Chapter 6. Trade policy and the impact of WTO entry

Further opening to international trade and investment: Kazakhstan’s WTO entry

Cumulatively, WTO entry was estimated to increase Kazakhstan’s GDP by 3.7% in the medium- and 9.7% in the long run (with heterogeneity across economic sectors).3 The opening of services sectors to FDI was predicted to have by far the largest impact on the Kazakh economy (over two thirds of total gains) (Figure 6.1). It is discussed first. While the impact of the tariff reform is predicted to be small, the positive effect of common WTO rules on the stability and predictability of Kazakhstan’s tariff regime can be important (i.e. tariff bindings, customs valuation rules, etc.), and is discussed in this section as well. In some other areas, further reforms, going far beyond the country’s WTO current commitments, will be required to help meaningfully reduce trade costs faced by firms. This applies, among others to trade facilitation and other reforms that aim to reduce at-the-border and behind-the-border barriers to trade, be it through changes to domestic regulatory process and closer co‐operation with trading partners. Finally, investment in physical infrastructure for trade (i.e. road, railroads, etc.), including through greater participation of private sector infrastructure, will also play an important role.

Figure 6.1. Estimated impact of WTO reforms on Kazakhstan’s GDP (in the medium run)

Source: Authors elaboration based on calculations in Jensen and Tarr (2007).

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Reforms in services sectors and other reforms with impact on investment

As mentioned above, pre-accession studies predicted that, among all the WTO-related reforms, the opening of services sectors would have the largest impact on country’s economic welfare (accounting for two thirds of total gains or 2.7% of GDP in the medium run, see Figure 6.1). Kazakhstan has indeed made specific commitments in ten services sectors, including 116 sub-sectors, in its Schedule of Commitments under the WTO General Agreement on Trade in Services (GATS) (WTO, 2016c). The country also implemented a number of reforms liberalising its FDI regime throughout the 19 year-long time WTO accession period during which the terms and conditions of its entry were negotiated. Therefore, many reforms had been undertaken before the country acceded to WTO as well as in 2015 and early 2016 in order to ensure full compliance with the terms of its entry.

Figure 6.2 illustrates the impact of WTO reforms on Kazakhstan’s FDI regime, in 2016 and 2020, by calculating the likely effect of the implementation of WTO commitments on the country’s score on the OECD FDI Regulatory Restrictiveness Index. As can be seen, WTO commitments will help remove restrictions to FDI in some sectors Kazakhstan. For example, in telecommunications, the country committed to removing the maximum foreign equity limit in fixed-line telecommunications (of 49%), which had previously contributed to the Kazakhstan’s elevated score on the FDI Index (Figure 6.2), within 2.5 years from its accession. Similarly, in the case of financial services, the commitment to allow branches of foreign-owned banks by 2020 will have a further liberalising effect.

Figure 6.2. FDI Regulatory Restrictiveness Index in Kazakhstan by sector after the WTO entry, 2015, 2016 and 2020

Source: Authors’ elaboration based on WTO (2015a; 2015c and 2015c) and the OECD FDI Restrictiveness Index.

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Kazakhstan has also made horizontal commitments that will impact the degree of its openness in all services sectors. (See Table 6.1 below and Annex 6.A1 for a summary of the country’s WTO commitments in this area.) This applies, among others, to the country’s commitments relating to its local content policies (in mining and more broadly) and rules on hiring of foreign staff. For example, the requirement of local content in goods applied in the subsurface sector was removed altogether, and the share of foreign executives, managers and specialists that can be hired as intra-corporate transferees by firms is not subject to the national foreign labour quota (see Table 6.1). In addition, by 2020, the economic needs test (ENT) will no longer apply to foreign managers and specialists hired as intra-corporate transferees. As a result of these changes, the average FDI Index score of Kazakhstan would fall from 0.139 in 2015 to 0.074 (i.e. around the OECD average) by 2020 (Figure 6.2). Still, the commitments relating to local content and hiring of foreign staff are subject to several transition periods and exceptions (Table 6.1), which means that firms may not immediately perceive the results. For example, exceptions exist in case of local content requirements applied in the subsurface sector (up to 2021), the automotive sector (up to 2018) and in special economic zones (SEZs) (up to 2017), and purchases by state-owned firms.4 In the area of hiring foreign staff, also several conditions and phase-out periods apply.5 In addition, as also noted in Chapter 2, the government will need to ensure that the administrative procedures in this area do not serve as a de facto barrier to hiring foreign personnel, impeding firms’ ability to hire talent and compete. As discussed in the next section, the country has made some commitments relating to regulatory transparency in services sectors in which it made specific GATS commitments to ensure that licensing requirements and other administrative procedures do not pose a barrier to entry were FDI restrictions were removed.

Finally, in several relatively closed sectors Kazakhstan has made little or no commitments. For example, in the case of air transport, one of the most protected sectors in Kazakhstan as measured by the FDI Index, no commitment regarding the lifting of the maximum foreign equity limit was made.10 While the government still unilaterally lifted the limit in early 2016, it is free to reinstate the limit in the future, given the lack of the WTO commitment; and the plans to do so appear to already exist (see Chapter 2). Such uncertainty is likely to de facto deter any investments above the 49% threshold. Last but not least, no commitments have been undertaken in regards to the maximum rental time of land for agricultural and forestry purposes by foreigners (currently of 10 years). As can be seen in Figure 6.2, the restriction contributes to the country’s relatively high score on the FDI Index. The maximum rental time of such land by foreigners in Kazakhstan is much shorter than in OECD countries, and may be holding down Kazakhstan’s potential in agricultural production (OECD, 2013). Given high sensitivity of reforms in this area, illustrated by recent protests (see Chapter 7), further liberalisation appears difficult in the short term, and would require the government to engage in further communication and dialogue with the population on the reform’s likely consequences – both real and perceived.

In summary, while changes to horizontal or sector-specific restrictions to FDI required by the WTO entry have helped significantly liberalise Kazakhstan’s FDI regime over time, in some sensitive areas, identified as restrictive or burdensome in the past (OECD, 2012), the impact will be felt only gradually and the removal of de jure restrictions on FDI will need to be accompanied by further investment facilitation reforms to ensure improved market access in practice.

Tariffary and quantitative restrictions on trade

Even though tariff reductions were estimated to account for only 6% of the estimated gains from Kazakhstan’s WTO entry, the commitments in this area can have important implications on the stability and predictability of the country’s trading environment that are difficult to capture in standard trade models. For example, tariff bindings can help prevent future tariff increases above the agreed upon levels and the common WTO rules on customs valuation and tariff classification reduce the variation in tariff application in practice. These aspects are described in more detail below.

The WTO tariff binding means that a country cannot apply tariffs above the level agreed as part of its Goods Schedule with other WTO members (see Box 6.1). Following the WTO accession, Kazakhstan’s overall level of import tariffs has been bound at, and cannot exceed, 6.1%.11 This implies a tariff reduction from the current tariff level and can help provide an additional stabilising mechanism to Kazakhstan’s tariff system, which was subject to important tariff increases over the past couple of years (Figure 6.3) as a result of the country’s integration into the Eurasian Customs Union (ECU), and later the Eurasian Economic Union (see Box 6.2). While in the early 2000s the average applied import tariff level in Kazakhstan was 2%, below the OECD average at the time (of 4%), it increased three times following the entry into force of the ECU and adoption of the common external tariff (CET) in 2010.12 One simulation (World Bank, 2015a) foresees that, upon full implementation of WTO reforms by 2020, Kazakhstan’s import tariff levels would have largely returned, on trade-weighted basis, to its pre-ECU period and tariff dispersion would have reduced as well. The authorities are currently negotiating with other ECU members an administrative mechanism that will allow Kazakhstan to implement such tariff reductions without imposing additional tariff reductions onto the other ECU members, but its administrative implementation may nevertheless impose transaction costs at the border on certain investors andtraders.

Figure 6.3. Applied import tariffs in Kazakhstan and OECD countries (in %), 2004-14

Note: Simple average is shown. Tariff data for Kazakhstan for years 2005, 2006, 2007, and 2009 is not available.

Source: Authors’ calculations using UN TRANS database.

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Besides the stabilising effect of tariff binding on the country’s tariff regime, common WTO rules on customs valuation16 can also help reduce the variation in tariff application in practice.17 This is because Kazakhstan’s Customs Code (under review at the time of writing), the ECU Customs Code, and the ECU Agreement on Customs Valuation are now subject to relevant WTO rules on customs valuation, limiting the risk of arbitrary treatment at the border and imposition of higher import values than suggested by the actual value of goods being shipped. The implementation of additional trade facilitation provisions enshrined in the WTO Trade Facilitation Agreement, such as a more extensive use of advanced rulings, could also help improve the practicability of customs processes in practice (see next section).

Last but not least, the WTO rules on quantitative trade restrictions can also have a stabilising effect on Kazakhstan’s trading environment. Prior to the WTO entry, Kazakhstan regularly took recourse to quantitative restrictions on exports in the agricultural sectors. Namely, it frequently introduced bans on exports of certain grains and other agricultural products (see Table 6.2 below and OECD, 2013) in an attempt to control domestic prices. At times, these measures introduced additional uncertainty into the market and reduced local firms’ export opportunities (OECD, 2013). Export bans and quantitative restrictions on commercial products are prohibited under WTO rules, except in certain circumstances justified under existing WTO provisions.18 Should these rules and potential challenges under the WTO Dispute Settlement Mechanism dissuade Kazakhstan from use of such measures, it could reduce the noise in market signals and have a stabilising effect on investment opportunities of firms operating in the sector.19

The simultaneous effect of being bound by different rules on tariff, quantitative restrictions and other measures with impact on trade can help the government ensure greater coherence in the area of trade policy. Being subject to WTO rules on export restrictions, subsides, and other rules, means that such actions should be less frequent in the future, and may allow for an emergence of clearer market signals in the agricultural and other sectors.

Trade facilitation

WTO entry also means being subject to the growing disciplines on trade facilitation and rules on certain border procedures, notably as enshrined in the WTO Trade Facilitation Agreement (TFA). Being a landlocked country, improving the efficiency of border procedures as well as trade infrastructure should be a priority for Kazakhstan to attempt to compensate for some for the geographical disadvantages. Meanwhile, Kazakhstan is scoring poorly on efficiency of its border procedures. For example, Kazakhstan ranked 119th out of 190 economies in the area of ease of trading across borders on the World Bank’s Doing Business indicators in 2017, which is significantly below the average score and has remained unchanged for several years. This appears to be consistent with the insights from the available firm-level data: it takes longer for an average firm to clear exports and imports through customs in Kazakhstan than elsewhere in the region; and only 5% of firms do export, as compared to 19% in the region as a whole (Figure 6.4).

Figure 6.4. Firms’ trade experience in Kazakhstan compared to other countries, 2013

In %

* This indicator is computed using data from manufacturing firms only.

Source: Word Bank’s Enterprise Survey, 2013.

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The World Bank (2015a) estimated that, if reforms associated with Kazakhstan’s WTO entry were to be accompanied by a 30% decrease in the costs of trade facilitation, the overall impact on welfare would increase by about one percentage point of GDP per year (which implies a nearly 5% GDP gain by 2020). The OECD analysis using the OECD Trade Facilitation Indicators (TFI) also suggests that implementation of a comprehensive trade facilitation reform, involving improvements across all eleven areas covered by the TFA, could reduce trade costs by about 13% in upper middle-income countries like Kazakhstan (Box 6.3). While these estimates likely represent the upper bound of possible gains, government could consider undertaking key reforms to reap benefits. For example, streamlining and automating border processes, including through the use of risk management processes – where Kazakhstan lags most behind the average – are found to have the most impact on trade costs in countries like Kazakhstan. This area should hence be prioritised by the government, as already envisaged in the President’s 100 administrative steps and other strategic documents.20

Box 6.3. What are the OECD Trade Facilitation Indicators and how does Kazakhstan perform?

As goods cross borders many times, first as inputs and then as final products, fast and efficient customs and port procedures are essential. Unduly complex processes and documentation raise costs and cause delays, with businesses and consumers ultimately bearing the cost. Conversely, countries where inputs can be imported and products and services exported within short and reliable timeframes are more attractive investment locations.

To help governments improve their border procedures, reduce trade costs, boost trade flows and reap greater benefits from international trade, OECD has developed a set of Trade Facilitation Indicators (TFIs) that identify areas for action and enable the potential impact of reforms to be assessed. The OECD indicators cover the full spectrum of border procedures for more than 160 countries across all income levels, geographical regions and development stages. The indicators seek to reflect not only the regulatory framework in the concerned countries, but delve, to the extent possible, into the state of implementation of various trade facilitation measures. The TFIs track the policy areas of the WTO Trade Facilitation Agreement (TFA), namely:

• Information availability;

• Involvement of the trade community;

• Advance rulings;

• Appeal procedures;

• Fees and charges;

• Formalities (Documents, Automation, Procedures);

• Border agency co-operation (Internal and External);

• Governance and impartiality.

Estimates based on the indicators provide a basis for governments to prioritise trade facilitation reforms and to mobilise technical assistance and capacity-building efforts in a more targeted way. Such analysis shows that the potential trade costs reduction from implementation of all the options contained in the TFA range between 10.4% and 17.4% for all countries, and about 13% for upper middle-income countries like Kazakhstan. Streamlining and automating border processes, the use of risk assessment as well as the use of advance rulings are estimated to have the largest impact on reducing trade costs of such countries (Moïsé and Sorescu, 2013; OECD, 2014). Given that Kazakhstan lags behind its income group in the area of formalities (see figure below), further progress in streamlining and automating border procedures could have a sizable impact.

Kazakhstan’s performance on the OECD Trade Facilitation Indicators, 2016

Source: www.oecd.org/trade/facilitation/indicators.htm.

Further reform in this area could include implementing the Single Window for Trade,21 operationalising the Authorised Economic Operators programme,22 introducing the electronic customs clearance and payment systems23 as well as improving the border risk management system and intra-agency co-operation in Kazakhstan.24 To support such trade facilitation reforms, the authorities are in the process of implementing several modernisation programmes.25 They also undertook a diagnosis of the country’s readiness to implement the WTO TFA provisions.26

While these efforts are laudable, given that several of the on-going reforms have been planned for years,27 better monitoring of progress as well as an allocation of adequate resources and targeted capacity-building programmes will be crucial to help the government achieve the intended results. One tool to facilitate monitoring is a conduct of a Time Release Study (TRS), which has been used in numerous OECD and other economies to trace average time spent by goods at each stage of the border process, help identify bottlenecks, and monitor reform implementation (Box 6.4). The experience of other countries shows that TRS can be a powerful tool to identify specific lacuna in the entire body of border processes (not only customs procedures), facilitate inter-governmental coordination, and support strategic planning and oversight of on‐going reforms. The government could undertake such a study in collaboration with the World Customs Organisation and consider making its results publically available to help raise awareness about the progress made and remaining challenges as well as help generate support for reforms.

Box 6.4. Time Release Study: A trade facilitation benchmarking tool

A Time Release Study (TRS) is a standardised method to assess the trade facilitation performance of Customs administrations and other agencies and private entities operating at the border (e.g. brokers, forwarding and shipping agents, carrier.) It was elaborated following similar initiatives undertaken by the Customs Administrations of Japan and the United States and endorsed by the WCO in 1994, then shaped into a methodological Guide in 2002. TRSs serve the principles of the WCO Kyoto Convention to simplify and harmonise customs procedures internationally to reduce overall trade transactions costs. A TRS involves a detailed diagnostic of the efficiency of border processes and identifies potential corrective actions. As such, it is a powerful performance assessment tool for customs and other border services and provides a pre-reform benchmark that can serve a number of policy purposes:

• When undertaken over a series of years, it allows monitoring the evolution of progress and assessment of the efficiency of particular reform measures. For example, Japan’s successive TRS exercises (there were 9 between 1991 and 2010) helped sustain reforms that reduced sea cargo intervals from 7 days in 1991 to 2.6 days in 2009 whereby customs clearance takes on average 3.1 hours (see the figure below). Japan customs also use TRS to measure impact of particular reforms such the implementation of the Authorised Economic Operator (AEO) status. In 2009, AEOs in Japan experienced average times between goods arrive and release over a day shorter than non-AEOs.

• Today a number of countries use TRS as a tool for internal benchmarking and to support strategic planning, including the United States, Japan, Mexico, Korea, Australia, Colombia and others. For example, the Australian Customs and Border Protection Service conducted a Time Release Study (TRS) in 2007, published the results in 2009, and decided to conduct the study on an annual basis as an aid to strategic planning. The TRS has covered all border-related procedures, including Sanitary and Phytosanitary (SPS) procedures managed by 41 other concerned government agencies, and identified 1.3 days of interval between the arrival and release for sea cargo.

• Most recently, countries have also started using TRS in an international and regional context. One example is the Trans-Tasman TRS carried out in 2010 as a joint effort by the Australian and New Zealand Customs Services in order to identify opportunities for streamlining trade between the two countries. Customs officers in both services worked together on the scope of the TRS, and the study lead to revision of 4 border procedures responsible for delays. Another example is a pilot TRS carried out in a northern corridor of the East African Community (EAC) which aimed to identify bottlenecks in the flow of cargoes from/to Mombasa sea port in Kenya to/from customs office in Kampala, Uganda.

Monitoring of trade facilitation reforms using TRS in Japan, 1991-2009

Source: Japanese Customs.

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Overall, a TRS represents a powerful performance assessment tool for customs and other border processes, which can help monitor progress over time, aid strategic planning, and facilitate reform in an international context. As such it can support countries efforts to increase their integration into GVCs, and on a global level to support the overall goal to harmonize customs procedures and reduce trade transaction costs.

Source: OECD, Matsuda (2012).

In the long run, a substantial improvement in the time and reliability of border procedures coupled with increased investment and realisation of infrastructure projects can help significantly reduce the cost of trading in Kazakhstan. While the WTO accession, including the ratification of the WTO TFA by Kazakhstan, will assist the government in the process, further domestic reform, including effective implementation and monitoring of progress will be crucial to help tangibly reduce the costs of trading in Kazakhstan.

Other regulatory barriers to trade and transparency

Beyond improvements in trade facilitation, a progressive removal of other non-tariff barriers (NTB) to trade (such as overly burdensome technical regulations or opaque licensing requirements), and improving the overall quality and predictability of the regulatory environment for trade activity, will be critical to help increase trade opportunities for Kazakh firms and making Kazakhstan a more attractive investment destination. For example, a recent survey by UNECE (2014) shows that, on average, NTBs affect 30% of importers and exporters in Kazakhstan, and in some sectors they significantly prolong the time it takes to import and export.28 As Kazakhstan has the ambition of diversifying its trade structure away from oil products towards goods and services that may face higher regulatory requirements (such as agro-food or manufactured products), engaging in negotiations with its main trading partners–at the EAEU level but also beyond–about progressive reduction or NTBs will be an important aspect of reducing trade costs faced by firms.

It appears that EAEU-level regulations are the main source of NTBs in Kazakhstan.29 Proving compliance with technical regulations, including sanitary and phyto-sanitary (SPS) and conformity assessment, prove most burdensome. Kazakhstan is hence facing a double challenge of using EAEU integration to reduce the regulatory barriers to trade stemming from other EAEU members’ legislation, while avoiding establishing new barriers, at the EAEU level, which could render trade with third countries more difficult (i.e. cause trade diversion).30 The government is conscious of this challenge, and recognises that further progress in this area will require changes to the domestic and EAEU-level regulatory processes, progressive adoption of international standards, improvements in the accreditation and certification infrastructure as well as further coordination with the other trading partners through further international trade agreements and regulatory co-operation (discussed next).

WTO accession does involve certain transparency-enhancing measures and measures relating to technical barriers to trade (TBT) that will be binding to Kazakhstan upon its entry. For example, several WTO provisions require Members to publish laws, decrees, resolutions or other measures of general application pertaining to or affecting trade in goods, services or intellectual property rights before they can be enforced.31 Kazakhstan also committed to publish all laws, regulations, decrees, decisions and administrative rulings, whether issued or adopted by the Republic of Kazakhstan or by a competent body of the EAEU; and to providing a reasonable time to WTO members and other interested parties to comment (normally not less than 30 calendar days) before the measure is adopted.32 The Protocol also stipulates that Kazakhstan will comply with notification requirements embedded in various WTO Agreements,33 provide the right for an independent review of its conformity with WTO obligations;34 and undergo periodic reviews of its trade policy by the WTO Secretariat.

In addition, as mentioned earlier, Kazakhstan made several broad commitments relating to governance of the country’s services sectors in its WTO Accession Protocol. For example, it committed to ensuring that licensing procedures would not in themselves constitute a restriction on the supply of service in the services sectors in which it made specific WTO commitments.35 It also agreed to abide to a set of specific guidelines relating to the process of setting and implementing licensing requirements and procedures in these sectors (e.g. regarding their publication, review and approval process, and notification about the final decision).36 The government also committed to ensuring that relevant regulatory authorities in these sectors would not be accountable to any service suppliers they regulated; and that, where practicable, regulations of general application in these services sectors shall be published in advance; an opportunity to comment regulatory proposals shall be provided to interested parties, and a reasonable time between the publication of a proposed regulation and its entry into force shall be ensured.37 If the opportunity of existence of these specific commitment is seized by the Government to improve the regulatory transparency and quality in these sectors, it could translate into a more pro-competitive and transparent regulatory environment in these sectors, making them more attractive for investment.

All these measures help monitor the changes in Government’s actions in the area of trade policy and, hence, can help increase their transparency. They are subject to the WTO dispute settlement mechanism and have been employed in disputes more frequently over time, which may increase compliance.38 Other WTO members are also bound by the same WTO rules in this area, and Kazakhstan can monitor and require notifications or explanations from other WTO members as well. Still, such obligations remain relatively broad, and rarely supplant the need for, on the one hand, continued domestic reform to improve the quality of domestic regulations and remove unnecessary administrative burdens to trade and, on the other, further co‐operation and commercial agreements with trading partners to help reduce the incidence of TBTs abroad.

Further trade integration – going beyond WTO

As highlighted above, WTO accession marks an important step in Kazakhstan’s economic integration with the rest of the world. Still, trade costs faced by Kazakh firms, including foreign investors in investing in the country, can be reduced further through signing of further preferential trade agreements, as well as development of physical infrastructure for trade.

Up until now, Kazakhstan has mainly signed Free Trade Agreements (FTAs) with other CIS countries, as well as Georgia and Serbia (Table 6.3), and has continued its integration within the Eurasian Economic Community. Most recently, the Treaty on Eurasian Economic Union (EAEU) was signed on 29 May 2015, and came into effect on 1 January 2015, creating an economic union between Kazakhstan, Russia, and Belarus that provides for free movement of goods, services, capital and labour as well as allowing for progressive harmonisation in relevant legislation and coordination of trade and economic policies. Studies estimate that the removal of NTBs among the member countries within that process as well as improved border coordination and joint trade facilitation reforms, described earlier, could bring important gains to Kazakhstan, outweighing the costs related to trade diversion.39 The government should therefore pursue further diplomatic efforts to facilitate harmonisation, whenever possible avoiding the introduction of standards and regulations that are different or more stringent than international standards and could unduly impact its trade opportunities with other countries.

In parallel Kazakhstan has also been strengthening its relationship with the EU, which remains its main trading partner (Figure 6.5). The terms of Kazakhstan-EU relationship have been historically defined by the Partnership and Co-operation Agreements, the first one having been signed in 1995 and the most recent one, Enhanced Partnership and Co-operation Agreement (EPCA) on 21 December 2015.40 The agreement covers a whole array of trade policy issues, including trade in goods and services, trade facilitation, intellectual property rights, TBTs and regulatory co-operation, competition, treatment of state-owned enterprises, and many others. It also includes a dedicated dispute settlement mechanism to which the provisions of the Agreement are subject, with certain exceptions.41 In some cases, the agreement refers to and reaffirms WTO commitments (e.g. on import and export restrictions); in others it includes additional provisions (e.g. IPR protection, SOEs, TBTs and regulatory co‐operation), and provides a basis for deepening the trade-related reform process. Kazakhstan could benefit from further co-operation and capacity building in these areas, and notably regulatory co-operation and border procedures mentioned above, to facilitate trade in non-traditional products. In addition, some of the tariff hikes on certain Kazakh products could be reduced to limit the disadvantage placed on some firms (Figure 6.A2.2. in the Annex).

Figure 6.5. Kazakhstan’s exports by partner country, 2000-14

Source: Authors’ calculations using the UN COMTRADE database.

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Finally, given this binary approach to trade negotiations–oriented primarily towards the EU and the EAEU, Kazakhstan may have unexploited opportunities for closer economic integration with other countries, such as China or Iran, and other economies with whom it benefits from a relatively high trade complementarity (World Bank, 2015a). This could also help reduce Kazakhstan’s dependence on the European and CIS markets. Given that tariffs faced by Kazakh exporters in some regions are still relatively high (Table 6.4), and these tend to be markets where NTMs for Kazakh products may be relatively low (given the less developed regulatory environment than in the EU market, for example), there could be scope for exploring further options for singing new FTAs and building on Kazakhstan’s recent trade reform momentum.

Encouraging more private investment into infrastructure

Trade facilitation and other trade reforms can do little to meaningfully reduce trade costs faced by firms and help them connect to global markets if the country’s underlying infrastructure is undeveloped or of poor quality. This is particularly important in the case of landlocked countries, like Kazakhstan, that already pay a transport premium and relay on a well-developed network of surface transport corridors and transit routes to connect with the outside world.

Despite improvements, infrastructure in Kazakhstan requires further investments to help reduce costs and connect far-flank regions to markets, and benefit from its strategic location. According to one study, the share of transport cost to the total cost of goods in Kazakhstan is 8% in the case of railway transportation and 11% in case of road transport, compared to 4-4.5% in industrialized countries (Rana, 2016). The country also ranked 79th out of 140 countries on the quality of transport infrastructure in the World Economic Forum’s Global Competitiveness Index 2015-2016, with the quality of roads being particularly badly evaluated (107th rank). Still, some international organisations point to progress made in recent years. For example, the country improved its ranking on the World Bank’s Logistics Performance Index (LPI) from 137th place in 2007 to 57th place in 2016. Likewise, according to the World Bank’s Enterprise Survey, while 37% of firms identified transport as a major constraint to doing business in 2009, this share dropped to about 8% in 2013 (Figure 6.6). These results may indicate a certain degree of optimism among market participants about the on-going efforts. Going forward, improved regulatory framework for private sector participation in infrastructure – identified as a constraint in the previous review – and observance of due process in project selection and implementation will be critical to ensure planed future projects are duly implemented.

Figure 6.6. Percent of firms identifying transportation as a major constraint, 2009 and 2013

Source: World Bank Enterprise Survey.

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Improvements in the coverage and quality of infrastructure require investments – both public and private. Mobilising private investment in infrastructure can be a way to gather additional capital as well as to reap additional efficiency gains in project delivery or operations (OECD, 2015). As such, the Policy Framework for Investment recommends a list of questions for the government’s consideration to allow for a creation of an enabling environment for investment in infrastructure (Box 6.5).

In the previous Review, the OECD noted that “given the importance of infrastructure for national and international integration in such a large and remote country as Kazakhstan, the stock of infrastructure is inadequate and outdated”. It noted that the inadequacy of the legal framework for Private-Public Partnerships (PPP) as well as high presence of state-owned enterprises in several segments of the infrastructural markets are an important factor limiting private participation in infrastructure.

Since then the government has implemented several reforms to improve the legal framework for infrastructure development. In particular, a new PPP Law was adopted on 31 October 2015 to provide a legal framework for co‐operation between the state and business entities in delivery of PPP projects. This marks an important change in light of the OECD 2012 recommendations and considering that the private sector has repeatedly pointed to the inadequate legal framework as an important limiting factor for their participation.42 The Law introduced several changes to the legal framework of Kazakhstan, amending and extending some of the provisions of the Law on Concessions, which is the principal source of rules governing concessions as described in Chapter 2.43 For example, prior to the adoption of the PPP Law, PPP was defined in accordance with Article 19 of the Law on Concession as a form of co-operation between the state and private businesses aimed at financing, creating, reconstructing and (or) operating social and critical infrastructure; now, pursuant to the PPP Law, PPP can apply in any sector of the economy (Ernst and Young, 2015). In addition, several new terms have been defined in the Law (such as “public partner”, “private partner”, “PPP project”), while the main principles of balance, consistency, competitiveness and efficiency have been adopted from the Law on Concessions. The law also provides for an intended more robust institutional framework that includes a PPPs agency, the PPP Centre (established in 2008),44 whereas the National Chamber of Entrepreneurs – Kazakhstan’s umbrella business association – hasbeen assigned a role in the implementation of PPP projects.45

To-date, no PPP project based on the new Law has been implemented, and investors appear to be awaiting the results from the first pilot project to assess the adequacy of the new legal framework.46 Hence, currently, it is too early to assess the impact of the recent changes on the attractiveness of investment in infrastructure for private firms and their future willingness and ability to engage in infrastructure projects. Still, the cumulative effect of the various initiatives undertaken by the government over the years appears to be producing some results. As noted in Chapter 2, EBRD has been assessing positively the direction of the undertaken reforms and has substantially increased its investment in Kazakhstan in recent years, with nearly half of project portfolio being in infrastructure.47 With several large scale projects planned for the coming years, within the Silk Road initiative and beyond,48 the expectations are high, and it will be critical for the authorities to ensure that corruption and project delays do not hamper the realisation of these plans in practice.

Policy recommendations

Overall, while the WTO accession process marks a fundamental step in the country’s trade policy reform, it addresses some, but not all, trade-related policy challenges in Kazakhstan. The long process of negotiation has led to liberalisation of several barriers to FDI in services, and led to a reform of some elements of local content policies. The predictability of the country’s trade regime has also likely improved, being now bound by common WTO rules and an international enforcement mechanism. To reduce meaningfully trade costs faced by firms and facilitate their participation in global markets, the government will, however, need to go further. This will involve a committed trade facilitation reform, further investment in physical infrastructure and economic co-operation with key trade partners, inside and outside of the region, via preferential trade agreements and regulatory co-operation. The progress in the latter area will mean not only a better access to foreign inputs by foreign firms investing in Kazakhstan but also better market access conditions for Kazakh firms abroad.