Title: CONTROL ISSUES IN FOREIGN DIRECT INVESTMENT: INADEQUACIES IN THE RECENT 'ONE-STOP SHOP' EXPERIMENT IN KAZAKHSTAN, NOVEMBER 1996-MARCH 1999
Author: Douglas A Townsend
Last saved by: Nispacee
Company: SCHOOL OF PUBLIC POLICY

Kazakhstan – State Investment Committee/Agency of the Republic of Kazakhstan for Investments

Control Issues in Foreign Direct Investment: 
The “One-Stop Shop” Experiment in Kazakhstan

Douglas Townsend and Anuradha Bose, TEMAS Ltd.

Purpose
This article analyses the brief history and activities of the State Investment Committee (SIC), GosKomInvest/GKI, established in November 1996 as the single state entity representing Kazakhstan to foreign investors. It was originally thought that this monopoly role would diminish the bureaucracy of the investment process, which investors regarded as the single most important impediment to realising their business plans. This paper seeks to provide an explanation for the early demise of the SIC, which was dissolved only two years after being founded. The article then examines the current government arrangements for attracting investment, wherein the SIC’s successor, the Agency of the Republic of Kazakhstan for Investments (ARKI), shares the investment process with other institutions.

Witt, Daniel and Hall, Arthur. ‘Kazakhstan Survey. Second Annual Survey of Foreign Investors: The Investment Climate in the Republic of Kazakhstan.’ International Tax and Investment Centre (ITIC), Washington, May 1997.

Introduction
Over the last decade, the large, resource-rich, sparsely-populated Central Asian Republic of Kazakhstan has been second only to the Russian Federation among the Commonwealth of Independent States in attracting foreign direct investment (FDI). In the former Eastern Bloc as a whole, Kazakhstan has received more FDI per capita than any other country except Hungary. Actual direct investment had reached $5.7 billion net from 1988 to 1998, and in future years, an additional fifty billion dollars is already projected through signed contracts with international companies. Reflecting the natural resources of the country, FDI is concentrated mainly in the extractive industries.

For country and comparative economic data see Transition Report (Annual 1994-98 and Updates) of the Office of the Chief Economist, European Bank for Reconstruction and Development (EBRD), London.

Foreign investment first began to flow shortly after independence, despite the fact that the country did not have a comprehensive and coherent policy for attracting investors. The Kazakh leadership appreciated the need for new sources of investment after the collapse of the Soviet Union and was able to quickly conduct business with major international companies seeking access to Kazakh resources.

Nazarbayev, Nursultan. My Life, My Times and the Future.  Ch. 11. Trans. & ed. Peter Conradi. Pilkington Press, UK. 1998.

From 1994, Kazakh macro-economic policy became avowedly pro-market and investor-friendly. The economic programme established by the May 1994 presidential decree prescribed priorities of economic stabilisation and liberalisation, privatisation, and the integration of Kazakhstan into the world economy. In October 1994, a new, pro-market government was appointed. The 1994 Foreign Investment Law (27 December 1994) prescribed “national” treatment for foreign investors, “grandfathered” all investments for ten years, introduced protection against expropriation and guaranteed profits repatriation. Privatisation of the country’s strategic industries (hydrocarbons, mining and metallurgy, infrastructure, and other resource-processing facilities) was initiated.

Ospanov, Marat & Witt, Daniel. “Economic Reform.” Chapter in CBI-Confederation of British Industry. Doing Business in Kazakhstan. Kogan Page, UK. 1995

At the operational level, individual ministries launched their own investment attraction programmes, which included, in the case of the Ministry for Subsurface Resources, the establishment of an Investor Information Centre in Almaty in 1996, partly financed by major mining investors. “Coordination” of promotion efforts and of contract negotiations had been attempted by the government’s ministerial-level State Committee for the Utilisation of Foreign Capital, established in 1995 as the successor to the regulatory National Agency for Foreign Investment. These coordination efforts sought to identify, if not control, the effects of the earlier practice of sovereign guarantees with respect to investment projects and to try to channel investment to “priority” areas.

Ospanov, Marat. Interview in ‘Kazakhstan’ supplement to ‘The Times’ (London) 12 January 1996.

A relatively coherent policy consciously seeking to attract foreign direct investment emerged in 1996, as the Kazakh leadership struggled to address its concern with diversifying the economy and lessening dependence on the extractive sectors at a time when domestic investment and output continued to flag. In developing this policy, the government of Kazakhstan studied the approaches of the governments of some OECD countries and other former Eastern Bloc emerging economies and consulted the International Financial Institutions (e.g. World Bank), other advisers and investors. Subsequently, the example of the ASEAN “Tigers,” particularly Malaysia, was closely studied. The policy included a strategy for attracting foreign direct investment, particularly for the processing of resources, infrastructure and construction, and provided incentives for qualifying projects. The key institution for delivering the strategy was Kazakhstan's own version of a “one-stop-shop” for investors, the State Investment Committee (the SIC), an “off-line” agency reporting directly to the head of state.

Saidenov, Anvar. ‘The Role of the State Investment Committee in Kazakhstan’s Investment Policy.’ Speech London 9 December 1998 to EuroForum Conference - Investment Opportunities in Kazakhstan.

Creation and Essence of the State Investment Committee
The State Investment Committee (SIC) was created by the presidential decree “On the Formation of the State Investment Committee of the Republic of Kazakhstan” on 8 November 1996. The decree was elaborated in the Law On State Support for Direct Investments of 28 February 1997. By the provisions of these legal instruments, the committee was “the only state agency authorised to perform state support for direct investments in the Republic of Kazakhstan.” The law provided that the chairman of the committee was appointed by the president and was the first deputy prime minister; and it required him/her to “report regularly” to the president and “also report” to the prime minister. The first SIC chairman was Deputy Prime Minister Akhmetzhan Esimov, who is reportedly a close relative and loyal supporter of the president.

State Investment Committee of the Republic of Kazakhstan. Set of Legislation Acts of the State Committee of the Republic of Kazakhstan on Investments, Almaty, 25 September 1998.

Masanov, Nurbulat. The Kazakh Political and Intellectual Elite. Ludy, Moscow, 1997.

Incentives System
Article 7 of the Law on Direct Investments provided a system of “privileges and preferences” for prospective investors in projects in specific priority sectors of the economy, and who also met specific economic and social policy objectives. These incentives included tax holidays, import exemptions and state grants-in-kind with amounts depending on the volume, profitability and nature of the investment. The priority investment sectors subsequently designated by the president in accordance with Article 6 of the law included industrial infrastructure, processing industries, establishments in Astana City (the new capital), housing, and establishments in the social sphere, tourism and agriculture. Incentives were provided pursuant to a detailed contract negotiated between the investor and the committee, and this document then governed the investment project.

Decree of the President ‘On the Approval of the List of Priority Sectors of the Economy Intended for Attracting Direct local and Foreign Investments.’ April 5,1997.

Resolution of the State Investment Committee. ‘Framework Contract on Granting of Incentives to and Providing State Support for Investment Activities Carried Out in Priority Sectors of the Economy of the Republic of Kazakhstan. March 21, 1997.

Reaction
This interventionist policy, which was not without its critics (even within the administration), provoked controversy and opposition domestically and internationally, particularly among international financial institutions and international economic advisers. Concerns were expressed about state intervention in the market, discrimination among types of investors, utilisation of the tax system for economic and social engineering purposes and damage to trade from import substitution effects. The government firmly and consistently rejected such criticisms. It maintained the position that the policy would channel necessary investments into sectors that had been unable to attract funds previously and, through such investments, also generate additional tax revenues. At the end of the two-year experiment, while the investment attraction strategy had only moderate success, its operation had not been accompanied by the predicted extreme market-distortion effects, although some commentators claimed that the average job-creation cost of approved projects was high by international standards.

McLure, Charles E. Jr. “Tax Reform in Kazakhstan.” Bulletin of International Fiscal Documentation, October 1998.

Saidenov, Anvar. Presentation to Working Group on Consumer Goods Industries, Kazakhstan Investment Summit, Almaty, 4 June 1998.

Nature of the State Investment Committee 
The model chosen for the SIC was a combination of the “networking” investment promotion agency model, operating widely in OECD and Central European countries, and of the investment attraction development agency model of ASEAN countries with its integral system of fiscal and financial incentives. The nature of this composite model is reflected in the basic functions of the committee as outlined in Article 15 of the law: to attract direct investment; to coordinate the activities of relevant government agencies; to ensure project implementation; to ensure the smooth execution of all negotiations and related paperwork; to assist investors in identifying qualified employees, goods and services; and to control the implementation of projects and the fulfilment of contractual obligations by investors. Unlike the predecessor Committee for the Utilisation of Foreign Capital, SIC was established as an executive and coordinating body.

Saidenov, Anvar. Speech, 9 December 1998 cited above.

The committee was first established with a small staff in the old southern and business capital, Almaty. It was organised in five directorates – priority sector investments; sub-soil contracts; legal and investor compliance; information and development; and investment promotion. It moved to Astana, the new northern capital, in June 1998, retaining the promotion directorate (KazInvest) in Almaty. The committee had no international representation but cooperated with Kazakh diplomatic and foreign trade representatives abroad. In 1998, it employed sixty-three staff with an average age of thirty-three, and annual operating costs were approximately one million dollars.

Focus Central Asia. Vol 23, Almaty, November 30 1998.

Modus Operandi of the Committee
The working arrangements for the committee were more or less continuously outlined and revised through a succession of presidential decrees and government and committee resolutions. This continuous fine-tuning partly reflected the difficulty faced by the committee in trying to calculate how best to discharge its demanding promotion and development mandate, which included attracting and ensuring the implementation of projects involving the transfer of new technologies to Kazakhstan, generating employment and social development. It also partly reflected the general “churning” of institutions and personnel, a common feature of government in Kazakhstan.

Witt, Daniel and Hall, Arthur. ITIC Survey cited above.

In September 1997, the original SIC mandate was extended to cover negotiations on mineral projects, and the scope of the application of incentives expanded to include minerals processing projects as well. In 1998, the SIC ceded the negotiating part of its mandate on investments in oil and gas to Kazakhoil, the national oil company that was created in March 1997 as part of the re-organisation of the government.

Resolution of the Government.‘Issues on Improving the Regulation of Investment Activity of Mineral Resources Users in the Republic of Kazakhstan.’ September 12, 1997.

Kazakhoil Presentation, KIOGE Conference Business Breakfast, Almaty 8 October 1998.

Record
By the end of its first year, the committee had accepted three hundred and thirty-seven applications (one hundred and eighty-four from domestic investors) and registered forty-one applications totalling two hundred and eighty nine million dollars. It had, however, managed to sign only thirteen contracts covering $58.2 million and was reviewing sixteen other contracts totalling $117.9 million. Projects approved covered flourmills, bakeries, sheepskins and hides processing and the production of telecom equipment, television sets, energy meters, detergents, beverages and semi-finished metals. In the same period, net foreign direct investment totalled $1.3 billion.

‘Report of the18 February 1998 Tax Policy Forum.’ Tax Bulletin 1/98. Astana, Ministry of Finance and Dunaev Publications, March 1998.

EBRD ‘Transition Report Update’ April 1999.

The SIC records of its first year indicate that its approach – providing incentives on a case-by-case basis after a detailed project analysis and negotiations involving local third-party intermediaries – was uncertain and protracted, could not preserve commercial confidentiality and did not lend itself to the marketing of Kazakhstan. The first-year results indicated that the SIC could make little headway with this approach in the intensely competitive world of attracting investment, where many of its competitors for the investment dollar could, upon expression of interest, offer potential investors a package of generally-available incentives, without requiring the disclosure of project information or a government/investor contract negotiation. This approach also provided an opportunity for “rent-seeking,” while it overburdened the negotiators and decision-makers of the committee.

‘Focus Central Asia’. Vol 23/98 cited above.

The recommendations of the April 1997 survey of investors in Kazakhstan by the US-based International Tax and Investment Centre called on the government “to simplify its bureaucracy and work to end corruption.” The same survey showed that investors accorded a low ranking to government subsidies and special tax incentives as a strategic factor influencing their investment in Kazakhstan. The first-year record of the SIC seemed to demonstrate that its activities had not met the needs of investors or the objectives of the committee itself.

Witt, Daniel and Hall, Arthur. ITIC Survey cited above.

Impediments to SIC
From its inception, the SIC had encountered fundamental problems revolving around staffing, skills, its mandate and its scope of operations. As an important aside, Kazakhstan lacked a competitive entry system for the civil service, with appointments frequently being made through blat (connections) rather than on merit. Although this is hardly unique to Kazakhstan, the absence of a professional civil service was an impediment to achieving the policy objective of integrating into the global economy. SIC staff were, thus, a “mixed bag.” Although their ranks included quality professionals, the committee – as did the bureaucracy as a whole – lacked certain essential investment project appraisal skills and an appreciation of the time value of capital. Committee staff were more highly paid than other civil servants and, by the very nature of investment attraction, had greater opportunities for international travel, a “bonus” for an official in any bureaucracy, but generally a source of resentment among home-based colleagues, citizens and media.

‘Focus Central Asia’. Vol.23/98 cited above.

The committee encountered significant bureaucratic competition from those “line” ministries that were obliged to share critical functions with or surrender them to the SIC. For example, the fact that the committee was empowered to promote and negotiate tax concessions disturbed the influential Ministry of Finance with its primary responsibility for safeguarding revenue. Additionally, exercising the expanded mandate, which involved reviewing mineral resources contracts, brought the committee up against powerful special interests. Generally, the SIC experienced difficulty in exercising its overall coordinating mandate across the wide range of central and regional government agencies usually involved in the investment process and, therefore, could make little progress in substantially reducing the amount of “red tape” for investors.

Investor Opinion
The 1997 ITIC survey cited above revealed that “bureaucracy” remained the greatest barrier to investing in Kazakhstan. Fifty four percent of respondents felt that “bureaucracy” was a “major” barrier, and a staggering ninety-five percent saw the bureaucracy as either “a major” or “some” barrier. The centre, responding to the results of the survey, urged the government to “simplify its bureaucracy and work to end corruption.” It also called on the government to “eliminate overlapping jurisdictions among the different ministries” and make sure that prospective investors had “clear and certain knowledge about the exact functions and competencies of the various ministries.”

Witt, Daniel and Hall, Arthur. ITIC Survey cited above.

Government Response
The government and the committee itself were not insensitive to these deficiencies, taking (frequently-conflicting) counsel from a variety of sources and widely canvassing for technical assistance in order to try to remedy them. As early as December 1996, in connection with the establishment of the committee, Kazakhstan requested one million ECU from the European Union’s Technical Assistance Commonwealth of Independent States (TACIS) programme to develop a comprehensive, proactive investment promotion operation involving staff training, programme development and management and promotional activities. A much-less ambitious contract was eventually concluded, and a limited technical cooperation project was launched in March 1998.

Esimov, Akhmetzhan. ‘Policymaker Interview’ Autumn 1997. ITIC Washington, October 1997. Jandosov, Oraz. ‘Policymaker Interview’ Spring 1998. ITIC Washington, February 1998.

EU-TACIS Project Description. http://europa.eu.int/en/comm/dgTa/tacis/home.htm

Commercially-backed investment promotion conferences in Kazakhstan and abroad, often involving the country’s top leadership, had been an essential part of the post-independence landscape and became a major element of SIC’s campaign. In June 1997, a flagship event – the annual Kazakhstan Investment Summit – was inaugurated in Almaty with the sponsorship of Chevron and the organisational assistance of the Stanford Research Institute. In the context of this summit, a Consultative Council of Investors under the president was introduced, providing a forum for high-level host-investor dialogue. Conferencing intensified in 1998 following the establishment of KazInvest and the subsequent inauguration of cooperation with the United Nations Industrial Development Organisation (UNIDO). The agreement with UNIDO also envisaged the establishment of an International Investment Training Centre to produce investment managers for the committee.

EU-TACIS ‘Kazakhstan Economic Trends 1/98’, January-March 1998.

Kazakhstan Investment Promotion Centre. ‘KazInvest’ Bulletin December 1998.

Following a critical World Bank review in December 1997, in the context of the Bank and IMF dialogue with the Kazkh government, the committee also initiated work on developing standardised incentive packages to replace the uncompetitive case-by-case response to potential investors. These attempts were accelerated after the change of SIC leadership in February 1998, although these packages were not completed or formally adopted until August 1998.

Tax Bulletin 1/98 cited above.

Resolution of the State Investment Committee. ‘On Improvement of the Procedure of Granting Tax Privileges.’ August 7, 2998.

The committee also intensified its efforts to develop a direct dialogue with priority investors, culminating in the July 1998 inauguration of a regular “roundtable” on investment issues in the mineral resources sector. Major areas of investor concern addressed at the roundtables included licensing, taxation and regulation of foreign labour. The dialogue also contributed to the government’s review of the legislative framework for mineral development.

Press Release of the State Investment Committee, Almaty, September 11, 1998.

Operating Environment
An evaluation of the SIC's achievements needs to consider the fact that it operated in a sensitive domestic political environment with oscillations in the official consensus on economic policy. For example, former Prime Minister Kazhegeldin’s macro-investment attraction strategy, involving awarding management contracts to foreigner investors taking on major former state owned enterprises in return for their agreeing to boost overall investment inflows, attracted allegations of “selling-off the farm,” endangering revenue and the social welfare safety net. Mr. Kazhegeldin was perceived by foreign investors as their best guarantee of a market-orientated investment regime. This criticism could have had a negative impact on the committee’s efforts to attract foreign investment, although there is little to no evidence supporting this point.

‘Focus Central Asia.’ Nos. 19-20 October 1997 and Nos. 21-22 November 1997.

Mr. Kazhegeldin resigned in October 1997 for health reasons. His successor, Nurlan Balgimbayev, former president of KazakhOil and one-time Minister for Oil and Gas, was perceived as more of an economic interventionist. In February 1998, however, First Deputy Prime Minister and SIC Chairman Esimov was replaced by National Bank Chairman Uraz Jandosov, widely viewed as the leader of the “marketeers” and as lukewarm to the tax incentives operated by the committee. Mr. Jandosov brought his own team on board, including internationally well-connected individuals such as Executive Director Anvar Saidenov (formerly with the EBRD London). The new leadership proceeded to review and frequently revoke decisions of their predecessors while accelerating procedural reform, including moving away from the case-by-case approach to investment projects.

President’s Position
As evidenced by his actions and speeches, including the seminal “2030” speech in autumn 1997, President Nazarbayev took close interest in the SIC's performance as part of his continuing “hands-on” involvement in stimulating investment and meeting investor requirements. The president himself conducted a continuous, if somewhat ad hoc, dialogue with major investors – with visiting delegations, during visits abroad and at the World Economic Forum Annual Meeting in Davos. Furthermore, the ad hoc Consultative Council of (Major) Investors, established in June 1997, was systematised through the creation of the President's Foreign Investors' Council (FIC) in 1998 with EBRD cooperation.

Nazarbayev, Nursultan. ‘Kazakhstan – 2030.’ Embassy of the Republic of Kazakhstan for the United Kingdom, London, 1998.

Decree No 3985 of the President of the Republic of Kazakhstan. ‘On the Establishment of a Council of Foreign Investors under the Auspices of the President of the Republic of Kazakhstan.’ Astana, 30 June 1998.

Foreign Investors’ Council
The FIC, which effectively superseded the Consultative Council created at the first Kazakhstan Investment Summit in June 1997, held its inaugural meeting in September 1998. Council members agreed on an institutional framework and a practical programme for improving the investment climate. The SIC, designated by decree as the “executing agency” for the council, was given the additional responsibility of cooperating with the EBRD in administering this new body and for coordinating the participation of all relevant Kazakh agencies in the implementation of the FIC work programme. The SCI, however, lacked the mandate to direct those agencies in discharging the FIC agenda.
 
Discontent
Not surprisingly, the committee continued to suffer from the effects of overload, and the processing of applications lagged and procedures remained irregular. Thus, in September 1998, important and frustrated investors complained directly to the president, alleging inefficiency, incompetence and a lack of probity on the part of the committee. A consequent investigation by the Supreme Disciplinary Council, a part of the presidential administration that has responsibility for maintaining standards of public life and reports exclusively to the president, upheld investor criticism of the manner and delays with which applications were handled. The Supreme Disciplinary Council found that staff were, for example, dealing arbitrarily with mineral resources licences, breaching public service regulations on the issuing of staff bonuses and taking unauthorised junkets abroad. Equally important, it found that few staff had the necessary professional qualifications as hiring had been done largely without regard to education or professional experience.

‘Focus Central Asia.’ Vol. 23/98 cited above.

 	On receipt of the Supreme Disciplinary Council’s report, the president instructed SIC Chairman Zhandosov and Erzhan Utembaev, the Head of the Agency for Strategic Planning and a recognised economic interventionist, to attempt to impose order in the committee. Nothing seems to have been done about the specific allegations of corruption, leaving the perception among some foreigners and locals that the SIC's processes lacked integrity. At the time, prescient commentators noted the weight of the accusations and predicted major changes in the committee, if not its demise. 

.‘Focus Central Asia.’ Vol. 23/98 cited above.

Denouement of the SIC
The investigation of the SIC occurred against the backdrop of the Asian “contagion,” falling oil prices and the Russian economic collapse, all of which negatively affected Kazakhstan's economic prospects. These external events precipitated a significant constitutional change in early October 1998, which, among other things, advanced the presidential elections by one year and sealed the fate of the government, obliged by the constitution to resign upon the election of a new president.
The SIC continued to operate as a state committee. In December 1998, Executive Director Anvar Saidenov outlined a comprehensive programme for making Kazakhstan more attractive to foreign investors. This programme envisaged a continuous review of the regulatory process and the establishment of a complaints mechanism within the committee; the promotion of a guarantee arrangement system for investors with backing from the World Bank, EBRD, the International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA) and the Overseas Private Investment Corporation (OPIC); the development of a standardised investment incentives system; the improvement of financial intermediation for investment projects; stimulating the development of the insurance sector; and accelerating improvements to the physical infrastructure.

Saidenov, Anvar. London Speech, December 9, 1998 cited above.

This was seen as a belated attempt to assert the role that had originally been assigned to the committee but which it had struggled to fulfil. The December 1998 programme was progressive, but its delivery doubtful. Thus, following the presidential elections and the appointment of a new government in January 1999, the committee was recreated as an agency under the prime minister, and its direct presidential connection diminished. Subsequently, from mid-March 1999, the agency was re-located under the First Deputy Prime Minister and Foreign Minister, Kasymzhomart Tokaev. It nonetheless retained a central, if shared, role in trade and investment, including coordinating the improvement of the legislative framework for investment and investment promotion.
 
Conclusions on the Fate of the SIC
The State Investment Committee failed to live up to overly high expectations for many reasons. First, it was an extremely ambitious project for a new country and an untested bureaucracy. In its conception, the committee combined elements of an investment promotion agency and an industrial development agency and was not well-equipped to do either of these tasks. It was a small agency, staffing quality was variable and leadership changes thwarted continuity and inhibited the establishment of institutional memory. The committee had little international presence and needed to “network” with embassies, official and commercial international agencies, investors and “friends.” Building an effective international network is neither easy nor accomplished quickly. While the committee was comparatively better-resourced than most Kazakh ministries, these resources were inadequate for competing on the world stage. As an industrial development agency, it encountered continuing criticism from those not favoured by its programmes and from powerful trading interests who felt threatened by the import substitution elements of the investment strategy.
The “one stop shop” idea was an imperfectly-explained and imperfectly- understood concept in Kazakhstan. In practice, for investors it often amounted to a “first stop shop” and sometimes a “last stop shop.” The experiment might have been more successful if the product it had been selling were a superior one and if the committee had a competitive marketing strategy, but this was not the case.
During the period of 1996 to 1998, the committee’s mandate was significantly extended but without allocating commensurate resources. Moreover, the initial case-by-case approach to the provision of incentives undermined the ability of the committee to compete internationally against more sophisticated operations in attracting investment. Furthermore, the tardiness in substituting standardised procedures inhibited the committee from becoming really effective in the comparatively brief time traditionally allowed for government agencies in Kazakhstan to succeed.

New Directions in Investment Promotion Policy 1999-2000
The effective discharge of investment promotion and coordination remains critical for Kazakhstan given both the intense international competition for foreign direct investment and operational peculiarities of the country, including the relative remoteness of the regulators in the new capital and the foreign investors in the old. Other local issues also need to be taken into account. The Kazakh government continues to need to “sell” the value of foreign investment to a sometimes-unenthusiastic population. For essentially political reasons, it seems impelled to try to “win” a narrower competition for attracting investment among its neighbours within the Eurasia region. And perhaps only thirdly, it acknowledges that it is in a global competition for investment. The last consideration is, conversely, the first priority of foreign investors and provides a fundamental challenge for securing economic development and, in doing so, assisting the regime to survive. This asymmetry in priorities can direct the host and investor along different paths and contribute to misunderstandings in project implementation, particularly with local and regional officials.

Peck, Anne E.  'Foreign Investment in Kazakhstan's Minerals Industries.' Post-Soviet Geography and Economics, 1999, 40, No. 7, pp. 471-518. This excellent overview of the history of foreign investment in the mineral industries of independent Kazakhstan captures the essence of the ambivalence of the Kazakhs towards foreign investment.

Following its major investment policy review in April 1999, the re-formed Balgimbaev Government's 1999/2002 programme proposed to simplify business licensing procedures, complete outstanding investment-related legislative tasks (such as the revision of the laws on subsurface use and on oil), improve the tax code and its administration, modernise customs, modify labour regulation, institute private property in land, develop the physical infrastructure and establish a sophisticated banking system. Incentives for strategic investments were to be maintained, although less favourable terms for new investments were to be legislated in 1999.

Tokaev, Kasymzhomart. Kazakhstan Investment Summit speech, June 3, 1999.

Law 'On State Support for Direct Investments' of February 28, 1997, No. 75-1, as amended December 1999; Decree of the President having the Force of Law 'On Taxes and Other Mandatory Payments to Revenue' of April 24, 1995 No. 2235, as amended December 1999; Decree of the President' On the System of Privileges and Preferences and the Procedures of Granting Them on the Conclusion of the Contract with the Investor' of March 7, 1999.

New Institutional Arrangements
A new Inter-Ministerial Commission for Relations with Foreign Investors, established in principle by a presidential decree of 15 May 1999 and instituted by a government resolution of 1 November 1999, was charged with responding to special appeals, complaints and requests of foreign investors in connection with their business in Kazakhstan. It also had the competence to make recommendations to the government for improving the investment climate. First Deputy Prime Minister and Foreign Minister Tokaev was appointed Commission Chairman and, as Prime Minister after the October 1999 resignation of Balgimbaev, retains that role as part of his direct responsibility for attracting investment and formulating policy.

EU-TACIS Kazakhstan Economic Trends 3/1999 January-September 1999, page 100; Serik Paev, K. - The Almaty Herald November 25, 1999, No. 196, page 5.

In this revised and more crowded scheme, under Tokaev the Agency of the Republic of Kazakhstan on Investments (ARKI) largely inherited SIC’s functions, including the important coordinating role with regards to foreign investment, as the state's sole authorised representative to negotiate with foreign investors. 
The critical role as the “competent body” for purposes of the important subsurface use legislation was confirmed in the August 1999 legislative amendments, an exercise that SIC had begun in 1998 and that ARKI finished – although not without some concessions to KazakhOil, the national oil company. According to ARKI Chairman Kouanyshev’s comments of September 1999, “On the basis of the new law, ARKI will raise the overall economic effectiveness of using natural resources, the transparency of forecasting the state's regulating role and will, at the same time, exercise strict control over violations of the legislation in this field by users of mineral resources.” Investors, however, are still struggling with the regulatory intricacies of the revised legislation, which seems unlikely to stimulate a "rush" into new ventures.

Interfax-Kazakhstan News Agency. (in Russian) Almaty. 10:30 GMT September 2,1999, BBC Monitoring CAU 030999/va/mv.

ARKI also officially participates in the government's high-level economic policy-making machinery. Additionally, it is envisaged that ARKI will administer the proposed system of investor guarantees being negotiated with the World Bank, covering such items as sovereign expropriation, currency transfer, government breach of contract and war and civil strife (although how the Agency could suitably execute such functions has not yet been made clear).

Jack, Andrew.  'Kazakhs in Plan for Corruption Loss Insurance.' Financial Times. March 2000.

After a settling-in period during the first half of 1999, while responsibilities and operational relations were clarified with its new bureaucratic patrons (particularly the Foreign Ministry), ARKI continued on a reform path not vastly different from that outlined by Saidenov in December 1998. With considerable professional assistance from domestic and foreign official and private sector advisors, ARKI achieved positive ratings for its first major tests, handling the June 1999 Foreign Investors' Council and Kazakhstan Investment Summit meetings.

Ibid., 42.

The Foreign Investors' Council has continued as the centrepiece for interaction with foreign investors, although not without some controversy. ARKI retains the former SIC “counterpart” role with the EBRD, the foreign joint venturer in the Council, and hence the responsibility for coordinating the participation of the Kazakh side.
Some non-Council investors have resented their exclusion and inability to contribute directly to the FIC agenda, prompting the development of guidelines for some limited Council expansion and rotation of membership. Furthermore, Council members are naturally attentive to their individual investor interests and prudently avoid antagonising regulatory authorities through public criticism of the investment regime. Doubts have arisen whether the Council's programme can be effectively sustained and its potentially-limitless agenda implemented in a case where the foreign investor members have participated on a “pro bono” and as-possible basis.

Various media reports December 1999 of the meeting of the Foreign Investors Council, Almaty, December 1999, as confirmed to the authors orally by EBRD representatives.

This situation and the extra administrative load on ARKI have prompted efforts to develop a dedicated secretariat for the Council, although there has been no rush to contribute to its financing. It has also prompted a more rigorous prioritising of the Council's agenda so that it now covers legal system reform, some changes to the tax code and improving business licensing systems, among other areas. Not surprisingly, a number of necessary changes remain to be addressed, and the primacy of the Council therefore remains moot. This is underscored by a proliferation of national and sectoral business consultative associations among foreign and domestic investors.

Ibid., 44.

Investment Attraction
Consistent with government policy, the role of the Image Enhancement Working Group of the Foreign Investors' Council (one of the four Council working groups established by a prime ministerial instruction on 26 November 1998) has been intensively examined by domestic and foreign advisors in 1999. Support has been voiced for an expert investment promotion task force to advise ARKI. A promotional plan envisaged improving the quality and availability of Kazakh promotional materials while strengthening outreach efforts to targeted investor audiences and enhancing the structure and quality of official information on Kazakhstan's investment climate.
The plan is being broadly followed by ARKI and some results are apparent; the KazInvest website,  for example, and a more competitive presence outside Kazakhstan. The DAVOS connection is another significant achievement, culminating in the inaugural World Economic Forum Eurasia Economic Summit in Almaty in April 2000. A strong relationship also is being developed with Pacific Rim and Gulf countries. 

http://www.kazinvest.com.

Interfax-Kazakhstan News Agency. (in Russian) Almaty. 10:37 GMT March 10, 1999. BBC Monitoring CAU 090320 va/mv.

Investment Prospects 
In 1999, foreign direct investment reached USD 0.8 billion and is expected to reach USD 1.0 billion this year, while total investment flows from 1993 to date are approximately USD 8.0 billion. Nevertheless, the country's political stability, improving macro-economic performance and favourable long-term prospects, as well as evaluations of the investment climate in Kazakhstan have been off-set recently by very public conflicts with major foreign investors in the metals and power industries and by Astana's oil export restrictions (imposed from January 2000), ostensibly to ensure a supply of feed-stock to domestic refineries lacking the purchasing power to compete with high world oil prices.

ABN-AMRO Central & East, March 2000, page 12.

These issues dominated the 25 February 2000 dialogue between the Prime Minister and American investors, wherein Tokaev had sought to assure them and to obtain their practical support for the government's plans to diversify and modernise the economy. Kazakhstan's premier argued that his government would continue its policy of foreign investment protection, modernising national legislation, improving the investment climate in the priority sectors of the economy and providing a rational regime for foreign and domestic investors. At the same meeting, ARKI Chairman Kuanyshev emphasised the Agency’s intention to run a continuous dialogue with investors and promised the range of investment incentives would be preserved. This last point was confirmed in detail by the president's decree of 7 March 2000. It is, however, not clear how well this approach will play with potential investors while the controversy continues.

Turkistan-Newsletter, Vol. 101, March 8, 2000.

Interfax-Kazakhstan News Agency. (in Russian) Almaty. March 7, 2000.

Conclusions 
It is difficult to draw general lessons for “transition economies” on the management of attracting and managing investments from the Kazakh experience, just as it is difficult to group all former Eastern Bloc countries under the rubric of “transition economies.” Each of these countries has a different set of endowments and, therefore, are at various stages of the transition process. The challenge with attracting investment is to create and then retain investor confidence. To help meet that challenge successfully, the following elements are important:

EBRD, “1999 Ten Years of Transition.” Transition Report, November 1999.

•	the rule of law as the norm for host/investor relations, thus reducing conflicts between host authorities and investors;
•	a professional, well-trained and well-remunerated judiciary, thus facilitating the satisfactory resolution of conflicts; 
•	the consistent pursuit of effective coordination among ministries to minimise inter-ministry conflict, in accordance with detailed written administrative orders outlining responsibilities;
•	the consistent pursuit of effective coordination between central and local government; 
•	a worldly, professional and highly-trained civil service able to handle the task of promoting foreign direct investment in a responsible manner and meeting foreign investors as equals;
•	a code of bureaucratic conduct, with vigorous pursuit of infractions and allegations of staff impropriety, supported by appropriate disciplinary measures as required;  
•	a clear mission statement for the investment promotion agency, separating it from policy involvement, thus allowing staff to work more efficiently (while acknowledging that, in the transition economies as elsewhere, to try to distinguish between administration and policy can be difficult);
•	fewer personnel changes, especially in the top leadership, to avoid disruption to the management of the investment process;
•	consideration of the optimum ministerial home for the agency, e.g., the Foreign Ministry, the Ministry of the Economy or others. 

Large overseas investors ought to play a consistently constructive role. Among their peers, they can be vociferous in their complaints about local failings although, face-to-face with their hosts, they understandably act in a more prudent fashion. The Foreign Investors' Council decision to diminish its exclusivity is, however, a step in the right direction, as is its combining of forces with other interested investor groups. In this regard, the unique intermediary role played by the International Tax and Investment Centre (ITIC) since 1993 has contributed significantly to the reform of the regulatory regime in a pro-business direction in Kazakhstan and other transition economies.

ITIC is a not-for-profit education, research and outreach foundation established in 1993 at the request of the governments of Kazakhstan and the Russian Federation and with the support of major international corporations investing in the CIS member states. The centre has its headquarters in Washington, DC and offices in Astana, Almaty, Moscow and London. The mission of the centre is to achieve reform of investment regulation and the development of private business in the interests of economic development.

Change is unlikely to be affected rapidly considering the realities of bureaucracy and complications with the implementation process, compounded by the variable quality of the members of the civil service in Kazakhstan. The Kazakh government has, however, often spoken admiringly of the New Public Management, especially as pursued in the UK, and emphasises its own credentials as a leader among the transition economies in attracting investment. Kazakhstan could, therefore, consider a more “lateral” approach to attracting investment by contracting-out the function of investment promotion in a selected number of OECD countries through competitive tendering. Consortia made up of Kazakh and foreign partners would be encouraged to bid. Contracts would be for a fixed term and would include strict performance criteria. The contract bidding process would be supervised by an outside agency, e.g. EBRD, which might also consider committing some funds to the exercise. However, this would be without prejudice to progress in the professionalisation of the civil service, which remains a critical programme as confirmed by Premier Tokaev at his AmCham presentation on 25 February 2000.
In that regard, an Agency for Civil Service Affairs (ACS) was set up in February 1999 as an institution reporting directly to the president. The idea, which had been voiced by foreign aid agencies in 1997, received funding support from the EU TACIS Programme until April 2000. On 1 January 2000, a new Civil Service Law came into effect, and it draws a clear distinction between political and administrative positions and stipulates competitive recruitment for civil service positions under the supervision of the Agency for Civil Service Affairs.

Decree of the President having the Force of Law 'On the Civil Service.' No. 4073, September18, 1988.

In 1997, University of Birmingham (UK) teachers of the UK 'Know-How' Fund-supported MPA programme at KIMEP initiated dialogue on the need for a professional civil service with the head of the president’s personnel office, with a view to the employment opportunities for MPA graduates. Subsequently, a high-level workshop was convened with the support of the Strategic Planning Agency. The workshop concluded there was an urgent need to create a professional civil service and for a distinction between career civil servants and political advisors. These findings were reaffirmed in an EU-TACIS workshop in 1999. The workshops reached no conclusions on the financing of this programme.

See respectively Articles 11 and 12, Article 12 and Article 5.

According to ACS Chairman Baimenov, elaborating the schedule for the implementation of the law and establishing systems of distance education and competitive examinations for the civil service will be based at the ACS centre in Astana from 2000. These programmes will be conducted by individual ministries in 2000, with the ACS verifying and ratifying the results. All civil service positions will have detailed job descriptions and be placed in categories with required qualifications and salary scales. Seniority would, however, remain a “primary consideration.” No details were provided as to the costs of this exercise nor how it might be financed.

Speech to the UNDP/TACIS/USAID Conference on the “Decentralisation of Government in Kazakhstan.” Astana, December 2, 1999.

A reform programme and hortatory pronouncements from the leadership are not enough by themselves, and they need to be implemented with hard cash from the government. Civil service reform is too important a subject to be left to donor financing, for it will be hampered by a lack of coordination within the donor community, the time-bound nature of their interventions and the jealous guarding of their respective “turfs.” For example, at any one time there have been eight or nine different projects for civil service reform operating independently within Kazakhstan. In a cash-strapped transition economy, this amounts to unhelpful duplication and unequal distribution of donor funds rather than healthy bureaucratic competition. Another basic problem with outside funding is the lack of absorptive capacity in overstretched recipient agencies. Thus, the SIC had received some establishment support from the EU-TACIS programme, but the project suffered from an asymmetry of priorities that significantly diminished its efficacy. In the future, harmonising the implementation of the overall professionalisation programme of the ACS and that of the specialist training envisaged by the plans of the FIC Image Enhancement Working Group could significantly improve the work of ARKI.

References
1.	Witt, Daniel and Hall, Arthur. Kazakhstan Survey. Second Annual Survey of Foreign Investors: The Investment Climate in the Republic of Kazakhstan. International Tax and Investment Centre (ITIC): Washington, May 1997.
2.	Nazarbayev, Nursultan. My Life, My Times and the Future.  Ch. 11. Trans. & ed. Peter Conradi. Pilkington Press: UK. 1998.
3.	Ospanov, Marat & Witt, Daniel. “Economic Reform.” Confederation of British Industry. Doing Business in Kazakhstan. Kogan Page: UK. 1995
4.	Ospanov, Marat. Interview in ‘Kazakhstan’ supplement to ‘The Times’ (London). 12 January 1996.
5.	Saidenov, Anvar. “The Role of the State Investment Committee in Kazakhstan’s Investment Policy.” Speech to the EuroForum Conference. London 9 December1998.
6.	State Investment Committee of the Republic of Kazakhstan. “Set of Legislation Acts of the State Committee of the Republic of Kazakhstan on Investments.” Almaty, 25 September 1998.
7.	Masanov, Nurbulat. The Kazakh Political and Intellectual Elite. Ludy: Moscow, 1997.
8.	McLure, Charles E. Jr. “Tax Reform in Kazakhstan.” Bulletin of International Fiscal Documentation. October 1998.
9.	Saidenov, Anvar. Presentation to Working Group on Consumer Goods Industries, Kazakhstan Investment Summit, Almaty, 4 June 1998.
10.	Focus Central Asia. Vol 23. Almaty, November 30 1998.
11.	Kazakhoil Presentation, KIOGE Conference Business Breakfast. Almaty, 8 October 1998.
12.	“Report of the 18 February 1998 Tax Policy Forum.” Tax Bulletin 1/98. Ministry of Finance and Dunaev Publications: Astana, March 1998.
13.	EBRD. Transition Report Update. April 1999.
14.	Esimov, Akhmetzhan. Policymaker Interview. Autumn 1997. ITIC Washington: October 1997. 
15.	Jandosov, Oraz. Policymaker Interview. Spring 1998. ITIC Washington: February 1998.
16.	EU-TACIS Project Description. http://europa.eu.int/en/comm/dgTa/tacis/home.htm.
17.	EU-TACIS. ‘Kazakhstan Economic Trends 1/98.’ January-March 1998.
18.	Kazakhstan Investment Promotion Centre. ‘KazInvest’ Bulletin. December 1998.
19.	Press Release of the State Investment Committee, Almaty, September 11, 1998.
20.	Focus Central Asia. Nos. 19-20 October 1997 and Nos. 21-22 November 1997.
21.	Nazarbayev, Nursultan. ‘Kazakhstan – 2030.’ Embassy of the Republic of Kazakhstan for the United Kingdom, London, 1998.
22.	Peck, Anne E.  “Foreign Investment in Kazakhstan's Minerals Industries.” Post-Soviet Geography and Economics. 1999, 40, No. 7, pp. 471-518.
23.	Tokaev, Kasymzhomart. Kazakhstan Investment Summit speech, June 3, 1999.
24.	EU-TACIS. Kazakhstan Economic Trends. 3/1999. January-September 1999, page 100 
25.	Serik Paev, K. The Almaty Herald. November 25, 1999, No. 196, page 5.
26.	Interfax-Kazakhstan News Agency (in Russian). Almaty. 10:30 GMT September 2,1999, BBC Monitoring CAU 030999/va/mv.
27.	Jack, Andrew.  “Kazakhs in Plan for Corruption Loss Insurance.” Financial Times. March 2000.
28.	Interfax-Kazakhstan News Agency (in Russian). Almaty. 10:37 GMT March 10, 1999. BBC Monitoring CAU 090320 va/mv.
29.	ABN-AMRO. Central & East, March 2000, page 12.
30.	Turkistan-Newsletter. Vol. 101. March 8, 2000.
31.	Interfax-Kazakhstan News Agency (in Russian). Almaty. March 7, 2000.
32.	EBRD, “1999 Ten Years of Transition.” Transition Report. November 1999.
33.	Baimenov. Speech to the UNDP/TACIS/USAID Conference on the “Decentralisation of Government in Kazakhstan.” Astana, December 2, 1999.

Instruments Governing SIC/ARKI Working Arrangements
1.	‘On Foreign Investments.’ The Law of the Republic of Kazakhstan. December 30 1994.
2.	‘Concerning the Subsurface and its Utilisation.’ Presidential Decree. January 27 1996.  
3.	‘On State Support of Direct Investments.’ Law of the Republic of Kazakhstan. February 28 1997.
4.	‘Framework Contract on Granting of Incentives to and Providing State Support for Investment Activities Carried out in Priority Sectors of the Economy of the Republic of Kazakhstan.’ Resolution of the State Investment Committee. March 21 1997.
5.	‘Regulations of the State Committee on Investment Project Requirements.’ Resolution of the State Investment Committee. March 28 1997.
6.	‘Provision on the System of Privileges and Preferences and the Procedure of Granting Them on the Conclusion of a Contract with Investors.” Presidential Decree. April 5 1997. 
7.	‘On the Approval of the List of Priority Sectors of the Economy Intended for Attracting Direct Local and Foreign Investments.’ Presidential Decree. April 5 1997.
8.	‘On the Approval of the List of the Most Important Branches of Industry to Attract Direct Local and Foreign Investments until 2000.’ Resolution of the State Investment Committee. April 10 1997. 
9.	‘Issues on Improving the Regulation of Investment Activity of Mineral Resources Users in the Republic of Kazakhstan.’ Resolution of the Government. September 12 1997.
10.	‘On the Establishment of the foreign Investors Council Under the President of the Republic of Kazakhstan.’ Presidential Decree. June 30 1998. 
11.	‘On the System of Privileges and Preferences and the Procedure of Granting Them on the Conclusion of the Contract with Investors.’ Presidential Decree. June 30 1998.
12.	‘On Improvement of the Procedure of Granting Tax Privileges’ (with three Attachments: I. ‘List of the Most Important Branches of Industry to Attract Direct Local and Foreign Investments for a Period until 2000;’ II. ‘Provision on Rates of Standard Tax Privileges and Procedure of Granting Them when Carrying out Investment Activity;’ III. ‘Application for Obtaining Standard Privileges when Carrying out Investment Activity’). Resolution of the State Investment Committee No. 131. August 7 1998.

About the Authors

Douglas Townsend is the director of TEMAS Ltd., a UK business consultancy specialising in trade and investment with the emerging markets of the former Eastern Bloc.  He is an associate of the Centre for Euro-Asian Studies at the University of Reading (UK) and a Senior Advisor of ITIC London.  He served as an Australian ambassador in Kazakhstan from 1995 to 1997, in Hungary from 1988 to 1992 and in Switzerland, Côte d'Ivoire and Senegal from 1985 to 1988. From 1992 to 1995, he held the post of Australian Investment Commissioner, Europe.

Anuradha Bose received a PhD in Public Administration from the International Development Department of the School of Public Policy at the University of Birmingham (UK).  From May 1996 to June 1999, Dr. Bose was Resident Project Director and Head of the Department of Public Administration of the Kazakh Institute of Management, Economics and Strategic Planning (KIMEP), Almaty, Kazkhstan, a project of the UK Know-How Fund.  She is presently associated with TEMAS Ltd in a tax-training project in Kazakhstan.