Chapter 5. Investment promotion and facilitation in Kazakhstan

The legal regime faced by foreign investors, the protection granted to them, and the design of the country’s tax policy are only a part of the overall investment environment. The quality of domestic regulations and administrative procedures, the incidence of corruption as well as policy transparency and coherence also influence countries’ ability to attract and retain investment. Kazakhstan has recently undertaken many steps to improve the quality of its overall investment climate, including through administrative simplification, changes to the regulatory process and efforts to reduce corruption and other forms of unfair treatment of businesses. In many areas it is too early to assess the impact of recent legal changes while, in others, challenges related to implementation and enforcement persist.

  

Investment and jobs are central to Kazakhstan’s economic development agenda and critical in achieving its inclusive growth objectives. Investment facilitation and promotion can, in turn, be powerful means to attract investment and maximise its contribution to job creation, diversification of the national economy, and to provide opportunities for broad-based entrepreneurship. Successful investment facilitation policies reduce the costs of establishing and expanding business operations in the country, for foreign and domestic investors alike, while effective investment promotion helps reduce information asymmetries and attract investors, who might otherwise not establish their operations in the country. Jointly, investment promotion and facilitation policies can help increase the amount, as well as the type of incoming investment, in the host economy. If inadequately designed or implemented, however, they can prove costly for the governments and taxpayers as well as affect the level playing field among the different economic actors, leading to a reduction in the overall welfare.

The previous Investment Policy Review of Kazakhstan (OECD, 2012a) made several recommendations regarding the country’s investment promotion and facilitation policies (see Box 5.1). For example, concerns were raised about the administrative procedures for business and the quality, predictability and transparency of domestic regulations, in particular in certain areas related to local content policies, hiring of foreign staff, and tax administration, among others. More generally, it was stressed that the quality and predictability of investment-related decisions and creating new regulations could be improved in Kazakhstan. In relation to investment promotion, it was recommended that Kazakhstan evaluates the impact of its existing investment incentive schemes, including those in Special Economic Zones, in order to improve their efficiency. In addition, it was suggested that the government consider whether the fragmented approach to granting investment incentives, administered through the conclusion of individual investment contracts with investors, supports the objectives of transparency embodied in the OECD Checklist for Foreign Direct Investment Incentive Policies. Finally, the government was encouraged to improve the institutional framework for investment promotion. All these and other relevant aspects are discussed in this section.

Box 5.1. OECD 2012 Recommendation on investment promotion and investment facilitation policies in Kazakhstan

The OECD made, in 2012, several recommendations relating to the country’s investment promotion and facilitation policies (OECD, 2012a; 19-20). They relate to four areas, described below in more detail: a) a reduction of administrative barriers for businesses, including in the area of local content and hiring expatriate staff; b) improvements in the quality, transparency and coherence of domestic regulations and predictability of investment policy decision-making; c) better evaluation and administration of fiscal incentives for investment; b) and reconsidering institutional framework for investment promotion to ensure its efficiency, including through possible streamlining.

  • Reducing administrative burdens on firms, including in the area of local content and hiring expatriate staff: The Investment Policy Review of Kazakhstan recognised the overall progress that the Government made in simplifying administrative procedures for business. It also noted that available business surveys show that one in ten investors mention strict regulations, licenses and approvals as one of top three obstacles to doing business in Kazakhstan (Ernst and Young, 2010). In addition, the Review noted three areas where the applicable regulations appeared to be overly burdensome for firms and may be holding investment back –namely local content requirements and the procedures for hiring expatriate staff.

  • Improving the quality of domestic regulations and transparency and predictability of investment policy decision-making: More generally, the Review noted the need to improve the regulatory transparency, predictability and coherence in Kazakhstan, especially as the country progressively narrows down the coverage of stability clauses in its investment contracts. It was highlighted that the government can improve policy consistency by improvements in the process of drafting new regulations, including by avoiding conflicts and overlaps between existing and new regulations as well as systematising the process of public consultation and ex ante assessment of draft regulations.

  • Institutional set-up for investment promotion: In regards to investment promotion, the Review noted that Kazakhstan’s institutional system for promoting, attracting and assisting foreign investment is quite complex as several governmental agencies have related various responsibilities, which are not always clearly delineated. For example, it was not clear how the coordination between the Ministry of National Economy, Ministry of Industry and New Technologies (MID, currently the Ministry for Investments and Development), the national body for investment promotion – KaznexInvest, the Intergovernmental Commissions (IGCs) in charge of trade and economic co-operation, and Investor Service Centres are to co-operate and complement each other, rather than compete and dilute the overall effort, both de iure and de facto.

  • Fiscal incentives for investment: Finally, the Review stressed the need for improving the transparency, effectiveness and efficiency in the management of fiscal incentives for investment in Kazakhstan. At the time of the previous Review, the choice and scope of incentives provided for investment projects was specified on a case-by-case basis through agreements signed by individual investors with the Investment Committee at MID. Such tailor-made arrangements, especially if not systematically published, often lack transparency and run the risk of administrative discretion, with the possibility of differentiated treatment for individual investors depending on their economic weight and local political connections. In addition, systematic evaluation and coordination of the various incentive and state support programmes was lacking, and low administrative capacity and coordination have further reduced their effectiveness.

Investment facilitation

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).

Box 5.2. Recent administrative simplification efforts in Kazakhstan

In recent years, the Government of Kazakhstan has launched several initiatives aiming at improving the quality of domestic regulations and reducing the administrative burden faced by businesses (OECD, 2012a; OECD, 2015c). These efforts have predominantly focused on administrative simplification and streamlining of the domestic licences and permits system as well as administrative procedures more broadly, as covered by the Doing Business indicators.

For example, the “Concept of Further Reforming of the Licensing System of the Republic of Kazakhstan for 2012-15” was introduced to simplify procedures to obtain licences and improve the licensing system more generally. The Law 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 introduced several changes both regarding the process of obtaining licenses and applicable requirements. For example, time periods as well as the number of procedures and lists of documents required for obtaining the permits for construction, business registration and liquidation, bankruptcy have been reduced. Currently, licences are issued in electronic format through the public database “E-licensing” and the time period for issuing licences has been reduced from 30 to 15 days.

In addition, on 20 May 2015, President Nazarbayev announced a set of 100 administrative steps to be undertaken by the government to improve the efficiency of the state apparatus and reduce the administrative burdens placed on citizens and firms to support the country’s economic development. The announced measures fall into five broad categories i) creation of a modem and professional civil service; ii) ensuring the rule of law; iii) Industrialization and economic growth; iv) a unified nation for the future; v) transparency and accountability of the state), with over a dozen relating to investment policy. For example, the plan includes strengthening of the post of the business ombudsman to protect the rights of entrepreneurs; integration of customs and tax systems (currently under way); a reform of the tariff system in the regulated services sectors to help attract investors; a reform of the antimonopoly committee to align it with the OECD standards; and several trade facilitation measures, including the implementation of a single window for trade. The full list of measures is available on the website of the President’s Administration (www.akorda.kz).

If fully implemented, the measures could significantly alter Kazakhstan’s investment climate. The government’s implementation capacity is, however, contingent on the ability of the responsible agencies to develop medium to short term action plans, allocation of sufficient human and financial resources, including training for the responsible staff, and effective progress monitoring and evaluation. Obtaining feedback from businesses and other stakeholders should be integral in the process to ensure that the reforms’ objectives are achieved in practice. Businesses consulted in the process of this Review stressed that, in the past, implementation has fell short of official assurances and that high variation of administrative practices and rent-seeking behaviour of implementing officials remained a de facto barrier to doing business in Kazakhstan.

Source: The Government of Kazakhstan and stakeholders consulted during the process of the present Review (April 2016).

Figure 5.1. Overall ease of doing business rank in Kazakhstan and other regional economies, 2017
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Source: World Bank’s Doing Business indicators, 2017.

 http://dx.doi.org/10.1787/888933452888

Figure 5.2. Kazakhstan’s performance on different aspects of Doing Business relative to the regional best performer and regional average, 2016-17
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Source: World Bank’s Doing Business indicators, 2016-2017.

 http://dx.doi.org/10.1787/888933452890

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.

Table 5.1. List of economic activities subject to licensing requirements in Kazakhstan, 2016

List of activities subject to licensing requirements (Law No. 202-V)

1. broadcasting;

2. culture;

3. education;

4. architecture, town building and construction;

5. oil and gas;

6. industry;

7. informatisation and communication;

8. turnover of narcotic preparations, psychotropic substances, precursors;

9. healthcare;

10. use of atomic power;

11. ensuring of information safety;

12. special technical facilities for performance of immediate search measures;

13. turnover of weapons, military equipment and certain types of arms, explosives and related articles

14. turnover of toxic substances;

15. manufacture of the state symbols of the Republic of Kazakhstan;

16. manufacture and turnover of ethyl alcohol and alcohol products, manufacture of tobacco articles;

17. commodities exchange;

18. export and import of goods;

19. financial sphere and activities related to concentration of financial resources;

20. use of cosmic space;

21. gambling business;

22. veterinary;

23. agriculture;

24. transport;

25. forensic expert;

26. services provided for physical persons and legal entities

Source: Government of Kazakhstan (April 2016).

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.

Table 5.2. Number of days to obtain various licenses in Kazakhstan as compared to other countries, 2013

Days to obtain an operating licence

Days to obtain a construction-related permit

Days to clear direct exports through customs

Days to obtain an import licence

Days to clear imports from customs

Days to obtain an electrical connection*

All Countries

30.2

71.1

7.9

18.6

11.8

30.9

Eastern Europe and Central Asia

23.2

72.6

4.8

13.5

5.9

26.6

Kazakhstan

42.9

61.4

7.2

21

11.8

31.6

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

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).

Box 5.3. One Stop Shop (OSS) for investors in Kazakhstan and relevant international experience

The Entrepreneurial Code (EC) of the Republic of Kazakhstan No. 375-V of 29 October 2015 established the principle of a “single window” for investors to be administered by the agency responsible for investment, (i.e. currently, the Investment Committee at the Ministry for Investments and Development). The pronounced goal is to provide “a centralized form of assistance to investors by the authorized body for investment in the provision of public services; minimise investors’ involvement in the collection and preparation of documents; and limiting their direct contact with public authorities” (Article 282 of the EC). Currently, the one-stop shop for investors in Kazakhstan is a physical facility, called an Investor Services Centre (ISC), one of which is located at the Ministry for Investments and Development (Address: Kabanbay Batyr Avenue 32/, 1 Transport Tower Building.) In order to access the centre, an investor needs to pre-notify the centre about its arrival and have an identification document during the visit. Altogether, there are 19 ISC offices in 16 cities in Kazakhstan. The information on regional ISCs can be obtained on the Kaznex invest website (http://invest.gov.kz). In addition to the Center, there appear to be 19 offices in 16 different cities in Kazakhstan, administered by the State-Owned Corporation “Government for Citizens”.

The “single window” approach was launched in 2015 in a pilot form, applying to priority strategic investment projects only, and extended to all firms in 2016. ISC has been developed with the help of PricewaterhouseCoopers. According to the government, investors can obtain through the ISC information on investment opportunities in Kazakhstan; receive assistance in the preparation and presentation of the documents required by different agencies; as well as benefit from support in obtaining the required administrative permits and licences. Currently, the most common services obtained by investors via OSS are: requests of investment incentives, investors visa (C1) requests, business registrations, access to land as well as receipt of permits for geological exploration, construction or hiring foreign staff. The government allows investors to obtain over 300 public services via the ISC and in the near future plans to complement it with an online investor support system that will allow investors to register, receive information and submit applications for permits digitally (www.baseinvest.kz).

During the consultations with stakeholders undertaken in the course of this Review, it was established that the ISC is still relatively unknown by the businesses operating in Kazakhstan and embassies of top investing countries in the country. It appears that further work could be undertaken in order to familiarise the business community with the services provided by the ISC as well as to obtain feedback as to the features that could be extended or improved.

In addition, as the government is progressing in expanding and operationalising the single window for investors, it could learn from international as well as its own experience in establishing one-stop shop (OSS) solutions in other fields, notably those undertaken by the Ministry of Justice (Janenova, 2009), to avoid common pitfalls and adopt best-practices. Introducing successful OSS solutions is notoriously difficult and involves many challenges related to effective co-operation among agencies, introducing necessary amendments to the legislation, and establishing information-sharing systems and appropriate digital solutions, among others (Sader, 2006; World Bank, 2009; OECD, 2015a). For example, according to the government, currently 13 different ministries as well as authorities at the regional and city level co-operate within the OSS. Joint orders were signed between the participating ministries and regional akimats, establishing posts responsible for interaction between ministries and internal follow-up within each agency, together with posts for a delivery of a given public services that involves coordination among the agency. It remains to be seen if this mechanism will suffice to ensure effective coordination in practice, at the central and regional level, as more investors learn about and use the OSS services. Given that effective governmental coordination is a critical component of success of any effective OSS, and also remains the most difficult to achieve, the government should closely monitor the ability of the OSS to deliver permits involving several agencies and the associated delays.

More generally, as the government further operationalises and expands its single window, it should consider what institutional set-up and functional arrangement best suits its needs, and which functions should the OSS perform. The table below provides an overview of different functions that an OSS can have in different countries. Feedback from potential and established investors can play an important role in fine-tuning the design and functions of the OSS, while external advice and capacity building may be helpful to ensure that the choices reflect international best-practices.

Comparative performance of the types of one-stop shops in place in 2010

No. of countries

Average

No. of procedures

No. of days

Ranking (out of 183)

A. Commercial Registry with other bodies on the same site

  7

7

24

 99

B. Commercial Registry which liaises with other bodies

 20

6.7

19

 61

C. One-Stop Shop (not a Commercial Registry) which liaises with other bodies

 13

6.3

27

 98

D. Integrated registration function

 12

5.8

13

 49

E. Online registration facility

 15

5.2

14

 48

All countries with one-stop shops

67

6.1

19

 67

F. Other countries

116

9.3

46

106

Source: Government of Kazakhstan, OECD (2015a),World Bank (2009), Sader (2006).

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.
picture

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
picture

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)

Box 5.5. Mechanisms for dialogue with foreign investors in Kazakhstan

The Foreign Investors Council (FIC), created in 1998, is currently the main forum for direct dialogue between the authorities and foreign investors to address critical issues related to the country’s investment activities and the business climate (www.fic.kz). It is chaired by the President of the Republic of Kazakhstan and includes, on the government side, the Prime Minister, Chairman of the National Bank and several key ministers (Foreign Affairs, Industry and Trade and Budget Planning), as well as the chairman of the Committee on Investment of the Ministry of Industry and New Technologies. The latter also forms the executive body of the FIC.

Foreign investors are represented by high-level officers from the banking sector, energy, manufacturing, telecommunications legal and consulting companies and international financial organisations (EBRD, Eurasian Development Bank, Asian Development Bank). To become a member of the FIC, interested foreign companies have to submit their application to the Committee on Investment. The main criterion is the amount of foreign investment in Kazakhstan (USD 100 million for investors operating in the Subsurface sector, USD 25 million in other sectors). Representatives of international organisations involved in Kazakhstan can also participate in the FIC. The FIC has several specialised working groups, including on oil and gas, legal matters, taxation and investment image enhancement. The working groups hold regular meetings and report to the FIC plenary sessions conducted twice a year. The Council has proposed various actions and made recommendations to encourage economic modernisation and local development, to improve the qualifications of local staff and to simplify tax and administration procedures.

In addition to FIC, the government also established a Council for Improving the Investment Climate chaired by the Prime Minister whose goal is also to consult with investors and suggest reforms that can help address investors’ concerns and, more generally, lead to improvements in Kazakhstan’s business climate.

Source: OECD Investment Policy Review of Kazakhstan (2012) and the Government of Kazakhstan.

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

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).

 http://dx.doi.org/10.1787/888933452904

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

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.

 http://dx.doi.org/10.1787/888933452918

Investment promotion

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).

Box 5.6. Strategic objectives of Kazakhstan’s development and investment promotion policy

The “Vision 2050” outlined by the President in January 2014 provides the broad vision and objectives of the national development strategy in Kazakhstan (Nazarbayev, 2014). The “main goal [of the strategy] is to join the group of 30 most developed countries: by 2050”. Multiple targets are included in the strategy, relating to annual GDP growth and per capita income and other aspects of well-being such as safety, peace or life expectancy (Nazarbayev, 2012). In addition, rates of investment, scientific research, productivity, share of SMEs in the economy and standards of living of OECD countries are considered a “natural benchmark for Kazakhstan” in realising the Vision (Nazarbayev, 2014).

The “Strategic Plan till 2020” outlines in more detail the country’s strategic objectives relating to economic development.17 These include: i) improving business climate, supporting financial sector development, and improving the legal framework; ii) accelerating economic diversification, including through support for priority sectors and creating favourable economic environment; iii) investment in education, healthcare and labour force; iv) improving social protection and quality of housing; v) and ensuring inter-ethnic harmony, political stability and security. Some of the Plan’s targets and measurable objectives are relevant to investment policy and include, for example, an increase of domestic and foreign investment in non-extractive sector by at least 30%, an increase of the share of FDI in GDP by ten percentage points; and entry of Kazakhstan into a group of 50 countries with best World Bank’s Doing Business indicators by 2020. A monitoring and evaluation mechanism is also put in place with some elements available in English on the government’s website. It is, however, unclear what methodology is used either for setting of the quantitative targets or the evaluation of the progress in their implementation.

Five-year programmes, called State Programme on Accelerated Industrial and Innovative Development (SPAIID), support the implementation of the long-term strategic objectives outlined above, the current one spanning the period 2015-19. The overall goal of the programme is to “facilitate the ascension of a private investor in the manufacturing industry” and “create attractive conditions for private investment” (Government of Kazakhstan, 2014). The plan builds on seven broad priority sectors identified in the Vision 205018 and sets a more detailed list of specific sectors and associated activities that are considered to be a priority.19 For each of the sectors, the programme identifies key strengths of the Kazakh industry; key factors impacting competitiveness in these sectors as well as important global players, including potential foreign partners, and sets broad tasks and targets for implementation. It also foreshadows the creation of a specific investment promotion attraction policy. In addition, the plan also includes several investment facilitation measures, such as the establishment of a visa-free regime for investors from OECD countries; creation of the office of business ombudsman and a single window for investors (described in the previous section). Finally, it also highlights the importance of aftercare services provided to investors through a network of Investor Service Centres (ISC).

The country’s investment promotion strategy depends and inscribes itself into this framework. The strategy for the previous period has been outlined in the “Programme for Investment Attraction, Special Economic Zone (‘SEZ’) Development and Export Promotion in the Republic of Kazakhstan for 2010-2014” (OECD, 2012a: 77). It appears that the objectives for the current period are outlined in order No. 406 of the Minister for Investments and Development, which established a sectoral Action Plan for investment attraction for 2016. It is not clear how the plan builds on the results achieved in the previous periods, and whether the change in the time period covered (from four to yearly plans) has been a conscious change in the government planning and monitoring framework.

Source: Government of Kazakhstan.

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
picture

* 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.

 http://dx.doi.org/10.1787/888933452921

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

Box 5.8. Special Economic Zones in Kazakhstan

Special Economic Zone (SEZ) is a part of the territory of the Republic of Kazakhstan with precisely defined boundaries with a special legal regime for implementation of priority activities. The SEZs are now primarily governed by the Law “On Special Economic Zones in the Republic of Kazakhstan” No. 469-IV of 21 July 2011, most recently amended in 2015 to introduce several improvements in the management and operations in the SEZs.

There are currently ten SEZ in Kazakhstan:

  1. “Astana - New City” in Astana

  2. “Ontustyk” in Sairam District of South-Kazakhstan region

  3. “Seaport Aktau” in Aktau

  4. “Park of innovative technologies” in Almaty

  5. “Burabay” in Akmola region

  6. “National Industrial Petrochemical Technology Park” in Atyrau region

  7. “Saryarka” in Karaganda region

  8. “Khorgos Eastern gate” in Almaty region

  9. “Pavlodar” in Pavlovdar

  10. “Chemical Park of Taraz” in Dzhambul oblast

Currently, the main infrastructure of three of the above-mentioned SEZs is finished, namely that of SEZ “Saryarka”, SEZ “Ontustik” and SEZ “Burabay”.

Enterprises operating in the SEZs are exonerated from the corporate income tax, land and property tax, value-added tax fully consumed during realization of SEZ activities as well as customs duties and land use fee. Enterprises registered in SEZs also benefit from several procedural benefits, including facilitated procedures for hiring foreign staff and easier customs clearance procedures (given that goods located and used in a SEZ are exempt from customs duties and taxes, non-tariff measures and any bans or restrictions placed on CU goods). Finally, within the boundaries of the “Park of innovative technologies”, firms can benefit from an exemption from social charges provided that labour costs for a given corporate income tax period constitute not less than 50% of the total annual income and that 90% of expenditure on labour costs are salaries of employees that are residents of the Republic of Kazakhstan. The maximum period of application of such benefits is 5 years from the date of registration as an enterprise within the SEZ territory.

In order to be able to operate within an SEZ, an enterprise must be registered by the tax authorities in the territory of SEZ; have no structural subdivisions beyond the boundaries of the territories of SEZ; and at least 90% of aggregate annual income must constitute income earned from activities in the SEZ consistent with the objectives of the SEZ’s formation. For a legal entity in the ‘Park of Innovative Technologies’ – at least 70% of the aggregate annual income must constitute income earned from activities in the ‘Park of Innovative Technologies’. In turn, enterprises that are users of subsurface resources; produce excisable goods (except if engaged in manufacturing or assembling of excise goods under sub-paragraph 6) of Article 279 of the Tax Code); are engaged in form of gambling activity; or, finally, seek the use of other special tax regimes or have used the investment tax preferences in the past cannot register in the SEZ.

Source: Government of Kazakhstan.

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.

Box 5.9. Investment Promotion Agency of Kazakhstan – Kaznex Invest: how well is it doing?

Kaznex Invest was created in 20087 as the export promotion agency of Kazakhstan in an effort to support the goal of economic diversification. In April 2010, its mandate has been altered so that besides the export promotion function the agency became the sole Investment Promotion Agency (IPA). Since then, it performs both of these functions and is the sole coordinator of Special Economic Zones (SEZ) in Kazakhstan. It also hosts a database on investment projects and foreign investors in the country and in co-operation with Investor Support Centers (ISC) supports investment promotion in the regions.

The agency is set up as a joint stock company in which the Investment Committee of the Ministry for Investments and Development (MID) owns 51% of shares and 49% is owned by the National Chamber of Entrepreneurs of the Republic of Kazakhstan “Atameken”. It has joined the World Association of Investment Promotion Agencies (WAIPA) in 2011. In an effort to boost Kaznex Invest’s effectiveness in attracting investors into the key strategic sectors, the government of Kazakhstan has requested from the OECD an audit of Kaznex Invest operations and a benchmarking vis-à-vis the best practices encountered in other agencies to make the necessary adjustments in its mandate, structure, or operations (OECD, 2015).

One of the strongest findings of the report was the low efficiency of Kaznex Invest vis-à-vis the best performing agencies. For example, only 5% of total FDI inflows were estimated to have been directly generated by Kaznex Invest in 2013 as compared to 11% in Nicaragua or 33% in Czech Republic, for example. The relatively poor performance has been identified in the report to be linked to the relatively large mandate of the institution, which resulted in lesser attention given to investment promotion and facilitation; its focus on serving the needs of the ministry rather than investors; and a lack of clear strategy and well-identified priority sectors and key performance indicators that would be outcome rather than process oriented and in line with the pre-identified strategy.

Source: Government of Kazakhstan and OECD (2015).

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
picture

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).

Box 5.11. Australian Industry Participation Plans

The Australian Industry Participation (AIP) National Framework – established in 2001 – supports supply chain development in the mining industry by requiring Australia industries to be given “full, fair and reasonable access” to opportunities deriving from significant public and private investment projects (including mining operations).

AIP policy obliges investment projects to compile an AIP plan to set out how they will provide full, fair, and reasonable access to opportunities for Australian suppliers. While not mandatory for operating, an AIP plan – approved by Austrade (Australia’s Trade and Investment Promotion Agency) – is a requirement for firms that wish to apply for tariff concessions on eligible imported goods under the Enhanced Project By-law Scheme. AIP plans must show evidence of consultation with Australian manufacturers to determine existing local capacity. Criteria included in the assessment of an AIP plan include, among others: employment creation; skills transfer; regional economic development; technology transfer and R&D; and “full, fair and reasonable opportunities” for suppliers to tenders.

In light of the information about recently declining local content in goods and services in the mining sector, in 2010 the Department of Commerce of Australia commissioned an independent assessment of the ability of the local steel fabrication industry to secure module contracts from energy and mineral projects, followed by a similar study of the local engineering and design industry. Results of firm surveys and market analysis confirmed that changed market conditions and increased competition reduced the share of local content in these and associated industries. For example, in offshore energy projects, local industry participation has fallen from a peak of 72% to an estimated 45%-55% for some projects. As a result of these changes, the Government has decided to revamp its local content programme, both at the national and state level.

For example, in July 2012, reforms to the AIP program were implemented, which included, among others, a requirement for plans and outcomes to be published and a requirement for projects accessing the import duty programs to increase the level of detail provided to Austrade in their AIP plan (e.g. provision of more comprehensive evidence on opportunities being made available to Australian industry.

Australian states also engage in creation of active linkage programmes. For example, the state government of Western Australia through its Industry Capability Network of Western Australia (ICNWA) maintains a local supplier database, matches the inquirer’s specified requirements with competitive local manufacturers, provides company profiles and assists in writing specifications and tender processes to facilitate local participation. The service is publically funded and free of charge for participating firms. Due to changes to the way multinational search for (e.g. utilising their owned supplier databases) and contract local firms, the mandate of INCWA has been under review. The state also gives other market intelligence tools at disposal of local firms and has recently engaged in an overhaul of training policy and engaged in policy dialogue with the federal Government regarding facilitated access to skilled labour through temporary and permanent visa programmes.

Source: Farole (2014), Warner (2011), 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.

Box 5.12. BHP Billiton-led World Class Suppliers’ Programme in mining in Chile

The World Class Suppliers’ model encourages mining companies to identify areas where innovative solutions could assist operational efficiency across its operations, and identify local suppliers who have the capacity to work on the problem. Each prioritized challenge is weighted and advertised to suppliers. The selection procedure is rigorous: for example, only 16% of identified projects at CODELCO reached implementation stage. Selection criteria include economic benefit, replicability, urgency of the problem, technological risk, and impact on the operation in the fields of health, safety and environmental standard (HSE). A cluster of 2-3 local suppliers is then created to research the problem and pilot new innovations. In addition to technical funding and support for the area of innovation, some companies such as BHP also employ external consultants to provide training on organisation and managerial competence and support supplier linkages with local universities.

The project is coordinated by Fundación Chile, a non-profit corporation that aims to support technology transfer and innovation, and increase the competitiveness of Chilean firms across the economy, but does not provide funding for the projects themselves. Fundación Chile has also produced a guide for mining companies undertaking World Class Supplier projects and a detailed handbook is also in development. The guide includes practical advice for companies in the operationalization of the project. As of 2012, 70 cluster projects were under way from BHP and CODELCO and there is interest from the Peruvian and Colombian mining industry. BHP is also currently working on ways to clarify intellectual property rights for innovations developed under the cluster program.

Source: Barnett and Bell 2011; Urzua 2011.

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

Box 5.13. The Penang Skills Development Centre (PSDC)

The Penang Skills Development Centre (PSDC) was established in May 1989 as a not-for-profit training and development centre. At initial start-up, the PSDC received support from the Penang State Government in the form of subsidised rental of premises and an annual training grant for the centre. As it grew in relevance it attracted the attention of the federal government. Starting from 1993, the PSDC received capital grants to assist with its capacity building expenditure such as equipment and machinery. The PSDC invites membership from the manufacturing and related industries and to-date has a member base of 130 companies. With strong support from the government and industry, the PSDC undertook the facilitation of effective resource utilisation amongst the manufacturing and service industries.

The PSDC does not target any specific group and is accessible to all who wish to pursue lifelong learning. Its staple programmes such as those conducted on behalf of the government and the degree and diploma programmes offered under continuous education tend to attract: i) secondary school (high school) leavers; ii) unemployed graduates; and iii) the existing workforce which requires re-skilling and skills upgrading. The success of the PSDC is also attributable to its tripartite business model which draws on the involvement of its three key stakeholders: industry, academia and government. The PSDC is managed and led by the industry and is supported by national academic bodies and the government.

Six government agencies were involved in launching the PSDC: i) the Ministry of Entrepreneur & Co-operative Development (has since then been dissolved); ii) SME Corp; iii) the Standard and Industrial Research Institute of Malaysia; iv) the Penang Regional Development Authority; v) the Penang Development Corporation; and vi) the Penang State Secretariat. These agencies represent the various interests of the government such as local enterprise development, research and development and both state and national level development initiatives. More importantly, their involvement in the PSDC council enables the PSDC to understand the policy directions of the government and therefore, to implement and introduce new human resource development initiatives which complement national policies.

Source: OECD (2011).

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.

Table 5.3. Factors influencing formation of MNE-SME linkages – An illustrative list

Demand for linkages

Supply of linkages

Interaction

Non-policy factors

  • MNE strategies, parent-affiliate relations,

  • MNE affiliate characteristics

  • Type of sector or activity

  • Local firms’ characteristics

  • Local market structure

  • Trust and social capital

  • Language and cultural barriers

Policy factors

  • Ownership requirements

  • Local content requirements

  • Tax policies and other incentives

  • Trade policies

  • Special Exporting Zones (SPEs)

  • Education policies

  • Financial sector development

  • Venture capital funds

  • Other private sector development programmes

  • Clustering and maturity of local business associations

  • R&D and innovation policies

  • Regulatory environment (e.g. ease of enforcing contracts)

  • Quality of infrastructure (roads, utilities, ICT, standardisation and certification systems, etc.)

  • Promotion of local engagement through CSR and RBC

  • WTO rules relevant to investment promotion

Role for an IPA

  • Targeting investors prone to engaging with local suppliers or having existing supplier development programmes

  • Negotiating with incoming investors and offering incentives

  • Surveying investors on the barriers to engaging with local suppliers

  • Policy advocacy for changes in policies hampering demand

  • Training programmes

  • Other capacity-building support (e.g. assistance in obtaining a certification)

  • Financial incentives or financial support provided to suppliers

  • Support clustering or development of local business associations

  • Policy advocacy for changes in policies hampering supply

  • Organising matchmaking events, site visits, and workshops

  • Keeping a database of local suppliers and providing MNEs with information on local firms

  • Provision of tailored services (e.g. guarantee recovery for delayed payments) or policy advocacy for changes in policies hampering interaction (e.g. administrative simplification, etc.)

Source: Authors’ elaboration based on OECD (2015), ODI (2002), UNCTAD (2001).

The challenge of bribery and other forms of unfair treatment of business

Many of the reforms described in the present chapter illustrate a willingness on the part of the Kazakh government to further improve the enabling environment for investment and to take practical measures to address it. Not surprisingly, as noted earlier in this chapter, Kazakhstan was in 2016 among the top 10 economies among 190 economies surveyed showing the most improvement in the World Bank’s 2017 Doing Business report. The average distance to frontier (the distance to frontier is the absolute distance to the best regulatory practices) across all indicators has constantly improved since the 2012 Investment Policy Review of Kazakhstan.

The country has also significantly improved its ranking in the World Economic Forum’s Global Competiveness Index in 2015-16 compared to the 2011-12 Report (up from 72 to 42 out of 140 countries).51 However, these developments and on-going reforms aimed at further improving Kazakhstan’s investment climate represent only a small part of a larger picture. As noted throughout the present Review, feedback from domestic and foreign enterprises indicates that the overall business environment in Kazakhstan continues to be weakened by bribery, favouritism and weak rule of law. Kazakh firms as well as foreign investors, in particular those from OECD countries but also from other countries such as Russia, most frequently mention bribery as one of the constraints in doing business.52

Perception of bribery and other forms of unfair treatment of business has continued to characterise the past 5 years since the first Investment Policy Review was undertaken by the OECD. According to various national and international reports, corruption remains a persistent national problem, although such reports recognise that Kazakhstan has made progress in its anti-corruption efforts. The level of perception of corruption in Kazakhstan is well documented.53 According to Transparency International’s annual Corruption Perception Index (CPI), whereas Kazakhstan occupied the 105th place among 178 countries surveyed in 2010, its score was 140th among 177 countries in 2013, and 123rd among 167 countries in 2015. During the period 2012-15, Kazakhstan had an average score of 26 on a scale from 0 (the highest level of corruption perception) to 100 (the lowest level of corruption perception) (see Figure 5.6). According to the Global Corruption Barometer survey commissioned by Transparency International covering the period from September 2012 to March 2013, 34 % of Kazakh citizens believed that corruption had increased “significantly” during that period, while another 45% were of the opinion that the level of corruption had not changed. One third of respondents reported they had given bribes to receive government services in the recent past.54

Figure 5.6. Perception of Corruption in Kazakhstan, 2014
Index from 0 (highly corrupt) to 100 (very clean), 2014
picture

Source: OECD (2016), Multi-dimensional Review of Kazakhstan: Volume 1. Initial Assessment, OECD Publishing, Paris.

 http://dx.doi.org/10.1787/888933452931

This type of pressure has reportedly affected first of all medium-sized companies. Corruption and other forms of pressure on businesses have nevertheless stymied larger domestic companies and foreign investors as well. During the past few years, bribery has primarily taken the form of facilitation payments, i.e. bribes or unofficial payments of a rather small amount.55 Foreign investors and domestic entrepreneurs have also complained about other problems that have arisen at the interface between companies and public authorities: arbitrary and excessive inspections by local and national tax and financial authorities; unfair regulatory compliance in areas such as housing and land registration; excessive (illicit) fees in relation to licensing; non-enforcement of prescribed rules.56

Favouritism and political connections have also been identified as undermining Kazakhstan’s investment climate. As already noted in Chapter 2, SOEs represent a large part of Kazakhstan’s economy, with the SOE sector dominated by a few national holding companies such as the National Welfare Fund Samruk-Kazyna aggregating SOEs operating in different economic sectors. The management of these companies is often appointed at the political level and it has extensive links to the public sector, including access to public funding from state-owned banks as well as credit facilities. State-owned enterprises also have an advantageous position in terms of licensing. Consequently, in 2014, the OECD called for sufficient accountability and transparency in these companies and emphasized the importance of external monitoring of their operations (OECD 2014c).

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.

Preventing misconduct in the public and private sectors

The Kazakh authorities have turned to different methods to alleviate some of the challenges that result from bribe demands. One has been to criminalise different forms of bribe payments to domestic public officials. Other ways to target the demand-side origins of bribes have involved the initiation of confiscation or forfeiture proceedings to recover property derived from corruption and the development of anti-money laundering measures to improve detection of criminal activity by law enforcement and regulatory authorities. Progress on the implementation of criminal legislation has nevertheless been mixed. In the third round of monitoring of the Istanbul Action Plan, it was noted that while Kazakhstan has taken steps forward in the area of anti-bribery policy, there has, on the whole, been a lack of progress in the areas of enforcement of criminal legislation (OECD, 2015d). In 2012, the OECD had already advocated stronger law enforcement (OECD, 2012a).

More recently, as an additional tool to reduce bribe demands, the authorities have launched new initiatives to strengthen the integrity of public service. Setting principles and standards of conduct for public officials through codes of ethics has been one way in which this has been carried out. Requiring financial asset disclosure for certain categories of public officials is another method the government has turned to. As from 2017, the new Law on Corruption Countermeasures, enacted on 1 January 2016,59 requires all state officials (and their spouses), as well as candidates to the President, members of Parliament and of local representative bodies (maslikhats) and heads of local executive bodies, to regularly disclose information about their assets and liabilities.60 The law also contains provisions aimed at avoiding or managing conflict of interest, establishing a system that requires certain categories of public officials to disclose conflicting interests. If a side activity creates the conflict, the official may be suspended from performance of the functions that constitute the conflict or be required to change his/her position.

The government has also recently turned to programmes to help businesses resist bribe solicitation and thus ensure their contribution to Kazakhstan’s anti-corruption efforts. A significant development that took place is the recent adoption of an “Anti-Corruption Charter” for businesses. Adopted in June 2016 by the National Chamber of Entrepreneurs – an umbrella organisation which brings together all commercial legal entities and individual entrepreneurs registered or recorded in Kazakhstan as well as the government of Kazakhstan –,61 it is open for signing by all companies regardless of their place of registration and industry. Although signing the Charter is voluntary, it provides a model for prevention as it introduces to the business community general features of an effective anti-corruption programme. In particular, the Charter recognises the importance for companies to have programmes or measures for preventing and detecting corruption in their business operations in line with the principles contained in Chapter VII of the OECD Guidelines for Multinational Enterprises (see also Chapter 7).

Enhancing integrity and effectiveness of public procurements

Kazakhstan has also progressively taken measures to address bribery in public procurement because of the heightened risks at this major interface between the public and private sectors. The continuous adoption of amendments to the legal and regulatory framework governing public procurement during the past years illustrates this trend. Public procurement is a key activity of Kazakhstan’s SOEs and also one of the largest government spending, accounting for around 43% of governmental expenses in 2010 (United Nations Economic and Social Commission for Asia and the Pacific, 2014). As acknowledged in the Anti-Corruption Strategy for 2015-2025, high levels of corruption in public procurement have characterised the past years. Businessmen have complained in particular about collusion, i.e. that technical specifications of tender documents were very often adjusted to particular suppliers.

To keep corruption at bay, and with the view to improving the business environment in Kazakhstan, steps have been taken to substantially modernise procurement. On 1 January 2016, a new law on Public Procurement, designed to facilitate and streamline the government procurement procedures and address corruption risks, came into force.62 The new law is an improvement compared to its predecessor as it is based on the principles of equality, free competition, non-discrimination and the independence of the supplier vis-à-vis the public buyer (OECD, 2016c). The law also contains several provisions aimed at upholding the principles of transparency and procedural fairness.63 As compared to previous legislation dating back to 2007, the law has also broadened the scope of application and reduced the number of exemptions from the public procurement regulations. This process has gone hand in hand with some streamlining of available appeal mechanisms for the oversight of the procurement process and the introduction of a monitoring mechanism to foster integrity. However, Kazakhstan’s public procurement system continues to suffer from an abundance of exceptions regulated in bylaws or ministerial orders that minimise the reach of the well-meaning new public procurement law. In particular, as already noted in Chapter 2, state-owned enterprises can organise purchases according to their own rules.

The government has also been increasing efforts to render electronic public bidding proceedings and make them accessible through the web. In 2010, Kazakhstan launched its electronic Government Procurement (e-GP) system with a view to improving and facilitating transparency (OECD, 2016a). Since then, the legislation specifies that public procurement processes should be conducted through the e-procurement portal (goszakup.gov.kz/) to minimize interaction between officials and potential bidders, thereby reducing bidders’ vulnerability towards bribe solicitation.64 International organisations such as the Asian Development Bank have reported that procurement in Kazakhstan now is largely executed through the electronic government procurement web portal launched in 2010.65 It nevertheless remains unclear what proportion of all government contracts are covered by the law. Also, as noted above, procurements of state-owned enterprises are not covered by the law and therefore it is likely that Kazakhstan’s e-procurement system does not apply to them.

Reforming the judiciary

As a response to the perception of weak rule of law and lack of professionalism in the judiciary judicial reform has been underway with the overall objective to strengthen foreign and domestic investors’ trust in Kazakhstan’s courts. Amendments were introduced in 2015 to the Law on Judicial System, with new rules that apply to the selection and disciplining of judges.66 The measures include toughening qualification criteria for the recruitment of judges by introducing a new requirement for a candidate to serve at least five years within the court system (or at least ten years as a lawyer) and a one-year trial period for newly appointed judges.67 Higher level judges are required to have lower court experience. The law, as amended, also provides for the establishment of an Academy of Justice for the purposes of professional advancement and training of judges. The professional activity of each judge (except judges with more than 20 years of judicial experience) will also now be assessed by a Court Jury every five years.68 Steps to increase the liability of judges for breaches of ethical standards and violations of the legislation have also been taken with the adoption in October 2016 of a new Code of Judicial Ethics, replacing the one dating from 2009.

In order to diffuse concerns about the lack of professionalism and independence of the judiciary, on 1 January 2016 a new Law on Supreme Judicial Council, replacing the previous one on the same subject, came into force.69 The law allegedly targets the independence and composition of the Supreme Judicial Council which, under Kazakh law, gives recommendations on the appointments of magistrates (judges are appointed by the President of Kazakhstan upon recommendations made by the Council). Membership in the Council has been broadened through inclusion of new state bodies; civil society representatives may become members of the Council upon the President’s decision. The independence of the Council from undue interferences is stipulated in the law.

Kazakhstan has taken additional steps to strengthen the performance of its justice system, by developing mechanisms tailored specifically to businesses’ legal needs. As seen in Chapter 3, this includes the establishment of a dedicated panel of judges at the court of Astana to hear investment disputes and new alternative dispute resolution mechanisms.

Providing channels of communication to companies to resist unfair treatment

These measures have gone hand in hand with the establishment of dedicated bodies to facilitate communication and consultation with investors, provide a channel to relay investors’ concerns to relevant governmental agencies, thus potentially influencing government activities, decisions, behaviour, regulations having an impact on the investment climate. Illustrations of this include the establishment of government-sponsored councils at the National Chamber of Entrepreneurs (NCE) of the Republic of Kazakhstan – the Council for Fighting Corruption and the Shadow Economy and the Council for the Protection of the Rights of Entrepreneurs – as well as the recently-established Commissioner for Protection of Entrepreneurs Rights (hereafter: the Business Ombudsman), also housed in the Chamber.

The National Chamber of Entrepreneurs’ Council for Combating Corruption has been operating since 2014.70 In addition to senior officials of the Chamber itself, it consists of accredited associations, representatives of government authorities – including officials of the Ministry for Investments and Development –, and members of parliament and the media. The Council’s primary purpose is to provide for the practical participation of businesses in Kazakhstan’s anti-corruption efforts. In 2014 as well, still within the Chamber, a Council for the Protection of the Rights of Entrepreneurs – bringing together parliamentary and civil society representatives, representatives of government agencies and state bodies, Kazakhstan’s business community, and experts in the field of law – was established to examine and resolve claims of entrepreneurs related to situations of corruption and other forms of administrative and legal abuse by state and local authorities. In April 2016, the Council was processing over 11,500 complaints coming from all regions of Kazakhstan.71 Breaches by public officials which give rise to criminal liability are referred to law enforcement authorities in the framework of co-operation agreements (memoranda of understanding) that have been signed with the General Prosecutor’s Office and the prosecutor’s office in all regions as well as in the cities of Almaty and Astana.

Still recently, following the examples of other countries in the region and beyond such as Georgia, Korea, the Russian Federation and Ukraine, Kazakhstan has stepped up its efforts to enhance dialogue with investors to alleviate some of the challenges that result from bribe and other illegal demands on businesses through the establishment of two dedicated Ombudsmen: one is called the Investment Ombudsman; the other is called the Commissioner for Protection of Entrepreneurs Rights (or Business Ombudsman).72 Both have been designed to address instances of unfair treatment of businesses by public officials; to quickly provide remedies; and, based on an assessment of complains addressed to them, to make proposals to the government on how to improve the business climate in Kazakhstan, including proposals to amend legislation and regulations (Box 5.14 below). The Investment Ombudsman has been operating since 2014. From its date of inception to the first quarter of 2016 the mechanism received some 150 complaints; out of 62 complaints received in 2015, 20 decisions had been solved in favour of investors.73 On its part, the Business Ombudsman institution was established in 2016. At the time of writing (third quarter of 2016), the institution had received 40 complaints; out of which 29 were under consideration (11 had been solved).74

Box 5.14. Main characteristics of the Investment Ombudsman and the Commissioner for Protection of Entrepreneurs Rights (the Business Ombudsman)

There are many similarities between the Investment Ombudsman and the Commissioner for Protection of Entrepreneurs Rights (the Business Ombudsman).

Functionally, both institutions have been designed to address instances of unfair treatment of businesses by public officials. As a result, both ombudsmen have been empowered to receive complaints of unfair practices against companies in addition to bribery such as repetitive tax audits, excessive licensing fees, threats, retaliation or other unfair regulatory enforcement actions by Kazakhstan’s public agencies.

Both are intended to be incidental to other anti-corruption efforts undertaken by the government in general and by specific state and local agencies. They are not intended to undermine existing legal processes but rather to complement them by providing an avenue to those companies thatseek a more informal platform through which to address their grievances and obtain, whenever possible, a speedy response to resolve issues. In short, they are not judicial tools, although both institutions may pass reports to law enforcement authorities where there are reasonable grounds to suspect a violation of the law. The Business Ombudsman may also file a lawsuit in court.

Both mechanisms rely on a kind of third party – the Investment Ombudsman at the Ministry for Investments and Development; the Business Ombudsman at the National Chamber of Entrepreneurs – who plays the role of being the facilitator between the complainant and the concerned public agencies. Both have access to relevant information in the possession of government bodies and officials and powers to make recommendations to such bodies and officials. At the same time, the mandate of both mechanisms – along the lines of similar institutions established in other countries – exclude the authority to exercise enforcement actions, including prosecution powers. Also, neither of the two ombudsmen has the power to override the illegal acts of other public agencies or to compel compliance with any recommendations.

Last but not least, both mechanisms also encompass an advisory role to the government. For example, the Investment Ombudsman is empowered to develop and submit to the government recommendations on improving legislation aimed at enhancing the investment climate. Both Ombudsmen are accountable to the executive branch of government: the Investment Ombudsman is appointed by and report to the Prime Minister; the Business Ombudsman is appointed and report to the President.

There are also differences. The structure and composition of Kazakhstan’s Investment Ombudsman is perhaps the most visible difference compared to the Business Ombudsman. Organisationally, the Investment Ombudsman functions are carried out by the Minister for Investments and Development of Kazakhstan, whereas the Business Ombudsman is housed in the National Chamber of Entrepreneurs; a separate secretariat, not formally rooted in government, supports the latter. There are also differences in the mandate accorded to each institution. Only the Business Ombudsman institution contemplates the right to publicly reports about the complaints it has handled and the way in which it has handled them. The Business Ombudsman has also its own website (http://ombudsmanbiz.kz/eng/) which publicises the mechanism and also allows the complainants to submit a complaint online.

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.

Policy recommendations

Kazakhstan is currently undergoing major administrative reforms aimed at facilitating and promoting investment. They have been launched in recognition that administrative simplification, the use of one-stop shops and specific tools that ensure a proper consideration of investors’ concerns during the early stages of policy-making can translate into increased investment. With a strong focus on administrative streamlining, these reforms may however miss the primary source of overlapping and conflicting administrative requirements, i.e. poor-quality legislation. Furthermore, these developments represent only a small part of a larger picture. The overall business environment continues to be weakened by bribery, favouritism and weak rule of law. The need to enhance the fight against bribery and other forms of abuse on entrepreneurs is a crucial challenge for Kazakhstan. Properly addressing business concerns in these areas requires determined implementation of several reforms.

Investment facilitation

  • Ensure that business views are taken into account in the design of future investment facilitation reforms: To-date many reforms in the area of investment facilitation in Kazakhstan have been driven by the desire to improve the country’s Doing Business rankings. In order to ensure that future reforms address adequately business needs, it is critical that the government seeks regular feedback from investors – not only large foreign investors – on the obstacles to doing business. The Investment Committee of MID or Kaznex Invest can play a useful role in this regard.

  • Ensure that the business community is aware of the functioning of the one-stop-shop (OSS) for business registration: The OSS was launched in pilot form in 2015, applying to strategic investment projects only, and extended to all firms in 2016. As the government operationalises the OSS, it should ensure that the business community is familiar with the services provided as well as provides the authorities with feedback as to the features that could be extended or improved.

  • Improve transparency of the process of creating new laws and regulations: Multiple, speedily-passed laws with conflicting or insufficiently defined requirements complicate the interpretation of administrative rules by firms and leave scope for arbitrary interpretation by the authorities, offering a breeding ground for corruption. Respecting advance notice requirements and involving a broad base of stakeholders in the ex-ante consultation process can help improve the status quo.

Investment promotion

  • Define a clear investment promotion strategy that would outline the goals and tools of investment promotion strategy in Kazakhstan. While in the past, the government used four year investment promotion plans linked to the country’s economic development plan (SPAIID and Vision 2050), it appears that no such plan currently exists. Best practices suggest that such strategy should be easily available to on-line, outlining clearly government’s goals.

  • Clearly define responsibilities and agree on modes of co-operation between different agencies involved in investment promotion activities in Kazakhstan. While Kaznex Invest serves as the national Investment Promotion Agency in Kazakhstan, several other agencies perform investment promotion activities. In order to avoid a waste of resources and ensure complementarity, some of their functions could be streamlined or resources and facilitates shared.

  • Improve the efficiency of Kaznex Invest and reorient its functions towards serving investors, not other government bodies: As Kaznex Invest matures as an organisation, it would be advisable that it learns from best practices in other countries to increase its effectiveness, currently evaluated as low, and engages in a full range of investment promotion activities, including aftercare services, organisation of SME-MNE linkage formation programmes and policy advocacy.

Addressing bribery and other forms of wrongdoing by public agencies and entities

  • Implement determinately anti-bribery and integrity measures, notably in the areas highlighted by the third round monitoring report on Kazakhstan under the Istanbul Anti-Corruption Action Plan and by the Integrity Scan of Kazakhstan undertaken under the auspices of the OECD CleanGovBiz Initiative.

  • Promote effective safeguards to increase transparency and fight bribery in civil service, notably through the development of efficient systems that proscribe conflicts of interests in line with the OECD Recommendation on Guidelines for Managing Conflict of Interest in the Public Service.

  • Further modernise justice institutions with the objective to improve their integrity and independence.

  • Develop an appropriate public procurement system in line with the OECD Recommendations on Public Procurement and on Fighting Bid Rigging in Public Procurement, especially in terms of transparency and accountability, oversight, and fair and equitable treatment for potential suppliers.

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Notes

← 1. In the framework of the OECD Revenue Statistics in Asia Project, a report by Kazakhstan on revenue statistics is expected to be finalized in the second half of 2016.

← 2. Article 28 of the Law No. 202-V “On Permits and Notification” of 16 May 2014.

← 3. The legal basis for the OSS is enshrined in Article 282 of Entrepreneurial Code of RK No. 375-V dated 29 October 2015.

← 4. Two recent studies – Corcoran and Gillanders (2012) and Jayasuriya (2011) – find a small significant effect, driven primarily by the “trading across borders” indicator.

← 5. For example, Bénassy-Quéré et al. (2007) find a positive impact of the quality of institutions on inward FDI independently of GDP per capita; Zhang (2007), Daude and Stein (2007) show the positive impact of regulatory quality on FDI, in particular in less developed countries; and Habib and Zurawicki (2002), Egger and Winner (2006), Wei (2000) and Al Sadig (2009) find a significant negative effect of corruption.

← 6. At that time, the country did not then have a systematic mechanism of open public consultation on either primary or secondary legislation in place and the available methods and procedures for impact assessment were limited and not obligatory for all legal drafts (OECD, 2014).

← 7. The Law No. 401-v “On Access to Information” of 16 November 2015 implemented the constitutional rights of all persons to receive and disseminate information by all means not prohibited by law. According to the Law, all draft laws and regulations are required to go through “public discussions” process on the Internet portal “Open Normative Legal Acts”. The Law No. 383-V “On Public Councils” of2 November 2015 implemented the state policy on the formation of public councils. Consultations via public councils have been mandatory in Kazakhstan since 2009 (OECD, 2014).

← 8. Article 63 of the Entrepreneurial Code sets out the rules for engagement of accredited business associations in assessing draft laws, regulations and international treaties and the accreditation process. Accredited business associations, together with other accredited bodies, can provide their views on draft laws and regulations submitted to the Expert Council for Private Enterprise by a central or local government body for expert opinion. Article 65 specifies that the government is to send draft regulations for an expert opinion of the Council for no less than 10 working days and, when doing so, accompany the draft law with an explanatory note that contains the results of regulatory impact assessment of the proposal legal act on business. The expert advice is advisory in nature and, according to Article 66, is “an essential supplement to the draft law concept”. Article 67 of the Code also specifies that all draft normative legal acts affecting businesses are subject to mandatory publication in the media, including Internet, prior to their consideration by the appropriate body or at the meeting of the Expert Council for Private Enterprise.

← 9. As of 1 August 2016, the number of draft laws and regulations posted on the portal was 1853. Website was viewed 45,408 times and comments by the public were submitted on 74 out of all 1853 laws.

← 10. Selection criteria for public councils were also criticised as being unclear in OECD (2017, forthcoming) and OECD (2014). Kazakhstan applies a commenting period of ten working days, while OECD countries with mandatory consultations periods allow on averagea period of four to six weeks. Best practices also suggest that comments obtained from stakeholders should be published and, whenever possible, commenting stakeholders should receive motivated responses as to how their suggestions were addressed (OECD, 2015b).

← 11. See Article 65 and 82-83 of the Entrepreneurial Code.

← 12. The review recommended an establishment of “a fully-fledged regulatory impact procedure when preparing regulations to capture the full consequences (benefits and costs) of draft regulations, building on the existing requirements for scientific expertise”.

← 13. Information based on the OECD consultations with stakeholders in Kazakhstan in 2015-16.

← 14. Address of the President of Kazakhstan to the nation, “Kazakhstan’s Way – 2050: Common aim, common interests, common future”, 17 January 2014.

← 15. Decree of the President No. 992 “On Strategic development plan of the Republic of Kazakhstan till 2020” dated 1 February 2010.

← 16. Decree of the President of the Republic of Kazakhstan No. 874 dated 1 August 2014.

← 17. Information based on written answers submitted by the government of Kazakhstan in the framework of the current Review.

← 18. Decree of the President No. 992 “On Strategic development plan of the Republic of Kazakhstan till 2020” dated 1 February 2010.

← 19. The sectors identified as priority sectors in the Vision 2050 are: agricultural production and processing; construction industry and construction materials; oil refining industry and infrastructure for oil projects; metallurgy and production of finished metal products; chemical, pharmaceutical and defence industries; power generation; and transport and communications sector (Government of Kazakhstan, 2010).

← 20. These are: ferrous and non-ferrous metallurgy; oil refining; petrochemical industry; food production; agro-chemistry; production of chemicals for industry; manufacture of vehicles, spare parts, accessories and motors; electrical equipment; manufacture of agricultural equipment; railway equipment manufacture; manufacture of machinery and equipment for mining industry; manufacture of machinery and equipment for oil refining and oil producing industry; construction materialsproduction; and “innovative sectors”, which are defined to mean mobile and multimedia technologies, nano- and space technology, robotics, genetic engineering, and renewable energies.

← 21. The Order No. 406 of the Minister for Investments and Development of 28 April 2016 approved the plan.

← 22. Decree No. 103 of 24 February 2016 includes a detailed plan on how to implement 12 out of the 19 recommendations made by the OECD at the time of the previous Investment Policy Review of Kazakhstan.

← 23. These are: ferrous and non-ferrous metallurgy; oil refining; petrochemical industry; food production; agro-chemistry; production of chemicals for industry; manufacture of vehicles, spare parts, accessories and motors; electrical equipment; manufacture of agricultural equipment; railway equipment manufacture; manufacture of machinery and equipment formining industry; manufacture of machinery and equipment for oil refining and oil producing industry; construction materials production; and “innovative sectors”, which are defined to mean mobile and multimedia technologies, nano- and space technology, robotics, genetic engineering, and renewable energies.

← 24. As mentioned earlier, SPAIID 2015-2019 identifies 6 priority branches (metallurgy, chemistry, petro-chemistry, mechanical engineering, material construction and food industry) divided into 14 sub-sectors (Decree of the President of RK No. 874 of 1 August 2014). The Decree of the Prime Minister of RK No. 13 of 14 January 2016 provides the actual list of sectors to be considered for priority investment projects.

← 25. As stipulated in Article 286 of the Code, “investment preferences are granted on the basis of an investment contract between the authorised body on investment and the legal entity of the Republic of Kazakhstan implementing an investment project.”

← 26. Information provided by the Government of Kazakhstan.

← 27. As per definitions embedded in the Entrepreneurial Code, investment priority project is an investment project implemented by the newly established entity (i.e. the state registration of such a legal entity needs to have been completed no earlier than 24 months before filing of an application for the investment incentive) under the identified priority activities with the amount of investment above the pre-identified threshold. The allocation of incentives is also subject to compliance with other conditions in paragraph 282 of the Entrepreneurial Code.

← 28. Chapter 8 “State Support of Private Enterprises” of theEntrepreneurial Code of RK No. 375-V dated 29 October 2015.

← 29. For a full overview of all available financial support instruments, see Government of Kazakhstan (2014: 114-117).

← 30. The recent creation of the Commission for Industrial Development and the National Institute for Industry Development was supposed to facilitate better monitoring and co-ordination (Government of Kazakhstan, 2014; OECD, 2016: 143).

← 31. The implementation of the program was supported by the Asian Development Bank (ADB), based on a framework agreement on co-financing signed in May 2014.

← 32. See, for example, Khakimzhanov and Seitenova (2013) for an overview and assessment of Kazakhstan’s industrial policies planning and implementation.

← 33. The programme has been approved by Decree of the Government of Kazakhstan No. 168 dated 31 March 2015.

← 34. For example, while SMEs contribution to GDP is about 25% in Kazakhstan, the corresponding shares in such OECD countries as Poland and Turkey are 47% and 59%, respectively. The share of population employed in the SME sector in Kazakhstan (of 26-30% in the past five years) is also much lower than in many OECD countries, such as the United States and Turkey, where it reaches 54% and 81%, respectively. Also, even though in January 2014 the number of registered small enterprises (small companies, individual entrepreneurs, and farmers) reached 1.5 million, only 56.4% were economically active and over two thirds were in the form of individual entrepreneurship without the creation of a legal entity (World Bank, 2015b).

← 35. The goals of the national cluster policy have been outlined in the Concept for formation of the prospective national clusters in Kazakhstan till 2020, approved by the Government Decree No. 1092 dated 11 October 2013.

← 36. They are primarily regulated by the Law No. 469-IV “On Special Economic Zones in the Republic of Kazakhstan” of 21 July 2011, most recently amended in 2014 and 2015.

← 37. The amendments to the Law on SEZs were passed 27 October 2015.

← 38. See WTO (2015a, §0933).

← 39. See WTO (2015a, §0934). Following that date, the goods of juridical persons which had been registered and active in SEZs and free warehouses prior to Kazakhstan’s accession to the WTO would continue to enjoy the treatment with respect to local content requirements, sufficient processing, and exemptions from tariffs and taxes (WTO, 2015a: §0934). In addition, goods imported into free warehouses and SEZs under provisions that exempt imports from non-EAEU Members from customs duties and certain taxes, would be subject to those duties and taxes and customs formalities when released to the rest of the territory of Kazakhstan and the territory of the EAEU; and if those imported goods were substantially transformed within the territory of an SEZ or in a free warehouse, the duties and taxes that would otherwise have been assessed for those goods are to be paid when the final products enter the rest of the territory of Kazakhstan and the territory of the EAEU. See WTO (2015a: §0896).

← 40. See WTO (2015a: §0585). Relevant subsidies are specified in Table 4 in WTO (2015a). It was also confirmed that Kazakhstan would not invoke anyof the provisions of Articles 27 and 28 of the SCM Agreement, which relate to exceptions and transition periods in the application of the SCM Agreement available to developing countries. See (WTO 2015a: §0585)

← 41. In addition, the IPA’s legal status and reporting structure as well as the quality of the materials it presents on its website is also found to impact the volume of the FDI attracted (Harding and Javorcik 2007, 2011). In particular, subunits of ministries are found to be less effective in attracting FDI than agencies with a more autonomous status and accountability to an external entity positively affect agencies’ performance. This confirms some of the earlier case study findings (Wells and Wint, 2000) and complements a cross-country study by Morisset and Andrews-Johnson (2004), which demonstrates that, on average, the IPA’s budget is positively correlated with increase in FDI flows, once the per capita income and the quality of investment climate are controlled for.

← 42. For example, the National Institute for Technological Development has several relevant functions in the area of attracting and promoting investment in technology-intensive activities; the National Institute for Industrial Development supports the planning of the national cluster policy; and the National Institute for Local Content creates and maintains a database of local suppliers and helps promote the use of local content. See Article 246 §4 of the Entrepreneurial Code.

← 43. According to the government, the Council has offices in more than 70 countries.

← 44. United States (Washington), Germany (Berlin), France (Paris), China (Beijing), UK (London), Italy (Rome), South Korea (Seoul), Iran ( Tehran), Japan (Tokyo),India (Delhi).

← 45. United States (New York), Germany (Frankfurt), Turkey (Istanbul), UAE (Dubai), China (Beijing).

← 46. E.g. the IPA of Netherlands has 27 foreign offices and UKTI professional advisers in over 100 countries.

← 47. In 2014, the government adopted five national investment priority industries to be promoted by Austrade, which are listed on Austrade’s website, and towards which the agency is mandated to attract investment into.

← 48. e.g. National Institute for Industrial Development charged with developing inputs into national cluster policy and a map of enterprises in different regions, and could also provide relevant inputs.

← 49. The ILP was created in 1996 to allow both local suppliers and large buyers to benefit from income tax reductions when they contribute to building productive capacity of local firms and improving the quality of their services. 906 SMEs were registered under the ILP by 2007, with 128 supplying to MNEs or large companies. The sectors vary, but one of the most recent successes of the ILP was the increased sourcing of global supermarket, such as Tesco, from local food processors (OECD, 2013: 145).

← 50. In Singapore, the Economic Development Board (EDB) organised supplier development programmes whereby a manager in a foreign firm was paid by the EDB to select and develop local suppliers. 32 partnerships were formed between 1986 and 1994 involving 180 domestic suppliers. Productivity of suppliers rose by 17% already in first stages of the project. In Ireland, the country’s Industrial Development Agency (IDA) led a consortium of agenciesthat identified potential linkages in a range of sectors, developed a group of domestic suppliers, and offered buyer support and development services. Between 1985 and 1992, foreign affiliate increased their local purchases of raw materials by half and their purchases of services by one third (World Bank, 2005: 172).

← 51. Kazakhstan is currently undergoing an OECD review of its innovation system (OECD, 2016, forthcoming).

← 52. The World Economic Forum (2016), The Global Competitiveness Index 2015-2016.

← 53. American Chamber of Commerce in Kazakhstan, Improving Kazakhstan’s Investment Climate: Top Ten Barriers to Foreign Investment, Amcham White Paper May 2014; Ernst & Young’s Attractiveness Survey: Kazakhstan 2014 (Ernst & Young, 2014), p.20; Survey of representatives of over 100 Russian companies operating in Kazakhstan in Dossym Satpayev, Corruption in Kazakhstan and the Quality of Governance, IDE Discussion Paper No. 475, August 2014, p.22.

← 54. In addition to international organisations, domestic civil society and business organisations, such as the National Chamber of Entrepreneurs of Kazakhstan, the Sange Research Centre and Transparency Kazakhstan, regularly conduct independent research on corruption in the country. The now defunct Financial Police Agency (reorganised in March 2015 into a state body to report directly to the president) also periodically conducted sectoral studies of corruption risks. Other government institutions have regularly conducted surveys of corruption prone areas. The print media also regularly expose publiccorruption and government abuses of authority.

← 55. Transparency International, Global Corruption Barometer 2013.

← 56. Facilitation payments are payments made to induce public officials to perform their functions, such as issuing licenses or permits (see the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions). For example, according to media reports, in 2011 a subsidiary of a major British catering and services company established in Kazakhstan would have made small facilitation payments to the country’s customs officials in order to release goods from customs (The Guardian, 22 June 2015). From 2003 to 2005, a Kazakh subsidiary of Pride International Inc., which owns and operates oil and gas drilling rigs throughout the world, allegedly paid bribes totalling USD 364 000 through a freight forwarding agent and a tax consultant to Kazakh government officials to reduce customs-related penalties and taxes, and to otherwise obtain favourable customs treatment (source: U.S. Securities and Exchange Commission (SEC) Digest Numbers D-86, D-85, D-84, and D-83).

← 57. American Chamber of Commerce in Kazakhstan, Op. cit.; “Doing Business in Kazakhstan”, United States Diplomatic Mission to Kazakhstan website, http://kazakhstan.usembassy.gov; “2015 Investment Climate Statement- Kazakhstan”, US Department of State website, www.state.gov; “Gani Kasymov: “It is important to createthe most favourable conditions for the preservation of business”, Atameken (National Chamber of Entrepreneurs of the Republic of Kazakhstan) website http://almaty.palata.kz/en/news/22238; information collected by the Ministry for Investments and Development on the basis of complaints addressed to the Investment Ombudsman.

← 58. For a comprehensive account of Kazakhstan’s anti-corruption policies up to 2015: OECD Anti-Corruption Network for Eastern Europe and Central Asia (ACN), “Anti-Corruption Reforms in Kazakhstan. Round 3 Monitoring of the Istanbul Anti-Corruption Action Plan (October 2014); Istanbul Anti-Corruption Plan, “Third Round Monitoring. Progress Updates: Kazakhstan”, 15th ACN Istanbul Action Plan Meeting on 23-24 March 2015.

← 59. The Anti-Corruption Strategy was approved by presidential decree No. 986 dated 26 December 2014.

← 60. Law of the Republic of Kazakhstan No. 410-V dated 18 November 2015 “On Corruption Countermeasures”.

← 61. As from January 2020, certain information will be made available to the public.

← 62. Membership in the National Chamber is compulsory for everyone engaged in business in Kazakhstan. The Charter is the result of work undertaken by the Chamber’s Council for Combating Corruption, whose mandate is to provide for the practical participation of businesses in Kazakhstan’s anti-corruption efforts.

← 63. Law “On Public Procurement” adopted on 4 December 2015, complemented by the new “Public Procurement Rules” approved on 11 December 2015.

← 64. For example the new law provides that 10 days prior a tender, technical specification will be publicly available and the public will have the opportunity to submit comments.

← 65. In addition, the Law “On Public Procurement” adopted on 4 December 2015 foresees the conclusion of contracts in electronic format via the e-procurement portal.

← 66. Asian Development Bank, “Sector Assessment (summary): Public Sector Management”, Countercyclical Support (RRP KAZ 49083).

← 67. Constitutional Law of the Republic of Kazakhstan “On Amendments and Additions to Constitutional Law of the Republic of Kazakhstan “On the Judicial System and Status of Judges dated 25 December 2000 No. 132-II”.

← 68. Previously, two years of working experience was enough to become a candidate for a judge.

← 69. A Court Jury is a special commission consisting of experienced judges for the purposes of judges’ professional activity assessment as well as for consideration of judges’ resignation and disciplinary liability issues.

← 70. Law of the Republic of Kazakhstan dated 4 December 2015 No. 436-V “On the Supreme Judicial Council of the Republic of Kazakhstan”.

← 71. The Council was established by the order No. 81 of the Chairman of the Board of NCE “Onthe establishment of the Council on Fighting Corruption and the Shadow Economy at the National Entrepreneurs of the Republic of Kazakhstan ‘Atameken’” dated 9 April 2014, as amended by the order No. 95 dated 27 April 2016.

← 72. Source: Website of the National Chamber of Entrepreneurs of the Republic of Kazakhstan ‘Atameken’, 7 April 2016, accessed on 21 June 2016: almaty.palata.kz/en/news/22238. Complains from the capital city of Astana accounted to only 9% of the total number of complaints submitted to the Chamber.

← 73. Both institutions are regulated under Chapter 28 of the Entrepreneurial Code of the Republic of Kazakhstan No. 375-V of 29 October 2015.

← 74. Data provided by the Government of Kazakhstan (June and September 2016) and statistical data displayed on the Ministry for Investments and Development website (accessed on 9 August 2016): http://invest.mid.gov.kz/en/news/2015-investment-ombudsman-helped-20-companies-working-kazakhstan.

← 75. Data provided by the Government of Kazakhstan (June 2016).

← 76. American Chamber of Commerce in Kazakhstan, Improving Kazakhstan’s Investment Climate: Top Ten Barriers to Foreign Investment, Amcham White Paper, May 2014, p. 29. In June 2016 the International Labour Organisation (ILO) urged the government to amend the provisions of the Law on the National Chamber of Entrepreneurs to ensurethe full autonomy and independence of employers’ organisations: See Chapter 7 on employment and industrial relations.