Iskandar GULAMOV, Officer-in-Charge, Asian Development Bank Kazakhstan Resident Mission:
ADB EXPERTS ARE READY TO SUPPORT THE GOVERNMENT IN TAX REFORMS
Kazakhstan and the Asian Development Bank are celebrating the 30th anniversary of their partnership. Over the years, the development institution has invested about $7 billion in the economy of Kazakhstan and is not going to stop there. Iskandar GULAMOV, Officer-in-Charge of the Asian Development Bank Kazakhstan Resident Mission spoke in an interview with Interfax-Kazakhstan about financing infrastructure projects, support for SMEs, initiatives in the field of climate change, and shared the bank’s plans in fiscal reforms, expressed his opinion on the development of a new Tax Code in Kazakhstan.
- This year marks the 30th anniversary of ADB’s partnership with Kazakhstan. In what direction do you think your cooperation with Kazakhstan is moving?
- Indeed, this year is significant for our partnership with Kazakhstan. This year we are celebrating the 30th anniversary of our successful cooperation, as a result of which ADB has mobilized approximately $7 billion investments in the economy of Kazakhstan. These funds were used for improving road infrastructure, building solar power plants, providing affordable financing for SMEs, and supporting women's mortgage lending, as well as many other important projects.
It is obvious that over 30 years our cooperation has evolved. If at the beginning the focus of our joint work was on infrastructure and support to the transition to a market economy, now our cooperation is more multifaceted and includes not only projects in the public but also in the private sectors, as well as the Knowledge and Experience Exchange Program. Kazakhstan is a pioneer in knowledge partnership in Central Asia, and together with the government we have been successfully implementing this program for many years.
Currently, our operations in Kazakhstan are based on the Country Partnership Strategy that we approved last year. This is a five-year strategy that aims to support the government in three key areas. The first is addressing the impacts of climate change and decarbonizing the economy. The second is promoting inclusive economic growth. Third, improving governance. All three areas are aligned with the new priorities of Kazakhstan and strongly support the government programs that have been adopted for their implementation. Accordingly, our projects in the public and private sectors, our analytical work and training programs, as well as the technical assistance are aimed primarily at supporting Kazakhstan in addressing these three key issues.
- Can you tell us in more detail about the projects you are implementing in the three areas of your strategy?
- Today, our portfolio includes 4 projects totaling $800 million. These are only those projects that we are implementing in the public sector. We also have a number of projects in the private sector. Our public sector projects portfolio includes two projects in the transport sector – the reconstruction of major highways Aktobe - Makat and Aktobe - Kandyagash. These projects are designed to improve capacity for freight and goods and provide more economic opportunities for people using these roads. Our portfolio also includes a project in the financial sector – providing access to long-term and affordable mortgage financing for Kazakh women. The project is known as the Umai program, which is being implemented jointly with Otbasy Bank and will be completed this year. The fourth project in our portfolio supports the government's recently adopted public fiscal management reforms. This financing instrument is being used in Kazakhstan for the first time. It envisages allocation of funding to support Kazakhstan’s fiscal governance and financial sector reforms.
- Are we talking about the allocation of $350 million for fiscal reforms, which were previously announced?
- Yes, that's right. In addition, our portfolio includes 12 technical assistance grants worth $13 million, including the joint Knowledge and Experience Exchange Program that I mentioned earlier. This is a unique program for ADB, which has been financing institutional reforms of the government for 10 years and is co-financed by the government and our bank in equal shares. The program is highly successful and innovative. Several other countries have expressed interest in creating similar knowledge platforms with ADB in their countries.
- How much does ADB plan to invest in projects this year, not only in the public sector, but also in the private sector?
- This year we plan to approve and make available for disbursement more than $800 million. This amount includes projects that provide support for the development of electricity networks in southern Kazakhstan, financing SMEs through microfinance organizations, construction of wastewater treatment facilities in several cities and the development of transport networks.
- Are the previously announced $350 million for fiscal reforms included in the volume of investments in the economy of Kazakhstan planned for the current year?
- Yes, this program to support reforms in fiscal management and the banking sector consists of two subprograms. The first was approved in December last year, we intend to sign it and mobilize funds this year. In parallel, we will start working on the second subprogram, which will include discussion and selection together with the government of new additional reforms, based on the results of which we will be ready to provide additional funding next year.
- Does the fiscal reform program include work on a new Tax Code of Kazakhstan?
- This program is now based on two concepts adopted by the government: the Concept of Public Finance Management and the Concept of Financial Sector Development until 2030. Most of the reforms selected in our program are drawn from these concepts. Based on the new instructions from the Head of State and requests from the government, in April we are sending a special project team to Kazakhstan to discuss the need to include additional priority government reforms in the program, which may also include the Tax Code reforms. Regardless of whether they are included or not, we have expressed our readiness to support the government in its work on tax reforms and are ready to provide all possible assistance not only through financing, but also through expertise and technical support.
- So, can ADB employees be included in the working group to discuss amendments to the Tax Code?
- Absolutely right. We have now launched a program to study international best practices with the State Revenue Committee under the Ministry of Finance. This program has been launched and will be implemented soon. Additionally, we are discussing the need for our experts to work on the reforms themselves.
- The expected amendments to the Tax Code are causing a lot of controversy in the expert community and beyond. Does ADB have any opinion or assessment of the measures proposed by the developers? For example, the issue of VAT and luxury tax is controversial.
- Our experts have not yet started their work. We must first have a discussion with the government and understand in what roles and in what areas of the ongoing tax reforms their assistance is needed. In general, of course, tax reforms in any country are a sensitive issue that affects not only economic activity in general, but has also social aspects that are important for the entire population, especially when it comes to VAT. Therefore, this matter must be approached very carefully, studying all the pros and cons, analyzing the chain of possible effects, and making an appropriate balanced decision. At the same time, it is obvious that it is necessary to take specific measures to strengthen the revenue side of the state budget, with which we absolutely agree. Nowadays, worldwide there is an acute issue of mobilizing internal budget resources. Many countries around the world are working on additional measures to identify new sources of income or increase revenues from current sources. We understand the goals being pursued and are ready to provide support, primarily in terms of studying the experience of developed Asian countries, some of which have already implemented such reforms at some point.
- Can you clarify on what conditions and for what period $350 million will be povided for fiscal reforms?
- We are currently finalizing the agreement, which will then be submitted to the government and parliament for consideration. Now we are talking about providing $350 million to the Ministry of Finance on standard conditions, including a grace period. I would like to note that we fully trust national systems and focus only on reforms. Typically, such loans are provided for a period of up to 15 years, but the final period is determined by the government. We, in turn, provide a wide range of tools to optimize financing conditions.
- This year Kazakhstan chairs the Central Asia Regional Economic Cooperation (CAREC) program. What are its main results and future plans?
- From 2001 to 2022, the total investment volume under this program exceeded $50 billion and covered 280 projects in different sectors of the economy. Over the years, the CAREC program has demonstrated effectiveness in increasing the physical connectivity of member countries through investments in roads, railways, and ports along 6 corridors. As part of it, more than 10 thousand km of roads and more than 6 thousand km of railways were built. If we talk about Kazakhstan, one example is the Aktau-Beineu road. After reconstruction, the travel time on this road was reduced from 12 to 6 hours. This in turn contributed to the growth of shipment through Aktau seaport. Since 2008, under ADB projects, more than 1,200 km of roads have been built along the CAREC corridors in southern and western Kazakhstan. We are currently considering diversifying transport routes and strengthening the CAREC transit potential along the Trans-Caspian International Transport Route (Middle Corridor). The Middle Corridor is the shortest route between the Western part of the People’s Republic of China and Europe, so it is obvious that CAREC will and should play an important role in realizing the potential of this corridor.
CAREC's priorities for this year also include initiatives for the implementation of the CAREC Climate Change Vision, including the establishment of the CAREC Climate and Sustainability Project Preparatory Fund. In addition, work has begun on the development of regional investment projects pipeline and continues within the framework of the Almaty-Bishkek economic corridor.
If we talk about projects that contribute to the development of the Middle Corridor, in Kazakhstan we have begun working on the Kyzylorda – Zhezkazgan road project and Saryagash bypass.
- If we focus on climate change projects, do I understand correctly that they include financing for the modernization of a number of thermal power plants in Kazakhstan?
- Our support to address the consequences of climate change and decarbonize the economy is multi-level. We primarily assist the government in implementing several strategic roadmaps and concepts, as well as provide technical assistance projects. One of these projects will identify coal assets that could be included in our energy transition program. In addition, we provide financing both for projects that involve transition from coal to less carbon-intensive sources, as in the case of thermal power plants, and for projects that involve transition to carbon-neutral sources, i.e. RES. Last year we approved the CHPP-2 project in Almaty.
- Last year, you began working on the pre-feasibility study for decommissioning of coal-fired thermal power plants. Can you tell us at what stage this project is?
- Currently, work on the pre-feasibility study has been completed, a comprehensive analysis of the thermal power plants has been carried out for possible inclusion in this program in Kazakhstan. In April, we will hold a large round of consultations with the participation of ADB experts in Astana, where the results of the pre-feasibility study will be presented to the government and the final report will be finalized. This report will determine which CHP plants need to be included in the program and what type of additional examinations will be required. I can say that the owners of coal-fired thermal power plants have expressed interest in exploring options for their phased decommissioning and abandonment of coal.
Following completion of the pre-feasibility study, we will conduct further in-depth studies, including developing a preliminary financing framework that includes access to concessional financing, which we plan to mobilize through our partner institutions and organizations. As the coal industry employs a large number of people, all our proposals will also include a specific set of social measures, considering “just transition” – transition that will take into consideration interests and well-being of the people employed in the industry.
The financing amount has not yet been determined as it will depend on the financing mechanisms and structure. Some stations are owned by the government, while others are owned by private sector companies. Each of them requires an individual approach.
- As for CHPP-2 in Almaty, for which 98 billion tenge has been allocated, what is this project's status?
- In March last year, we approved the Almaty CHPP-2 modernization project. It provides for the gradual decommissioning and replacement of coal turbines with combined cycle gas turbine units with a capacity of up to 600 MW for electricity and 957 Gcal/hour for heat. We believe the project will bring significant environmental benefits to Almaty by reducing emissions. The project is currently under implementation.
- As since the beginning of the year two cases of significant tremors have already occurred in Almaty, will ADB initiate any projects on seismic safety?
- In fact, we have already begun working in this direction, in particular on a new type of catastrophic risk insurance. Today there is no such product in Kazakhstan. We hope that a regulatory environment will be created for this type of insurance product so that insurance companies are not afraid and can provide it. As part of the Knowledge and Experience Exchange Program, we received and approved an application, and experts have already begun working.
The second area that we are working on together with the structural division of the Baiterek Holding is the creation of a new mechanism for financing sustainable housing. It's about introducing new green building standards and providing sustainable financing for this. Construction is a very complex field, with many standards and requirements. This work began before the first earthquake in Almaty. The report has already been prepared, and I hope that by May it will be published.
- Do you plan to issue bonds on KASE or AIX this year?
- KASE is our strategic partner – with their help we have placed 15 bond issues since 2019 and raised 165 billion tenge. Our 10-year bonds, for example, financed the Umai program. Today there are 11 issues in circulation, two of which will be repaid this year. This year, we plan to additionally issue bonds to finance our road projects and private sector operations.
- Thanks for the interview!
April, 2024
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