Kazakhstan: Sharpening Competitiveness and Modernizing Institutions

Challenge

Kazakhstan’s development objective is to join the ranks of the 30 most developed countries by 2050. Its long-term vision focuses on economic diversification to move away from natural resource dependence and toward more balanced growth, and social modernization away from social disparity and toward more inclusive growth. The successful implementation of Kazakhstan’s development agenda requires addressing several key challenges. In the near to medium term, economic prospects depend on a continuation of the stability-oriented macroeconomic policies that promote a rules-driven framework for resource earnings and the strengthened accountability of state-owned enterprises. Improved access to finance is also essential for non-oil sector growth in the near term. Although bank liquidity is ample, non-performing loans (NPLs) remain high and constrain banks’ ability to provide fresh credit to the non-oil sector, calling for timely implementation of a new insolvency regime and the government’s strategy to resolve the NPL situation. Enhancing medium- to long-term development prospects depends on raising non-oil productivity through promoting a more competitive and favorable environment for doing business, providing greater room for private sector expansion amid neutral incentives, making progress on governance to allow greater accountability, improving the quality of education and health care to generate a more skilled and healthier work force, investing in critical infrastructure for better connectivity with the world, and pursuing the recently launched green growth vision to enable more environmentally sustainable growth.

Solution
The World Bank Group program in Kazakhstan supports the implementation of the government’s core development priorities of competitiveness, improved governance through higher standards and accountability in public service delivery, and environmental protection. The program interlinks knowledge interventions with sequenced products in a multiyear framework to maximize impact. It also targets areas of lagging performance, as revealed by the Bank’s assessment tools, country-grown strategies, or international comparative analysis. A key instrument to support the government’s program is the multiyear programmatic Joint Economic Research Program (JERP), aimed at bringing in international experience and building up the capacity for adopting knowledge transfer. The JERP is complemented by selective investment projects in strategic high-impact areas. To ensure successful results from the infrastructure projects, an emphasis is put on governance and institutional arrangements that strengthen capacity and accountability for public services and promote an environment more conducive to results.

Results

World Bank Group operations in Kazakhstan have produced the following key results:

• impact of the economic crisis mitigated while credibility of the newly introduced oil fund management was maintained, avoiding fiscally risky general bailout strategies in the banking sector;
• overall Doing Business ranking improved from 74 in 2010 to 49 in 2013;
• neutrality and simplicity of the taxation system increased through the adoption of a new tax code in 2009 and a new taxpayer service in 2008, simplifying reporting forms and implementing risk management in tax administration;
• anticorruption efforts strengthened through the elimination of administrative barriers in business licensing (reduced by 30 percent in 2011);
• insolvency regime improved for the speedier resolution of bankruptcy cases;
• framework established to improve the national statistical system to inform the government’s decision-making process, supported by advisory services (since 2008) and by a capacity-building operation (launched in 2012);
• accountability of the extractive industries increased through implementation of the Extractive Industries Transparency Initiative (EITI) (103 companies in 2006 to 167 companies in 2011);
• performance, efficiency, and responsiveness of the health care system increased through: (i) health network master plans in 14 regions of Kazakhstan, (ii) a network of medicine information call centers in all 16 regions, and (iii) a streamlined food safety system;
• national education strategy enhanced by providing advisory services toward evidence-based decision making and a national entrance exam system;
• transport connectivity improved by upgrading about 700 kilometers along the Western Europe–Western China International Transit Corridor;
• reliable and cost-effective electricity supply improved by upgrading and modernizing the country’s power transmission systems, increasing the volume of electricity transfer from generating plants to markets by 92 percent and reducing transmission losses by 16 percent;
• agricultural productivity increased between 12 and 200 percent by rehabilitating deteriorating irrigation systems and diversifying into nontraditional farming;
• over 140,000 hectares of grassland and pastures restored after degradation from wheat cultivation, increasing the potential for livestock breeding;
• forests rehabilitated and land degradation trends reversed by planting about 30,000 hectares in Irtysh pine forest and 40,000 hectares on Dry Aral Seabed since 2006;
• the availability of water for productive purposes improved, including irrigated agriculture, fisheries, and industry, and the Northern Aral Sea revived;
• access to safe and affordable water in the Nura river basin increased by removing 2 million tons of historic mercury contamination from the river banks, beds, and flood plains;
• gas flaring legislative framework and institutional capacity improved, leading to a threefold reduction in gas flaring.

Bank Group Contribution
As of December 31, 2012, the lending portfolio of the International Bank for Reconstruction and Development (IBRD) in Kazakhstan consisted of 12 active projects with total commitments of US$3.6 billion in various sectors, including transport, energy, health, education, agriculture, environment, and public and private sector development. The IBRD portfolio is increasingly directed at institutional reform. In addition to lending, the IBRD provides extensive advisory services to the Government of Kazakhstan through the cofinanced JERP, which provides policy analysis, strategic planning expertise, and good practice options for economic and social development reform. JERP financing has grown from US$1 million a year since its inception in FY03 to over US$4.5 million in FY13. The JERP for FY13 comprises 28 interrelated analytical and advisory assistance activities, focusing on the government’s strategic priorities in the growth agenda: public finance management, social modernization, productivity and competitiveness, and a safe environment.

As of December 31, 2012, the total committed portfolio of the International Finance Corporation (IFC) in Kazakhstan amounted to US$379 million, with 10 clients in financial markets, agribusiness, retail, construction materials, and the railway sector. In line with the Country Partnership Strategy (CPS), the IFC strategy in Kazakhstan focuses on improving the infrastructure, strengthening the financial sector, and supporting economic diversification and competitiveness. In addition to direct investments, IFC is providing advisory services to improve corporate governance, help the government structure public-private partnerships, and bring food safety standards to international levels.

Partners
The Bank closely collaborates with other multilateral institutions and development partners in Kazakhstan, comprising the Delegation of the European Union (EU), the United States Agency for International Development (USAID), the German Agency for International Cooperation (GIZ), the International Monetary Fund (IMF), the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), the United Nations Development Programme (UNDP), and the United Nations Children’s Fund (UNICEF). In the area of improving competitiveness and fostering job creation, partners provide support on expanding the role of the private sector and trade integration (EU, USAID), financial sector reforms (IMF), building skills (EU, GIZ), agriculture (GIZ), small and medium-sized enterprise development (ADB), electricity markets and investments (EBRD, USAID), and roads (ADB, EBRD). In the broad governance agenda, partners provide advice on local public administration reform, public sector implementation capacity (EU), civil service reform (EU, UNDP), customs reforms (USAID), judicial sector reforms (EC, GIZ, USAID), social protection (EU, UNICEF), and health (EC, USAID). In the area of the environment, partners focus on sustainability (EC, GIZ, UNDP) and energy efficiency (EBRD).

Moving Forward
The Bank’s CPS for 2013–17 is aligned with the government’s core development priorities outlined in the Kazakhstan Development Strategy until 2020, and supports the country’s long-term objective of joining the top 30 developed countries by 2050. The CPS emphasizes progress in the following broad areas of engagement: (i) improving competitiveness and fostering job creation, (ii) strengthening governance and public service delivery, and (iii) ensuring environmentally sustainable development. In each of the strategic CPS themes, key advisory activities are underway, mainly in a programmatic structure. An indicative lending program envelope for the first four years would be expected to total about US$2 billion (plus the mobilization of counterpart funds from the government), allocated to priority areas to advance institutional development and increase access to key public services. In accordance with the government’s preferences, all IBRD lending is foreseen in the form of investment projects. The CPS holds out the possibility of extending program-for-results financing in view of the capacity needs and strong results orientation of the investment programs, or deploying development policy operations to counter external shocks.

Beneficiaries
As part of the Western Europe–Western China International Transit Corridor Program, a new road in Akzharma, a remote village in Kazakhstan, is not finished yet, but has already brought enormous changes to local life. Tursynbay Akhmetov, an adviser at a Kyzylorda-based road construction company, says that an advantage of employing locals is that they care about the road’s long-term quality. “They want it to meet international standards and they want it to last,” he says. “We also try to focus on young workers. They are the future of our road sector. And this helps keep them at home and occupied.” Maya Assanova, who manages a local catering company, says that the demand for women workers is high. “Our company is feeding construction workers. And almost all of our employees are women.”

The Drug Information Analytical Centers established under the Health Sector Technology Transfer and Institutional Reform Project in 2011 throughout Kazakhstan provided popular consultancy services to the population and health practitioners on rational drug use. Astana resident and mother of two, Janna Kassymova, says she finds the new system very useful: “Whenever my children get sick, I call to the Center for a consultation on the use of medication prescribed by the doctor. The staff always advises on the best cost efficient option, and informs on the rights for a free medical care.”