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22nd FIC Plenary Session, December 4, 2009, Astana
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20th FIC Plenary session, December 5, 2008, AlmatyThe Issues of Local Content Development
The 20th Anniversary Plenary Session of the Foreign Investors’ Council (FIC) chaired by the President of the Republic of Kazakhstan took place on December 5, 2008 in Almaty and considered the issues of developing local content in the contracts of foreign investors operating in Kazakhstan.
Opening the session President Nursultan Nazarbayev noted that the FIC meetings with investors became a good tradition over the past ten years and the Council itself became an open platform for dialogue on most important issues both for investors and the country.
The Head of State has outlined main areas for cooperation on the issues of local content development. In particular, he reminded that at the very beginning of the cooperation this country has created comfortable and liberal environment for foreign companies, including enabling import of goods, services and workforce because at that time Kazakh companies were not prepared to supply competitive goods and services. However, now in 17 years of independence Kazakh economy has developed and become stronger and more competitive, the President said. Nevertheless, local content does not exceed 10-15% based on the results of the 9 months of 2008. It is apparent that these numbers do not reflect the real production capacities of Kazakhstani suppliers.
- Neither the government, nor the operators, nor the Kazakh suppliers can be happy with that, especially since all the contracts directly specify the obligations of companies for the local content – Nursultan Nazarbayev said.
The President identified the following problems that prevent increase of local content and has assigned a number of tasks for tackling them.
First, despite the fact that the issue of developing the local content has been high on the agenda for quite a long time, no one - governmental authorities, national companies or foreign investors - has a common agreed methodology to calculate the local content. As a result, there is no a credible evaluation of the share of the Kazakh suppliers in items supplied to operators.
Second, the government failed to put in place an efficient system to monitor fulfilment of obligations for the local content until now. According to the data supplied to the President, of 575 operators, only 135 companies are actually monitored. And they do not include such large operators as Tengizchevroil, Agip KCO, and Karachaganak Petroleum Operating, whose share in all the goods to be procured reaches 42%.
Kazakh suppliers have no information on the time and terms on bidding for supply of goods, works or services, as well as on the future procurement plans.
Third, the number of attracted foreign labour increases every year. It is justified when highly qualified specialists like engineers and technologists are employed. However, in reality within the quotas set for foreign labor, foreign workers, who are not in deficit in this country, come to Kazakhstan. For instance, cooks, various construction workers and others.
Fourth, the Government does not coordinate governmental bodies and national companies, who are empowered to work together with operators on local content issues.
In this regard, the national company KazMunaiGas was supposed to agree upon annual procurement plans, annual capital and operating expenditure programmes. However, KazMunaiGas did not exercise its powers in order to support the increase in the local content under joint projects.
– I believe that lack of progress in increasing the local content is the result of unsatisfactory work of the government, Nursultan Nazarbayev said. – Therefore the increase in the local content must become the top priority to the government. This means the efforts to develop our real sector, on which our plans to diversify and industrialize the economy are depending.
The Head of State urged to bring the local content at least up to 50%.
The Head of State ordered the First Deputy Prime Minister Umirzak Shukeyev to coordinate the work of the Cabinet on this issue and to establish high level working group, comprising top officials of the respective ministries and top managers of the holding company SamrukKazyna. Contributing specific suggestions on how to resolve the following issues must become the main task of the working group.
First, the common methodology to calculate the local content agreed with the largest operators is required. The methodology must also provide for separate records of goods, works, services and workforce.The methodology is supposed to be approved through a regulatory document and it should be made sure that it applies to all the contracts for operation.
The President assigned the Government to hold within three months talks and sign with operators agreements on the local content in order to set specific terms on their operations in Kazakhstan.
Second, there must be tightened liability for failure to fulfill contractual obligations, and put in place a system for governmental agencies to check how operators fulfill the respective obligations.
The Ministry of Energy and Mineral Resources must monitor and check how all contracts for operation including obligations for the local content are executed. The Minister of Energy and Mineral Resources Sauat Mynbayev will be personally responsible for that.
National Company KazMunaiGas must make sure that from year to year more goods, works or services are supplied by the Kazakhstani suppliers. The president of KazMunaiGas will be personally responsible for that. The Ministry of Finance represented by the Minister of Finance Bolat Zhamishev will be responsible for monitoring and controlling the local content in procurements to be made by the central and municipal governments and public companies.
Chairman of the Board of the Fund SamrukKazyna Kairat Kelimbetov will be responsible for increasing the local content in procurements to be made by the national companies.
The Ministry of Industry and Trade will be assigned to develop the domestic suppliers and support better quality of their operations to international standard.
Third, the government and the working group need to cooperate closely with the operators on the local content. As to the contracts, which set targets, one needs to make an agreed phased plan of beating such targets and determine the Kazakh suppliers that might be involved. This work needs to start off immediately and be done by the end of the first half of 2009.
Fourth, local workforce is the critical component of the local content. The Government and the Ministry of Labour and Social Protection was assigned to streamline the system of determining and issuing quotas by regions and to improve the quality of monitoring so that good quality workers are employed within the quota set.
Fifth, It is necessary to invest in developing our domestic businesses, which are capable of supplying their services and goods with required quality and safety.
Nursultan Nazarbayev assigned the working group to develop a special programme of developing domestic suppliers of goods, works or services and make sure it is funded, considering requirements for quality set by operators.
Sixth, the President supported SamrukKazyna’s initiative to create the Caspian Energy hub. This project has good prospects to become an integrated cluster for oil and gas sector.
In conclusion, addressing foreign investors Nursultan Nazarbayev has emphasized that joint work must become a mutually beneficial project for all parties.
– With consistent efforts made and support from the government you will have the Kazakh suppliers of goods or services capable to properly and inexpensively produce goods, works or services required by you, the President noted.
– Moreover, as a result, we together can make another contribution to the enhancement of the well-being of the Kazakhstanis and of the well-being of the country, where you have been successfully operating.
The full text of the President’s speech can be downloaded here.
The President of the European Bank for Reconstruction and Development Thomas Mirow noted in his speech that economic diversification remains a priority for Kazakhstan given ongoing world economic crisis. One measure to support economic diversification is the use of local content requirements (LCRs).
Stimulating producers to use local inputs seems an attractive way to develop a manufacturing base. There are indeed countries that successfully implemented LCRs (China, India). However, the experience of many other countries is that LCRs may make local suppliers less instead of more efficient. LCRs tend to shield companies from the disciplinary effect of international competition. The introduction of LCRs may also reduce the efficiency of local producers because they are not free to buy the best input. And finally, LCRs may impede Kazakhstan’s plans to accede to the WTO.
Thomas Mirow says that alternatives to local content requirements are to improve tax regulation, access to financing, fight corruption, improve quality of work force and infrastructure as the main obstacles to the development of competitive producers in Kazakhstan.
Another important step to improve local competitiveness would be to strengthen the Anti-Monopoly Agency and introduce the new competition law, head of EBRD says. A strong and independent competition authority is necessary to guarantee a level playing field for domestic and foreign producers.
The President of EBRD emphasized that the Bank continues to focus on the development of a vibrant and diversified private sector of Kazakhstan. As an example, in 2008 EBRD provided about USD 200 million in syndicated loans to Kazakhstan’s agribusiness. Besides, EBRD will also continue to provide SME credit lines to local banks. Especially now that external commercial funding is less readily available to Kazakh banks. In addition, EBRD will support on a selective basis the budding private equity sector in Kazakhstan.
A report on implementation of the Minutes of the previous Plenary session and a speech on the main theme of the session was delivered by the Minister of Industry and Trade of the RoK Vladimir Shkolnik.
The Minister of Industry and Trade noted that establishing industries to satisfy the needs of operators in Kazakhstan is the critical challenge that has directly to do with the economic diversification and the development of non-extractive industries.
The Minister reminded that in March 2006, the Ministry of Industry and Trade and a group of operating companies signed the Memorandum of Increase in the Local Content in the Operation Service Market and the Memorandum of the Initiative of Operators’ Transparency While Procuring.
These memorandums were supported by over 60 oil and gas and mining companies, and over 70 domestic producers. The local content accounts for 8.4% (for oil and gas industries) and 22% (for mining industries).
Vladimir Shkolnik said that main difficulties faced while increasing the local content were no common methodology of defining such concept as the “local content”, and no common methodology of calculating the local content in the contracts, incomplete information in reports on the demand for goods, works, services or workforce provided by operators, incomplete information on existing domestic suppliers of goods, works or services, limited range of products produced by domestic producers for extractive industries and lack of skilled domestic workforce.
The Ministry of Industry and Trade contributed suggestions on how to further increase the local content having grouped goods, works or services demanded in the operation market into 3 groups as follows.
For goods, works or services produced in Kazakhstan and meeting respective requirements, the governmental authorities will be guided mainly by recently signed Law On State Procurement. As to companies, where the government owns some shares, and to which the Law is not applicable, they will have to procure the Kazakh products following the respective rules, approved by the Board of Directors of SamrukKazyna Fund. Privately owned operating companies, including foreign ones, will have to operate within memorandums signed. The newly signed contracts for operation must set requirements for the local content, the Minister said.
Goods, works or services produced in Kazakhstan but not meeting the respective requirements. For each product item one needs to analyse applicable international standards, which have been registered in Kazakhstan, and make sure they are adopted nationally.
This should be done by generating the register of operators’ needs for goods, works or services for the short-term (current year) and long-term (3 or more years) periods, which would be accessible to domestic producers. This will allow domestic producers to prepare their own operations and start producing demanded products.
For goods, works or services not produced and not provided in Kazakhstan the Industrial and Innovative Development Strategy and The 30 Corporate Leaders Programme were developed in Kazakhstan. One needs to monitor the demand and benchmark the structure of goods to be procured and the Kazakh supply and it is important to encourage foreign investors to establish joint ventures to produce high-tech products. And while making large procurements of imported equipment one needs to try to localise their production, repairs and maintenance in Kazakhstan.
Full text of V. Shkolnik’s speech can be downloaded here
Kairat Kelimbetov, the Chairman of SamrukKazyna Fund noted in his speech that in present conditions Fund Samruk-Kazyna plays key role in keeping stability of the Kazakh economy and in its further modernization and diversification. One of the key objectives of the Fund is to support domestic producers of goods and services. This objective will be implemented by means of increase of local content through priority – oriented placement of orders of the largest national companies with domestic producers, conduct of offset policy and expansion of local ownership interest under realization of the largest investment projects.
The Fund will elaborate complex program on the development of local content aimed at ensuring effective and coordinated activities of the holding’s companies in procurements of goods, works and services, Kairat Kelimbetov said. Principles of support of domestic producers will be laid in Rules of Procurements of companies of the Fund.
The head of SamrukKazyna says that the basic long-term mechanism of development of local content shall become conduction of measures on assimilation of new types of goods having long-term stable demand by domestic producers.
In his speech, Kairat Kelimbetov announced the launch of the Caspian energy hub, similar to those established in the Persian Gulf, Norway and Houston. This project provides for creating an infrastructure for preparing specialists urgently required for the development of the region. Network of universities will be created for this purpose. The purpose of the Caspian hub is to create activities with high added value in all aspects of the energy sector - human, technical and commercial. The project will also help to maximize the potential of the domestic service sector for oil and gas industry through the development of research, testing, marketing and other support activities that remove the obstacles in working with world-class clients.
Head of the SamrukKazyna Fund informed that implementation of the following Fund projects in the railway complex will allow to increase significantly the share of the local content and develop localization:
- Organization of wagon - assembly production in Kazakhstan with the participation of the Fund enterprises;
- Modernization of electrics of series VL-80;
- Construction of a locomotive - assembly factory in Astana with participation of General Electric (GE).
In the nearest future in order to systematize the identification of kinds of products mostly demanded by national companies for the long term, the Fund will develop an integrated program of Kazakhstani content development with a focus on four sectors: subsoil use, railway, telecommunication and electricity.
The full text of speech of K. Kelimbetov can be downloaded here.
Foreign members of the Council, who delivered speeches at the session, shared their visions of key issues of local content development and investment policy of Kazakhstan.
The session was moderated by David Wilkes, Partner, Ernst & Young CIS, Head of Advisory Practice in Kazakhstan, Chairman of the Board, Kazakhstan Foreign Investors’ Council Association.
— And, of course, it makes sound business sense for foreign investors to support measures to grow and diversify the host economy, emphasized in his speech Frank Chapman, Chief Executive Officer, BG Group.
According to him, the history of open discussion and collaboration between Government and industry has made Kazakhstan into a beacon for attracting foreign investment.
— And this positions Kazakhstan well, in a time of financial crises, when governments around the world share a great challenge, that of securing the material foreign investment they all need to sustain long term prosperity, when the availability of cash is so highly constrained, Frank Chapman noted.
Emphasizing the county’s achievements in the economic and social spheres over the last ten years Chapman said: National wealth has quadrupled, and life expectancy has increased by four years in just a decade. This progress made is a tribute to the comprehensive set of forward-looking policies of the Government. These policies have encouraged foreign investment that in turn has played a vital role, by providing employment and new skills, and new capacities, and further aiding the diversification of the economy. And the multiplier effect of direct project employment never ceases to surprise. KPO employs some 4000 people locally and has stimulated the creation of up to 20 times that number of indirect jobs.
In his speech, George Kirkland, Executive Vice-President Upstream and Gas, Chevron Corporation recognized the importance and timeliness of measures being taken by the Government of Kazakhstan to overcome the impact of the world financial crisis, including increased support of local producers and informed about the Corporation’s contribution to the development of local content in Kazakhstan.
— We’re particularly proud of our efforts to enhance the growth of local goods and services—an essential element of ensuring growth, prosperity and a favorable reception in local communities. In the last two years alone, for example, Tengizchevroil has spent U.S. $2.2 billion, or 55 percent of its total budget, on services and goods from Kazakhstan, George Kirkland said.
— The SGI/SGP expansion employed some 17,000 Kazakhstanis and more than 8,000 were from the Atyrau Oblast. Through our commitment to developing livelihoods and careers, we’ve seen more than 4,500 Kazakhstanis trained in craft skills ranging from insulators and electricians to scaffolders and pipefitters. And today, 84 percent of TCO’s employees are Kazakhstanis, and the numbers of people in management positions continue to grow steadily. That, in turn, makes Kazakhstanis even more competitive in Eurasia and the larger global economy, head of the corporation noted.
Alexander Machkevitch, Shareholder, Eurasian Natural Resources Corporation Plc. noted that the share of works and services rendered by local businesses for ENRC is over 80 % of the total purchase volume. The company purchases about 30% of goods of local production (for all types of materials and equipment required for the provision of the investment activities and operations).
Alexander Machkevitch has made the following recommendations in his speech:
— The government programs are required to stimulate the consumption growth of local goods in the local market. They should be intended to enhance the range of local goods, improve their quality and reduce production costs. It is quite obvious that involvement of institutions of innovation development and resources of national companies may provide efficiency for the programs implemented. The Government of Kazakhstan shall serve as the catalyst for all these processes. This will allow developing the common and integrated policy, a more clear coordination and availability of national strategy for the following development of local content.
— It is necessary to focus a special attention to improve competitiveness of local producers and provide assistance to them at all levels. The detailed analysis is required which industrial sectors show a maximum potential to develop the local content. Local suppliers in Kazakhstan shall adapt their production to the real needs of the major companies.
—It is necessary to clarify methodology for defining the local origin of goods, namely, to solve issues related to the common determination, calculation and control of local content in Kazakhstan.
Lakshmi Mittal, Chairman of the Board of Directors, CEO, ArcelorMittal in his speech noted that thanks to the measures contained in the governmental program for the stabilization of the economic and financial system of the country during the years 2009-2010 there's been a positive influence on the social and economic life of the country by softening the impact of the global crisis on the Kazakhstani companies and consumers.
ArcelorMittal sees the fiscal measures contained in the Program as essential steps to encourage more local and foreign investment in the country, head of ArcelorMittal noted.
According to Lakshmi Mittal, reduction of corporate income tax, reduction of VAT, reduction of social taxes, investments in the infrastructure of the country, construction sector and funds for small and medium size enterprises will create a fertile and sustainable investment climate in the country which will lead towards more growth and prosperity.
Besides, recently signed Memorandum of mutual cooperation entered into by the company, government, trade unions and Fund SamrukKazyna have positively contributed to sustainability and competitiveness, Lakshmi Mittal thinks.
- I would like to reassure you that we shall remain a very active player in the Kazakh economy, a responsible corporate citizen and committed to further invest in the country as part of the Government’s “30 corporate leaders program” by continuing to pursue investment program for Temirtau, Karaganda and Karashal, head of ArcelorMittal said in conclusion.
Vagit Alekperov, the President of LUKOIL OJSC noted that Kazakhstan has established favourable conditions for conducting business. Significant personnel potential has been formed in the country. Small and medium business is actively developing and quality of servicing companies’ performance is improving constantly.
High qualification level of specialists in Kazakhstan allows us to maintain local content in total number of employees at a worldwide unprecedented level – 93%, Vagit Alekperov said.
LUKOIL has provided professional training for 750 employees in 2007. During this period 833 million tenge were spent on training and personnel development.
The president of LUKOIL also said that the company is prepared to render support to implement governmental program aimed at preparation of general workers (so called “blue-collar workers”).
With regard to the contracts on procurement of goods and services, among equal options, at present its share in total contract volume accounts for 80%.
In 9 months of 2008 alone, 404 contracts for total amount of more than $573 million were concluded with local contractors, V. Alekperov said.
The President of LUKOIL thinks that the measures aimed at developing business competition within oil and gas production service sector, as well as a wide program for certification of local equipment and technologies for compliance with international standards should be implemented.
Zhao Xiaoyu, Vice President of Asian Development Bank spoke about issues of financing of local contractors in the conditions when access to normal bank finance has become difficult. In particular, he shared information on pilot business linkage programs in developing countries, which a small group of multinational corporations developed over the last 10 years. These programs opened up a broad range of possibilities for major foreign direct investors to directly support the development of local supply chains.
— Supply chain loans can be valuable for lenders because payment risk on contracts between large multinational corporations’ (“MNCs”) suppliers is generally low. Credit analysis of loans then becomes simpler, and the use of contracts as collateral strongly underpins the potential for MNC’s to provide “supplier finance facilities” in which local banks act as agents or co-financiers. Such contracts can help lower the borrowing cost for supply chain loans and increase the borrowers’ profitability, Zhao Xiaoyu said.
— A simpler alternative would involve MNC placing in-country deposits with designated lenders subject to an agreement governing on lending of an agreed portion of the deposit amount to companies in its supply chain. For this to operate effectively, the deposit maturity would need to match average loan maturity, noted vice-president.
In conclusion, ADB vice-president suggested discussing further this concept with both foreign and government side members of FIC to find potential application in Kazakhstan.
James Mulva, Chairman and CEO, ConocoPhillips in his speech suggested a number of recommendations, which will help to increase local content in international projects implemented in Kazakhstan:
- based on such strengths as well developed steel and aluminum industries and major construction expertise to expand this base and later progress to more complex areas of business;
- invest in people, expand vocational training;
- use the powers of government to encourage capacity growth;
- emphasize excellence in health, safety and environmental performance. Local suppliers must meet world standards on HSE metrics;
- we recommend that Kazakhstan require local businesses to compete on the basis of value, quality and price;
- and finally, we urge you to maintain a stable business environment that gives investors the continued confidence they need in order to expand their businesses.
Yves-Louis Darricarrere, Executive Vice-President, Member of the Executive Committee, President Exploration and Production, Total mentioned in his speech that as experience shows, without an approach geared to each particular country and an evaluation tailored specifically to each project, Local content strategies can entail certain risks and challenges. The stakes related to each risk must be leveraged into a variety of growth opportunities.
First, host countries stakeholders have a range of legitimate expectations in terms of job creation, acquisition of technical know-how, training of the local workforce, attainment of self-sufficiency in terms of skills and management. These expectations can be fulfilled through the promotion of local workforce recruitment and training, through agreed plans to nationalize staff positions over a certain number of years in concert with, or at the initiative of the oil company. It is also important to develop joint programs with local universities and institute of technologies.
Second, meeting the expectations of the population and promoting local acceptance of an industrial project require finding the right balance between Local Content initiatives and Economic and Social development projects in neighboring communities. It is worth mentioning the importance of working closely with national and local authorities to ensure that company’s Local content guidelines and policies are in keeping with host country policies.
Third, local content strategies must address the potential negative impacts related to the expansion of a single industry, making a country highly dependent on this single sector, hindering its growth and its diversification into other industrial sectors. Here again we have to find the right balance between Local content initiatives and Economic and Social Development projects outside the oil and gas industry. Beyond the need to “secure” the human capital required for its oil and gas sector, the aim is to avoid having local skills and work force become overly dependant on this sector.
Claudio Descalzi, Chief Operating Officer, Head of Exploration and Production Division, Eni S.p.A shared company experience of developing local content in his speech.
Eni promotes the development of local economies by giving preference to local products, local services and local personnel and by developing ad hoc training programmes to increase the capabilities of the local labour force.
In Kazakhstan, approximately 40% of the goods and services procured by our controlled Companies, have been procured from local suppliers. Since 2002, Agip KCO’s department for local content development has assisted 1,414 local companies in relation to the health, safety and environment qualification requirements, participation in joint ventures and certification for international standards.
The key factor for a successful Local Content Development is long term planning, emphasized C. Descalzi.
Only by doing this, is it possible to define realistic and sustainable objectives and to identify the actions needed for their achievement. The best results are then obtained where a National Local Content Master plan has also been developed. This is essential to provide the necessary framework to the individual plans defined by the various Operators, whilst maintaining the necessary competition with the international markets.
Mustafa V. Koç, Chairman of the Board of Directors of Koç Holding told about the company’s efforts to develop local workforce in its investment projects in Kazakhstan.
- We have concentrated our efforts in building up the local workforce in our investment in the service/retail industry in Kazakhstan. We seek to maximize the added value of our Kazakhstani staff by preparing a career development plan for each employee. In addition, we conduct parent company on-the-job training programs. We believe creating teamwork and a competitive environment are essential to develop a qualified workforce and to the overall success of the company. It is part of our corporate culture to reward company loyalty regularly to motivate and retain our employees, Mustafa Koç said.
Frank Kuijlaars, Corporate Executive Vice President, The Royal Bank of Scotland Group plc noted in his speech:
The vast majority of our personnel is local and many goods and services are procured locally.
It is fair to say that for a long time RBS has been the supplier of well trained staff to the Kazakh banking sector. This is only natural and we are happy to be in that position. For the oil and gas sector it is quite different. The sheer size of the investments and the very wide spectrum of required skills put the issue of Local Content in a category of its own. Many of the required services can only be procured on the international market. Kazakhstan is not the only oil and gas producing country for which this applies, but it is important that Kazakhstan sets its priorities right.
Karl Johansson, Managing Partner, Ernst&Young CIS B.V. raised one of the other great challenges, i.e. meeting the market demand of sufficiently qualified labor to coordinate and execute the countries ambitious economic development plans.
- We do have reservations over the countries existing rules over the issuance of work permits and that the resulting constraints that these impose on Kazakhstan’s economic development, whilst acknowledging the fact that such policies do encourage the development of local content, they may at the same time represent an impediment to the country achieving its economic growth plans, said Mr. Johansson.
- Firstly, the job classifications currently used by the labor authorities for work permits are too narrow and outdated. We would recommend the job classification be more flexible to accommodate a wider variety of positions in the contemporary market place.
- Secondly, the number of quotas by regions and industries are presently set annually. With today's fast changing business environment it would be more desirable to adjust quotas more frequently, say every 3 months to avoid misbalances between various regions and industries.
- Third, current work permit rules do not address the treatment of internationally accepted concept of secondment.
- Fourthly, in practice the timeframe for a work permit process from start to finish could be 2 months or more while formally the decision to issue a work permit is normally 20 days. It will be beneficial to have an established deadline which will be kept by the labor authorities once an application has been made.
- And lastly, work permits are currently granted for a 1 year period. Companies normally bring foreign specialists into Kazakhstan for more than 1 year period. It might be beneficial from the sense of business continuity and professional development of national labor force to have a longer period for work permits for non-first heads of the company if there is a business case for it, i.e. in situations where there is a clear development relationship between expatriates and local staff.
James T. Hitch III, Managing Partner, Baker& McKenzie – CIS, Limited shared recommendations on how to improve the local content requirements for subsoil projects.
The existing local content requirements do not foster competitiveness of Kazakhstani servicing companies. Currently, subsoil users must purchase most goods and services through competitive tenders. The rules provide certain preferences to Kazakhstani producers and suppliers. In particular, the bid price offered by a Kazakhstani producer or supplier is deemed to be decreased by 20% for purposes of determining the winner of the tender. Thus, even if the goods produced in Kazakhstan are up to 20% more expensive than equivalent goods produced abroad, the subsoil user will be required to purchase the goods produced in Kazakhstan, James Hitch III noted.
A similar requirement applies to state entities and state-controlled companies, including to those operating in the oil and gas sector.
Thus, the local content rules do not provide any incentives to Kazakhstani producers to reduce production costs, increase efficiency, and otherwise improve their competitiveness. Thus, Kazakhstani producers will be able to sell their goods and services only in Kazakhstan.
Partner of Baker& McKenzie recommended making the following amendments to the rules for procurement of goods and services in subsoil operations:
- where a Kazakhstani oil and gas servicing company operates in the servicing market for more than 5 years, or where its annual turnover exceeds 1,500,000 times the monthly calculation index, the bid price offered by such company should be decreased by 10%, rather than by 20%;
- where a Kazakhstani servicing company operates in the servicing market for more than 10 years, or where its annual turnover exceeds 3,000,000 times the monthly calculation index, the bid price offered by such company should be decreased by 5%; and
- where a Kazakhstani servicing company has a dominant position in the market, its bid price should be decreased by 5%.
Taichi Ito, Executive Vice President of Mitsubishi Corporation UK PLC noted in this speech:
“Local Content Development” is, of course, not an easy task to achieve. But, I believe, we can get some hints if we look at the development in South East Asia as an example.
The first phase is to introduce supporting mechanism for foreign investors to make investment easier by providing them with attractive incentives, such as tax holiday, liberal usage of land, work permission for the foreign expert, competitive supply of energy for the factories, improved basic infrastructure, etc.
Technical transfer from foreign investor to local companies will be the second stage. From our experience, “modularized-parts” is the area where technical transfer can be achieved since it is easier to standardize this for the mass production.
To encourage this transfer, the protection of “Intellectual Property Rights” is important. In that sense, not only the development of laws and regulation needs to be done but also to enforce such laws to Small and Medium size Enterprises (SMEs) is essential.
And last but not least, in order to promote these SMEs, the establishment of clear industrial policy and support by the government is much needed.
Malcolm Brinded, Executive Director on Exploration and Production, Member of the Board of Royal Dutch Shell plc. outlined certain conclusions and made some suggestions in this speech.
Local capability means using local staff, local suppliers, and working with the community to improve the talent stream.
- Firstly because local staff and suppliers know the local environment
- Secondly because it creates a lower cost environment while also adding value to the national economy.
- Thirdly, it helps diversify Shell’s talent pool.
Shell has experience in countries and projects around the world in supporting the development of local companies in the project supply-chain, and can share the following lessons learnt:
- Maximising a project’s added value to the local and national economy is not something that should be driven by legislation… although setting an aspired target can be a useful tool.
- There needs to be early two-way interaction between foreign operators and the local supplier community. With operators providing forward plans and helping suppliers understand and meet the standards required.
- Exposing local suppliers to international competition on an equal terms basis, in line with the principles of free trade and WTO accession lead to the most efficient allocation of global resources and maximises economic returns.
M. Brinded offered the following suggestions:
1) Development of high quality educational institutes working in partnership with industry – such as KBTU - to prepare qualified staff inline with industry requirements and standards.
2) Creation of a single national Kazakh content development organisation to help potential supply companies qualify for contracts.
3) Support further Research & Development and technology transfer to bring the best available industry standards to local market.
Further there was a discussion of issues of financial crisis, with participation of Thomas Mirow, the President of the European Bank for Reconstruction and Development, Peter Tils, Managing Director, CEO Central and Eastern Europe, Deutsche Bank Frankfurt, Murad Megalli, Senior Country Officer for Turkey and Central Asia, JP Morgan, Karim Massimov, Prime Minister, Anvar Saidenov, Chairman of the National Bank, Kairat Kelimbetov, Chairman of the Board of SamrukKazyna Fund.
Commenting speeches of participants of the discussion on the impact of the world financial crisis on the economy of Kazakhstan, Prime Minister Karim Massimov emphasized that investors should bear some part of losses. In his opinion, no one can exit this situation without losses. The Head of the Cabinet has also informed of the main measures taken by the Government to support financial sector of Kazakhstan, SMEs, and briefly explained five steps set out in the governmental anti-crisis program.
Within the framework of the 20th Plenary session the Head of State, Nursultan Nazarbayev, had a number of bilateral meetings with the session participants: Thomas Mirow, the President of the European Bank for Reconstruction and Development; Xiaoyu Zhao, Vice President, Asian Development Bank; Frank Chapman, Chief Executive Officer, BG Group; Vagit Alekperov, President, LUKOIL OJSC; James Mulva, Chairman and CEO, ConocoPhillips; Lakshmi Mittal, Chairman of the Board of Directors, CEO, ArcelorMittal; Yves-Louis Darricarrere, Executive Vice-President, Member of the Executive Committee, President Exploration and Production, Total and George Kirkland, Executive Vice-President Upstream and Gas, Chevron Corporation.
At the end of the anniversary FIC session, Nursultan Nazarbayev announced the winners of the “Best Foreign Investor in Kazakhstan – 2008” Contest and awarded them with special diplomas.
Contest Winners:
The Grand prix The Best Foreign Investor in Kazakhstan went to BG Group.
In the nomination for Long-Term and Stable Investment Cooperation -Chevron Corporation.
In the nomination for Support for Kazakhstan’s Sustainable Development - Eurasian Natural Resources Corporation plc.
In the nomination for Contribution to Kazakhstan’s Investment Image Enhancement - Chevron Corporation.
The Contest aims to determine the best foreign investor that considerably contributed to Kazakhstan’s economic development. The Contest will be held on a regular basis once in three years.
In addition, the President awarded some members of the Council with jubilee medals “10th Anniversary of Astana”.
At the press briefing following the Session the Head of State briefly summarized the results of the Session.
— Today for the first time we clearly set the condition that the local content component should increase from year to year, - emphasized N. Nazarbayev. As you know the State Procurement Law has been enacted recently, which will oblige all national companies to purchase everything they need from local suppliers. From now on foreign companies should also start negotiations with the Government and local producers on the issue of covering their major procurement needs at the local market, employing more local workers and engineers, and buying Kazakhstani equipment.
— Of course, this raises the issue of the quality level of our equipment, and its compliance with the international requirements and high technology standards, mentioned the President.
— If we have information of foreign companies’ procurement needs for the 2-3 year period ahead, the state together with investors will be able to help our plants and factories to produce the required goods. This point of view was supported by representatives of all foreign companies; they also approved the measures being taken by Kazakhstan to address the implications of the world financial crisis, i.e. the Programme, which has recently been approved by the Government. They believe that the country rich in such natural resources as oil, gas, metals, will always be attractive for investors, and Kazakhstan should see another raise of economy once the crisis is over.
The next FIC plenary session will take place in Kostanai on June 12, 2009. Its topic will be Alternative sources of funding for Kazakhstan's economic growth in changing world financial markets.
(Based on the materials of the Kazakhstanskaya Pravda newspaper, an official website of the President of Kazakhstan and speeches of the session participants).
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