Approved

by the Decree of the President

of the Republic of Kazakhstan No, _____

dated  "     "                                   2014

THE STATE PROGRAM

on industrial development of Kazakhstan for 2015-2019

Astana, 2014

CONTENT

CONTENT……………………………………………………………………………2

INTRODUCTION……………………………………………………………………7

1    ANALYSIS OF THE CURRENT SITUATION………………………………....8

1.1               Analysis of the current situation on industrial development in the Republic of Kazakhstan………………………………………………………………8

Industry regulation…………………………………………………………………..10

Internationalization…………………………………………………………….........10

Technology and Innovation………………………………………..……………......11

Financial resources.  Funding model. ………………………………………………13

Infrastructure…………………………………………………………………….......13

Human Resources……………………………………………………….…………..14

State procurements…………………………………………………………………..14

Entrepreneurship and SMEs…………………………………………………….......15

Promotion of competition……………………………………………………....…...15

1.2               Global trends in industrial development................................................16

1.3               Review of international experience in industrial development..............17

1.4               Scenario of industrial development of Kazakhstan................................18

1.5               SWOT-analysis…………………………………...……………………19

1.6               Selection of priority sectors....................................................................20

2.               GOALS, OBJECTIVES, BENCHMARKS AND PERFORMANCE RESULTS OF THE PROGRAM…………..……………………………………….21

2.1               Goals, objectives and general benchmarks of industrial development of Kazakhstan till 2020. …………….…………………………………………………21

2.2               Goals, objectives and benchmarks in priority sectors…………………22

2.2.1               Ferrous metal industry……………………………………………….23

2.2.2               Non-ferrous metal industry…………………………………….…….32

2.2.3 Oil refining………………………………………………………………….....44

2.2.4 Petrochemicals……….………………………………………………………..55

2.2.5 Food production………………………………..……………………………...64

2.2.6 Agrochemicals………………………………………………………………...73

2.2.7 Implementation of the projects. Manufacturing of chemicals for industry……………………………………………………………………………...81

2.2.8 Motor vehicles, their parts, accessories and engines production………..........90

2.2.9 Electrical equipment…………………………………………………………..98

2.2.10 Production of agricultural machinery……………………………..………...107

2.2.11 Manufacturing of railway equipment……………..………………………..125

2.2.12 Production of machines and equipment for the mining industry……………135

2.2.13 Production of machines and equipment for the oil refining and oil industry……………………………………………………………………...……...142

2.2.14 Production of building materials…………………………………………….154

2.3.               Goals, objectives and benchmarks in innovative sectors……….........169

2.3.1.               Innovative sector…………………………...………………………169

2.3.2.               Space industry……………………………………………………..170

3. MAIN AREAS, ROADS TO THE PROGRAM'S OBJECTIVES AND ASSOCIATED MEASURES. …………………………………………….………179

3.1               System-wide measures to support industrial development……………183

3.1.1               Industry regulation…………………………………………….…….183

3.1.2               Internationalization……………………………………….…………185

3.1.3               Technology and Innovation…………………………………………188

3.1.4               Financial resources.Funding model………………………………..191

3.1.5               Infrastructure…………………………………………….………….192

3.1.6               Human Resources…………………………………..……………….193

3.1.7               State and other procurements…………………………...…………..195

3.1.8               Entrepreneurship and Small and Medium Business………….........195

3.1.9               Promotion of competition………………………………………..…196

3.2 Regional aspects of supporting the development of the manufacturing industry……………………………………………………….………………….…197

3.2.1. Ensuring balanced development of the manufacturing industry in the regions……………………………………………………………………………..198

3.2.2. Specialization of manufacturing in the regions…………………………….199

3.3               Priority and other industrial sectors. Enterprises support………….….224

4               MECHANISM, CONTROL AND MONITORING OF THE PROGRAM IMPLEMENTATION…………………………………………………………..…230

4.1               Mechanisms for implementation of the Program………………….....230

4.2               Managing the implementation of the Program……………………….231

4.2               Monitoring the implementation of the Program………………………233

5               IMPLEMENTATION PHASES OF THE PROGRAM…………….....233

6               RESOURCES REQUIRED…………………………………………….234

7               EXPECTED RESULTS OF INDUSTRIAL DEVELOPMENT OF KAZAKHSTAN TILL 2020. …………………………………………….………..236

8               DEFINITION OF THE TERMS:……………………………………….237

Passport of the Program

INTRODUCTION

The State program on industrial-innovative development of Kazakhstan for 2015-2019 (hereinafter - the Program) is designed in accordance with the long-term priorities of the Strategy "Kazakhstan-2050" for the implementation of key direction "Accelerating economic diversification" of the Strategic plan for development of the Republic of Kazakhstan until 2020. It is pursuant to the instructions of the President given on the XXVI-th plenary session of the Foreign Investors Council under the President of the Republic of Kazakhstan, and as part of the Address of the President of the Republic of Kazakhstan to the People of Kazakhstan "Kazakhstan's way - 2050: common aim, common interests, common future"  dated January 17, 2014.

The Program is a logical continuation of the State program on forced industrial-innovative development of Kazakhstan for 2010-2014 (SPFIID) and takes into account the experience of its implementation. The Program is part of an industrial policy of Kazakhstan and focuses on developing the manufacturing industry with concentration of efforts and resources on a limited number of sectors, regional specialization using the cluster approach and the effective regulation of the industry.

The Program is developed on the basic principles and approaches of the Concept of industrial-innovative development of Kazakhstan for 2015 - 2019, approved by the Resolution of the Government of the Republic of Kazakhstan No. 1497 dated December 31, 2013. It accounts for the principles and provisions of the Concept of Innovation Development of Kazakhstan till 2020, approved by the Decree of the President of the Republic of Kazakhstan No. 579 dated June 4, 2013, the Concept on formation of promising national clusters of Kazakhstan till 2020, approved by the Regulation of the Government of the Republic of Kazakhstan No. 1092 dated October 11, 2013and other program documents in the field of industrialization.

Implementation of this Program depends on the success of attracting foreign direct investment in manufacturing, the share of budget funds in the total amount of funding required amounts 20%. The Program is sensitive to the public policy aspects affecting the business climate. Success of the Program will depend on the achievement of the Republic of Kazakhstan of tasks set to improve the business environment (Doingbusiness), increasing the country's competitiveness (Globalcompetetivnessindex), reduction of the state involvement in the economy through a planned privatization based on the principle of Yellowpages, Kazakhstan ranking by FDIConfidenceIndex. It is necessary to develop a Program on social and economic development of the country till 2020 to address these challenges and define the priorities of the state economic development. Furthermore, the Program's efficiency depends on the completeness and timeliness of budgetary allocations for its implementation.

1           ANALYSUS OF THE CURRENT SITUATION

1.1    Analysis of the current situation of industrial development in the Republic of Kazakhstan

During implementation of the Strategy "Kazakhstan-2030», dynamic economic development allowed the Republic of Kazakhstan increasing the average per capita income more than twice. All the goals of the Strategy "Kazakhstan-2030" have been achieved ahead of schedule. The aim of the new Strategy "Kazakhstan-2050" is entering the country among the 30 most developed countries in the world by 2050. Its achievement will require maintaining high rates of economic growth for a long time.

Success of the Republic of Kazakhstan in the social and economic development and attracting foreign investment is largely due to such key factors as availability of natural resources, favorable macroeconomic environment and political stability.

Since 2000, Kazakhstan has continued to grow the economy's dependence on income generated by oil exports. Oil revenues in 2012 amounted about 51% of the consolidated revenues of the state, and the budget deficit excluding these revenues reached 9.3% of GDP. Transfer of the National Fund of the Republic of Kazakhstan provides funding for almost a fifth of all government expenditures.

According to the country report of the International Monetary Fund for September 2013[1]the economy showed the signs of "Dutch disease", in particular the formation of unfavorable terms of trade, costs increase in the economy and institutional issues. This is also confirmed by the structure of foreign trade. According to the Statistics Agency of RK share of mineral products in the export structure in 2003-2013 increased from 64.5% to 80%. As the world prices for resources rise these symptoms will worsen.

Kazakhstan faces the challenge of "middle-income trap." Upon reaching a certain level of wealth in the range of 10-15 thousand U.S. dollars GDP per capita growth may slow down due to rising wages, increasing transaction costs and decrease in price competitiveness of the country. In this position, Kazakhstan will not be able to compete with both developed economies having high skills and innovation, and economies of low-income, low-wage and low-cost production of industrial goods. Countries (Taiwan, Finland, South Korea, etc.) that broke the barrier in the last century, was able to do this because of accelerated development of the manufacturing industry.

Currently, industry occupies almost a third part of the structure of Kazakhstan's industry. The mining sector accounts for more than 2.5% of employment and 18% of GVA in the economy. Investments in the fixed assets in the mining industry today represent more than 30% of the total volume, and in the manufacturing industry only 12%. Kazakhstan, the world's leading exporter of extractive industries (primarily due to oil), in terms of per capita exports is ahead of all CIS countries. However, per capita manufacturing exports of the Republic of Kazakhstan is twice lower than the same of Russia is.

To ensure the quality economic growth of the country it will be necessary to implement structural changes in the economy required for the transition to a new stage of development. Development and launch of SPFIID was a response of the country to the challenges arising from the global financial crisis of 2008-2009. This Program laid the foundation for further industrial growth and considered as one of the examples of the system state approaches to the industrial policy. The aim of SPFIID is to ensure sustainable and balanced growth in the economy through diversification and increase of its competitiveness.

By the end of 2012 in comparison with 2008, Kazakhstan has seen positive  growth dynamics of the main indicators of SPFIID: GDP grew by 22.5%; GVA of non-oil sector - by 23.4%; GVA of manufacturing sector - by 22.3%; labor productivity in manufacturing sector - by 70%; volume of non-oil exports - by 6.5%; the level of innovation activity of enterprises - by 3.6%; volume of innovative products - by 240%, energy intensity of GDP decreased by 13.6% (Table 1.1.1).

Table 1.1.1. Dynamics of the main benchmarks of SPFIID 2008-2012

Source: Agency of the Republic of Kazakhstan on Statistics

In the process of industrialization, the focus in the industry is gradually shifting towards the manufacturing industry, although its level of development remains relatively low. Manufacturing sector generates less than 7% of employment and 12% of GVA in the country’s economy. For comparison, the level of productivity in the manufacturing industry of Kazakhstan is 2 times lower than the average for member countries of the Organization for Economic Cooperation and Development (OECD), the share of employment in manufacturing industry of Kazakhstan is inferior to all the OECD countries.

State support for industrialization was carried out through the implementation of the economic policies system measures at the macro and sectoral levels, as well as selective measures to support specific sectors and projects, based on a combined package of financial and non-financial support, through the formation of a favorable macroeconomic environment, expansion of financial support instruments, infrastructure , resource and staffing, improving the business environment, technological modernization, innovation and science, creation of favorable conditions for attracting foreign direct investment, effective trade and tariff policy.

Industry regulation

Technical regulation has become an effective tool for renewal of production assets. Around 2.5 thous. standards were adopted during 2010 - 2013, allowing production of more than 150 new products in engineering, pharmaceuticals, chemical and food industries and other sectors.

However, technical regulation has not become an effective tool to protect the domestic market from deficient and unsafe imported products. This is due to the lack of adequate testing facilities and certification centers network in the industry. Besides, harmonization with internationally recognized standards has not been yet completed.

Internationalization

The basic incentives have been created for the investors operating in priority sectors: exemption from customs duties, government land grants, concessions on land tax and property tax, industrial benefits. The incentives apply to all residents of Kazakhstan, including residents with foreign participation. Since 2010 there have been attracted more than U.S. $ 90 billion in foreign direct investment, accounting for over 50% of the total gross FDI inflows since 2005; Of this amount, about U.S. $ 25 billion have been invested in non-primary industries.

Kazakhstan is ranked 186 in the field of "international trade" by Doingbusiness 2014.It suggests that the terms of the foreign trade operations do not meet international standards. This figure is unchanged since the beginning of ranking the country.

More than $ 90 billion have been attracted since 2010.T.Kerney (FDI confidence index) calculated for 21 countries according to the polls of the global TNC leaders with total turnover more than U.S. $ 2 trillion. As a result, Kazakhstan as an object for investment is beyond the global companies’ vision.

Technology and Innovation

Improving the competitiveness of the manufacturing industry is inextricably linked with the development of science and innovation.

With adoption of SPFIID in2010, Kazakhstan embarked on a course of large-scale industrialization, as the foundations of the transition to an innovation economy. Completely new laws "On Science", "On state support of industrial innovation" were adopted in this period. They include both previously in force and new tools to support innovation, covering the full innovation cycle, from supporting scientific ideas to introduction of innovations into production. New impetus was given to the development of innovation: the Intersectoral plan for scientific and technological development of the country until 2020 and the Concept of Innovation Development of Kazakhstan till 2020 were adopted. Scientific field was reformed.

As a result of the reforms since the implementation of SPFIID share of innovation active enterprises increased from 4% to 7.6%, more than 5 times increased expenses of enterprises for technological innovation (from 61 to 326 billion tenge), more than 4 times increased volume of innovative products and services (from 82 to 379 billion tenge). Science funding in 2012 was doubled (47 billion tenge) and reached 0.22% of GDP.New financing mechanisms have been implemented: basic, program-targeted and grant. National research councils in areas of science have been established in accordance with national priorities of social and economic development, they include scientists, business representatives and foreign experts.

The role of innovation infrastructure have been strengthened through improving the efficiency of industrial parks, industrial design offices, commercialization centers, technology transfer centers. 9 commercialization offices, 8 regional technology parks, 4 industrial design offices, 2 Technology Transfer Centers, innovation clusters "innovation park" Alatau" "Nazarbayev University" were established as part of creation the core innovation system in  the country during the last 5 years. In addition, to increase access to finance 4 domestic venture fund  were established, in the period from 2010 to 2013 the budget allocated innovation grants totaling more than 12 billion tenge. Scientific and Technological Holding "Parasat" and JSC "KazAgroInnovation" were created. Small innovative enterprises received a new impetus (start-ups). If during the period from 2003 to 2009, 180 innovative projects were supported, in 2010-2012 over 400 projects received support.

Key figures of scientific and innovative development have changed: innovative activity increased from 4% in 2009 to 7.6% in 2012, expenditure on technological innovation increased 5.4 times (from 31 to 168.5 billion tenge).

By a factor "Innovation" of the Global Competitiveness Index of the World Economic Forum Kazakhstan improved its ranking by 18 positions and was the 84th, by a factor "Technological readiness" - by 25 positions (the 57th place). However, despite the growth of sub factors in innovation ranking  the following indicators are still low in Kazakhstan: quality of research institutes (102nd place), availability of scientists and engineers (98th), the availability of the latest technology (88th), cooperation of industry and universities (79th) the development of technologies at the companies level (78th), costs of R & D for companies (77th).

However, the industry in Kazakhstan lags behind other countries in the development of innovative and high-tech manufacturing. According to the report of the Eurasian Institute of Competitiveness, innovation system of the country occupies the 45th place (among 50 countries) in terms of competitiveness among developed and developing countries.

Despite considerable measures taken in recent years to support innovative activity the relationship between science and production, the lack of technological and managerial skills, weak demand for innovation, the relative underdevelopment of the innovative environment remain key issues. Efficient use of existing infrastructure remains inadequate, primarily because of low demand for innovation from the companies and the lack of volume and quality of research and development. In general, the mechanisms of interdependence of the various components of the innovation system and the creation of "innovation climate" have not been yet well developed. 

Domestic research are made in isolation from the production. Most scientific researches are not ready to enter the market, which reduces their attractiveness for the business. Following the results of the Global Competitiveness Report of the World Economic Forum 2013 Kazakhstan occupies the 84th place by the level of innovation. 

Business sensitivity to technological innovations increases moderately, but remains low  ...In 2012, the share of innovation active enterprises was 7.6% of the total number of industrial enterprises, which is significantly below the same indicator in Germany (73%), Ireland (61%), Belgium (58%), Czech Republic (41%).

Expenditure on research and development of Kazakhstani companies remain very low - 0.3% of GDP, after Russia's 1.4%, Ukraine's 0.9% and 0.7% in Belarus.  Besides "quantify" backlog of Kazakhstani companies by the level of innovation activity, there are significant structural problems in the organization of innovation management at the companies level. On such indicators of the Global Competitiveness Index of the World Economic Forum as "availability of the advanced technologies" and "development of technologies at the level of companies," Kazakhstan is on the 88 and 78 places respectively.

The complex of these problems is expressed in the absence of critical mass of competitive innovations, underdevelopment of their quality selection and commercialization system. The problem is compounded by the lack of clear and user-friendly tax, financial and technical incentives. In this regard, it is necessary to strengthen the work on the introduction of new tools to support innovators and optimization of their allocation, the maximum information coverage.

It is required to improve the quality of basic science, development of relevant competence centers at Nazarbayev University, strengthening research component in the universities for the appearance of absolute innovations in Kazakhstan. This direction requires pivotal improvement of the Ministry of Education and Science activity.

Financial resources.  Funding model.

Previously established system of development institutions has been supplemented and adjusted to the needs of industrial and innovative development. We tested various tools to support industrial development: interest rate subsidies, reimbursement grants for innovation and implementation of technology, promotion of export, credit guarantees and others.

During the implementation of SPFIID, funding covered a wide range of industries, which led to a shortage of funds in the financing of sectoral support measures and some projects. However, funding was insufficient largely due to the underdeveloped domestic financial market infrastructure where "long" money funds should be formed and attract long-term investment. In the absence of adequate funding from commercial financial institutions this niche in the Kazakh market had to be taken by the state through a system of national holdings and development institutions.

Infrastructure

By the end of 2013 in Kazakhstan, there are 10 free economic zones and 10 industrial zones that operate in various sectors such as chemicals and petrochemicals, iron and steel industry, ICT, textiles, logistics and tourism. The state support for industrialization subjects in terms of access to basic infrastructure is performed under the FEZ and IZ.Construction and reconstruction of industrial infrastructure is carried out for 535 companies, totaling in 96 billion tenge.

However, in the absence of proper infrastructure funding the infrastructure of FEZ and IZ is not complete. Problems also exist with the efficiency and management of FEZ and IZ.

Human Resources

Number of people employed in the industry in 2008-2013 increased by 13.2% and exceeded 1 million people. As part of the Industrialization Map there were created more than 67,000 new jobs in the manufacturing industry, that allowed compensating for the loss of employment in the industry. The transition to the dual education in technical disciplines has been commenced; a system of colleges is created for technical training and education.

However, domestic and foreign companies note shortage of human resources with sufficient qualifications as a key barrier to the development of the industry.  Indicators of education and science of global competitiveness index, alongwith the general trend of improvement, preserve the following challenges: by the indicator "coverage of primary education" Kazakhstan occupies the 118th place, by the "quality of research organizations" - the 108th place, "availability of scientists and engineers" - the 104 place, "Cooperation of universities and business in R & D" - the 90th place, "quality of mathematics and science" - the 81st place.

According to the results of PISA (Program for International Student Assessment), Kazakh schools senior students are inferior to their foreign peers from developed countries by most indicators of knowledge - mathematics (49 of 65 countries), the skills of working with text (63 of 65 countries) and knowledge of Exact Sciences (52 of 65 countries).

Unlike a number of developed countries (USA), where the shortcomings of secondary education are "recovered" in the higher education system, in Kazakhstan there is a low quality of higher education. According to the international rankings (QS, THE, ARWU) Kazakhstani universities do not fall within the first two hundred.

Negative trends in the education system are exacerbated by structural problems, including outdated model of educational process, the lack of modern teaching and administrative staff.  In general, the education system does not meet the expected learning outcomes from the economy part.

State procurements

The state procurement system and quasi-public sector procurement has not lowered the barriers for the products of manufacturing industry to enter it. Existing requirements for local content have not created an effective stimulus for suppliers of public, quasi-public sector and subsoil users to localize production and create demand for innovation in Kazakhstan.

The existing rules governing the procurement of subsoil users significantly restrict access of Kazakh suppliers to the requirements for the technical specifications of products. 

Entrepreneurship and SMEs

Due to the government support measures the contribution of small and medium enterprises in the economy of Kazakhstan has significantly increased. By the end of 2012, the share of SMEs in GDP was 17.3%. As of January 1, 2014 the number of active entities exceeded 863,000, the number of employees - 1.9 million people.

From 2010 to 2012 133.6 billion tenge was allocated from the national budget for the implementation of the program "Business Road Map - 2020", support measures covered 87,430 entrepreneurs.

A unified business infrastructure has been created, which will increase assess of the economically active population to information, tools and conditions of the state support. Today the country has 17 entrepreneurs’ service centers. There are 14 mobile and 27 fixed entrepreneurs support centers in all region s.

At the same time, a high concentration of quasi-public sector and extractive TNCs in the economy creates barriers to entrepreneurship and SME development, development of suppliers system around large enterprises.

Promotion of competition

According to estimates by the World Bank in 2012, Kazakhstan improved its position by 7 points, taking 49th place by the business climate in 185 countries on 10 indicators of Doing Business rating. Besides, the republic joined the list of countries, which have demonstrated significant improvements in ease of doing business for the last year. In the category "Registration of companies» Kazakhstan rose by 30 positions (from 55th to 25th), which was a result of simplifying the creation of enterprises and reforms to optimize the legislation on insolvency procedures.

However, according to the index GCIWEF 2014 in terms of the competitiveness of companies Kazakhstan ranks 94th.The main problems are concentrated in the quantity and quality of suppliers, weak development of clusters, insufficient coverage of value chains, and low control of international distribution channels. Undeveloped business environment negatively affects the level of competition in the manufacturing industry, its ability for clustering.

1.2              Global trends in industrial development.

While developing the Program, we have taken into account the impact of global trends in the global industry.

1. Increasing importance of resources.

Shrinking resources and fluctuations of their price form two divergent trends. The first one is increasing the cost of resources in the medium term and "resource nationalism", characterized by reduced availability, the second trend - the development of resource-saving and resource-efficient technologies.

2. Globalization and transformation of production chains.

TNCs being major participants of world trade, are constantly seeking more efficient production sites and partners, including local ones. Value added chains are under constant transformation. Geography and level of their globalization is changing.

3. Strengthening the role of markets in developing countries.

Formation of a middle class in developing countries leads to a shift in demand towards emerging markets.

4. International restrictions and narrowing of opportunities for government intervention.

In recent decades a number of countries participating in international organizations voluntarily assumed obligations to limit government intervention in the economy to benefit from participation in international organizations, from the reduction of tariffs and barriers is growing. Participation in regional economic unions may impose additional restrictions on the industrial policy of the country. However, in some cases, countries deliberately violate commitments in order to support domestic industries.

5. Competition of countries for the location and development of production.

Importance of production sites in developing countries in recent decades has grown steadily and competition between them has increased. Production moves to countries with lower costs and developed resource base.

6. Increase in the share and importance of services.

With the increasing technological complexity of the product and transition to modular designs, the services play an increasing role in modern manufacturing sectors. Economic activity shifted from manufacturing to services sector, capacious in terms of human capital. Such services as research and development, engineering and design, are developed successfully only if there is demand from the competitive manufacturing sector.

7. Entrepreneurship role growth.

Industrial development in the world is based on the entrepreneurial potential. In many sectors integrated companies give way to multi-level providers systems, the role of small and medium-sized businesses grows. Countries having developed small and medium businesses are most likely to develop successfully on their territory new segments of global industry chains.

8. Development of new production technologies (The Third Industrial Revolution).

New technologies change the global organization of production and determine the competitiveness of companies. Management  of business process and supply chain with information and communication technologies, usage of new materials and new ways of production using robotics, smart modeling and additive technologies provides competitive advantages and opens up the opportunities for the development of high-tech industries in the developing countries. This leads to a reduction in production, increase in resource efficiency, rapid response to consumer demand and labor productivity growth, which affects the benefits of the developing countries in the cost of labor, helps to preserve jobs in manufacturing sector in the developed countries.

1.3              Review of international experience in industrial development.

Reducing dependence on natural resources, diversification of industry, growth of human capital, science and innovation requires the development of manufacturing industries, products of which are in demand in the world market.

Studying the experience of other developing countries: South Korea, Turkey, Malaysia, South Africa, India and the Philippines, as well as developed countries - Australia, the EU and the United States showed as follows.

Successful industrial development requires a coherent industrial policy implemented through government programs for 4-5 years. Implementation of the programs aimed at the development of a limited number of priorities. The presence of cluster policy allows for improving industry competitiveness through the creation of competitive regional industrial complexes and promotes the active creation and development of innovation. 

Effective industrial policy should preserve a balance between the development of priority sectors and improving conditions for economic development. System-wide support measures in this case aimed at the general industry support in such areas as promoting competition, increasing the availability of financial resources supporting technological development and innovation.

While focusing on the development of priority industry sectors and clusters it is necessary to consider the limitations imposed by the participation of the countries in the agreements on the establishment of free trade and membership in WTO.

To implement the programs, a system of development institutions is created and the issue of interagency coordination is addressed with use of the specialized committees and councils. Application of a specialized agency for industrial development is widely used. This allows us to focus efforts and resources on a limited range of tasks. This is especially true for the Republic of Kazakhstan where the vast majority of the problems is associated with the introduction and implementation of the programs and plans.

For effective coordination, monitoring and control we use the key indicators management systems as well as agreements on performance. These modern approaches to improving efficiency in the public sector become more widely available in developed: U.S., UK, France, South Korea; and developing: Malaysia, Turkey, India, China, etc. countries.

1.4              Scenario of industrial development of Kazakhstan.

Successful industrial development in Kazakhstan depends on many factors with varying degrees of uncertainty. It is appropriate to consider various scenarios that allow timely adjustments of the set priorities according to the changing trends. Industrial development in the Republic of Kazakhstan is largely dependent on two strategic conditions: global market conditions and the degree of integration of resources within the macro-region.

Global resources market environment is formed depending on the state of the global economy, strongly influences the activity of the backbone enterprises of the mineral sector in Kazakhstan. Consequently, it is reflected in the state budget revenues, domestic demand and welfare of the citizens.

Integration processes in the macro region specify the accessibility of markets and distribution channels of domestic industrial production, the development of inter-country cooperation, attractiveness to investors and opportunities for technology transfer and innovation. Degree of integration of the macro-region largely determines the opportunities and prospects for economic diversification.

There are four basic scenarios for the country's industrial development.

1) "Favorable Environment" - this is the most positive scenario possible in the presence of a favorable environment of global resources market and subject to close integration of the macro-region countries. While implementing this scenario government support for manufacturing in aggregate with demand formed by materials sectors and an increase in consumer demand in the macro-region countries, economy of which is also associated with prices for resources, will allow achieving significant growth in industrial production and increasing export potential.

2) "Raw Materials Sector Growth" - this is the scenario with the best resources market conditions, but in terms of a weak macro- region integration. In this case, the steady growth of industrial production will be provided by the materials sector. Relatively low growth can be expected in the manufacturing industries. Therefore, the government needs to focus on the development of sectors and clusters associated with the extraction and processing of natural resources;

3) "Growth Through Technology" will be implemented with the active integration of the macro-region countries, but under unfavorable resources market environment. However, production will grow at the expense of non-extractive industries, which implies a qualitative development of human capital. At this, the rate of industrial growth is expected to be lower than in the previous two scenarios;

4) "Slowdown in Economy" - worst-case scenario, the potential in conditions of commodity market depression and in the absence of integration of the macro-region countries. Consequently, economic isolation in the absence of access to new technologies can lead to a reduction in investment activity in the country. In such circumstances, in order to avoid the slowdown in industrial production, the state will play a key role through the use of anti-crisis measures, coupled with an effective policy for allocation of resources.

Therefore, the alternative scenarios mentioned above give us a general description of options for the future development. In long view, it makes possible to shift the priorities according to their relevance. The most likely scenario is "Favorable Environment" and "Raw Materials Sector Growth". This Program is designed to meet the basic principles of the script "Favorable Environment".

1.5              SWOT-analysis

Strengths:

High availability of mineral resources;

Macroeconomic and political stability;

Improving business climate and reforms;

Availability of development institutions for implementation of industrial policy.

Weaknesses:

Low investment activity in the manufacturing sector;

Low availability of human resources of required competencies;

Presence of bottlenecks in infrastructure (transport and logistics, energy and water supply);

Low level of small and medium-sized businesses development with the dominance of state-owned companies;

Low level of competition in the manufacturing industry;

Low competitiveness of the innovation system;

Low resource efficiency and high energy intensity of the industry;

Undeveloped system of technical regulation;

Structural problems in the economy ("Dutch disease", middle income trap, the problem of employment);

The high levels of "bad" loans in the economy.

Opportunities:

Access to the market of the Customs Union, market opportunities in China, Central Asia and the Caspian states;

Demand of resource sectors for technical equipment, specialized services and innovation;

Introduction of modern production and management technologies in processing industry;

Improving the efficiency of public, quasi-public procurements and procurements of subsoil users.

Threats:

Negative impact of global and regional crisis on the economy and industry of Kazakhstan;

Changing conditions in world mineral commodity markets;

Increasing competition between companies from the Customs Union countries in the domestic market of Kazakhstan;

Accession to the WTO.

1.6              The selection of priority sectors.

According to the priorities of the Strategy "Kazakhstan-2050”, we should support only those industries that perform socially important strategic functions and prove their efficiency. At the Eurasian emerging markets forum "Kazakhstan Entering the thirty most developed countries" the head of the state stressed the need for adjustment of industrial policy: "We need to limit the number of priority sectors for accelerated industrial policy. Otherwise it will lead to dispersion of resources and lack of concrete results".

Manufacturing development opportunities relate to the satisfaction of the mining industry demand for equipment, spare parts, components and materials, and demand of consumer sectors of the markets in the macro-region consisting of five levels: (1) the boundary regions of Russia; (2) other regions of Russia, Ukraine, Belarus; (3) the western regions of China; (4) Central Asia and other regions of China; (5) Azerbaijan, Iran and the Caucasus.

Selection of priority sectors is implemented according to the criteria:

"The attractiveness of the sector." The demand and growth prospects in the domestic market and macro-markets, as well as the contribution of the sector to employment, innovation and development of related sectors;

"Competitiveness of Kazakhstan." Availability of existing production or opportunities for production sector.

According to the analysis, there are made two groups of manufacturing sectors: basic and market-oriented, selected priority product groups. Basic sectors of the industry is the production of goods associated with high resource and energy consumption and production of large-tonnage products. Market-oriented sectors are driven by demand in the domestic market and the macro-region's market.

Priority sectors of the first and second groups sectors to support are:

1) iron and steel industry;

2) non-ferrous metallurgy;

3) refining;

4) oil and gas chemistry;

5) food production;

6) agricultural chemistry;

7) production of chemicals for industry;

8) production of motor vehicles, their parts, accessories and engines;

9) manufacture of electrical machinery and apparatus;

10) production of agricultural machinery;

11) production of railway equipment;

12) production of machinery and equipment for mining industry;

13) production of machinery and equipment for oil refining and oil extracting industry;

14) production of construction materials.

The third group, the innovative sectors, is defined according to the priorities identified in the conceptual and program documents, letters and speeches of the Head of the State, in particular in the Address of the President of the Republic of Kazakhstan to the people of Kazakhstan on January 17, 2014 These sectors include: mobile and multimedia technologies industry, nano and space technologies, robotics, genetic engineering, search and discovery of future energy.

2. GOALS, OBJECTIVES, BENCHMARKS AND PERFORMANCE RESULTS OF THE PROGRAM

2.1   Goal, objectives and general benchmarks of industrial development of Kazakhstan till 2020.

Goal of the Program:

Promote diversification and competitiveness of the manufacturing industry.

Objectives:

1)      Advanced development of the manufacturing industry;

2)     Improving the efficiency and added value in the priority sectors;

3)     Increase in non-oil exports;

4)     Preservation of productive employment;

5)     Giving a new level of adaptability to the priority sectors of the manufacturing industry and providing a basis for future sector development through the formation of innovation clusters;

6)     Promotion of entrepreneurship and development of small and medium-sized businesses in the manufacturing industry.

General benchmarks.

Program implementation will allow achieving in 2019 the following economic indicators compared with the level of 2012 (Table 2.1.1):

1) growth of gross value added in the manufacturing sector not less than 1.6 times in real terms;

2) labor productivity growth in the manufacturing industry 1.4 times in real terms;

3) growth of the value of non-commodity (processed) export not less than 1.7 times;

4) reducing energy intensity of manufacturing industry at least by 15%;

5) employment growth in manufacturing by 29.3 thousand people.

Table 2.1.1. General benchmarks

2.2               Goals, objectives and benchmarks in the priority sectors

              Implementation of the Program's projects in the priority sectors of the manufacturing industry depends on the availability of funding, solving of infrastructure problems and involves the following risks that may impede:

Macroeconomic risks associated with the possibility of slowing the economy and the level of investment activity, world prices for metal, energy and transportation;

Geopolitical risks, depending on the stable political situation in the countries of the macro-region and the depth of integration in the Eurasian Economic Community.

Regulatory and legal risks associated with a lack of technical and normative support of the Program, which creates favorable legal and economic climate;

Financial risks associated with the financing of investment projects.

2.2.1       Ferrous metal industry

Iron and steel industry has historically been a major manufacturing sector. The sector generates more than 10% of manufacturing employment. Products of the sector are the source of equipment and semis for oil and gas sector, engineering, construction industry.

As part of SPFIID in the period from 2010 to 2013, there were commissioned 27 investment projects worth 322.8 billion tenge, created more than 6.8 thousand jobs. 

Examples of the projects completed under SPFIID for 2010-2013:

1)                   Reaching by the rolling shop of JSC "ArselorMitall Temirtau" the design capacity - 400 thousand tons of reinforcement and Kostanay rolling mill LLP "EvrazKaspian Steel" capacity of 450 thousand tons, reaching of the design capacity by LLP "Casting", JSC "ALZ", LLP «KSPSteel», LLP "Ferrum-Vtor" will allow fully meeting the domestic demand of Kazakhstan in the armature;

2)                   Construction of  new ferroalloy plant inAktobe (shop number 4) with a capacity of 440.0 thousand tons per year have been completed, JSC "TNK" Kazkhrom ";

3)                   Kostanay rolling mill of LLP "EvrazKaspian Steel" has been launched with a production capacity of 450 thousand tons of bar steel rolled stock per year;

4)                   LLP «Kaz-metiz» organized production of steel wire with capacity of 8 thousand steel ropes, or 5 tons, which were not previously produced in Kazakhstan.

In the structure of manufacturing industry share of ferrous metal industry fell from 20% in 2008 to 13.3% in 2012. According to operational data for 2013 - 10.7%. (Table. 2.2.1.1).

Table 2.2.1.1. Share of ferrous metal industry in the volume of the manufacturing industry inRK, %.

Source: Agency of the Republic of Kazakhstan on Statistics

Production volume increased 1.6 times from 2008 to 2012. According to operational data for 2013 production volume amounted to 631.9 billion tenge. This sector increased production from 2008 to 2011. The production has started to decline since 2012. (Table 2.2.1.2).

Table 2.2.1.2. Dynamics of production for 2008-2013, billion tenge

Source: Agency of the Republic of Kazakhstan on Statistics

Gross value added increased from 395.2 billion tenge in 2008 to 450.6 billion tenge, or 1.14 times.

Number of people employed in the industry in the period from 2008 to 2012 decreased by 28 thousand people. In 2013, employment in the industry was   37 594 people. Labor capacity in 2012 amounted to 111 thousand of U.S. dollars and for the period from 2008 to 2012 increased 1.5 times. However, in 2012 the industry was still 37% behind the average index of the OECD countries (151.9 thousand of U.S. dollars).

Cost of basic fixed assets at the end of 2012 at book value amounted to 115.5 mln. tenge. Depreciation of fixed assets in 2012 was 35.27%, coefficient of renewal of fixed assets - 11.7%. It should be noted that the smallest coefficient of renewal of fixed assets was seen in 2009 and 2010.

Operating rate for 2008-2012 was in average 67.9% with the world average level 80%. The main reasons for the decline:

1)        Decline in consumer demand in the steel consuming industries in the domestic and foreign markets, resulting in decreasing of operating rate of  Kazakhstan pipe plants in 2012 to 24%.Which includes reducing of steel production in the LLP «KSP Steel», seamless pipes in the LLP "Casting";

2)        Moral and physical deterioration of basic production assets at the JSC «« ArselorMittalTemirtau " which has led to significant equipment downtime at the enterprise. Therefore, the blast furnace number 1 from the last overhaul of the 1st grade has worked for 30 years though the standard rate is 16 years. Shutdowns of the converter No.2 and No.3 (welding of blowholes in the gas pipe), maintenance and repair of the BF No. 1 and BF No.4;

3)        High level of the furnaces No1 and No.6 hot-idles in Aksu Ferroalloy Plant of the JSC "TNK" Kazkhrom" due to adverse furnace No.61 resulted in decline in the production of ferroalloys;

4)        Low operating rate at LLP "Taraz Metallurgical Plant" is associated with deficiency of manganese ore for 400 thousand tons at launching six furnaces. It is projected that in 2016 deficit will amount to 900 thousand tons of manganese ore in 2017 - 1.4 million tons (it is required 324 tons of manganese ore for one furnace operation).

Metal industry companies operate in Kazakhstan in a special mode, in frames of that they are granted tariff and tax preferences. At the initial stage of the industry development, it allowed to attract both domestic and foreign investment for the diversification of the Kazakhstan's economy. Investments in the fixed assets in 2013 in the steel industry totaled 278.4 billion tenge, an increase compared to 2008 (138.1 billion tenge) was 2.8 times. The predominant sources of financing investments in fixed assets of metallurgical industries are own funds of investors -74.2% of the total investment, foreign and borrowings - 12.9%, respectively.

In 2013, exports of steel products compared to 2008 decreased by 47.3% and amounted to U.S. $ 3.4 billion. Pipe products for export in 2013 amounted to 76.5 million tons, including 32.9 million tons exported to Russia (44.9%). The greatest decline in exports was seen in 2009 and 2010. Since 2012, the situation with export to Iran remains tense.   

The activities of the metallurgical industry is heavily influenced by external factors, including the slowdown in the world economy, the protracted crisis in the Euro area, the decline in economic growth in China, the international sanctions against Iran, the state of the metallurgical industry of Russia, etc. Complexity of international markets affected the export of products and steel industry's plants capacity, such as JSC "ArselorMittalTemirtau", LLP "Casting", LLP "ALZ" and LLP «KSPSteel».

The volume of imports in the steel industry in 2013 compared to 2008 increased by 12.9%.   Imports of pipe products and fittings for steel and cast iron pipes in 2013 amounted to 2 445.3 thousand tons, including 1 478.5 thousand tons from Russia (60.5%), 337.9 thousand tons from China (13.8%), 215.1 thousand from of Ukraine (8.8%), wire produced by cold extraction - 78.2 tons, hot-rolled bars and rods - 754.6 tons, profiles and welded constructions of sheet steel and ferrous metal products for railways - 244.9 tons, which are not produced in Kazakhstan.

In 2012, the country produced 275 tons of reinforcing bars, while imports amounted to about 227 thousand tons, of which 215 thousand tons from Russia. The main producers of rebar in Kazakhstan are JSC "ArselorMittalTemirtau", LLP "Casting", LLP "Aktau foundry", LLP "Ferrum Fluorine", total design capacity of which is 900 thousand tons.

Basic data on the sector for 2010 - 2013 years are given in the Table 2.2.1.3.

Table 2.2.1.3. Sector data for 2010 - 2013.

Source: Agency of the Republic of Kazakhstan on Statistics and Customs Control Committee of the Republic of Kazakhstan

33 enterprises worked in the steel industry in 2013. Production capacity of the steel industry is mainly concentrated in Aktobe, Karaganda, Kostanai and Pavlodar region s.

Major manufacturers and nomenclature of steel products is given in the Table 2.2.1.4. There is seen a high concentration, as the share of JSC "Arcelor Mittal Temirtau is 38.3%.

Table 2.2.1.4. Major manufacturers and range of products

Source: JSC "KIDI"

The largest players in the global market of ferrous metal industry included in the list of transnational companies of the world by the magazine Forbes, - Global 2000 which are present in the domestic industry: Posco (South Korea - $ 56.5 billion), ArcelorMittal (the USA - $ 84.2 bn), EvrazGroup (Russia - $ 16.4 billion).

Transnational companies of the world of Global 2000 list, which are most interesting for cooperation in investing steel industry: JSC "Severstal" ($ 14.1 billion) and OJSC "NLMK" ($ 12.2 billion).

Strengths: availability of main raw material and willingness of the state to support the industry.

Weaknesses: a narrow range and low quality of metal and metal products in the sectors of mass demand; high degree of depreciation of fixed assets; underutilized production capacity; insufficient investment; low productivity and lack of resource efficiency; shortage of qualified personnel, poor development of research and development.

Opportunities:

growth in domestic demand for metal and metal products by resource and infrastructure sectors of the construction industry;

potential of exports to the CU countries and manufacturing high value added products that are not produced in Kazakhstan - ferromanganese, ferrosilicon, cold drawing wire, hot-rolled bars and rods, profiles and welded construction of steel sheet pile and ferrous metal for railway tracks, pipes of different diameter, seamless steel hollow fittings, non-cast steel fittings for pipes, large and small diameter pipes, hollow profiles of cast iron, pipes and cast fittings for cast iron pipes;

production of high quality raw materials to produce steel (granular iron and hot briquetted iron, ferroalloys with non-ferrous and rare metals), production of high quality steel (pipe and corrosion-resistant, heat-resistant, tool, ball bearing, rail and spring steel) and expanding of high-alloy steel range of products.

Threats:

growing competition from more advanced metallurgical industry of foreign countries;

limit of state support in connection with membership in the CFMZ and accession to the WTO;

change in tariff policy of transport and energy monopolies;

social policy to preserve jobs and investment in social infrastructure.

              Goals, objectives and benchmarks

Goal: To stop downturn in production and provide transition to sustainable development.

Objectives:

1)                  Utilization of existing facilities.

2)                  Modernization of existing companies in the industry to improve production efficiency through increased productivity and resource efficiency.

3)                  Expanding the range and quality of steel and metal products in mass demand sectors.

4)                  Creation of new competitive industries in the high-margin segments.

5)                  Providing the necessary infrastructure for investment projects;

6)                  Stimulating domestic demand.

7)                  Export promotion and participation in global value chains.

8)                  Providing industry with skilled manpower, including secondary technical resources management;

Benchmarks:

Program implementation will allow achieving the following economic indicators in 2019 to the level of 2012 (Table 2.2.1.5):

1) not less than 1.3 times growth of the gross value added in real terms;

2) employment growth by 6.2 thousand people;

3) 1.2 times growth of labor productivity in real terms;

4) not less than 1.03 times growth of the value of non-commodity (processed) export.

Table 2.2.1.5. Benchmarks

Priorities for the sector's development

Priority activities

Priority activities in the steel industry is the production of iron, steel and ferro-alloys, tubes, pipelines, hollow profiles and steel fittings, cold drawing  wire (Table 2.2.1.6).

Table 2.2.1. 6.Priority activities

Source: Agency of the Republic of Kazakhstan on Statistics

Priority product groups

Table 2.2.1.7 shows selected according to the results of the analysis and evaluation of priority product groups of the sector.

Table 2.2.1. 7.Priority product groups

Source: Agency of the Republic of Kazakhstan on Statistics and Customs Control Committee of the Republic of Kazakhstan, "JSC KIDI" - a report on the Integrated Map of Priority Goods and Services.

Priority projects

In the period from 2015 to 2019 state policy in the development of ferrous metal industry will be aimed at the implementation of priority areas for the production of high quality raw materials to produce steel (granular iron and hot briquetted iron, and increase the production of new types of ferroalloys), the production of new types of steel (pipe and corrosion-resistant, heat-resistant, tool, ball bearing, rail and spring steel) and expanding assortment of high-alloy steel, shipbuilding steel.

In the five-year period it is provided for the implementation of 11 projects within the Industrialization Map, planned for launch in the period 2015 - 2019, discussed with applicants. (Table 2.2.1.8).

Table 2.2.1.8. Projects within the Industrialization Map, planned to be launched in the period 2015 - 2019

List of prospective projects announced by iron and steel enterprises and planned to be launched for 2015 - 2019 is shown in the Table 2.2.1.9.

Table 2.2.1.9. Promising projects announced by iron and steel enterprises and planned to be launched for 2015 - 2019.

2.2.2       Non-ferrous metal industry

Non-ferrous metal industry is the key sector of manufacturing industry of the Republic of Kazakhstan, forming export potential of manufacturing. Products of the sector are used in mechanical engineering, electrical engineering, construction, and electronics. 

As part of SPFIID in the period from 2010 to 2013, there were implemented 23 investment projects worth 366.7 billion tenge, created 8.2 thousand jobs.

Examples of projects completed under SPFIID in the period of 2010-2014.:

1)        Gold refinery plant with production capacity of 25 tons of refined gold was commissioned in Astana;

2)        Gold processing plant of the LLP «AltyntauKokshetau» with a design capacity of 12.5 tons of gold per year was commissioned for processing at LLP "Kazzinc", which allowed increasing production of refined gold in Kazakhstan to 24 tons in 2013;

3)        With the launch of the plant for the production of titanium ingots and alloys in JSC "Ust-Kamenogorsk Titanium and Magnesium Plant" the production of not previously manufactured products started in Kazakhstan - titanium ingots and alloys. Production is 100% export-oriented, takes 50% share in the titanium sponge market of the USA and 20% of the world market;

4)        The second stage of the electrolysis plant of JSC "Kazakhstan Electrolysis Plant" was commissioned in Pavlodar region, which allowed increasing the production of primary aluminum to 250 tons and reducing alumina export by 500 thousand tons per year;

5)        LLP "Sary-Kazna" has implemented a project to build a plant to produce cathode copper with the capacity of 10 thousand tons of cathode copper per year. Theuniqueness of the production lies in the complex extraction of useful components from man-made mineral wastes of the Kounrad mine. This method has been applied for the first time in Kazakhstan.

Share of non-ferrous metals in the structure of manufacturing increased from 19.5% in 2008 to 23.3% in 2012. %. According to operational data for 2013 - 19.2%. (Table 2.2.2.1).

Table 2.2.2.1. Share of non-ferrous metals in the bulk manufacturing of RK, %.

Source: Agency of the Republic of Kazakhstan on Statistics

Production volume increased 1.7 times since 2008 to 2012. For 2013, production reached 1131.4 billion tenge, or increased by 57.8% compared with 2008 (Table 2.2.2.2).

Table 2.2.2.2. Dynamics of volume for 2008-2013, bn tenge

Source: Agency of the Republic of Kazakhstan on Statistics

Gross value added increased from 384.9 billion tenge in 2008 to 722.4 billion tenge in 2012.

Number of people employed in the industry in the period from 2008 to 2012 decreased by 16.3 thousand people. In 2013, employment in the industry was 47 276 people.

Labor productivity in the non-ferrous metal industry in 2012 amounted to 124 thousand U.S. dollars and for the period from 2008 to 2012 increased 1.8 times. This indicator of the OECD countries during the same period averaged 147.5 thousand U.S. dollars, which is 18.9% higher compared to the same period in Kazakhstan.

Capacity utilization for the period of 2008-2012 in nonferrous metallurgy averaged 87.4%. Depreciation of fixed assets in 2012 amounted to 47.47%, a renewal of fixed assets - 12.7%. The greatest rate of renewal of fixed assets was observed in 2009 - 25.6%. Cost of fixed assets in nonferrous metallurgy at the end of 2012 at book value amounted to 197.3 trillion tenge, or 5.6% of the value of all fixed productive assets in manufacturing.

The volume of nonferrous metallurgy exports increased from 2008 to 2012 by 1.6% and in 2013 amounted to U.S. $ 4.2 billion. The industry is export-oriented, of the total production in 2008-2012 exports amounted to: raw aluminum - 70.5%, raw zinc - 88.2%, raw lead - 87.8%, refined copper - 89.3%, copper wire - 61.4%.

The volume of non-ferrous metallurgy imports in 2012 compared to 2008 decreased by 15.9%. In 2013, imports amounted to U.S. $ 426.3 million. Imports of non-ferrous metallurgy products of higher processing not produced in Kazakhstan - copper and copper alloys unfinished products. (Table 2.2.2.3).

Table 2.2.2.3. Sector data for 2010 - 2013.

Source: Agency of the Republic of Kazakhstan on Statistics and Customs Control Committee of the Republic of Kazakhstan

34 non-ferrous metallurgy enterprises functioned in 2013. Production is concentrated in the East Kazakhstan, Karaganda and Pavlodar region s (Table 2.2.2.4).

Table 2.2.2.4. Large manufacturers and range of products

The largest players in the global market of nonferrous metallurgy, included in the list of transnational companies in the world by the magazine Forbes - Global 2000 are present in the domestic non-ferrous metallurgy: Eurasian Natural Resources Corporation (6.3 $ billion), Glencore International (214/4 $ billion), Sumitomo Metal Mining (10.2 $ billion).

World transnational companies of Global 2000 list, which are most interesting for cooperation in the domestic non-ferrous metal industry: RioTinto (51.0 $ billion), Xstrata (32.3 $ billion) and OAO "Norilsk Nickel" ($ 12.8 billion).

Strengths:

availability of raw materials and production of major base metals;

the presence of large, vertically integrated industrial enterprises;

willingness of the State to support the industry.

Weaknesses:

high degree of depreciation of fixed assets;

insufficiency of investments; low productivity and resource  efficiency compared to the world average level;

small capacity and dispersal of the domestic market;

shortage of qualified personnel.

Opportunities:

emerging markets of China, India and Southeast Asia growing demand in base metals;

increased access to foreign markets for base metal producers at accession to the WTO.

Threats:

change in tariff policy of transport and energy monopolies;

depletion of the resource base;

volatility of prices for base metals;

limitations of government support measures associated with membership in the CFMZ and accession to the WTO;

social policy to preserve jobs and investment in social infrastructure.

Analysis of the SPFIID implementation.

7 sectoral measures of state support have been defined in the mining and metallurgical complex of SPFIID.

1. Providing with infrastructure - not executed (capacity of railway stations has not been increased: Aksu-2 (Pavlodar region), Don (Khromtau, Aktobe region) Zhinishke (Aktobe region).

2. Providing qualified human resources - in progress (Staffing requirements in 15 specialties of steel industry in Aktobe, EK, Karaganda, Pavlodar region s has been covered by training in high schools and 10 institutions of VET within the state educational order, a system of vocational education issuing secondary level technical specialists for metallurgy and metalworking has been restores and practical training in manufacturing plants is implemented  for a period of 3 months with fixing of individual leaders in the fields).

3.Removing administrative barriers - in progress (in metallurgy and mining the Resolution of the RK Government approved 5 technical regulations of RK. 193 state standards acts in metal and mining industry, of them 144 standards have been  aligned with international requirements.97 state standards of RK were approved in 2010-2011).

4. Promotion of the development of innovation and technological modernization - in progress (Center of metallurgy is created in Ust-Kamenogorsk, East Kazakhstan. The old equipment has been dismounted. Reconstruction and strengthening of building structures has been started. A hydraulic press has been launched. There is conducted construction and installation work for thermal-oxidative facility.  Furthermore, MINT RK developed 19 kinds of new technologies under the budget program 006 "Applied technological researches" according to the Industry Program for Development of MMC in Kazakhstan for 2010-2014).

5. Inducing direct investments - not executed. Because consumers enter the contracts directly with major manufacturers of raw materials, the major manufacturers of raw materials make it impractical to sell through the stock exchange to domestic refiners, as the demand for raw materials for the domestic enterprises of metallurgy and metal is low).

6.  Development of systematic measures of large backbone enterprises of mining and metallurgical complex participation in diversification of Kazakhstan economy and creation of added value, including the development of local content, technology transfer, promote development of new types of products (protocol instructions of the Head of State of Kazakhstan at the 25th plenary meeting of the Council of Foreign Investors under the President of RK dated May 22, 2012 and the orders of the Head of the Presidential Administration No.283-10kbpu dated June 18, 2012) - in progress.

Goals, objectives and benchmarks

Goal: Increased production of base metals, development and creation of production of their products.

Objectives:

Expansion of existing businesses' capacity and creating new production of base metals.

Modernization of existing companies in the industry to improve production efficiency through increased productivity and resource efficiency.

Expansion of existing production and development of new base metals products output for related sectors.

Providing the necessary infrastructure for investment projects;

Promotion of demand in the domestic market;

Promotion of export and participation in global value chains.

Providing industry with skilled workers, including technologists.

Program implementation will allow achieving in 2019 the following economic indicators to the level in 2012:

Benchmarks:

Program implementation will allow achieving in 2019 the following economic indicators to the level of 2012 (Table 2.2.2.5):

1) growth of the gross value added not less than 1.2 times in real terms;

2) reduction in employment not more than 2.2 thousand people;

3) 1.3 times growth of labor productivity in real terms;

4) not less than 1.3 times growth of non-commodity (processed) export.

Table 2.2.2.5. Benchmarks

              Priorities for the sector's development

Priority activities

Priority activities in the production of non-ferrous metals are production of: copper, lead, zinc and tin, aluminum, precious metals not included in other groups. (Table 2.2.2.6).

Table 2.2.2. 6.Priority activities

Priority product groups

Table 2.2.2.7 shows priority product groups selected according to the analysis and evaluation.

Table 2.2.2. 7.Priority product groups

Priority projects

In the period from 2015 to 2019 state policy in the development of non-ferrous metallurgy of the country will focus on the expansion of base metals production: copper, gold, titanium, with the exception of aluminum, and increasing in production volumes of products: rolled wire, wire, rolled profile and alloys, foil, jewelry products, products for related industries. The possibilities to use titanium in the oil and gas industry will be explored.

12 projects within the Industrialization Map are provided for the implementation in the five-year period. They are scheduled to be launched in the period 2015 - 2019 and were discussed with the applicants. (Table 2.2.2.8).

Table 2.2.2.8. Projects within the Industrialization Map, planned to be launched in the period 2015 - 2019

List of prospective projects stated by nonferrous metal industry enterprises and planned to be launched in the period of 2015 - 2019 are shown in the table. 2.2.2.9.

Table 2.2.2.9. Promising projects announced steelworks and planned for launch during the period 2015 - 2019 years

2.2.3 Oil refining

Oil refining is one of the traditional industries rapidly developing in Kazakhstan. The industry occupies a significant share of the total processing industry of Kazakhstan - 10.8% in 2012, and because of operational data, it is expected that in 2013 the proportion will be 13.8% (Table 2.2.3.1).

Table 2.2.3.1. Oil refining share in manufacturing industry of RK, %

1

Source: Agency of the Republic of Kazakhstan on Statistics

The physical volume of production grew by 13.9% from 2008 to 2012. According to operational data for 2013 production amounted to 810.2 billion tenge, an increase of the value was 4.2 times compared to 2008 (Table 2.2.3.2). The growth in the sector was due to the rise in prices for basic petrochemicals, as well as due to increasing of refineries utilization and, as a consequence, increasing the physical volume of production.

Table 2.2.3.2. Dynamics of production for 2008-2013, mln. KZT

Source: Agency of the Republic of Kazakhstan on Statistics (excluding heavy oils)

Oil refining is represented in the Republic of Kazakhstan mainly by three major refineries (Atyrau refinery, Shymkent refinery and Pavlodar Petrochemical Plant) located in the west, south and north-east of the country, respectively (Table 2.2.3.3). Pavlodar Petrochemical Plant is focused on processing the West Siberian oil that comes from Russian.

Table 2.2.3.3. Oil processing in the oil refineries, thous. tons

Source: IAC of MOG

Share of mini-refinery in the total production in the sector (in terms of processing of raw materials) was 5.8% in 2012. It is expected that in 2013 this proportion will remain at the same level. Total number of enterprises engaged in the processing of oil at mini-refineries - 23. Their share in the total production in the refinery sector is steadily declining due to their industrial and technological characteristics that limit oil refining efficiency and quality of the product. The consequence of such characteristics is the low competitiveness of mini-refineries' products.

The main share of the production and supply of petroleum products to the markets accrue for the main three plants. Due to the established practice of raw materials supply to these plants based on a give-and-take basis it is impossible to trace the distribution of their products (domestic market or export).In this regard, the characteristics of the domestic market of oil products is illustrated on the basis of statistical data (Table 2.2.3.4).

Table 2.2.3.4.  Range of products and the major players in the sector of construction materials production    

Source: Agency of RK on statistics, CC of MF of RK and RK MOG for 2012

Main export is composed by diesel fuel, kerosene, jet fuel and fuel oil - 97.4%. The largest volume of imports compose light petroleum oils and preparations <>), aviation gasoline - 48%; as well as FEACN code (271019) - 41%.

Key indicators for this sector are shown in the Table 2.2.3.5. 

Table 2.2.3.5. - Data on the sector for 2008-2013

Source: Agency of RK on statistics, TradeMap.

The productivity of oil and gas sector in Kazakhstan remains relatively low - 14 times lower than in Germany (Table 2.2.3.6).

Table 2.2.3.6. Productivity in oil refining, USD mln. per a person

Source: Agency of RK on statistics, SPG analysis

The main reason for this is the current technical condition of the major Kazakhstan's refineries. A relatively low refinery depth (Table 2.2.3.7) characterizes currently existing refineries

Table 2.2.3.7.Data on refinery depth of three main producers

Source: KMG RM, SPG

Oil refining sector is seen in SPFIID as the source of providing the domestic market with quality petroleum products and manufacturer of basic petrochemicals. Actual production volumes do not provide domestic needs. In 2013, the share of imports in domestic consumption of gasoline was more than 30%, diesel fuel -14% (Table 2.2.3.8-2.2.3.9). 

Table 2.2.3.8. The balance of production and consumption of gasoline in the Republic of Kazakhstan, 2003-2013.

Table 2.2.3.9. - Balance of production and consumption of diesel fuel in the Republic of Kazakhstan, 2003-2013.

Source: MOG RK, Agency of RK on statistics, analysis KMG RM

Along with the low current level of technological development of the existing refineries, another reason of the market deficit is underutilized production capacity (Table 2.2.3.10).

Table 2.2.3.10. Dynamics of diesel fuel export and import in the Republic of Kazakhstan

The reason for underutilization of capacities is higher profitability of exports of raw materials (oil) regarding the supplies to the domestic market. Currently, capacity utilization is regulated, including administrative and legislative methods.

One of the strengths of the refining industry in Kazakhstan - own resource base. The Republic of Kazakhstan is the 12th in the world in terms of proved reserves, 21% of recoverable reserves account for the Kashagan field. By 2025, annual production is planned to be increased by 34% to 92.6 million tons (Table 2.2.3.11 - 2.2.3.12).

Table 2.2.3.11. Dynamics of oil production in Kazakhstan, 2002-2013

Sources: National Energy report of KAZENERGY

Table 2.2.3.12. - Forecast of oil production in Kazakhstan till 2050

Source: MOG of RK

However, despite the significant volumes of produced crude oil in Kazakhstan, the share of processed crude oil in Kazakhstan is quite low (Table 2.2.3.13).

Table 2.2.3.13. - Dynamics of oil producing and refining in Kazakhstan

Sources: IACOG, analysis of KMG RM

The data in the table above are calculated based on the total refining volume at RK refineries (including mini-refineries) and crude oil production.

Thus, despite the positive trend of production, according to the share of processing of oil produced Kazakhstan takes one of the last places in the world in terms of the ratio of the total refining capacity and production volume (Table 2.2.3.14).

Table 2.2.3.14.Oil refining in the domestic market

Sources: BP Statistical review of World Energy 2013, analysis of SPG

However, the growth of the national economy, which is expected due to the growth of industries in the framework of the Program, as well as the expected growth in population and living standards, entail an increase in domestic demand for the most important petroleum products.

Increasing the number of cars in Kazakhstan causes increased consumption of motor gasoline. Increase in commercial vehicles, growth in the agricultural sector, as well as in the sector of rail transport directly affects the growth of diesel consumption. Increase in passenger and cargo air transportation causes the growth of consumption of aviation fuel in the long term (Table 2.2.3.15).

Table 2.2.3.15. Forecast of petroleum refinery products consumption in Kazakhstan

Despite the fact that the most important task of the petroleum sector is to meet the demands of the domestic market, in the long view export of oil products is possible providing saturation of the domestic market.

World Market by the code of FEACN 2710 - "Oil and petroleum products other than crude, obtained from bituminous rocks; products, not elsewhere specified or included, containing 70 wt.% or more of oils or petroleum products obtained from bituminous rocks" is ranked for the top five importers in terms of import volume. Their total imports in 2012 amounted to 229 million tons, which is 20% higher than the level of 2008. The main importing countries are the USA, China, EU countries.

Total imports of the "most accessible" macro-region countries in 2012 amounted to 60.7 million tons (Table 2.2.3.18).

Table 21. - Import of macro-region countries, tons

Source: Database of ITC TradeMap

Changing the volume of total imports of the said countries for the period 2008 - 2012 illustrates a growing trend, despite the moderate dynamics. Upon that China takes the first place (84.6%) in the total imports of the "the most accessible countries of the macro-region".

The highest average import value is observed with respect to Russia and Turkmenistan. The volume of the "expensive" light oil imports to China in 2012 is also significant and is slightly less than 2.2 million tons (Table 2.2.3.19).

The largest players in the global market in the refining sector are companies[4][4] ExxonMobilCorp (U.S. $ 334 billion), ChevronCorp (U.S. $ 233 billion), RoyalDutchShellplc (Britain, Holland, $ 360 billion), Gazprom (Russia, $ 375 billion), StatoilASA (Norway, $ 135 billion) included in the list of the largest manufacturers in the petrochemical sector, according to data of the information agency Platts.All these companies are vertically integrated, carry out their activities in the segments of oil production and refining and petrochemical segments, as well as Kazakh mining and processing companies, integrated within the JSC "NC" KazMunaiGas ".

However, the development of the petroleum sector in Kazakhstan is constrained by a number of barriers. Primarily, it is a problem of raw material supply (Table 2.2.3.20). 

As a result of the imbalance of oil contracts under the so-called "old" deposits (deposits of Atyrau, Mangistau, Aktobe and Kumkol groups) and contracts for the "new" fields (Tengiz, Kashagan, Karachaganak) that exist in the form of production sharing agreements (PSA), it is predicted that in the near future, the processing segment will face the challenge of providing raw materials due to the depletion of the "old" fields. By 2030, the expected total oil production at the "old" fields will be equal to the total volume of oil production at three RK refineries and bitumen plant at Aktau, and then falls below the total processing capacity of existing refineries.

Table 2.2.3.20. Balance of oil production in the "old" deposits and consumption of oil in Kazakhstan, mln t

Source: MOG RK, analysis of KMG RM

Currently oil to the operating refineries of RK comes from "old" deposits' resources, contracts for which contain provisions on the mandatory oil supplies to the domestic market. In accordance with these contracts oil-producingorganizations developing the "old" field must supply to the RK refineries 2.67 million tons in 2014, 2.43 million tons in 2020 and 1.37 million tons - in 2030, 15.7%, 12.5% ​​and 7% of the total existing and planned capacity of three main plants respectively.

Thus, the oil supplied from the "old" fields only on the basis of the commitments is not enough to cover the needs of the domestic market.  Therefore, in order to provide the internal market with oil in full, the Ministry of Oil and Gas uses administrative measures not linked to contractual obligations as the existing mechanism of the sector regulation, namely the fiscal regime does not stimulate the supply of oil to the domestic market.

In general, all segments of the sector, from production to retail sales of petroleum products are profitable. However, the distribution of returns by separate segments is uneven and size of returns is limited (Table 2.2.3.22).

Table 2.2.3.22. Distribution of returns by segments

Source: MOG of RK, Agency of RK on statistics

The data were obtained on the basis of calculation of one ton of oil turnover. Figures for refineries were calculated based on the weighted average rate for the processing, calculated on the basis of tariffs approved by the Government of Kazakhstan for each refinery (the"selling price" means the rate for refinery processing). Price in the wholesale market - weighted average price across a range of oil products. Retail price - weighted average traded price on items (gasoline and diesel), calculated on the basis of maximum prices of refined products approved by the Government of Kazakhstan.

A key imbalance factor in the distribution of profitability - is the higher profitability from oil exports mentioned above, relatively to the supply of the domestic market, which stimulates the export of oil, and constrains its processing in the domestic market.

In addition, the relatively low raw material recovery rate (less than 30%), and the data on the volume of gas flaring illustrate the low efficiency of development of the resource base, which is also a reserve to increase profitability in the mining sector (Table 2.2.3.24).

Table 2.2.3.24.Dynamics of flaring of associated gas for 2006-2012. (billion cub. m.)

Source: MOG of RK

As a result, these profit reserves generate reserves to increase government revenue through taxes and other economic benefits. Failure to use these reserves entails economic loss to the Republic of Kazakhstan in the form of resource losses, loss of financial benefits and, given the high energy intensity of the economy, in the form of increasing the value of costs in other sectors.

Strengths:

Availability of own rich mineral resource base;

Sector is supported through government priorities;

Major enterprises in the sector have the potential to compete in the markets of the macro-region's countries;

Geographical proximity to large consumer markets (Russia, China, Asia-Pacific countries, the Republics of Central Asia).

Weaknesses:

The overwhelming proportion of the PSA in oil production does not allow ensuring sufficient supply to the domestic market by market methods of regulation;

Low recovery rate and depth of oil refining;

Insufficient pipelines throughput for increasing volume of oil and gas;

Ineffectiveness of individual companies;

Low innovation potential;

Administrative barriers hampering the development of SMEs (an ecosystem of suppliers).

Opportunities:

Growth in domestic and external demand for petroleum products;

Potential increase of competitive advantages of major Kazakhstani producers after technological modernization.

Threats:

Risks to ensure Kazakh oil refineries with fuel and energy resources due to priority of the oil companies to export crude oil as well as low quality of these resources;

Reducing resource base and inadequate exploration;

Growth of environmental and other costs in the industry;

Upgrading and increasing of refining capacity in the macro-region's countries.

Goal, objectives and benchmarks

Goal: Maximum realization of the resource potential of Kazakhstan to ensure domestic market with quality oil, gas processing and petrochemical industries products, as well as the development of exports to the countries of the macro-region.

Objectives:

1)             Full provision of the internal market with quality petroleum products.

2)             Ensuring a stable supply of oil refining industry with raw materials.

3)             Improving the performance of the oil refining industry.

4)             Kazakh products coming into the markets of the macro-region.

Solving the above problems will allow achieving the following benchmarks

Benchmarks

Program implementation will allow achieving in 2019 the following economic indicators to the level in 2012:

1)                       not less than 1.7 times growth of gross value added in real terms;

2)                       decrease of employment no more than by 2.6 thousand people;

3)                       2.3 times productivity growth in real terms.

Table 2.2.3.25.Benchmarks

Industry development priorities are shown in the Table 2.2.3.26.

Table 2.2.3.26. - Priority activities by CCEA-4

Priority product groups are defined on the basis of the need to improve product quality standards due to rising requirements to reduce environmental emissions (Table 2.2.3.27). This increase in standards is a key factor in the increase in world prices for petroleum products.

Table 2.2.3.27.Priority activities by CCEA-4

Sources: ITC TradeMap database

* Countries of the macro-region: China, Kyrgyzstan, Russia, Turkmenistan, Uzbekistan, Pakistan, India (based on the results of 2011, 2012)

Because of these requirements, production of motor fuels Euro 4-5 and increase in production of light petroleum products to 76-82% was defined as a priority.

Priority projects are presented in the Table 2.2.3.28.

Table 2.2.3.28.Priority projects

The project of refineries modernization will allow increasing processing of crude oil in Kazakhstan's refineries to 19.5 million tons per year, producing environmentally friendly motor fuels meeting the requirements of K4, K5 class. Key indicators of petroleum products production will change after modernization as follows (Table 2.2.3.32):

Table 2.2.3.32. Oil refining in Kazakhstan

In addition to these projects, there are carried out the researches of prospects of the project for the construction of the 4th refinery (with a probable processing capacity to 10 million tons per year), as well as institutional project for the creation and development of engineering assets.

2.2.4 Petrochemicals

Basic petrochemicals (production of petrochemical products in primary forms) is a new branch of the economy of Kazakhstan, which occupies a small proportion of the total volume of chemical industry of Kazakhstan. The industry has the necessary conditions for development: availability of raw materials and related industries, market outlet.

In 2012, the share of industry in total production of the chemical industry was 10.8%, having increased by 3.9% compared to 2008. According to operational data for 2013,the share of basic petrochemicals in the chemical industry will be about 10% (3.6 times increase compared to 2008).

Share of basic petrochemicals in the volume of manufacturing industry increased from 0.2% in 2008 to 0.4% in 2012. According to operational data in 2013, the proportion was 0.3% (Table 2.2.4.1).

Table 2.2.4.1. Share of petrochemical bases in the volume of manufacturing and chemical industries in Kazakhstan, %

Source: Agency of RK on statistics

Accordingly, the volume of production from 2008 to 2012 increased almost 2.7 times, the operational data for 2013 shows that production amounted to 18.5 billion tenge, which means 2.5 times increase compared with 2008 (Table 2.2.4.2 ).

Table 2.2.4.2. - Dynamics of production for 2008-2013, mln. KZT

Source: Agency of the Republic of Kazakhstan on Statistics

The main part of the existing facilities for the production of polypropylene is located in Pavlodar city. Currently the leaders among operating companies are as follows - JSC "Pavlodar Petrochemical plant", LLP "Company Petrochem Ltd”.They supply existing facilities with raw materials on the basis of production of oil refining at Pavlodar Petrochemical Plant.

Polystyrene and expanded polystyrene production facilities are dispersed in six regions, with the main share of them concentrated in Aktobe, Karaganda and East Kazakhstan region s.

Table 2.2.4.3.Range of products and the major players in the sector of primary petrochemicals

Source: Agency of RK on statistics, CC of MF of RK, ITC TradeMap

Volume of production and export of basic petrochemicals products manufactured in Kazakhstan is minor and unstable. Export of items FEACN (390120) - "Polyethylene with specific gravity 0.94 or more," and FEACN (390210) - "Polypropylene" was growing permanently and steadily during the period 2008 - 2012. Total exports for these items in 2012 amounted to 45.4 thousand tons, or 61.2 million of U.S. dollars. The greatest volume of exports in 2012 was seen for the item of FEACN (390210) - "Polypropylene" in the amount of 44 thousand tons or 58 million of U.S. dollars.

According to the ITC TradeMap database, exports of primary petrochemical products from Kazakhstan, during the period 2008 - 2012 increased 28.5 times, from 2.2 to 63.7 million of U.S. dollars.

In the absence of facilities that may meet domestic demand, fast-growing demand for primary petrochemical products is largely ensured by imports.

Gross value added in the sector increased from 3.5 bn tenge in 2008 to 14.6 bn tenge in 2012. Significant and sharp rise took place in 2010 - more than 2.5 times.

Number of people employed in the sector in the period 2008 - 2012 decreased by 478 people. Decline began in 2010, and in 2011 the number of people employed in the sector decreased - to 971 people, or by 42% compared to 2008. Employment growth in 2012 was substantial, despite the fact that the level of 2008 was not achieved - by 22.7% relatively to the previous year. According to operational data, an increase exceeding the figures of 2008 by 21.1% is expected in 2013.  

Labor productivity increased 5.8 times from 2008 to 2012 (Table 2.2.4.5). However, the index of 2012 decreased by 14% relatively to the previous year. According to operative data, the performance is expected to decline by 55% in 2013 compared to 2012.    

Depreciation of fixed assets in 2012 amounted to 51.9%, a renewal of fixed assets - 22.4%.

Investments in fixed assets in 2012 amounted to 48 676 mln tenge that is 33.1 times higher than in 2008. The largest volume of investments - 62 278 million tenge is expected in 2013.

Table 2.2.4.5. Sector data for 2008-2013.              

Source: Agency of RK on statistics, ITC TradeMap.

.

Average volumes for 2012:

Polystyrene and expanded polystyrene in primary forms - 2100 tons;

Polypropylene in primary forms - 33000 tons.

The utilization of these volumes amounted to 41.7 and 97.4%, respectively.

Volumes are characterized by relatively low power performance indicators (Table 2.2.4.6).

Table 2.2.4.6. Production of plastics in primary forms, million $ / person

Source: analytics of Strategy Partners Group, LLP "AIRI"

Basic petrochemicals segment is technologically interlinked with production and processing of hydrocarbons. These segments are most concentrated in the western regions, and to a lesser extent in southern Kazakhstan. The scope and performance of the existing production characterize the base petrochemicals sector as underdeveloped.

However, the sector plays a significant role in the local economy and the Program. This role lies in two main functions:

raw materials supply for high value added petrochemical industry and other sectors of the economy and the Program;

providing efficient use of hydrocarbons - APG and dry gas. 

The first function is justified by dynamics and trends of development of the local economy and high value-added petrochemical industry, namely the growth of imports of basic petrochemicals, which indicates the growth of production in sectors that are customize basic petrochemicals.

Table 2.2.4.7. Exports and imports structure by the extent of product processing

Table 2.2.4.7 illustrates the growing dynamics of export and import of goods items at all levels of redistribution, except the export of primary products.

It is expected that the incentives for production and business activities, which according to the approved Concept will be planned and implemented under the Program will lead to increased production volumes and expand the range of domestic demand for petrochemical products as basic value added and high value added. These expectations are evidenced by a significant export potential of high value-added petrochemical products (Table 2.2.4.9).

Table 2.2.4.9. World imports dynamics, U.S. $ bn

Source: ITC TradeMap

The largest players of the global market in the production of petrochemical products are[5] ExxonMobilCorp (USD 334 billion), ChevronCorp (USD 233 billion), RoyalDutchShellplc (Brtaniya-Holland, USD 360 billion), Gazprom (Russia, USD 375 billion), StatoilASA (Norway, USD 135 billion), included in the list of the largest manufacturers in the petrochemical sector in accordance with the data of the information agency Platts. All the above-mentioned companies are vertically integrated, carrying out activities in the segments of oil production, oil refining and petrochemicals segments.

The second function is justified by the necessity of fast generation of domestic demand for APG to reduce the volume of its flaring, as well as the demand for colliery gas to improve the safety of coal mining processes (Table 2.2.4.10).

Table 2.2.4.10. Dynamics of flaring of associated gas for 2006-2012. (billion cub. m.)

Source: MOG of RK

APG and colliery gas utilization problem arose in exists in presence of barriers to exports and increasing domestic consumption for energy-related limited transport and infrastructure capabilities. The methods employed to solve this problem (injection into formation, flaring) entail additional unproductive economic costs, including those of ecological character.

There is a risk of further growth of the problem, since in the future periods significant increase of gas production is expected (Table 2.2.4.11).

Table 2.2.4.11. Dynamics of gas production in Kazakhstan. (Billion cubic m.)

Source: MOG of RK

With the development of gas transportation infrastructure and access to markets, given the high level of world prices and the tendency of further growth, it is necessary to regulate the export of raw materials to ensure an acceptable economic cost of gas in the domestic market and provide economic benefits for the sectors consuming gas as fuel and raw material.

Strengths:

existence of own rich mineral resource base;

sector is supported through government priorities;

geographical proximity to large consumer markets (Russia, China, Asia-Pacific countries, the Republics of Central Asia).

Weaknesses:

inadequacy of existing facilities for the processing of extracted and projected volumes of gas (APG, dry and colliery gas);

low throughput capacity of pipes for the growing volume of oil and gas;

serious lag of Kazakhstan petrochemical performance in comparison with developed countries (4-5 times);

ineffectiveness of individual companies;

shortage of qualified personnel;

low innovation potential;

administrative barriers to development of suppliers system;

financial sector's directions of development does not meet the requirements of the industry;

existing standards for basic petrochemical products do not meet EU standards, etc.

Opportunities:

potential growth of domestic demand;

considerable size and growth potential of the global market;

potential increase in production capacity and productivity;

Threats:

non-market regulatory mechanisms in related sectors and the economy as a whole;

reduction of the resource base;

growth of the environmental and other costs in the industry;

modernization and capacity expansion in the macro-region countries, delaying the timing of petrochemical projects.

Goal, objectives and priority activities

Goal: maximum realization of the resource potential of Kazakhstan for high-added value petrochemicals supply, as well as the development of exports to the macro-region countries.

Objectives:

1)   Rational development of resources extracted (APG , colliery and dry gas);

2)   Ensuring availability of quality raw materials for petrochemical of high-added value industry;

3)   Increased export earnings from raw materials supply for petrochemical of high-added value industry

4)   Entry of Kazakh products into the markets of the macro-region.

Solving the above said problems will allow achieving the following benchmarks (Table 2.2.4.12).

Benchmarks:

Program implementation will allow achieving in 2019 the following economic indicators to the level in 2012:

1)        growth of gross value added not less than 12.7 times in real terms;

2)        employment growth by 2.1 thousand persons;

3)        4.6 times labor productivity growth in real terms;

4)        growth of the value of non-commodity (processed) export not less than 24.7 times.

Table 2.2.4.12.Benchmarks

Development priorities

Priority activities of the sector are presented in the Table 2.2.4.13.

Table 2.2.4.13. - Priority activities by CCEA-4

Priority product groups are defined on the basis of the domestic market's requirements, as well as the size and growth potential of the international market (Table 2.2.4.14).

Table 2.2.4.14. Priority product groups

Priority projects are presented in the table (Table 2.2.4.15)

Table 2.2.4. 15.Priority projects

2.2.5 Food production

Food production is a significant portion of total production in the manufacturing industry 16.5% (2013). The sector has some export potential: According to the results of 2013, exports totaled $ 2.7 billion. Strategic significance of the industry is justified also by objectives to provide food safety of the country.

Volume of food production from 2008 to 2012 increased by 38.8%, beverages by 57.8%, according to operational data for the 2013 production volume of food was - 973,030 tenge, which means an increase by 56% compared with 2008 (Table 2.2.5.1).

Table 2.2.5.1. Dynamics of production in 2008-2012, mln KZT

* According to operational data

Source: Agency of the Republic of Kazakhstan on Statistics

Feed processing industry (23.5%), milk (16.3%), bread and bakery (15.3%), meat processing (13.4%), fruits and vegetables (8.1%), fat and oil (7.8%) and other sectors (15.6%) occupy the main share in the structure of food production.

Companies in the sector in 2013 produced 16.5% of the manufacturing industry. The share of food production in the volume of manufacturing industry fell from 18, 6% in 2008 to 16.5% in 2013 (Table 2.2.5.2).

Table 2.2.5.2. Share of food in the volume of manufacturing industry of RK, %

Source: Agency of the Republic of Kazakhstan on Statistics

Totally, the level of food production in 2013 amounted to about 973 billion tenge or USD 5260 mln. Thus, the share of manufacturing in total consumption is about 77%. The remaining 23% are imported from abroad. 

Key performance indicators of the sector are shown in the Table 2.2.5.3.

Table 2.2.5.3. Sector data for 2008-2013

Operational data

Source: Agency of the Republic of Kazakhstan on statistics, TradeMap.

Strengths

high proportion of Kazakh producers in the domestic food market;

geographical proximity to major markets for food products in China, South-East and Central Asia;

availability of sufficient resources for the creation of competitive food industry.

Weaknesses

high import content in the industry for certain categories of goods;

Kazakhstan's food products do not meet international standards;

low level of development of transport and logistics infrastructure;

lack of qualified professionals in the industry.

lack of concessional credit resources to upgrade production facilities and working capital financing

Opportunities

steadily growing domestic demand for food products, as well as increase of the range of products consumed;

development of new segments in processing of agricultural products;

existence of sufficient prerequisites for creation a broad base for livestock sector;

existence of vacant niches in the production of high value-added processing of grain, meat, fat and oil products; growth in exports to the countries of TC and macro-region.

Threats

increased competition from the participating countries of the Customs Union and the WTO (after accession)

adverse changes in climatic conditions

lowing yields of key crops

growth of counterfeit goods from China and Central Asia.

2. Goal, objectives and priority activities

The goal is to increase the competitiveness of food industry in Kazakhstan.

Objectives:

Increasing the competitiveness of Kazakhstan food products by implementing measures to support raw material supply, marketing and quality control

Growth of competitiveness of domestic enterprises in the industry, including by means of cluster initiatives

Reducing infrastructure costs of production in the industry, including through PPPs

Solving the above mentioned problems is correlated with the decisions set out in the Master Plan in priority areas of agricultural sector of Kazakhstan, developed in the framework of the Program Agrobusiness-2020 (hereinafter - the Master plans). This is because actually agricultural industry supported in the framework of the Master Plan, provide raw materials for the production of all the products in the food industry, being an essential step in the value chains.

Because of this factor, the activities set out in the current Program and activities put in the framework of the Master Plan are complementary. Moreover, the successful implementation of the Master plan's activities is a prerequisite for achieving the objectives of the Program.  

At the same time, the measures developed under the Program, are designed to support not only high raw material processing stages, but also for the early stages of processing relating to agriculture.           

Thus, under the current Program a series of measures is established that do not have financial support from the program Agribusiness-2020 and support the early stages of processing, however, actually aimed at the successful functioning of the higher stages of processing. First of all such measures relate to infrastructure solutions that contribute to the development of both agricultural and food industry.

Benchmarks:

The Program implementation will allow achieving in 2019 the following economic indicators to the level of 2012 (Table 2.2.5.4):

1)        not less than 1.2 times growth of gross value added in real terms;

2)        employment growth by 3.6 thousand people;

3)        1.1 times labor productivity growth in real terms;

4)        growth of the value of non-commodity (processed) export not less than 1.2 times.

Table 2.2.5.4 Benchmarks

Priorities for the sector's development

Priority activities are presented in the Table 2.2.5.5.

Table 5. - Priority activities

Table 2.2.5.6 presents the priority product groups focused on key markets.

Table 2.2.5.6. - Priority product groups

* Countries of the macro-region: Armenia, Azerbaijan, Belarus, China, Georgia, Iran, Kyrgyzstan, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.

Priority projects

76 projects of the Industrialization Map (IM) were considered during the development of the Program among them 56 are in progress, and 20 are planned for implementation (Table 2.2.5.7).

Table 2.2.5.7. - Priority projects

Major projects for the modernization of existing facilities that are included in the IM:

    Modernization of the plant for processing natural aseptic milk with capacity 15. 6 million liters per year LLP "Milkproject";

    Modernization of production facilities for the production of social bread TOO "HBK " Aksai-nan";

    Capacity extension of the poultry plant up to 20 thousand tons of meat per year JSC "Ust-Kamenogorsk Poultry Plant";

    Modernization and development of the poultry plant LLP "Poultry plant named aft. Karl Marx ";

    Modernization and expansion of the mill complex LLP "Karaganda Flour Mill";

    Expansion and modernization of confectionery plant through purchasing and commissioning of a process line for the production of extruded and laminated solid wrapped caramel JSC "Bayan Sulu";

    Reconstruction of Novoishimsk fat processing plant LLP "MasloDel."

Major new projects that are planned to run within the IM from 2014 to 2020.

         Construction of the poultry plant LLP "Healthy foods";

         Construction of the sausage making shop LLP "Volynka";

         Construction of the farm to produce bottled kumys, fine meat products the farm "Sagyp";

         Poultry Plant for the production of commercial eggs
LLP "Almaty Poultry Plant Sunkar";

         Construction of the plant for the production of juices LLP «SPEUROSALDA»;

         Reconstruction of the poultry plant LLP "Kyzylzhar-Kus";

         Construction of the plant for deep processing of wheat resulting in glucose-fructose syrup, gluten, starch, bran LLP "BioGrain";

         Poultry farm, farm "Kudayberdy."

The above projects are listed by their state at the beginning of 2014, their list will greatly expand following the implementation of the Program. The main driving force behind the industry is small and medium businesses, the most sensitive to the support of the state and reacting rapidly by the increasing of investments to improving of profitability, the unit costs of production and increase in capitalization. Because of this factor, this list may not be definitive and should be supplemented repeatedly during program implementation. 

2.2.6 Agrochemicals

Agrochemical products manufacturing sector is a priority, since the use of fertilizers and plant protection products in the Republic of Kazakhstan may increase productivity in agribusiness by 30-50%, which is a priority according to the strategic plan of the country development until 2020.

A modernization of existing facilities and construction of new enterprises was started as part of SPFIID . In 2012 was finished the first stage of modernization LLP "KazAzot" which allowed to increase labor productivity 1.5 times, modernization of LLP "Kazfosofat" is continuing towards the production of fertilizers and a project is launched for the production of mineral fertilizers by LLP "Evrohim-Fertilizers."

Sector's share in manufacturing in 2012 remained unchanged compared to 2008 and amounted to 0.6%.  Sector's share in the chemical industry in 2012 increased by 0.3% compared to 2008 and amounted to 20.1% (Table 2.2.6.1.).

Table 2.2.6.1. - Share of agrochemical sector production in the manufacturing industry and chemical industry of Kazakhstan,%

Source: Agency of the Republic of Kazakhstan on Statistics

The volume of production in the agrochemical sector from 2008 to 2012. increased 1.7 times and amounted to 34,664 mln tenge (Table 2.2.6.2) The potential volume of fertilizers consumption for 2013 amounted to 1012.7 thousand tons of active faction among them phosphorus - 58.4%, nitrogen - 40% and potassium - 1.6%.It was consumed ​​84.5 thousand tons of a.f., which is 12 times lower than the required application rate. Agricultural area fertilized with mineral fertilizers in 2013 amounted to 1 397   457 hectares. By 2019, the projected level of demand for fertilizers will increase by 5%, and amounted to 1062.1 thousand tons of a.f., among them phosphorus - 57.5%, nitrogen - 40.4% and potassium - 2.1%[7].

Table 2.2.6.2. Dynamics of production for 2008-2013, mln. KZT

Source: Agency of the Republic of Kazakhstan on Statistics

GVA in the agrochemical industry in the period 2008-2012 increased 2.7 times. Number of people employed in the sector of agricultural chemistry for the period 2008-2012 decreased by 38 people.

Labour productivity in the Republic of Kazakhstan in 2012 increased 2.7 times compared to 2008 and amounted to 13 618 thousand tenge.Labor productivity of agrochemical sector in Kazakhstan in 2012 was 2.7 times lower than the average labor productivity in the OECD countries.

Number of active enterprises in the agrochemical sector from 2008 to 2012 increased by 4 and amounts to 28 enterprises, while capacity utilization decreased by 5.6%. Depreciation of equipment for the period increased by 10% at a rate of renewal of fixed assets 8.9% in 2012.

Investments in fixed assets in 2012 amounted to 3 484 mln tenge, which is 10 times higher than investments in 2008. Growth of investment in the sector is associated with the adoption of the Program for the development of chemical industry in Kazakhstan for 2010-2014.

The volume of exports of fertilizers and pesticides in 2012 decreased by 13.6% compared to 2008 and amounted to U.S. $ 63.5 million (9.8 bn tenge), while the volume of imports for the period increased by 36.1 % and amounted to 116.9 million of U.S. dollars (18.1 billion tenge). Decline in exports and increase of imports of agrochemical sector products is equally associated with an increase in domestic consumption of fertilizers and pesticides by manufacturers of agricultural products.

Key indicators of the agrochemical sector for the period 2008-2012 are presented in the Table 3.

Table 2.2.6.3. Agricultural chemistry sector data for 2008-2013