IMPACT OF INVESTMENT PROCESSES ON THE FINANCIAL STABILITY OF KAZAKHSTAN AGROFORMATIONS.

Elmira Balapanova doctoral PhD,

Kazakh National Agrarian University

Almaty, Kazakhstan

Kazakhstan is among 25 countries that are the main producers of agricultural raw materials. According to experts, the resources of the republic can produce 3 times more food than consumes its population. (source: Report on the Statistics Agency of Kazakhstan, 2011).

In recent years the development of agro-industrial complex has stabilized, there is increased production of agricultural products (Table 1).

(Table 1) Dynamics of production of main products of Agriculture in all categories of farms, thousand ton.

description	2007	2008	2009	2010	2011	2007 to 2011 %
Crops	20,138	15,578	20,831	12,185	26,961	34
Oilseeds	459	414	704	775	1,142	149
of which: sunflower	206	186	368	329	409	99
potatoes	2,415	2,354	2,756	2,555	3,076	27
vegetables	2,196	2,280	2,457	2,577	2,878	31
melons	662	870	852	1,118	1,248	89
sugar beet	309	130	181	152	200	-35
meat	623	874	898	937	937	50
milk	3730	5162	5265	5347	5186	39
eggs, mil.	1.00	2.00	3.00	4.00	4.00	300
wool	23	34	35	36	37	61

Dynamics of production Profitability main agricultural crops

(Note-account by the athor according to the Statistics Agency of Kazakhstan).

According to the Republic of Kazakhstan Agency on Statistics, the gross agricultural output in 2010 amounted to 1 442 billion tenge (about U.S. $ 9,7 billion, 6.3% of GDP), with the volume index increase to 2009 – 13, 8%.

In 2011, the sown area of crops amounted to 24.1 million hectares, which is 14% more than in 2010. Gross grain harvest in weight after processing was 26.9 million tonnes (twice the 2010). Amount the oilseeds production was 1, 142 tons of (80% more in 2010), while the increase in potato production stood was 17%, fruit was 25.3% and grapes was 66.5%.

Kazakhstan has more than 180.0 million hectares of natural pastures, of which 40% are used. (source: Report on the Statistics Agency of Kazakhstan, 2011).

description	number of farm	Size of the area thousands hectares
Whole agricultural enterprises:	193,540	24,100
Big agricultural enterprises (JSC, LLP, PC, grain companies)	8,796	15,910
Medium & small farms	184,744	7,937
Household plots		253

Big agricultural enterprises have the land more than 10 000 hectares, medium & small farms have up to 10 000 hectares of land.

Despite the increase in the production and stabilization of the rate of development of agriculture, agriculture's share in GDP, against a background of strong economic growth in the extractive industries and industry, declined to the level of 7-8%. This represents a significant change in the economy. In 1995 the share of agriculture in GDP was 34% , in 1998 were 8.6 and in 2010 were 9,7%.

The Agricultural Sector in Kazakhstan is characterized by low financial sustainability of agricultural enterprises, producing low-margin products. The profitability of agricultural production compared to other sectors of the economy is low, and in some years, agricultural production is unprofitable. The disparity in prices for agricultural and industrial production continues to increase, further reducing the level of profitability and investment opportunities in agricultural. Therefore it is necessary to increase the level of profitability of
agricultural enterprises.

Formation of agricultural income depends on the structure of capital used (the ratio of debt to equity), which defines the financial, investment, production activity of agricultural enterprises.

Agricultural enterprises, using only their own capital, have the highest financial strength (coefficient of autonomy is one).

The company, using borrowed capital, has a higher financial strength of its development (due to the formation of an additional amount of assets) and the possible increase financial profitability (due to the effect of financial leverage).

The need to consider a variety of positive and negative implications of using internal capital and borrowed capital requires the development of targeted mechanism of formation of structure in the enterprise. However, there are some objective and subjective factors, that allow you to generate capital.

These include: industry affiliation, market conditions and financial market commodity, price and yield uncertainty the concentration of own capital, loans, profitability and competitiveness of product. Given these factors, management of structural capital is reduced to the establishment of an optimal proportion of equity and debt, to ensure the necessary involvement of the volume and types of capital in order to achieve specified rates of its structure.
The optimal capital structure is the relation, that provides the most effective factor of proportionality between financial profitability and financial sustainability for an agricultural enterprises.

An analysis of agricultural companies in the East Kazakhstan region found that in 2010 compared to 2008, own and borrowed capital increased by 36.5%, including equity capital by 54.3%, barrowed capital by 3.2%.

In 2008, the borrowed capital has exceeded own capital by 33.3%, 2009 - by 78% and 2010 - by 6%. The structure of the equity capital, reserve capital increased during the period by 2.8 times, retained earnings by 1.8 times. The deficiency of own fixed and working capital has increased the coverage liabilities in 2010 compared with 2008 by 28.4%, including accounts payable in 2008 by 83.6%, in 2009 by 55,3%, 2010-by 50.7% (Table 1).

Table 1 - Structure of own and borrowed capital of farms of the East Kazakhstan region during 2008 -2010.

Indicator	Year
	2008		2009		2010
	mln.$	%	mln.$	%	mln.$	%
Equity capital
Share capital	24	32%	23	25%	23	27%
reserve capital	1	2%	3	3%	4	5%
retained earnings	10	13%	10	11%	17	20%
uncovered loss	(3)	-5%	(3)	-4%	(3)	-3%
Total	32	43	33	36%	41	48%
Borrowed capital
long-term liabilities	8	10	6	6%	6	7%
shot-term liabilities	35	47	34	37%	38	44%
including:			19	20%
current liabilities
Total	43	57	59	64	44	52%
Whole	75	100	92	64	86	100
Note-account by the author according to the Statistics Department of East Kazakhstan

Long-term commitment has reduced because of lack of repayment sources. The ratio of own and borrowed capital in 2008 amounted to 1.3, in 2009 - 1.2 and 2010 - 1.06. For the expanded reproduction in agriculture, this ratio should be no greater than 1.

Consequently, the development of agricultural production carry out of borrowed capital. The ratio of assets and liabilities define 3 types of current asset strategies: conservative, aggressive, and compromise.

A conservative approach to financing assets suggests that non-current assets, the constant part of them, and half of the variable part should be financed by equity and long-term debt, the second half of the variable part of current assets should be use short-term debt.

The compromise approach requires that the non-current and constant part of current assets be financed by equity and long-term debt. This model provides an acceptable level of financial stability.

An aggressive approach assumes that the expense of long-term equity and debt capital non-current assets are financed, and everything is negotiable at the expense of short-term debt. This model allows for productive activities, but it creates serious problems in ensuring financial stability and solvency of agricultural enterprises.

The share of fixed capital in total assets on the farms in the Zharma region is 48%, working capital is 52%, for the Kokpekty region fixed capital is 38 %, working capital is 62% and for the Tarbagatai region fixed capital is 69%, working capital is 31%.

By using an aggressive strategy 40% of non-current assets and 50% of current assets financed by long-term and short-term debt. By using a compromise strategy, 30% of non-current assets and 20% of current assets finansed by long-term and short-term debt. In the conservative strategy 20% of non-current assets and 50% of current assets financed by equity.

The farmers in the Kokpekty region use a more aggressive strategy of funding and financial risk is high (2.5), and the farmers in the Zharma and Tarbagatai regions use a more conservative mechanism, so the degree of financial risk is low ( 0.25 and 0.29).

Table 2 - Recommended normative values for different types of financing agricultural enterprises of the Eastern Kazakhstan Region (2010).

Strategy	region
	Zharma	Kokpekti	Tarbagatay
Aggressive:
The share of borrowed capital	0,48	0,56	0,44
Normative rate:
Financial risk factor	0,92	1,27	0,79
The share of borrowed capital	0,58	0,57	0,58
The share of equity	0,42	0,43	0,42
Financial leverage ratio	1,38	1,33	1,38
Compromise:
The share of borrowed capital	0,29	0,39	0,29
Normative rate:
Financial risk factor	0,41	0,65	0,40
The share of borrowed capital	0,34	0,37	0,41
The share of equity	0,66	0,63	0,72
Financial leverage ratio	0,52	0,59	0,57
Conservative:
The share of borrowed capital	0,12	0,17	0,15
Normative rate:
Financial risk factor	0,14	0,21	0,17
The share of borrowed capital	0,26	0,30	0,33
The share of equity	0,74	0,70	0,80
Financial leverage ratio	0,35	0,43	0,41

Note-The author calculated according to the Statistics Department EBA

Raising equity capital at the expense of profit distribution, depreciation and external sources of emission; debt-loans, securities and government finance.

The major impediments for agricultural enterprises to attract debt capital are high requirements for collateral, high interest rate, short duration of need and the lack of grace period.

For the development of competitive agricultural production and food products assistance for the population of Kazakhstan it is necessary to introduce an innovative mechanism by increasing the volumes of capital investment in agriculture, particularly:

- purchase of high-performance equipment, which allows to introduce advanced energy saving technologies;

- construction of livestock farms;

- purchase of manufacturing and special equipment;

- purchase of breeding stock.

For the development of agricultural production 298 billion tenge should be allocated annually by 2020, including for the purchase of breeding stock - 18 billion tenge (6%), investment in fixed capital - 180 billion tenge (60%), government financial support - 100 billion tenge (33.6%).

The main sources of funds should be: budget - 130 billion tenge (33.6%), own funds - 117 billion tenge (39.3%) and leasing - 51 billion tenge (17.1%) (see Table 1).

To increase the income of agricultural producers it is proposed to increase the amount of subsidies from the budget, from 5 to 10%, based on a single agricultural enterprise - from 6.7 to 15.6 million tenge.

Allocation of budgetary resources should be carried out in the following directions:

- subsidies for purchase of fertilizers, pesticides, animal feed, interest payments on loans received from the state resources;

- subsidies for storage of products and vehicles for transportation, construction of production facilities, implementation of irrigation projects, creation of production cooperatives;

- monitor the parity prices of industrial and agricultural products;

- support domestic prices for agricultural products, establish quotas, tariffs, taxes on export and import of food products;

- for state financial support and increasing the profitability of producers to use the target (guaranteed) prices for grain and other important types of agricultural products. The level of target prices must ensure self-funding for the extended production of producers. The target price in particular is an economic reality, i.e., the selling price.

Table 1 – Annual need and financial resources of agricultural production in Kazakhstan, bln. tenge

Name of financial resources	Financial resources need, bln. tenge	Financial resources, bln. tenge
		budgetary funds	own funds	leasing
Purchase of animals	18	3	9	6
Investment in fixed capital	180	27	108	45
State financial support (subsidies)	100	100	-	-
Total	298	130	117	51

Apply for sale the loan rate of NE JSC "ProdCorporatsiya", that is the lower limit of guaranteed prices for agricultural products, but agriculture producers will receive the net profits from the difference between the lombard rate and the world price. In this case, as the main buyer of the main types of agricultural products, primarily grain, should act NE JSC "ProdCorporatsiya", which should be the sole implementator in the foreign markets.

This will help control the price of manufactured and sold products and have sufficient money resources to increase profitability of agricultural producers.

To stimulate the leasing services it is recommended:

• to increase the lease terms on equipment to depreciation;

• to reduce payment of the first contribution by 8-10%;

• to reduce the customs duties and taxes on leasing transactions;

• to exempt the lessor from paying income tax.

The state should act as a guarantor of rural producers in leasing transactions. For this purpose, it is recommended to create a special fund for leasing transactions. The size of guarantees provided by leasing companies should be differentiated depending on the amount of the loan, so that it covers at least 70-80% of the amount not received from agricultural producers.

In addition, to stimulate the loans gaining, it is proposed to provide the tax benefits on taxation in the amount of 20% of actual investment in lease financing to the commercial banks (on a competitive and leasing basis).

An important factor which holds off the leasing process is an important for agricultural producers advances before the equipment transferring, which together with payments for the first year are approximately 25-30% of the cost of equipment.

It is proposed by JSC "Financial Fund Supporting Agriculture" to establish:

- At micro-credit for rural and agricultural producers:      

● interest rate - less than 6.5% per annum;      

● term of micro-credit – less than three years;      

● micro-credit rate – up to 1 000.0 thousand tenge;

- at micro-credit for agricultural producers for development of the breeding stock of cattle and breeding stud bulls for production of beef breed young stock:      

● interest rate - less than 6% per annum;      

● term of micro-credit – less than seven years;      

● micro-credit rate – up to 8 500.0 thousand tenge.

The following needs - stimulation of associations of agricultural producers and rural communities to conduct joint production, harvesting, distribution, processing, and storage, transportation of agricultural production and supply of commodity-material valuesusing loans on favorable terms - are arisen.

This will provide agriculture producers for preferential credit resources in accordance with their needs for the development of a competitive, export-oriented agricultural production;

- to improve the efficiency of state investment in AIC for creation of high-tech productions for agricultural and fishery products processing, obtainment of competitive products with high added value;

- to develop rural infrastructure (service centers, commodity points, primary processing of agricultural products, business development, expansion of rural retail points, etc.).

It is proposed:

- to develop a method for calculating the size of insurance premiums, taking into account the 50% of public funds and regulations for expenses when applying science-based technology of crop cultivation in agricultural areas;

- to introduce insurance schemes approved in other countries and proved its viability in an terms similar to the conditions of Kazakhstan;

- to develop an insurance program of agricultural producers from catastrophic risks;

- to further stimulate the market development of insurance services alternative suppliers, including via government regulation of insurance services alternative suppliers. In addition, it is necessary to introduce risk transferring mechanisms for reinsurance (including insurance services alternative suppliers).

- to approve by law the deadlines for the payment of compensation by insurers in case of insured event.

The above proposes should be stated in the regulatory and legislative documents.

It is proposed to accept the following laws: "On the parity prices of agricultural and industrial products (services) used in agriculture", "On individual farms", "On state regulation of foreign trade", "On mortgage lending in agricultural production". 

The significant production costs in the agricultural enterprises are the taxes, because the assessment of taxes is substantially higher than the payout. 

Tax incentives can reduce the tax burden on a single agricultural enterprise 2.5-fold and on the farm 5-fold in comparison with the generally established tax regulations.

During the 2010 agricultural producers were paid taxes to the budget in the amount of 22.5 billion tenge, and in the established manner they should had to pay 42.1 billion, the last included the production costs.

In order to improve the taxation system of farms, it is proposed to release them from paying VAT in case of raw materials purchasing (fuel and lubricants, seed, feed, etc.), which increase the prime cost and raise the price of agricultural products. This measure will affect the efficiency of production of their products.

To increase the material incentives of agricultural enterprises employees it is proposed to introduce tariffs, schedules of charges, tariff rates, taking into account the existing and projected annual increase of minimum monthly wage, adjusting for inflation, using the 1.3 intensity factor, which includes the severity, harmfulness and danger of the agricultural production conditions.

The basic remuneration of labor must be combined with additional, premium and incentive systems. We propose the following additional payments: an increase in payment by 15% when the most important works of high quality are done, by 11% - social contributions, 8% - holidays reserve. Based on the financial and economic condition of agricultural enterprises, you should separate the highly profitable, with little debts and steady economic position and low-profit and unprofitable, which are in debts, but kept their productive capacity and are able to conduct its business, without resources, existing in a formal form and demanding the bankruptcy procedure.

To avoid the accumulation of debts it is proposed to provide the appropriate parity price between the major types of products and agriculture services and other industries.