On the Investment Climate

For high-quality and substantial economic growth, investment is needed first and foremost, and how the country develops depends on it. Investment can come into a country in various forms: through banks, through funds, as foreign direct investment, as domestic investment, as state investment and so on. But the highest-quality and most significant investment, the kind that can give the economy a real boost, is private investment alone, because private companies are more adaptive and quicker to find the most profitable and promising niches. State investment is important, but it is limited, and it should go only into sectors that are of no interest to private players but without which private business will not invest. Examples include infrastructure, social facilities, healthcare, education and so on. When the state tries to put money into projects where private players should be operating, it is in practice an inefficient use of funds, and such projects usually end badly. Kazakhstan, unfortunately, has plenty of such examples.

Nevertheless, the most important task of any state is to create every possible condition for attracting private capital into the economy.

Creating conditions for private business is an extremely difficult task, and it tolerates no exceptions to the rules. In building an investment climate there are several very important rules, without which attracting investment will be exceedingly hard.

The investment climate must not be split between foreign investors and local business. Too often we try to create conditions for foreign investors that are far better than those for local business. For example, we may give individual foreign investors preferences and cheap financing, while local investors have no such preferences. This causes capital to flow out and move to countries where investors are treated more favorably.

There must be no double standards in law enforcement across different companies. Too often the same rule is interpreted differently depending on who is on the other side. For example, one subsoil user may have a deposit taken away on formal grounds, while another receives a hundred warnings and still keeps its contract. Some may exploit loopholes in the Tax Code and use various special tax regimes to avoid taxes, while others end up paying for contractors who failed to pay theirs. As a result, the companies that are treated unfairly lose interest in further development, unfair competition emerges, and nobody will put money into a sector marked by unfair competition.

There must be no manual handling of investors without building a system. Too often, for quick results, we create various add-ons and mechanisms that attract individual investors in a manual mode. This hands government officials a tool to use these mechanisms for their own selfish ends. Of course, some large investors will be able to enter the country through such a mechanism. But the hardest part is that as soon as the people making decisions change, there is a risk that the new teams will hold their own views about particular investors and projects, and institutional memory will no longer work. In future it will be hard to bring in investors even through the manual route, because companies will price in such risks. It is more logical to identify the bottlenecks in the investment climate and eliminate them systematically.

Investors must not be attracted at any price just to get them to come. Otherwise such investors will understand that it is not we who are attractive but they who are, and this leads to unequal partnerships in which investors receive enormous preferences and profits, while the country as a whole does not get the effect that was intended.

The rules of the game must not be changed, and laws must not be given retroactive effect. Formally, of course, no one will do this, but in practice it can happen. For example, subsoil users entered projects under one tax environment, and several years later the conditions change after the company is already in the project, so the investor can no longer reach the targets he had planned. Or, say, a system was created with loopholes in tax legislation, and then business is told that using those loopholes was illegal. There are always gaps in legislation, but companies must never be punished for using them, because this later breeds total distrust of the system, and investors become extremely cautious about investing.

Of course, many other factors determine the investment climate. But it is more important to understand that actions that worsen the investment climate can bring only very short-term, one-off effects, while long-term prospects are lost as a result. We can bring the state revenue through actions against particular investors and companies (collecting additional taxes, recovering assets and so on), but we do not assess how much we lose in the future because investors will see such actions as a source of risk and prefer other countries. It is hard to estimate the amount of future lost taxes and jobs, but given that projects are built to last decades, that amount will be far larger than a one-off additional tax payment or asset.

Investment Climate

For high-quality and substantial economic growth, investment is needed first and foremost, and how the country develops depends on it. Investment can come into a country in various forms: through banks, through funds, as foreign direct investment, from domestic investors, as state financing and so on. But the highest-quality and most significant investment, the kind that can give the economy a boost, is private alone, because private investors are more adaptive and quicker to find the most profitable and promising niches for their projects. State investment is important, but it is limited, and it should be directed only to sectors that are of no interest to others but without which business will not function. Examples include infrastructure, social facilities, healthcare, education and so on. When the state tries to put funds into projects where private initiative should prevail, in practice it leads to inefficiency, and such projects usually end badly.

Nevertheless, the most important task of any state is to create every possible condition for attracting private investment into the economy, and this can be achieved only by creating a favorable investment climate. In shaping it, there are several very important principles, without which attracting capital will be exceedingly hard.

Equal rules for all investors. The investment climate must not be split into conditions for foreign investors and conditions for local business. Often we try to create conditions for foreigners that are far better than those for domestic business. For example, individual foreign investors are given preferences, state guarantees, cheap financing and other advantages, while local companies have none of these privileges. This leads to an outflow of local capital and to businesses moving to other countries with more favorable conditions.

No double standards. Often the same rule is interpreted differently depending on who is on the other side, and if a company has the right connections and capabilities, its conditions will differ from those of a company without such relationships. For example, one subsoil user may have a deposit taken away on formal grounds, while another may receive numerous warnings and carry on working. Some use loopholes in the Tax Code and apply special tax regimes to optimize their taxes, while others are forced to pay the taxes of their contractors. This leads companies to lose interest in development and gives rise to unfair competition, and private investors will be reluctant to put money into such sectors. A consistent and uniform approach to all investors, without exception, is essential.

Systems instead of "manual control." Quite often, for a quick result, various add-ons and structures are created that attract investors on an individual basis, and this becomes a tool in the hands of officials to pursue personal interests. Of course, large investors can enter the country through such a mechanism, but when a particular official is replaced, there is a risk that conditions will change, which damages investor confidence. Under this paradigm, there is no institutional memory. It is more logical and right to look for the narrow and weak points in the process and eliminate them, thereby changing the system itself and building proper business processes.

Do not attract investors at any price. Investors will feel that the country needs them more than they need it, which leads to unequal partnerships. In such cases investors receive unjustifiably large benefits, while the country does not get the expected effect. It is very important to create conditions in which investors want to come to us of their own accord, thanks to a good investment climate and low risks.

Do not change the rules of the game after a project has started. Formally, no one adopts laws with retroactive effect, but in practice it can happen. For example, companies entered projects under one tax environment, and several years later conditions changed sharply, and investors could no longer reach their planned targets. Or gaps were left in legislation, and later business was told that using those gaps was illegal. Such actions breed distrust among investors, and in lawmaking, consistency and predictability are crucial.

Of course, many other factors determine the investment climate. But it is more important to understand that actions that worsen the investment climate for the sake of short-term results will lead to greater losses in the long term. We can bring the state revenue through actions against particular investors and companies (collecting additional taxes, recovering assets and so on), but we do not assess how much we lose in the future because investors will see such actions as a source of risk and prefer other countries. It is hard to estimate the amount of future lost taxes and jobs, but given that projects are built to last decades, that amount will be far larger than a one-off additional revenue or asset.