3. Conclusions and recommendations for Kazakhstan’s state-owned sector
The Kazakh Government has undertaken important reform efforts over the past decade to improve the governance and performance its state-owned enterprises. Yet, significant implementation shortcomings exist. This chapter provides some overarching conclusions emanating from the Review, and subsequent policy recommendations to help Kazakh authorities implement planned reforms and undertake further reforms to align Kazakhstan with the OECD Guidelines on Corporate Governance of State-Owned Enterprises.
The government of Kazakhstan has taken steps in recent years to improve the management and corporate governance of SOEs. As recounted in the President’s various addresses to the nation, the government and holding companies have streamlined corporate governance practices for SOEs, improved reporting mechanisms and aimed to further reduce the state’s substantial presence in the economy.
Despite stated aims and related progress, this report raises important and varied concerns. Kazakhstan’s current ownership arrangements make it difficult to exercise state ownership rights on a whole-of-government basis. Line ministries and the two largest holding companies function alongside one another, seemingly with little to no co-ordination or communication. The situation is further complicated by a lack of clarity on roles and responsibilities between ownership entities and SOEs. The absence of a formal state ownership policy and thus of a clear rationale for ownership, and the presence of ambiguities regarding the extent of SOEs’ commercial and non-commercial objectives, make it difficult for the state to monitor and encourage improvements in SOEs’ sub-optimal performance.
The ownership arrangements in Kazakhstan are pieced together through a multitude of laws, Codes, decrees and regulations that are frequently revised and amended. The expectations and objectives – delegated by the state owner to the SOE – are often implicit, and KPIs that stem from development and action plans are often not directly accessible to the public.
In the current ownership landscape, there is no separation between the government’s ownership, regulatory and other state functions. Line ministries undertake both regulatory and monitoring functions, as well as sectoral regulatory functions. While the model Corporate Governance Code outlines the powers vested in the governing bodies of SOEs, aiming to limit direct involvement in day-to-day matters by the ownership entity, the state retains the authority to approve vital corporate documents, such as strategic plans and financial decisions. This practice has many implications, including the issuance of competing objectives for SOEs.
In practice, the state – as a sole or dominant shareholder – may control directly or indirectly a number of corporate decisions and thus limit SOEs’ operational autonomy, including with regards to hiring decisions. Perhaps relatedly, SOE boards and executive management seem to be subject to a high degree of political intervention, as revealed by frequent dismissals of CEOs following interventions by the President or the government. There are thus instances where state influence in SOEs goes beyond the strategic level and involves operational decisions. This risk seems higher where the government has a strong interest in a particular enterprise or sector, which likely stems from, inter alia, government policies and the importance of the enterprise to the national economy.
The risk of political interference in SOEs is, reportedly, a historical phenomenon, particularly regarding political appointees on boards and in executive positions. Board of Directors (BOD) currently have neither the independence nor the responsibilities to fulfil essential strategy setting and corporate oversight roles. Nomination procedures are not uniform across SOEs and do not sufficiently protect boards from political interference. In practice, therefore, many SOEs operate either as extensions of their ownership ministries or at the discretion of their executive management (whose representatives are appointed by the state rather than the BODs).
Access to unbiased legal or arbitration processes remains a concern frequently expressed by private businesses who expressed doubt about the domestic courts' reliability in resolving disputes between private parties and the state or SOEs. Kazakh SOEs have special privileges, distorting competition. Minority investors in SOEs have limited rights and protections, particularly in cases where state interests may conflict with commercial interests.
SOEs in Kazakhstan function within an incomplete accounting system, making it challenging to distinguish their financial activities and effectively allocate funds. Commercial and non-commercial activities are not separated, and compensation for public service obligations is not transparent. Although the public policy objectives and functions that SOEs are expected to fulfill as part of their national company and operator status are available in open sources, the phrasing and scope of these functions are often quite broad and lacking in specificity.
At the request of the Republic of Kazakhstan, this report reviewed Kazakhstan’s SOE corporate governance framework against the OECD Guidelines on Corporate Governance of State-Owned Enterprises. The Guidelines were developed by the WPSOPP to help governments ensure that the enterprises they own or control are more competitive, efficient and transparent. The WPSOPP recognises that, by requesting this review, Kazakhstan has positively indicated a willingness to assess and improve the corporate governance laws, rules, and practices that determine how their SOEs do business. This is of paramount importance for Kazakhstan given the prominent role of SOEs in the Kazakh economy.
This report finds that Kazakhstan’s SOE corporate framework, as it was at the time of writing, diverges from the Guidelines in certain fundamental respects. Effectively and promptly addressing these shortcomings could help ensure that SOEs contribute, to the fullest extent possible, to the Kazakh economy and citizens, and in line with state reform priorities. The Review has identified the following priority areas for reform:
Strengthening the state ownership function. The government should issue an explicit ownership policy which specifies how the state exercises its ownership rights, setting out the rationales for state ownership of companies. The policy should apply to all commercially-oriented enterprises in the state-owned sector and be subject to periodic reviews.
Professionalising boards. The government should develop, and ensure the enforcement of, transparent and competitive procedures for nominating directors, with particular attention placed on ensuring that members of boards have the requisite professional qualifications and are capable of and willing to exercise objective and independent judgement. It should further consider increasing the number of independent board members.
Enhancing transparency and disclosure. In order to enhance transparency, the Kazakh authorities should implement their indicated action plan, which notes the development of an annual aggregate report on SOEs that covers all SOEs fully or majority-owned at the central level of government.
Equitable treatment of shareholders and other investors. Ensure that the rights of non-state shareholders in SOEs are fully respected. They should have access to full information about the companies’ non-commercial objectives and be shielded from subsequent ad-hoc interventions by the state.
Maintaining a level playing field. To avoid distorting competition, public service obligation frameworks should be clarified and improved, with a clear compensation methodology established. SOEs should be required to maintain separate accounts for commercial and non-commercial activities to ensure competitively neutral compensation for carrying out public service obligations. The government should review the bankruptcy rules and moratoria applicable to SOEs, while eliminating the unconditional (in terms of duration and amount) use of state guarantees for SOEs to access finance. The government should require SOEs to access finance on commercial terms, which, among other things, means that they should be able to pledge their assets. In turn, boards and management should have the right incentives for sound financial management. To this end, the Ministry of Finance should strengthen its system for monitoring fiscal risks and ensure that all SOEs begin to have their annual financial statements audited by external independent auditors.
The following sections provide further details on the aforementioned priority areas for reform, and propose a number of additional areas for reform that the authorities are strongly encouraged to address when appropriate.
3.1.1. Strengthening the state ownership function
The Kazakh government is encouraged to develop an ownership policy, which should inter alia define the overall rationales for state ownership, the state’s role in the governance of SOEs, how the state will implement its ownership policy, and the respective roles and responsibilities of those government offices involved in its implementation. It may be considered good practice to include, in the ownership policy, objectives such as the creation of value, the provision of public services or strategic goals such as the maintenance of certain industries under national ownership.
The government should further consider transitioning from the existing separate track ownership model towards a more centralised model. This could be done by collecting the ownership of all commercially oriented SOEs under the aegis of the existent holding company Samruk-Kazyna/Baiterek or by establishing a new holding company or ownership agency to replace it. If this is not politically or practically feasible, the government should consider establishing a co-ordinating body reporting directly to the government of Kazakhstan. Its tasks would include formulating and upholding the state's governance and transparency benchmarks for SOEs, monitoring SOE performance and ensuring regular public disclosure. Additionally, the body should actively contribute to the selection of board members for SOEs by proposing candidates to ownership ministries, thereby facilitating the establishment of proficient boards.
3.1.2. Professionalising boards
More professional boards with an adequate degree of independence are needed. In line with the law, the boards of selected SOEs should be required to comprise a majority of independent directors, with clear criteria for their independence and selection (open contest for instance). The ownership entity should ensure that BODs are composed of majority independent directors to avoid undue political interference and have the necessary autonomy to carry out their work. No state representatives – civil servants or otherwise – should be considered as independent. Nomination procedures should ensure that BOD members of all majority- and fully-owned SOEs are selected based on their professional qualifications and subject to a transparent and competitive procedure. The state’s board member remuneration policy and practices should ensure that it is able to attract and retain qualified professionals.
There is a need for clear criteria and processes for the selection, nomination and dismissal of SOE board members. The government should develop clear instructions for nominating directors, with a special view to ensuring that members of boards have the requisite professional qualifications and are capable of and willing to exercise objective and independent judgement. It should further establish safeguards to ensure that the implementation of these instructions is continually and consistently enforced.
The state should empower boards to carry out functions of setting strategy and supervising management. While the boards’ role in this respect is already provided by law, the combination of weak boards and politically affiliated CEOs and board members leave much to be desired. The current role and responsibility of SOE boards in Kazakhstan should be strengthened to empower them to consistently oversee strategy, appoint the CEO and supervise management, free from political pressure and interference. To this end, the state could review procedures that require prior approval of corporate strategies by and establish an on-going and active dialogue of the ownership entity with the BOD on draft key strategic documents and corporate performance.
SOE boards should be expected to conduct comprehensive self and independent assessments of the BOD – in line with what is already given in the law. Clear grounds for the early termination of powers of the BOD members should be established, which should be decoupled from the board evaluation process. Moreover, reliable monitoring and controlling functions should be established.
3.1.3. Enhancing transparency and disclosure
The government is encouraged to proceed with the planned reform and establish an annual procedure for aggregate reporting. In order to enhance transparency, the Kazakh authorities should develop annual aggregate reports on SOEs that cover SOEs fully or majority-owned at the central level of government. SOEs’ financial and non-financial objectives and related performance should be included on top of an assessment of SOEs’ compliance with the state’s applicable governance and disclosure rules. Ideally such a document would also disclose the costs and revenues resulting from costs on public policy objectives.
Disclosure and reporting practices across Kazakh SOEs vary extensively and largely depend on the ownership entity (Ministry or holding company). It remains unclear to which companies the national legal framework (which requires IFRS compliance) applies. Disclosure standards could be further strengthened and harmonised across the SOE sector to ensure high quality and credibility of all SOEs’ corporate reporting and not just of listed SOEs. A policy document could be developed setting a whole-of-government standard for what accounting, auditing and disclosure standards are applicable to SOEs, including any differences according to enterprise characteristics.
3.1.4. Equitable treatment of shareholders and other investors
While it is entirely legitimate to offer to the public shares in an SOE that carry significant public policy objectives, these objectives should be fully disclosed prior to the opening of the company's shareholding and updated if revised. Non-state shareholders need to be able to make an informed decision on the SOE’s likely future profitability to make investment decisions.
There is a need to improve internal processes that may limit the disclosure of BOD or GSM materials or communications with the major shareholder before BOD or GSM. If SOEs conduct discussions with major shareholders, then minorities should also take part in such discussions. This is especially the case when non-core projects or expenses are financed by the SOE and can negatively impact minority shareholders.
In the event that the state intends to instruct an SOE to undertake material transactions or alter their public policy objectives, high standards of transparency and involvement of the non-state investors must be ensured. One option might be to establish dialogue or consultation platforms with minority shareholders to preliminarily discuss key issues or transactions.
3.1.5. Maintaining a level playing field
While the updates to the State Property Law enshrine some important basic principles related to SOEs’ competitive position in the marketplace (notably by explicitly prohibiting unfair competition and abuses of monopoly), several elements could still distort the level playing field between SOEs and (actual or potential) private competitors, including the use of holding companies to facilitate intragroup financing among subsidiaries and shortcomings in the applicability of public procurement rules to SOEs as procurers, amongst other aspects. Appropriate measures should be implemented to remedy concerns about a level playing field and further align Kazakh ownership practices with the SOE Guidelines.
There is a need to further clarify SOEs' financial and non-financial objectives: Guided by the overarching expectations of the state as an owner, Kazakh authorities should define unambiguous financial and non-financial goals for all SOEs. This process can commence with categorising SOEs based on whether they primarily serve a public-policy role, predominantly engage in commercial activities or operate as a hybrid of both. A structured mechanism should be instituted to establish and monitor tailored performance objectives for each enterprise.
Too many variations of Corporate Governance Codes exist. There is a need to streamline and create a national Corporate Governance Code that includes all corporate governance practices in Kazakhstan. A clear methodology on how to assess the adherence to the Corporate Governance Code is needed which also clarifies which entity monitors its execution, and thereby increase controlling functions.
Numerous laws targeting SOEs exist on top of laws that separately address SOEs and holding companies. This can create confusion, and ultimately lead to non-compliance with the laws. In the long-term, it is recommended to streamline laws and abolish separate laws for separate entities.