KAZAKHSTAN CLOSES IN ON EITI VALIDATION

UNCLAS SECTION 01 OF 03 ASTANA 002129

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E.O. 12958: N/A
TAGS: PGOV PREL ECON EINV EPET SOCI KZ
SUBJECT: KAZAKHSTAN CLOSES IN ON EITI VALIDATION

REF: ASTANA 0948

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1. (U) Sensitive but unclassified. Not for public Internet.


2. (SBU) SUMMARY: From November 23-December 2, independent
validators based in the UK interviewed government officials,
non-government organizations, energy executives, and diplomatic
representatives to assess Kazakhstan's progress toward validation
under the Extractive Industries Transparency Initiative (EITI). The
validators said that while Kazakhstan is likely to complete the
validation process by the end of 2009, the Ministry of Energy and
Mineral Resources (MEMR) and the energy companies involved in the
initiative have done little more than meet the bare minimum
requirements for validation. They -- and the NGO representatives
they spoke with -- are concerned that once validation is achieved,
there will be little incentive for Kazakhstan to continue to improve
transparency in the extractive industries sector. END SUMMARY.

THE BENEFITS OF EITI


3. (U) The Extractive Industries Transparency Initiative (EITI)
aims to increase transparency in transactions between governments
and companies within extractive industries. Benefits include an
improved investment climate by providing a clear signal to investors
and international financial institutions that the government is
committed to greater transparency. In extractive industries, where
investments are capital intensive and dependent on long-term
stability to generate returns, increasing transparency and reducing
uncertainty is beneficial for business. Increased transparency also
benefits civil society by disclosing payments that companies make to
governments for energy resources, thereby making governments more
accountable to their citizens. Kazakhstan's EITI work plan,
including measurable targets, a timetable for implementation, and an
assessment of potential capacity constraints, is available at
www.eiti.kz/en/workplan/.

THE IMPORTANCE OF VALIDATION


4. (U) Validation is EITI's quality assurance mechanism and serves
two critical functions. First, it promotes dialogue and learning at
the country level. Second, it holds all EITI implementing countries
to the same global standard. Validation is not an audit. It
evaluates EITI implementation in consultation with stakeholders,
verifies achievements with reference to the EITI global standard,
and identifies opportunities to strengthen the EITI process going
forward. The 28 EITI candidate countries, including Kazakhstan,
must complete validation by March 2010. If validation is not
completed, or if the validation review shows that there has been no
meaningful progress toward achieving EITI compliance, the EITI Board
will revoke that country's candidate status. Azerbaijan (February
16) and Liberia (October 4) are the only two countries that have
successfully completed the EITI validation process to date.

VALIDATORS SAY KAZAKHSTAN HAS MADE SIGNIFICANT PROGRESS...


5. (SBU) On December 1, Energy Officer met with Chris Nurse,
Director of the Hart Group, an audit and consulting firm based in
Oxfordshire, England, and Dmitry Pozhidayev, a social development
advisor retained by the Hart Group to assess Kazakhstan's progress
toward EITI validation. According to the terms of the EITI,
payments and revenues must be reconciled by a credible, independent
administrator using international auditing standards, including an
opinion on the financial statements and identification of any
material weaknesses.


6. (SBU) Overall, according to Nurse, Kazakhstan has made
significant progress under EITI and, although a final report will
not be available for several weeks, he indicated that Kazakhstan
would complete the validation process by the March 2010 deadline.
Nurse said that more than 90% of oil and gas revenue in Kazakhstan
is disclosed via EITI reports.


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BUT MORE WORK REMAINS TO BE DONE


7. (SBU) However, according to the validators, only 60% of the
revenue from the mining industry is disclosed according to EITI
procedures. Industry leaders, such as Kazakhmys, KazZinc,
KazAtomProm, and Arcelor Mittal, have shown little to no interest in
the initiative, which Nurse asserted sets a bad example for other
mining companies. He added that only 20% of companies in the
extractive industries -- and no Chinese businesses -- have signed
the EITI memorandum of understanding. (NOTE: Nurse complained that
MEMR was unable to produce a comprehensive list of companies
operating in the extractive industries sector, and said it admitted
it had misplaced the document containing the original signatures of
the companies that initially signed up to EITI. END NOTE).

QUESTIONS ABOUT KMG'S CASH FLOW AND DUAL ROLE


8. (SBU) The validators expressed concern that the government and
energy companies operating in Kazakhstan have not indicated any
desire to go beyond the most basic requirements of EITI. In fact,
some, such as national oil company KazMunaiGas (KMG),refused to
meet with the validators during their visit. Nurse said he wanted
to question KMG about its cash flow and contributions to government
revenue. He also wondered about the potential conflict of interest
in KMG's dual role as both the government's regulatory authority and
an equity partner in major projects, such as Tengiz and Kashagan.

NGOS SAY VALIDATION IS NOT THE END OF THE PROCESS


9. (SBU) Dmitry Pozhidayev met with several NGOs during his visit
to Kazakhstan and expressed a high opinion of their efforts to
increase transparency and accountability. Despite their passion and
dedication, he asserted they did not fully succeed in speaking with
one voice through the coalition that they created to monitor
Kazakhstan's EITI progress -- Oil Revenues Under Public Oversight.
Pozhidayev said the NGOs are concerned that the government and
energy companies will have no further incentive to continue to push
for greater transparency once Kazakhstan has achieved validation.
"They think they're done!," he exclaimed, "but they need to go
further and deeper, to make EITI part of the business culture."

HOW INDEPENDENT ARE KAZAKHSTAN'S NGOS?


10. (SBU) On November 25, Energy Officer met with Pavel Lobachev of
the Almaty-based NGO "Echo," which is a member of the EITI NGO
coalition. A lifelong resident of Almaty, Lobachev has traveled to
the United States twice under the International Visitor Leadership
Program and provides social marketing research and analysis to
private companies, the OSCE, and independent political parties in
Kazakhstan. He said he has repeatedly turned down state grants
under the Civic Alliance Program, because he said the money comes
with strings attached. Lobachev said that once an NGO receives a
government grant, it also receives directions from the local
government on how and where to spend the funds. Lobachev said he
knows of NGOs that were forced to stop core social projects in order
to focus on the government's priority. He said that there are at
most "two or three" legitimate, independent NGOs in each oblast.


11. (SBU) Pozhidayev, however, disagreed. He said there are so
many independent, diverse NGOs in the Civic Alliance that the
government "cannot possibly" control them all.


12. (SBU) COMMENT: Kazakhstan has indeed made demonstrable
progress under the EITI, thanks in large part to the efforts of
international oil companies (reftel). However, it would be a
mistake for those companies or the government to assume that
validation is the end of EITI. On the contrary, Kazakhstan must
continue to improve transparency in its mining sector, at the local
government level, and at National Welfare Fund Samruk-Kazyna if it
is to remain an attractive, long-term investment opportunity for
strategic investors. END COMMENT.


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