KAZAKHSTAN - LAUNCH OF THE PUBLIC PRIVATE ECONOMIC

UNCLAS SECTION 01 OF 04 ASTANA 001321

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EAID PREL PGOV KZ

SUBJECT: KAZAKHSTAN - LAUNCH OF THE PUBLIC PRIVATE ECONOMIC
PARNTERSHIP INITIATIVE

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SUMMARY
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1. (U) Special Representative for Commercial and Business Affairs
Frank Mermoud and Commerce DAS Paul Dyck joined Kazakhstani Prime
Minister Masimov and a delegation of U.S. and Kazakhstani public and
private sector officials to launch the U.S.-Kazakhstan
Public-Private Economic Partnership Initiative (PPEPI) in Astana on
June 24. Discussion was organized around the PPEPI's six pillars.
All sides acknowledged the need to tackle difficult issues so as to
further improve Kazakhstan's investment climate. Participants had
an opportunity to directly address questions of concern to Prime
Minister Masimov. The launch concluded with the issuance of a Joint
Statement, which envisions the formation of a PPEPI Coordination
Committee and PPEPI working groups. End Summary.

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PROMOTING A HEALTHY BUSINESS CLIMATE IS KEY
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2. (U) The U.S.-Kazakhstan Public-Private Economic Partnership
Initiative (PPEPI) was launched in Astana on June 24. The all-day
program supported by EEB/CBA, SCA, and U.S. Embassy Astana included
sessions devoted to each of the PPEPI's six pillars (economic
diversification, anti-corruption, transparency, exchanges of experts
and technology, regional integration, WTO accession) and a keynote
address by Prime Minister Masimov, following which he answered
questions from the audience. In addition to the four official PPEPI
partners -- the USG, Kazakhstani government, American Chamber of
Commerce in Kazakhstan (AmCham),and Kazakhstan's Atameken National
Economic Chamber -- the U.S.-Kazakhstan Business Association (USKBA)
and Kazakhstan's Forum of Entrepreneurs also played prominent roles
at the launch.


3. (U) Vice Minister of Industry and Trade Edil Mamitbekov delivered
opening remarks at the June 24 event, reminding the audience that
the U.S. is the largest source of foreign investment in Kazakhstan.
He expressed the hope that PPEPI would strengthen U.S.-Kazakhstan
economic ties through "long-term dialogue," establish greater
confidence between U.S. and Kazakhstani businesses, and contribute
to Kazakhstan's economic diversification. In his follow-on address,
senior Commerce Department representative DAS Paul Dyck explained
that the PPEPI was unique in being private-sector driven. He
stressed the need to further strengthen Kazakhstan's business
climate. Atameken's Azat Peruashev noted in his own remarks that
the Kazakhstani government had recently adopted decisions aimed at
reducing administrative barriers to business activity. The AmCham's
Ken Mack stressed that the principal aim of PPEPI should be to
provide policy recommendations that would promote a healthy business
environment. He noted that for much of the audience, economic
diversification is the most important PPEPI pillar, but the key to
diversification, he argued, is progress on the other five pillars,
especially anti-corruption.

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ECONOMIC DIVERSIFICATION
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4. (U) A session on economic diversification followed the addresses
by Mamitbekov, Dyck, Peruashev, and Mack. Timur Nurashev, Chairman
of the Ministry of Industry and Trade's Investment Committee, noted
the economic progress Kazakhstan had already made, attracting 80
percent of all the foreign investment in the Central Asia region.
World Bank Kazakhstan Country Director Sergey Shatalov argued that
successful economic diversification will require legal stability,
political stability, regulatory efficiency, and strong
anti-corruption measures. He contended that tax privileges and
other investment benefits may be important at the initial stage of
promoting investment, but in the long-run they can be economically
distorting.

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ANTI-CORRUPTION
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5. (U) During a session on anti-corruption measures, Customs
Committee Deputy Chairman Serzhan Duysembayev readily admitted that
corruption is an "acute problem" in the customs service. The
Customs Committee had done an analysis and found 58 different types
of customs-related corruption. As a result, he explained, Customs
was changing its procedures to decrease opportunities for
corruption. Yerlan Sagadiyev, an advisor to Prime Minister Masimov,
told the audience that Kazakhstan's new Tax Code -- which is
expected to be adopted by the end of the year -- would increase
transparency and reduce corruption. The economic aim of tax reform,
he explained, was to gradually shift the tax burden from production
to wealth. Raimbek Batalov of the Forum for Entrepreneurs argued
that the situation with small- and medium-sized enterprises (SMEs)

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is not sustainable. They are hampered by corruption and the shadow
economy. Though the government has recently taken steps to reduce
administrative barriers to business activity, it must do more on
that front. In addition, in order to assist SME development it is
necessary to improve Kazakhstan's infrastructure, reform the tax and
customs codes, provide better SME financing, and improve education
and human capital.

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TRANSPARENCY
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6. (U) Leading off a session on transparency, Asian Development
Bank Country Director Steven Wermert focused on government tenders.
He contended that the lack of prequalification requirements for
bidders deters prospective foreign participants who presume that
less qualified but politically connected domestic companies are
advantaged in the tender process. Karl Bach, Project Manager of the
World Bank's Central Asia Corporate Governance project, highlighted
the importance of bringing Kazakhstani corporate governance in line
with international standards. He argued that progress remains slow
on implementing accounting and corporate disclosure. Businesses are
especially reluctant, he said, to provide better information on
conflicts-of-interest and related-party transactions. Dina
Shazhenova, Executive Secretary of the Ministry of Economy and
Budget Planning, discussed the government's efforts to improve
transparency through making state services more accessible,
including through e-government initiatives.

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EXCHANGES OF EXPERTS AND TECHNOLOGY
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7. (U) In a session on exchange of experts and technology, Nick
Olds, Country Manager for ConocoPhillips, argued that effective
integration of knowledge and technology is critical to achieving the
goal of economic diversification. Atameken's Azat Peruashev argued
for exchange of American stock market expertise with Kazakhstanis.
USAID Central Asia Regional Director Bill Frej proposed partnering
the 30 Kazakhstani firms selected to participate in the government's
"30 Corporate Leaders Program" with foreign companies as means to
facilitate technology transfer and enhance cooperation.

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REGIONAL INTEGRATION
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8. (U) In a session on regional integration, USKZBA's Bill Veale
stressed the importance of transport, logistics, and trade
facilitation in developing regional economic links. The Lancaster
Group's Nurlan Kapparov argued that Kazakhstan has great potential
as a transit bridge between Europe and Asia. He emphasized the need
to develop railway, highway, air routes, and pipelines to maximize
Kazakhstan's attraction as a transit corridor. Ali Takesh of Philip
Morris complained that differing and complex customs procedures have
made it impossible for his company to export production from
Kazakhstan to Uzbekistan.

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WTO ACCESSION
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9. (U) During a session on WTO accession, Betsy Hafner, USTR's
Director for Russia and Eurasia, argued that low tariffs and open
access to services markets -- two sensitive points in Kazakhstan's
WTO negotiations -- are both good for Kazakhstan. High tariffs, she
contended, increase prices for consumers, increase input costs for
producers, and encourage smuggling. Hafner explained that open
access to services ensures supplies of services at world prices,
benefiting manufacturers as well as consumers. Discussing yet
another sensitive area, she contended that rigid controls on foreign
labor are counter-productive, discouraging foreign investment.
Zhanar Aitzhanova, Vice-Minister of Industry and Trade and
Kazakhstan's lead WTO negotiator, described numerous initiatives to
both improve the investment climate and speed Kazakhstan's WTO
accession. Aitzhanova highlighted current efforts to liberalize the
financial services sector, and asked that the U.S. take into account
the WTO accession conditions it has requested from Russia when
negotiating Kazakhstan's accession.

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MASIMOV ANSWERS AUDIENCE QUESTIONS
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10. (U) State Department Special Representative for Commercial and
Business Affairs Frank Mermoud introduced Prime Minister Masimov,
thanking him for his leadership and for his participation in the
launch event. Mermoud noted that significant advancements in
reducing trade barriers would benefit the public and private sectors

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of both countries. In his keynote address, Masimov reminded the
audience that Kazakhstan had already attracted over $80 billion in
foreign investment and was aiming to become one of the world's 50
most competitive countries. Masimov stressed that the PPEPI pillars
were all focus areas for the Kazakhstani government. Following his
prepared remarks, Masimov responded to audience questions,
addressing, inter alia, fairness, transparency, and competition. He
also admitted the need to reduce corruption in both tax and customs
by streamlining and simplifying procedures. In response to a
question about pressures on foreign businesses from regional
authorities, Masimov acknowledged the problem, and said that the
inconsistent application and enforcement of laws by regional
authorities is a critical concern for the central government. After
the question and answer period, the AmCham's Ken Mack read out the
agreed-to PPEPI Joint Statement, which envisions the formation of a
PPEPI Coordination Committee and PPEPI working groups. (see para 12
for the Joint Statement text).

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COMMENT
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11. (SBU) Earlier concerns, particularly on the part of the AmCham,
that the Kazakhstanis would try to turn the launch event away from
the ambitious aims of PPEPI and into yet another routine investment
conference proved to be unfounded. Instead, there was a clear
understanding that the PPEPI is not about directly cutting business
deals, but rather about proposing policy changes that, if
implemented, will ultimately lead to more foreign investment,
economic growth, and economic diversification. The Kazakhstanis
were, in fact, very accommodating in agreeing to almost all of the
requests of the USG and AmCham regarding both the format of the
launch event and the substance of the PPEPI Joint Statement. This
included enshrining all six original PPEPI pillars in the Joint
Statement and ensuring all were covered at the launch. Prime
Minister Masimov also delivered on his promise to reserve a time
block to answer participants' questions following his keynote
address. That the Kazakhstanis have become much more open to
seriously discussing tough, uncomfortable issues related to the
investment climate was best evidenced by the remarks of Customs
Committee Deputy Chairman Duysembayev, who minced no words about
corruption in the customs service. Our next step should be to move
forward expeditiously in forming several PPEPI working groups, so as
not to lose the momentum from the successful launch event. End
Comment.

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JOINT STATEMENT
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12. (U) The following is the full text of the PPEPI Joint
Statement.

BEGIN TEXT

JOINT STATEMENT ON THE U.S.-KAZAKHSTAN PUBLIC-PRIVATE ECONOMIC
PARTNERSHIP

Astana, June 24, 2008

Building on the United States-Kazakhstan strategic partnership and
recognizing the fundamental role of the private sector in creating
sustained economic growth, the Governments of the United States and
Kazakhstan have established the Public-Private Economic Partnership
to invest our public and private sectors in a shared vision of
stability, prosperity, and reform in Kazakhstan.

The Partnership will propose policy reforms and other actions to
remove impediments to, and create opportunities for, successful
investment in Kazakhstan. It is intended to advance the following
objectives:

(1) Development of robust anti-corruption measures;

(2) Economic diversification, with a special emphasis on small- and
medium-sized enterprises;

(3) Transparency and good governance, in particular measures that
improve the investment climate by reducing corruption, removing
administrative and legislative barriers, and strengthening the rule
of law;

(4) Scientific and technical cooperation and exchanges of
specialists between universities, research institutes, and private
business;

(5) Highlighting the advantages that membership in the World Trade
Organization will give to American and Kazakhstani investors and
traders as well as positive impact on bilateral trade relations and

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the overall economies of both countries;

(6) Regional economic integration that will bolster the
independence, sovereignty, and security of the countries of the
region, ensuring their sustainable development and prosperity.

The Governments of the United States and Kazakhstan, The American
Chamber of Commerce in Kazakhstan, the Chamber "Atameken" are
expected to be Partners in the Partnership. The Partnership also
welcomes the support and participation of U.S. and Kazakhstani
private companies and business associations.

The Partnership is intended to advance the key objectives mentioned
above and facilitate dialogue on reform through working groups,
consisting of one or more representatives of each of the Partners,
as well as experts from international institutions and the private
sector. The working groups will formulate proposals on legislation,
policies, strategies and programs for achieving the Partnership
objectives which will be submitted to the two Governments for
review.

In accordance with objectives of the Partnership, the Coordination
Committee, consisting of six people, including one representative of
each of the Partners as well as Ambassador of the Republic of
Kazakhstan to the United States and the U.S. Ambassador in the
Republic of Kazakhstan is to coordinate the activity of the working
groups.

At a minimum, the following working groups are to be created:

(1) on issues of economic diversification and small and medium
business development;
(2) on securing transparency and creating conditions for efficient
economic activity;
(3) scientific and technical cooperation;
(4) on issues of regional economic integration; and
(5) on issues relevant to the reduction of corruption and the
improvement of the investment climate.

In order to maintain a permanent dialogue within the framework of
the Partnership, the United States and Kazakhstan plan to conduct a
Kazakhstani-American Forum on the issue of Public-Private Economic
Partnership on a regular basis every 1-2 years.

END TEXT

ORDWAY