Competitiveness and Private Sector Development

KAZAKHSTAN
SECTOR COMPETITIVENESS STRATEGY

KEY FINDINGS

Since 2000, the economy of the Republic of Kazakhstan has been growing at an annual rate of between 8 and 9%, making it one of the ten fastest growing economies in the world. Kazakhstan attracts more foreign direct investment than all other Central Asian countries together. To date, the country’s economic performance has been driven largely by its natural resources sector – the oil and gas sectors alone attract three quarters of foreign investment inflows. However, Kazakhstan also has clear competitive advantages in non-energy sectors. These potential sources for growth and competitiveness remain largely untapped. As part of a far-reaching programme to support the country in diversifying its sources of foreign direct investment (FDI) and defining a targeted investment promotion agenda, the government of the Republic of Kazakhstan asked the OECD to help develop a Sector Competitiveness Strategy. The first stage in developing this strategy was an assessment of the competitiveness and FDI attractiveness of the country’s key non-energy sectors: • AGRI-BUSINESS (with special emphasis on the grain, meat and dairy sectors) • CHEMICALS (with a focus on fertilizers)
The OECD Eurasia Competitiveness Programme was launched in 2008 to support Eurasian economies in developing more vibrant and competitive markets. It includes seven countries from Central Asia (Afghanistan, Kazakhstan, the Kyrgyz Republic, Mongolia, Tajikistan, Turkmenistan, Uzbekistan) and six countries from Eastern Europe and the South Caucasus (Armenia, Azerbaijan, Belarus, Georgia, the Republic of Moldova and Ukraine). The Programme’s approach leverages OECD instruments and tools in order to assess where and how to enhance the competitiveness of countries, sectors and regions to generate sustainable growth. Since its inception, the Programme has developed and implemented several regional and country specific competitiveness strategies, complemented by capacity building seminars and coaching for policy makers.

• LOGISTICS FOR AGRI-BUSINESS • INFORMATION TECHNOLOGY AND BUSINESS SERVICES This brochure contains the main conclusions of this assessment, which serve as a basis for the Sector Competitiveness Strategy for Kazakhstan. It examines the main challenges facing these high-potential sectors – and related sub-sectors – and provides key recommendations to policymakers on ways to remove sector-specific barriers. It also outlines next steps in helping these sectors further modernise to create a more diverse, balanced and sustainable development model for Kazakhstan.
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KA Z AKH STAN : C OMPETI TI V E N E S S FACT S H E E T

Numerous competitive advantages...
LOCATION
The Republic of Kazakhstan is located between high-growth markets such as China, India and Russia.

...however obstacles need to be removed
LACK OF DIVERSIFICATION
Economic activity and investment are concentrated in the hydrocarbon and mining sectors, with oil and fuel products accounting for 65% of the country’s exports.

NATURAL AND HUMAN RESOURCES
It benefits from vast energy and agricultural resources and nearly universal literacy.

GROWING PROSPERITY
Since 2000 per capita income has doubled, the unemployment rate has been halved, and close to USD 30 billion of foreign exchange reserves have been accumulated.

OPENNESS TO TRADE
From 1999-2008, Kazakhstan’s international trade has grown twelve-fold in value of exports – from USD 6 billion to over USD 71 billion. During the same period imports went from USD 4 billion to nearly 38 billion, reflecting a growing economy and rising incomes.

INCOME INEQUALITIES
Kazakhstan’s income inequalities present the widest regional economic disparities among Eastern European and Central Asian countries.

POOR BUSINESS ENVIRONMENT
The country suffers from significant delays in time to export and import, major skills gaps in the service sector and limited technical standards. It takes about 20 days to start a business in Kazakhstan, as compared with an average of 13 in OECD countries.

LINGERING EFFECTS OF THE FINANCIAL CRISIS
The global financial crisis has driven up external debt to roughly 44% of GDP and intensified all other obstacles.

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Agri-business
Kazakhstan’s agricultural sector has extensive arable land resources, high regional demand prospects, growing domestic consumption and an absence of distortive government support in most agri-business sectors. To enhance its competitiveness across the agri-business sector, policy makers and the private sector must address the following sector-wide barriers: • Limited working capital • Obsolete technology • Limited access to land, especially for foreign investors • Major skills gaps • Lack of consistency of legislative framework • Limited logistics infrastructure Specifically, the grain, meat and dairy sub-sectors are where Kazakhstan shows the greatest potential to successfully compete on global markets.

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Agri-business sector: grains
SECTOR STRENGTHS:
Kazakhstan produces a high quality of hard grain – its major non-extractive export – which makes up 2% of the country’s total exports. The country is among the ten largest wheat producers and five largest exporters in the world. Its large land area, low production costs and freight advantage provide an opportunity for moving up the value chain with more processed wheat products.

…however, yield remains low by international standards
WHEAT YIELD BY COUNTRY

SECTOR CHALLENGES:
Increase in demand from emerging markets: Asia, Latin America and North Africa made up 55% of world imports in 2009. Limited access to finance: 53% of Kazakhstan’s enterprises surveyed cited access to financing/credit as a first priority in developing their businesses. Investment in machinery and other inputs remains too low, and farmers do not have sufficient credit and financial support. Low productivity: farmers have little knowledge of modern farm management and marketing techniques. Insufficient standards to attract foreign retailers: global retail chains require suppliers to guarantee product availability, quality and safety.

Low production costs create a key competitive advantage...
WHEAT PRODUCTION COST BY COUNTRY, USD PER TONNE, 2008
Source: FAO statistics.

Facts:
➤ Grain production makes up
65% of Kazakhstan’s agricultural enterprises and dominates 75% of the total cultivated area.

RECOMMENDATIONS FOR SECTOR REFORM:
• Develop stronger links between farmers and processors:
for example, processors could act as guarantors for farmers vis à vis financial institutions.

• Attract foreign retailers to spur development of the entire
supply chain in line with international retailers’ standards.

• Encourage deep processing of wheat end-products.

➤ Wheat accounts for over 80%
of total grain production.
Source: KazAgro Marketing, UK Farmers Weekly, US Wheat Marketing Center.

• Increase promotion of wheat exports. (The US invests USD
10 million per year to promote its products, which provides a return of USD 23 for every USD 1 spent).

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Agri-business: meat
SECTOR STRENGTHS:
Global demand for meat and meat products, particularly in developing countries, has been growing steadily over the past three decades. Globally, a greater concentration of retailers is providing stronger buying power, creating a more lasting relationship with producers and providing stability in markets for their produce. Although OECD countries account for a large portion of today’s world beef production, this share is decreasing while emerging economies are stepping up their share of exports. Kazakhstan could tap into this trend by leveraging its regional strengths: abundant land resources, low production costs, low labour and land costs, low processing costs and access to premium markets, such as Russia.

Kazakhstan meat companies cite lack of financing as major barrier to sector growth
BARRIERS FOR BUSINESS DEVELOPMENT: FINANCING

SECTOR CHALLENGES:
Low production levels: domestic meat consumption exceeds production. Low cattle inventory relative to the vast pasture area: Kazakhstan has the same cattle inventory as Ukraine with four times the land. Quality issues: low quality standards in meat production. Marketing: absence of an active marketing institution for Kazakhstan beef. Affordable financing: Kazakhstan businesses cite the dearth of affordable financing as a major hindrance to sector growth.

Note: Currency of loans refers to the difficulty of obtaining a loan in the national currency (not in euros or U.S. dollars).

Highly competitive production costs
COSTS OF BEEF MEAT PRODUCTION(1) AND TRANSPORTS TO RUSSIA, IN SELECTED EXPORTING COUNTRIES

Source: OECD Country Capability Survey, Kazakhstan 2010.

Facts:
➤ The beef sector can be highly
profitable for producers, as farming accounts for half of the creation of value added across the supply chain.

RECOMMENDATIONS FOR SECTOR REFORM:
• Promote modern retail and access to finance schemes
to increase quality of feed and increase cattle inventory.

• Implement standardisation and regulation to upgrade
standard of beef products.

• Target markets: to develop its export potential Kazakhstan
should focus on the high-growth Russian, Central Asia and the Middle East markets.

➤ Global trade in beef grew by
288% between 1977 and 2007. Beef imports by major buyers are expected to increase by 1.9 million tonnes by 2019.

• Move up the value chain: explore higher value-added beef
products.

• Further develop producers’ organisations and extension
programmes to educate farmers.

Note(1): Costs of production only include breeding costs and do not cover here slaughtering and primary processing costs. Source: Asian AgriBusiness Research Center, International Meat Trade Associaion, KazAgroMarketing, OECD

• Promote better quality standards through producers’
organisations.

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Agri-business: dairy
Milk yields remain low by international standards

SECTOR STRENGTHS:
Globally, the dairy sector has changed significantly in its structure, geographical distribution and volumes of production. Technology and changing global trends in dairy consumption have seen a shift of power from producers and processors to retail operators; the main growth of dairy production has been in developing countries. Kazakhstan is presently a dairy-importing country but in the long run should position itself as a producer of higher value-added dairy products with export potential, such as milk powder. The Kazakhstan dairy industry has relatively low costs of milk production and can take advantage of favourable sector development trends globally. It now has an opportunity to move up the value chain into value-added dairy products. Importantly, its government subsidy levels – as measured by Sector Commodity Transfers (SCT) – are near zero.

MILK YIELD IN KAZAKHSTAN BY INTERNATIONAL STANDARDS Average annual productivity, cow milk, whole, fresh, kilograms per animal, 2008

Source: FAO, 2010.

SECTOR CHALLENGES:
Loss of market: with the dissolution of the Soviet Union, Kazakhstan lost a major market: cow milk production fell by 40% in 4 years; herd levels have not yet regained 1992 levels. Quality of product: the quality of milk is poor: 38% of milk-processing businesses in Kazakhstan point to the low quality of milk inputs as the most important business challenge for moving up the value chain. Domination of smallholder farms: small farms account for about 85% of the total number of dairy stock and almost 90% of total milk production. Low productivity: Kazakhstan is import-dependent for milk products; between 2003 and 2008 imports of dairy products increased by 516% Lack of access to finance to grow the livestock supply.

Facts:
➤ Kazakhstan experiences
an annual shortage of milk for internal consumption estimated at 255 thousand tonnes.

RECOMMENDATIONS FOR SECTOR REFORM:
• Increase access to finance schemes: to improve milk
quality, to grow the share of pedigree cattle, to apply innovative technologies and to promote modern retail chains.

➤ OECD/FAO projections forecast
that global imports of whole milk powder will grow by 10% by 2019.

• Support the development of producer organisations
and extension services to promote the sector to improve the quality of feed and increase the inventory of milk animals.

➤ Kazakhstan has a low level of
pedigree livestock: 6% of the total headcount of cows as compared to 25-30% in the US and Canada.

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Chemicals
The mineral fertilisers sector is the largest of all agri-chemicals sectors in volume and market value. The global value of the fertiliser market was estimated at USD 132 billion in 2008, 1.8 times larger than the value of the herbicides, insecticides, food additives and food packaging sectors together.

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SECTOR STRENGTHS:
Kazakhstan has all of the basics in place for developing its fertiliser production: deposits of between 4 and 15 billion tonnes of phosphate rock, significant reserves of natural gas and sulphur, and low cost access to ammonia. Moreover, with a very low current level of fertiliser use, the country’s large potential domestic market remains untapped. It also has major market opportunities in the growing neighboring economies of Central Asia, China and India.

...yet the domestic market remains untapped
INTENSITY OF FERTILISERS USE, KG PER HA OF CROPLAND, 2006-07 AVERAGE

SECTOR CHALLENGES:
Underutilised capacities and low domestic demand: government subsidies to farmers – up to 40% for the purchase of domestically produced agricultural chemicals -- reduce incentives for local producers to improve quality. Import of higher quality fertilisers: also reduces incentives for producers to raise quality. Low level of investment: basic and outdated technology, low quality inputs and absence of know-how among farmers. Lack of awareness among foreign investors of Kazakhstan’s mineral fertiliser sector.

Mineral fertiliser products dominate the agriculture chemicals sector...
WORLD MARKET ESTIMATES OF THE FOUR MAIN AGRIBUSINESS CHEMICALS SECTORS BY VALUE, 2008

Facts:
➤ Asia and Eastern Europe lead
fertiliser demand (more than USD 12 billion annually).

Source: OECD Country Capability Survey, Kazakhstan 2010.

RECOMMENDATIONS FOR SECTOR REFORM:
Kazakhstan has an opportunity to develop its fertiliser sector by leveraging domestic demand, attracting foreign technologies and know-how and participating in joint investment projects to develop phosphate- and nitrogen-based fertilisers. Access to long-term financing is essential for large-scale production projects and for the farming sector to invest in fertiliser domestically.

➤ The global rise in consumption
of fertilisers (over 20% from 2002 to 2008, growing from 139 to 168 million tonnes) will reach 186 million tonnes by 2014, an increase of over 35%.

• Simplify procedures for access to land for construction of new production facilities and extraction of minerals. • Facilitate international trade by benchmarking customs clearance procedures. • Offer incentives for introduction of new technologies. • Improve access to long-term financing for large-scale investment projects and promote business opportunities
to foreign investors.

➤ 42% of producers in Kazakhstan
see poor quality and price competition as the most significant barriers for export of mineral fertilisers.
Source: European Commission, Data Monitor, 2009, OECD analysis.

• Raise awareness among foreign companies of sector-specific investment clearance procedures. • Capture the domestic market through extension programmes. • Open the market to competition and promote to foreign investors.

➤ 50% of fertiliser companies
surveyed said access to long-term financing was a major obstacle for development of their businesses.

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Logistics
An effective value chain depends on efficient transportation and logistics services. Its role of reducing cost, improving efficiency of businesses, and ensuring that goods reach markets effectively is particularly crucial for the agri-business sector, which relies on cold stores, warehousing and good transport systems.

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SECTOR STRENGTHS:
Kazakhstan is at the crossroads of transit routes between Europe and Asia and has a number of logistics centres and free-trade zones for production warehousing and transportation of goods.

SECTOR CHALLENGES:
Outdated transport infrastructure: Kazakhstan’s transportation system, inherited from Soviet times, has not undergone sufficient modernisation. Institutional policies and regulations: high customs levies and cumbersome customs clearance procedures and frequent changes in customs laws are significant barriers. Inadequate operational capability and logistics knowledge: workers need training and skills improvement; no training exists in logistics or supply chain management and a lack of technological innovation -- particularly in cold chain logistics -- limits the wider development of the agri-business sector.

Logistics shortfalls significantly hinder sector potential
PROBLEMS THAT LIMIT PRODUCTION POTENTIAL IN AGRIBUSINESS

RECOMMENDATIONS FOR SECTOR REFORM:
• Modernisation of physical infrastructure. • Incentives for investments in construction of cold-store
facilities.

Facts:
➤ Between 1995 and 2008 world
container traffic more than tripled in volume and grew at an average annual rate of 8%.

• Review of container import tariffs and promotion of
container traffic.

➤ Kazakhstan has limited
high-quality national and inter-regional freeways or urban expressways (Class I, Class II roads).
Source: OECD, CCS, 2010.

• Investment in human resources development. • Access to and affordability of financing.

➤ 60% of businesses surveyed
quoted public infrastructure as an obstacle for business development. 20 21

Information technology and business services
The IT sector in Kazakhstan is nurtured by domestic demand and global requirements but remains small with limited impact on growth. Its share in the country’s economy continues to shrink due to its narrow human capital capabilities.

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SECTOR STRENGTHS:
Kazakhstan has strong potential for provision of information technology outsourcing. The government of Kazakhstan has made a commitment to enhance education, particularly in information technology (IT). With the low cost of labour as compared to key regional competitors such as Russia and existing skill levels, the IT sector is taking advantage of strong demand for its services from government, local businesses and foreign investors already based in Kazakhstan. A high level of broadband penetration and mobile connection as compared to its neighbours also make Kazakhstan a potential platform for IT businesses in Central Asia.

...and low labour costs give the business services sector a competitive edge
COMPARISON OF AVERAGE MONTHLY LABOUR WAGES IN SERVICES, 2003-2007

SECTOR CHALLENGES:
Limited public-private dialogue: absence of links between government, private enterprise, multinationals and training institutions mean that skills often do not match industry needs. Lack of soft skills among employees: despite strong Russian language skills and many study abroad programmes, cultural understanding and other soft skills need to be further developed. Limited human capital capabilities: few Kazakhs have formal IT qualifications. Low levels of innovation: IT companies have little opportunity for technology transfer.

Source: International Labour Organization, zdnetasia; Wall Street Journal; OECD interviews and analysis.

The IT sector is set to grow significantly...
IT SPENDING GROWTH RATES FOR 2007-2011

Facts:
➤ There are about 500 IT and
business service companies in Kazakhstan.

RECOMMENDATIONS FOR SECTOR REFORM:
• Strengthen public-private dialogue by creating working
groups that bring together policy makers and local and international firms to address policy barriers.

• Target SMEs: building business linkages to improve capacities
and performance of local SMEs will foster a collaborative business environment, facilitate development of business for foreign companies and mobilise FDI to support transfers of know-how and technology from multinationals to SMEs.

➤ The country’s 20,000 IT
graduates annually cover only 40% of present domestic demand.

• Develop a supplier database: investors require up-to-date • Encourage human capital development to raise labour
productivity, rise in the value chain and attract FDI.

information on available skills and competencies of local providers.

➤ The Network Readiness Index
Source: IDC, OECD analysis and estimates

of the World Economic Forum ranks Kazakhstan 73rd out of 134 countries.

• Improve IT infrastructure: the government of Kazakhstan is

committed to providing basic IT services and ensuring that 60% of Kazakhs are computer literate by 2020.

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KEY CONTACT INFORMATION:
Mr. Fadi Farra
Head, OECD Eurasia Competitiveness Programme Fadi.Farra@oecd.org
Page 6 photo: © Ralph Grunewald

FOR GENERAL ENQUIRES: eurasia@oecd.org

Page 14 photo: © HLPhoto - Fotolia.com

MEDIA CONTACT: Ms. Vanessa Vallée Communications Manager Vanessa.Vallee@oecd.org

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www.oecd.org/daf/psd/eurasia