Financing Innovation March 25, 2004 Knowledge Economy Forum III Budapest, Hungary NATIONAL INNOVATION FUND KAZAKHSTAN

Agenda Republic of Kazakhstan National Innovation Fund Investment Strategy of the Fund 2 NATIONAL INNOVATION FUND

Republic of Kazakhstan Real GDP Growth Current account and foreign direct investments CA FDI  Industry is the main driver of GDP growth 3 NATIONAL INNOVATION FUND

Republic of Kazakhstan Successfully managing transition to market economy:  Leading producer and exporter of natural resources, including oil, gas and minerals.  Highest GDP growth among CIS and CEE countries for the last three years.  Strong FDI inflows and FX reserves. 4 NATIONAL INNOVATION FUND

Challenges for the country Lopsided extraction-oriented economy Weak integration into the global economy Technical and technological obsolescence of enterprises Lack of efficient connection between science and production Low expenditures on R&D 5 NATIONAL INNOVATION FUND

Kazakhstan adopted Innovative and Industrial Development Strategy for aims to: achieve sustainable development through diversification of economy create favorable investment climate for manufacturing industries, including high-tech foster further development of the financial sector 6 NATIONAL INNOVATION FUND Strategy for

To address challenges the following institutions were established: Kazakhstan Investment Fund Export Insurance Corporation National Innovation Fund Center for Marketing and Analytical Research Engineering and Technology Transfer Center 7 Development Institutions NATIONAL INNOVATION FUND

Project Database Financing of basic and prediscovery research Database of leading experts At the stage of project expansion Loans at project expansion stage National Innovation Fund Center of Engineering and Technological transfer Kazakhstan Investment Fund National Academy of Science Research institutes Universities Industrial and service enterprises Private financial institutes and investors Kazakhstan Bank of Development Creation of technopolises, techno parks and business incubators Financing of applied R & D Creation of venture funds Financing of enterprises that realize investment projects Science Fund Assessment of investment potential of industries, marketing Patenting of innovations and engineering Center of Marketing and Analytical Research 8 Working together towards innovative and industrial development

NATIONAL INNOVATION FUND National Innovation Fund Joint Stock Company “National Innovation Fund” was established by the Government of RK on May 31, 2003 as one of the governmental instruments for: stirring up innovation activity, attracting private capital in innovation process, developing high tech industry 9

Challenges – linking: Finance Science Entrepreneurship Industry How we respond: Provide capital Retrieve, assess and advance projects to private investors Deliver projects to the industry level Finance R&D 10 National Innovation Fund

Canada (1960s) US (1950s) Europe (1980s) Israel (1992) Malaysia (1984) Singapore (1980s) Australia (1970s) Hong Kong (1980s) S.Korea (1980s) Japan (1970s) Kazakhstan Russia (1993) 2003 The development of institutes of venture financing in the world 11

Establishing Venture funds with private investors Financing projects aimed to apply R&D results and transfer technology into industry Building elements of innovation infrastructure Applied R&D financing International cooperation in technology transfer Staff management Achievin g objectives 12 Achieving objectives NATIONAL INNOVATION FUND

Venture Funds Investment projects Elements of innovation infrastructure Applied R&D financing Investment directions for %35%10%5% Investment Strategy 13 NATIONAL INNOVATION FUND

Investment strategy 14 Sources of investments: Chartered capital, Profits of the Fund, Grants, awarded by international financial institutions and foreign governments Investments of the Fund: Investments at seed and start up stages of projects Also grants to R & D NATIONAL INNOVATION FUND

Management Access to capital Commercial product Private investors Equity financing Major requirements Project is aimed to create new or advance existing product/technology Project is commercially viable Minority interest of the Fund (up to 49% of chartered capital) Well defined time-horizon of investments Staged financing Qualified management 15 Project financing NATIONAL INNOVATION FUND

seedstart-upearly expansion Priority stages of financing for National Innovation Fund exit 16 Funding strategy

Development of innovative management in enterprises Provision of access to capital for realization of innovative projects Installation of innovation, structuring of technology market Attraction of private equity into innovative activity Equity financing of innovation M MM Main conditions for investment: i nvestment project in-line with industrial and innovative policy priorities of Kazakhstan project to create new scientific product/service or innovate, install new technologies project should be commercially viable (including market potential of innovation), minority holding (not more than 49% of chartered capital), participation of the fund in management of the company that realizes the project, well defined time-horizon of investments staged financing of the project. 17 Investments into companies NATIONAL INNOVATION FUND

18 Innovation infrastructure Financialsupport Industry Ideas Management Innovation infrastructure Main concentration for the Fund Management (including consulting: legal, financial etc) Selecting and financing ideas Government Financing infrastructure: buildings, laboratories and equipment Special Economic Zones Tax Incentives NATIONAL INNOVATION FUND

19 R&D financing commercial potential intellectual property new technology time horizons R&D financing Main requirements Research and Development process should not exceed 18 months Product should have feasible competitive advantages Corresponding market must exist NATIONAL INNOVATION FUND

Assessment of projects: Stage I – internal assessment by Fund’s Investment Committee Stage II – assessment by external independent experts (expert organizations) and Expert Committee of the Fund (unbiased and independent experts) Risk management: Private equity participation Investment portfolio diversification Upper Bounds (limitation) of investments Qualified management 20 Project Assessment NATIONAL INNOVATION FUND

21 Proposals received As of February, the Fund has received around 162 projects in terms of business proposals for a total of about $500 mln. Proposals by industry (“other” includes industries with less than 5 projects each): NATIONAL INNOVATION FUND

National geo-stationary satellite  On 7 January 2004 the Fund has signed an agreement of creation and provision of a telecommunication satellite with Russian Khrunichev State Research & Production Space Center  The Fund has created a daughter enterprise JSC “KAZSAT”. Its main task is financing of works and services for the creation of geostationary telecommunication satellite.  The total cost of the project is more than $65 mln. 2 NATIONAL INNOVATION FUND

JSC “National Innovation Fund” Thank you for your attention. 111, Gogol’ street, Almaty, Republic of Kazakhstan Tel: Fax: NATIONAL INNOVATION FUND