Chapter 5. Investment promotion and facilitation in Kazakhstan

Improvements in the overall business climate and administrative simplification

As already noted in the previous Investment Policy Review of Kazakhstan (OECD, 2012a), Kazakhstan has made perceptible progress in pursuing administrative simplification and reducing certain elements of red tape. Indeed, this has featured high on the government’s agenda, with several prominent strategies and policies being launched to reduce the administrative burdens on firms (see Box 5.2). These actions have been reflected in the country’s improved ranking on the World Bank’s Doing Business (DB) indicators – from 51st in 2016 to 35th out of 190 evaluated economies in 2017, positioning it ahead of many of other economies in the region (Figure 5.1). Recent improvements were most important in the area relating to dealing with construction permits, getting electricity and starting a business (Figure 5.2). In turn, progress in facilitating trade or getting access to credit has been muted and is explored in more detail later in this chapter (see trade policy and financial sector development).

Figure 5.1. Overall ease of doing business rank in Kazakhstan and other regional economies, 2017

Source: World Bank’s Doing Business indicators, 2017.

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Figure 5.2. Kazakhstan’s performance on different aspects of Doing Business relative to the regional best performer and regional average, 2016-17

Source: World Bank’s Doing Business indicators, 2016-2017.

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Most recently, the Law of RK No. 269-V “On Amendments to Certain Legislative Acts of the Republic of Kazakhstan on Issues of Fundamental Improvement of the Conditions for Entrepreneurial Activity in the Republic of Kazakhstan” of 29 December 2014, which came into effect on 1 January 2015, introduced amendments to 119 laws in the country – including the Tax Code, the Civil Code, the Labour Code, the Land Code. It has clarified and simplified some procedures for obtaining administrative permits and licences, including for small- and medium-sized enterprises (SMEs). The areas targeted by Law No. 269-V, notably those relating to starting or liquidating a business, have contributed to significant improvements in the DB rankings, mentioned above. Also, through that process a number of licences and permits were streamlined or cancelled. According to the Ministry of National Economy, this number reached 153 or 30% of all licences and permits. Currently, 26 activities (and 87 sub-activities) are subject to licensing requirements (Table 5.1).1 In addition, as highlighted earlier in this Review and explained further in Box 5.2, President Nazarbayev announced a list of 100 administrative steps, some of which include measures that can help reduce the bureaucratic burdens placed on firms and improve the efficiency of the state apparatus.

It remains to be seen whether these initiatives will be effectively implemented and whether they translate into better experience by firms as well as improved perception of the business climate in Kazakhstan. In 2013, it took firms 11-30% longer to obtain an operating or import licence in Kazakhstan than it did in other countries in the region (Table 5.2). Once all planned reforms are implemented and new procedures fully operational – including the single window for investors, discussed next, the government could engage in an evaluation exercise, potentially in a form of a firm survey, to verify whether the reforms have achieved the desired effect.

As mentioned above, one element of particular relevance to investment facilitation included been the establishment of a single window for investors in Kazakhstan. Since then, a one-stop-shop (OSS), incorporating some OSS elements, has been established and is administered by the Investment Committee at the Ministry of Developments and Investment (see Box 5.3).2 It was launched in pilot form in 2015, applying to priority investment projects only, and extended to all firms in 2016. According to the government, currently, the OSS includes 20 physical facilities throughout Kazakhstan, with the main office located at the Ministry for Investments and Development (Investor Services Centre, ISC) and 19 offices operated by the State-Owned Corporation “Government for Citizens” in different regions. In principle, investors can obtain necessary information, start administrative procedures and obtain permits in these facilities. In the future, there are plans to provide these facilitates online on a dedicated government website (www.baseinvest.kz).

As the government increases awareness about the functioning the Single Window among the business community and expands its functions, it could consider reaching out to international organisations, its development partners, and other experts for assistance in implementation as well as to involve local business associations for feedback and promoting the use among the business community. The international experience with the establishment of single windows has shown that the process of setting them up and operationalising them is far from easy, and requires a high level of co-operation among the participating agencies, regular feedback from the private sector as well as a high level of political support to ensure that it becomes an effective “one-stop shop” rather than “one more shop” (Sader, 2006; World Bank, 2009; OECD, 2015; Box 5.3).

In addition, as mentioned at the outset, specific aspects related to administrative procedures were highlighted as particularly burdensome to firms at the time of the earlier Review (OECD, 2012a). This related in particular to local content policies but also to tax and environmental regulations. Overall, while important progress has been made in some of these areas, e.g. in the area of local content policies and hiring of foreign staff, with some changes resulting from the country’s WTO entry but also broader reforms, several problems remain. For example, businesses report that, despite de jure changes to the process of hiring of foreign workers, administrative procedures for obtaining working permits for foreign staff remain complex (see Chapter 2). In the area of tax administration, it appears that tax authorities still lack appropriate capacity and training, which results in varying interpretation and application of law as well as rent-seeking opportunities. Even in the case of administration of fiscal incentives, the goal of which is to encourage and attract investment, large delays in distribution and retroactive changes in administrative decisions are said to complicate rather than facilitate investment decisions of firms. All in all, while Kazakhstan has made important progress in improving several elements of the administrative procedures, as reflected in its improved business rankings, several specific issues still remain problematic to foreign and domestic investors alike.

Quality of regulations

Changes to the country’s investment climate captured by World Bank’s Doing Business, explained above, do not necessarily reflect the quality, transparency, and predictability of investment-related policies, nor the consistency in their implementation. Therefore, reforms that focus primarily on improving such rankings may miss the mark in terms of improving the aspects of investment climate that have highest incidence on firm investment decisions. For example, the empirical cross-country studies examining the impact of improving Doing Business indicators on increasing FDI inflows have found mixed results.3 Meanwhile, the impact of strong institutions, high regulatory quality and control of corruption on FDI is found to be significant in numerous studies.4

In 2012, the OECD Review highlighted that the predictability, coherence, and quality of regulations and administrative procedures remain problematic in Kazakhstan (OECD, 2012a: 20, 63-66). Business stressed that input on draft regulations was not sought systematically, and: “there are cases when only a fraction of stakeholders are invited to participate in public discussion, or draft law or regulation is provided to stakeholders for input and comments just before it is sent to parliament”. Hence, at that time, two most important challenges related to the need for more systematic stakeholder consultations and the conduct of ex ante impact assessment of draft laws and regulations.5 Since then, Kazakhstan implemented several reforms in these and other areas related to regulatory policy, highlighted briefly below, and described in more detail in the OECD Regulatory Review of Kazakhstan (OECD, 2014) and OECD Integrity Scan of Kazakhstan (OECD, 2017, forthcoming).

For example, several laws were passed to better regulate the right of the public to be informed about and comment on draft laws and regulations.6 The new Entrepreneurial Code and the Law No. 480-V “On Legal Acts” of 6 April 2016 also regulate the participation of business entities in rulemaking in Kazakhstan, including the possibility of accredited business associations to submit suggestions on draft laws on regulations through the Expert Council for Private Enterprise.7 Advances in the provision of e-government services have also allowed the government to make draft laws and regulations available to the public and obtain inputs from citizens via a dedicated website (www.egov.kz).8 Currently, consultations take place most commonly via public councils and online consultations with the wider public.

While this process involves certain elements of a consultation mechanisms found in OECD countries (Box 5.4), it still distant from the concept of pro-active and open stakeholder consultation. For example, selection criteria for participation in public councils remain unclear, potentially increasing the risk of policy capture, and commenting periods are limited (OECD, 2017, forthcoming).9 The government could also take a more pro-active stance towards public consultations, using an explicit call for comments and providing more guidance to public officials; as well as consider if current procedures for the private sector involvement do not unduly limit involvement of some businesses in the consultations process. While the government of Kazakhstan appears to be increasingly involving various stakeholders, including private-sector representatives, in the process of preparing draft laws and regulations, implementing some of the recommendations identified above could help reduce the risk of public capture and increase the openness of the decision-makings process.

Box 5.4. Overview of relevant best practices in stakeholder consultation in the OECD countries

Based on the 2014 OECD Survey of Regulatory Indicators, a majority of OECD countries have adopted systematic stakeholder engagement practices and require that stakeholders are consulted in the process of developing new regulations. Overall, a systematic conduct of public consultations open to general public, engaging general public in both early and later stage of consultation, setting minimum periods for submitting comments, and, finally, having a formal procedure for taking comments received into account and providing feedback to participating stakeholders reflect the best practices and have a positive impact on the scoring presented below.

Stakeholder engagement in the OECD countries, 2014.

Note: The results apply exclusively to processes for developing primary laws initiated by the executive. The vertical axis represents the total aggregate score across the four categories. The maximum score for each category is 1 and the maximum aggregate score 4.

Source: 2014 Regulatory Indicators Survey results, www.oecd.org/gov/regulatory-policy/measuring-regulatory-performance.htm.

The figure above shows the different types of consultation processes and their changing usage. Some tools, e.g. public meetings, are used consistently in all stages of the process. Other tools are used more frequently early (e.g. advisory groups or preparatory committees) or later in the stakeholder engagement process (e.g. posting draft regulations on the Internet or formal consultations with social partners and all interested stakeholders). Limiting consultations to the “usual suspects” through targeted consultations (i.e. over-relying on meetings with special groups), let alone groups accredited by the government, as is the case in Kazakhstan, may discriminate against small and medium-sized enterprises (SMEs), new entrants, and foreign traders and investors (OECD, 2014a; OECD, 2015b).

Type of consultation

Note: Based on data from 34 countries and the European Commission. Early stage stakeholder engagement refers to a situation where consultations are undertaken to discuss the nature of the problem and to inform discussions on possible solutions. Later stage consultation refers to stakeholder engagement where the preferred solution has been identified and/or a draft regulation already issued.

Source: 2014 Regulatory Indicators Survey results, www.oecd.org/gov/regulatory-policy/measuring-regulatory-performance.htm. For more information, consult the OECD website: www.oecd.org/gov/regulatory-policy/measuring-regulatory-performance.htm.

When it comes to the regulatory impact assessment (RIA), the Entrepreneurial Code has made RIA an obligatory element of developing new regulations and legal acts in Kazakhstan.10 This is in line with an earlier recommendation made by the OECD (2014).11 Still, to reap full benefits of RIA, it should be undertaken using a standard methodology at an early stage of the regulatory process by well-trained public officials and be open to public consultation (i.e. attached to the documentation for public consultations). This will help ensure that RIA is used to inform rather than justify public decisions, and that all costs and benefits of proposed regulations are taken into account. Finally, ensuring that RIAs are of adequate quality in practice will require clear administrative procedures for public officials, allocation of adequate resources and training to responsible staff as well as due supervision and monitoring of RIAs quality. Progress in these areas would bring the country closer to the good practices enshrined in the OECD 2012 Recommendation on Regulatory Policy and Governance (OECD, 2012b).

Overall, the government has taken steps to improve the quality of domestic regulations and involve outside stakeholders more in the process of making new legal acts and regulations. Still, the businesses consulted in the process of this Review highlighted that poor-quality and inconsistent regulations as well as irregularities in their interpretation and application remain problematic and continue complicating investment decisions by firms.12 Further improvements to the process of assessing the impact of draft regulations and strengthening process of stakeholder consultations could be considered. This will help ensure that various stakeholders, including smaller domestic enterprises, can offer their inputs on planned legal changes and voice their concerns, reducing the risk of strong ex post reactions by specific stakeholders or the larger public, as observed most recently. While foreign investors dispose of additional consultation mechanisms with the government that allow them to discuss their specific concerns, such as through the Foreign Investor Council (FIC, see Box 5.5), small and medium-sized enterprises and other domestic firms do not benefit from such additional points of contact with the government and, hence, may gain most from improvements described above. Finally, improvements in this area, together with wider efforts to combat corruption and improve the rule of law (described at the end of this chapter) can help translate into firms’ improved perceptions about the quality of business climate the country (see Figures 5.3- 5.4)

Figure 5.3. Kazakhstan’s scores on the Worldwide Governance Indicators (WGI), 1996-2014

Note: Estimate of governance (ranges from approximately -2.5 (weak) to 2.5 (strong) governance performance).

Source: World Bank World Governance Indicators (WGI) database (2015).

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Figure 5.4. Perception of business obstacles by foreign, domestic and small firms in Kazakhstan, 2013

Note: Results are based on interviews with business owners and top managers in 600 firms undertaken in 2012-13.

Source: World Bank’s Enterprise Survey results, 2013.

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Investment promotion strategy

As described in detail in the previous Investment Policy Review (OECD, 2012a), Kazakhstan has a number of programmes in place that aim to support private sector development, investment and entrepreneurship. The broad orientations for the country’s development strategy are provided by the President’s Vision 205013 and a ten-year “Strategic development plan till 2020”,14 whose implementation is supported by five-year development programmes called State Programmes on Accelerated Industrial and Innovative Development (SPAIID). The current SPAIID spans the period of 2015-1915 and identifies a list of sectors considered to be priority sectors.16 The country’s investment promotion strategy inscribes itself into these strategic documents (see Box 5.6).

Until the end of 2014, the main orientations of Kazakhstan’s investment promotion were outlined in a four-year investment attraction strategy (“Programme for Investment Attraction, Special Economic Zones’ Development and Export Promotion in the Republic of Kazakhstan for 2010-14”). That strategy had built on the SPAIID programme (2010-14), identifying actions to be undertaken in the area of investment promotion to support the development of priority sectors. Since then the approach appears to have changed: instead of a four-year investment attraction strategy, the Ministry for Investments and Development – responsible for strategic planning in the area of investment policy – adopted a new sectoral investment attraction strategy for 2016.20 The plan aims to attract investment in support of the country’s industrial development plan notably by i) increasing fixed-capital investment in the non-resource sector by 105% relative to the previous year; ii) and attracting new companies listed on the Forbes Global 2000 list. Among others, it proposes to extend the list of priority sectors for which investment preferences are granted as well as proposes actions aiming at investment facilitation (notably through the creation of the OSS and the role of investment advisors in selected embassies abroad and five offices of Kaznex Invest) as well as increased investment promotion and attraction efforts and co-operation with investors.

In addition, as mentioned earlier, the government also approved a “Plan on the Improvement of Investment Climate”, including measures to address issues identified as problematic at the time of the previous OECD Review.21 Some of these measures related to investment attraction and facilitation policies. For example, the plan calls for a greater activism of units charged with investment promotion abroad (including actions to be undertaken by Kaznex Invest, investment advisors abroad and Government Council for investment attraction, see later section on the institutional set-up), and refers to a possible provision of exceptional investment preferences.22 It also lists measures aiming to facilitate investment, notably through facilitated migration and other administrative procedures for foreign staff and improved enforcement of tax and customs legislation. In order to policy coherence and implementation, it would be advisable that the relationship between this roadmap and other existing (or planned) documents aiming to attract and facilitate investment is clarified (such as the Sectoral Plan of MID), including the respective roles of different institutions involved; and that different agencies and ministries are aware of the plan and their respective tasks; and one clearly identified institution monitors progress and ensure effective coordination of different activities. Overall, it appears that Kazakhstan lacks a comprehensive framework for evaluating costs and benefits of different investment promotion and facilitation initiatives and a clear monitoring and coordination mechanism in place. This risks creation of multiple structures that lack efficiency or transparency, compromising the overall goal of investment attraction, pronounced to be the government’s priority. Giventhe centralised character of Kazakhstan’s administration, it could be considered whether an agency or taskforce reporting directly to the President’s or Prime Minister’s Office could not be charged with monitoring of progress and ensuring that agencies co-operate in practice.

The various strategic documents listed above together with the Entrepreneurial Code of 2015 and the implementing decrees establish the general scheme of state support for investment in Kazakhstan. The Entrepreneurial Code outlines the concept and the types of investment preferences available for investment, and provides the legal definition of investment projects that are eligible for investment support, including priority and strategic investment projects (Article 284 and 286), while government decrees establish the list of priority activities and strategic projects referred to in the Code.23 The different incentives available for investors in Kazakhstan are described in detail in Chapter 4. Despite the existence of the general framework for investment support, explained above, the choice and scope of certain incentives are still specified on a case-by-case basis in Kazakhstan via agreements signed by individual investors with the Committee on Investment under the responsibility of the Ministry for Investments and Development (MID), as already highlighted in OECD (2012a). The adoption of the new Entrepreneurial Code in 2015 has not changed this status quo.24 The terms and conditions of the contracts as well as the allocated incentives are not publically available, which may limit the transparency of these provisions. In 2015, 44 contracts were signed by investors with MID.25

In addition, investors complain that certain incentives for priority investment projects are available only to newly-established legal entities.26 As a result, new projects or project extensions undertaken by existing investors in the priority sectors are not be eligible for the additional state support dedicated to priority investment projects. Given that in many countries firms tend to engage in more complex or high value-added activities such as R&D after having operated in the host economy for a longer period of time (OECD, 2008), this may pose a barrier to the realisation of the goals enshrined in the country’s economic development and investment promotion strategy. In addition, some investors highlighted that the administrative process of allocating incentives remains intransparent and opens scope for corruption possibilities and arbitrary treatment, with some cases of ex post recollection of investment incentives causing an uncertainty in project implementation. If that is the case, the irregularities in the administration of fiscal incentives could reduce the attractiveness of the use of incentives in the first place, and dissuade rather than encouraged investment, hence undermining the policy objective. The government could consider if some changes to its investment promotion framework suggested above, including improvements in transparency of the incentives’ allocation process and potential reconsideration of the definition of priority investment projects would not serve better its announced policy objectives.

Available instruments of state support

Besides the specific investment preferences, government programmes provide a range of different instruments of state support, such as subsidies for loan interest payments, loan guarantees, industrial infrastructural development, training of personnel and other in-kind contributions, for which both foreign and domestic-owned investors are eligible, if they fulfil the relevant criteria. These different instruments are outlined in the SPAIID programme (Government of Kazakhstan, 2014) as well as the country’s Entrepreneurial Code.27 In particular, Article 92 of the Code specifies that state support can be provided to different types of firms and business activities, and in particular small- and medium-sized enterprises (SMEs), agribusiness and non-agricultural activities in rural areas; industrial innovation; special economic zones; and investment projects, among others. State support can involve financial and in‐kind support (including through the provision of a physical property); institutional support (including through creation or financing of a dedicated financial, research and development or other institution that provides services that are beneficial to firms) and informational support (Article 93).

Overall, the financing of the various investment projects is primarily channelled through the Development Bank of Kazakhstan (for big infrastructure projects, loans are at least KZT 30 million or USD 165 000), Baiterek National Holding and particularly the DAMU Entrepreneurship Development Fund (for financial support of SMEs) as well as KazAgro (for financial support to rural and agricultural areas) (OECD, 2016: 142). There are also several specific programmes designed to support financing and growth of SMEs, described in more detail below.28 According to the recent OECD Review analysing the country’s industrial and development programmes, a well-structured overview of all programmes together with their coordinated objectives, status of implementation and evaluation results is missing in Kazakhstan (OECD, 2016: 142). Consequently, the multitude of development programmes currently in place is not sufficiently coordinated nor assessed against their objectives in a systematic fashion, which has compromised their efficiency. For example, about 30% of projects under the SPAIID 2010-2014 have failed (OECD, 2016). If the government wishes to ensure that public resources are not wasted and deliver good value for money, it could consider verifying if the introduction of two recent institutional innovations dedicated to better programme monitoring and coordination has helped reduce the ratio of failed programmes and improved take-up by firms (as well as their subsequent better performance).29

Pro-SMEs schemes

In its first Review of Kazakhstan’s investment policy, the OECD observed that, in spite of the government’s declared support of SMEs, existing pro-SMEs schemes did not sufficiently address SME needs and the contribution of SMEs to Kazakhstan’s economy remains low. It further noted that access to bank loans by SMEs remained difficult and prohibitive interest rates hampered the expansion of small firms, even if these firms had economically viable projects. The OECD thus, recommended that Kazakhstan “further expand access of SMEs to financing”, in particular through the development of technical expertise in banks “so that banks can properly assess the risks in lending to SMEs and better adapt their services to meet SME needs” (OECD, 2012a).

Since then, the government launched several economic support programmes, each of them focusing on the provision of subsidised loans to SMEs. The first programme for 2014-15 provided for KZT 1 trillion (USD 5.5 billion) to be used primarily to relieve credit problems in the banking and providing subsidised loans to SMEs.30 In addition, the programme “Nurly Zhol” (Bright Path) for 2015-17 (a stimulus package of USD 14 billion, co-financed by international financial institutions to help the country overcome the difficulties related to the drop in oil revenues) is also meant to be used to continue providing subsidised loans to SMEs. Two other financing programmes have also been reoriented or expanded in reaction to the economic downturn to support SMEs’ access to financing (see Box 5.7). In the case of some of these programmes, it is too early to assess their impact on the economy, given that they have been launched or altered relatively recently. The government could nevertheless undertake their mid-term review to assess the level of take-up by SMEs and initial performance results. Overall, comparative analysis of the SME sector in Kazakhstan shows a noticeable lag of contribution of SMEs to the national economy (see Figure 5.1 below and OECD, 2013).31 While changes to the productive tissue of the economy are long-term processes, and take several years to yield results, the government should monitor and evaluate the effectiveness of the recently introduced SME support programmes and continue advancing on other reforms that aim to facilitate business registration (see investment facilitation section) to assist a healthy growthof the SME sector.

Box 5.7. Recent programmes implemented in Kazakhstan to facilitate financing by SMEs

One of the recent tools to support entrepreneurship in Kazakhstan and its regions is a Unified Program for business support and development, i.e. so‐called “Business Road Map 2020”.32 The aim of the programme is to support entrepreneurial activity in Kazakhstan, and in particular the development of SMEs, through the provision of loan guarantees, lower interest on loans or in-kind capacity building support. The development and growing capacity and specialisation of SMEs in different regions is meant to support the implementation of the national cluster policy set up in 2013.33

In addition, in accordance with the “Anti-crisis action plan to ensure economic and social stability in the years 2016-18”, approved by the minutes No. 51 of the Government meeting on December 8, 2015, the state support under the Business Roadmap was reoriented to target any new or on‐going investment projects, which provide a 10% increase in permanent jobs, production (or services delivery) output and tax payments in comparison to the period prior to project implementation to expand take-up. Moreover, additional funds (KZT 7 billion) are to be allocated to the “Business Road Map 2020” programme, of which KZT 5 billion are to subsidize the interest rate and 2 billion tenge used for loan guarantees.

Finally, as part of the anti-crisis measures for 2016 announced by the government, additional KZT 200 billion are to be allocated towards financing of SMEs working capital and refinancing of loans through the second-tier banks, of which: KZT 100 billion for the priority sectors of the economy (with the ratio of 50% for working capital and 50% for refinancing loans); and KZT 100 billion for the financing of SMEs needs regardless of their nature. The funds will be provided to the Single Pension Savings Fund and the list of financial instruments and second-tier banks to participate in the programme are to be determined in accordance with the Fund’s investment policy.

According to the government, action in 2015 focused on implementing an appropriate regulatory framework for the disbursement of state support provided for the Roadmap. In the second stage, in years 2016-19 the government aims to implement an annual monitoring framework. In order to assist in the realisation of these plans, it could be useful for the government to consider publication of the list of beneficiaries of the programme as well as the programme’s mid-term evaluation towards the end of 2016.

Note: For more information, please see www.damu.kz and www.business.gov.kz.

Source: Government of Kazakhstan.

Overall, as highlighted in OECD (2016) and elsewhere,34 a well-structured overview of the various private sector development programmes, including those directed at SMEs, is missing in Kazakhstan, and implementation monitoring and impact assessment mechanisms are not systematically employed. This can undermine the effectiveness of the programmes in place, and reduce the government’s ability to improve programmes over time (OECD, 2015). Nevertheless, as will be outlined in the following sections, the government has invested in self-evaluation in several areas related to investment promotion, in particular in relation to the management of SEZs and operations of its investment promotion agency (Kaznex Invest), following which reforms have been undertaken to overcome the lacunae identified in the process.

Figure 5.5. The importance of small and medium enterprises in the Kazakhstan’s economy, 2005-14

* Data for 2014 as based on a new definition of an SME, introduced as of 1 January 2014, based on the number of employees only (Law dated 10.07.2012 No. 36-V “On amendments to some legislative acts of the Republic of Kazakhstan on the reduction of permits and optimization of control and Supervisory functions of public authorities”).

Source: www.stat.gov.kz.

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Special Economic Zones

As seen in Chapter 4, special economic zones (SEZs) are another vehicle through which Kazakhstan aims to attract foreign investors, and facilitate economic development of different regions. Currently, there are ten SEZs in Kazakhstan (see Box 5.8 for more detail).35 Recognising the fact that the quality of infrastructure (both within the SEZ and its connectivity with the outside transport routes), as well as the quality of the legal and administrative framework for trade and business facilitation within the zones is an important factor influencing the attractiveness of SEZs for investors (see e.g. Farole, 2011), the government undertook a thorough audit of the operations of its SEZs in 2013. Thanks to the audit, undertaken with the help of a private consulting company, several weaknesses of the current SEZ framework have been identified, including weak infrastructure, poor management and a deficient legal framework. The OECD 2012 recommendations have also highlighted that Kazakhstan should seek to ensure cost effectiveness and transparency of its SEZ to ensure they achieve their intended objectives (OECD, 2012a: 19). Consequently, the government has implemented an action plan that resulted in the introduction of amendments of the Law on SEZ as well as other pieces of relevant legislation, including the Tax Code (currently under further reform as seen in Chapter 4).36

A primary focus of the recent reform has been the establishment of a single focal point at the level of the central government – currently at Kaznex Invest – to allow for better monitoring of the functioning and performance of SEZs; improved planning of individual managing companies activities and improvement in their management practices and procedures; planning and development of SEZ infrastructure, identification of fraud; as well as provision of the overall marketing support and assistance in identification of new projects. Meanwhile, individual trust management companies are responsible for the management of individual zones. The government’s commitment to reform is welcome as is its use of the private sector’s expertise in the design of the reform in this area. Given that Kaznex Invest is still a maturing agency, grappling with several different mandates, and that SEZs’ management reforms tend to be challenging due to the existence of possible vested interest groups, it is recommended that the government pays attention to the progress in implementation of the reform, possibly through periodic reporting to the parliament or to the responsible ministry (i.e. MID).

In relation to management of SEZs, Kazakhstan is also tied by certain commitments that it made in the process of its WTO accession. Namely, from the date of Kazakhstan’s WTO accession, SEZs and free warehouses in Kazakhstan will need to be established, maintained and administered in conformity with the provisions of the WTO Agreement, including TRIMs (see Chapter 6 on trade policy).37 This means that, upon expiration of the transition period negotiated by Kazakhstan (1 January 2017), no firms registered in SEZs and operating in free warehouses–new or existing–would be subject to export performance, trade balancing, or local content criteria requirements, in law or in practice.38 Kazakhstan has also made other broader commitments relating to the pursuit of its industrial policy, including the use of subsidies. For example, Kazakhstan committed to removing or modifying all subsidies programmes, including provisions contained in its development programmes, which fall within the scope of Article 3.1 of the WTO SCM Agreement, so that any subsidy provided would not be contingent, de jure or de facto, upon export performance, or on the use of domestic over imported goods.39 This may require some changes to the design of the current and future programmes for the purposes of private sector development in Kazakhstan and has led the government to introduce certain legal changes in relation to the use of local content policies applied to investment contracts in certain sectors and SEZs. This highlights the need for an innovative approach to promoting linkage creation between foreign and domestic firms,described at the end of this section.

Institutional set-up for investment promotion in Kazakhstan

Another aspect of investment promotion policy that was highlighted as potentially undermining the efficiency of government efforts at the time of the previous Review (OECD, 2012a), and where the government undertook reforms, is the institutional set-up for investment promotion. Currently, the Ministry for Investments and Development (MID) is the main government body responsible for the formation of the national investment policy, provision of state support for investors and coordination of implementation of the investment policy in Kazakhstan. This marks a change from a previous review when one ministry was responsible for investment policy design (i.e. Ministry of Economic Development and Trade, MEDT) and another for implementation (i.e. MID) (OECD, 2012: 81). In some areas, the Ministry co-operates with the Ministry of National Economy, previous MEDT, and other relevant ministries, but it is currently the principal ministry in charge on investment policy formation and coordination.

In regards to implementation, Kaznex Invest is the country’s national investment and export promotion agency. Its responsibilities include export promotion, in particular in non-oil sectors; search for investors and attraction of FDI into priority sectors; trouble-shooting and support for investors; promotion of Kazakhstan’s image abroad; and, as of recently, the management of SEZs. The experience of various OECD and non-OECD countries shows that national and state level investment promotion agencies play an important role in facilitating investment, and helping the government mobilise investment into priority sectors (e.g. Harding and Javorcik, 2007). The degree of success in investment attraction varies, however, significantly depending on the character and effectiveness of the investment promotion agency (IPA) involved (including its function, organisational structure, mandate, financial and human resources at its disposal) as well as the institutional set-up in which it operated and a monitoring and evaluation framework that it is subject to (OECD, 2015a).40

Kaznex Invest is a relatively young IPA, having acquired its investment promotion functions in 2010. As such, the agency is still grappling with defining appropriately its core mandate and adjusting its strategy, institutional structure, staffing policy, operations, and modalities of co-operation with other government bodies. Recognising the need to learn from international best-practices and to adapt its internal processes, Kaznex Invest has recently undertaken an audit of its operations by the OECD. The goal of the exercise was to assess the current level of the agency’s efficiency in attracting FDI as well as to identify principal factors that may hamper it, through a comparison with selected benchmark agencies from other countries (see Box 5.9 for more detail). It was established that, compared to the benchmark agencies, Kaznex Invest records currently a low rate of FDI attraction (of 5%) as a result of its actions.

One important finding of the OECD audit was that the agency remains primarily oriented towards servicing the needs of the Ministry (i.e. MID) – e.g. through the preparation of reports on FDI trends, tracking changes in various investment climate indicators, such as Doing Business ranking, and explaining government investment attraction policies–rather than dealing with investors, assisting them, and addressing their concerns. As such, it was suggested that the agency reorient its functions to allocate more attention and specialised staff towards generating investment leads and addressing investors’ concerns. The development of the new strategy for 2016-19 may be an occasion to address some of these issues, including through an appropriate choice of main objective and Key Performance Indicators (KPIs).

In addition, it will be important that the agency’s functions as well as modus operandi with other relevant organisations and government agencies is clearly defined. Currently other governmental institutions in Kazakhstan have similar, if not overlapping, functions as Kaznex Invest. For example, several national institutes have functions that are relevant for investment promotion.41 At the level of the regions, akims (i.e. regional governors) are responsible for assisting in attracting investment into the regions as are Investor Support Councils (ISC) with whom Kaznex Invest supposedly co-operates. In addition, in the past Intergovernmental Commissions (IGCs) were charged with developing relations with target countries (OECD, 2012a: 81-82). It appears that a special Government Council is also charged with the coordination of major investment projects, dialogue with large MNEs, and works towards attraction of MNEs into Kazakhstan through a wide network of offices abroad.42

Most recently, following presidential instructions to attract investment, the Ministry for Investments and Development (MID) and the Ministry of Foreign Affairs defined a list of ten priority countries to which the two ministries are to appoint a special advisor43 while Kaznex Invest is also planning to open offices in five countries.44 Given that some of these countries overlap and that the government Council appears to dispose of a large network abroad, it would be advisable for the government to consider how complementarities can be achieved and the various institutions can co-operate and interact to increase impact and reduce costs. While advanced IPAs tend to have a well-developed network of foreign offices,45 many countries assign an investment advisor from the IPA to operate in the premises of an existing bilateral diplomatic unit (e.g. embassy) or other existing government agency to optimise costs, especially at the initial stages of the agency’s operations. Overall, in order to achieve results, the government will have to avoid distraction in its investment promotion activities and ensure the actions are well planned, in tune with the overall investment promotion strategy as well as well-coordinated and executed. If given the necessary political support, the MID could play an important role in coordinating various investment promotion activities, providing a clear strategy and roadmap as well as a monitoring framework to assess the actions of implementing agencies. The example of a monitoring and evaluation framework used by the Australian government for its investment promotion activities could provide an inspiration in this regard (Box 5.10).

Box 5.10. Austrade and National Investment Priorities in Australia

The Australian Trade and Investment Commission (Austrade) leads a national, whole-of-government strategy for FDI and trade promotion in Australia. The agency’s performance in attracting investment into the priority sectors46 is evaluated under the Australian Government’s outcomes and programmes framework. As part of that process, Austrade’s Portfolio Budget Statements identify the outcomes and associated deliverables and key performance indicators (KPIs); while the annual reports evaluate the agency’s performance against these specific outcomes. The results of that assessment are available, on a yearly basis, online (www.austrade.gov.au/About/Corporate-Information/AnnualReport).

According to the Annual Report, 89% of Austrade-assisted investment outcomes were in the five agreed priority industries (see the figure below); while non-priority industries constituted 11 % of outcomes (with the majority being in retail, water management, transport and logistics, and media). Among the KPIs used to measure its performance, Austrade uses number of investment outcomes facilitated (92 in 2014-15, which marks a 28% increase since the previous reporting period); amount of capital expenditure associated with the FDI outcomes facilitated (7.75 billion in 2014-15); the number of new jobs created/retained as a direct result of investment outcomes facilitated (17 685) and the anticipated annual exports from investment outcomes facilitated ($14.5 million). As part of the Annual Reports, detailed information on financial expenditures are also reported and explained, which helps track costs and the agency’s efficiency over time.

Austrade-assisted investment outcomes by industry sector, 2013-14

Source: Australian Trade and Investment Commission (www.austrade.gov.au).

In addition to this annual exercise, periodically, the government undertakes a deep review of the agency’s actions, using Austrade client, investor and customer data (more than 80 000 firm records), annual client survey’s conducted by Austrade and targeted interviews of other government, business and industry stakeholders. As a result of such a review in 2011, the agency has been reformed, changing the agency’s structure, operating model and structure. All the information listed above is publically available on the Austrade’s website.

Finally, more attention could be given, at the level of the IPA, not only to investment promotion and improving the image of Kazakhstan as an investment location, but also to trouble-shooting, aftercare services, dialogue with investors, and eventually policy advocacy. While Kazakhstan disposes of other fora for discussion with investors to improve the business climate, in many OECD and non-OECD countries IPAs can play a valuable role in sustaining regular working-level contact with investors, gathering their feedback as well as coordinating with other agencies to resolve problems and facilitate investment (OECD, 2015; UNCTAD, 2008; UNCTAD, 2007; Morisset and Andrews-Johnson, 2004). It can also be a useful go-to agency for smaller foreign investors and domestic firms, which encounter hurdles or lack information on available opportunities and state support but do not benefit from access to high levels of the government. It could, therefore, be considered how the functions between the various institutions involved in dialogue with investors could be usefully divided and made complementary, and what role would Kaznex Invest would de facto play in that process. In particular, once the single window for investment is implemented and managed by Kaznex Invest, the IPA will start gaining significant information about the usually encountered problems and bureaucratic constraints faced by investors, which could be a potent source of information for its investment facilitation and policy advocacy role. Last but not least, as described in more detail below, the agency could also play a more active role in facilitating contacts between foreign firms and local producers, including through making available the planned database of local suppliers and multinational enterprises operating in various sectors in Kazakhstan (www.baseinvest.kz),as well as tailored matchmaking events.

Creation of effective linkage programmes

One important function of a country’s investment promotion efforts is the creation of linkages between domestic firms and foreign investors. Such linkages not only help embed investors more in the local economy, allowing for greater investment retention, but also facilitate the development of local skills and capacities, and ultimately contribute to economic growth (OECD, 2015). An IPA can play an important role in this regard, allowing for creation of business linkages between foreign and domestic firms, for example, through matchmaking events and development of databases of MNEs and local suppliers, co-creation of specific supplier development programmes as well as advocacy for wider reforms, often in collaboration with other government agencies. According to one study, 43% out of 123 IPAs from 109 countries surveyed had linkages programmes in place (UNCTAD, 2006); and a recent survey confirms that linkages creation is perceived as a primary objective by nearly half of responding IPAs (Farinelli, 2015).

Especially as the government appears to move away from reliance on local content requirements (see Chapter 2), it could consider alternative ways in which it can support the creation of business linkages between local domestic and foreign-owned firms. Some of them may involve targeted activities by the IPA (or other agency), while others may require further broader reforms. Examples from several OECD and non-OECD countries can provide some ideas on successful policy approaches that promote local content in a voluntary manner and through strong engagement of investors. For example, since 2001, Australia has been using voluntary Australian Industry Participation Plans (AIP), in order to monitor and encourage local industry’s participation in the supply of goods and services to the mining sector (See Box 5.11). The programme has a voluntary character, but according to the government, a high degree of political attention and frequent monitoring, in particular in large projects, has helped ensure that local sourcing amounts on average to 86% of total expenditure in the sector (Government of Western Australia, 2011).

In this context, the government could consider retaining the monitoring system of local content that it currently has in place, as administered by the National Agency for development of local content (NADloc), even once mandatory requirements are phased out. It can help the government track the evolution of the local content over time as well as serve as an awareness-raising tool to be used in conversations with investors, as is done in some other resource-rich countries, as Australia. It could also be considered by the government how NADloc and Kaznex Invest can coordinate their activities in the area of promoting the use of local content by foreign investors to benefit from complementarities and avoid undue duplication. For example, the planned development of the database of local suppliers and MNEs operating in different sectors by Kaznex Invest could help local and foreign enterprises learn about the locally available opportunities, and may benefit from the information and expertise already gathered by NADloc and other national institutes.47 In addition, these activities can be complemented with active matchmaking events, which facilitate in practice the development of business contacts among firms.

In some cases, it is the lack of certain skills, technology, or sufficient quality that hampers the ability of local suppliers to provide goods and services to MNEs present locally. In this case, the IPA, MID or other government agency can engage in facilitating creation of specific capacity-building programmes for local firms, often developed and implemented in close collaboration with investors. The case of Chile provides an example of a private-sector led supplier development programme, led by a large multinational in the mining sector (BHP Billiton), which has been developed in co-operation with the government (Box 5.12). The programme has allowed Chile to increase the ratio of exports to imports in the mining sector from 7 to 50% in only ten years (McKinsey Global Institute, 2013). The co-operation with an MNE not only allows ensuring that the types of skills or capacities that the workers gain are indeed sought after and can lead to creation of employment or business opportunities later on. They can also help reduce the cost of such training programmes if the MNE also contributes some resources, even if in-kind through availability of its specialists and staff.

Malaysia also provides a good example of how linkage formation can be facilitated by active skill development- and training programmes, which help bridge the capacity gap of local suppliers and workers, including at a regional level (see Box 5.13). Malaysia implemented several successful national-level linkage programmes aiming to bring together foreign and local firms (e.g. Industrial Linkage Programme48). Within that process, it was identified that skills gap of the local population were an important obstacle to effective linkage formation. Consequently, several training and supplier development programmes were put in place. For example, the Global Supplier Programme, guided by 23 MNEs, trained 813 employees from 225 SMEs in its first year alone. It has been implemented in coordination with state-level initiatives, such as the Penang Skills Development Centre (described in Box 5.13) that was a private-public initiative in the region of Penang that aimed to, and successfully helped, reduce the supply-demand skills mismatch in the local industry. This model, which builds on a strong collaboration between the business, government and academia has proved effective in bridging the skills gaps that ensued in a rapidly industrialising economy, and can provide some inspiration to the Kazakh Government. Similar examples can be found in Singapore and Ireland in 1980s and 1990s where the two respective national development agencies played an important role in fostering supplier development programmes, implementing targeted educational programmes in the local educational institutions and advocating for a larger policy reform aiming to improve the level, and adequacy, of qualifications of the local population.49

Overall, in most cases, successful local content and linkages programmes have involved a close co-operation with the private sector to help forge strategic partnerships with foreign investors to develop local skills and facilitate interactions between these firms and MNEs. They also have been accompanied by continued reforms and adequate funding in the areas of education, innovation, and research and development to facilitate the creation of a domestic knowledge system (OECD, 2011; World Bank, 2013; McKinsey Global Institute, 2013; Ramdoo, 2015).50 While the IPA can influence some of these factors, notably through provision of information on the already existing suppliers, facilitating matchmaking as well as targeted training, financial support or other capacity-building programmes; other factors – such as MNE global sourcing strategies or the quality of the overall national education or infrastructure – lie largely outside of its control. Table 5.3 summarises this issue in conceptual terms. In such cases, the agency can still play a powerful role by surveying existing and potential investors regarding the obstacles to engaging with local partners and, whenever applicable, engaging in policy advocacy with the relevant institutions, whenever broader reforms (such as educational reform) are necessary. In order to allow the broader reforms to take place, strong political support at the highest level of the government is required to allow the various ministries long-term reform and co-operation to achieve the desired results. Kazakhstan, with its high political stability and centralised government, would be well positioned to provide such support.

Addressing business concerns

Over the past years, a vast array of mechanisms, tools and methods have been developed by the Kazakh authorities to alleviate some of the challenges that have resulted from bribe demands and other kinds of unfair treatment of businesses.57 The government has in particular identified control of corruption as one of the key priorities in the strategy Kazakhstan 2050. With the goal of making more effective the fight against corruption, a new “Anti-Corruption Strategy of the Republic of Kazakhstan for 2015-2025” was approved at the end of 2014 as part of the action plan to implement the Kazakhstan 2050 strategy.58 The anti-corruption strategy stipulates that all state bodies and officials must strive against corruption within their area of responsibility and includes a set of new measures to fight corruption in Kazakhstan by: developing and nurturing a culture of integrity among public officials through the provision of standards of conduct and rules requiring financial asset disclosure; promoting business ethics in the private sector; reforming the judiciary; involving the participation of the civil society and the public in the fight against corruption; creating a feedback system for improvement of the anti-corruption strategy; and other measures.

Going beyond reforms

Many of these recent reforms illustrate a willingness on the part of the Kazakh authorities to acknowledge the problem of bribery and other forms of unfair practices in Kazakhstan and to take practical measures to confront them. This appears to be a worthwhile goal, which in time could have a direct influence on the perception of the investment climate. Legal and business representatives met by the OECD Secretariat in the framework of this Review seemed for example hopeful that the judicial environment was improving. They also cited an increasing amount of communication on corruption matters between the Kazakh authorities and the private sector through the above-mentioned government-sponsored working groups and councils.

Notwithstanding such developments, the real impact of the various measures described above remains to be seen. Past reforms have been closely monitored under the Istanbul Action Plan. In 2015, while recognising that Kazakhstan had taken steps forward in the area of anti-corruption policy, the OECD Anti-Corruption Network for Eastern Europe and Central Asia (ACN) noted there was still a clear weakness in translating these intentions into results (OECD, 2015d). The government appears to be committed to cleansing the system of corruption. New laws have been enacted; the authorities have prepared the necessary action plans and programmes. However, the real test can only be met through determined implementation of actions on the ground every day. For example, while the adoption of an Anti-Corruption Business Charter is an important step to encourage the development of preventive measures among the business sector, the impact will be felt only if both the government and Kazakhstan’s leading business association make efforts to promote the Charter through awareness-raising and training programmes. In this regard, Kazakhstan could make use of the OECD Good Practice Guidance on Internal Controls, Ethics and Compliance. Although directed at foreign bribery, the Guidance can be a useful reference for designing and implementing a strong corporate compliance programme.

Furthermore, there are questions as to whether the recently adopted reforms would fully meet the objectives officially set by the President. Despite reforms in the judiciary, there is still limited separation of powers as the Supreme Court and local courts, as well as members of the Supreme Judicial Council, are appointed by the President. Many exceptions apply to the recently introduced regulations on conduct in office and conflicts of interest as well as to the duties to report on assets and liabilities. A credible checking mechanism for assets declaration as well as effective sanctions in case of false or inaccurate declarations are also lacking.

Although the changes in the legislation governing public procurement would appear to represent progress with respect to efficiency, transparency and procedural fairness, their impact is yet to be seen. Moreover, although the number of possible exceptions to publically open procurement procedures has decreased since the enactment of the new public procurement law, they remain numerous. As noted above, for example, state-owned enterprises are not subject to the public procurement law and can organise purchases according to their own rules. Kazakhstan’s sovereign wealth fund Samruk Kazyna, Kazakhstan’s largest purchaser which procures a considerable share of the infrastructure projects in the country, does not operate under the law on public procurement either. One of the main areas for further reform should be to increase the share of procurement processes managed under the rules of the public procurement law. The legislation is also far from being aligned with international standards. One of the government’s priorities should be to effectively combat collusion in public procurement to level the playing field for suppliers and allow them to do business with the public sector on a fairer basis. The OECD Recommendation on Fighting Bid Rigging in Public Procurement could be useful in this regard as it supports close co-operation between competition and contracting authorities to identify markets in which bid rigging is more likely to occur and for which special precautions should be taken.

While foreign investors have access to new redress mechanisms, it is difficult to ascertain at this early stage to which extent the establishment of these reporting mechanisms has added values to the fight against bribery and other forms of abuse by state and local agencies and exactly which results these mechanisms have produced. For example, businesses met in the context of the present Review complained that the post of the Investment Ombudsman has remained largely ineffective so far. Clear responsibility and coordination between these bodies in their efforts to facilitate the handling of complaints by corporations affected by public authorities’ activities is also key to effective implementation of Kazakhstan’s anti-corruption strategy. The overlap of the functions between the Entrepreneurs’ Rights Commissioner, the Investment Ombudsman and the Protection of the Rights of Entrepreneurs’ Council should be avoided. The multiplicity of actors may also generate confusion among investors.

In addition, as the experiences of Colombia’s High Level Reporting Mechanism and Ukraine’s Business Ombudsman Council prove, such mechanisms can only be successful if they are seen to be sufficiently impartial in companies’ eyes (Wehrlé, 2015). There is a possible downside of Kazakhstan’s choice to locate its Investment Ombudsman in the Ministry for Investments and Development. For sure, one could argue that the merits of the Ombudsman lie in being housed in the ministry, which include access to other government institutions for the purpose of obtaining information and better coordination among agencies and ministries. At the same time, the Ombudsman might not be seen independent enough from the government. Similarly, much of the credibility of the Entrepreneurs’ Rights Commissioner is tied to the degree of credibility of the National Chamber of Commerce. The latter has been perceived by foreign investors as well as by international institutions as being too much tied up with the branches of government in Kazakhstan (president, council of ministers, and parliament) as well as state-owned businesses.75 The recent experience of Ukraine’s Business Ombudsman Council, which is neither a constituent part of the hierarchy of authority nor accountable to any branch of government, can be useful in this regard (OECD, 2016b).76 Korea’s Foreign Investment Ombudsman also provides a good example of trusted grievance resolution mechanisms.