The situation and prospects

— Recently on one of the meetings you said: “As an economist, I am sure that the production industry should be the engine of Kazakhstan’s, or any other country’s, economy. What is production industry? It is the labour of people who create concrete material benefits – goods and services.” In general, this notion is quite obvious, does it need additional ascertaining?
— The experience shows that it does. Lately we have been having a dispute in this issue, many banks think, and even declare publicly, that the financial sector is the engine of Kazakhstan’s economy, because banks have great financial possibilities. Once it was even stated in the Parliament that Kazakhstan’s banking sector is larger that Turkey’s by assets. In reality, banks show that Kazakhstan’s production industry is not attractive for investors, by financing production projects outside Kazakhstan, for example, construction of hotels and fabrics in Russia.
It should make many people seriously think about this issue. It is the concern of not only our industrial producers, but also the government and the management of the National Bank. Of course, nobody is against the large assets of the banks and their growth. We are against developing mainly the financial sector and impairing the production industry.
What do we see around us? First of all, there is a booming growth of housing construction, which is financed by the banks for the collateral of this same housing, while industrial construction is weakly financed. It is worrying that banks, taking large loans abroad and financing projects in our country, are not seriously interested in financing production industry.

— Obviously, it is not a result of a malicious intent; there must be objective factors, which make the industrial projects less attractive for the banks. Maybe small capacity of internal market, condition of the infrastructure, etc.?
— The infrastructure is an example of subjective factors.
One of the reasons that impede development of production industry in our country and its investment attractiveness is that in reality it is a risky business. In order to launch a production, at least one has to buy land, and land is very expensive in Kazakhstan. Now, let’s consider the infrastructure. The second step for industrial entrepreneur is to acquire permissions to connect to electricity, water and heating supply. The second task is a big problem. Not many of us know that in some regions akims decided to charge the firms when they connect to electricity and heating supply based on their consumption capacity. This creates the following examples: There are industrial projects nearby Almaty assessed at 3,5 million Euro, but for connecting the consumption capacity of 1 thousand kWt firms have to pay 1 million Euro. In this case the producer has not even built anything yet, but he already has to pay a lot of money. Moreover, the payments must be made there and then and cannot be recorded as future payments. The situation is the same with connecting to water supply. In addition, industrial production generally have long payback period, sometimes it even takes them five years to build the factories.
The government should seriously think about the issue. They should develop energy policy, which would include the following: increase prices for electricity and within 1,5 – 2 years abolish the payment for consumption capacity when connecting to the supply system, as it is done in the rest of the world. We are unique in this problem, everywhere else the power supplying companies are interested to connect industrial producers to electricity supply system and acquire a stably working client.
In addition, a different approach to industry policy from the government is required. For example, in China newly opened producers don’t pay any taxes for 10 years. If we want to develop our industry we need the legislation to relieve the producers from paying any taxes during the construction period till launching the production. All the discussions on the need to develop high added value production haven’t given any results; such production is still not profitable under current taxation system. The challenges in this sector of economy are significantly higher than in commercial and financial sectors.

— Industrial producers, both large and medium size businesses, always say that our taxation system is a problem. However, to be fair, let’s remember that taxes today are different from taxes in 1990s. For example, VAT…
— This is one of the most important problems. Last year in Kazakhstan the return of the VAT to the producers at the rate of 0% practically stopped. It is a big problem – it is a serious breach of taxation code by the government. Besides, the code itself, which is amended annually, is constructed in a way that permits to return as little VAT as possible. Currently the budget own exporters 144 billion tenge; it is more than 1 billion of USD! This is a very significant amount taken out from turnover of the exporters. When they are not returned the VAT, they have to loan from banks and pay high interests. It means that government is involved in transferring the capital from production industry into financial sector. In my opinion, it should never be done, because this artificially inflates the financial sector and restricts the production industry. Nobody can say that it isn’t true.

— You speak of the exporters, but there are also other producers in Kazakhstan’s industry.
— Kazakhstan is a big country, but its market is not. Thus each businessman, if he wants to acquire a good niche and achieve a good scale of production, he has to produce high quality products which he can sell not only within Kazakhstan. And here he will face the problem of non-return of VAT with all the consequences.
I understand that tax authority can argue that there is an issue of false entrepreneurship. But VAT payments are not returned even to large companies, which are monitored by the taxation committee. Their activity is always transparent to the tax authority. Moreover, many companies have their export contracts signed for decades, they don’t and will not deal with false entrepreneurs. They work on the international market with well known companies. And mainly these companies don’t receive the VAT returns!
Maybe non-return of VAT is also beneficial for the Ministry of Finance. After all, the non-return distorts the budget’s income-expense information. There is always a huge surplus!
Recently producers and exporters raised the question of returning VAT in real time. It seems that things began to move. But what will happen starting from 1 January 2008? There is an idea to return 70% right away to large tax payers and 30% after the check. But we argue for 90% and 10% for large companies, which are monitored by the taxation committee. Actually, VAT should be returned in full amount right away. And if someone is caught with violations, the government can always get the money through court. This is how it’s done in the rest of the world.
 
The delays in returning VAT even forces some companies to decrease their exports. There even an opinion emerged that the VAT may not be returned! Returning VAT is not Kazakhstan’s invention, it is the world practice.
By the way, among 30 breakthrough projects of the Ministry of Economy there are few projects connected with technologically intensive industries, most of the projects are connected with extraction of natural resources and its exports.

— What if your opponents say that exporters, the majority of which work with natural resources, are benefiting the favourable situation on the world market, receive hyper-profits and even then ask for more.
— Firstly, the situation might change. In the foreseeable future Kazakhstan will have to rely on export of resources. For example, mining gives 22% of GDP; and it is a very capital intensive industry… Secondly, taxation policy should be formed based on long-term priorities of developing all sectors of economy. Do we see this happening? Let’s consider another example, which is not connected with the favourable situation of high world prices.
To hope for a considerable development of any sector of industrial production, real privileges should be given to the objects under construction. The privileged should also cover the VAT payments for imported equipment. Kazakhstan doesn’t produce this equipment. In order to introduce new technologies in our productions we need to buy the equipment abroad. Mechanical engineering accounts for 3 – 4% of our GDP. An entrepreneur in Kazakhstan has to pay 14% of VAT for the purchased equipment when he launches a production. The government doesn’t behave like a good contriver. Of course, it decreases the attractiveness of developing the industrial production.
Finally, regarding the thought that the exporters “still ask for more”. We only request law compliance, nothing more and nothing less.  If the taxation code says that VAT should be returned, they have to do it.

— It is easy assume that you are not happy with the amendments to the taxation code, which were developed by the Ministery of Economy and are to be considered in the Parliament…
— Of course, they don’t take into account the situation around large industrial projects; the amendments are based on only fiscal objectives. I think that this issue requires an extensive discussion. Otherwise, many of the innovative breakthrough projects may never be implemented.
For example, AMMC (Association of Mining and Metallurgy Companies) thinks that VAT should be included into the article 138 of the code alongside the current investment privileges. It would avoid freezing companies’ current assets, which are directed to paying VAT, and investments when importing equipment for launching new production. We also have some questions about article 183, regarding the way of calculating and paying the tax on profit from capital appreciation when selling securities. The recently suggested abolition of the privileges, for example on profit from sales of securities on open sessions of stock exchange, including the international stocks and bonds from official listings, will lead to future tax liabilities from potential investors to Kazakhstan. It will decrease the attractiveness of stocks placed by Kazakhstani companies on international markets; moreover, it will increase their price. Thus, market value of stocks of Kazakhstani companies will be artificially increased.

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