206 — 64 established in Kazakhstan; 142 not established in Kazakhstan). According to investors, the top priority of Kazakhstan’s 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 country’s 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 34 EY’s attractiveness survey Kazakhstan 2013 for each region, and industrial satellite towns will be developed to improve living standards and provide job opportunities. long-term centers of economic growth integrated with regional and international markets. Priority industries will be specified Main sectors by city or region City Main sectors Astana Business services; construction and construction materials; food processing; public services Almaty Business services; construction Region Main sectors Akmola Agriculture and agroprocessing; chemical and pharmaceutical; construction materials; mechanical engineering; uranium and gold mining Aktobe Industry (ferrous metal industry; mechanical engineering; oil) Almaty Agriculture and agroprocessing Atyrau Industry (oil and gas; mining) East Kazakhstan Nonferrous metal industry Karagandy Mining (ferrous and nonferrous metals; precious and rare metals) Kostanay Agriculture and industry (iron ore production and processing; asbestos) Kyzylorda Oil and gas; mining Mangystau Oil and gas North Kazakhstan Agriculture and industry (food processing; mechanical engineering) Pavlodar Industry (aluminum; coal; ferroalloys; power) South Kazakhstan Agriculture and industry (processing; uranium production) West Kazakhstan Natural gas Zhambyl 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.
  • 37. www.ey.com/attractiveness Enhance the business environment Ways to improve the investment climate In your opinion, where should Kazakhstan concentrate its efforts to improve its investment climate? (Respondents prioritized up to three measures) Enable transparent and predictable regulatory environment 32% Invest in infrastructure and urban projects 30% Develop highly skilled human capital with the focus on economic needs and innovation 26% Ensure the court system's independence 18% Support high-tech industries and innovation 18% Increase flexibility of labor regulations for skilled foreign specialists 15% Adopt a proactive approach to attract investors 15% Develop venture capital and other financial tools dedicated to support of entrepreneurship 9% Stimulate entrepreneurship and innovation 9% Increase international trade 1% Improve democracy 1% 30% Can't say Source: EY’s 2013 Kazakhstan attractiveness survey (total respondents: 206 — 64 established in Kazakhstan; 142 not established in Kazakhstan). Enable a transparent and predictable regulatory environment Thirty-two percent of investors call for further reforms to make Kazakhstan’s regulatory environment more transparent and predictable. While legislation is constantly being updated to comply with international best practices, and the corporate sector is being given the opportunity to comment on new laws and regulations, it is not always given sufficient time to consider the impact of the changes that are proposed. Unifying rules within the Customs Union and decriminalizing some economic offenses are frequently called for. At the same time, respondents acknowledge the constructive and committed attitude of the country’s leadership toward open dialogue with investors. A series of challenges must be overcome if a stable regulatory environment is to be established. Inconsistent interpretation of the law and its selective application are reported regularly by foreign investors operating in Kazakhstan. Overregulation and local content requirements harm the investment climate and slow down existing investment projects. Investors 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, Kazakhstan’s court and arbitration system is not consistently capable of resolving disputes involving foreign investors. This perception is supported by the WEF Global Competitiveness Report 2011–2012, 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. 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 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 country’s export potential. Better infrastructure could attract more investors, given Kazakhstan’s 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, Kazakhstan’s 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 Kazakhstan’s products and services. Unlocking value 35
  • 38. 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 27% Increase incentives for companies in innovative and knowledge-based sectors 24% Develop entrepreneurship 20% Develop a culture of innovation and creativity 18% Promote vocational learning courses 13% Develop joint research programs 13% Develop infrastructures 1% 36% Can't say Source: EY’s 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 36 EY’s attractiveness survey Kazakhstan 2013 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.
  • 39. www.ey.com/attractiveness What it means for businesses Kazakhstan’s economic progress in the last decade has been very impressive. However, it still has to travel a long way to establish itself on business leaders’ investment radar. The Government of Kazakhstan has to intensify diversification efforts and create an environment in which research, innovation and entrepreneurship can flourish. Nevertheless, given the Government’s willingness to attract strategic investors and the country’s positive economic outlook, more foreign companies are expected to establish operations in Kazakhstan. Therefore, the timing of investment becomes important. Investors may wish to exploit untapped potential before the competition intensifies. Business leaders should follow the Government’s policies closely and seek to invest at the right time. Also, as government involvement in business remains high, business leaders should build and maintain strong relationships with the Government of Kazakhstan. Unlocking value 37
  • 40. Actions Methodology EY’s 2013 Kazakhstan attractiveness survey is based on: 1 The real attractiveness of Kazakhstan for foreign investors Our evaluation of the reality of FDI in Kazakhstan is based on international reports from the World Bank, WEF’s Global Competitive Report 2012–2013 as well as reports from fDi Markets, UNCTAD and government sources, such as the National Bank of Kazakhstan. 2 The perceived attractiveness of Kazakhstan for foreign investors We define the attractiveness of a location as a combination of image, investors’ confidence and the perception of a country’s or area’s 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. Profile of companies surveyed Geography Euromed 3% Oceania Turnover Middle East 3% 1% Less than €150m Northern Europe 25% 7% North America Western Europe 14% 43% More than €1.5b 39% 14% Asia 36% 15% €150m–€1.5b Central and Eastern Europe Job title Sales and marketing director/ Communication director 6% Others Transportation and automotive Director of development/ Director of strategy 1% 11% Managing director / Senior vice president/COO Financial director 4% Real estate and construction 4% Other sectors of activity Private and business service 8% 25% Life sciences 8% 7% 44% 8% Director of investments 8% 16% Human resources director Chairman/President/CEO Individual values are rounded and may not total 100%. 38 Sector of activity EY’s attractiveness survey Kazakhstan 2013 16% 18% High-tech and telecommunication Energy and heavy industry 16% Consumer
  • 41. www.ey.com/attractiveness Unlocking value 39
  • 42. 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 country’s growing success in the years to come. Commitment to employee development Ninety-seven percent of our employees are Kazakh citizens. EY has established an effective professional training system that is not only supported by EY’s practice in Kazakhstan, but also by its offices abroad. Each of our organization’s professional service lines — Assurance, Tax, Transactions and Advisory — supports milestone learning programs and more than 10 international qualifications programs including the Association of Chartered Certified Accountants, Certified Internal Auditor and Chartered Institute of Management Accountants. EY supports hiring young specialists and providing training, professional development and career growth opportunities. Each year, we employ 70–100 students and provide them with training and professional international qualifications. We also bring students into the job market by hiring around 40 interns annually. 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 EY’s attractiveness survey Kazakhstan 2013 Collaboration with Nazarbayev University We lecture at Nazarbayev University as part of a government initiative to provide the SME sector’s top management with the additional knowledge and business skills needed to participate successfully in the state Business Roadmap 2020 program. EY sponsors an International Financial Reporting Standards professor at Nazarbayev University. 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 our clients in dynamic landscape At EY, we know that businesses in emerging markets need innovative thinking and practical advice in order to succeed. Our major services • Assurance • Tax • Transactions • Advisory
  • 43. 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. Human capital: compensation and benefits in Kazakhstan This publication contains important data, including pay levels across 14 Kazakhstan regions and the cities of Astana and Almaty; salary changes in 2013 and forecasts for 2014; pay for performance, benefits package structures, allowances and other compensation; HR function metrics and a detailed description of the country’s HR regulations and practices. EY’s Rapid-Growth Markets Forecast April 2013 Rapid-growth markets, the dominant force in global trade. In the April edition of our quarterly economic forecast, you will find out how growing trade between RGMs over the coming decade will create a wide range of new opportunities for them and advanced economies. You will also discover how reliance on commodity revenues in Latin America brings opportunities as well as challenges. Ernst & Young's 2013 European attractiveness survey The year 2012 was another difficult one for Europe. Business leaders struggled to protect their bottom line in a stagnant economy. However, perhaps counter to expectations, this year’s European attractiveness survey shows that tough times have not totally destroyed investors’ faith in the continent. In 2012, 37% of business leaders interviewed ranked Western Europe as the second most attractive FDI destination in the world. Some 3,797 FDI projects were announced (-2.8% compared with 2011), creating 170,434 jobs (+8%). Find out more in the 12th edition of our European attractiveness survey “Coping with the crisis, the European way,” which measures the reality of FDI in terms of projects initiated and jobs created and reveals the perceptions of more than 800 decision-makers. Ernst & Young's 2013 Russia attractiveness survey Russia’s growing consumer market, rising disposable income, expanding middle class, vast resource reserves and highly skilled workforce continue to attract investors from all corners of the world, who rank it as the sixth most attractive country in the world for FDI. Find out more in our 2013 Russia attractiveness survey “Shaping Russia’s future,” which combines an analysis of FDI in the country, with a survey of 206 international business leaders. Ernst & Young's 2013 Turkey attractiveness survey After overcoming a series of political and economic challenges, Turkey is enjoying a period of stable and solid economic growth. The country, which still has great untapped potential, is attracting a number of investors who commend the country's geographical location and domestic market, while remaining confident about its future. Find out more in the first edition of our Turkey attractiveness survey “The shift, the growth and the promise,” which is based on the analysis of FDI in the country as well as the views of 201 international business leaders.
  • 44. EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. Contacts EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Sandra Sasson Marketing and Communications Director Emerging Markets Center, EMEIA Marketing Tel: + 30 210 2886 032 Email: sandra.sasson@gr.ey.com © 2013 EYGM Limited All Rights Reserved. Bijal Tanna EMEIA Press Relations Tel: + 44 20 7951 8837 Email: btanna@uk.ey.com EYG no. AU1722 EMEIA MAS e247.0113 ED 0615 In line with EY’s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. The opinions of third parties set out in this publication are not necessarily the opinions of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were expressed. ey.com Scan here to visit our Emerging Markets Center portal and download the report. Growing Beyond In these challenging economic times, opportunities still exist for growth. In Growing Beyond, we’re exploring how companies can best exploit these opportunities — by expanding into new markets, finding new ways to innovate and taking new approaches to talent. You’ll gain practical insights into what you need to do to grow. Join the debate at www.ey.com/growingbeyond. Marc Lhermitte Partner, Ernst & Young Advisory Global Lead — Attractiveness and Competitiveness Tel: + 33 1 46 93 72 76 Email: marc.lhermitte@fr.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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