Previously, we examined in detail the capabilities of machine-building plants to produce civilian and military products (link to the article - https://ke.kz/ru/press-center/news/4954/ ), we also examined promising and profitable projects and companies (link to the article - https://ke.kz/ru/press-center/news/4975/ ).

Today I would like to return to the basics - procurement methodology. I touched on this topic in my article about a year and a half ago ( https://ke.kz/ru/press-center/news/2253/ ). Since then, the methodological basis has not changed fundamentally, the principles and approaches have remained the same. Unfortunately, there are still no specific imperative norms that stimulate the development of existing and the creation of new industries in Kazakhstan.

Through personal communications with customers or representatives of authorized bodies, absolute confidence is formed that they all support the development of their own production and competencies in Kazakhstan. When you ask the question: “Would you like our industry to develop, jobs to be created, modern engineers and technologists to be educated?”, everyone answers with one voice - “Yes.” But when you ask for a contract, they send you to participate in procedures in accordance with current legislation and methodology. This means tender, bureaucracy, lower prices affecting quality, fear of making a decision...

There would be absolutely no indignation among Kazakh manufacturers if all procedures were open, understandable for participants, electronic, with priority for Kazakh manufacturers, with an emphasis on quality and assessment based on the total cost of ownership and long-term understandable plans.

I will highlight several main problems for Kazakhstani manufacturers and service providers:

1) Fear of customers to make decisions in favor of Kazakh manufacturers.

Recently there was a good interview with the Deputy Agency for Civil Service Affairs that it is beneficial for civil servants not to make decisions - ( https://kaztag.kz/ru/news/dolzhnostnym-litsam-v-kazakhstane-vygodno-ne-prinimat-samostoyatelnye- resheniya-adgs?utm_source=facebook&utm_medium=cpc ).

In procurement matters, this fear increases tenfold. The customer, suppose, is a true patriot who wants to buy exactly Kazakhstani products, having the methodological opportunity to do so, for example, to buy from a single source under copyright law (Article 39 of the Law on Public Procurement), all the same, out of fear of responsibility for the choice, will announce a tender on a general basis, because “tomorrow they will come and ask.” Even if the supplier is a Kazakh state plant, fear of making a decision prevails.

2) The absence of mandatory rules of law in the current legislation obliging the purchase of Kazakhstani goods.

The state defense order is regulated by the Law “On the Defense Industry and State Defense Order”, within the framework of which the following regulations have been developed, which, in my personal opinion, significantly bureaucratize the processes:

• Acting order Minister of Industry and Infrastructure Development of the Republic of Kazakhstan dated April 13, 2020 No. 197 “On approval of the Rules for the provision of public services “Issue of a license to carry out liquidation activities through the destruction, disposal, burial and processing of released ammunition, weapons, military equipment, special means”;
• Order of the Minister of Industry and Infrastructure Development of the Republic of Kazakhstan dated August 29, 2019 No. 675 “On approval of the rules for providing state support measures to organizations of the military-industrial complex”;
• Order of the Minister of Industry and Infrastructure Development of the Republic of Kazakhstan dated September 3, 2019 No. 687 “On approval of the Rules for certification and issuance of a certificate of an organization for the maintenance and repair of state aviation equipment”;
• Order of the Minister of Industry and Infrastructure Development of the Republic of Kazakhstan dated November 7, 2019 No. 829 “On approval of the rules for organizing and conducting scientific research within the framework of the state defense order”;
• Order of the Minister of Industry and Infrastructure Development of the Republic of Kazakhstan dated November 20, 2019 No. 862 “On approval of the Rules for testing the results of development and technological work”;
• Order of the Minister of Defense of the Republic of Kazakhstan dated August 18, 2022 No. 684 “On approval of the Rules for interaction between structural units of the Ministry of Defense, the General Staff and the Armed Forces of the Republic of Kazakhstan in the formation of the state defense order and the implementation of public procurement in the interests of the Ministry of Defense of the Republic of Kazakhstan”;
• Decree of the Government of the Republic of Kazakhstan dated October 14, 2019 No. 759 “On approval of the rules for the formation, placement and implementation of the state defense order”;
• Decree of the Government of the Republic of Kazakhstan dated October 31, 2019 No. 812 “On approval of the rules for monitoring the quality of execution of the state defense order in organizations regardless of the form of ownership”;
• Decree of the Government of the Republic of Kazakhstan dated November 29, 2019 No. 896 “On approval of the rules for the circulation of weapons and military equipment”;
• Decree of the Government of the Republic of Kazakhstan dated October 17, 2019 No. 772 “On approval of pricing rules for military goods (products), dual-use goods (products), military work and military services within the framework of the state defense order”;
• Decree of the Government of the Republic of Kazakhstan dated November 6, 2019 No. 832 “On approval of the rules for the transfer, sale, liquidation, through destruction, disposal, burial and processing of unused property, as well as the provision of unused defense facilities for property lease (lease)”;
• Decree of the Government of the Republic of Kazakhstan dated January 26, 2023 No. 48 “On approval of the rules for the transfer of property between law enforcement and special government agencies, the Armed Forces of the Republic of Kazakhstan, other troops and military formations during the introduction of a state of emergency or martial law throughout the territory of the Republic of Kazakhstan and in its individual localities” .

In my opinion, for the effective development of industry the following mechanisms are needed:

• Mandatory rules for choosing and concluding contracts with domestic enterprises.

The current norms of the Law of the Republic of Kazakhstan “On the Defense Industry and State Defense Order” and the lack of liability provided for by law allow customers of defense products to choose at their discretion the method of procurement between two systems: through a defense order or government procurement. It is unacceptable. It is necessary to introduce administrative liability for failure to comply with consistent procedures for selecting suppliers in the first place among domestic manufacturers, and then by other means.

In this case, the choice should be not only according to specific characteristics, but according to categories. I remember one story from civil supply, how a manufacturer was on the register only for the production of a “straight sofa” (he received orders from government customers), but a corner sofa was bought from foreign resellers, because it was not on the register.

• Long-term purchases (more than three years) with price indexation are the main, effective tool for the development of factories. The current approach does not allow planning long-term utilization of factories and future development. The conclusion of long-term contracts would be beneficial both from a procedural point of view and would contribute to the cluster development of production.

In the legislation it is necessary to replace the words “has the right to enter into contracts for a period of more than 1 year” with “is obliged to conclude...”.

On September 1, the Head of State delivered a message on “The Economic Course of a Fair Kazakhstan,” identifying as a priority “the comprehensive strengthening of the defense-industrial complex, which in developed countries plays a key role in ensuring national security. The most important task is to create a production cycle with a high degree of localization, which will reduce dependence on import supplies... It is necessary to strengthen production capacity for the rapid repair of equipment, strengthen support for domestic enterprises... It is also important to increase the volume of domestic goods in regulated procurement and fully launch the offtake system.”

The Law must provide for the mandatory conclusion of offtake contracts for defense products and the inadmissibility of unilaterally introducing changes to the concluded offtake contract to reduce the volume of purchases and reduce the contract price.

For example, our factories could be given an offtake contract for drones. We can definitely produce and assemble ourselves (of course, with the supply of some components from China); we have a ready-made prototype - the Karakus drone. Instead, a new regular public procurement tender numbered G11678062-1 with technical specifications completely for the DJI “Matrice” drone.

It seems to me that work on this issue should be carried out within the framework of the documents of the State Planning System of the Republic of Kazakhstan. According to paragraph 6 of the State Planning System in the Republic of Kazakhstan, approved by Decree of the Government of the Republic of Kazakhstan dated November 29, 2017 No. 790, the President of the Republic of Kazakhstan addresses the annual Address to the people of Kazakhstan. The provisions of the Address, as well as the instructions of the President of the Republic of Kazakhstan, are the basis for the development and adjustment of documents of the State Planning System. The system includes the Development Strategy of Kazakhstan until 2050, the National Development Plan of the Republic of Kazakhstan, and others as such documents. The definition in such documents of long-term (more than three years) planning for equipping and modernizing defense departments will become the basis for concluding offtake contracts.

• Digitalization. The transition to the electronic plane will reduce the time required for the formation and execution of orders, transfer the relationship between customers and contractors into a machine-readable format, expand the capabilities of data analysis, make the procedures for generating orders and selecting contractors more transparent, and provide the opportunity to analyze purchases. It should be noted the positive experience of the Samruk-Kazyna system.
• Inclusion of associations of legal entities (consortia) among potential contractors. Combining financial capabilities, combining competencies and productive distribution of roles, rights and responsibilities within participants, distributing the risks of fulfilling accepted obligations will increase localization. For example, a consortium for light industry: one supplier produces fabric, another produces buttons, a third fur, and a fourth sews it all.

Pricing rules are a separate big problem on the topic of which you could write a dissertation.

3) Lack of strategic vision and long-term planning, lack of consolidation, standardization, unification. Lack of centralization.

The choice of purchase very much depends on the personal preferences of the first manager, customer or authorized person. An abstract example - “I know how to operate a VAZ 21213, I know how to repair it, so we will only take the VAZ 21213.”

Real examples from government procurement:

Currently, 5 different tenders have been announced for the supply of cartridges for territorial divisions of government agencies, with different technical specifications, budgets, volumes, and deadlines. In one of them, the name of the lot already indicates the manufacturer “BPZ” (Barnaul Cartridge Plant).

It should be:

- an analysis of long-term needs is carried out, the need is compared with the capabilities of the Kazakh industry; a consolidated large volume is purchased with uniform technical requirements; where the capabilities of domestic industry do not allow it, money is allocated for the development of research and development work to create one’s own, meanwhile, urgent needs are covered by supplies from foreign partners.

The Prime Minister of the country in his speech drew attention to the development of domestic production - “It is necessary to increase the share of products produced in Kazakhstan, we will fully launch the system of offtake contracts.” The other day, the Prime Minister visited a cartridge factory and instructed all entities to purchase Kazakh products.

Given large consolidated long-term volumes of orders, our industry could increase localization through the production of its own raw materials. If we take cartridges, it could become the production of brass tape.

Below I will also give statements and instructions from the President, which could become the basis for adapting legislation to the development of Kazakh industry.

–  The Head of State, in his Address to the people of Kazakhstan “Economic Course of a Fair Kazakhstan” on September 1, 2023, identified as a priority “the comprehensive strengthening of the defense-industrial complex, which in developed countries plays a key role in ensuring national security.” [1]

– The most important task is to create a production cycle with a high degree of localization, allowing to reduce dependence on import supplies. Our army must be provided with high-tech weapons and military equipment, including armored vehicles, unmanned aerial vehicles, and modern small arms. It is necessary to strengthen production capacity for prompt repair of equipment and strengthen support for domestic enterprises. We have the appropriate material and technical base, competencies and personnel. They need orders from the relevant departments. Work should continue on the transfer of modern technologies and localization of new production facilities, Tokayev said in his message to the people of Kazakhstan.

– The state, together with large enterprises, must “close” the production cycle in the country... It is also important to increase the volume of domestic goods in regulated procurement and fully launch the offtake system... It is necessary to simplify and shorten the procurement process, ensure the principle of priority of quality over price, that is, put an effective barrier against dumping, as well as implement full automation of procedures. … As a result, the share of Kazakhstani content in regulated procurement should exceed at least 60% within three years.

Now many countries are actively applying measures to protect the domestic market. Even developed countries have switched to protectionist industrial policies. The state is obliged to protect domestic producers. This is not a signal to close our economy from the outside world: it must remain open, but taking into account the interests of national business,” the President emphasized.

At a Government meeting chaired by former Prime Minister of the Republic of Kazakhstan Alikhan Smailov on April 26, 2022, issues of developing import substitution were considered.

– On behalf of the Head of State, an Import Substitution Program until 2025 is being prepared, within the framework of which it is planned to increase the share of Kazakhstani content to 60%. This will give impetus to the development of new industries and will create 116 thousand new jobs, [2]- said Alikhan Smailov. 

In this regard, regional akimats, together with the ministries of industry and national economy, have been instructed to ensure the timely provision of infrastructure for the implementation of import substitution projects. 

While taking part in the state awards ceremony on May 6, 2022, Kassym-Jomart Tokayev stated the high importance of the country’s defense capabilities.

– In conditions of geopolitical instability, new challenges and threats, we must be ready to defend our national interests, defend the sovereignty and territorial integrity of the state. Therefore, strengthening our defense potential will always be our top priority, [3]- Kassym-Jomart Tokayev is convinced.

The authorities of Kazakhstan aim to consistently strengthen the defense potential of the republic. Kassym-Jomart Tokayev announced this on October 22, 2022 at the ceremony for conferring the highest military and special ranks.

– In order to preserve our sacred Independence, peace and harmony in the country, we will consistently strengthen our defense potential and improve the activities of the entire security bloc. Comprehensive social support for all who guard our national interests and stability in society will always be a priority of state policy, [4]- said the President.

On April 19, 2023, an extended meeting on the socio-economic development of the country was held under the chairmanship of President Kassym-Jomart Tokayev.

– The most important priority is to increase our own production... The level of localization should be steadily increased, moving from simple to complex. Such examples already exist, but there are also facts of substitution of concepts due to false localization. This leads to import subsidies, which is undesirable. We need genuine industrialization, [5] - Kassym-Jomart Tokayev emphasized

When visiting the strategic command and staff military exercises “Batyl Toytarys-2023” on September 5, 2023, the Head of State emphasized that our army must be highly professional, mobile and ready to carry out the most complex combat missions.

“To do this, it is fundamentally important to equip it with high-tech weapons and high-quality military equipment, and fully provide it with ammunition. In my recent Address, I set a priority task - to create a production cycle with a high degree of localization. Armored vehicles, unmanned aerial vehicles, modern small arms - we can and should produce all this at home, in our country. In general, the defense-industrial complex must provide a reliable foundation for the combat effectiveness of our army, [6]- the President emphasized.

– Head of State Kassym-Jomart Tokayev, at a meeting with representatives of domestic business on September 12, 2023, said that Kazakhstan has created favorable conditions for the localization of production - tax preferences and preferential loans are provided, as well as assistance in marketing products. However, the actual share of local content in the production of goods is still low.

– We, in fact, continue to subsidize imports. I understand that this is a natural phenomenon at the initial stage of production, so we treat this problem as a growing pain. It is better to have such production than none at all. The government must carefully and substantively address the issue of increasing the level of localization. [7] Imports are allowed if there are no similar products in the country and under the obligatory condition that within two to three years the import consuming companies themselves or their foreign partners will create or help launch such production facilities in Kazakhstan. Of course, we are talking only about economically feasible projects [8], Tokayev concluded.

When visiting and getting acquainted with the work of the Kazakhstan Paramount Engineering LLP plant on October 4, 2023, the Head of State especially emphasized the prospects for the development of the mechanical engineering industry and called for every possible assistance in the development of domestic companies specializing in the defense industry. [9]

During the meeting of the President with Defense Minister Ruslan Zhaksylykov on December 4, 2023, he set a number of tasks for the minister on interaction with domestic defense enterprises and the development of territorial defense. Particular attention was paid to the implementation of the state defense order, the arrival of new types of aviation equipment, including unmanned systems, weapons of air defense forces, modernized armored vehicles and communications equipment. [10]

In a speech at an extended meeting of the Government on February 7, 2024, Head of State Kassym-Jomart Tokayev instructed to give a new impetus to the industrial development of the country.

– Large-scale and innovative projects that lay the foundation for economic growth for many years to come should receive priority government support. We are talking about both the modernization of existing production facilities and the development of completely new industrial sectors for our country... The task of radical modernization of existing production facilities requires special attention, [11] - said the President.

[1] https://www.akorda.kz/ru/poslanie-glavy-gosudarstva-kasym-zhomarta-tokaeva-narodu-kazahstana-ekonomicheskiy-kurs-spravedlivogo-kazahstana-18588

[2] https://primeminister.kz/ru/news/programma-importozameshcheniya-do-2025-goda-razrabatyvaetsya-v-kazahstane-2631455

[3]  https://akorda.kz/ru/kasym-zhomart-tokaev-prinyal-uchastie-v-ceremonii-vrucheniya-gosudarstvennyh-nagrad-vysshih-voinskih-i-specialnyh-zvaniy-klassnyh-chinov-6451

[4] https://www.akorda.kz/ru/v-kanun-dnya-respubliki-prezident-prisvoil-vysshie-voinskie-i-specialnye-zvaniya-klassnye-chiny-22980

[5] https://www.akorda.kz/ru/vystuplenie-glavy-gosudarstva-kasym-zhomarta-tokaeva-na-rashshirennom-soveshchanii-po-voprosam-socialno-ekonomicheskogo-razvitiya-strany-1934439

[6] https://www.akorda.kz/ru/glava-gosudarstva-posetil-strategicheskie-komandno-shtabnye-voennye-ucheniya-batyl-toytarys-2023-58266

[7] https://kapital.kz/economic/119020/prezident-poruchil-prinyat-mery-po-prodvizheniyu-otechestvennykh-nefteservisnykh-kompaniy-za-rubezhom.html

[8] https://tengrinews.kz/kazakhstan_news/pokazuha-ne-nujna-tokaev-o-mestnom-soderjanii-510230/

[9] https://www.akorda.kz/ru/glava-gosudarstva-oznakomilsya-s-rabotoy-zavoda-kazakhstan-paramount-engineering-493251

[10] https://www.akorda.kz/ru/glava-gosudarstva-prinyal-ministra-oborony-ruslana-zhaksylykova-4113148

[11] https://www.akorda.kz/ru/vystuplenie-glavy-gosudarstva-kasym-zhomartatokaeva-na-rashshirennom-zasedanii-pravitelstva-71442