Launched in 2002, Astana’s special economic zone (SEZ) is the largest and most diversified of the 10 SEZs that the Kazakh government has established across the country to spur development in key industries and diversify the economy beyond oil and gas and the mining sector. Thanks to its ability to attract investment, Astana’s SEZ has played a major role in supporting the development of the city’s urban profile and still-narrow manufacturing base. Today, a growing number of Kazakh and international companies are manufacturing everything from train cars to solar panels.
As Astana continues to grow economically and physically, the SEZ will be expanding to a second industrial park and even as far as the site for the upcoming Expo 2017, where authorities are planning to establish the Astana International Financial Centre (AIFC) and offer financial institutions the benefits of the SEZ.
“President Nursultan Nazarbayev decided to set up a special economic zone to speed up the development of the city’s new urban centre,” says Ilyas Zhangaskin, the head of Astana’s SEZ. “The SEZ gave tax and duty preferences to anyone developing real estate on the left bank of the Ishim river... and became the major engine of the dynamic growth the city has experienced.”
The establishment of Astana’s SEZ facilitated the development of dozens of residential and commercial buildings on the western bank of the Ishim river – the SEZ’s administrative and business centre – after the city was made the capital of Kazakhstan in 1997.
Overall, the territory of the SEZ has attracted investments totalling $10.9bn since 2006, according to figures from the Akimat, the local municipality. In the same period, 58 projects kicked off in the SEZ’s first industrial park, accounting for total investments of $920.5m up to the end of June 2015. Some 21 of them have already come online and produced goods worth $1.9bn since 2006; 19 are under construction phase, and another 18 are either in the design or land registration phase. Most of the producers active in the SEZ are Kazakh companies. Foreign investors such as Alstom, Airbus, Metro, General Electric, Gevo, Ipek Kagıt and Talgo account for 11 of the 58 projects. They all enjoy the SEZ’s wide rage of fiscal and other incentives.
Andrey Yershov is managing director of EKZ, a joint venture between French company Alstom Transport, Kazakhstan’s state railway company Temir Zholy and Russia’s Transmasholding, which produces and maintains electric locomotives in Astana’s SEZ. “The SEZ has obvious advantages,” he says. “We import a lot of raw material from the EU and China, and we don’t pay a penny in customs duties on it. If we were outside the SEZ, we would pay a lot a duties.” EKZ is ramping up production to 18 freight locomotives in 2015 and another 33 in 2016.
With only 17 million people living in a huge, landlocked territory, Kazakhstan is not a regular target for market-oriented foreign investment. But the country’s growing economy and government efforts to create opportunities beyond the extractive sectors are paving the way for a domestic manufacturing industry, traditionally absent during the Soviet era because Kazakhstan was mostly seen as source of agricultural produce.
Companies setting up in Astana’s SEZ do not pay any income or property tax, VAT or land costs. In addition, they benefit from Kazakhstan’s traditionally low costs for water (the single rate of water and sewage services in the SEZ, as in the rest of Astana, is $1.30 per cubic metre), electricity ($0.09 per kilowatt hour) and heating ($7.90 per gigacalorie). These benefits are available to both Kazakh and foreign investors, alongside 100% ownership of the local subsidiaries in as many as 16 sectors including heavy machinery, food, furniture, railways carriages and pharmaceuticals.
International investors in the railway industry have already proven receptive to the opportunities offered by Astana’s SEZ and the government’s push to make Kazakhstan a key transit hub in China’s grand vision of a New Silk Road. The New Silk Road project aims to strengthen overland connections between China, central Asia, the Middle East and eastern Europe along the route of the ancient Silk Road, formerly the only viable connection with China before European explorers opened sea routes.
Right on track
Chinese president Xi Jinping announced in November 2014 that China would invest $40bn in setting up the Silk Road Fund and upgrade connections along the Silk Road Economic Belt. A number of road and railway transit corridors will run through Kazakhstan, improving national and regional ties. EKZ signed a $1.3bn contract for the supply of 295 locomotives to Temir Zholy in 2010. It also closed a supply contract worth €300m with Azerbaijan’s state railway company, ADDY, for the supply of 50 passenger locomotives. Spanish rolling stock producer Talgo also set up its local production facility within Astana’s SEZ in a joint venture with Temir Zholy to fulfil contracts worth more than Ä1.5bn.
Opportunities abound also for renewable energy suppliers. Traditionally dependent on coal-fired generation, Kazakhstan is taking its first steps to make its energy matrix cleaner and aims at to access 3% of its electricity from greener sources by 2020. The potential for solar energy generation across the central Asian steppe is well documented, but barely exploited. Astana’s Expo 2017 will focus on ‘future energy’ and give Kazakhstan a chance to build some momentum around the development of renewable energy generation. Local firm Astana Solar chose to locate the country’s first production facility for photovoltaic panels in the SEZ.
Astana’s real estate boom is creating opportunities for construction materials manufacturers, too. Polish group Selena is in the process of setting up a local production facility within the city’s SEZ with the support of the European Bank for Reconstruction and Development.
The launch in January of the Eurasian Economic Union (EEU), a common market stretching from Belarus all the way to Kazakhstan’s eastern border with China, is increasing the export potential of manufacturers producing in Kazakhstan by abolishing customs duties for intra-EEU trades. It also mandates 50% local content for these trades, which increases the importance of local sourcing. This heightens the potential of Astana’s SEZ to become fertile territory for the development of a real industrial cluster around existing manufacturers of finished products.
Power in a union
“We definitely have space to source locally more of our raw materials,” says Mr Yershov. “Intelligent suppliers with enough capital to invest will acknowledge the opportunities of being within an SEZ in the EEU.”
Local authorities are convinced the benefits of establishing a manufacturing facility in Astana’s SEZ go even beyond the EEU. “Kazakhstan plays a major part in China’s New Silk Road vision,” says Adil Shalmanov, managing director of Astana Innovations, one of the divisions of the public company managing Astana’s SEZ. “The world mostly trades with coastal China. We can become a back door to China and serve its western provinces.”
Betting on increasing interest in local industry, the Akimat is developing a second industrial park of 433.1 hectares (the first covers 598.1 hectares), slated to come online in 2017.
“Singapore’s Jurong Consultants was hired to work on a masterplan for the second industrial park,” says Nurali Aliyev, Astana’s deputy mayor. “We want this industrial park to focus specifically [on certain] segments and be a cluster attracting innovative productions. Hopefully in a few months the masterplan is going to be ready.”
Many of the SEZ benefits will be extended to the Astana International Financial Centre, which will take over the Expo site once the event is over. “The economic slowdown of 2009 [when annual GDP growth in Kazakhstan fell to 1.2%] showed us that the country remains vulnerable to global economic crises,” says Alibek Nurbekov, deputy director of the finance development department of the National Bank of Kazakhstan, the country’s central bank. “That’s why we need to develop something very solid in the long run, some alternatives to the traditional banking sector such as capital markets and Islamic finance.”
The National Bank of Kazakhstan and the stock exchange will relocate to Astana from Almaty, and Kazakh authorities hope investment banks, asset managers and Islamic finance institutions will follow suit. The authorities have shown a commitment to developing Islamic banking and specific legislation is expected to be approved by the end of 2015. Mr Nurbekov adds that retail banking will remain based mostly in Almaty, however.