The government of Kazakhstan has set a target of reaching a total export volume of IT products amounting to 500 million USD by the year 2025. In an article authored by Zhaslan Nurbayev exclusively for CABAR.asia, the factors influencing the development of this industry are examined.
Digital strategies of the Republic of Kazakhstan
Since the 2000s, the IT industry in Kazakhstan has received significant support from the government, with dedicated efforts focused on creating a favorable legal framework and implementing national programs. Notably, the state program “Digital Kazakhstan” has been implemented since 2017, with a substantial allocation of over 655 million USD dedicated to its implementation. In 2018 alone, the government allocated more than 255 million USD to foster the development of the IT sector.
Within the framework of the “Strategic Development Plan of the Republic of Kazakhstan until 2025,” the identification of priorities for establishing the pillars of a new economy, technological rejuvenation, and production digitalization takes center stage. In 2021, the national project “Technological Breakthrough through Digitalization, Science, and Innovation” was introduced, encompassing the development of infrastructure and scientific-technological support for economic digitalization. Moreover, since February 2022, the draft Concept of Digital Transformation of Kazakhstan has been undergoing comprehensive discussions.
All these measures are expected to contribute to improved performance in international rankings. At the inception of the Digital Kazakhstan program in 2017, the Republic of Kazakhstan was ranked 52nd among 175 countries in terms of the level of development of information and communication technologies.
Kazakhstan is actively implementing digital transformations in various sectors of the economy and fostering innovation ecosystems. As early as 2008, the country pioneered the launch of an e-government system in the post-Soviet space. In 2020, the United Nations ranked Kazakhstan as the top country in the Commonwealth of Independent States (CIS) in terms of e-government development. According to Internet World Stats, as of June 2021, Kazakhstan had a total of 14,669,853 Internet users, representing a penetration rate of 77.2%.
Infographic 1. Ranking of Central Asian countries in the UN Global e-Government Development Index (2020)
However, it is necessary to consider not only point indicators of digitalization, but also consider more complex components - resources and results of innovations, including human capital and science, the level of market and business development, the development of technologies and the knowledge economy, the results of creative activity, etc. Thus, in the ranking of the Global Innovation Index in 2021, among 132 economies of the world, Kazakhstan took only 79th place.
Despite good support from the state, problems have accumulated in the Kazakhstani IT sector that require an early resolution. According to experts, the weaknesses of the IT industry are the personnel issue, high import dependence, imperfection of legislation, etc.[1]
Training of IT specialists
With the development of the IT industry in Kazakhstan, a shortage of professional personnel began to appear. For the needs of the national economy, it is necessary to train at least 100 thousand qualified IT specialists .
The first educational projects aimed at training personnel in the field of IT appeared in the late 1990s. One of the first universities was the University of S. Demirel. In the same 1999, the “Shag” Academy was established. Since 2004, programming began to be taught in other universities of the country as well.
In 2008, the Information Technology Competence Center was established, the main function of which was training and advanced training of IT specialists. The International University of Information Technologies (2009), Astana IT-University (2019) are aimed at developing human capital. Since 2019, 39 IT lyceums have been opened in the country, in which more than 50 thousand schoolchildren study. The educational program on informatics in schools and universities has been updated .
Every year, universities in Kazakhstan train 20,000 IT specialists. Despite this, the shortage of qualified personnel in the industry is very noticeable. This problem is especially evident in the search for narrowly focused specialists. Moreover, the quality of university graduates does not correspond to the trends of the times. The Minister of Digital Development B. Musin sees this as the main problem of low exports of IT products to other countries.
From September 1, 2022, the acceptance of applications from private IT schools for receiving vouchers for the training of Kazakhstani specialists under the Tech Orda program has started. The program's primary objective is to equip an additional 20,000 IT specialists by 2025.[2]
To address the personnel shortage and enhance the quality of education, the concept of "side entry" into the profession can be universally employed. This involves providing practicing IT specialists with the opportunity to teach in educational institutions. The education system should adopt more flexible approaches that closely align with practical requirements. It is crucial to foster a symbiotic relationship between traditional classroom education and online learning platforms, while actively promoting dual education programs.
In this aspect, the experience of Halyk Bank is interesting. Together with the largest IT universities IUIT (International University of Innovative Technologies), KBTU (Kazakh-British Technical University) and SDU (Suleyman Demirel University), the bank launched the Halyk Academy project. Students are trained according to the programs and technologies that the bank needs. Halyk Bank specialists, together with universities, determined the basic set of competencies for 3-4 year students and participated in the training .
It is widely recognized that the remuneration for skilled production specialists is considerably higher than that of teachers. Hence, it is imperative to consistently raise teachers' salaries in order to attract and retain highly qualified educators.
In recent years, nearly 3,000 robotics clubs have been established in schools. However, this number is significantly insufficient considering the more than 7,000 schools in the country, and rural schools are particularly uncovered in this regard. Therefore, it is essential to augment budgetary allocations and ensure widespread implementation of IT programs in extracurricular educational institutions.
Assessment of the Kazakhstani IT market
The domestic market of information and communication technologies in 2019 amounted to 5.9 billion USD. Of these, 3.5 accounted for communications, and 2.4 billion USD for the IT market.
The level of development of the IT sector is evident from the trajectory of tax contributions made by this industry over the years. In 2013, approximately 80,000 USD was paid for software publication, whereas by the end of 2019, the amount had surged to over 245 million USD. Similarly, taxes received under the article "Activities for the Management of Information and Communication Infrastructure as Part of the Formation and Development of State Electronic Information Resources and Systems" totaled slightly over 20,000 USD in 2013, but escalated to 11.5 million USD in 2019.
The IT market of Kazakhstan and the entire post-Soviet space was affected by the war in Ukraine. Until 2022, market leaders pointed to a bumpy growth rate and planned large-scale transformations in the future, but today forecasts and expectations have become more cautious. First of all, many IT companies left Russia, having lost part of their market. Kazakh IT companies began to experience big problems and reduced sales, as 80% of suppliers were from Ukraine, Russia and Belarus. The re-export of IT equipment through Kazakhstan to Russia carries the risk of circumventing sanctions and may have consequences. This may lead to vendors leaving our country.
However, there are also positive trends. In addition to individual digital migrants, in 2022, 119 Russian and Belarusian IT companies applied to be registered as a member of the Astana Hub, which created more than 4,000 additional jobs .
Traditionally, telecommunications companies, the oil and gas industry, banks, and the education system have been the most receptive to digital innovations.
Gradually, as a special trend in the IT-sphere, outsourcing is firmly taking the position. Despite the limited outsourcing market, the services of private IT companies have begun to enjoy particular popularity among small and medium-sized businesses. Most often, these services include the development and maintenance of websites, hosting, and the implementation of cloud solutions in the daily activities of companies.
However, Kazakh IT companies face challenges in competing with global players, particularly in the field of software. As a result, many national companies, including those in the quasi-public sector, opt to purchase software from abroad.
To address these and various other challenges, the Astana Hub IT startup techno park was established. The successful implementation of startups is supported through financial, technological, methodological, and other forms of assistance. Early-stage startups receive tax incentives and have opportunities for project acceleration. The result of this policy is the fact that of all foreign investment in Central Asia, Kazakhstan accounts for 70%.
However, every emerging startup encounters at least three challenges: financial, infrastructural, and regulatory. Financial difficulties arise from the search for investors and reliance on government agencies and national companies, which are the primary recipients of IT sector services. Infrastructure challenges include inadequate coverage of high-quality Internet, among other issues.
The imperfection of the legislation is manifested in the implementation of copyright, or, for example, with the procurement processes in corporations. In accordance with the law, tenders are won by those companies that offer the lowest price for a service or product. In this scenario, domestic companies are not competitive.
In addition, it is necessary to note such undesirable phenomena as bureaucracy, corruption, staff turnover, constant change of managers, which leads to zeroing the knowledge base. New managers come with new ideas, which often contradict the policies of previous administrators. IT specialist Baizhan Kanafin believes that it is necessary to deal with the problem of weak synchronization of state policy in the IT field and contradictions in decision-making processes.
To address these issues, efforts are required to enhance legislation. It is necessary to streamline the tendering process and adopt a protective policy that supports local IT companies. Furthermore, reducing the tax burden and providing increased tax incentives for domestic IT companies are crucial steps to be taken.
One of the essential measures is the establishment and implementation of a targeted support program for established and mature IT companies and their products. This program should be officially adopted at the government level to ensure its effective implementation. Similar approaches have been successfully implemented in international practice. For instance, in the 1980s, South Korea witnessed the growth of industry giants like Samsung, LG, and others, thanks to such supportive policies.
Creating favorable conditions and providing incentives for domestic IT products is another crucial aspect. This requires conducting a thorough analysis of existing products, identifying the most competitive ones, implementing targeted improvements, and progressively advancing the product to regional and eventually international levels.
Export potential
The Kazakh IT market has the potential for significant growth by tapping into the markets of Central Asia and the Commonwealth of Independent States (CIS). Language advantages can be leveraged, as there is a Russian-speaking market of approximately 300 million people surrounding Kazakhstan. Currently, only Belarus partially satisfies this demand. Belarus serves as a notable example of establishing IT resource outsourcing centers. In 2018, the export revenue generated by companies in the High-Tech Park reached 1.4 billion USD, accounting for 5.5% of the country's GDP.
The “Fintech Startup Market Study in Kazakhstan”, which was conducted in 2021 by the AIFC Tech Hub, showed that Kazakhstan is the main startup market (49%). This is followed by the CIS countries - 22%, the Asian market - 12%, Europe - 10% and the USA - 7%. At the same time, 72% of entrepreneurs plan to enter the international level. And 16% of existing fintech startups in Kazakhstan have already begun the process of relocation to new markets.
Undoubtedly, the export of Kazakh IT products is contingent upon the level of digitalization in Central Asian countries and the extent of integration processes within the region.
According to the World Bank, the countries of Central Asia have poor quality and high cost of the Internet, an imperfect regulatory framework, and low levels of private investment. As part of integration processes, this provision restricts regional integration and connection to global Internet traffic.
Infographic 2. Rating of Central Asian countries by fixed Internet speed (2022, January)
For the purpose of digital development, the World Bank has developed a regional program Digital CASA (Digital Central Asia - South Asia). The goal of the program is to improve high-speed Internet and develop digital infrastructure in the region. Kyrgyzstan was the first to join the program. Kazakhstan, Uzbekistan and Tajikistan are currently negotiating. Thus, the support of the World Bank can be the beginning of a regional digital connection.
Within the framework of the Eurasian Economic Union, Kazakhstan and Kyrgyzstan are developing their digital strategies. Since 2016, the "Digital Agenda of the EAEU until 2025" has been implemented, which contributes to digitalization at the regional level. However, due to the escalation of the conflict between Russia and Ukraine, the implementation of this direction is problematic.
Conclusion
Regrettably, the progress of integration in Central Asia has been sluggish. Numerous agreements are being established on a bilateral basis between countries. However, collaboration in the realm of digitalization within the framework of regional integration holds the potential to rectify the disparities in digital development among Central Asian nations. Moreover, this collaborative effort would present promising opportunities for Kazakhstani IT projects to penetrate the markets of these countries.
However, Kazakhstan currently struggles to achieve favorable performance in this regard. The country's export revenue from the IT industry amounts to a mere 22 million USD a year. This is 7 times less than Moldova, 73 times less than Belarus and 145 times less than Ukraine.
To develop the export potential of the national IT industry in Kazakhstan, various measures are being taken and implemented. Cooperation between industry and IT companies is being established. Laws were passed allowing Kazakhstan to become one of the international data processing and storage hubs. In 2019 alone, more than 175 million USD of investments were attracted to digital mining.
One successful example of the export of domestic IT products is the Sergek video monitoring system. Prior to the Covid-19 pandemic, "Sergek" underwent testing in Tashkent and garnered interest from Kyiv as well. It is worth noting that the domestic video monitoring system was initially implemented in the capital in 2014, following a competition with foreign alternatives for the tender organized by the capital’s akimat.
At the end of 2021, the Astana Hub techno park launched the Scalerator online acceleration program for the first time. The program is aimed at helping domestic IT companies enter foreign markets. The head of the accelerator Anna Sholina explains that the main task is to work on the business etiquette of founders, channels of communication with clients and legal issues.
In light of this, the scalability of IT projects becomes a crucial consideration. Given the relatively small size of the Kazakhstani market, relying solely on domestic demand is insufficient. To maintain competitiveness, it is imperative to expand into the international market.
Another crucial aspect for the successful export of IT products is conducting a comprehensive study of competition and the target market in the destination country. Each country has its own unique characteristics, and national markets vary significantly. Relying solely on experiences gained in one country is insufficient in such cases.
Another significant factor is the development of the IT ecosystem and technology parks in various regions of the country. Currently, it is observed that over 90% of fintech startup founders reside in Almaty and Astana. However, the regions possess immense potential for the growth of the IT industry and for penetrating the markets of neighboring countries.
[1] Sultan A. What hinders the development of the IT sector in Kazakhstan? // https://cabar.asia/ru/chto-meshaet-razvitiyu-it-sfery-v-kazahstane; Asanova R.N. IT market of Kazakhstan: analysis of the current development indicator // Central Asian Economic Review. 2018;(4):161-171.
[2] “The higher the salary of the graduate, and the lower the cost of the course, the more effective the IT school.” How to become a member of the Tech Orda program //https://digitalbusiness.kz/2022-10-20/chem-vyshe-zarplata-vypusknika-a-stoimost-kursa-nizhe-tem-effektivnee-it-shkola-kak-stat-uchastnikom-programmy-tech-orda/ ; Private IT schools will receive 3,000 vouchers under the Tech Orda program for training specialists// https://digitalbusiness.kz/2022-09-01/chastnye-it-shkoly-poluchat-3-tysyachi-vaucherov-po-programme-tech-orda-dlya-podgotovki-speczialistov/