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What prevents Kazakhstan from producing products with higher added value, and why have we not discovered a single deposit in recent years? We analyze with experts.

In manual mode

The 14th mining and geological forum MINEX recently ended in Astana. Industry participants once again gathered to compare notes, analyze the status quo and understand where to move next.

On the sidelines of the forum, we asked Timur Odilov, an expert in the mining sector, a member of the working group for the development of the Code of the Republic of Kazakhstan “On Subsoil and Subsoil Use”, about the efficiency of such meetings.

“Smart people here say what should be done and what should not be done, what systemic measures, institutional things should be taken. What do we see in practice? – The government continues to work in manual mode. And the investment headquarters, created by presidential decree last year, considers individual projects. As a lawyer, I have doubts, even from the point of view of the Constitution, about his activities. That is, all industry forums are not about specific problems of a particular project, they are always a discussion about systemic things. But neither the past nor the current government sees or considers them. And now everything is done in manual management mode for specific projects,” Odilov noted.

The second problem he pointed out was “the notorious industrialization, high processing levels and everything else.”

“We continue to develop myths, the narrative of “raw materials in exchange for technology.” What technologies? – Tall? But high-tech companies do not buy raw materials; between them there is a huge chain of structures that deal with all kinds of processing. People who continue to support the “raw materials for technology” agenda do not understand how business and the industry work,” the expert continued.

The third point: Kazakhstan has traditionally been accustomed to developing the manufacturing industry – multi-stage programs of the SPFIID, and now the industrialization policy continues.

“But let’s look at how this policy developed – we have never developed the manufacturing industry through a large package of incentive measures. The entire policy was based on the administrative-command system through the setting of restrictions. SPFIID was structured as obtaining rights to subsoil not through competition, but through direct negotiations – that is, as an exception to the rule,” emphasized Timur Odilov.

Narrow neck

Now the supply of raw materials to the domestic market is developing through the creation of bureaucratic barriers so that you cannot export raw materials, concentrate or metals, but supply them to the domestic market, which is already not experiencing a shortage, he stated.

“All the rhetoric is based on the fact that we will either create a bottleneck or make life more difficult for subsoil users, and the manufacturing industry will heal. Look at the history in other countries where this area developed in the absence of access to their own raw materials – simply because it did not exist. So, does the failure of the manufacturing industry really depend on the behavior model of subsoil users?.. This is nonsense, but this discourse was put into the mouths and minds of politicians on the Left Bank of Astana,” the expert said.

And this narrative sells well, and the population is angry with subsoil users, who appear to be careless entrepreneurs who develop subsoil in the country and do not want to develop the manufacturing industry.

“So maybe it’s not about subsoil use, but about industrial policy, the lack of incentive measures and a comprehensive vision? And the fact that one business in the field of subsoil use hinders the growth of business in the manufacturing industry is a lie. In Uzbekistan, this industry is developing even if there are problems with raw materials; Taiwan somehow developed without its own mining industry. Economists understand this, other smart people understand this. But the status quo is killing the development of the mining industry and the discovery of new deposits,” Odilov emphasized.

The reform failed

He called the subsoil use reform in the country a failure.

“The legislative part of the reform lasted from 2014 to 2018; a specialized Code was adopted, but implementation was failed. Some call the Code bad, which is supposedly why it did not work and there were no discoveries of new deposits for the first 5-6 years. What has the government done to implement this code? The database in the elementary part – submitting an application – was launched only last year, 5 years later! We have not switched to the international Crisco standards (the system of reporting standards for reserves of solid minerals, TPI), we have not posted all the primary geological documentation, we have not analyzed it – there is simply no way to get there,” the expert noted.

No work has been done to discover new deposits or attract investors, he believes.

“The state ruined the implementation part, and then did even worse in the legislative part, sharply increasing the mineral extraction tax by 50 and 30% in 2023 (for exchange-traded and over-the-counter metals). This clearly did not improve the investment climate and did not benefit the discovery of new fields. The smartest way is to raise taxes, which means that the financial model of some projects will not work. I have personally warned government members who raise taxes about the consequences. And a year later, it is clear that the resource base, previously profitable, is now unprofitable,” Timur Odilov shared with

Thus, while taxes remained at the same rate, the deep horizons of already operating fields were in the border zone. As soon as they increased, they became unprofitable. And these are new jobs, the continuation of the life of these deposits.

“Then the government had the task of patching up the hole – here and now, and no one was interested in what would happen next. The principle of work is just not on my shift, but after us there might be a flood,” the expert described the state of affairs.

There will be no quick victories

In the current conditions, the interlocutor does not see the light at the end of the tunnel due to the composition of the Cabinet.

“The situation will worsen, people will leave after some time, and no one will bear political responsibility for earlier decisions. At the same time, the industry itself will develop contrary to this. Key fundamental things have already been launched, they cannot be turned back. Another thing is that development will occur slowly, and you should not expect quick victories. Once again: in all countries, geological exploration is stimulated by tax methods. Not to mention the fact that they have a ready-made information and analytical structure and everything else. We haven’t done the basics to talk about things that would help open new deposits. How much has the National Geological Survey made by selling information that should be free? Companies are giving it money rather than investing in exploration. This is a clear example of the fact that Kazakhstan needs institutional reforms, which we have been waiting for for several years,” said Timur Odilov.

It should be noted that AZRK recently reported that the NGS (National Geological Survey), which is a subsidiary of the Ministry of Industry and Construction, illegally charged potential investors a fee for geological information. In 2022-2023, the operator received 1.2 billion tenge when considering 4 thousand applications. AZRK emphasized that the relevant ministry did not have the right to issue the corresponding order, since it contradicts the Code “On Subsoil and Subsoil Use,” which guarantees open free access to geological information to all interested parties.

AZRK issued an order to the Ministry of Industry, but the head of the NGS, Erlan Galiev, on the sidelines of the MINEX forum, said that the organization will continue to charge a fee for the information provided.

New money from old projects

Economist Murat Temirkhanov, in a conversation with us, also emphasized the importance of investment, without which the development of mining and processing industries is impossible.

“Oil refining cannot be done without private investment. The state, KazMunayGas, does not have enough money or expertise for complex projects. What is happening in the oil industry now is 3 mega-projects for production, all thanks to private injections, and everything is exported. And new projects are no longer underway, because everyone sees: the state recently increased the amount of claims against Kashagan developers to $150 billion. Before this, the state was suing Tengiz and Karachaganak. All this scares off foreign investors. We are now trying to take more money from old megaprojects, “attacking” investors,” which, I think, is wrong. I don’t know how they will come out of this in the future,” the economist told us, emphasizing that our main problem is too much government participation in the market economy.

Give incentives!

Executive Director of AGMP (Association of Mining and Metallurgical Enterprises) Nikolai Radostovets, when we asked when we will move from mining to deep processing, responded with a counter statement:

“We need to ask the question: is this profitable? Australia also produces and supplies raw materials and metal for export. Here we need to look at each product group before answering when we move on. Domestic consumption needs to be stimulated. President Tokayev instructed to provide tax benefits for 3 years to those who engage in processing within the country,” said the head of the mining and metallurgical association.

There is no such practice in the world that the mining and metallurgical sector, which is engaged in metal production, is also engaged in processing, and does a higher conversion, he recalled.

“We are already selling metal to the domestic market at a reduced price – with a 5% discount. And we need to stimulate and create businesses interested in recycling. If enterprises produce new types of products, from aluminum, for example, to make cans, beer cans, window blocks, then they should be exempt from all taxes for 3 years,” Radostovets expressed his opinion.

At the beginning of April, amendments were adopted to introduce licensing for the export of metals. Will come into force in October of this year.

“Export licenses will be issued only if metallurgical enterprises fulfill certain obligations and meet the needs of the domestic market. We are not supporters of such administrative methods. To develop metal processing and create metallurgical clusters in Kazakhstan, it is more expedient to take fiscal measures aimed at stimulating enterprises to process natural resources within the country (including by differentiating the mineral extraction tax or switching to royalties according to the principle “the higher the redistribution, the lower the rate”) “- said Radostovets.

It is also necessary to develop coal chemistry, as the President spoke about in his recent Address to the People. According to the head of AGMP, it is necessary to develop a long-term Development Program for the coal industry and take incentive measures for the production of high-value coal products.

Why milk a calf if it is not yet a cow?

Let us remind you that, on behalf of the head of state, a new Tax Code is being developed within the government. The AGMP proposed their own package of amendments. In particular, the Association proposes to deduct all geological exploration expenses, regardless of the allocation of individual areas to new contracts, and also to establish a corporate income tax deduction for geological exploration expenses for solid minerals through existing production contracts.

“We need to make sure to provide for all possible deductions that now, one way or another, the tax authorities do not accept for geological exploration. Regarding VAT on exploration costs, ensure the return of excess VAT on geological exploration costs, regardless of the result of exploration and the availability of exports of solid minerals and processed products. We hope that amendments to the Code will make it possible to ensure full compliance with all international requirements regarding exploration activities,” Radostovets said.

The current production of copper cables, lead batteries, aluminum car disks, and window units is not enough, he continued.

“We need to scale production, and for this we need to create incentives. Before someone comes, he needs to invest in new construction, lay the foundation, purchase equipment, launch a workshop, and work out logistics. But taking taxes right away is not done in other countries. In Shanghai for 5 years, and a number of industries are exempt from taxes for 10 years so that they grow like mushrooms, and then they are harvested. And here it is: we won’t give you benefits and work under general conditions. And the investor thinks, why should he create a new industry, invest investments, when it is easier to engage in trade, resale, where he does not waste his capital for so long – some transactions even turn around in a month. And any production takes at least 3-5 years. This is money that needs to be spent in the long run,” the interlocutor noted.

In other words, we need long-term preferential loans, and if they are not available, then give new industries the opportunity not to pay taxes.

“This is not a reduction in the tax base – these enterprises do not exist yet. Why milk a calf if it has not yet grown into a cow?..,” asked the head of the AGMP a reasonable question.

According to statistics, only 0.1% of the total investment in geological exploration is successful. In most cases, geological exploration yields nothing; discoveries are very rare.

“We have not discovered a single large deposit in recent years. Therefore, if you take a risk and drill at 100-200-300 meters, you incur huge costs, you don’t need to take taxes or you need to transfer them to subsequent production. If I start making ice cream and I have milk, then I’m sure there will be ice cream. And if I made a hundred wells and I have nothing, I just spent money. What do taxes have to do with it if there is no result?..,” Nikolai Radostovets commented to us.

Finding balance

He also reported that for a number of metals – copper, gold, ferroalloys, lead and others – the physical volume of production and sales decreased in 2023. The reasons are logistics related to neighboring countries and, in general, the deterioration of the mineral resource base.

“Kazakhstan has accumulated a huge amount of solid waste – man-made mineral waste. We process only 11% of the volumes generated annually. The Association firmly raises with the government the question of the need to solve the problem not through administrative influences, but primarily through tax breaks. Now, if we process waste, the mineral extraction tax rate is the same as when processing full-fledged raw materials. This is unfair, so we raise the question that for solid waste belonging to subsoil users, it is already their property, and the processing of this solid waste should not be subject to mineral extraction tax. In relation to solid waste, which belongs to the state and which we have the opportunity to process, there should be a reduced mineral extraction tax rate,” said the head of AGMP.

Another issue is in-country value.

“Now we are encouraged to purchase domestic goods, but the methods of encouragement are more limited to administrative ones, they even imply the imposition of a fine if we do not purchase Kazakhstani goods. There needs to be a balance here. At the NPP site we will raise the question with processors and manufacturers – we will conclude offtake contracts for the products that our enterprises can produce. For other types of products there should be free purchase on standard terms, in many cases from a single source,” Radostovets said later at the forum.

About raiding and other risks

Meanwhile, the President of the Kazakhstan Chamber of Mines, Ruslan Baimishev, recalled at the forum about the growing need for the discovery of new deposits.

“In the future, we will face an annual crisis of up to 5 million tons of metals. Existing copper projects in the world can cover this need, but the issue is not a shortage of metal ore, but a shortage of jurisdictions in which this business can be built today. The negative image of a subsoil developer is spreading around the world, and it also exists in Kazakhstan,” he said.

In general, according to the chamber, reform in the sector has taken place. In 2022, the volume of private investment in geological exploration of the Republic of Kazakhstan amounted to 100 billion tenge, expenses for studying 1 square kilometer of deposits exceeded $100, which is higher than the world average.

“But at the same time, there are risks of deterioration in the investment climate caused by the adopted legislative initiatives – the ban on the export of solid minerals. There are risks that bans will apply to all minerals. The requirement for exploration programs is worrying: the investor spends money, and the state specifies how it should be spent. New grounds for revocation of a license are also being initiated, but there are factors here that may not depend on the subsoil user. And these are the prerequisites for raiding. Investment agreements and processing agreements have not yet come into effect; the volume of investments of 50 million dollars has not been allocated, but it is already proposed to increase it another 10 times – to 500 million. It’s premature. In addition, it is necessary to stimulate the development of deeper horizons, and the construction of mines requires capital investment and government support. The inconsistent policy on contracts with subsoil users remains a sensitive issue,” Baimishev said at the forum.