“We must start not with the attraction of new investments, but with resolution of the problems of those investors who are already working in Kyrgyzstan. Every year, the number of lawsuits between the companies and public authorities are growing, and, unfortunately, most decisions are not in favor of Kyrgyz government”, said Temirbek Azhykulov, executive director of the International Business Council (Bishkek, Kyrgyzstan), in an article written exclusively for cabar.asia.
It is clear that for a country with a weak economy and an undeveloped industry like Kyrgyzstan, it is difficult to stand up without investment – both domestic and external. Under this situation, there should also be an obvious interest of the government in the creation of all necessary conditions for investors and its active work to attract them. From this perspective, there is a double position in Kyrgyzstan – on the one hand, there are certain conditions and attempts to improve the situation and the desire to attract new investments, on the other hand, there are serious factors impeding business and investment growth, which the government has not seriously dealt with.
In 2014, inflows of foreign direct investment in the country decreased by 37% compared with 2013 and amounted to 608.5 million dollars. Data of the National Statistics Committee of the KR have shown that the decline took place in all sectors, with the exception only of the sectors of construction, information and communication.
There are several reasons why Kyrgyzstan has not yet become a competitive country for investment, but first, let’s start with the attempts that are made to improve the situation.
Advantages and disadvantages of Kyrgyzstan for potential investors
Advantages
Kyrgyzstan’s current advantages for potential investors include the relatively cheap labor and electricity, some minerals; agriculture with relatively mild winters and warm summers has great potential; there is also has a huge layer of untapped opportunities in the areas of hydropower, tourism, light and food industries. These are all about the so-called “natural conditions” for investment.
Now about the legislation: the country has the most liberal tax system in the region. In particular, the country has created conditions for business development based on liberal principles, including MFN, equal conditions for activities of foreign and local companies, the right of investor to appeal to international arbitration, freedom of monetary transactions. In addition, investors have the guarantees of export and repatriation of investments, property and information from Kyrgyzstan. Protection of the rights of foreign investors is provided by the law “On Investments in the Kyrgyz Republic.”
There is a permanent dialogue between the public and private sectors. Adopted in 2012, the Law “On Public-Private Partnership” has new opportunities for investors. Foreign investors may participate in privatization, purchase of shares and securities of Kyrgyz companies. The law provides an opportunity of long-term cooperation with the State, including the involvement by a public partner of a private partner in the design, financing, construction, rehabilitation and reconstruction of objects. The law establishes the forms of state support, state guarantees of the protection of private investment.
The main task today is to diversify investments. More funds should be invested in production, processing, energy and tourism industries. The entry into the Eurasian Economic Union will give impetus to investment in the processing sector, because so far, Kyrgyzstan exports most of the agricultural products as raw materials.
The legislation in the sphere of protection and promotion of investments is improving. In early 2015, there was enacted the Law of KR “On amendments and additions to some legislative acts of the Kyrgyz Republic” on the introduction of stabilization regime for investors in Kyrgyzstan. The International Business Council was directly involved in the development of the bill aimed at stimulating the growth of investment by providing investors with the opportunity to exercise the right to stabilize the legal regime for a certain period. Within ten years since the signing of the agreement on stabilization, investors have the right to choose the most favorable conditions for them to pay taxes, including the value added tax, in addition to other indirect taxes and non-tax payments.
In recent years, there were held reforms to deregulate the business environment, reduce the number of licensed types of business and reduce the number of regulatory bodies in Kyrgyzstan. Checks are carried out on the basis of risk criteria. A system of “single window” was introduced for starting a business, obtaining construction permits and permits for pre-customs formalization at export-import transactions.
Disadvantages
At the same time, despite a number of positive factors above, there is not any stable and large inflow of investment. Business, both domestic and foreign, is carefully monitoring the situation and investing even more carefully. What is the reason?
According to the business community, the following factors hinder the growth of investments: lack of protection of private property; poor enforcement of laws and regulations; high level of bureaucracy and the lack of clear rules of the game; the lack of continuity of the policy on the part of the highest leadership; unpredictable political and economic environment; unpredictable legislation and the lack of consistency of judicial decisions; labor shortages and difficulty of obtaining work permits for foreigners.
There are no development programs that would have considered small and medium enterprises (SMEs) as full participants of the economy. The National Sustainable Development Strategy of the Kyrgyz Republic until 2017 (NSDS) considers business development in general terms, although there is a definite need for a detailed roadmap for the development of small and medium-sized businesses.
The Law of KR “On state support of small business” is declarative and not enforced. The legislation is frequently changing, and local officials take advantage of legal illiteracy of SME participants.
The pessimistic investor sentiment is due to the inconsistency of the policy pursued by the main governmental institutions of the country. The change of leadership in government does not always guarantee the consistency of priorities. The level of mistrust of the population, including investors, in the government is not reduced because the statements of the leaders of the country are not supported by real actions.
The instability of the legislation, the growing number of disputes and lengthy litigation between the companies and the government, unsolvable issues with the local population in all regions of the country are disturbing potential investors.
The ongoing litigation initiated by foreign investors against Kyrgyzstan reinforce negative perceptions of the investment climate in the country.
Research of investment attractiveness of Kyrgyzstan
The investment research held by the IBC for ten years involves the companies with the participation of both foreign and local capital. These companies operate in Bishkek and in all seven regions of the country.
Among the most important issues when planning investments in the Kyrgyz Republic, respondents mentioned predictable legislation, safety, including property rights, regulation of the business environment, licensing system, tax and non-tax burden, corruption of public officials, and tax administration.
According to investors, the legislative base in Kyrgyzstan is constantly subjected to changes and additions, while there is a question about the quality and timeliness of these amendments.
They also noted the instability of the situation around the mining companies, the problems with the local population and the weak role of law enforcement bodies in resolving these issues.
Legal Environment
One indicator of the investment climate is the legal environment. Respondents were questioned on the subject of the complexity of bureaucratic procedures and regulation of business environment, including obtaining licenses and permits, difficulty in complying with environmental regulations, the right to acquire and own property, as well as the legislation in the field of labor recruitment.
Despite the ongoing reforms undertaken by the government in the area of deregulation of business, the evaluation of the work of legislation and law enforcement remains low. The legal environment is complicated by bureaucratic delays and the presence of many vague and unclear procedures for obtaining permits, licenses and restrictions on land acquisition, especially for foreign investors, who do not have the right to acquire agricultural land as property.
As one of the most important factors affecting the investment climate in the country is the low level of infrastructure, according to investors. In addition to bad roads, it is the lack of adequate commercial infrastructure, including the well-established insurance system, movement of goods and level of financial services.
Tax environment
The tax environment that is not only the burden of tax and customs duties and non-tax payments, but also a complex system of their administration, the number of procedures and the time spent on the payment of taxes, as well as customs clearance procedures.
A difficult issue for business is the write-off by tax authorities of the VAT taken by mining enterprises as offset, and the failure by the tax authorities of the offset of the overpaid tax on account of the unfulfilled tax liability of the taxpayer. Other problems are associated with the complexity of tax administration, the simultaneous presence of two indirect taxes – VAT and sales tax, and the tax on income from mining and processing enterprises, whose activity is connected with gold. The latter tax is levied on revenue and does not allow to use lawful exemptions, thereby impeding the effective performance of the company.
Market conditions
One of the most important factors in determining the investment potential of the country is the consumption and raw materials market. The research has shown that market conditions are estimated below average in Kyrgyzstan. The limitations of the consumer market in the country due to the small population and low incomes, and the limited access to raw materials for the production hinder the development of the market.
The situation is better with the demand for goods from neighboring countries. An assessment of trade relations with the neighboring countries would be higher if the issues of cross-border trade in terms of the exports of meat and dairy products in Kazakhstan and opening of trade relations with Uzbekistan are resolved.
RECOMMENDATIONS
So what should the government do to attract investors? According to the business community, first of all, Kyrgyzstan should have a clear vision – a program of economic development, and this program should be a handbook for the government and a reference point for all citizens.
Does the National Sustainable Development Strategy of the Kyrgyz Republic for 2013-2017 perform this function? The lack of teamwork between Ministries and Agencies, poor enforcement of laws, excessive interference of the Jogorku Kenesh in the work of the Government, the low level of human development in the country, the prevalence of personal interests of civil servants over national interests make it impossible to fulfill the objectives of the NSDD and other development strategies.
Creating a favorable investment climate and business environment are the priorities of not only the country’s leadership, but also the business community.
The International Business Council has developed its own vision of the development of the Kyrgyz economy, outlining the priorities – establishment of effective state bodies, honest courts, quality education, fair taxation and reducing corruption and ensuring the safety of investments.
To enable the private sector, the IBC suggests the State to take measures to accelerate the process of administrative decision-making and harmonization, to eliminate the overlapping powers of state bodies and improve the system of electronic document management.
Fighting corruption
Despite the fight against corruption declared by the President in Kyrgyzstan, it is widespread, and that disturbs investors. Among the most important priorities, the IBC members speak about the need to combat corruption, especially its causes rather than the consequences.
Although Kyrgyzstan’s position in reputable international rankings, largely reflecting the state of the investment climate, has been gradually improving lately, it still remains poor (especially in the Corruption Perception Index). In 2014, Kyrgyzstan was among the countries with high levels of corruption – the 136th place out of 175 countries. But compared with the previous year (150th), the situation has improved. (More on corruption in Kyrgyzstan, read the article: Adylbek Sharshenbaev: Corruption is the second most important problem after political instability in Kyrgyzstan)
However, business people in Kyrgyzstan did not notice any great progress in the fight against corruption. Businessmen and ordinary citizens are dissatisfied with the fact the high-ranking officials, against whom there were initiated criminal proceedings, have not been punished.
In the regional scale (among Central Asian countries), indicators of corruption are acceptable, which creates incentives for successful competition with the neighboring countries in creating an attractive business environment.
To improve the situation, the IBC suggests providing competitive pay and working conditions for civil servants, increasing funding for education, as well as minimizing the conditions for corruption by automating the processes of interaction with government agencies. It is necessary to cultivate intolerance of corruption in the society, to ensure that it is perceived negatively at all levels – from top officials to ordinary people in the country. The culture of zero tolerance for corruption should be cultivated in kindergarten, schools, universities and among civil servants.
Addressing problems of existing investors
We must start not with the attraction of new investments, but with resolution of the problems of those investors who are already working in Kyrgyzstan. Every year, the number of lawsuits between the companies and public authorities is growing, and, unfortunately, most decisions are not in favor of Kyrgyz government.
A number of large investors, previously working and developing their projects in Kyrgyzstan, have recently brought their capital out of Kyrgyzstan to other countries and left the projects in the sphere of subsoil use in Kyrgyzstan. Here are some of them: JSC “Santos International”, Australia (oil and gas projects in the south of the country – JSC “South Oil Company”, CJSC “Textonic” JV “KNG Gidrokarbons”); a group of companies Petrofac, UK (production, processing and sale of oil – CJSC “Kyrgyz Petroleum Company”); OAO “Kentor Gold Ltd”, Australia (copper-gold mine in Talas, gold deposit in Issyk-Kul – LLC “Andash Mining Company”, a branch of PJSC “Kentor Gold Ltd” in Kyrgyzstan); “Gold Fields Ltd”, South Africa (copper-gold mine in Talas – LLC “Talas Copper Gold”).
Using International Experience
The experience of developed countries shows that even with a significant shortage of minerals and other natural resources, the economy can rapidly grow at the expense of services, high-tech and other industries. However, this is possible if there are necessary human resources, technology, capital, and social, political and economic stability in the country.
For example, Switzerland, like Kyrgyzstan, has no access to the sea, and in contrast to our country, it has no mineral deposits, but it, however, has managed to build one of the most reliable banking systems in the world. Today it is one of the most stable economies in the world, which, as of 2014, is on the 4th place in the world in GDP per capita.
Using high-tech manufacturing, Kyrgyzstan could revive the now idle factories, provided that there will be created clear and stable rules for entrepreneurs.
Improving human potential
Human resources are of particular importance for the economic development of the country. Whatever natural wealth the country has, the effectiveness of its use, including the effectiveness of investment and the quality of the use of technologies, depends on the level of human potential. Today, companies face not only the lack of highly skilled workers, but also of semi-skilled labor.
The image of man educated by the country is formed during his entire life, beginning with pre-school institutions. The role of government is especially important in providing quality pre-school, elementary, secondary and higher education, as well as the ideological education of the population.
EEU
Soon, Kyrgyzstan will become a full member of the Eurasian Economic Union (EEU). Last week, the parliaments of the countries-members of the EEU completed the ratification of the treaty of accession of the Kyrgyz Republic to the EEU, and now it remains to resolve some technical issues.
However, entrepreneurs still have a lot of questions about the new economic environment. Many entrepreneurs are afraid that local products simply cannot compete with products that will come from the EEU.
Meanwhile, the EEU market opens borders for manufacturers and suppliers of Kyrgyzstan, but they need to understand the demand and offer consumers competitive goods.
The IBC made one of its latest studies on the upcoming membership in the EEU. Of the responding companies, 17% are involved in export-import operations with the countries of the EEU. The companies deal with commodities and industrial goods, including oil, mining and telecommunications equipment and supplies to them, tobacco by-products, as well as food and agricultural products. In addition, these companies have financial relationships in banking – letters of credit and guarantees, as well as project services.
Some of the respondents who were in favor of accession to the EEU speak about the direct effects, such as the simplification of customs procedures, reducing customs duties and reduction of bureaucratic barriers, and improving the certification process and the mutual recognition of the quality of goods. Among other direct positive effects of joining, the companies mentioned the reduced time for cargo crossing the borders due to the simplification of customs procedures and improvement of tax procedures for the adoption of the VAT offset.
Every sixth of the companies surveyed positively links the country’s economic future with the expansion of the consumer market, increased competitive environment and increased capacity of Kyrgyz exporters, attracted investment and deepening pragmatic cooperation between large companies in the area of the EEU, such as the mutual opening of representative offices and participation in joint projects.
Among the indirect effects, entrepreneurs indicated a positive impact of the EEU in solving many social problems associated with labor migration: the improvement of the legal status and freedom of movement of workers, settlement of issues of employment, wage and social security issues. Strengthening of external borders and the implementation of scientific and educational programs have been mentioned among the positive non-economic effects.
At the same time, respondents pointed out the risks associated with the entry into the EEU, including an increase in prices in the domestic market due to the increase in customs duties on imported finished products and on components for industrial goods imported from third countries, as well as the loss of Kyrgyzstan’s previous positions in the regional market of re-export of goods. Among other negative economic consequences, the respondents indicated the decline of the domestic production of goods due to the weak competitiveness against other members of the EEU.
Several companies predict the outflow of skilled labor and rising unemployment. In addition to economic reasons, some respondents spoke about the country’s political risks, such as the growing influence of Russia, tightening legislation and the reduction of donor activity. Among other indirect causes, there were mentioned risks associated with the return of invested assets in loans by the entities of the Kyrgyz Republic and with the instability of the currency.
The companies made their recommendations to the Government of the country: to defend the interests of Kyrgyzstan at most by obtaining special preferential conditions. We need programs of state support of local producers in sectors that represent a comparative branch advantage for Kyrgyzstan, for example, agriculture, processing and textile industry.
Upon accession to the EEU, infrastructure readiness of the country is very important – the existence of laboratories for certification of quality products and modern customs infrastructure, as well as the creation of logistics centers based on the markets of “Dordoi” and “Kara-Suu”.
Temirbek Azhykulov, executive director of the International Business Council (IBC)
The views of the author do not necessarily reflect the views cabar.asia