© Lumiere Consulting 2001

Concept Evaluation for Pre-feasibility Study

 

Project Summary

 

General Project Description

 

The purpose of this project is to help provide a humanitarian-focused solution to many problems that currently exist in the country of Kazakhstan.  The project began as recognition of two current problems in the country: the need to process and preserve excess vegetables at the end of the harvest season and the need for better nutrition for the people in the region, especially the children.  Other benefits resulting from this project will include: much needed employment, sustainable development, and technology transfer.

 

Upon careful examination of the project, it became apparent that a stand-alone cannery would not be economically feasible.  The reason being, that the harvest is not large or long enough to provide a sufficient amount of raw vegetables to process for a 12-month operation.  A factory that could only run for four to five months would not only have the workers unemployed for more than 6 months a year, and most likely, would end up failing.  To resolve this problem, the green house portion of the project was included.

 

The Agri-house technology is a key project element for several reasons.   It provides a year-round harvest, healthy and productive plants, and vegetables that are not tainted by soil and water contamination. It appears to be very cost effective due to its efficient use of fertilizer, water, the elimination of a need for pesticides, and a significant increase in plant production per unit area..  The Agri-house technology will also helps the project to meet certain mandates and requirements of both the United States and Kazak governments.

 

The Duke Solar part of the project has not been cost-estimated, however, it appears to be cost effective. Its cost effectiveness will be determined in the Pre-Feasibility stage.  However, the solar aspect positively addresses many issues that currently exist in the country.  One are of concerns the poor power distribution. Although electrical energy is available and relatively inexpensive, it is unreliable, and depending on where the facility is located, power may not be available. While power is currently inexpensive, the facility will be energy intensive and once the Solar system is in place, the maintenance cost are minimal and the energy costs are very low.

 

 The Duke Solar system is very efficient at water desalination.   Desalinization is very energy intensive and costly. and is needed to provide safe water for plants and the cooking and processing of the vegetables.  Much of the surface water in the area is contaminated with heavy metals, pesticide run off, and other contaminants.  To use this water untreated for the irrigation will allow these toxins to be absorbed into the plant producing unhealthy vegetables to eat.

 

The project is expected to be located in Qyzylorda Oblast, which is in the south central portion of the country.  Although this region is subject to considerable temperature fluctuations, it is the best region in the country for agricultural development.  The area will be able to supply seasonally, locally grown vegetables for processing.  There are currently local representatives involved with this project residing in the city of Qyzylorda. This is a major benefit to the project.  The Qyzylorda region is in need of economic stimulus and this project will help supply it.  The government of Kazakhstan has given high priority to the agricultural production and food processing industry in this region of the country.  It also provides additional employment, the transfer of advanced technology, and the production of an exportable product.  All of these factors will be very helpful in gaining their support and co-operation.

 

Individual Project Components

 

The Cannery

 

A canning facility, which is the nucleus of this project, fulfills many needs for the country of Kazakhstan.  Mainly, the cannery will process and can fresh vegetables.  The initial interest in building a canning factory in Kazakhstan was proposed in answer to the over abundance of vegetables that spoil yearly at the end of the harvest season as there was no way to preserve them.  Our research has shown this to be especially true in the southern region of the country.  It appears that the Northern and Western regions import their vegetables, both fresh and canned from Europe, Iran, and other countries in the Central Asian Region.  Because the harvest period of the local farms is about 3 months of the year, a greenhouse with year-round production is being proposed so that the cannery will have a continual supply of fresh vegetables.  See “Agri-house”.

 

The canned vegetables can be shipped throughout the entire country reducing the need for importing canned vegetables.  As the facility is successful and the greenhouse production capabilities grow, excess canned vegetable may be produced and utilized for export into neighboring countries – providing Kazakhstan with hard currency and the surrounding countries with safe and healthy food.

 

The food processing industry is a leader in the country and one that the government is heavily promoting.  This is especially true in the southern region of the country where the growing season is rewarding and a considerable amount of production is wasted due to a lack of processing capacity.  There are special initiatives and tax incentives available for companies that promote agriculture and the food processing industry. 

 

Additionally, the cannery will provide significant employment, educational opportunities, and safe healthy food for the local and surrounding populations.

 

Duke Solar 

 

The Power Roof is a total building system that can provide lower energy costs, superior natural day-lighting, and a more comfortable workplace. Equally important, this energy option is environmentally sound and, because of its operating temperature range, can fulfill an important array of end-uses.  This solar process can provide the energy to run the entire facility on a sunny day and can easily be integrated with standard energy utilization on days with heavy cloud cover.

 

Because of the Power Roof system's enhanced solar energy concentrating powers, collection temperatures up to 750º F are possible. The collected thermal energy can subsequently be utilized for industrial processes, double-effect absorption cooling, desalination and water purification as well as secondary space heating and domestic hot water uses. Where needed, it can also be converted into electricity to satisfy specific facility requirements or sold onto the distributed generation market during times of peak electrical demand.

 

The Duke Solar system provides many advantages to this project.

 

1. Power Distribution Problems:  Although there is an availability of electrical power and it is rather inexpensively, there are significant reliability and distribution problems throughout the country.  Both the infrastructure and the capacity to distribute large quantities of energy are not reliable and subject to problems. An integrated solar option makes this less important and less of a potential hindrance to the feasibility of the project.  It also gives flexibility of location to the project.

 

2. Cost of Power Generation.  The system should eventually pay for itself in the reduced use of purchased energy.  The proposed canning factory and surrounding complex will be energy intensive.  The Duke solar system will use the generated steam heat multiple times in a cascading manner to produce the most energy efficient system possible.

 

3. An Environmentally Sound System:  Renewable energy that is environmentally sound is supported by all governments.  The Duke Solar System makes the entire project more attractive to

4. the United States Export Assistance agencies we visited and to the Kazak Government.  It will help to fulfill many requirements, agendas, and desires of potential funding sources and government programs.

 

5. Natural Day Lighting:  The Power Roof System allows for natural lighting of the building and work areas.  It is known that natural lighting enhances the productivity, healthiness, and happiness of the work place.  Natural lighting also provides for a safer work place, less electrical needs, less maintenance and cost of florescent bulbs.

 

6. Global Acknowledgment:  The Duke Solar technology offers an opportunity for Kazakhstan to receive global acknowledgement for being a leader in this technology.

 

7. Desalinization of Water and Collection of Rain Water: The process used to distill and to desalinate water requires a tremendous amount of energy.  Much of the water in the country has heavy metals and may be contaminated with various toxins thus creating a need for water purification.  A process to produce clean potable water for use in the canning of vegetables as well as providing safe water for the greenhouse plants is absolutely necessary.   The amount of energy needed to produce non-toxic water for irrigation and processing is tremendous

 

Potentially, a traditional energy source may become cost prohibitive.  The Duke Power Roof would eliminate this concern. The Power Roof System also is designed with a trough that collects and funnels rainwater to a centralized location.  This water can be used in the solar system or to provide cleaner water naturally for the greenhouse plants.  This design to collect the rainwater is especially advantageous in arid regions like Kazakhstan.

 

8. Provides a Facility Roof:  This solar system will also act as a roofing system covering the canning facility.  It therefore eliminates the extra cost of engineering, building and providing the materials for a roof in addition to the solar system.

 

Agri-house

 

The Aeroponic system is a patented system, developed in conjunction with the University of Colorado and grants provided by NASA.  The purpose of the technology was to develop the most effective environment for plant growth in a space environment.  The Aeroponics system provides a trough-like base that suspends the vegetables part of the plant above the trough and allows the roots to hang down into an enclosed area.  Special spray nozzles atomize the water into micro-droplets that mist the roots on a scheduled basis to provide the most optimal growing environment.

 

The greenhouse portion of the project addresses many issues:

 

1. Growing season.   Although Kazakhstan has a productive growing season, the harvest season runs for only a few months of the year.  This creates a situation where the processing facility would only operate one-third of the year and would not create enough cash flow to be financially feasible.  By extending the growing and harvesting season to year round, the cannery would also run year round. 

 

2. Plant health and productivity.  By placing the vegetables in a controlled environment, they will not be exposed to the contamination of soil and water that is currently contributing to the poor health in the region.  The Aeroponics system will produce larger yields at an accelerated growth cycle making the food affordable, more accessible and healthier.

 

3. Health.  The Kazak people suffer from malnutrition and vitamin and iron deficiencies.  Vegetables produced in the green house facility as well as readily available canned and fresh vegetables in the winter and spring months will help the overall health of the community.  In addition, the Agri-house technology allows for vegetables grown in the facility to be vitamin and iron enriched.  This is done organically and offers a boost to the overall health of the local population

 

4. Grow in area not previously tillable.  Clean, non-contaminated, arable land that is good for growing vegetables is not available on a large scale in many population centers.  Because the Aeroponics system requires no soil, the process can be implemental anywhere.  Therefore, it does not take any arable land away from the Kazak farmers.  This creates a more favorable acceptance from the local farming population as well as the local government.  Because the plants are not subject to the potential pollutants that are prevalent in the soil, we are able to produce safe and healthy vegetables in an area where growing them has not been the case.

 

5. Reduce water usage by 95 - 98%.  The process would use approximately 5% or less of the water required if the plants were grown in the traditional manner.    Traditional farming methods would require substantially more clean water to produce healthy organic vegetables.  Irrigation practices in the country have lead to the shrinking of the Aral Sea, which is located directly north east of Qyzylorda.  This makes water even more scarce and water conservation very important.

 

6. Reduces fertilizer usage by 95%.  The fertilizer is dissolved into the water and is re-circulated until the plant absorbs all of it. 

 

7. Pesticide usage is nearly eliminated.  The system is in a micro-controlled environment with no soil required from the environment.  There is little need for pesticides or inorganics that are costly and not healthy for the consumer.

 

  

8. Increases crop yields by 45% to 75%.   The Aeroponics technology allows the plants to grow in the air, which provides them with a great deal more oxygen than plants grown in soil.  This is a key to increasing crop yields.  Kazakhstan is an impoverished country with malnourished children.  It is in everyone’s interest that the most effective food growing method be used to produce the healthiest vegetables possible in the most efficient manner.

 

 

 

9.      Employment and Technology Transfer.  The Agri-house technology offers an educational opportunity as well as employment in an environment where more than a third of the population is unemployed.

 

10.  An Exportable product.  By supplying the cannery with a consistent supply of vegetables for processing, there may be product for export.  Export in areas, other than oil rich areas, are very important and are needed for economic development.  The government is therefore motivated to facilitate projects that may assist in the development of exportable products.

 

11.  Fulfills mandates by various government agencies:  Most grants, guarantees, and funding monies available by government agencies need to accomplish or fulfill specific mandates or requirements.  The Agri-house element makes the entire project more attractive to the

mostagencies we visited as it fulfilled many requirements and desires of these agencies.   

 

Note:  Currently this technology is not being used in a facility of this size or nature and there is no statistical data available.  However, it is known that the technology works and performs in the manner indicated. 

Location

Considered the heart of Kazakhstan, Qyzylorda is the capital of the Qyzylorda Oblast (or state) and is located in the south-central portion of the country. The project will be located in this region.  The Qyzylorda Oblast is approximately 228,000 sq meters with nearly 600,000 people.  Located along the Syrdariya River, it is a fertile rice growing area.  Of the cities in Kazakhstan, Qyzylorda is one of the most Kazak cities. Over 90% of the population speaks Kazak as the mother tongue and it is one of the few large cities in Kazakhstan that one can get around in using only Kazak.  Although this region is subject to significant temperature fluctuations, (much of which may be attributable to the shrinking of the Aral Sea) it is the best region in the country for agricultural development. 

 

The Qyzylorda Oblast was chosen for the following reasons:

 

1. The best agricultural production.  This region grows the vegetables that are the best for canning.  The northern region of the country has less favorable growing conditions with mostly wheat and cotton grown there. The Western region of the country is dominated by oil drilling and farming is not prevalent.  There will be a large supply of vegetables available to be processed from the private farmers in the area. 

 

2. Involved people living in the area.  Some individuals directly involved in this stage of the project currently reside in Qyzylorda and are familiar with the area, the law, the language, the people and the customs.  They will be able to provide back up management and facilitation of the project.  This is more important than it may seem at first. When dealing with any emerging market there will be potential stumbling blocks involving customs, the government, and the way the local community conducts business.  Having the advantage of a local ‘resident’ is invaluable resource to the project.

 

3. Government priority.  The priority directions for social and economic development in Southern-Kazakhstan are:

 

1. The continuation of a policy designed to reform farm production and effective specialization of farming production; 

2. The implementation and application of up-to-the-minute processes and engineering to provide high quality farm products and an increase in agricultural exports;

3. The overcoming of disproportions in the development of different spheres of the activity within regional farming economies;

4. The establishment of a wide network of small plants processing agricultural raw materials and a modern industry for its storage, with the purposes of forming a solid and substantial food complex in the Republic;

5. The creation of a necessary manufacturing and social infrastructure, fortification of the material and technical base for farming and for industries producing consumer goods which contribute to the balanced development of the consumer market.

 

4. Need.   Indeed, this project is needed in Kazakhstan.  The western region has the oil fields to support the economy.  In the North and East there is industry and tourism.  The Southern region that borders Kyrgyzstan and Uzbekistan is badly in need of its agricultural assets to support the local economy.

 

Geography

 

Topology

The Republic of Kazakhstan is situated in Central Asia between the Ural River and the lower courses of the Volga River to the west, the Alatau Mountains to the east, the West-Siberian plateau to the north, and the Tien Shan mountain chain to the south. The territory of the Republic stretches 1,600 kilometers (1,000 mi.) north-to-south, and more than 2,800 (1,750 mi.) kilometers west-to-east, occupying an area of 2,717,000 sq. km. (1,050,000 sq. mi.)

Most of the area of Kazakhstan is flat and low-lying. In Central Kazakhstan, vast plains give way to the isolated low mountainous range of Saryarka, to the south and southeast they melt into the mountainous systems of Altai, Sauyr-Tarbagatai, Dzhungarski Alatau, and Tien Shan.

Kazakhstan is bordered to the north, northwest, and west by Russia, to the southeast by China and to the south and southwest by Kyrgyzstan, Uzbekistan, and Turkmenistan.

Kazakhstan is situated in Central Asia, deep in the Eurasian continent.

 

Climate

 

The climate of the Republic is deeply continental and extremely dry.  It is severely influenced by the Arctic Region and Eastern Siberia. The absence of any natural barriers in the north of the Republic enables cold arctic winds and arctic air masses to come from this direction without restraint. Conversely, the high mountains rimming the east and the southeast of Kazakhstan act as a barrier to air masses from the south. This accounts for the rather unsparing winters over the greater part of the area of the Republic. In Kazakhstan summers are hot and dry, with hot winds. Remoteness of the country from oceans and vastness of its territory determine climatic conditions.

 

The climate of the country is sharply continental. Average temperature in January varies within - 19° to - 4° C (-2 to 25 ^oF) while average July temperature fluctuates within + 19° to + 26° C (66 to 79 ^oF). The lowest temperature in winter may go down to - 45° C (-49 ^oF) with the highest one in summer + 30° C (86 ^oF).

 

The Qyzylorda Oblast has experienced a weather change in the last ten-year, much of which is attributed to the shrinking of the Aral Sea.  Despite the flux of temperature in the region, it is the most desirable area to locate the canning facility.

 

General Country Information

 

-         The population numbers some 14,953,000 people (census of 1999). Population density is as high as 6 people per 1 sq km.

-         The capital is the city of Astana (since December 10, 1997) whose population is as large as 319,000 people.

-         The Qyzylorda Oblast has about 600,000 people with 150,000 of those living in the Oblast’s capital city, Qyzylorda.

-         Kazakh is the official language. This notwithstanding, in State institutions and local administration bodies along with the Kazakh language, they speak Russian officially.

-         Monetary unit is tenge, which is equal to 100 tyins. It was introduced on November 15, 1993.   The current exchange rate (November 2001) is approximately 105 tenge to $1 USD.

-         Kazakhstan is a modern secular state that promotes ethnic and religious diversity and tolerance. Freedom of religion is one of first priorities addressed in Kazakhstan's Constitution

-         The EIU gives Kazakhstan and Russia the highest marks in CIS economic reform

 

Kazakhstan and Russia rank as the top two CIS countries in terms of economic reform, according to a survey of 1996-2000 economic policies released by the Economist Intelligence Unit.  The EIU, a unit of The Economist magazine, focuses on in-depth economic research of policy and business development around the world. According to the EIU survey, during the past four years Kazakhstan and Russia have upgraded their standing in terms of investment attractiveness, and the two countries now rank among the top 50 countries most attractive to investors.

 

Infrastructure

Electrical Power

Thermal electric plants produce the dominant share of electricity and hydroelectric plants            produce most of the remainder. The total length of all grids equals 460 thousand km (286,000 mi.).  However, the sharp reduction in demand for electric power and the permanent deficit of fiscal assets prevented the effective repair, maintenance and technological improvement of obsolete power stations. Thus, the production of electric power depreciated from to 52.17 billion kWh in 1997, to 49.22 billion kWh 1998.

 

Structural changes in the consumption of various power sources have also occurred. Due to the considerable increase in oil and gas tariffs, many consumers switched to fuel oil (mazut), which was previously utilized as a reserve fuel. A certain interest also occurred in the utilization of associated gas.

 

 

Communications  

The mean density of installed telephones per 100 inhabitants of the republic is about 11, which corresponds to 6^th place among the CIS states.

 

Kazakhtelecom is active in the Kazakhstan market for services related to local and international telecommunication. It is the national operator and is the owner of a network of general-use telecommunications facilities and is licensed to offer all kinds of communication within the Republic (with the exclusive right to offer services of international and long-distance communication).

 

The commissioning of a ground satellite communication system in February 1992 in Almaty, with the Australian Telstra Corporation and in June 1994 in Astana, with the German Deteline Corporation, enabled Kazakhstan to independently set up international telephone channels to non-CIS countries for the first time.

 

Transportation

A developed network of basic transit routes and skilled manpower in the transport sector are currently available in the Republic.  However, due to neglect, much of the transportation sector is in disrepair and frequently is not reliable.

 

Railway Networks  

The arrangement and structure of the rail network, as a whole, meets both the interior and exterior transport and economic needs of the republic, though requiring improvement and maintenance. Kazakhstan is interested in utilizing its transport and transit potential, to develop the key sectors of industry and farming. The railway is essentially sound, but problems exist. Major reorganization has taken place over the last few years despite an acute financial shortage and a drop in the volume of business owing to the financial crisis in CIS and Asian countries.

 

In the railway transportation sector, 12 Mutual Relations Agreements have been signed between the Government of the Republic and the Governments of the republics of Belarus, Tadjikistan, Turkmenistan, Uzbekistan, Ukraine, Azerbaijan, Kyrgyz, Lithuanian Republic, Russian Federation, and Georgia.

 

Highways

 

The highways and man-made structures are maintained using the road fund, which is derived from the highway users’ deductions; fares for entrance to, exit from, and transit within the territory of the Republic of Kazakhstan; the tax on gasoline and diesel fuel; and charges for travel on some state-owned highways.  Unfortunately, much of these funds have not been used for repair and maintenance of the highways being taken by corrupt government officials instead.

 

The economic need to develop international communication means there is a need to attract investments to maintain the roads, to bring them into conformity with international standards in terms as hardness and flatness of coating, to improve the maintenance organization and to promote safe driving. Services for drivers (hotels, motels, camping with shops, cook-shops, medical aid, etc.) and new transport services (maintenance, refueling, help with accidents) will also be created.

 

Water Transport

 

The water transport of Kazakhstan is represented by many enterprises involved in the river transport of freight and passengers, as well as cargo handling facilities in river ports and seaports. The water transport system comprises 6 river ports and 2 seaports, the extent of river ways exceeding 4,000 km (2,500 mi.). The inland waterways include the rivers of Irtysh, Ural, Ili, Ishim, Syr-Darya; the water reservoirs of Bukhtarminskoye, Ust-Kamenogorskoye and Shulbinskoye; and the Balkhash and Zaisan Lakes.  The major seaports of the Caspian Sea are the Aktau commercial seaport and the Atyrau commercial seaport.

 

Air Transport

 

The national air carrier of Kazakhstan is Air Kazakhstan. Air Kazakhstan is responsible for most international and inland air journeys originating in Kazakhstan. Seventy percent (70%) of Air Kazakhstan’s passenger journeys are domestic in nature.  Twelve airports are able to serve international flights - Astana, Aktau, Aktyubinsk, Almaty, Atyrau, Karaganda, Kostanai, Taraz, Uralsk, Ust-Kamenogorsk, Pavlodar, and Shymkent.

 

Banking

 

The significant devaluation of national currencies in many of Kazakhstan’s trade partners during the last eighteen months, principally in Russia, precipitated a considerable rise in the value of the Tenge against the currencies of Kazakhstan’s main trading partners. As a result, the competitiveness of Kazakhstan goods, businesses and of the entire economy dropped drastically. In turn, this brought about an unfavorable rise in the balance of foreign trade operations, a decrease in gold and currency reserves, and a decrease in the GDP. As a result, in April 1999 the Government and the National Bank decided to introduce a free-floating exchange rate for Tenge as the most suitable treatment in light of the open economy of Kazakhstan and the unstable conditions within international finance and trade markets.

 

In order to create a stable monetary and financial market in Kazakhstan, in 1991 the financial system was reorganized. As a result, a new two-tier banking system has been formed. The first level is represented by the National Bank of Kazakhstan (National Bank), whose first task is to secure the stability of money circulation, while the second level is represented by commercial banks whose activity is immediately associated with the funding of the economy.

 

First level banks

 

The National Bank of Kazakhstan according to the Law “On the National Bank of the Republic of Kazakhstan” the National Bank bears the entire responsibility for the operation of the monetary sphere, and represents Kazakhstan’s interests in its relations with central banks and the financial institutions of foreign countries.

 

Second level banks

 

The Republic of Kazakhstan's law "On banks and banking" states that second-level banks (except state-owned) shall be created in the form of joint stock companies authorized to issue shares to bearers. Second-level banks are authorized to attract money resources from corporate bodies and individuals and to open and maintain correspondent accounts of banks and non-bank financial institutions, and also metal accounts of banks. They are also able to deal with cash transmittance, registrations, loans, trust, clearing, safe and Lombard operations, funding for capital investment and operations with foreign currency.

 

The policy and measures to perfect the operation of commercial banks has produced some good results. Banks such as Kazkommertsbank, Bank TuranAlem, National Bank and Eximbank have enough assets to invest in production, whilst actively participating in trade operations on world capital markets. Kazkommertsbank and the National Bank have their own credit rating assigned to them by international rating agencies.

 

Development

 

The regions of Kazakhstan are divided into four groups, which have unique priorities, linchpins, and incentives for social and economic development:

 

Group three, Northern-Kazakhstan, Akmola, Kostanai, Zhambyl, Southern-Kazakhstan, Western-Kazakhstan and Almaty oblasts, is recognized as Kazakhstan's foremost national agricultural production asset and is best suited for the project.

 

The priority directions for social and economic development of the third-group regions are:

 

• The continuation of a policy designed to reform farm production;

• The effective specialization of farming production;

• The implementation and application of up-to-the-minute processes and engineering to provide high quality farm products and an increase in agricultural exports;

• The overcoming of disproportions in the development of different spheres of the activity within regional farming economies;

• The establishment of a wide network of small plants processing agricultural raw materials and a modern industry for its storage, with the purposes of forming a solid and substantial food complex in the Republic;

• The creation of a necessary manufacturing and infrastructure, fortification of the material and technical base for farming and for industries producing consumer goods which contribute to the balanced development of the consumer market.

Another area for consideration is Group four which is comprised of rural areas of the Atyrau, Mangistau, Karaganda and Southern-Kazakhstan oblasts, i.e. depressed regions with extreme soil, climatic, social, economic, and technological conditions that restrict the opportunities for economic maneuver. In these regions, because of a failure of economic links, the economic and social crisis is severe.

 

Priorities for the fourth group of regions are:

 

• The prevention of further environmental degradation;

• The radical reconstruction of the economic complex to make use of the local resources, experience, and traditions of the native population;

• The creation of a first echelon of industrial facilities for processing agricultural raw materials in rural districts;

• The creation of necessary conditions for town-dwellers, and dwellers of other communities in rural areas with environment problems, who wish to move to other regions of the Republic;

• The attraction of foreign technical and humanitarian help and its efficient utilization.

 

This project meets the Kazakhstan government’s objectives for both group three and four.

 

 

Labor and Wages

Employment

 

In 1998, 6.3 million people were employed in the national economy. Of these, 3.1 million workers were employed in medium-sized and large plants. Some 296,000 people worked in small enterprises. In addition, up to 270,000 people were employed on farms, while 2.3 million people were self-employed.

 

There is a growing outflow of workers from large and medium-sized enterprises. During 1998, 1,102,000 persons withdrew for various reasons. Of these, every fifth person left employment as a result of a reduction of staff. The highest percentage of withdrawals was observed in Akmola, Northern-Kazakhstan, and Pavlodar oblasts, and in the city of Astana, where every second employee left employment due to a reduction in staff.

 

Most workers are employed in commerce, catering, industry, farming, and education with agriculture being the highest.

 

At the end of 1998, there were 252,000 unemployed people registered with placement services, according to the Ministry of Labor and Social Protection. This figure represents a decline of 2.2% compared to 1997 and equals 3.7% of the economically active population.  The countryside accounts for 37% of the unemployed.  The demand for employees as of late 1998, according to the information received by placement services from 1,887 enterprises and organizations, was 8,800 people.  Of these 60% are workmen, 2,600 women and 1,400 youths aged 16-19 years.

 

The number of persons applying to placement services considerably exceeds the number of vacancies.  However, in 1998 placement services were able to place 20% of their applicants. As a whole, over the period from 1993 to 1998, 2.5 million people applied to placement services, of which 24% found employment.

 

Wages

 

Using the weighted-average exchange rate of the US dollar at the Republic Kazakhstan National Bank, the monthly average rated wage of workers employed in all kinds of economic activity for 1998 equaled US $123.70, which represents an increase of 9.3% compared to 1997. The Qyzylorda Oblast is in the 2^nd lowest  wage category with the average monthly wage at about USD $106 to $135.

 

Average wages vary considerably depending on economic activity. Earnings of employees in the financial sector ($263 average monthly wage), mining industry ($249), and air transport are the highest. At the same time, for employees in public health services, education, and municipal, social, and personal services, the monthly average wages ranges from $82 to $101, which is 44-56% less than, for example, wages in industry.

 

Considerable disparities in wages also occur in industry. In 1998, the average wage of industrial staff was $181, with the highest wages being paid to workers in tobacco goods production ($512), crude oil extraction, gas distillate and services associated with oil and gas extraction ($442) and in production of coke, oil refineries, production and the handling of nuclear waste ($337).

 

Yet, within the manufacturing industry, the monthly average wages of workers in garment making, stationery and computing machinery production and furniture, textiles, leather and footwear production ranged from $49 to $87, which is 52-73% lower than the overall industry average.

 

Regional Political Summary

 

The Central Asian Republics (“CAR”) has been, to some degree, already suffering with the problems caused by terrorism, civil war, and poverty.  Current CAR governments fear takeover by Islamic militant groups and are concerned with the potential threat of internal rebellion.  By cooperating with the United States, this region has shown its desire to overcome these problems.  In addition, by being a focal point for the U.S. government, many benefits will accrue to the individuals, the government, the economy, and the day-to-day life in this region.

 

The Afghanistan military action has created a wild card situation for the entire CAR.  Almost overnight, this previously obscure region has now become the focal point of the entire world.  The U.S. government recognizes an opportunity to become more established in Kazakhstan, a mineral rich country with a huge potential emerging market.  The U.S. government is planning to spend money and increase mandates for U.S. government economic involvement.  The time for capital investment in this region is at its prime.  Considering that past attempts have been hampered by political problems and the Asian economic crisis now is an opportune time. 

 

Kazakhstan is the most stable of the Central Asian countries.  They have also been cooperative with the U.S. since the beginning of the current conflict.  The Kazak marketplace may now find itself at the long awaited turning point on a road to economic independence.

 

From every indication that we were told in Washington, to articles published both in print media and on the web, the government is heavily in favor of economic development in this region.

 

Our project addresses several primary areas of concern:

 

-     Severely needed employment of the local population.

-     Nutrition

-     Uncontaminated food source

-      An exportable product

-     Sustainable development

-     Technology transfer

 

These points fulfill the mandates of the U.S. Government programs and the desires and requirements of the Kazakhstan governments, both locally and nationally. 

 

The President of Kazakhstan, President Nazarbayev, is and has been willing to cooperate with the U.S. government and other foreign trade organization of the world.   There has been no indication from the representative at the Embassy to any of the government officials in Washington that there will be any reason that this would not be a doable project.

 

Government

 

Background

 

Kazakhstan, by Constitution, is a republic.  The governmental leaders are:

• Chief of state: President Nursultan A. NAZARBAYEV (chairman of the Supreme Soviet from 22 February 1990, elected president 1 December 1991)

• Head of government: Prime Minister Kazymzhomart TOKAYEV (since 2 October 1999)

• Cabinet: Council of Ministers appointed by the president

• Elections: President elected by popular vote for a seven-year term; election last held 10 January 1999, a year before it was previously scheduled (next to be held NA 2006);
  Note - President NAZARBAYEV's previous term had been extended to 2000 by a nationwide referendum held 30 April 1995; prime minister and first deputy prime minister appointed by the president

 

Note: President NAZARBAYEV expanded his presidential powers by decree: only he can initiate constitutional amendments, appoint and dismiss the government, dissolve Parliament, call referenda at his discretion, and appoint administrative heads of regions and cities

 

The supreme representative body carrying out law-making functions is the Parliament of the Republic of Kazakhstan consisting of two chambers, both of which operate on a constant basis - the upper chamber (Senate) and lower chamber (Mazhilis). The Senate is formed by 47 deputies, of whom 40 are elected (two persons from each oblast, one from each city of national importance and one from the capital of the Republic of Kazakhstan). These deputies are elected at a joint sitting of the deputies of all representative bodies from each oblast, city of national importance, and from the capital of the Republic. The President of the Republic appoints seven deputies of the Senate for the term of the powers of the Parliament. The Mazhilis consists of 77 deputies - single-member territorial constituencies elect 67 deputies and 10 are on the basis of Party lists. The Parliament has very little actual power as Kazakhstan is ruled by Presidential decree.  Effectively Present Nazarbayev has all power as to the operation of the national government.

 

Due to the size of Kazakhstan and the “independence” of the oblasts, each oblast government and local governments exercise considerable control over the affairs of their jurisdiction.  Any business must comply with all oblast and local government edicts.  Establishing favorable relationships with local government officials will be mandatory.

 

Foreign Policy

 

Recent years have shown that multi-vector diplomacy is the most rational and reasonable foreign policy for the Republic. This implies the development of friendly and predictable mutual relations with all states playing an essential part in world issues, and which are of practical interest. As a landmark for practical operations, a Concept for Foreign Policy has been worked out and a Law on Diplomatic Service has been passed.

 

Cooperation with the United States is of considerable strategic importance for the Republic. Since 1992, Kazakhstani-American relations have steadily improved to the point where they have formed an effective partnership in both political and economic spheres. The United States is the largest investor in the Kazakhstan economy and Washington considers Kazakhstan to be a stronghold of stability and security in Central Asia and, consequently, its key partner in the region.

 

Kazakhstan was the first Central Asian country to offer alliance with the United States in the U.S. actions against terrorism.  Due to this cooperation, the U.S. government is anxious to reward Kazakhstan with aid and economic development.

 

Membership in International Organizations TC "Membership in International Organizations" \f C \l "3"

 

The Republic of Kazakhstan is a member in 59 international organizations, such as the United Nations (UNDP, WHO, UNICEF, UNESCO), the Organization for Security and Cooperation in Europe (OSCE), the World Bank (IBRD, IFC, IDA, MIGA), the International Monetary Fund, the Asian Bank of Development, the European Bank for Reconstruction and Development and the Organization for European Economic Cooperation.

 

 

Rule of Law

 

Constitution

 

The Constitution was adopted by national referendum 30 August 1995.  According to the Constitution of the Republic of Kazakhstan, Kazakhstan is a secular democratic, constitutional, and social state. It is a unitary state subject to presidential government.

 

Investment Code TC "Investment Code" \f C \l "3"

 

A State Committee for Investments of the Republic of Kazakhstan was created. In January, 1999, this Committee was transformed into the Republic of Kazakhstan Agency for Investments, which is the only authorized state body to implement state policy in relation to the attraction of direct investments.

 

Guarantees to foreign investors

 

The Constitution of the Republic of Kazakhstan and the Foreign Investment Law provide a series of guarantees designed to protect the interests of foreign investors. These include:

 

·        The provision of a legal framework for foreign investments

·        Guaranteed use of income at own discretion

·        Guarantees against modification of legislation

·        Guaranteed use of own currency funds

·        Guarantees against expropriation

·        Openness in foreign investors’ activity

·        Guarantees against illegal acts of public bodies and officials

·        Guarantees against being checked by the state

·        Compensation and redress of losses to foreign investors

 

Priority sectors for investment:

 

Special state assistance is provided to investors operating in the following priority areas:

 

Manufacturing industry - production of apparel, yarn, textiles, footwear, fur and leather products; production of furniture and accessories; manufacture of new types of cardboard-paper products; industrial processing of agricultural products; processing of sea food and fish-breeding products; provision and storage of agricultural products; manufacture of children’s food nutrition products; manufacture of confectionery, non-alcoholic beverages and wines; output of new high technology machinery, equipment and tools; manufacture of vehicles and transport equipment etc. 

 

Farming/Agriculture - cultivation of high-yield cereal and oil-production crops on the basis of advanced technologies; production of the high yield seeds of plant-growing products; production and breeding of the highly productive cattle and poultry as well as of pedigree cattle; production of highly effective, environmentally-friendly forage and forage additives.

 

Tax control

 

In the Republic of Kazakhstan there are 5 national and 6 local taxes and charges:

 

• National taxes

• Local taxes and charges

• Income tax from corporate bodies (30% of aggregated income) and individuals

• Tax on property of corporate bodies and individuals (1% of cost of property)

• Value added tax (20%)

• Land tax

• Customs and excise duties

• Vehicle tax

• Registration fees on the issue of securities

• Registration fee for corporate bodies and individuals

• Special ecological payments and taxes

• Charges for the right of occupation of certain kind of activity

• Charge from auction sales

 

System of privileges and preferences

 

To qualify for grants, privileges and preferences investors must:

 

1. Conclude contracts with the Investments Agency of the Republic of Kazakhstan

2. Be investing in one of the priority sectors of the economy

3. Quantify the total amount of direct investments

4. Quantify the number of new jobs being created

5. Provide guarantees of environmental safety, etc.

 

 

The incentives available are:

 

1. A 100% reduction to the rate of the income, land and property tax can be granted for a term of up to 5 years from the moment of contracting. A further 50% reduction can also be granted for the following 5 years.

2. Natural grants of the state

3. Natural grants are fixed assets, incorporeal assets, production reserves, land allotments and the right of land tenure free-of-charge conferred to the investor in the property. When investing in farming, farmlands are transmitted to the foreign investors in the form of temporary gratuitous land use rights.

4. Customs privileges

5. A release from payment of customs duty on imported goods necessary for the implementation of the project can be granted to investors. The given release is granted to investors for particular volumes of imported goods for the term fixed in the investor’s contract with the Agency.

 

 

Taxation Detail

 

All Kazakhstan-based legal entities, representatives and foreign legal entities, undertaking activities on the territory of Kazakhstan, are subject to mandatory registration with tax bodies, regardless of whether their activity is taxed in Kazakhstan or abroad.

 

Income tax

 

According to the existing tax laws, the taxable income of corporations is taxed at a rate of 30%. A legal entity registered and operating within the territory of Special Economic Zone's is subject to a taxation rate of 20%. Corporations whose land is the major production asset shall pay tax at a rate of 10% of income derived from the direct utilization of land. Dividends paid to corporations and individuals shall be a subject to a tax charged at source, at a rate of 15%, and are free from future taxation. The remuneration (interest) paid to corporations except bank-residents shall be subject to 15% tax charged at the source of payment.

 

The taxable income of individuals shall be taxed at the following rates according to the amount of gross income:

 

• Minimum rate - 5% when the gross income is less than $826;

• Maximum rate - 40% when gross income is more than $4 129.

 

Value Added Tax

 

The rate of value added tax is equal to 20% of the value of the taxable turnover, except for cases determined in the Tax Code of the Republic of Kazakhstan.

 

 

Excises

 

The excise tax is payable on goods produced in or imported into the territory of the Republic of Kazakhstan. The list of excisable goods includes alcoholic beverages, tobacco products, particular types of fish and caviar, passenger vehicles, weaponry etc.

 

The Government of Republic of Kazakhstan has established the rates of excise tax as a percentage of goods' value or of the amount in kind. Pursuant to the international agreements to which the Republic of Kazakhstan is a party, reciprocal payments for deliveries of goods at prices inclusive of excises may be permitted.

 

Land tax

 

The tax amount is calculated on each unit of land.

 

Corporations and individuals in possession or permanent use of acres shall be liable to land tax. Land tax applies to the following types of land:

 

1. farm land;

2. urban land;

3. land accommodating industrial, transport, communications, defense and similar facilities;

4. lands of specially protected national parks;

5. forestry;

6. water resources.

 

The amount of the land tax shall be determined by the quality, location and access to water supplies not the result of business, or other activities, on the part of owner or tenant. Land tax is a fixed annual payment for a unit of land area in accordance with a quality score.

 

Tax on property

 

The payers of property tax are corporations and individuals having ownership rights or trustee, managerial, or operational supervision over taxable objects.

 

The tax on capital goods and non-production capital assets of corporations and individuals involved in business activities shall be payable annually at a rate of 1% of the value of the specified assets. The individual tax for the property, not used for entrepreneurial activity, shall be paid annually based on the value of real estate, at rates stipulated by the tax law of the Republic of Kazakhstan.

 

Customs regulations

 

The basic act, regulating the customs procedures on the territory of Kazakhstan is the Decree of the President, being in effect law, "On customs regulation in the Republic of Kazakhstan". According to this Decree during the transportation of goods across the customs border of Kazakhstan the following fees are to be paid:

 

1. Customs duty

2. Seasonal customs duty

3. Special customs duty

4. Duty against dumping

5. Countervailing duty

6. Fees for licensing by customs bodies

7. Tax for distributing a quality certificate on behalf of the customs registration expert

8. Customs duty for customs registration

9. Customs tax for the storage of goods

10. Customs tax for the customs escort of goods

11. Payment for consulting and information services

12. Payment for the provision of a preliminary decision

13. Payment for participation in customs auctions

 

Bilateral Treaties and International Conventions

 

Over the past few years Kazakhstan has become a member of the following multilateral treaties: the European Convention “On foreign trade arbitration" and the Convention "On the recognition and fulfillment of foreign arbitrage solutions."

 

 

Company Incorporation and Licensing

 

Corporate Registration

 

In accordance with the regulations of the Republic of Kazakhstan, foreign investors are able to:

 

1. establish Kazakhstan legal entities in the form of an enterprise with foreign participation (entire foreign ownership or as a joint venture with local partners), and

2. establish a branch or representative office; and/or act as a sole foreign investor.

 

The parent entity documents must be authenticated and legalized in the home country. Any document drawn in a language other than Kazakh or Russian should be supplied with a notarized translation into Kazakh or Russian.

 

Licensing

 

Licensing legislation in Kazakhstan establishes a list of investment activities requiring licenses and permits.  Licenses may be granted to individuals and legal entities of Kazakhstan as well as to foreign legal entities, foreign residents, stateless persons and international organizations.

 

The licenses differ due to the following features:

 

1. according to the subject:

 

·        issued for individuals and legal entities of the Republic of Kazakhstan

·        issued for foreign legal entities

·        foreign individuals

·        stateless persons and international organizations.

 

2. according to the volume of activity:

 

• general - for certain activity types, issued  without restrictive terms

• single - for certain economic operations within the limits of permitted volume, weight or quantity

• operating - for certain banking operations.

 

In 1997, the State Investment Committee was authorized to regulate and coordinate procedures to issue permits, licenses, visas and other documents to investors through the various state agencies. The investor should submit all the required documents specified by the relevant agency and pay the application fee. If the application meets all requirements, the license will be issued within one month from the application submission date.

 

Penalties for operating without a license can be severe and subject the individual or corporate to criminal liabilities.

 

Market Information

 

The amount of market information that is available without a substantial cost is limited to general agricultural statistics.  Regardless of this, some important information is available and does assist in determining the market size of fresh vegetables.

 

Agricultural Overview

 

The agricultural sector is one of the key elements of the country’s economy. Kazakhstan is one of the major producers of marketable grain, meat, and wool.  Farming areas occupy more than 220 million hectares and grain-growing areas occupy about 13-14 million hectares. Farming areas comprise 74% of the country’s total area. The pasture area totals 185.7 million hectares - 68% of all the farming areas.  Individuals, collective farms and organizations utilize 81% of all farming areas and 98% of all pastures.

 

In 1998 there were 70,000 farms, of which 99.6% were in the private sector. 61,000 farms were transferred on the basis of long-term tenure, involving 27.2 million hectares of land, 4300 farming cooperatives, over 4,000 partnerships, 505 joint stock companies and other entities. In 1998, large farms accounted for 73.5% of land, small farms 18.6%, state-owned firms 4.0%, and individuals 0.2%.

 

Kazakhstan has embarked upon agricultural sector restructuring through the establishment of new corporate entities and privatization. This is based upon the successful experience of several other countries, which have used the same strategy to create a strong, privately owned agricultural sector.  Private ownership is now the dominant organization for agricultural production.

 

The following figure shows the percentage of total farm production provided by private farms verses state-owned enterprises.

 

 

The farming law provides the following rights:

 

• Private ownership of property (land, real estate), Free separation of land and property from any collective farming to establish the private farms, Property protection from illegal expropriation, Freedom of the choice concerning the type of activity followed and product operations, Equal access to markets, materials, information and finance.

 

• A number of state agricultural and processing companies have undergone restructuring, including meat processing, dairy and sugar plants.

 

• The privatization involved firms involved with logistics machinery, spare parts, mineral fertilizers, plant protection agents, servicing and other companies.

 

Vegetable Farming

 

Vegetable farming has shown a steady increase.  The following figure illustrates the growth in metric tones produced from 1995 through 2000 (est.).

 

 

The following Figure shows the growth of vegetable production as a part of the food processing industry.

 

 

In addition, vegetable farming has shown a steady 20% per year growth since 1997.  The figure below shows the annual percentage growth from 1995 through 2000 (est.).

 

 

 

Food Processing Industry

 

The food processing industry plays an important role in Kazakhstan’s economic development. Its share in the aggregate amount of Kazakhstan’s industrial production is constantly increasing. It accounted for 19.3% by the end of 1998, compared to 9.9% in 1994.  In recent years the food processing industry in Kazakhstan has made relatively stable progress.  The physical amount of production in 1996-1997 showed considerable growth as compared to previous years.

 

Most of the production costs within the food industry are associated with material expenditures. The share of material costs is rising compared to the share of the cost associated with salary payments. In 1997 the index of material costs increased by 3.8%, compared to the previous year, to 70.4%, while the index of salary costs reduced by 2.4% to only 14.6%.

 

In many other respects, however, the main indices of the food processing industry demonstrate a relative stable situation in this sector, compared to other areas of the economy. The average number of enterprises for the period of 1994 - 1997 was 5,098. It is important to note that the actual number has increased from 3,785 in 1994 to 5,818 in 1997.

 

The amount of production has also grown over this period (from 33,783 to 137,653 million tenge) while there has been a simultaneous reduction in the number of industrial staff (from 138 to 92 thousand people).  Profit levels fluctuated between 3,067 and 3,897 million tenge, although the overall level of profitability reduced from 14.2% in 1994 to 6,2% in 1997.

 

The food processing industry’ share of Kazakhstan’s industrial production, (in%)

 

 

The food processing industry is mainly related to the agricultural sector. In particular, processed foodstuffs account for 56.4%, and meat and milk for 18.8% of the whole industry.  The main types of the goods produced in the food processing industry include sugar, meat, sausages, canned meat, milk, cheese, vegetable oil and butter, margarine, canned food, bakery and macaroni products, soft drinks, mineral water and salt. Among the most important types of foodstuffs the production levels per capita, in 1997, were 9.9 kilos for meat, 12.9 kilos for milk products, 9.4 kilos for refined sugar and 3.8 kilos for macaroni products.

 

Development of food processing industry in Kazakhstan is a very important priority task for the development of the agro-industrial sector of the country. This sector has attracted considerable foreign direct investment, amounting to about $186 million in the period from 1995 till 1998.

Foreign Direct Investment Inflow to the Food Processing Industry of Kazakhstan, (million USD)

 

 

Vegetable and Fruit Processing

 

No more than 10% of Kazakhstani vegetable production and 20% of fruit production is processed by local industries.  Instead, vegetable and fruit production is preserved by individuals in their homes. In 1991 there were 98 vegetable and fruit enterprises employing 5,500 people in Kazakhstan.  Far fewer have continued in operation since then.

 

Most enterprises are relatively small.  Eight large enterprises account for almost 90% of commercial production and employ 80% of all employees.  Most are canning operations; there is only one frozen food factory.  Processing of potatoes is negligible.

 

Kazakhstan has large vegetable and fruit storage facilities: over 500,000 tons of potato storage, 220,000 tons for other types of vegetable storage and 90,000 tons for fruit.  Most of these facilities have inadequate ventilation and cooling systems and, as of June 1998, were only partially utilized. There is considerable foreign competition from the Swedish firm, Tetrapak, in the juice processing industry.

 

Problems in the Agricultural Sector

 

Kazakhstan is an agrarian country and the agro-industrial complex is the main branch of its economy. The level of development level of the agrarian sector of the economy is one of the main factors of the society's economic, social and political stability.

 

Since agricultural production has decreased, there has been a corresponding decrease in pesticides and nitrates in the environment of Kazakhstan. Some problems with nitrate remain, however, e.g. in Almatinskaya, Mangistauskaya, Qyzylorda and Kokshetauskaya oblast.

 

Challenges

 

One of the main issues demanding immediate attention is protection of crops from weeds, diseases and pests. The area of agricultural crops and lands inflicted by most dangerous plant diseases and far-spread pests (such as locust, cutworm, grain cutworm, mildew, etc.) has increased lately. Measures to combat with them are financed from the Federal budget.

 

Annual insufficient and inopportune financing of the plants protection program and appearance of a large area of uncultivated arable lands caused a very serious situation in the country in the current year. That caused increase of area inflicted by the far-spread pests. Lack of financing in the current year made it impossible to cultivate more than 2 million hectares of lands. In 2000 area of cultivation will amount to 4.9 million hectares.

 

 

Environmental Issues

 

Kazakhstan faces potentially severe health and environmental problems from the legacy of the Cold War. Most of Kazakhstan's environmental problems result from the Soviet era. Key current environmental issues include the following:

 

·        High levels of air pollution due to low octane fuel usage

·        Poor disposal of hazardous wastes (more than 17 billion tons of hazardous materials are stored in landfills)

·        High levels of radioactivity and associated high incidences of oncology as a result of its position as the site of defense industries and test ranges of the former Soviet Union

·        High levels of radiation result from the dismantling of nuclear weapons factories

·        Years of above-ground and below-ground nuclear testing

·        Land and soil degradation

·        Heavy metal contamination of surface water

·        Pollution in the Caspian Sea

·        Soil pollution from overuse of agricultural chemicals such as toxic pesticides

·        Soil salinization from faulty irrigation practices

·        The Aral Sea had shrunk 65 miles, leaving the area high and dry and exposing thousands of square miles of seabed. The result is a massive dust bowl, spreading not only dust but also, every year, 100 million tons of nitrates, defoliants and pesticides over the area.

 

 

Washington DC Trip

 

A trip to Washington D.C. was undertaken on September 24-27, 2001.  Several United States agencies and departments were visited as well as other non-governmental organizations (“NGOs”).  The results of the trip are as follows:

 

 

Asian Development Bank

10 am Monday the 24^th of September

 

Asian Development Bank

Mr. Karti Sandilya

Regional Representative

815 Connecticut Ave, NW

Washington, DC 20006

202-728-1500

 

Description:

 

The Asian Development Bank extends loans and equity investments to its developing member countries (DMCs) for their economic and social development, provides technical assistance for the planning and execution of development projects and programs and for advisory services, promotes and facilitates investment of public and private capital for development, and responds to requests for assistance in coordinating development policies and plans of its developing member countries.

 

Meeting Notes:

 

The ADB has a $500-$600M. set-aside for private sector equity funding per year for the Central Asian Republics for potential loans or equity stake in projects.  The most they will put into any project is 25% of the total project cost but they can do a guarantee for the entire project cost.  Application information is available on their web site.

 

The application has to come from a host Company in Kazakhstan and the project needs to have the Governments blessing.

 

Mr. Sandilya personally expressed an interest in the project and suggested that it maybe a project that the ADB would be interested in becoming an equity partner.  The project fit into their parameters and he thought that the fact that the profits were being invested back into country made it even more attractive to the bank.  He asked many questions, liked the concept and suggested other areas of the world that he felt were also good  places for such a facility.

 

Karti asked that we kept him informed of our progress and gave us the contact information for others at ADB that we would be working with if they became involved in the project.  He also suggested that we send them a copy of our presentation when we returned to Denver..

 

We were told by the Kazak Embassy that the ADB process could take up to 2 ½ years to receive funding.

 

Trade Development Division of the International Trade Administration

Department of Commerce

1:00 pm Monday the 24^th of September

 

Kelly Raftery

International Trade Specialist

BISNIS

US Department of Commerce

1301 Pennsylvania Ave, NW

Washington, DC  20230

202-482-4199

 

Description

As part of the Trade Development Division of the International Trade Administration, the Advocacy Center acts as a unique, central coordinating point marshalling the resources of 19 U.S. government agencies in the Trade Promotion Coordinating Committee to ensure that sales of U.S. products and services have the best possible chance abroad. They are, in short, your advocates.

Exporting today means more than just selling a good or a product at a competitive price; it can also mean dealing with foreign governments and complex regulations. That’s where they step in. The Advocacy Center at the U.S. Department of Commerce puts the resources and authority of the U.S. government behind your company to help resolve problems like these:

-         Contracts pursued by foreign firms that receive assistance from their home governments to pressure a customer into a buying decision;

-         Unfair treatment by government decision-makers, preventing you from a chance to compete;

-         Tenders tied up in bureaucratic red tape, resulting in lost opportunities and unfair advantage to a competitor.

 

The department of ITA that we would work with is BISNIS.  BISNIS is the Department of Commerce’s primary resource center for U.S. companies exploring business opportunities in Russia and other Newly Independent States. BISNIS provides U.S.  companies with the latest market reports and tips on developments, export and investment opportunities, and strategies for doing business in the NIS. Since opening in 1992, BISNIS has facilitated more than $2.4 billion worth of U.S. exports and overseas investments.

 

Meeting Notes

Kelly felt that the biggest risk would be the political risk. A weak rule of law and government intervention were two other concerns.  She said ownership would also be an issue and suggested that we partner with an in-country company.

 

Kelly provided us with us a tremendous amount of information including many contact names and phone numbers.  She provided us with agricultural report that has recently been done by employees of the Department of Commerce.  Unfortunately, the report dealt mainly with the poor quality of farm equipment currently owned by the local farmers and not with the current growing conditions.

 

Kelly has left the department and a permanent replacement for her has not yet been established.

 

Quotes

“This is one of the most solid projects I have seen come through here is years”

“It almost made me not want to leave the department so I could see how it turns out.”

 

The overall feel of the meeting was very good.  Initially it was evident that Kelly sees many presentations and seemed to have little interest in the project.  About half way through she began asking questions and became interactive in the meeting.  In the end, she was very supportive and eager to help.

 

U.S. – Kazakhstan business Council

3:00 pm Monday the 24^th of September

 

William Veale

Executive director

U.S. - Kazakhstan Business Council

1200 G Street, NW

Suite 827

Washington, DC  20005

202-434-8791

 

Description

The Business Council in a private organization that is similar to a Chamber of Commerce.  They have private company members that pay a fee and the Council is a connection to governments and Kazak companies for its members.  They focus on local development separate from the national government but they do have ties to the U.S. government.  They have 30-40 members that have branch offices in Kazakhstan.  Some of their members are Chevron, Philips Petroleum, Mobil, Exxon, 3M, GE, Boeing, Lockheed Martin, Valmont Irrigation and Newmont Mining. 

 

Meeting Notes

According to Bill “All of these companies are there for the long haul.  They see the tremendous potential in the country.”  He indicated that there is corruption in the country and that there may be pay offs required on both governmental levels – national and local.  He felt that the project was small enough that it may “fly below the radar” of the national government.

 

He recommended that we contact a company in Kazakhstan call Food-Master whose parent Company DTR Development Technology Resources is an American company doing business in Kazakhstan.  DTR is located in Minnesota.

 

The overall feel of the meeting was very positive.  Bill was excited about the project and he asked us to keep him informed of the progress of the project.   He hopes we will be come a member of his organization at some time in the future.

 

The American Uzbekistan Chamber of Commerce T

4:30 pm Monday the 24^th of September

 

Bob Pace

Executive Director

The American Uzbekistan Chamber of Commerce

1800 Massachusetts Ave, NW

Washington, DC  20036

202-828-4317

 

Description and Meeting Notes

Mr. Pace is the Director of the Uzbekistan American Chamber of Commerce in Washington DC.  He felt a similar project would be welcome in Uzbekistan.  He would put us in touch with possible partner companies.

 

Multilateral Investment Guarantee Agency – MIGA

World Bank

9:30 am Tuesday the 25^th of September

 

 

Abir Burgul

Underwriter

MIGA

1818 H. Street, NW

Washington, DC  20433

202-458-0522

 

Description

The Multilateral Investment Guarantee Agency (MIGA) was created in 1988 as a member of the World Bank Group to promote foreign direct investment into emerging economies to improve people’s lives and reduce poverty. MIGA fulfills this mandate and contributes to development by offering political risk insurance (guarantees) to investors and lenders, and by helping developing countries attract and retain private investment.

 

MIGA is led in its mission by four guiding principles: focusing on clients — serving investors, lenders, and host country governments by supporting private enterprise and promoting foreign investment; engaging in partnerships — working with other insurers, government agencies, and international organizations to ensure complementarity of services and approach; promoting developmental impact — striving to improve the lives of people in emerging economies, consistent with the goals of host countries and sound business, environmental, and social principles; ensuring financial soundness — balancing developmental goals and financial objectives through prudent underwriting and sound risk management.

 

Meeting Notes

Our Project is eligible for their underwriting.  We meet all of their criteria.  It is highly developmental (which is what they are looking for).  They are very motivated to do projects like this.  If we had a feasibility study she would “underwrite us today.”  They can be creative in finding financing solutions.

 

MIGA is currently open in Kazakhstan and not expected to close.  Their work in Kazakhstan has not been affected by the terrorist attacks, but if things change in a negative manner towards the country, they will close it.  They have done many projects in Kazakhstan. We need a Kazak partner if we want to own the land  or we can get a 99-year lease on the property.

 

We need to register the project with them which is free.  However, there is a $5,000 application fee which will be applied toward the principal.  It takes 2-3 months for a guarantee.  They will work with European Banks and cover up to 90% of equity and 95% of debt.

 

Overall feel of the meeting was very positive.  Abir asked many questions and became excited at various points through the presentation.  She showed most interest in the Aeroponics and suggested that the technology was useful in many other countries.  She asked that we keep her informed of the progress of the project.

 

Overseas Private Investment Corporation – OPIC

11:00 am Tuesday the 25^th of September

 

James Gale

Regional Manager

Investment Development

OPIC

1100 New York Ave, NW

Washington, DC  20527

202-336-8629

 

Description

The Overseas Private Investment Corporation’s political risk insurance and loans help U.S. businesses of all sizes invest and compete in more than 140 emerging markets and developing

nations worldwide. OPIC, a U.S. government agency, assists U.S. private investment overseas because it is in America's economic and strategic interest. By charging user-fees, OPIC operates at no net cost to U.S. taxpayers, and its reserves currently exceed $4 billion.

 

OPIC's mission is "to mobilize and facilitate the participation of United States private capital and skills in the economic and social development of less developed countries and areas, and countries in transition from non-market to market economies, thereby complementing the development assistance objectives of the United States …"

 

OPIC accomplishes this mission by assisting U.S. investors through four principal activities designed to promote overseas investment and reduce the associated risks:

 

      - insuring investments overseas against a broad range of political risks;

      - financing of businesses overseas through loans and loan guaranties;

      - financing private investment funds that provide equity to businesses overseas; and

      - advocating the interests of the American business community overseas.

 

Meeting Notes

OPIC’s working in Kazakhstan was not affected by the terrorist attacks and is not expected to be affected.  OPIC feels that Kazakhstan is even more important to invest in now because of the oil situation.  They have government liaisons with the Kazak government and will work hand in hand with us and them.

 

OPIC requires that we register the project with them.  They do not finance pre-feasibility or feasibility studies.  However, they can retro finance them and any other fees after they have committed to the project.  They require a 40% minimum to a 60% maximum equity participation in all projects.  They can be creative with the 40% equity.  They can only finance up to 50% of the debt.  They do bilateral guarantees not multilateral like MIGA.  They will only insure the U.S. side of the project.

 

• We fit well with their mandate. 

• They want to allocate more than 50% of their funds to doing small projects like this.

• The environmental aspect of renewable energy is very important to them.

• Central Asia Region is a current focus for them.

• It promotes capitalism and democracy which is one their mandates.

• It is a non-governmental project.

• It is a commercially viable – sustainable project.

 

Quotes:

“How do I sign you up”

“Shall I get my checkbook out now”

“This is one of the best presentations I have seen in years”

“You need to work with us not MIGA”

 

Overall feel of the meeting was extremely positive – almost as if we would be doing them a favor it we let them participate in the project.  This is the type of investment that they are looking for and they don’t come along every day.  However, they do require a completed feasibility study (they will retro finance it).  Jim asked us to keep him informed of our progress on the project.

 

Ecolinks TC "Ecolinks" \f C \l "2"

1:00 pm Tuesday the 25^th of September

 

Patricia Lai

Deputy Director

Ecolinks

1400 K Street, NW

Washington, DC  20005

202-326-7798

 

Description

EcoLinks is an initiative of the US Agency for International Development that seeks practical, market-based solutions to industrial and urban environmental problems in Central and Eastern Europe (CEE) and Former Soviet Union (this region is referred to as Europe and Eurasia (E&E) at USAID). The program promotes partnerships by linking businesses, local governments, and associations from the E&E region with US businesses and other organizations.

In working with their US (or regional) partners, organizations in the region will be able to better identify and remedy environmental problems by learning from their partners how to adapt the best environmental management practices and technologies available. As these partnerships mature, trade and investment in environmental goods and services will increase.

 

 

Meeting Notes

Ecolinks is a foundation that is funded by USAID that gives small grants to groups that help solve environmental problem in the world.  They require we partner with an in-country sponsor company, an agribusiness with a specific problem or it can come from the local government.  That company is the one that will fill out the application and request the grant.  They will need to define the environmental problem that our project solves.

 

There are 2 possible areas that this project may solve an environmental problem, one being clean renewable energy with the solar and the other being the ability to produce vegetables that is not contaminated by the soil or the ground water.  Potentially the desalination with the solar to produce potable water may be a possible avenue but then changes the scope of the project.

 

They will provide a quick grant for $5,000 that will be shared with the in country host and is to be utilized for travel either to Kazakhstan or for the host company to travel here.  Both parties would then complete the application together and apply for a $50,000 grant that can be used toward a pre-feasibility or a feasibility study.

 

The overall feel was not as positive as most of the other meetings.  This was not because she didn’t like the project but because she was unsure as to how it fit in with their program.  She indicated that she liked the concept and suggested that we fill out their application if we can find an in-country host company.  She directed us to the website where we could download an application and also view summaries of the types of projects that they do.

 

Embassy of the Republic of Kazakhstan

 

Aslan B. Sarinzhipov

Attaché

Embassy of the Republic of Kazakhstan

1401 16^th Street, NW

Washington, DC  20036

202-232-5488 ext. 129

 

Meeting Notes

Aslan is a Kazak National and of course, very familiar with the country, it’s needs and politics.  However, he did not mention corruption or payoffs.

 

Aslan said that although energy is very inexpensive – actually they have a surplus of it –the government is always looking for other sources of renewable energy.  Also he reconfirmed the fact that the country suffers from ineffective distribution of power.  Many places do not have adequate infrastructure of the power lines and they either have no power or very ineffective or inconsistent power flow.

 

Aslan felt that the project was well suited for the south where the vegetables is plentiful during the harvest season and spoils from lack of consumption and distribution.  They have no processing plants in that region to preserve food and the power distribution is that area is lacking.  He indicated that this type of product was currently being imported from Europe and was expensive and poor in quality.

 

He felt that there would be no interference from the government either locally or nationally.  He felt that the project was small enough that it would be of little interest to the national government but that we would have to work closely with the local government where ever we decide to locate the facility.  He also suggested that we partner with and
in-country company to avoid many of the problems that may occur if we go in with out one.

 

Quotes:

“The concept is very attractive”

“It addresses all of our current problems”

 

The overall feel of the meeting was very good.  Aslan thought the project would be well received in his country and saw no specific problems that needed to be addressed at this time.  He gave us many suggestion and a CD with a tremendous amount of information about an organization called Kazinvest that could be a tremendous resource for us.   He also mentioned that both Chevron and Citibank have venture funds for private investment in Kazakhstan.  Aslan asked us to keep him informed of the progress on the project and said he would be available to assist us in the future.

 

Ex-Im Bank

9:00 am Wednesday the 26^th of September

 

Paul Tumminia

International Business Relations Division

Export-Import Bank

202-565-3413

 

Description

Ex-Im Bank's mission is to create jobs through exports. It provides guarantees of working capital loans for U.S. exporters, guarantees the repayment of loans or makes loans to foreign purchasers of U.S. goods and services. Ex-Im Bank also provides credit insurance that protects U.S. exporters against the risks of non-payment by foreign buyers for political or commercial reasons. Ex-Im Bank does not compete with commercial lenders, but assumes the risks they cannot accept. It must always conclude that there is reasonable assurance of repayment on every transaction financed.

 

Meeting Notes

The Export-Import Bank is very favorable towards working on projects in Kazakhstan.  There policy towards the country did not change after the terrorist attack and indicated that the country is now more favorable to them that it was before the attack. 

 

They would need a complete and favorable feasibility study from us and a bank, sovereign or sub-sovereign guarantee.  They would need information regarding the size of the project and the structure of the debt and equity.

 

The overall feel of the meeting was positive but unfortunately Paul was distracted by several crisis that had resulted from the attacks of September 11^th.  Unfortunately, this allowed us very little time with him.  However he indicated that there were no foreseeable red flags with the project at this time.  He asked us to contact him in the future if it looked as if we would need a guarantee from the Ex-Im Bank.

 

United States Agency for International Development -- USAID

 

1:00 pm Wednesday the 26^th of September

 

Fred Wayne McDonald

Program Officer

USAID

1300 Pennsylvania Ave., NW

Washington, DC  20523

 

 

Description

USAID has been the principal U.S. agency to extend assistance to countries recovering from disaster, trying to escape poverty, and engaging in democratic reforms.

 

 USAID is an independent federal government agency that receives overall foreign policy guidance from the Secretary of State. The agency works to support long-term and equitable economic growth an advancing U.S. foreign policy objectives by supporting: Economic growth and agricultural development; Global Health; and, Conflict prevention and developmental relief.

 

They provide assistance in four regions of the world:

 

• Sub-Saharan Africa;

• Asia and the Near East;

• Latin America and the Caribbean, and;

• Europe and Eurasia.

 

They work in close partnership with private voluntary organizations, indigenous organizations, universities, American businesses, international agencies, other governments, and other U.S. government agencies. USAID has working relationships with more than 3,500 American companies and over 300 U.S.-based private voluntary organizations.

 

 

Meeting Notes

USAID may be helpful in funding some of the training for both office and factory personnel.

 

Fred did ask that we keep informed of the progress of the project.

 

Eurasia Foundation

3:00 pm Wednesday the 26^th of September

 

Gavin Helf

Director of Grant Program

Eurasia Foundation

1350 Connecticut Ave, NW

Washington, DC  20036

202-234-7370 x129

 

Description

The Eurasia Foundation is a privately managed grant making organization dedicated to funding programs that build democratic and free market institutions in the twelve New Independent States (NIS) of the former Soviet Union --Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, the Kyrgyz Republic, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.

 

Mission Statement              

 

The Eurasia Foundation believes that societies function best when citizens take responsibility for their own civic and economic future. Foundation programs seek to promote the skills and vision necessary to bring the greatest social and economic benefits to individuals and their societies.

The Eurasia Foundation promotes the advancement of democratic institutions and private enterprise in twelve host countries: Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, the    Kyrgyz Republic, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.

 

Meeting Notes

This was the least favorable of all of the meetings.  Our project did not fit the guidelines for their program and the people we meet with were negative towards the project.   The reason that we did not meet their guidelines is mainly that the project would be a for-profit venture.  Their projects are non-government and non-profit in nature.

 

Some of the negative feelings in general towards the project were: It may interfere with American exports of food into Kazakhstan; they felt the food might not be affordable by the local population; they felt the Kazak people were not sophisticated enough to handle such a high tech operation.

 

We listened to their concerns and comments and found them to be inconsistent with comments made by all of the other organizations that we visited.  As they were not a match for our project nor could they see the value, we did not pursue the meeting further.  However, we will investigate the merit of each of these concerns.

 

United States Trade Development Agency --

10:00 am Thursday the 27^th of September

 

Melissa A. Eustace

Country Manager

Eurasia

US Trade and Development Agency

1621 N. Kent Street

Suite 200

Arlington, VA  22209-2131

 

Description

The U.S. Trade and Development Agency promotes American private sector participation by helping U.S. companies pursue business opportunities in developing and middle income countries.  Through the funding of feasibility studies, orientation visits, specialized training grants, business workshops, and various forms of technical assistance, we help American businesses compete for infrastructure projects in emerging markets.  In addition, the agency promotes capacity building initiatives and supports U.S. government trade, economic policy and development objectives around the world.

Meeting Notes

TDA funds feasibility studies for international projects that are joint partnerships between US companies and host country companies.  They require a pre-feasibility study showing that the project is financial feasible.  The grant will go to a local eligible entity in Kazakhstan, it will then be cost shared with us to do the feasibility study.  The local entity will be the one to submit the request to TDA for the grant.  They will have an independent consultant evaluate whether or not to give the grant.

 

We will need to have:

-         A local company with which to joint venture.

-         A pre-feasibility study

-         A detailed proposal

-         Financing structure

-         Letters of investment interest

 

The overall feel of the meeting was very good.  Melissa indicated that if we provide what they require and that if the pre-feasibility shows no red flags that funding for the feasibility study should be no problem.  She felt that the project on the whole was very good and definitely was inside of their funding guidelines.

 

 

Citizens Network for Foreign Affairs

11:30 am Thursday the 27^th of September

 

Michael Kunz

Senior Program Officer

Citizens Network for Foreign Affairs

1111 19^th Street  NW

Suite 900

Washington, DC  20036

                    

Description

The Citizens Network for Foreign Affairs (CNFA) is a non-profit, nonpartisan organization dedicated to stimulating international economic growth in developing and emerging world markets. CNFA builds partnerships between the public and private sectors to foster sustainable development and create market-oriented, economically viable enterprises where none or few existed before.

 

CNFA currently is working in the food and agriculture sector of the New Independent States, of the former Soviet Union - Ukraine, Russia, Moldova and Belarus; and in southern Africa Zimbabwe, Mozambique and Zambia. CNFA is expanding its model of public-private partnerships into different economic sectors and disciplines, and into other developing areas of the globe.

 

Meeting Notes

Our project was not a perfect fit for their program, however they were very interested and they were able to see our vision.

 

A Kazak National, named Elena, who was there on an internship, accompanied Michael.  She indicated that green leafy vegetables were uncommon to the Kazak people.  They were not readily available, they were expensive, and the quality was poor.  She felt that the people would easily adapt to eating them and that the change would be good.  She thought that the project was very good and that it addressed many of the problems that the country is currently experiencing. 

 

The part she was concerned about was the solar energy.  As she pointed out, electricity is availability supply and very inexpensive.  She felt that the solar roof would make the project too expensive and the vegetables not cost effective.  This is something we will evaluate.  However, we did explained to her that the solar, in addition to power generation for a power intensive facility, would be cascaded and would be re-used again and again in a very efficient manner and that water desalination would be quite energy intensive.

 

Ways in which this organization will be of benefit to the project:

 

-         They will be a tremendous resource for accurate information.

-         They may be helpful in locating an in country sponsor company.

-         They have the ability to organize centralized collection areas for excess vegetable production by the local farmers.

-         They may be able to help with in country problems.

 

The overall feel of the meeting was very positive.  Both Michael and Elena felt that is was a good project and addressed many of the current in country problems of Kazakhstan.  Elena was seemed happy to know that the people of her country were going to have better exposure to healthy food.  Michael indicated that they were expecting another grant in a couple months and that they may be better able to help us then.  This would not be grant money for a pre-feasibility study but more of the type of assistance mentioned above.  Michael did ask that we keep them informed of the progress of the project.

 

 

Financing and Financing Strategy

 

Meeting with several agencies and NGOs in Washington has convinced us that project financing is probable providing (1) the project is economically feasible and (2) a suitable in-country partner is found.  It is not likely that one single financing source will provide the funding but rather a consortium of entities each providing a part.

 

Estimated Funding Requirements

 

1. Pre-Feasibility Study:  $15,000 to $30,000 depending upon market information availability and cost, preparation of project estimates, and necessary legal work.  This estimate includes travel to Kazakhstan for site and in-country partner selection.  Most probable cost – $20,000 plus travel expenses.

2. Feasibility Study:  $125,000 to $200,000 depending upon design consulting fees, market research, and legal work.  Estimate:  $150,000.

3. Total Project Cost:  $9 million to $18 million depending upon sizing of project, land costs, shipping fees, and source of equipment.

 

Funding Strategy

 

Pre-feasibility Study

 

This may be the most difficult funding to obtain.  Like the Concept Evaluation funding, this funding is pure risk.  If the pre-feasibility study shows the project not feasible, then there is no way to recover this cost.  However, if the pre-feasibility study supports the project, a portion or all of the cost may be recovered from the feasibility study funding.

 

The primary pre-feasibility study costs are travel to Kazakhstan, development of a market study to support the revenue projections, refined project cost estimates, preparation of project financial projections, development of the project funding strategy and indications of support from funding and guaranteeing entities, and legal work to secure an in-country partner.

 

None of the agencies or NGOs we met with was able to provide pre-feasibility funding.  At each meeting we asked for referrals for pre-feasibility study funding.  However, no one knew of any funding source.  We are prepared to perform a “foundation search” and make further contacts on behalf of Share International providing a budget is approved.

 

Feasibility Study

 

The United States Trade Development Agency (“TDA”) has been mandated to assist in the funding of feasibility studies that promote (1) United States exports, (2) free market activities, and (3) democracy to foreign countries.  The primary goal is the promotion of US exports.

 

TDA will provide up to 90% of the funding required for a feasibility study with 50% to 60% funding typical.  The balance of the costs must come from other sources.  Because of the desirability of our project and the lack of sponsor funding capability, the Central Asian desk officer indicated she would consider funding to the maximum 90% level.  The remaining 10% can be contributed in cash or in-kind services.  We believe that Duke Solar and Agri-House would “contribute” some of the engineering design costs for the study recovering such costs in the sales price of the equipment sold to the project.  If the project is funded, TDA will be repaid their contribution.

 

In order for TDA to provide funding, the request for funding must be made by the in-country partner.  However, the actual cash is not given to the in-country partner, but placed into an “account” to pay for the study costs.  SFI will develop a budget as a part of the pre-feasibility study for submission to TDA.

 

Project Funding TC "Project Funding" \f C \l "3"

 

We expect the project funding to be provided by several participating agencies and organizations.  The funding package will be a combination of equity (15% to 40%) and debt.  The required equity percentage is a function of funding agency’s requirements, for example, OPIC-25% to 40%, MIGA-25%, Ex-Im Bank-15% of equipment financed.

 

The Desk Officer at OPIC indicated he was aware of equity investment sources for similar projects.  He believed that if the feasibility study was favorable, he could introduce the project to equity participants sufficient to meet OPIC’s equity requirements.  During our meeting with the Asian Development Bank (“ADB”), the representative indicated that the Bank may consider providing up to 25% direct equity and either a direct loan or guarantee for the balance of the funding.  The Desk Officer at MIGA indicated substantial enthusiasm for the project and the project’s attractiveness to MIGA and its guarantee programs.

 

We suspect that the project financing will look something like this:  Ex-Im Bank may provide financing guarantees for US manufactured equipment, OPIC may provide sources of equity and some project financing guarantees and risk insurance, and ADB will may provide some equity and an overall project guarantee.  Obviously, none of these entities have agreed to provide any financing, guarantees, or insurance.  Their actual participation will depend upon a favorable feasibility study, proper project structure, and competent implementation.

 

 

CONCERNS AND CHALLENGES

 

Corruption – Mafia/Government Interference TC "Corruption – Mafia/Government Interference." \f C \l "2"

 

For parts of this report, we have used information distributed by the Kazakhstan government.  We have been cautioned by several sources to be somewhat skeptical of the “optimistic” picture presented by these sources. We assumed that this was the case, however, the only accessible public information available is obviously slanted.  Of course, political officials want the laws and regulations to be written in way that will be attractive to potential investors and companies considering doing business in Kazakhstan.  It appears that the laws are what the government claims is the way business is done.  However, for the project to proceed and succeed, we believe some form of “contributions” to a pet project of a government official will be required to get the project (or any project) operational. 

 

This situation is common and unavoidable in nearly all developing countries.  SFI and the others involved in developing the project will make every attempt possible to curtail, if not eliminate, participation in corruption.  However, it is reasonable to expect there will be some fee allocations that may be viewed as a form of payoff.   We believed those who will interfere will also benefit from the operation of the project. Because of this, we hope that this will reduce the financial demands on the project to a minimal level so that the government officials will not interfere with the business being long term profitable.

 

Kazakhstan, as all of the NIS countries of the former Soviet Union, has endemic Mafia harassment in the infrastructure of doing business.  We have been lead to believe that in some cases, the mafia may be affiliated with the government.  When this is the case, the local government officials will have “independent agents” conduct the harassment.  This keeps the government “uninvolved,” and therefore, it can claim that it has not violated the laws of the country.  Fortunately, this project is small enough we believe we will only have to deal with the corruption on a local level.  During the in country visit, SFI will attempt gain the support and “understanding of” the local officials in attempt to convince them that it is in there best interest to allow the plant to be operational long term.  This, of course, will not eliminate the need to “contribute” in some form, but it should help to reduce the impact.

 

It should be noted that this is the norm in emerging and developing economics.  It cannot be avoided, but it can be reduced and dealt with successfully.  Obviously, nothing will be done that knowingly breaks any laws of the country of Kazakhstan or the United States.  SFI will not knowingly violate any law of the United States or Kazakhstan.

 

 

The Cost of the Product

 

It is imperative to grow and process the food at a cost so that the local population can afford it and that the total cost including export costs make the product saleable in those export markets.    Poverty is wide spread, high is unemployment, and low salary and wages are common in the region.  Therefore, the food must be priced to be affordable to the local population, or affordable, after transportation costs, by the population in other cities in the Kazakhstan or neighboring countries.

 

Currently, in season, fresh vegetables are sold at modest prices and home canning of vegetables is common.  The challenge will be to grow, harvest, and distribute the canned product at a competitive price.  Fortunately, labor in the region is inexpensive and with government’s co-operation, the entire operation should be cost effective.

 

Currently, we need to determine if the Aeroponics technology is the most cost effective for the project.  Its effectiveness cannot be determined until the pre-feasibility stage of the project which will require an in-country visit.  It is possible a standard greenhouse may work efficiently and be of a lower capital and operational cost. 

 

A standard greenhouse will use more water and fertilizer than the Aeroponics technology.  First the Aral Sea, which supplies the river and irrigation for the local farmers, is rapidly diminishing.  This results from aggressive irrigation to grow local crops in this extremely arid region.  It may be a concern to the local farmers that we could be competing with for sales with their produce. Also, we may compete for water where it may be scarce.  However, the cannery will provide a market for the vegetables that are not sold and may otherwise spoil.

 

As the projects currently is planned, by using the Aeroponics technology, the project is very attractive to both the United States and Kazak Governments.  This is important because the more attractive the project is to the US government, the easier it should be to obtain their financing.  The more attractive the project is to the local government, the less interference we should experience and more leverage to control interference.

 

In the Pre-Feasibility stage of the project both the United States and Kazakhstan government participation will be researched and the most advantageous direction to move forward will be recommended.  Supporting documentation will be made available in that report along with estimated cost.

 

Transportation

 

To transport the canned or fresh vegetables, for in-country distribution or for export, may be costly and difficult.  Although road conditions are improving, they are not conducive to trucking large shipments cross-country.  Qyzylorda is not located near a large population center either in-country or for export.  Qyzylorda is the best agriculture production area in the country and is ideally suited for the project (see Location).  The northern region of the country currently imports canned and fresh vegetables from other countries because the distance to Qyzylorda greater than to Russia.  The design of the project is that the vegetables from our project will be competitively priced with the imported products. 

 

Project Cost

 

While a ball-park cost of $9 to $18 million USD has been estimated, detailed cost estimates have been determined.  It may be necessary to source some of the equipment from countries closer to Kazakhstan (Qyzylorda) where the shipping and procurement cost will be less than from the United States.  Should the project cost be high and loan amortization schedule 10 to 15 years or less, the project may not be financially feasible.

 

Shipping

 

The Kazakhstan border does not connect with any major water way accessible by sea going vessels.  This will require all equipment brought into the country to either be shipped by air or by ocean vessel and then travel by land through other countries to Kazakhstan.  Some of the borders that will need to be crossed may be difficult to navigate through due to the region of the world in which Kazakhstan is located.    Regardless, the shipping involved will be expensive and complicated.  As much equipment as possible will be sourced in-country or obtained in close-in countries that are more favorable for procurement and transport.  This means that not all equipment will be sourced from the Untied States. 

 

Summary

The challenges for this project are not uncommon or simple.  If that were the case then it would be likely there would already be a cannery, financed by foreign investment, processing food in the area.  This project will be management intensive and will have to be closely monitored at every stage.  Although this may make the project seem difficult, there have also been very encouraging indications that the project is achievable.

 

 

RECOMMENDATIONS

 

Project Summary

 

The Concept Evaluation targeted five areas for evaluation:  the project, the market for the products produced, government support both Kazakhstan and United States, the potential for financial support, and major anticipated problems and concerns.  The major findings are:

 

The Project:  The project concept is sound and definitely fulfills a local need and the priorities of both the United States and Kazakhstan government.  The actual size and scope of the project has not been determined due to lack of design information.  Very early cost estimates place the project in the $9 to $18 million range.  The project provides an environmentally sound operation, substantial local employment, opportunities for training local people in business and free-market operation, and an opportunity to promote positive attitudes towards the United States and Share International.

 

The Market  There exists both a source of supply of vegetables and a market for the processed vegetables – both internal and export.  Of course canned vegetables cannot compete, price-wise, with fresh vegetables, however, fresh vegetables are available only during the growing season.  Also, there are markets available by train or truck, that do not have a dependable supply of fresh vegetables or the fresh vegetables are more costly.  During the non-growing season, all markets – local and available by transport – are in need of canned vegetables.  The export market is available at all times.  Actual per can cost must be determined and is related to the size of the cannery.

 

Government Support – United States and Kazakhstan  At the Washington D. C. meetings, the project received remarkable support.  Representatives of the EX-IM Bank, Overseas Private Investment Corporation (“OPIC”) , Trade Development Agency (“TDA”), and International Trade Agency of the Department of Commerce (“ITA”), all expressed support for the project including financial support pending a supporting pre-feasibility study and feasibility study.  The project fulfilled the mandates of these agencies and was targeted at the Central Asian Republics (“CAR”) where the U.S. now has a current vital interest.

 

The government of Kazakhstan, through its commercial officer at its Embassy, expressed considerable interest.  Also, food processing is a high priority, stated goal of both the national and oblast governments.  We expect support and little interference during the development of the project.  Interference with ongoing operations may be more problematic.

 

Project Financing:  Substantial financing for the feasibility study should be available from the Trade Development Agency.  Up to ninety percent (90%) of the feasibility study cost may be available providing a positive pre-feasibility study and an in-country partner are in place prior to application for the funding.  Project funding appears to be readily obtainable providing a positive feasibility study is completed.  Representatives of the EX-IM Bank and OPIC expressed “strong and positive” support as did the representative from the TDA.  The representative from the Asian Development Bank (“ADB”) was especially encouraging pointing out that the ADB may be interested in both an equity position in the project as well as providing project financing.  The Multilateral Guarantee Agency (“MIGA”) of the World Bank was extremely interested in the project and supporting it with a MIGA project guarantee.  Other U.S. agencies, such as the United States Agency for International Development (“USAID”) may also play a financing roll as the project develops.

 

Potential Problems and Concerns:  There are a number of potential problems and concerns.  They are:

1.      Corruption – Mafia/Government Interference.  As with all developing countries, corruption is a constant problem.  The size of the project should allow the project to “fly below the radar” of the national government.  However, the project will be very visible and a larger project in the Oblast and city.  Also, the local mafia, which is involved in the local farming industry, may become a problem.  A “well-connected” local partner will help to mitigate these problems and will be a focus of the in-country visit.

2.      Product Cost.  The cost of canned vegetables cannot compete with the local cost of fresh vegetables.  However, when local fresh vegetables are not readily available, the local population should be willing to pay a higher price for the canned vegetables.  There is a regional and export market, however, we have not yet determined the cost parameters.

3.      Local Transportation.  The highway and rail infrastructure is badly in need of maintenance.  In order to distribute and sell the canned vegetables, it will be necessary to market them in the regional area and deliver some for export.  While we know that imported items are reaching the Qyzylorda area, the cost, reliability, and availability has not been determined.

4.      Project Cost.  The total cost of the project has not been determined.  If the cost of the project is on the high side of the estimated range and/or the loan amortization term is too short, the project may not be financially feasible.  This will be determined in the pre-feasibility study.

5.      Shipping of the Project Equipment.  It is difficult, time-consuming, and expensive to ship equipment and other materials into Kazakhstan.  While shipping routes are available, the cost and time has not been determined.

 

There does appear to be a “fatal flaw” for the project at this time.  The primary concerns focus on regional and local Kazakhstan government inference, market pricing and product cost.  Market pricing and product cost as well as local transportation and shipping will be addressed and evaluated in the pre-feasibility study.  Mitigating local and regional interference will result from careful selection of a local partner, initial negotiations with government officials, support from the U.S. agencies, and the ability to work with the government officials on an ongoing basis.

 

The cost of the pre-feasibility study is estimated at Twenty Thousand Dollars ($20,000 USD) plus estimated expenses of Five Thousand Dollars ($5,000 USD) primarily used for a trip to Qyzylorda.  SFI is currently preparing a proposal for a grant form Ecolinks, a subagency of USAID, for the travel expenses. While we are hopeful to receive the grant, there is no guarantee.

 

Recommendation

 

Because of the positive responses, both political and financial, received from governmental agencies and NGOs, the high priority for food processing in the Qyzylorda area, and the benefits to the local people, it is recommended to progress to the pre-feasibility study.  Time to complete the pre-feasibility study is estimated to the three months.  SFI is available to begin as soon as a commitment to proceed is granted.

 

 

 

 

Written in conjunction with

Strategic Finance International