Reducing dependence on natural resource commodities in Kazakhstan


Delivered by: 

Sir Suma Chakrabarti, EBRD President

Venue: 

Astana, Kazakhstan

Event: 

26 Plenary Session of the Foreign Investors’ Council

Innovation is key to success

Thank you very much for your opening remarks, Mr President, and for the opportunity to outline the EBRD’s view on the priorities of Kazakhstan’s innovative technological development over the next decade.

Mr President,

Excellencies,

Ladies and Gentlemen,

Diversification away from excessive dependence on natural resource commodities remains an overarching priority in Kazakhstan. Sharp fluctuations earlier this year in prices of a broad range of commodities remind us of the urgency of the diversification and modernisation agendas.

The key to success of diversification is innovation. Indeed, diversifying the economy means producing and exporting new goods and services. This will not be possible without innovation. Innovation at the global frontier but also, importantly, innovation by imitation -- bringing international best technologies to Kazakhstan and modernizing existing industries.

Innovation is a complex task. Its success relies on several key ingredients coming together. Let me shortly stress five ingredients which the EBRD sees as critical for the further development of a knowledge- and innovation-based economy in Kazakhstan.

First, the development of human capital. Innovation and introduction of new technologies require new skills that may not be readily available in the market. This is as true for Kazakhstan as it is for most advanced countries. To address this challenges, the authorities and businesses could combine their efforts, for instance by establishing specialized vocational training programmes. Such initiatives have had notable success internationally, from Chile to Kaluga region in Russia. Foreign investors can further facilitate transfer of skills by bringing new technologies and hiring and training local staff. Educational curricula should be reviewed and, where needed, be made more flexible, to better match the supply of skills to the evolving demand. In certain cases a flexible approach to migration policy, including streamlined procedures for highly skilled labour, can help to address shortages of critical skills in the short-term.

The second major challenge is access to specialized finance. Innovation requires significant funding. Following major bank restructuring efforts, Kazakhstan’s financial system is on its way to recovery. Yet the level of non-performing loans in the banking sector remains high. This will constrain the ability of banks to finance innovation projects. Small and medium-sized enterprises in particular often find themselves starved of credit. EBRD stands ready to provide assistance in the areas of NPL resolution, credit risk management and SME lending going forward. EBRD has worked with over 1,000 companies over the last ten years through Bank’s Business Advisory Services Programme, helping them to prepare bankable business plans, maintain good corporate records and information systems. And, provided the conditions are right, EBRD  stands ready to do more to support SMEs in Kazakhstan.

Perhaps even more importantly, firms trying out truly innovative ideas need specialized financing, in particular at the early stages of innovation cycle. It can come, for instance, in the form of seed financing or venture capital funding. In these areas significant gaps remain, not just in Kazakhstan, but across the region where EBRD operates.

It is also important that innovation finance be provided on a commercial basis, by private sector funders or a combination of private and public sector vehicles. The presence of private sector funders is critical to provide market-driven tests for innovative ideas and technologies and, in many cases, valuable expertise that can help smaller companies develop and commercialize their ideas.

On the other hand, the state's presence as a minority investor provides greater overall risk tolerance and greater availability of funding. A minority investor approach also helps to ensure that public funding complements and catalyses private funding, rather than crowding it out.

The third challenge is to create an enabling business environment. The business environment is key to productivity and growth of all firms, but there is strong evidence that innovative firms are particularly sensitive to the quality of the business environment. This is clear, for instanec, in the early results from the latest round of the Business Environment and Enterprise Performance Survey (BEEPS) conducted by the EBRD and the World Bank across Emerging Europe and Central Asia. The differences are particularly striking in areas such as skills, corruption and customs.

Indeed, innovative firms introducing new technologies tend to be more export oriented, as exporting helps to spread the high fixed cost of investment in research and development. They also tend to import inputs, technology and equipment. In this context, streamlining import and export procedures can substantially reduce the overall costs of introducing innovative technologies, not only by foreign firms but - importantly - by domestic firms, including medium-sized enterprises.

The fourth challenge is the need to have a framework for innovation, that encourages individuals and firms to commercialize innovative ideas. One important element of supporting innovation is building stronger linkages between science and industry. This requires, for instance, greater clarity regarding ownership of results of publicly funded research, and opportunities and incentives for researchers to commercialize their ideas and respond to market needs. This requires clear, secure and enforceable intellectual property rights. This may also require review of how public funding for research is allocated, with a higher role for project-based grants for applied research with a clear commercialization potential.

The fifth and final challenge is the need for specialized infrastructure. Around the world, access to mobile and broadband technologies is changing the face of businesses, allowing smaller innovators to participate like never before. These technologies are also crucial to closing the rural-urban divide, giving companies an opportunity to be part of a global network regardless of their location. The Bank has been investigating a possible project with KTC  to improve internet access in the rural areas and strengthen the regulatory framework in the sector.

To conclude, I would like to stress that Kazakhstan has undertaken enormous efforts to overcome the effects of the financial crisis and address bottlenecks impeding innovative growth. Notably, a number of special economic zones have been set up in recent years throughout the regions of Kazakhstan. A number of specialized funding vehicles were set up over the last decade, including the National Innovation Fund and the Science Fund.

Crucially, the Green Economy agenda, which you have just presented, President, will play a key role ensuring that innovation is based on sound and balanced environmental policies and resource accountability. The green economy is in itself a major source of innovation. The EBRD has been supporting this agenda through its projects, by bringing best available technology and improving energy efficiency in the municipal and transport infrastructure. We are keen to strengthen this support, and actually expand our involvement to other areas such as the solid waste sector.

The themes of innovation and green economy will be at the heart of the Expo 2017, to be held in Astana. All these initiatives have been instrumental in pushing the innovation and modernisation agenda forward.

Yet more remains to be done. To foster innovative technological development over the next decade, it is not sufficient to focus on a few high-profile innovation initiatives. It is essential to make advances across the board, focusing on improving skills, creating a sophisticated and diversified financial system, and streamlining the regulatory framework so that the private sector can drive innovation and investment forward.

The EBRD stands ready to work together with investors and with the Government of Kazakhstan towards building a knowledge- and innovation-based economy and advancing the Green Economy agenda.

Thank you very much.
EBRD President Sir Suma Chakrabarti co-chaired the 26 Plenary Session of the Foreign Investors’ Council with President Nursultan Nazarbayev of Kazakhstan on 22 May 2013 in Astana.

Thank you very much for your opening remarks, Mr President, and for the opportunity to outline the EBRD’s view on the priorities of Kazakhstan’s innovative technological development over the next decade.

Mr President,

Excellencies,

Ladies and Gentlemen,

Diversification away from excessive dependence on natural resource commodities remains an overarching priority in Kazakhstan. Sharp fluctuations earlier this year in prices of a broad range of commodities remind us of the urgency of the diversification and modernisation agendas.

The key to success of diversification is innovation. Indeed, diversifying the economy means producing and exporting new goods and services. This will not be possible without innovation. Innovation at the global frontier but also, importantly, innovation by imitation -- bringing international best technologies to Kazakhstan and modernizing existing industries.

Innovation is a complex task. Its success relies on several key ingredients coming together. Let me shortly stress five ingredients which the EBRD sees as critical for the further development of a knowledge- and innovation-based economy in Kazakhstan.

First, the development of human capital. Innovation and introduction of new technologies require new skills that may not be readily available in the market. This is as true for Kazakhstan as it is for most advanced countries. To address this challenges, the authorities and businesses could combine their efforts, for instance by establishing specialized vocational training programmes. Such initiatives have had notable success internationally, from Chile to Kaluga region in Russia. Foreign investors can further facilitate transfer of skills by bringing new technologies and hiring and training local staff. Educational curricula should be reviewed and, where needed, be made more flexible, to better match the supply of skills to the evolving demand. In certain cases a flexible approach to migration policy, including streamlined procedures for highly skilled labour, can help to address shortages of critical skills in the short-term.

The second major challenge is access to specialized finance. Innovation requires significant funding. Following major bank restructuring efforts, Kazakhstan’s financial system is on its way to recovery. Yet the level of non-performing loans in the banking sector remains high. This will constrain the ability of banks to finance innovation projects. Small and medium-sized enterprises in particular often find themselves starved of credit. EBRD stands ready to provide assistance in the areas of NPL resolution, credit risk management and SME lending going forward. EBRD has worked with over 1,000 companies over the last ten years through Bank’s Business Advisory Services Programme, helping them to prepare bankable business plans, maintain good corporate records and information systems. And, provided the conditions are right, EBRD  stands ready to do more to support SMEs in Kazakhstan.

Perhaps even more importantly, firms trying out truly innovative ideas need specialized financing, in particular at the early stages of innovation cycle. It can come, for instance, in the form of seed financing or venture capital funding. In these areas significant gaps remain, not just in Kazakhstan, but across the region where EBRD operates.

It is also important that innovation finance be provided on a commercial basis, by private sector funders or a combination of private and public sector vehicles. The presence of private sector funders is critical to provide market-driven tests for innovative ideas and technologies and, in many cases, valuable expertise that can help smaller companies develop and commercialize their ideas.

On the other hand, the state's presence as a minority investor provides greater overall risk tolerance and greater availability of funding. A minority investor approach also helps to ensure that public funding complements and catalyses private funding, rather than crowding it out.

The third challenge is to create an enabling business environment. The business environment is key to productivity and growth of all firms, but there is strong evidence that innovative firms are particularly sensitive to the quality of the business environment. This is clear, for instanec, in the early results from the latest round of the Business Environment and Enterprise Performance Survey (BEEPS) conducted by the EBRD and the World Bank across Emerging Europe and Central Asia. The differences are particularly striking in areas such as skills, corruption and customs.

Indeed, innovative firms introducing new technologies tend to be more export oriented, as exporting helps to spread the high fixed cost of investment in research and development. They also tend to import inputs, technology and equipment. In this context, streamlining import and export procedures can substantially reduce the overall costs of introducing innovative technologies, not only by foreign firms but - importantly - by domestic firms, including medium-sized enterprises.

The fourth challenge is the need to have a framework for innovation, that encourages individuals and firms to commercialize innovative ideas. One important element of supporting innovation is building stronger linkages between science and industry. This requires, for instance, greater clarity regarding ownership of results of publicly funded research, and opportunities and incentives for researchers to commercialize their ideas and respond to market needs. This requires clear, secure and enforceable intellectual property rights. This may also require review of how public funding for research is allocated, with a higher role for project-based grants for applied research with a clear commercialization potential.

The fifth and final challenge is the need for specialized infrastructure. Around the world, access to mobile and broadband technologies is changing the face of businesses, allowing smaller innovators to participate like never before. These technologies are also crucial to closing the rural-urban divide, giving companies an opportunity to be part of a global network regardless of their location. The Bank has been investigating a possible project with KTC  to improve internet access in the rural areas and strengthen the regulatory framework in the sector.

To conclude, I would like to stress that Kazakhstan has undertaken enormous efforts to overcome the effects of the financial crisis and address bottlenecks impeding innovative growth. Notably, a number of special economic zones have been set up in recent years throughout the regions of Kazakhstan. A number of specialized funding vehicles were set up over the last decade, including the National Innovation Fund and the Science Fund.

Crucially, the Green Economy agenda, which you have just presented, President, will play a key role ensuring that innovation is based on sound and balanced environmental policies and resource accountability. The green economy is in itself a major source of innovation. The EBRD has been supporting this agenda through its projects, by bringing best available technology and improving energy efficiency in the municipal and transport infrastructure. We are keen to strengthen this support, and actually expand our involvement to other areas such as the solid waste sector.

The themes of innovation and green economy will be at the heart of the Expo 2017, to be held in Astana. All these initiatives have been instrumental in pushing the innovation and modernisation agenda forward.

Yet more remains to be done. To foster innovative technological development over the next decade, it is not sufficient to focus on a few high-profile innovation initiatives. It is essential to make advances across the board, focusing on improving skills, creating a sophisticated and diversified financial system, and streamlining the regulatory framework so that the private sector can drive innovation and investment forward.

The EBRD stands ready to work together with investors and with the Government of Kazakhstan towards building a knowledge- and innovation-based economy and advancing the Green Economy agenda.

Thank you very much.