Promoting revenue transparency in Kazakhstan
Fecha: 2 Jun 2005
Presentation at the European Parliament Seminar on EU-US Future Co-ordinated Strategies Towards Central Asia
I lead a project at the Soros Foundation – Kazakhstan called Kazakhstan Revenue Watch. The aim of the project is to encourage transparency and accountability in the management of government revenues from the development of oil, gas and minerals. The stimulus for this project is the disappointing record of most resource-rich countries in being unable to convert natural resource wealth into human and economic development.
It is generally recognized that Kazakhstan has done a good job of restoring economic growth. Indeed, our country is among the fastest growing economies of the world, with high per capita GDP as compared to other Central Asian nations (in 2004 per capita GDP in Kazakhstan was $2450). At the same time we should realize that this growth has become possible only because of the highly favorable situation on the oil market. Since oil market tends to be highly volatile and unpredictable we believe that economic growth should be accompanied by adequate social-economic development aimed at economic diversification, curbing poverty, and overall human development. These aims can only be achieved if the country’s revenue management policy is based on the principles of transparency, accountability and civic participation.
Let me summarize some of the key challenges which Kazakhstan faces in this regard:
- combating poverty and extreme regional disparities;
- developing a long-tern revenue management strategy similar to that being developed in Azerbaijan following recommendations by IMF. This strategy should also cover issues of possible usage of the National Fund to finance some human development programs At he moment the mission of the saving portfolio is characterized by a single nebular phrase “for the welfare of future generations”. On a related note we believe it is necessary to replace the presidential decree on the National Fund with the special law that should be a product of broad debates;
- this would require increasing the role of the legislature in the budget process by helping to build up the capacity of Kazakh parliamentarians and by giving them more authority and oversight functions over the budget and the National Fund;
- improving transparency of fiscal flows including those outside the budget;
- publishing information on payments received from extractive companies by adopting Extractive Industries Transparency Initiative (EITI);
- developing mechanisms which would make Aarhus convention and other acts regulating access to information work in Kazakhstan;
- improving the enabling environment for civil society to act as budget watchdogs. This will also require support of the independent press, which remains weak in Kazakhstan. Without an environment that permits free expression, there is little opportunity for public oversight of government spending. Government-organized broad-based public debates about the management of oil revenues, as occurred in Norway, Alaska, and more recently in Azerbaijan, would strengthen communication between the government and the public about the development challenges that lie ahead.
- lastly in my short list, improving investment beyond the oil and gas sector. Although a number of laws have been passed to improve the business climate, investors complain about superfluous checks by tax inspectors and excessive government reliance on fines, and the large amount of red tape required to register and operate a business. Removing public sector constraints to private sector development can do much to encourage investment beyond the extractive sector.
The Open Society Institute and the Soros Foundation – Kazakhstan were the first organizations who began to raise public awareness about the non-transparent and non-accountable character of management of extractive industry revenues in Kazakhstan both internationally and domestically. Since late 2003, Kazakhstan Revenue Watch and the network of its partners throughout the country have been involved in a number of activities spotlighting the above-mentioned issues of revenue management in Kazakhstan and advocating for the improvement of revenue transparency, greater government’s accountability and greater parliamentary and civic participation in the revenue management. In some cases, our efforts were finally crowned with success, in other cases we were only able to achieve half measures, yet in some cases our recommendations still have not been accepted or even discussed.
In June 2004, a coalition of Kazakh non-governmental organizations, including Soros Foundation-Kazakhstan, has been established to advocate for the adoption of Extractive Industries Transparency Initiative by the government of Kazakhstan. We strongly believe that the Extractive Industries Transparency Initiative (EITI) provides an effective framework for countries to take the necessary steps towards greater transparency of resource revenues with the support of financial institutions and donors.
Since its establishment the coalition has grown into a network of over 50 organizations all over the country, carrying out a variety of projects, mostly funded by the Soros Foundation-Kazakhstan.
We were pleased to see that, as a direct result of our joint efforts, EITI has been slowly gaining support among members of the Kazakh parliament and the government. In April this year, a special inter-department working group has been set up by the government on adoption of the EITI, although no official statements in this regard have been made so far by the president. The contribution of our Coalition members was recognized by the government and representatives of the coalition were invited to sign the four-party Memorandum of Understanding on EITI implementation on behalf of the civil society. Although this move clearly indicates the presence of the political will of Kazakh government to pursue revenue transparency and should therefore be highly commended and welcomed, we believe that EITI can work at its maximum only if disaggregated, individual payments will be published company by company. Unfortunately, we already see a clear intention of the extractive companies and the government to require publishing only aggregated data, which may be regarded as a half measure. While our coalition is determined to cooperate with the government constructively on EITI implementation we will be insisting on desegregation of financial reports, as only in this case there is an effective mechanism for the civil society to monitor discrepancies in reporting and to work cooperatively on curbing corruption.
Unfortunately, OSI, SFK, the British Embassy/Department for International Development, the World Bank and the European Bank for Reconstruction and Development are the only international organizations who pro-actively work in this field in Kazakhstan. We think that diplomatic missions of all EU countries accredited in Kazakhstan should pay a close attention to this issue, as even partial lack of revenue transparency may correlate directly with high levels of corruption (let me remind you that Kazakhstan occupies the 122nd place out of 144 in the Transparency International’s Corruption Perception Index).
We believe that this is in the interest of the EU as a whole and EU investors operating in Kazakhstan in particular to promote fiscal and revenue transparency and other good governance practices in the natural resource revenue management, since these are prerequisites of the social, economic and political stability in the Central Asian and Caspian regions.
This seems to be of high importance taking into account the number of EU-registered companies operating in the oil and gas sector in Kazakhstan (Agip, Shell, BG, BP, KazGerMunai, Karachaganak Petroleum Operating, Nelson Petroleum, Repsol YPF, Petrom, etc). We believe that since the EU businesses play such an important role in the investment projects in Kazakhstan, they should take the lead in the promotion of transparency, good governance, accountability and highest corporate standards in the extractive industries in Kazakhstan.
Members of our Coalition think that the European Parliament, European Commission and all EU member states can stress the need for publishing disaggregated data in negotiations with the government of Kazakhstan and with the top management of leading European investing groups and extractive companies operating or willing to operate in Kazakhstan. Your active support of this our position may be crucial for the true success of EITI in Kazakhstan.
Another encouraging signal from the government is possible adoption of the new concept of the National Oil Fund. This move is a result of constant work of several organizations, first and foremost – the World Bank, whose experts helped the government to draft the new concept. Kazakhstan Revenue Watch program has also contributed to this development: for three years we have supported and organized a series of public events bringing focus to the problems of this institution, funding research and bringing internationally recognized experts who have presented analysis of different models of stabilization funds.
Under the new concept, the National Fund becomes an integral component of the budget system (before that it existed as an extra-budget fund). Payments from all extractive companies will first be accumulated in the Fund, and after that the legislature will have the authority to finance non-oil budget deficit by taking the required amount from the fund. A special formula will exist to make sure that allocations to the budget from the National Fund will not lead to either overheating of the economy or fast deletion of the Fund’s portfolios. In greater detail this approach is described in the World Bank’s recent Country Economic Memorandum for Kazakhstan, published in March this year.
This scheme means that development programs will be funded mainly at expense of “oil money”, so the public will be able to see how effectively “oil money” work for the social-economic development. This scheme also means relatively greater authority of the parliament over the National Fund.
This scheme may also mean greater transparency of revenues but only if detailed, disaggregated reports of the National Fund are published. Reports publicly available today on the Fund’s website provide only highly aggregated data that allows to make only general conclusions. This is what Kazakhstan Revenue Watch program will be insisting on and I would like to use this opportunity to ask you to support us in this. We also ask for your support in calling the government to replace presidential decree on the National Fund with the law, which should be debated and approved by the parliament. This law should distribute the decision-making authority over the National Fund equally among the President, the government and the parliament. At the moment all decision-making functions are in the hands of the president with the Advisory Council being able only to propose recommendations, and European institutions could urge for this imbalance to be addressed.
We also believe that in order to improve the government’s accountability in the revenue management issues, the Supreme Auditor – called in Kazakhstan the Accounting Committee should enjoy independence with its members being appointed by and reporting to the parliament, and not he president as s the case at the moment. Our program has been advocating for this by gathering a body of research and best practices which are to be presented to the government for discussion later this year. I am sure that successful models of having an independent Supreme Auditor seen in some European nations are relevant for Kazakhstan and can therefore be advocated. Introducing of this new scheme will undoubtedly require technical and perhaps financial support and I think this issue can and should be considered by European Bank for Reconstruction and Development as well as the European Commission and member states.
The question of independence of Supreme Auditor is very closely linked to another problem at which Kazakhstan Revenue Watch has been pointing out for quite a while: the need for increasing the role of parliament and civil society organizations in the budgetary process. And this is where I clearly see opportunities for the European Commission to provide adequate technical and financial assistance to Kazakhstan.
Kazakhstan Revenue Watch has funded a series of events focusing on the need for increasing the role of the legislature in the budgetary process. As a result, we came to a conclusion that simply giving parliamentarians more authority will hardly help us reach the desired outcome, at least as long as the share of professional financiers among parliamentarians is low and as long as our parliamentarians cannot afford to hire professional experts to help them with analysis. International experience proves that legislature’s involvement in the budget process can be much more efficient if parliamentarians can enjoy services provided by a variety of independent analysts. And, normally, this does not add too much to the parliament’s own administrative costs. We are going to collect a body of best practices around the world and present them to both the parliament and the government. And it would be extremely helpful if the European Commission or representative offices of EU countries in Kazakhstan could support initiatives in this direction. It would be great if the European parliament could consider helping facilitate a compendium of European best practice.
There is also a growing interest among local NGO groups and journalists in the budgetary process. Kazakhstan Revenue Watch, the Eurasia Foundation and, since last year, TACIS have been encouraging and supporting this interest by organizing workshops for such NGOs, inviting international experts, carrying out study tours, publishing manuals and financing advocacy and research projects. For example, this year Kazakhstan Revenue Watch and the Open Society Institute co-funded a $150,000 project which includes: development and publication of Budget Guide for citizens, two study tours to Poland for NGOs and parliamentarians, a workshop, an analysis project on adequacy of budget’s expenditure on social programs in 7 cities of Kazakhstan-centers of extractive industry, a comparative analysis of the draft state budget for 2006 and an information campaign taking forms of press releases, debates, press conferences and roundtables with the purposes of informing the broad public on the budget and also with the purpose of developing concrete recommendations to decision-makers.
I think the impact of such initiatives would be even greater if the European Commission and EU member states could find an opportunity to fund similar or other civil society initiatives in Kazakhstan aimed at increasing public participation in the revenue management process.
Revenue transparency is not a goal in itself; it is simply a step on the way towards government’s accountability and public participation, so we believe that initiatives in these areas could become an important focus of your attention and a critical component reflected in the EU’s policy and funding strategies for Kazakhstan and the whole Central Asian region.
