A Package of Market Reforms

The country needs to carry out many reforms aimed at developing a market economy.

The first step is to build a professional civil service. Lately, the competence of specialists in government bodies has been eroding, officials lack the motivation to make decisions, and the bureaucracy has grown ever more entrenched. Building a professional civil service requires, first of all, the following:

Appointing as agency heads people with leadership qualities, real achievements and a relevant background, because the staff in its work always mirrors the behavior of its leaders.

Allowing agency heads to build their own teams. At present, in most agencies teams are imposed from above, and this later undermines cohesive teamwork: the head often has to delve into every process, because he cannot rely on or trust people he did not hire himself.

Protecting officials from law enforcement agencies and granting them the right to make mistakes. The current system of public administration is punitive, and every head fears taking decisions because he may later be made the scapegoat. As a result, every question requiring a decision goes all the way to the top or must pass through a system of collective decision-making, which distorts the original decision and drags the matter out.

Giving government bodies the right to raise staff salaries by cutting headcount. Heads would then have an interest in attracting more professionals by shedding dead weight.

Paying agency heads market-level salaries, to motivate and retain them. The current system pushes them to devote more attention to family businesses to solve their own financial problems, which substantially reduces their engagement.

Introducing the Yellow Pages principle and privatizing all non-strategic assets:

• transferring the stakes in the TCO, Kashagan, Karachaganak and CNPC projects directly to Samruk-Kazyna, and privatizing KazMunayGas by placing a controlling stake on the market;

• privatizing Samruk-Energo and creating a transparent electricity market;

• privatizing Kazpost;

• privatizing Tau-Ken Samruk;

• privatizing the parts of KTZ (Kazakhstan Temir Zholy) where private companies can operate;

• privatizing the assets of Samruk-Invest, Samruk-Kazyna Ondeu and Samruk-Construction;

• privatizing the subsidiaries of Kazakhtelecom and turning Kazakhtelecom into a purely infrastructure operator, for example, the owner of base stations and fiber-optic lines across the country.

Reforming the Baiterek holding:

• merging KMF (Kazakhstan Mortgage Company) and Otbasy Bank and ending direct mortgage lending. Only the market development function and work with socially vulnerable groups would remain. Subsidies on savings deposits should be abolished, since they distort the market.

• merging the Agrarian Credit Corporation (ACC) and the Damu Fund to create an entrepreneurship development institution focused on guarantees and subsidies for agriculture, as well as the distribution of non-credit subsidies. All remaining subsidies would be transferred to a single central body, namely Damu.

• merging the Development Bank of Kazakhstan (DBK) and the Industrial Development Fund (IDF), and transferring the loan portfolios of all other subsidiaries (ACC, Damu, KazakhExport) to the DBK, in order to cut costs and create a single lending operator for state money.

• consolidating the equity funds into one, transferring it to the AIFC and revisiting its operating principles.

The subsidy system needs to be streamlined to reduce market imbalances:

• ending subsidies for all non-tradable sectors (there is no point in subsidizing, say, restaurants or fitness clubs, since they do not need protection from foreign competitors and are developing on market terms; moreover, losing subsidies will push them to improve their work and raise quality and labor productivity);

• cutting subsidies for sectors with a low level of production localization, and tying subsidies to the level of localization, which will make public money work more efficiently;

• adopting a plan to phase out all subsidies completely over a horizon of 5–7 years, except for agriculture.

Creating a liberal market for trading subsoil use rights. Approval should be retained only for strategic assets; all other rights and stakes should be freely pledged and sold without the approval of the authorized body. Oversight would be exercised through the work program. This would make the subsoil use market as a whole more attractive and bring more investors into the sector. Lending would also grow, since subsoil use rights would become real collateral for banks.

Opening up all geological information to the public, in order to raise interest in subsoil resources and increase spending on exploration, and thereby expand the number of attractive projects.

Moving all arbitration disputes in subsoil use to the AIFC, in order to make the sector more attractive. Foreign investors do not trust our judicial system, and ministries can often revoke a license or terminate a contract unilaterally. Investors are then unable to defend their rights, because the courts often take the ministries' side and do not examine cases thoroughly.

Easing the requirements for establishing neobanks and niche banks in the country, including capital requirements, in order to increase competition in the market. This would make it possible to set up niche banks and neobanks with low operating costs, which would strengthen competition. Such banks should be allowed to operate in the AIFC to serve AIFC residents.

Creating a market for electronic grain receipts and other exchange-traded commodities, so that derivative securities can be pledged to obtain financing.

Shortening the time banks need to foreclose on collateral and allowing collateral to be sold without a court ruling, in order to make corporate lending more attractive.

Establishing uniform compliance rules for the AIFC and banks, in order to create a regional hub. Many banks are now overcautious, and as a result we lose a large amount of investment from neighboring countries. The AIFC currently has a unique chance to become a regional hub.

Multiplying investment in infrastructure, for example, building a high-speed railway between Astana, Almaty and Shymkent, as well as roads, ski infrastructure and so on.

Adopting a separate law on urban agglomerations and a separate program for their development, in order to encourage people to move to cities.

Liberalizing the electricity market and creating a mechanism that lets any consumer buy electricity through the market.

Merging the Financial Monitoring Agency (AFM) and the Anti-Corruption Agency into a single body, in order to optimize costs and shift their model of work toward preventing crime through proactive work and preventive systemic measures, rather than reactive action.