Import substitution and localization - how realistic is it and what is needed for this
Ibrahim Kamal explained to the correspondent of the International Information Agency "Kazinform" why Kazakhstan has to establish an authorized national organization for import substitution and localization. The businessman has been dealing with difficulties of transferring foreign inventions and technologies to Kazakhstani businesses and localizing production for many years.
First of all, according to Ibrahim Kamal, localization of production refers to the placement of manufacture of some items from foreign firms' parts in the same nation where those things are already created from provided components in finished form. Imports can be replaced with locally produced items through import substitution. The majority of nations in the world have experienced import restrictions and still follow this practice today. The rationale for this is straightforward: the more locally manufactured things we make, the less money will leave our economy when we sell raw materials and buy finished goods, even those made with our own raw resources. Creating production facilities is a long-term and effective tool to stimulate economic growth because it is not only jobs but also technology, infrastructure, and taxes. Production has a multiplicative impact on the economy that simple resource extraction and minimal processing do not.
Unfortunately, despite 30 years of autonomous growth, Kazakhstan continues to be a nation primarily focused on resource exports. The level of localization of manufacturing and import substitution in our nation remains low despite all the declarations and plans to use raw material profits to build the actual, productive sector of the economy as well as the billions of dollars invested under these slogans.
The establishment of a special authorized organization that will have to deal specifically with the localization of manufacturing in Kazakhstan may be the solution to this issue and a powerful boost for the nation's economy. We could even be able to advance the situation simply by doing this.
Foreign investors have frequently declared preferences for goods and services from Kazakhstan; some of these businesses even have entire departments dedicated to "local content." Can this not be seen as localization?
No, unfortunately. Obligations to purchase goods, services, and works from Kazakhstani businesses are frequently spelled out in contracts or tender criteria. A Kazakhstani corporation is what? It is a legitimate business that was created in Kazakhstan, is registered, and is governed by our laws. It is nonetheless a Kazakhstani firm even if its founders are people or organizations from another country. Additionally, this Kazakhstani business orders the identical products from its parent company, which it will then clear here and sell to the same investor. All of its Kazakh content will consist solely of an address in a Kazakh business complex where the company will rent a few offices. LLPs that are formed in Kazakhstan but whose creator or beneficiary is a foreign corporation are not local enterprises and are not localization. The "Kazakhstani content" issue is that it merely gives international producers a nominal presence in Kazakhstan without actually encouraging them to move their production here.
Could you please clarify that international corporations must register here as, example, an LLP in order to enter into a contract and present themselves as a local company?
Let me provide a few examples. For instance, in general contracting for construction, a foreign company registers an LLP in Kazakhstan while having foreign management, including directors and coordinators who get the best contracts while Kazakhstani workers and subcontractors are compelled to share the cost among themselves in order to somehow manage the work.
Localization is a universal issue. At the design stage, foreign design groups install foreign equipment, making further revisions to design solutions unfeasible. In my opinion, manufacturers are unlikely to localize an item with a guaranteed delivery order.
Do you think that foreign investors are not really interested in either localization or import substitution?
Localization and import substitution, in my view, are in the state's best interests, which is why I think that by establishing a recognized organization, this issue may be resolved. I personally had a situation involving the localization of the manufacture of Emerson spare parts. We signed a memorandum, created an investment strategy, and chose the localization name. However, when Emerson learned the project's budget, they naturally began a direct conversation with the subsoil user, who decided to buy without the necessity for localization.
The final push at this point would be finding an interested body, which is what I propose to start.
I have been involved in discussions about localization at various levels for a long time. I am firmly convinced that the only way to achieve success in this field is to establish a recognized national organization for localization and import substitution. I'm confident that great outcomes are attainable with the correct abilities and attitudes. Such an organization would develop into a significant influencer over foreign capital present in the nation.
In other words, it is something to consider for the government, then?
For the advantage of the domestic economy, the state can and must determine the rules of the game. This is recognized by the authorities. I recently read a news article about KazTAG. In it, Kazakhstan's Energy Minister Almasadam Satkaliev states clearly that "Long-term contracts will encourage domestic and foreign companies for localization of production." Furthermore, the statement states that PSA LLP and the International Center for Oil and Gas Engineering Development (ICOGEM) would work together to find a solution to this problem.
Long-term contracts are a great incentive, but it is unknown how they will be promoted, how they will be monitored, and many other things. It is particularly concerning that the ICOGEM, whose members are the same oil and gas operators whose localization results we have been waiting for all these years, would be in charge of handling this matter.
When it comes to PSA LLP, this company is an authority in production sharing agreements (PSA), which means that they have other priorities and that their involvement in the debate over localization is, in my opinion, a conflict of interest given that they want to regulate production sharing.
Another concern is whether foreign manufacturers will transfer their technologies and knowledge to Kazakhstan in order to localize their products there. Could this be the problem?
From the USA to South Korea, we have visited production facilities over the years. Nearly all manufacturers indicate their willingness to localize their manufacturing, especially if the Kazakhstani side is prepared to offer workshops and a production base, as in our case. No company will turn down a guaranteed profit.
World-renowned service providers, especially those who work on offshore projects with little to no local content, are also prepared for gradual localization, but despite this, we continue to see the same foreign service providers in this sector.
In light of the fact that just one operator's annual budget for spare parts exceeds $300 million US and that of services is considerably greater, it is quite challenging to come up with an explanation for the dearth of genuine localization projects. Although many chances have been lost, localization and import substitution now create jobs and a developed economy tomorrow.
