HOW ATTRACTIVE IS KAZAKHSTSAN TO FOREIGN INVESTORS?

Years ago, a few small foreign mining companies with a presence in Kazakhstan abruptly departed from the country.  This was after one mining company had its project taken away and awarded to yet another foreign company.  I still recall the fax our office received from one mining company listing the cars – one was a Humvee – and office furnishings that could be purchased at what seemed like fire sale prices.  One of the miners told me that his company and the others would prefer to mine in Peru where the geological risk was high but the political risk was low.  At least, he said, they could keep what they found.  These independent miners had just concluded that Kazakhstan’s low geological risk did not compensate for its high political risk.

That incident with the miners sent a clear message to the government.  For more than two decades, the government of Kazakhstan has sought to make the country more attractive to foreign investors by improving its legislation.  Unfortunately, the claim of improvement has been made so long and so often that worrying questions might be asked:  were past efforts misdirected or half hearted? Is the upgrading process endless? Is the ultimate goal unattainable?

President Nazarbayev recently urged the regional akims (governors) to strive to make their districts more attractive to foreign investment.  In fact, he urged them to compete with each other for the honor of being the most successful in attracting new foreign investment.

A country’s attractiveness to potential investors is a complex issue of which legislation is only one part.  Some factors vary from industry to industry.  A potential investor would want to know if the market is already too crowded for his business.  And there are numerous other factors, such as availability of a workforce suitable for a particular business, distance to the sales market (Kazakhstan is a huge country), climate, the blight of corruption, and a host of other factors.

Some guides are published annually that help potential investors gauge the attractiveness of Kazakhstan and other countries for investment.  Here is a brief look at some of the main ones:

 Ease of Doing Business Index (Kazakhstan is No. 35 out of 190 countries)

The International Finance Corporation annually conducts a survey to determine how easy it is to do business in 190 countries and then ranks them.  Kazakhstan has been rising in the ranks, due in part because the government wants the country to be seen as a good place to do business.  Currently, it ranks 35th which is encouraging to the government which wants Kazakhstan to be among the top 30 countries in the world.

Personally, I favor this index over all the other efforts to rank the countries for the benefit of potential investors.  (Disclosure:  I led our legal team in Almaty for several years in replying to the IFC’s highly detailed annual questionnaires.)

The IFC operates a genuine grassroots study of each country to assess the ease of doing business.  It relies upon local professionals and business contacts to keep it updated on the conduct of business.  Ten separate studies are made covering such topics as: starting a business; dealing with construction permits; getting electricity; registering property; and enforcing contracts.

In the construction permit topic, which was my area, the survey concentrates on every contact a company is required to have with a government official, from the lowest clerk to the top people involved in granting permits.  We had to answer how much time an applicant spent on each step, and then substantiate our answers by reference to the legislation and practical experience.

When information from all ten topics has been obtained from multiple sources within each country, the IFC assessment process begins.  At the end of the process, the results of the ten topics are collated to become a final score for each country, and then that composite number is used to establish the rankings.

The IFC publishes a booklet for the countries it ranks.  Each booklet provides details as to how the country fared and what remains to be done to improve its profile.

Like other countries, Kazakhstan has deliberately tried to nudge its way up the index.  I suppose this is a form of gaming the system.  The government is aware of how the survey is conducted, and the relevant officials undoubtedly are in direct contact with the local representatives of the IFC for suggestions as to how they can make the country more inviting to foreign investors.  If the IFC report shows, for example, that a contractor must go to two separate offices to obtain a certain type of permit, it is easy to overcome that blemish by consolidating the offices or eliminating one of them.  Of course, most of those easy steps have already been taken.

One topic is noticeably absent from the IFC survey: corruption in the public sector.  Any sensible foreign investor certainly would want guidance on that.  However, the IFC is part of the World Bank and it must be reluctant to offend member states.  For this reason, it is useful that there is an organization that annually publishes an index of the ‘perception’ of public sector corruption.

 Corruption Perception Index (Kazakhstan is No. 131 of 176 countries in 2016)

The 2016 Corruption Perception Index by Transparency International was published on 25 January 2017.  Kazakhstan ranked 131 out of 176 countries (sharing that rank with Russia, Ukraine and Iran).

This index ranks only public sector corruption.  It excludes the perception of corruption in the private sector, such as kickbacks by subcontractors to contractors, or buying agents who over pay for goods or services in exchange for a payment, or selling agents siphoning off profit by selling to relatives or related companies for too little.

The CPI is essentially a ranking by reputation though it tries to be more scientific than that description would suggest.  It is a composite index, a combination of surveys and assessments of corruption, collected by a variety of reputable institutions.  In other words, Transparency International does not send any of its own employees into each country to gain empirical evidence, and I am not aware that it follows the IFC model of surveying local lawyers, accountants, bankers and the like.  No one from Transparency International asks government officials or private sector executives about public corruption.  In short, the CPI is composed in an office where people use the findings of other organizations.  I don’t mean to knock the CPI.  It is good as far as it goes.  But they have no greater insight into public corruption than the published sources upon which they rely.

Index of Economic Freedom (Kazakhstan No. 42nd in 2016)

The Heritage Foundation of Washington, D.C., very recently published its Index of Economic Freedom, giving 42nd place to Kazakhstan.  The Heritage Foundation is a think-tank that generally is regarded as conservative leaning in political orientation.

By comparison, Kazakhstan ranked 85th in 2016 and 69th in the 2015 report.  I can’t yet say if the present 42nd ranking is due to improvements in Kazakhstan or bad things happening to countries that previously were higher in the rankings.  All things considered, 42nd place is a quite good position.

The list seems, to me at least, somewhat unusual.  At number 42, Kazakhstan is in close proximity to Columbia, Uruguay, Romania, Japan, Jamaica, Peru, Bahrain, Poland, Kosovo and Bulgaria.  Italy places 79th while Russia comes in at 114th.

Quantitative and qualitative factors such as property rights, government integrity, judicial effectiveness, government spending, tax burden, fiscal health, business, labour, monetary, trade, investment and financial freedom of the nation are carefully analysed.

The Heritage Foundation has a comprehensive methodology to achieve its country-by-country rankings.  Check this link for full details:   http://www.heritage.org/index/book/methodology  The thoroughness of the methodology is a bit deceptive.  Like Transparency International, the Heritage Foundation’s index involves no field work and relies exclusively on collating information from other published sources.

Their annual review focuses on four key aspects of the economic environment over which governments typically exercise policy control:

  • Rule of law
  • Government size
  • Regulatory efficiency
  • Market openness

In each of these four categories, the Index measures several specific components of economic freedom, each of which is graded on a scale from 0 to 100.  For example, in looking at a country’s rule of law profile, the Foundation seeks information about property rights, judicial effectiveness and government integrity.

For every component, the methodology cites the sources relied upon, such as publications by the World Bank (including the ease of doing business survey), Asian Development Bank, the United Nations, the Organisation for Economic Co-operation and Development, and many others.

oooOOOooo

 Book Sales:  Find stories about Kazakhstan from the 1990s and later in my book, West Meets East in Kazakhstan.  It’s available online in softcover or e-book format from AuthorHouse (the publisher), or Amazon or Barnes & Noble.

Website:  My blog posts go out on Facebook and often on LinkedIn.  If you’d like to see them again or check for posts you might have missed, go directly to my website: viewkazakhstan.com

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