JSC “NC “Kazakhstan Engineering” is the main defense holding of the country, at the same time, information sources often mention the deplorable financial condition of the national company and large debt obligations, which cast doubt on the development of the industry.

Garyp Muratovich Ismatov, Deputy Chairman of the Management Board for Economics and Finance, will tell more about the economic situation in the Company and answer the question of how the Company's management plans to solve financial problems.

Garyp Muratovich, is it possible to solve the long-term problem of debt burdens of JSC “NC “Kazakhstan Engineering” in a short time?

As of August 2022, the total accounts payable of NC Kazakhstan Engineering JSC (hereinafter referred to as the Company) to Halyk Bank of Kazakhstan JSC (hereinafter referred to as the Bank) and from Samruk Kazyna JSC (hereinafter referred to as the Fund) is 26.5 billion .tenge, including before the Bank - 21.4 billion tenge, before the Fund - 5.1 billion tenge. This debt, which has developed as a result of a number of economic factors and management errors, today is a huge burden. After all, it impedes the development of the Company and the implementation of planned modernization, forcing it to spend profits on remuneration on loans, and not on investments in the creation of new production facilities and the modernization of existing ones, which significantly affects the defense industry as a whole.

Answering the question - yes, it is possible to solve the problem of debts in a short time and start developing new projects, but everyone, both creditors and customers of the Company's products, should understand the situation.

How did the debt come about?

If possible, a little digression into history. The company was established in 2003, uniting in its structure all the defense industry enterprises of the country, which at that time were in a difficult financial condition. The factories' debts were consolidated and repaid at the expense of the republican budget allocated in accordance with Article 39 of the Law of the Republic of Kazakhstan dated December 05, 2003 No. 505-II "On the republican budget for 2004". The state has set further tasks for the Company to develop the defense industry. At that time, virtually the entire defense industry of the Republic of Kazakhstan was represented by Kazakhstan Engineering. Much has changed since then, the most profitable enterprises have been privatized. In the period 2015-2019 The company acted as the operator of the State Defense Order.

In 2013 JSC "NC "Kazakhstan Engineering" attracted investments in the amount of 200 million dollars (through Eurobonds) to replenish working capital and implement projects. In 2016, against the background of the negative impact of the devaluation (a sharp increase in the exchange rate from 150 to 399 tenge per dollar), external borrowing was repaid from the accumulated funds in the amount of 128 million dollars and the received tenge loan for 26.2 billion tenge (about 76.6 million tenge). dollars) in Halyk Bank of Kazakhstan JSC for a period of 1 year at 14% per annum.

However, it turned out to be impossible to pay such an amount in 1 year, and in 2017 the Company received interest-free financial assistance from Samruk Kazyna JSC (at that time - the Company's shareholder) for 6 billion tenge for up to 1 year, which was converted into a loan in 2018 maturing until 2021 at 4% per annum. From year to year, the terms of the loans of the Bank and the Fund were extended. However, against the backdrop of a shortage of funds in 2019, there was a delay before creditors represented by the Bank and the Fund. The total debt is currently 26.5 billion tenge.

What measures have already been taken?

In December 2020, the debt to the Bank was restructured with a maturity date of March 31, 2021. At the same time, overdue interest in the amount of 6.6 billion tenge that arose during this period was transformed into principal debt with an interest rate of 0.1% per annum.

In August 2021, the Bank and the Fund entered into an Agreement on the procedure for repaying debts with full repayment of debts until February 2024. But that doesn't help the situation. This year the Company must pay 18.6 billion tenge. To date, 0.9 billion tenge has been paid.

It should be noted that since the receipt of a loan from the Bank and financial assistance from the Fund, the Company has already paid 22.4 billion tenge, including to the Bank - 20.7 billion tenge and the Fund - 1.7 billion tenge. It turns out that, having received a loan from the Bank in the amount of 26.2 billion tenge, the Company has already paid the Bank 20.7 billion tenge and owes another 21.4 billion tenge, and having received assistance from the Fund in the amount of 6.0 billion tenge , being owned by the Government, owes the Fund - 5.1 billion tenge. In the case of the Fund, in fact, it is necessary to shift public money from one pocket to another.

How to solve a problem?

Previously, the Company planned that repayment would be made through the sale of its interest in subsidiaries and affiliates (as part of privatization). However, the unstable geopolitical and economic situation complicates the sale of assets. Moreover, it is a utopia to sell all the assets of the Company and use them to cover debts.

In addition, the new management of the company has a clear strategy and vision for the development of the Company's enterprises, in connection with which it is proposed to leave a number of them producing defense products under state control (for example, a cartridge plant).

Here we need to clearly define and understand the proposed development strategy - we work to cover our debts to the Bank and the Fund, or still act comprehensively and progressively to meet the needs of our main Customers (the Ministry of Defense of the Republic of Kazakhstan and other departments), which in turn provide the country's defense capability?

The Company's development strategy is supported by a number of deputies of both houses of Parliament, and they have repeatedly proposed to initiate the issue of the Company's debt to the Bank. It should be noted that the State supported the Bank during a difficult period in the recent past, and we hope that the Bank will meet the Government's needs now, especially on the problems of such a strategic area as the defense industry.

We hope that the Bank will meet the Company's needs in terms of debt restructuring, as well as writing off interest. Despite everything, we continue to work actively to attract investment and create new industries.

What are the prospects for a defense company with debts?

Today, in the defense industry (not only for the Company, but for all defense industry enterprises) there are a number of long-term accumulated problems, including the necessary renewal of the technical park and planned upgrades, lack of funding for scientific military activities and innovations, training of specialists - and this only to support current activities, not to mention the implementation of new projects. In order to implement new projects, the Company's management is forced to look for investments among international partners; work is actively carried out with Turkish and European partners. At the same time, today there are no programs for financing subjects of the military-industrial complex. For comparison, the turnover of the Turkish military-industrial sector is more than 20 billion US dollars, at the same time, twice as much is allocated for research and development work. The state has a stake in almost all Turkish defense industry enterprises, accounts payable, if formed, then to the state.

In the context of geopolitical instability, foreign countries are increasing investments in the defense sector, as well as scientific developments and IT, which are the key to the successful development of not only the military sector, but also the civilian industry, and against this background, we have to state that our entire Company is essentially working to cover debts.

Is it possible to solve the problem by selling assets and paying off debts, in fact, shifting money from one state pocket to another, to the detriment of the main strategically important industry - the defense industry? The answer is clearly no.

The company's management currently offers more than 70 projects in the civil and defense sector, the implementation and income from which will allow you to quickly pay off your debts. Within the framework of the state defense order, projects with high profitability for our enterprises are being worked out. Work is underway to reduce costs and other expenses.

For interest, if this year the Company would not have to pay 22.3 billion tenge to creditors, the Company could implement the following projects with this money:

1. Creation of production of anti-tank missile systems;
2. Creation of production of portable anti-aircraft missile systems;
3. Establishment of the production of loitering ammunition;
4.  Creation of a center for the production, repair and maintenance of reconnaissance and reconnaissance-strike UAVs;
5. Establishment of the production of domestic means of communication in the VHF range;
6. Expansion of the service center for maintenance of military and civil aircraft;

And the list of promising projects is not limited to this.

All this would create an additional 500 jobs, train 300 specialists, and create conditions around the main industries for the development of small, medium and micro businesses. We would increase the wages of all employees of the Company's plants by 30%, increasing the average wage as well.