What should be done to develop automotive industry in Kazakhstan? Expert opinion

The government of Kazakhstan seems to have seriously taken up the development of the automotive sector of the country. At least, there are some actions that can be regarded as an attempt to revive the industry. For instance, 2019-2024 Roadmap for the Development of Automotive Industry has been recently approved. However, is this enough to raise the domestic automotive industry, so that its products become in demand by the oil and gas operators? In an interview to petrocouncil.kz, former Director of the Belkamit plant, member of the Management Board of the Union of Machine Builders of Kazakhstan, Pavel Beklemishev, shared his opinion on what is necessary for the development of the automotive industry.

— Pavel Innokentiyevich, what is the current state of the automotive industry in the country in general?

— Regrettably, the state of the automotive industry of the country today is characterized by a deep stable stagnation, despite the fact that once we had our own fairly powerful automotive industry. It existed within a single production system in the Soviet Union with a stable serious cooperation, development processes, including in the automotive industry of Kazakhstan. In recent years, for example, work has been carried out on the creation of electronic engineering in Kazakhstan, which we almost do not even think about today. Electronic engineering enterprises were being created, a Design Institute and a Design Bureau were created.

In Soviet Kazakhstan, engineering accounted for 16% of the total industrial production in the consumer goods, food industry, including the processing of raw materials in the mining and metallurgical complex, the oil and gas sector, production of construction materials, almost all the national economy, except, for example, construction, education, health, culture. It should be noted that this is a good indicator. Now, we can hardly say that the same indicator is 2% of the volume of industrial production. Of course, there is a growth factor in the processing of products of the extractive sector, but …engineering has fallen and, so far, I do not see serious growth trends.

Our officials are great dodgers in terms of juggling numbers, so they try to portray some successes, which are practically absent.

“In 2018, the volume of production of Kazakhstan’s engineering reached $3.1 billion, However, the share of production of oil and gas engineering in the structure of the industry was only 5% or about 53 billion tenge.” Data of the Ministry of Industry and Infrastructure Development of Kazakhstan

If we talk about oil and gas engineering, it actually didn’t exist in Soviet Kazakhstan. There was a plant named after Petrovsky in Guryev, currently Atyrau. This area could include Ust-Kamenogorsk Valve Plant, which produced piping valves, including for the oil and gas industry.

Nevertheless, oil and gas engineering appeared in modern Kazakhstan. Ideally, this is a market for which we have a long-term stable demand. And no matter how much oil and gas operators wave us aside, our enterprises try to enter this market, and sometimes they succeed.

Regarding the Roadmap for the Development of Automotive Industry, I would like to note that in fact, we have prepared a comprehensive plan for the development of the industry. But it wasn’t approved. We have practically no machine builders. In my opinion, there are serious socio-economic explanations for this. Engineering is such a labor-intensive industry, it requires hard work. It is not high-margin, except some cases, so the people who work in it, firstly, must be competent enough and, secondly, hard-working. And it is difficult to take bribes from such people. When a literate person earning money by working is offered to share his/her profit, he/she refuses. Unfortunately, this problem is not resolved by our government, and machine builders are not particularly honored.

— What can you say about the demand for the small volume of products of Kazakhstan’s oil and gas engineering by our major subsoil users?

— I would like to say about engineering in general and note that up to 50% of the country’s imports are machine-building products. And if we talk about the oil and gas industry, then most often foreign companies that are participants in the implementation of large oil and gas projects in Kazakhstan try to observe the economic interests of those countries from which they came. And they are not fully honest when they say that Kazakhstani products do not suit them in quality. They bring from abroad even those products that can be produced in Kazakhstan.

For example, the Future Growth Project in Tengiz uses 260 thousand tons of steelworks, of which 200 thousand tons are imported, and only 60 thousand tons will be made in Kazakhstan. Although, I think that we could produce all this volume in our country.

I have worked with oil and gas companies for many years, including TCO, NCOC and KPO – three pillars, as we call them. I supplied them with tanks. And I can say that in this area today we could meet their needs by 80%. And for the areas where there are problems, we could invite foreign partners and work with them.

I brought foreign partners that were ready to work at AtyrauNefteMash, for example, and to localize together precisely the positions that are in demand in our country. Tengizchevroil did not agree to that.

— What was required from TCO? Long-term contract?

— The most important engine in any business is information. Give the information forward on a long-term basis, then the work of local producers will be easier and more profitable.

The operators tell us that everyone should have equal conditions. On the other hand, at the conclusion of the agreement on subsoil use, they undertook obligations that they would give preference to Kazakhstani suppliers, help them in development. But as soon as it comes to real actions, they say: “No, the conditions must be equal.”

We do not ask for money, do not ask to concede in terms of quality. We ask to give information, give it in advance and we will try to satisfy all the requests.

— And are the issues of local content solved in other countries where there are such problems?

— By the way, several times I made a proposal to hold an international conference on local content in our country. Such a conference is held somewhere in the UK. It would be good to hold it at least in Turkey, for example, in a neutral so to speak country. After all, the venue of the conference is also important. I was at one of these conferences in the UK. So, there I talked with one of my colleagues from Kuwait. Talking about local content, he noted that they had recently transferred 37 petrol stations owned by transnational companies to the management of Kuwaiti businessmen. In our country, it is our companies that sell gasoline. Large, medium, small, but ours…

— So, are they much worse than us in this regard?

— They didn’t even dream of what we have. Colleagues from Arab Emirates or Iraq were surprised when I talked about the equipment that we produced at the Belkamit plant. I was asked how many foreigners work in our company? I said none, all the experts are from Kazakhstan. In their countries, as it turned out, everything is produced by foreign enterprises, where the staff is also foreign.

However, in the UK, Norway and other countries, the development of local content for the production of equipment for the oil and gas industry started with a share of 10%, which was then increased to 80%.

We asked our Norwegian colleagues how they solved the issue of increasing local content. And they say that they the king gathered all the responsible persons and said: “It must be like this.” And then everybody began to do what the king said. Everybody.

“In 2018, TCO, NCOC and KPO imported goods worth about 245 billion tenge, and local goods were procured for only 19 billion tenge, which is about 7% of the total volume of procuredgoods.” Data ofthe Ministry of Energy

— Maybe with the adoption of the Road Map the situation will change…

— If you noticed, each part of the Road Map begins with the words: “explore the issue” or “consider the possibilities.” There are no words such as “to develop the law”, there is “to explore an opportunity”. As I said, we, that is, the Union of Machine Builders of Kazakhstan, have made a comprehensive plan for the development of mechanical engineering. It said specifically: to draft a law, to submit it to the Parliament, to create a fund to support machine-building enterprises, etc.

And yet, the fact that there is a road map in which the Prime Minister instructed to “explore” and “consider the possibilities” is already a good start. Now it all depends on the participants of the industry. If we take it up, start working, we are sure to achieve success.

That is, in the end, it all depends on ourselves. We should go and say that since the Prime Minister has instructed us to work, let’s work on it. Otherwise, you come to an official and say: let’s discuss with you the issues of industrial policy or the creation of the fund, and he/she says that there is no time for it, that it is not interesting. They won’t say that now.

That is, this formulation does not mean that the issue is resolved. It means that there is a basis to try to make it work.

— And if after all the law is adopted, the fund is created, the industrial policy is adopted, what should be done first of all? Maybe it is necessary to cancel VAT for manufacturing enterprises, customs duties or take other regulatory measures that will accelerate the development of the industry?

— You mentioned the VAT issue. I have known this question since 1997. That is, at one time there really was such a problem. For example, when TCO imported, it did not pay customs duty and value added tax (VAT). And when it bought from a Kazakhstani enterprise, it had to pay value added tax. But this problem was solved more than 10 years ago, during the Premiership of Danial Akhmetov. The Tax Code has been amended to provide that if a Kazakhstani enterprise delivers goods to a company such as TCO, which has benefits, it pays VAT “at zero rate”.

The only condition is that the government must annually publish a list of companies that have such benefits.

This issue has been resolved by law. I am surprised that some of our Ministers do not know this and speak about it from the rostrum.

It is regulated by article 393 of the Tax Code – “Taxation in certain cases”. The situation with customs duties is a little bit more complicated. However, the impact of customs duties is less. According to my estimates, at least twice. If VAT is now 12% of the total cost, the impact of customs duties is about 6%. But this issue also needs to be addressed.

Most importantly, we need information from subsoil users. And it is necessary on a long-term basis. We need certain support from our authorities. That is, it is necessary to remind subsoil users that they should give preference to local producers when choosing suppliers. It is necessary to remind purposefully and on the basis of laborious analytical work, relying on concrete figures to prove a point. The level of local content is not abstract. It needs to be calculated. In our country, CT-KZ certificates, which should be the basis for monitoring local content, are dished out. No one is responsible for wrongfully issued certificates. So, think now, how to develop local production and increase local content with this attitude to business.

As for oil and gas engineering, I can assure you that Kazakhstani enterprises have all the opportunities to produce quality products, and there is a qualified human resource. And I am still very optimistic about the future of Kazakhstan’s engineering.

— Thank you!

Photo by P. Beklemishev

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