Eight Steps to Reforming Subsoil Use, and the Tax Barriers Investors Face

Over the next five years, given the experience of the first State Program for Accelerated Industrial and Innovative Development (SPAIID), which did not deliver the intended effect, Kazakhstan needs to focus on subsoil use. The Ministry of Oil and Gas, the Ministry of Industry and New Technologies and the Geology Committee need a radical overhaul of how they handle subsoil use contracts. Any change to a contract (and even signing a work program counts as an amendment) takes at least 9!!!! months. And that is the minimum. To bring in a foreign investor and give him subsoil use rights, you must:

1. Obtain the state's waiver of its pre-emptive right (issued by the national company), which takes 2–3 months.
2. Go through the interdepartmental commission, another two to three months.
3. Go through the expert commission, yet another two to three months. You must also collect letters from all the ministries concerned. In most cases the Ministry of Justice issues opinions that take another two to three months to rebut with sound arguments.

Then comes the working group (with subsoil users taking part), where ministry and agency staff simply start dragging their feet and take a very, very long time to sign off. In the end, an ordinary subsoil user gets its contract amendment in roughly 12–18 months. When is it supposed to actually work? There are very many such examples. Extending a subsoil use contract is simply a nightmare. There have been cases where an extension was granted for one year at the end of the year, and when it expired, the whole procedure started over. That is why production growth comes only from large fields in which the state has an interest, while other subsoil users slowly but surely go through the circles of hell in the ministries.

What needs to be done:

1. Transfer some functions to regional bodies (the regional subsoil departments for Western, Southern, Eastern and Northern Kazakhstan).

2. Revise the Law on Subsoil and Subsoil Use so that ministry and agency procedures are fully regulated, with a clear time limit for the processing of each document. Here is a tip for the Presidential Administration: simply draw up a day-by-day map of how long it takes to approve and sign the main documents (projects, extensions, alienation, pledges and so on), and you will be amazed. When do subsoil users find time to actually produce anything?

3. Carry out a full audit of all subsoil use contracts for internal contradictions and conflicts with legislation. Ministries are afraid to make clarifying amendments, and foreigners are afraid to enter into contradictory contracts.

4. Abolish the requirement for state permission and simplify the procedure for obtaining permission to sell (perhaps replacing it with a mere notification) for exploration-stage fields and fields with small approved reserves (for example, up to 5 million tonnes).

5. Remove the disgraceful Kazakhstani content requirements for goods, works and services from contracts. They simply contradict the Law on Subsoil and Subsoil Use. Under that law, all goods, works and services are procured exclusively through competitive tendering on the basis of price offers. The subsoil user does not choose the contractor itself and therefore cannot guarantee that the state's condition will be met, and this simply frightens foreign investors.

6. Increase the quota for foreign workers at companies with foreign shareholders. Transferring knowledge and technology is simply impossible when your workforce is required to be 100-100-90 in local content.

There are very many such oddities, and all of them scare foreigners away.

7. Simplify the procurement of goods, works and services. Buying, say, toilet paper through a price-offer procedure is absurd. Fuel prices change at least every three months, which means holding tenders every three months, and all of this complicates operations. What is needed is corporate governance, for example by converting all subsoil users into joint-stock companies, as one option, and requiring full disclosure of information on the Kazakhstan Stock Exchange (KASE), even if a company is 100% privately owned.

8. Finally, and most importantly, test the knowledge of the Law on Subsoil and Subsoil Use among the relevant authorities. Not everyone knows it, particularly at the Ministry of Justice.

That is a very brief summary of subsoil use.

On taxes:

Most important, resolve the VAT refund problem right away. It is one of the biggest barriers for exporters outside the top 300, namely SMEs and some large businesses.

Back when Daulet was chairman, I also wrote in my blog about the unfair taxation of subsoil users. Poorer mines end up paying more tax than richer ones because the notional sale price is calculated in a way that is simply unfair, which holds back the development of poorer mines.

On other issues:

The law on project financing was introduced – it does not work.

The law on transfer pricing was introduced – it is simply a translation of some Western law – it does not work.

The law on public-private partnerships (PPPs) was introduced – it does not work.

The law on investment funds was introduced – it does not work.

Yet these laws define the toolkit for attracting foreign investment. They are written as if translated from somewhere else. Laws need to be written in plain language, building first the skeleton in the form of flowcharts and only then fleshing it out, so that ordinary people can understand them.