This letter of JSC "NC "Kazakhstan Engineering"

sent on June 8, 2022 to all responsible

state, judicial, local executive

and law enforcement agencies, the Public Council (ref. No. 1111-I).

(Information updated as of October 6, 2022)

Information mail

on the situation at JSC "Semipalatinsk Machine-Building Plant"

JSC NC Kazakhstan Engineering, as a key shareholder of JSC Semipalatinsk Machine-Building Plant, cannot but be concerned about the critical situation that is developing at one of the oldest machine-building enterprises of the republic. The plant is in a pre-bankruptcy state, it is shaken by high-profile criminal cases, many claims of creditors have been brought against the enterprise. The prospect of stopping production is real, with the ensuing risk of growing social tension.

The plant, founded back in 1969, previously had a stable supply of orders and was famous for its unique competencies in the production of tracked, trailed vehicles and products for the railway industry. The enterprise had a full cycle of machine-building production - workshops on its own land, an extensive machine park and qualified personnel. Since 2012, the Plant has been participating in the state defense order for the development and production of weapons and military equipment, and the repair of engineering equipment.

Despite the favorable prospects, since 2014 there have been problems in the activities of the Company - since 2015, the Company has recorded an increase in unprofitable activities with relatively stable volumes of orders - the accumulated loss is about 1.9 billion tenge.

In the same period, there is an increase in accounts payable. In the period from 2013 to 2016, the Plant was exposed to undeclared taxes totaling 210 million tenge, which led to the introduction of restrictions on the settlement accounts of the Enterprise. This did not allow us to fully carry out production activities, participate in tenders, and fulfill contracts on time.

The Company made efforts to solve the problems of the Enterprise by increasing its efficiency and ensuring its utilization. So, in 2014, on the basis of the Enterprise, a project for the production of MAZ vehicles was launched with an investment cost of about 1.5 billion tenge. The project was financed at the expense of the Company - more than 672 million tenge were allocated, which were mostly spent on the restoration of administrative buildings, workshops and replenishment of working capital. The production of cars was never started, as a result, in 2015, the project was curtailed. Public funds were wasted.

To ensure social stability and relieve tension in the workforce, due to the weak organization of labor and low financial discipline of the Enterprise, the Company and its subsidiaries provided financial assistance, which reached more than 2 billion tenge, including for the payment of wages. As of October 2022, the total debt of the Plant to the Company is 1.7 billion tenge.

Since 2015, as part of the policy of denationalization of the economy, the Enterprise has been included in the privatization program. However, attempts to transfer the Plant to a competitive environment were unsuccessful, primarily due to high debt, including to the tax authority. The procedure for the sale of shares of the Enterprise had to be suspended after the start of the procedure for its rehabilitation.

February 2022 in relation to the Plant, a rehabilitation procedure was applied for a period of 5 years, in particular, a ban was introduced on the shareholder to alienate the shares of the Enterprise. On June 7 this year, the court approved the Rehabilitation Plan for the Plant.

The Company recognizes that many of the current problems could have been avoided by greater shareholder control. However, it is obvious that a significant part of the blame lies directly with the executive body of the Enterprise. In the period from 2010 to 2021, Omarov N.S. was the General Director of SMZ JSC, then his deputy, Alenov M.B., took the post. Both have rich professional experience, including in the public service (Administration of the President of the Republic of Kazakhstan, akimats of the East Kazakhstan region and the city of Semey). A simple analysis and auditors' conclusions show that in a number of cases, the management of SMZ JSC did not show elementary responsibility and good faith.

Thus, the conducted audit revealed violations of the labor legislation of the Republic of Kazakhstan in terms of labor rationing, qualification requirements and payroll; lack of internal regulatory documents regulating the procurement process, cost calculation, agreement, price approval and the sequence of product calculation, etc.

In the period 2019 - 2020, despite the Company's measures to provide the Plant with orders and allocate funds for the execution of state defense contracts, incompetent decisions of the Company's management led to the realization of the risk of cancellation of previously concluded state defense contracts and, accordingly, to the return of funds, the imposition of penalties and litigation.

The low efficiency of personnel work at the Enterprise also had its negative impact: when dismissing and hiring managerial personnel, documentation was not accepted and transferred, which, in turn, led to the loss of technical, accounting and regulatory documentation.

Direct evidence of poor-quality management, in addition to the deplorable state of the entrusted enterprise, is the criminal case initiated by the Department of Economic Investigations for East Kazakhstan region against the first deputy general director of SMZ JSC Suleimenov K.R. The investigation proved that Suleimenov K.R. committed theft of budgetary funds on an especially large scale during the implementation of the state defense order. The amount of damage caused is more than 600 million tenge. By the verdict of the court No. 2 of Semey dated April 7, 2022, he was found guilty, and he was sentenced to imprisonment for a period of 7 years.

With the introduction of the rehabilitation procedure, "Kazakhstan Engineering" was removed from the management of the Enterprise, and all management functions were assigned to the rehabilitation manager, who, at the suggestion of the State Revenue Department of Semey, was appointed by the aforementioned Alyonov M.B.

Despite this, the Company is making every effort to improve SMZ JSC. Thus, in recent months, it was possible to receive orders for the Plant from a number of large Kazakhstani enterprises (Kazzinc LLP, Transremvagon LLP, Azhdar and K LLP, United Railway Economy LLP, Ibraev + K PK) for hatch covers of wagons, the total amount of concluded contracts exceeded 800 million tenge. However, payment under the contracts is provided as the obligations are fulfilled.

Contracts for more than 200 million tenge are in the process of being concluded.

However, for one reason or another, there are significant risks of non-execution of contracts. Including due to the current difficult social situation at the enterprise, due to wage arrears and social obligations to the team.

With the beginning of the implementation of the Rehabilitation Plan, the restrictions previously imposed by the court on the financial and economic activities of the Company were lifted, in particular, settlement accounts were unblocked.

The production capacities of the enterprise have the potential for further development. The total area of ​​the enterprise is 37,000 m 2 , of which production workshops - 25,000 m 2 . Most of the equipment of the main production shops is in a physically worn out condition, however, it has sufficient stock to continue work. For 2022, the company employs 142 people, incl. 114 - production personnel. The plant has a favorable geographical location, its own access roads and railways. The proximity of transport routes facilitates the task of supplying raw materials and components, as well as selling products.

The enterprises of the railway industry are also interested in the products of SMZ JSC for the long term. It is quite possible to deploy new projects at the enterprise. Negotiations are underway with the Serbian company Yugoimport for the development of new works and services on the territory of the Plant.

In connection with the above, we ask you to pay attention to the current situation around the Semipalatinsk Machine-Building Plant. We believe that in order to preserve the Enterprise, active joint actions of state bodies, the business community and the public are necessary, and we call on all interested parties to take part in this process.

We ask local executive and judicial bodies to assist in the issues of the early rehabilitation of the Plant, the preservation of jobs and the prevention of its bankruptcy.

We also consider it necessary that law enforcement agencies give an exhaustive legal assessment of the actions or inaction of the management of SMZ JSC, which led to the current situation.

For reference: by the decision of the Board of Directors of JSC "NC" Kazakhstan Engineering "in the period 2020 - 2022, JSC" SMZ "provided financial assistance to pay off wage arrears of employees: