How to Develop a More Favorable Investment Climate in Kazakhstan
Deloitte Tax Partner, Anthony Mahon, suggests that Kazakhstan needs to continue pushing forward with reforms aimed at improving the domestic investment environment in order to remain attractive for foreign investors.
The government of Kazakhstan has demonstrated its commitments towards ensuring its developmental program, Nurly Zhol, becomes a reality. It acknowledges the considerable contributions that both foreign investors and international financial bodies bring to the country’s development agenda.
President Nazarbayev has placed significant emphasis on the need for the country to achieve structural reforms and for increasing cooperation with the international community. In order for Nurly Zhol to be comprehensively implemented, the execution of joint projects with international financial organizations such as the World Bank, IBD, EBRD, and the ADB will form a crucial pillar of the program’s potential success.
This will be a continuation and further development of the trends over the last twenty years of the country’s independence, where foreign direct investment and collaboration with overseas partners have been crucial to the country’s economic evolution.
Accordingly, continuous corporation with international investors is vital if Kazakhstan is to maintain its targeted rate, scope and nature of development.
As the country is continues to recover from the consequences of the drawn-out global financial and economic downturn, there is an increased need for Kazakhstan to leverage from these sources of international cooperation (at governmental, non-governmental and commercial levels) with partners who share similar aspirations to improve the welfare of the global population.
In achieving this objective, it is imperative that Kazakhstan redoubles its efforts into ensure that such partnerships remain bilaterally successful.
In this regard, Kazakhstan will be required to continue to push forward reforms directed at improving the domestic investment environment (and to increase the rate at which reform is effected) in order to continue to be an attractive destination for substantial foreign direct investment (“FDI”).
To achieve this objective efforts should ideally be focused around a number of central reform platforms, which can be summarized as the development of:
- A strong rule of law;
- A reduction in barriers to trade;
- An improved regulatory framework;
- High quality infrastructure;
- Increased transparency; and
- A clear and equitable taxation system.
To achieve and ensure a strong rule of law, the Kazakhstan’s government needs to continue to develop legislation and an administrative framework that creates a strong, predictable and transparent legal environment. Investors need the ability to be able to understand laws, quickly enter into agreements and to resolve disputes in a straightforward and fair manner.
In order to reinforce the importance of the rule of law, the following concepts should sit at the core of all legislative developments and efforts in Kazakhstan.
- Laws should be clear, publicized, stable, and fair. They should be applied evenly; and protect fundamental corporate and individual rights;
- The processes by which the laws are enacted, administered, and enforced should be accessible, fair, and efficient; and,
- Competent, neutral, ethical, and independent officials should deliver judgments in relation to law on a timely basis.
Accordingly, not only must the legislation of Kazakhstan be well constructed and evenly applied but confidence in the bodies responsible for the enforcement of Kazakhstan’s laws should be an issue upon which the government remains fully focused.
In relation to trade barriers it is first necessary to accept that certain fundamental factors do (and will continue) make Kazakhstan a relatively challenging jurisdiction in which to achieve economic success. The country’s remoteness to markets, landlocked nature and relatively small population make certain activities and sectors relatively non-viable.
However, it is important that (in the context of these non-variable factors) the government strives to mitigate other issues which make trading in or with Kazakhstan a challenge.
Migration control and visa issues are the two difficulties most frequently cited by international investors and partners. Finding ways to maintain the integrity of its borders whilst becoming a country, which is more straightforward to enter and to do business in, should be one of the state’s primary objectives.
Whilst all investors appreciate the importance of the development of local content capabilities and the associated benefits to the local economy this is also another area where a more flexible and adaptable regime would bring benefits in terms of the local investment climate.
In relation to the subsoil use sector, further activity in terms of opening up new exploration and development blocks for oil, gas and mining is urgently needed. The promised “new licensing round” has seen very little, to date, in the way of real activity and this undermines investors’ confidence in the willingness of the state to open up to new partnerships.
An improved regulatory environment could be achieved via a number of means which might include the following:
- Limitation of frequency of ministry/state department reorganisations and leadership changes – Investors are often left in a state of “decision paralysis” when ministries or state agencies are reorganized and state decision making processes stall or require extensive efforts to re-set or re-start.
- Sudden and extreme legislative reform should be avoided – significant change should not be unexpected or not-previously-communicated. Ideally a period of consultation should be built into all major reform processes but certainly there should be sufficient time between communication and implementation to allow investors to react and to plan.
- Regulations should be aligned with international best practice – Kazakhstan should increase its willingness to closely align with major areas of regulatory best practice (as set out by bodies such as the Organisation for Economic Cooperation and Development).
- Stability of legislative framework – the principles of basic law should remain unaltered but within this overall framework the individual laws and regulations should be constantly improved or refined in line with the demands of the market and the state.
Overall the basic objective should be to ensure a regulatory environment which provides investors with the maximum possible amount of certainty. Investors need to understand the rules of the game and need to be given due warning of changes to those rules (and, ideally, the ability to be able to input into any reform processes).
The achievement of high quality infrastructure is at the heart of Nurly Zhol and it is clear that there is both the will and the committed resources to be made available to achieve these aims.
However, improving the degree to which the internal resources of Kazakhstan are connected to one another and with which Kazakhstan is connected to its neighbours and major trading partners is of paramount importance.
To achieve its objective of increased transparency, which is vital for achieving a sustained international investment, the Kazakh government should continue to increase the intensity of its work with relevant non-governmental (and governmental) partners.
The future execution of initiatives such the upcoming OECD Country Program should continue to keep the achievement of increased transparency at the top of the agenda. However, this is certainly an issue where significant improvements and positive reforms remain possible for both the government and its state institutions.
The final potential area of reform is in relation to the taxation landscape of Kazakhstan. Again, here the primary goal should be one of stability and clarity. This could be achieved via a number of means which could include; elimination of sudden (and most notably; retrospective) legislative reform, the issuance of interpretive guidance in relation to complex, unclear or ambiguous legislation, consultation with taxpayers in advance of legislative changes, decriminalization of tax offences, collaborative compliance structures with major taxpayers and, again, greater alignment with international best practices.
Kazakhstan’s 2050 strategy, as now supplemented by the pathway to Nurly Zhol, should enable the country to achieve its objectives of economic diversification and the realization of high quality and productive national infrastructure. In working towards these aims, however, it is also crucial that the country does not neglect its core economic sectors.
Finally, and most importantly, the importance of constant improvement and evolution of the investment climate should be kept at the heart of all that the government seeks to achieve and implement for the people of Kazakhstan.