KAZAKHSTAN REDUCES BURDENSOME BUSINESS INSPECTIONS

UNCLAS SECTION 01 OF 02 ASTANA 001348 SIPDIS STATE FOR SCA/CEN, EEB, EUR/ACE, F STATE PLEASE PASS TO USAID E.O. 12958: N/A TAGS: PGOV PREL ECON EAID SOCI KZ SUBJECT: KAZAKHSTAN REDUCES BURDENSOME BUSINESS INSPECTIONS ASTANA 00001348 001.2 OF 002 ¶1. SUMMARY: Inspections of business enterprises in Kazakhstan have traditionally served as disincentives to entrepreneurs due to their intrusive and burdensome nature. Recognizing this as a drag on business development and economic diversification, President Nazarbayev ordered a moratorium on inspections of businesses for the period of February 21, 2008, through December 31, 2008, which was then renewed for the period of February 17, 2009, through July 1, ¶2009. During this moratorium, the Government of Kazakhstan worked on developing and enacting new legislation to improve the inspections' regime. On July 17, these business reforms were realized when President Nazarbayev signed into law a series of amendments which will serve as the foundation for a new, pro-growth, and streamlined inspections' regime. END SUMMARY. ¶2. President Nazarbayev declared a moratorium on inspections of businesses on February 21, 2008. This moratorium was based in part on an analysis of the frequency and legality of inspections of business enterprises by the Forum of Entrepreneurs of Kazakhstan (the "Forum"),a Kazakhstani business association, the Prosecutor General's Office, and the USAID Business Environment Improvement Project, which showed that many inspections were not properly registered, and/or exceeded their legal parameters. The moratorium provided immediate relief to business and allowed time for the government to develop improvements to the inspections' system. Since that time, the Government of Kazakhstan has developed and enacted comprehensive improvements to its inspections' regime in an effort to reduce the level of intrusiveness, improve the government's legal compliance, and improve the overall efficiency of inspections. ¶3. A new Concept for Inspections, developed with USAID assistance, was adopted that described the free market principles upon which the new inspections' regime is based. This new approach analyzes the risks of particular business activity according to objective criteria and assigns appropriate resources for inspections. This approach was designed to minimize the burden on compliant companies and also increase the professionalism of government agencies conducting inspections. ¶4. In March 2009, the Government of Kazakhstan established an 
Anti-Recession Council reporting directly to Prime Minister Masimov, which includes members from the Forum and nine ministries. This Council was charged with (1) taking measures to immediately stabilize the economy, and (2) improve the legal environment for business to facilitate the growth of entrepreneurial activity. The Council was also tasked with developing the package of legal reforms needed for the implementation of the Concept on Inspections. To support the Council's work on inspections, the USAID project provided expert technical assistance based upon best international practice in order to complete the necessary legal amendments. ¶5. On July 17, President Nazarbayev signed the Law "On Modifications and Additions to Some Acts of the Republic of Kazakhstan Concerning Private Entrepreneurship," and amendments to the Law "On Private Entrepreneurship." These reforms introduced new rules for inspections of business enterprises. Among other improvements, the new legislation: -- resolves legal confusion and ambiguity regarding the definition of an inspection versus other forms of government-business interaction by providing a clear definition of an inspection (i.e. an investigation that can result in a fine) increasing clarity and control of government action; -- eliminates fines during the first visit by an inspector. Business are now provided an opportunity to remedy any identified violations with fines assessed only if violations are not corrected, transitioning the inspections system to a regime that favors compliance over sanction; -- continues the transition from the Soviet-era command and control legal system that resulted in 100 percent inspections, to a system that reduces the number of business inspections through a market-based risk management approach; ASTANA 00001348 002.2 OF 002 -- requires all inspections and other forms of investigation be consistent with the schedule developed using the approved risk management system; -- mandates that all investigations (except criminal investigations and those occurring at established transit points, e.g. on roadways, borders, etc.) be registered at least 30 days in advance with the Committee on Legal Statistics of the General Prosecutor's Office; -- sets terms limiting inspections of large businesses to 30 days, medium businesses to 20 days, and small businesses to 10 days; -- requires the development and use of standardized checklists by each government inspectorate as a tool to guide inspectors based on the agency's risk criteria, and prohibits any inspection conducted without the use of such a checklist tool; and, -- strengthens the rights of businesses in relation to government inspectorates by, for example, permitting business entities to refuse improper inspections and/or to record the inspectors' activities. ¶6. The amendments require that each inspecting body under the Law "On Private Entrepreneurship" identify the risk factors of activity within its jurisdiction and develop criteria and risk-appropriate oversight or inspection strategies for each category (i.e. serious, medium, or low risk). Once adopted, government inspectorates will use this framework to prioritize activities of inspectors, allocate resources to activities of highest risk, and eliminate unnecessary contact with businesses. Munavara Paltasheva, Executive Director of the Forum of Entrepreneurs of Kazakhstan, expects that the full implementation of the amendments to the law will be effective in improving the operating environment for businesses working in, or considering entering, the Kazakhstani market. ¶7. Prime Minister Masimov, in a government session held on July 21, ordered all inspection agencies to complete the development of new risk management systems and checklists within six months from the Laws' publication (July 23, 2009). Based on a request from the Ministry of Economy and Budget Planning, USAID has agreed to provide technical support to a comprehensive reform process designed to introduce risk management protocols into the operations of more than 50 government inspectorate agencies. USAID, through its several economic growth assistance projects, will help develop inspectorate-specific risk management policies, associated sub-normative legal acts, and operational reforms for full and effective implementation of the new laws, based on the needs identified by the Government of Kazakhstan. HOAGLAND