Offtake contracts to be used to saturate domestic market with new goods — Beibut Atamkulov

At the government session chaired by Prime Minister Askar Mamin, issues of local content development were considered. Minister of Industry and Infrastructure Development Beibut Atamkulov, Minister of Energy Magzum Mirzagaliyev, Chair of the Board of Samruk-Kazyna JSC Almasadam Satkaliev presented their reports.

“In order to implement the strategy of self-sufficiency of the national economy to support domestic producers, the ministry is taking systemic measures, as well as developing support mechanisms in accordance with international obligations. The existing horizontal support measures are aimed at providing sales markets and concluding long-term orders,” Atamkulov said.

The ministry monitors purchases of all subjects of the regulated market to take timely corrective measures. Since 2020, a positive vector of growth in the share of local content has been recorded, the figure was 1.3%.

“The total volume of regulated purchases following the results of 9 months of this year amounted to 12.9 trillion tenge, the share of local content increased by 6.4% and amounted to 58.3%. The greatest growth in terms of subjects is noted in public procurement — 6.2%, procurement of national companies — 0.8% and subsoil users — 12.8%,” the head of the Ministry of Industry and Infrastructure Development informed.

According to the instructions of the Head of State, at the beginning of the year, a reconciliation of data was carried out on the declared indicators of local content in public procurement in the implementation of infrastructure projects. As a result, in 14 regions the fact of overestimation of indicators was stated.

The Head of State has been instructed to conduct inspections annually until 2025. In connection with the accession to the World Trade Organization, measures to support Kazakhstani producers have been phased out since 2015. From Jan. 1, 2021, in the field of subsoil use, the requirements for local content in goods and no more than 50% in works and services have been excluded. Appropriate changes have been made to the use of the local content tool. Taking into account international obligations, 5 new mechanisms have been developed to protect the interests of domestic producers.

First. The draft law "On industrial policy" provides for the concept and development policy "domestic value". This concept complies with the WTO norms and is recognized in the international arena. For example, large subsoil users will adopt their own programs for the development of in-country value and a plan for the transition to the purchase of domestically produced goods.

Second. In order to ensure the sale of finished products and saturation of the domestic market with new goods, with the participation of subsoil users and national companies, offset contracts and offset contracts will be used. At the same time, offset contracts will be aimed at localization and creation of new production facilities, and offset contracts for technology transfer and investment attraction. In turn, long-term contracts will ensure the sale of products from existing industries.

Third. A joint roadmap with major oil operators was approved, which provides for:

- issues of adapting national standards;

- inclusion of mechanisms to support Kazakhstani producers in the tender procedures of large operators;

- an increase in local content until 2025;

- measures to localize 5 production facilities for oil and gas equipment.

The work of the International Center for the Development of Oil and Gas Engineering has begun, which has already begun the localization and transfer of technologies together with large operators. More than 1,200 imported commodity items were analyzed. Three product groups were selected for localization. By the end of the year, the Center plans to formulate recommendations on investment projects and localization of production, as well as to identify existing barriers for domestic producers.

Fourth. In order to preserve and increase local content indicators in the procurement of subsoil users, the Code "On Subsoil and Subsoil Use" approved the norm for concluding Agreements on stimulating entrepreneurship with subsoil users. In agreements, the average share of local content in goods is 30%, in works and services 80% and 85%, respectively. As of November 2021, 234 agreements were concluded. These measures, according to preliminary forecasts, will increase the share of local content in the procurement of subsoil users up to 55%.

Fifth. In order to increase the share of local content in public procurement, target indicators have been set for the manufacturing industries. In particular, the average share of local content for 2021 is determined at the level of:

- 77.3% — in building materials;

- 68.5% — in furniture;

- 65.5% — in light industry;

- 53.7% — in the pulp and paper industry;

- 36.2% — in chemistry;

- 32.3% — in pharmaceuticals;

- 19.5% — in mechanical engineering.

One of the mechanisms for achieving the declared indicators is exemption from the national regime. This mechanism operates for 4 items of goods for which government purchases are carried out exclusively from domestic producers. Also, the issue of establishing exemptions from the national regime for products of the light industry, furniture industry and mechanical engineering is being worked out.

In order to expand the range of domestic goods, it is planned to launch new projects. In 2022, it is planned to commission a project for the production of flat glass, Orda Glass LTD, in the Kyzylorda region with a capacity of 197.1 thousand tons per year. As a result of the implementation of this project, it is expected to cover 98% of the domestic market demand for flat glass.

Until 2023, three new ceramic tile factories will be commissioned with the participation of foreign investors. This will cover up to 90% of the consumption of the domestic market.

By 2025, it is planned to put into operation 2 more new plants for the production of soda ash. The commissioning of these projects will fully meet the needs of the domestic market.

Minister of Energy Magzum Mirzagaliyev reported on the work to support local content in the oil and gas sector.

So, at present, the Ministry of Energy pays great attention to the development of local content in the procurement of goods, works and services of subsoil users.

“At the end of 2020, the total volume of purchases of goods, works and services of subsoil users of hydrocarbon raw materials and uranium mining amounted to about 5.4 trillion tenge,” Mirzagaliyev said.

At the same time, the share of local content in these purchases amounted to 46%, including:

- 19.7% in goods;

- 51.3% in work;

- 50.3% in services.

The procurement plan of subsoil users for 2021 is 6.8 trillion tenge, the predicted share of local content is 46.5% or 3.1 trillion tenge, including:

- for goods, the share of local content will be 19.5%;

- for works, the share of local content will be 51.3%;

- for services, the share of local content will be 52.3%.

About 77% of the volume of purchases of goods, works and services falls on three large operators — Tengizchevroil LLP, Karachaganak Petroleum Operating B.V. and North Caspian Operating N.V., 13% — for the group of companies SWF Samruk-Kazyna JSC and 10% — for other subsoil users. Based on the results of the systematic work carried out, today the following products are fully provided by domestic producers, these are:

- construction and assembly materials (sandwich panels, metal structures, reinforced concrete and reinforcing bars);

- pipeline materials (pipes and fittings, flanges, valves, special pipeline supports);

- mechanical equipment (vessels, heat exchangers, etc.);

- electrical materials (transformers, electrical panels, lighting);

- telecommunication materials (telecommunication cables, video surveillance system, etc.).

- fuels and lubricants (including motor oils).

Thus, one can state the positive dynamics of the development of domestic commodity production.

The main problem of the low share of participation of domestic producers in large projects is the prevailing conditions of discrimination between foreign and domestic suppliers. Thus, customs preferences provided to large operators allow the purchase of foreign goods without actually paying value-added tax, while when goods are sold by domestic producers, a tax of 12% is paid.

One of the proposed ways to solve the current circumstances to increase the level of competitiveness is to amend the Tax Code of the Republic of Kazakhstan regarding the exemption of domestic turnover from VAT for domestic producers when supplying goods for large projects. This measure will help level the playing field between foreign and domestic companies.

“The Ministry is carrying out a number of measures and initiatives to develop local content. One of the main measures to support local content is to conclude agreements on stimulating entrepreneurship in the Republic of Kazakhstan,” Mirzagaliyev noted.

The Ministry, together with the Atameken National Chamber of Entrepreneurs, initiated the conclusion of agreements with subsoil users "On stimulating entrepreneurship", which are carried out on a voluntary basis. As of today, out of 282 contracts for hydrocarbons and uranium, 164 agreements have been signed, of which:

- 147 agreements with 84 subsoil users in the field of hydrocarbons;

- 17 agreements with 13 subsoil users in the field of uranium mining.

These measures of agreements made it possible to increase the share of local content in goods from 19.5% to 31%, in works from 66.8% to 78.6% and in services from 69.4% to 88.8%.

The next initiative for the development of local content is the International Center for the Development of Oil and Gas Engineering, created this year. The main goal of his work is to localize the production of goods for the oil and gas industry of the Republic of Kazakhstan, in particular, by opening new industries, as well as expanding the capabilities of existing domestic producers. At present, on the recommendation of the operators, the Center has focused on the analysis and localization of three product groups:

- shut-off valves;

- electrical equipment;

- instrumentation and control.

The rest of the product groups will be recommended by the Center after analyzing the complete data on the needs and analyzing the corresponding capabilities of domestic producers.

In this year the Local Content Development Direct Investment Fund was also established. The Chevron company, as part of its reinvestment obligations to the republic, is allocating funds in the amount of $248.5 million for the development of local content. Investments will be made in three areas of technology and IT, the production of basic goods and the assembly of certain types of equipment for the oil and gas sector and environmental protection. As of today, the Fund has already been registered on the site of the Astana International Financial Center. An electronic portal for receiving applications is being developed.

Chair of the Board Almasadam Satkaliev reported on the ongoing work to support local content in procurement of Samruk-Kazyna JSC.

“The general procurement plan for the group of fund companies amounted to 3.6 trillion tenge, of which the amount of procurement contracts concluded for 10 months of 2021 amounted to 3.3 trillion tenge, or 91.7% of the total plan. Contracts were signed with Kazakhstani companies for the purchase of goods, works and services for 2.9 trillion tenge or 87.9% of the total volume of contracts,” Satkaliev said.

The share of local content was 76%, incl. for goods — 66%, works — 85%, services — 89%. Particular attention is paid to the development of the branches of the Economy of Simple Things.

So, for 10 months of this year, the share of local content in Economy of Simple Things goods increased by 7% from 70% in 2020 to 78% in 2021. All plans will be completed by the end of the year. The share of local content for the year will be 76% and for the economy of simple things — 78%.

The Samruk-Kazyna Foundation on a permanent and systematic basis is working on the development of purchases and support for domestic producers. It should be noted that of the total amount of contracts for the purchase of goods, contracts for 1.2 trillion tenge or 75% were concluded with domestic manufacturers.

Thus, the fund successfully uses the mechanism of categorical procurement management, which provides an optimal approach to procurement and provides targeted support to domestic producers. Thanks to this mechanism, in 2021, 42 partnership agreements were concluded with domestic manufacturers and products worth 62 billion tenge were purchased. Also, the fund has established the priority priority of purchasing from commodity producers. Currently, this register includes more than 900 domestic manufacturers, with whom contracts have been concluded for a total amount of about 884 billion tenge.

“Along with this, according to numerous requests from the business community, in 2021, a transition was made to a new model of prequalification 2.0. Purchases from qualified potential suppliers are carried out only for large and strategically important goods, works and services. Following the results of 10 months, within the framework of this instrument, about 201 billion tenge was transferred to domestic producers," Samruk-Kazyna JSC emphasized.

The Foundation has created a unique and efficient import substitution system. So, in 2021, within the framework of the Import Substitution Program, 94 off-take contracts were concluded in the amount of 54 billion tenge.

Separately, Almasadam Satkaliev noted the support tool through categorical procurement management. As mentioned above, within the framework of this instrument, Kazakhstani products were purchased in the amount of 62 billion tenge, while the economic effect of the fund amounted to 2 billion tenge. In addition, due to mutually beneficial cooperation, it was possible to achieve a reduction in prices for certain goods by up to 40%.

As part of the Special Footwear strategy, a 100% purchase of footwear from 15 domestic manufacturers was ensured in the amount of 4.7 billion tenge. This strategy allowed, due to consolidation, to reduce the difference in the price of supplied products by 10 times. At the same time, the fund companies saved about 1 billion tenge.

Also, according to the category strategy "Cars and buses", it was possible to optimize costs by 67% due to the purchase of cars from domestic manufacturers.

“Every year we form and publish a pool of net imports of all the companies of the holding, as well as conclude off-take agreements that provide business communities with a wide opportunity to create new industries that are absent in the territory of the Republic of Kazakhstan. During the period of the program, 177 off-take contracts were concluded for over 70 billion tenge, about 2,000 jobs were created, the amount of investment amounted to 220 billion tenge and about 18 billion tenge of tax deductions were paid to the budget," Almasadam Satkaliev said.

To date, the Roadmap for the development of the construction industry for 2021-2025 has been developed and approved. Samruk-Kazyna Construction JSC is working on mutually beneficial partnership with potential investors to create new production facilities. The possibility of implementing 23 projects for the production of building materials is being considered. The list of products planned for production includes such as ceramic sanitary ware, decorative ceramic tiles, glass wool, aerated concrete blocks and reinforced products, precast concrete products, cement, door leaves, facade slabs, laminated flooring, bricks, cladding and roofing materials. The issues of providing raw materials and rendering assistance to potential investors in obtaining land plots for the construction of factories are also being worked out.

In addition, to determine the optimal financing scheme for the planned projects, work is underway with subsidiaries of Baiterek NMH JSC, namely with Industrial Development Fund JSC in terms of equipment leasing and Development Bank of Kazakhstan JSC in terms of lending for construction and installation works.

It should be noted that during the pandemic, the fund introduced the following measures to support Kazakhstani business, which are still in effect:

  • commodity producers are exempted from the security of the tender and the execution of the contract;
  • when designing project documentation, a requirement was established for the mandatory use of Kazakhstani products;
  • obligatory advance payment of at least 30%, the term of its payment has been reduced from 30 to 10 days;
  • payment for the delivered goods for producers not later than 5 working days;
  • delivery time for producers is at least 60 calendar days;
  • waiver of penalties for failure to comply with the terms of the contract during an emergency.

The analysis of purchases showed that the lion's share of them falls on inter-holding cooperation, that is, mutual purchases of goods, works and services between companies. Having analyzed the feasibility of such purchases, together with companies from 4,500 positions, they reduced 4,291 the basis for intercompany purchases, that is, there is a decrease by 22 times. The entire volume of these purchases was transferred to the business, which received direct access through the creation of a competitive environment. During this period, 23 thousand business entities received contracts for more than 1 trillion tenge. Due to these contracts, the budget will receive at least 36 billion tenge of tax revenues from businesses.

It is important to note that by creating a competitive environment, the fund companies themselves saved 70 billion tenge. Along with this, the fund is actively working to expand the competitive environment by reducing purchases from a single source.

To date, the volume of purchases from one source amounted to 413 billion tenge, or 13% of the total volume of purchases. It should be noted that reducing one source also has a positive effect on increasing the fund's savings.

In addition, the share of competitive purchases increased. If in 2017 the total amount of competitive purchases amounted to 284 billion tenge, then in 2021 — 2,100 trillion tenge. Also, in order to minimize corruption risks, all purchases of the fund group are carried out in an electronic system, including the conclusion of contracts and the signing of acceptance certificates.

In 2021, the fund introduced a new way of purchasing — through an electronic store. If earlier the procurement process from the beginning of the conduct to the conclusion of the contract ranged from 22 to 43 working days, then the electronic store allowed several times to reduce these terms, which today are from 1 to 5 working days. At the same time, the amount of labor costs was reduced by up to 9 times.

In addition, the introduction of an electronic store made it possible to increase the transparency of the supplier selection process, as well as to increase the number of partners by attracting small and medium-sized businesses. To date, in order to increase the number of potential suppliers in the e-store and ensure its further development, the threshold amount of purchases through the e-store has been increased from 1,000 MCI to 8 million tenge and restrictions on the accreditation of suppliers have been lifted. Also, to simplify and speed up the procurement procedures, the terms for confirming the purchase order (1 working day) and concluding the contract (2 working days) have been established.

All measures to support domestic producers were introduced and implemented thanks to the fund's flexible procurement model. It allows you to quickly and efficiently respond to the challenges of the modern economy and has proven its effectiveness in practice.

June 8, 2021, new Law of the Republic of Kazakhstan “On procurement of individual subjects of the quasi-public sector” was adopted, within the framework of which the fund’s procurement procedure and standard will be developed, providing for the best procurement practice and support measures for domestic producers. The plans of the fund for 2022 not only preserve the existing mechanisms for supporting manufacturers, but also actively develop the procurement system, ensuring the digitalization of additional modules.

“Nov. 11, 2021, the Fund Management Board approved the fund's development strategy until 2031. One of the strategic goals is to increase the value of net assets. To achieve this goal, the fund will support business development by integrating local businesses into the supply chain of portfolio companies through improving the procurement mechanism, which will create a solid base of local producers," the head of Samruk-Kazyna concluded.

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