JSC “NC “Kazakhstan Engineering”, as a 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.

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:

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.

Even in the current situation, there are signs of unfair management of the executive body. Thus, the Rehabilitation Plan submitted by the Enterprise in April 2022 for approval by the SIEC EKO did not contain specific areas and activities that would allow us to talk about the prospects for the restoration of the Plant. In fact, certain measures of the said Plan contained signs of deliberate bringing to bankruptcy. As a result, the court, by a ruling dated April 15, 2022, refused to approve such a rehabilitation plan and approved the adjusted Plan only on June 7 of the current year.

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 Committee of Creditors and the rehabilitation manager, who, at the suggestion of the State Revenue Department of Semey, was appointed by the aforementioned Alenov 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. Contracts for more than 200 million tenge are in the process of being concluded. Payment under the contracts is provided as the obligations are fulfilled.

However, despite the provision of orders, the Enterprise still does not receive income in sufficient volume to pay wages to employees, which indicates poor-quality planning and management of financial and economic activities. There are risks of non-fulfillment of contractual obligations to customers of products, which can significantly complicate the situation.

In connection with the current situation and the growth of social tension at the Enterprise, the Company addressed the General Meeting of Creditors of the Plant with a proposal to conduct an audit of financial and economic activities for the execution of current contracts.

On October 11, 2022, a meeting was held with the participation of members of the General Meeting of Creditors of the Plant, at which the creditors turned to the Company with a request to assist in the audit by involving the Internal Audit Service of the Company (hereinafter referred to as the IAS). As a result of the meeting, the decision was unanimously approved to initiate the direction of the Company's IAS to SMZ JSC for an audit.

October 18 this year The Board of Directors of the Company agreed and made a decision to conduct an audit of the IAS within ten days after the date of the relevant decision of the Committee of Creditors.

In addition to monitoring the implementation of the Rehabilitation Plan of SMZ JSC, the processes of disbursement of funds allocated by the Company for material assistance and the implementation of investment projects spent on repairing the enterprise's administrative building will also be subject to verification. In addition, individual contracts concluded by the Plant will be checked, for example, contracts for the supply of various products to AlES JSC and 20-foot containers to Kazatomprom JSC raise questions due to the fact that the supplied products were not manufactured by the Plant. In addition, we believe that these purchases were made using a single source method at inflated prices.

In case of detection of violations during the audit, it is supposed to file an application with the relevant control and law enforcement agencies.

At the same time, the Company continues to search for potential investors to carry out sanitation at the Plant. To date, the Company already has applications from potential participants in the reorganization of SMZ JSC:

• one of the companies is ready to participate in the rehabilitation procedure within the framework of the Plant Rehabilitation Plan, and assume obligations to ensure satisfaction of creditors' claims (including debts to the group of companies of NC Kazakhstan Engineering JSC) within the time frame specified by the Plant rehabilitation plan;
• in addition, Prime Management Ltd. LLP is ready to participate in the rehabilitation procedure within the framework of the Plant Rehabilitation Plan by injecting investments into the enterprise to increase its production potential with the subsequent repayment of all accounts payable.

The seriousness of the intentions of this LLP is evidenced by the actions to buy out the debt of SMZ JSC to Halyk-LIFE, a subsidiary of the Halyk Bank of Kazakhstan for life insurance, and, thus, join the meeting of creditors of the Plant.

prime management ltd. also addressed the creditors of SMZ JSC with a proposal to convene a meeting of creditors with the following agenda:

1. Removal of the rehabilitation manager of JSC "SMZ" Alenov M.B.

2. Appointment of a new rehabilitation manager.

3. Conducting an audit of the Plant's activities over the past 5-year period.

In this regard, at the October 26 this year. At the initiative of the Company, the operational meeting members of the meeting of creditors were invited to start the search for potential participants in the sanitation of SMZ JSC. This initiative met with support from creditors.

The sanitation algorithm assumes:

• the decision of the Committee of Creditors to announce an open search for participants in the rehabilitation (including in the media);
• studying all the proposals of potential participants in the reorganization of the Plant and choosing the most optimal option;
• conclusion of a preliminary agreement with the selected participant in the rehabilitation, which must give a corresponding written commitment;
• an appeal of the Meeting of creditors to the judicial authorities to amend the Rehabilitation Plan in terms of reorganization;
• approval by the court of amendments to the Rehabilitation Plan of SMZ JSC in terms of reorganization.

In order to search for opportunities for the implementation of new projects at the Enterprise. During a recent visit to the Republic of Serbia, our partners were presented with the capabilities of SMZ JSC and proposed to implement a joint project to organize a repair shop for unused equipment on an abandoned site built for a project with MAZ. A potential partner is considering this proposal. 

In general, we believe that the production capacities of the enterprise have significant potential for further development, both in terms of civilian and military products. 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.

In connection with the foregoing, 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 the local executive and judicial bodies to assist in the issues of the speedy rehabilitation and sanitation 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.

According to the rehabilitation manager Alyonov M.B., the Enterprise plans to independently pay wages to employees for September 2022 at the expense of payment for products (manhole covers) by customers - Transremvagon LLP and Azhdar and K LLP.