Kazakhstan’s Investment Climate - A Review of the Evidence
Martin Raiser, European Bank for Reconstruction and Development
This short note does two things. First it summarises existing comparative cross-country evidence which locates the quality of Kazakhstan’s investment climate among some of its peers both in the region and worldwide. Second it summarises the results of existing studies on the main impediments in Kazakhstan’s investment climate. The aim of the note is to provide the background to a fuller study both of investment obstacles in Kazakhstan and the analysis of the costs of these obstacles using case studies. The draft Terms of Reference for the fuller study are being presented to the FIC together with this note. EBRD, the Foreign Investment Advisory Service (FIAS) of the World Bank and the IFC and the EU are providing technical assistance to fund the study.
Kazakhstan’s Investment Climate in International Perspective
Table 1 provides some macroeconomic information for Kazakhstan as well as some other resource-rich middle income countries. The following results stand out:
• With $1400 income per capita, Kazakhstan in 1998 had roughly the same level of income as Algeria or Iran, was considerably poorer than Venezuela or Mexico but much richer than Indonesia or Nigeria. Note that per capita GDP is now around $1000, which arguably leaves very considerable room for real appreciation.
• Estimated oil reserves, excluding the Kashagan find, were below Venezuela’s, Mexico’s or Iran’s but not too dissimilar from Nigeria’s and much higher than Algeria’s or Indonesia’s. It is probable that Kazakhstan will raise oil production to some 1.2-1.5 million barrels per day over the next 5-7 years, making it a significant but not yet major player in the world oil market.
• In terms of macroeconomic risk indicators, Kazakhstan fared well within the group, boasting the second highest long-term credit rating, the lowest debt to exports ratio and the third highest inflows of FDI in the sample. Note that all macro-economic indicators in Kazakhstan have trended upwards in recent months and sovereign borrowing spreads are now down to 350 bp, well below the emerging market average.
Table 2 turns to the issue of investment risk due to other than macroeconomic factors, focusing in particular on corruption. The first two rows give an aggregate country risk score from ICRG for 1999 and 2000 respectively, which is an average over six categories:
• corruption, the rule of law, bureaucratic quality, ethnic tension, contract repudiation and expropriation. The second two rows examine in particular the issue of corruption, drawing on the cross-country ratings developed by Transparency International. The following emerges:
• Kazakhstan seems to have lost some ground over its peers in 2000 according to the ICRG rating, although still scoring above Algeria, Indonesia and Nigeria. This year, Kazakhstan failed to match the average rating for low-middle income countries (at 67.6) and was rated considerably below a mature emerging market such as Mexico. Disputes with foreign investors over existing contracts and increasingly publicised corruption cases may have contributed to this deterioration. It matches concerns of FIC members: while the macroeconomic environment has improved, the attitude towards investors in some cases seems to have hardened.
• Kazakhstan ranks within the bottom third of the international league table on perceptions of corruption in both 1999 and 2000. However, it has moved up several ranks last year, from place 84 (out of 99) to place 65 (out of 90). It is not easy to interpret this improvement. The corruption perceptions index is constructed as a moving average poll of polls. The number of polls included can change from year to year, as some surveys add or drop countries from their list. In Kazakhstan the number of surveys dropped from 5 to 4 in 2000. Moreover, the variation across surveys is large. If the worst score dropped out, this alone would be sufficient to account for the upward movement in the average rank, even if all remaining pollsters did not change their view. Nonetheless, Kazakhstan seems to have made some improvement on the corruption front in the eyes of international experts.
• Kazakhstan’s ranking on corruption seems to be closer to the more developed emerging markets such as Mexico and Venezuela than to Indonesia or Nigeria. However, most eastern European countries score considerably higher. Kazakhstan’s place in the corruption league in 2000 was just below China, and just above Romania.
• It may be important to note that Kazakhstan scores consistently better than some other large CIS countries on corruption, notably Russia (place 82 in 2000), Ukraine (place 87) and Uzbekistan (place 79). However, the difference to the latter is small, and the variation across pollsters in Kazakhstan is quite high.
Table 3 deepens the regional comparison drawing on data from the EBRD/World Bank commissioned Business Environment and Enterprise Performance Survey (BEEPS)1. The BEEPS was carried out during 1999 in 20 transition economies, surveying around 150 enterprises in each country. The sample contains predominantly domestic small businesses and thus provides an interesting complement to the expert ratings in Table 2. The four columns in the Table rank countries by the quality of their overall business climate (a simple average over 10 categories) and separately by the risk posed by inflation and the exchange rate, the obstacle posed by corruption and by taxes and regulations. Scores were given from 1 (not important) to 5 (very important). The results are:
• Macroeconomic risks were of considerable concern to enterprises in Kazakhstan in 1999 when the BEEPS was carried out, but this has arguably changed considerably since with the successful devaluation of April last year.
• On corruption, Kazakhstan scores better than Romania and Russia but worse than several other CIS countries and much of Central Europe. However, corruption is generally considered less of an obstacle than many other dimensions. The change in relative positions between the BEEPS and the corruption perceptions index within the region are a reflection of the imprecision of these measures. Note however that the BEEPS is based mainly on the perceptions of SMEs while Transparency International asks foreign experts and risk rating agencies. It should be of some concern to Kazakhstan’s authorities that they are particularly badly rated by their own domestic enterprises.
• Taxes and regulations are a key constraint on businesses in all six countries, with Kazakhstan again taking a middle position. It is interesting to view enterprises concerns about the new Tax Code against this background.
• Overall Kazakhstan is not dissimilar to Russia and Ukraine in the quality of its investment climate but considerably worse than Poland. While not surprising this is nonetheless disappointing if Kazakhstan aspires to become a prime location for investment in the region.
1 For details see Transition Report (1999) and Hellman, Jones, Kaufman and Shankerman (2000), «Measuring Governance and State Capture: The Role of Bureaucrats and Firms in Shaping the Business Environment». World Bank Working Paper 2312.
The BEEPS included a number of other obstacles for investors to choose from, but most countries highlighted the macroeconomic environment and the tax and regulatory regime as their main concerns, as in Kazakhstan. Again, therefore the country is not a typical of its peers. The better ratings for Uzbekistan are slightly puzzling but may be due to a selection effect among the enterprises surveyed: in Uzbekistan’s distorted environment only those companies survive, which have learned to cope with the problems.
Table 4 turns more specifically to the issue of corruption in the transition economies. The level and frequency of bribes are reported, the proportion of firms that are affected by the sale of parliamentary votes and presidential decrees to private interests (the level of state capture), and - for importing firms - the average time it takes for goods to clear customs. The results carry good and bad news:
• On the one hand, companies in Kazakhstan do not seem to bribe as frequently as in the other countries in the sample and are little affected by state capture.
• Yet, the level of bribes as a share of revenues is high. Customs clearance is also particularly slow - it takes four times as long to clear goods through customs in Kazakhstan than in Poland or Romania.
Again the results for Kazakhstan are not dissimilar than those for the other CIS countries in the table. Kazakhstan, according to the BEEPS offered not a particularly attractive environment among the countries in region.
Major Obstacles - Results of Previous Surveys in Kazakhstan
The emphasis so far has been on comparing Kazakhstan to other middle income and transition economies. The investment climate in Kazakhstan is neither particularly bad or good in relation to its peers. If Kazakhstan wants to improve its position and attractiveness to investors, one important first step would be to listen carefully to the experience of existing investors and the main obstacles they point to. In Table 5, the results of existing surveys on major business obstacles are summarised. Two of the surveys - the ITIC survey of 1997 and the Eurobusiness Survey - were addressed to foreign investors. The results of the investor roadmap focus on administrative barriers as experienced by domestic and foreign businesses in the South Kazakhstan oblast, while the USAID SME survey was administered to small local companies in the Atyrau oblast. Table 5 also reports the views expressed by FIC members on occasion of the last full FIC meeting in December 1999. Several important conclusions can be drawn:
• It is not so much the costs of abiding by existing rules that is considered burdensome by investors, but rather their complexity and the uncertainty relating to their consistent enforcement. As highlighted by the investor roadmap, these can often be problems related to lower-level governments, their lack of professionalism and tendency for petty corruption.
• Within the overall theme of lack of consistent application of existing legislation and weak public administration, areas of particular concern seem to be the tax system and the process of law enforcement in the courts. Foreign investors in particular are concerned by the protection of their rights under Kazakhstan’s and international law, for instance due to the lack of enforcement of international tax treaties and arbitration awards. It is interesting to note in the ITIC survey that foreign investors tend to blame the sheer pace of legal change in a transition economy for some of the inconsistencies in law enforcement.
• At the local government level, interference in operational matters - e.g. through an excessive string of inspections - and locational decisions relating in particular to land rights are considered much more important barriers than reporting and licensing requirements as well as employment regulations. However, foreign investors do continue to have concerns with regard to expatriate labour quotas. Moreover, as the contrast between the Atyrau and South Kazakhstan oblast surveys shows, local conditions may vary considerably.
• The surveys are also interesting for the areas, which are not considered major investment obstacles. Most notable among these is the lack of constraints from the availability or cost of skilled labour, generally a lack of concern about the quality of infrastructure, few complaints about the level of intrinsic tax rates, few concerns over political stability, cultural barriers and the general trade and forex as well as FDI regime.
Conclusions
Kazakhstan has made significant progress in some key areas of its investment climate. Moreover the availability of abundant resources, a skilled and cheap labour force and general political stability should make the country very attractive for investors. Yet, the application and enforcement of laws and regulations remains unpredictable and therefore a key element of business risk in Kazakhstan. Such risks are amenable to policy. The FIC has been spelling them out in very concrete terms through the working groups and at the meetings with President Nazarbayev. While it would be unrealistic to expect rapid progress on many fronts, it is hoped that the evidence presented here and the results of the planned study on the costs of administrative delays will encourage the government to seriously address some of the issues raised here.
Table of contents
The Corporate Bonds Market in Kazakhstan Damir Karassayev
Moscow Almaty Kiev Minsk Where Next? Alexandr Dilbazi
Financing of the Kazakh Mining Iindustry by Banks Asyl Khamitov, Valery Nalobin
