Foreign Aid to Institutional Reforms and the Role of Technical Expertise As a Political Resource

Foreign aid to institutional reforms and the role of technical expertise as a political resource. The case of business taxation reforms in Kyrgyzstan

Completed in January 2021

Yulia Poskakukhina, MSc Political Science 2006, University of Amsterdam [email protected], https://www.linkedin.com/in/yuliaposkakukhina/

The author would like to thank everyone who contributed to and supported the research in Kyrgyzstan and the Netherlands – especially all of the respondents

In dialogue with the ‘thinking and working politically’ (TWP) policy current in international development cooperation, the present study examines the leverage that foreign aid-funded technical expertise had as a resource in the legislative politics of business taxation reforms in Kyrgyzstan in 2010-2016. Specifically, it looks at how this leverage was informed by the public, decentralized and participatory dimensions of the country’s political system during that period. Thereby it explores how different national actors engaged with foreign aid-funded attempts to mobilize technical expertise for the purpose of reform advancement. The study reports that while the legislative process in Kyrgyzstan was generally associated with the primacy of informal transactions and private interests, the partakers in the policy contests treated public pressure backed by technical evidence as a significant means of influence. In particular, the country’s business leaders positioned themselves as citizen representatives who kept the government in check on its obligations to improve national wellbeing. They used the media and inter-stakeholder policy meetings to portray undesired reforms as detrimental to society, and did the same with government inaction on the reforms they favored. Thereby they sought to capitalize on the political risk that state officials and members of parliament attributed to such public criticism. As part of these attempts, business leaders drew on pro-reform technical evidence supplied with contributions from foreign aid programs. They also worked to counteract its application by the government and its foreign aid partners. Many of the policy discussion platforms where either happened were initiated or facilitated by foreign aid actors, sometimes with a concrete aspiration to influence a reform contest through the articulation of technical evidence. With these findings the study aims to contribute to the discussion about the space for foreign aid agencies to help advance positive institutional change by mobilizing technical knowhow through social stakeholder engagement.

Foreword In early October 2020 parliamentary elections took place in Kyrgyzstan. Their results were annulled within two days, after protests broke out in the capital city Bishkek over alleged vote rigging.1 The rallies went on for almost a week. In the violence of these events the former MP Sadyr Japarov was released from prison by his supporters (he had been sentenced for organizing an attempt to kidnap a governor). Although initially challenged by rival groupings, Japarov soon became prime minister and acting president. Shortly after, he resigned from the second post in order to run in the presidential elections of January 2021. Meanwhile, with input from Japarov, the legislature postponed the rerun of parliamentary elections from December to June. It also approved for January a national referendum on a new constitution, which if adopted would

1 The Foreword is primarily based on articles by the online news outlets Eurasianet and Kloop. See bibliography, and e.g. https://eurasianet.org/kyrgyzstan-hundreds-rally-against-constitutional-tinkering. 1 reinstate a presidential system with enhanced presidential powers. This would overturn the constitution adopted by referendum in June 2010, whereby Kyrgyzstan became a mixed parliamentary-presidential system with a more pluralist and powerful legislature than before. Although in the past ten years this new form of government did not fundamentally change the country’s elite-centered politics, many Kyrgyzstanis have been critical of the recent plans for political recentralization. Activists and some politicians have publicly contested the procedural legality of Japarov’s ascent, and of the parliament’s constitutional drafting and elections postponement. With respect to the latter actions, so did international bodies like the Venice Commission. In November-December 2020 regular small-scale protests were held in Bishkek against the proposed new ‘khanstitution’, as it was dubbed by its opponents. Still, the presidential form of government was chosen by 81.50% of the voters in the constitutional referendum that took place on January 10th 2021, with a turnout of 39.88%. On the same day Japarov won the presidential elections with 79.23% of the vote and a 39.75 % turnout. The present study is set back in 2010-2016. It examines a time when a political decentralization had energized public lobbying by Kyrgyzstan’s business associations and their involvement in policymaking, also in the context of private sector governance reforms supported by foreign aid programs.

Introduction There are various types of international development aid operations. For instance, some foreign aid programs focus on the practical side of socioeconomic development. They engage directly in providing healthcare and education, strengthening agricultural practices, improving public services, and etc. Other programs work at the community level to promote socioeconomic empowerment through advocacy and capacity building. Foreign aid programs of a further kind focus on institutional reforms. Such development aid is directed at revising laws, regulations, administrative procedures, and decision-making and working practices across the public sector and at its interface with the economy and society. The study that you are about to read probes into and explores the roles that operations of this third kind play in the politics of institutional reforms in recipient countries. It does so by examining a set of legislative reforms to business taxation that were advanced by foreign aid actors in Kyrgyzstan in 2010-2016. The analysis revolves around four case studies that address the following empirical research questions:

1. What kinds of technical work did foreign aid actors engage in to advance the reforms, and how? 2. What purposes was the technical work meant to serve in the efforts to advance the reforms through legislative politics, how, and why? 3. What can be said about the extent to which the technical work served the purposes envisioned?

What do I mean by technical work and why do I focus on it? In this study ‘technical work’ stands for the various activities of research, analysis, content design and professional instruction on matters of government policy and administration: for example, the production of policy- oriented economic and legislative studies, the development of legislation, the production of

2 administrative software, the sharing of policy models, and the organizing of trainings on new administrative procedures. As I will discuss in chapter 1, the funding and operational support of such activities has been and remains central to foreign aid programs that work on institutional reforms. Despite this, a foreign aid policy movement known as ‘the thinking and working politically (TWP) community of practice’ has paid limited attention to the question of how the technical work funded and facilitated by international development agencies forms part of institutional reform politics in recipient countries.2 My research project is a response to this particular oversight.3 Since its emergence in the early 2000s, the ‘thinking and working politically’ movement has argued that institutional reform programs must undergo a change in mentality if they are to become effective at fostering development. Specifically, it has urged foreign aid organizations to replace a mindset that revolves around the funding of technical solutions to governance problems with a mindset that recognizes and approaches institutional change as politics. The TWP community sees technical work and the technical expertise behind it as indispensable components of what it takes to help and/or impel governments to promote economic and social wellbeing. However, it believes that foreign aid agencies must become much more politically-informed in supporting technical work, and that they should specialize in enabling institutional reform politics while limiting their direct technical involvement. ‘Thinking and working politically’ research has focused on documenting and analyzing foreign aid initiatives that have helped bring about meaningful institutional reforms by operating in the way promoted by the movement. Meanwhile, it has not purposefully examined whether and how the technical work supported by foreign aid agencies affected and was internalized by reform politics in recipient countries. Consequently, it has not formulated an explicit body of empirically-grounded findings and assumptions on this question. Neither has the TWP literature provided explicit references to other studies that address it. This highlights that the topic has also been overlooked by broader development aid and political science research. My view is that concrete empirical insight on the political role of foreign aid-funded technical work is necessary in order to effectively elaborate and interrogate the TWP hypotheses and advice on how development aid should reconfigure its approach to institutional reforms. Furthermore, the ways in which such technical work forms part of institutional reform politics merit greater social science attention, because of the global ubiquity of this kind of foreign aid interventions. My specific research objective is therefore to contribute to a better understanding of foreign aid-funded technical work as a constituent activity of institutional reform politics, with a detailed empirical analysis of several legislative reforms in a single country and policy area. My general ambition is for this analysis to serve as a starting point for future (TWP) research on the political significance of foreign aid-funded technical work in other settings. Note that the focus of my research is legislative change rather than reform implementation. In other words, I look at the

2 See Laws & Marquette 2018 for a recent overview of TWP work. See chapter 1 for all further literature references. 3 For brevity, in the study I alternately use ‘foreign aid-funded’ and ‘foreign aid-facilitated’ to designate technical work that receives any sort of input from foreign aid actors. 3 role of foreign aid-funded technical work in legislative politics, which I define as the political contest and bargaining around the initiation, drafting and passing of legislation. This choice of focus rests on my (experience-based) expectation that in any given country foreign aid engagement in legislative reforms would be more common than foreign aid engagement in enforcing legislation. I formulated my research objective in 2010. In the summer of 2013 I completed my fieldwork. Soon after, I started elaborating the specific research questions that I would address in my empirical analysis. This process was informed by a set of ‘thinking and working politically’ studies that I came across in early 2014. These studies, published in 2011-2014, touched on the topic of how foreign aid-funded technical work influenced the legislative politics of institutional reforms in the Philippines. I explain the literature-based considerations behind my research questions in chapter 1.

Study structure The rest of the study proceeds as follows. In chapter 1 I introduce in greater detail the ‘thinking and working politically’ literature that inspired my project. As part of this, I elaborate on the core elements of my conceptual framework. In chapter 2 I discuss my case selection and methodology and introduce my four empirical case studies. I also present my general findings on the character of legislative politics in Kyrgyzstan. These findings provide a frame of reference for my case-specific observations, and additional support for my conclusions. Chapters 3 to 6 are my four empirical case studies on the involvement of foreign aid actors in the legislative politics of business taxation reforms in Kyrgyzstan. In chapter 7 I pool the case-specific observations together into a set of overarching findings and propositions on the role of foreign aid-funded technical work in the reform politics examined. Based on these findings and propositions, in the concluding chapter 8 I present what I believe to be the six core insights of my analysis, and the implications thereof for future research. You are advised to read the chapters in the following order: 1, 2, 8, 3, 4, 5, 6, 7. Note that in chapter 1 I use the present tense to refer to the situation as it stood in 2019, which was the last year that I followed the TWP literature and movement. In chapter 2 and in the empirical chapters I occasionally use the present tense to refer to the general political rules and practices in Kyrgyzstan as they broadly held in 2010-2016.

Table of contents

List of acronyms 6

Chapter 1. Conceptual framework 8

Chapter 2. Kyrgyzstan and business taxation: case selection and research methods 28

Chapter 3. Scaling back the voluntary patent tax regime 43

Chapter 4. The transfer of social insurance payments administration 66

Chapter 5. Reforming VAT administration 79

Chapter 6. Reforming indirect taxation policy 100

Chapter 7. Research findings across the case study reforms 124

Chapter 8. Conclusion 145

Bibliography 156

List of acronyms

ADB The Asian Development Bank AfDB The African Development Bank AusAID Australian Aid (Australian government) BGI Business Growth Initiative project CIS Commonwealth of Independent States DAI Development Alternatives, Inc. DFID The Department for International Development (UK government) DFAT The Department of Foreign Affairs and Trade (Australian government) DLP The Developmental Leadership Program EAEU Eurasian Economic Union EBRD The European Bank for Reconstruction and Development GDP Gross domestic product GNI Gross national income IFC The International Finance Corporation (World Bank Group) ICAS Investment Climate Advisory Services project IMF The International Monetary Fund IT Information technology KGS Kyrgyzstani som LASER Legal Assistance for Economic Reform (DFID program) MP Member of parliament NIE New institutional economics NGO Non-governmental organization ODI The Overseas Development Institute OECD The Organisation for Economic Co-operation and Development OECD/DAC The OECD’s Development Assistance Committee OSCE/ODIHR The Office for Democratic Institutions and Human Rights of the Organization for Security and Cooperation in Europe PEA Political Economy Analysis REFORMA REFORMA project (not an abbreviation)

RIA Regulative Impact Assessment/Analysis SDPK Social Democratic Party of Kyrgyzstan SIDA The Swedish International Development Cooperation Agency SME Small and medium enterprises TAF The Asia Foundation TWP Thinking and working politically UNDP United Nations Development Programme USAID The United States Agency for International Development USD US dollars VAT Value-added tax WTO World Trade Organization

Chapter 1. Conceptual framework

Chapter 1 discusses the background and evolution of the foreign aid policy movement that was the starting point of my research, and reports on how I formulated my research framework in dialogue with it. The movement in question, which in 2014 adopted the moniker ‘the thinking and working politically (TWP) community of practice’, emerged at a handful of foreign aid agencies in the late 1990s and early 2000s (Carothers & De Gramont 2013). From the policy- level departments of its origins it soon spread to (university-based) research institutes affiliated with the aid industry. The story of the ‘thinking and working politically’ movement is interlinked with the story of how governance aid and institutional reforms gained prominence as a focus of international development cooperation. The foreign aid industry’s turn to institutions and governance in the 1990s was a precursor to the emergence of the ‘thinking and working politically’ perspective. Moreover, the ‘thinking and working politically’ approach was and remains driven by the governance teams of development organizations, while institutional reforms continue to be the most visible type of foreign aid activity in TWP research and practice. Therefore I begin the chapter by outlining in the first section the history of governance and institutional reforms as realms of foreign aid practice. In section two I recount how the ‘thinking and working politically’ movement became part of these realms in the 2000s, and discuss its ideas during that decade. In section three I introduce the specific model which the ‘thinking and working politically’ community developed in 2014 on how foreign aid actors should engage with institutional reform as politics. I also briefly review the TWP literature of the 2010s. After this I repeat and expand on my central criticism of the ‘thinking and working politically’ research as a whole, restating my research objectives. In section four I discuss a set of studies situated in the Philippines which comment to a greater extent than other TWP literature on how foreign aid- funded technical work operates as part of institutional reform politics. Specifically, I present the main findings that surface in these studies on my research topic. In the chapter’s concluding section I connect these findings to my empirical research questions.

1. Governance and institutional reforms in foreign aid practice: a brief history In the ‘thinking and working politically’ literature, the origins and scope of institutional reform interventions in development cooperation are covered in detail in two books which are treated as important reference-points by the TWP community. One of the books is Development Aid Confront Politics. The Almost Revolution by Thomas Carothers and Diane De Gramont (2013). This work is typically referenced as a comprehensive history and stocktaking of the ‘thinking and working politically’ movement (e.g. Dasandi et al 2019). The other book is The Limits of Institutional Reform in Development. Changing Rules for Realistic Solutions by Matt Andrews (2013). As well as engaging with Andrew’s perspective on ‘thinking and working politically’, the TWP movement’s authors use his estimates on the amount of foreign aid spent on institutional reforms and on its effectiveness up to date (e.g. Bain et al 2016).

First, a few words about the use of the terms ‘governance aid’ and ‘institutional reforms’ in the two books, to highlight the fact that in foreign aid discourse there is no fixed definition of these terms and of the extent to which they designate the same range of activities. The ‘thinking and working politically’ discussion in Carothers & De Gramont (2013) revolves around the development cooperation practice which the authors refer to as governance aid. Carothers and De Gramont do not define the concepts of ‘governance’ and ‘governance aid’. However, they do mention one way in which ‘governance’ has come to be defined within the aid industry, noting that in the 1990s many aid agencies ‘drew on the World Bank’s politically neutral definition of governance as “the manner in which power is exercised in the management of a country’s economic and social resources for development”’ (ibid:68).4 To convey the types of interventions which they consider representative of governance aid, Carothers and De Gramont occasionally unpack the term into associated foreign aid programming concepts, such as public sector reform, rule of law, revising the legal framework, and institutional building. Again, they do not explicitly define ‘institutional building’. Instead, they discuss it as a practice of strengthening government organizations. In comparison, Andrews (2013) rarely uses the term governance in his narrative. Although his analysis is broadly concerned with the range of operations that Carothers and De Gramont categorize as governance aid, he specifies his subject matter as foreign aid involvement in public sector institutional reforms. Moreover, rather than viewing institutions as state organizations, Andrews ties his notion of institutional reforms to Douglas North’s (1990) influential definition of institutions as the formal and informal rules that govern human behavior in society. Thus, the opening pages of his book include the following statements: ‘…formal and informal rules – institutions – influence all people, organizations, and economies. Governments are the hub of many such rules, bound by some and the maker and enforce of others. Think of civil service laws, budget laws, norms of information disclosure, building permit requirements... many efforts to improve public organizations are thus called institutional reforms… Such reforms target improvements in core public administration processes, the way governments interface with business, and service delivery mechanism in areas like health…’’ (Andrews 2013:4). As indicated in the introduction, I use North’s definition of institutions and Andrew’s notion of institutional reforms to delineate the sphere of foreign aid activity examined in my study. I do so because the concept of institutional reforms is more explicit than the concept of governance aid at conveying the particular foreign aid objective which I interrogate in my study: that of advancing changes to laws, regulations, administrative procedures, and decision-making and working practices across the public sector and at its interface with economy and society. However, governance aid remains an implicit subject of my study, considering that governance programs are in part directed towards the promotion of institutional change as defined above.

4 Note that for visual clarity all citations in my study are presented in italics. For other definitions of ‘governance’ by foreign aid agencies, see Grindle (2007:556). See also Gisselquist & Resnik (2014:141): ‘Like most buzzwords, governance is an oft-used concept with multiple connotations. Nevertheless, surveying the plethora of definitions employed by various international organizations, Gisselquist (2012: 4) shows that at its root, governance refers to the way in which power and authority is exercised “to manage the collective affairs of a community (or a country, society, or nation).” 9

In the recent years, how prevalent have institutional reforms been as a focus of development aid programming? Andrews (2013:6) notes that ‘[t]hese reforms are now a major line of business for most development agencies’. According to his data, more than 50% of DFID operations in 2004- 2010 had an institutional reform component. So did more than 50% of ADB and AfDB project portfolios in the 2000s. Andrews (2013:6) also provides similar figures for the World Bank, in a passage that illustrates the wide range of interventions that the author includes in the institutional reforms category: ‘…projects likely to incorporate public sector institutional reforms comprised 65 percent of all operations between 2000 and 2010… They featured in more than $50 billion worth of World Bank- sponsored projects between 2006 and 2011, a quarter of spending in the period… This is the project spending benefiting activities in the PAL&J [public administration, law, and justice] sector… The amount could be much greater if capturing institutional reform content in various thematic areas. For instance, $28 billion was spent on the public sector governance, $1.7 billion on rule of law reforms, and more than $51 billion on financial and private sector reforms’. In addition, Andrews (2013:4,6) contrast the figures for the first decade of the 21st century with those on institutional reforms ‘featuring in fewer than 1 percent of World Bank projects before 1980’ and in under 10% of ADB and AfDB interventions before the 1990s. More broadly, Andrews (2013), Carothers & De Gramont (2013) and other ‘thinking and working politically’ authors report an upsurge in governance aid and institutional reform interventions in foreign aid programming in the 1990s onwards (for instance, see also Faustino 2012 and Unsworth 2015). The different studies largely agree on the developments which led to this upsurge. Furthermore, based on the TWP literature we can trace a path from the mainstreaming of institutional reforms in foreign aid practice to the rise of the argument that foreign aid agencies must learn to approach institutional and socioeconomic change as politics. Carothers & De Gramont (2013) present the first part of this story as follows. In the 1950s and 60s foreign aid operations were grounded in the belief that socioeconomic progress in developing countries could be achieved by boosting economic activity and improving infrastructure through ‘timely, well-targeted doses of capital and technical knowledge’ sent in from the West (ibid:7). This belief translated into some foreign aid attention to the functioning of recipient government bureaucracies, primarily in the form of efforts to introduce new managerial approaches. However, the envisaged socioeconomic progress generally failed to materialize. This discredited the standing approach. Some foreign aid professionals highlighted the neglect of local politics as an underlying cause of the failure. Still, in this respect little changed. Instead, in the 1970s foreign aid agencies prioritized ‘explicit attention to poverty reduction and other basic needs alongside or sometimes in place of a focus on economic growth’ (ibid:21). In the early 1980s the aid industry shifted to advancing liberal economic policies such as structural adjustment and financial stabilization. This brought a moderate increase in government capacity building activities, directed at facilitating the adoption of the policies deemed necessary for development. By the 1990s the nepotism and social hardship associated with the prescribed free-market reforms prompted aid agencies to reconsider their approach once again. The argument took center stage that, besides sound economic policies, development required functional governments that were

10 willing and able to provide citizens with adequate support, justice and accountability across all areas of public life. This ideational shift triggered an expansion of governance aid, directed at making the state better-fit for promoting development. Governance teams proliferated within aid agencies, tasked with advising socioeconomic programs on how to address issues of state resolve and competence.5 Andrews (2013) and other TWP authors (e.g. Whaites 2015) approach the aid industry’s shift to prioritizing government performance from a different angle. Specifically, they present it in terms of how from the 1990s onwards foreign aid policy and practice was increasingly shaped by New Institutional Economics (NIE) theory and research. The central idea of NIE theory is that socially constructed rules of the game (institutions) – rather than market forces, geography, resource endowment, and integration into global trade – are decisive in determining national economic fortunes. In the words of Andrews (2013:42), ‘“[i]nstitutions” entered the language and practice of development largely because Douglass North linked them to growth’. As reported in ‘thinking and working politically’ literature (Booth 2011) and beyond (Adam & Dercon 2009; Luiz 2009), by the mid-2000s the NIE principles popularized by North and others became a subject of widespread agreement within development economics. At first, the advent of new institutionalism in foreign aid thinking was accompanied by the widespread adoption of the ‘good governance’ model in designing institutional reform and governance programs (Grindle 2004). This model implied that in order to achieve meaningful socioeconomic progress countries must introduce a comprehensive set of ‘best-practice’ liberal economic and democratic institutions of the type common in the West. However, soon enough foreign aid professionals started challenging the ‘good governance’ approach, raising questions about its claims and practicalities around prioritization and sequencing (Grindle 2007). At the helm of such criticism, Grindle (2004; 2007) called for a shift to the ‘good enough governance’ model of program design.6 This model instructed foreign aid agency cadres to ask, for each specific country context, which institutional reforms were most feasible, urgent and promising for development at a given moment. The key message was not to go after everything at once, and to think beyond democracy and the ideals of the Washington consensus. Meanwhile, a host of prominent (political) economists – and most prolifically Dani Rodrik – published comparative academic studies and policy papers that explored the relationship between governance, institutions and development (Acemoglu and others in North et al 2008; Khan 2006; Levy 2010; Fukuyama & Levy 2010; Rodrik 2006, 2007, 2008; Rodrik ed. 2003; the policy papers were issued primarily by the World Bank). This literature argued that the institutions most likely to foster economic progress varied per context and did not necessarily reflect the free- market and property rights doctrine. It also emphasized that the relationship in question was complex and fluid, and that economists were only beginning to explore its manifold interactions and contingencies. At the same time, some the above authors turned to historical political economy research in which they advanced and theorized the argument that governance,

5 In the 1990s there was also a rise in democracy aid, which Carothers & De Gramont (2013) present as a separate development. 6 See Carothers & De Gramont (2013) and Unsworth (2015) for more on this development. 11 institutions and institutional change were a function of politics (Acemoglu 2008; Acemoglu & Robinson 2006, 2012; Khan 2010; North et al 2007, 2009; North et al eds. 2013; Levy 2014). As reported in a ‘thinking and working politically’ paper by Booth & Faustino (2014:6), by the mid- 2010s a broad consensus had formed within academic economics regarding the importance of politics as well as institutions to development: ‘There is no longer any fundamental disagreement about the role of institutions and institutional change in development. Students of the subject agree that a country’s institutions – the formal and informal rules of the game that apply within its borders – have a heavy influence on the development trajectory it is able to follow… Institutional change is therefore the key to development progress… Moreover, since institutions support and are shaped by structures of power, institutional change is invariably political. This, too, has passed into mainstream thinking. In the words of Rodrik and Rosenzweig (2009), “[e]conomists increasingly acknowledge the importance of institutions – the rules of the game in a society – and the nature of political and power struggles that lie behind them. [I]ssues of governance, politics, and power are no longer a sideshow; they constitute a central element in the field”’. In dialogue with the academic discussion on the relationship between development, institutions, governance and politics, in the 2000s a particular idea gained ground within foreign aid policy circles. This idea was that in order to foster development by effectively advancing institutional measures that would be ‘‘best fit’ rather than ‘best practice’’ in particular contexts, it was imperative to approach this task as one of understanding and engaging with recipient country politics (Williams et al 2008:28). In other words, a campaign to advance the use of what Carothers and De Gramont (2013) identify as one of several types of ‘politically smart methods’ took off within the aid industry. This campaign, which later became known as the ‘thinking and working politically’ movement, is the topic of the next section.

2. ‘Politically smart methods’: from technical expertise transfer to facilitating reform politics In the early 2000s a small group of governance specialists affiliated with a handful of development agencies started actively championing the notion that foreign aid programs – and institutional reform interventions in particular – must become politically smart in their methods. By this they meant that foreign aid actors should learn to approach institutional change as a political contest, which they were to mediate and broker based on an in-depth understanding of context-specific politics. Development aid practitioners working on institutional reforms were thus urged to ‘see their role not as experts bringing solutions, nor as politically neutral partners, but as conveners, facilitators and politically aware contributors to serious debate’ (Unsworth 2009:890). The underlying argument was that foreign aid agencies were falling short in their efforts to foster development by promoting institutional reforms because such efforts (a) relied excessively on technical expertise use and transfer, while steering away from tackling the pervasive challenges posed by recipient country politics; (b) were still largely oriented at transplanting Western ‘best- practice’ policies and administrative templates; (c) prioritized technical content over reform process, with typical program design reflecting the flawed logic of technical fixes neatly

12 resolving institutional obstacles to development (Carothers & De Gramont 2013; Unsworth 2009). In other words, by the 2000s institutional reform programs were under fire for having limited impact due to their alleged fixation with the technical and reluctance to take on the political. As reported in later ‘thinking and working politically’ literature: ‘Case studies and multicountry analyses show that many governments in developing nations are not becoming more functional, even after decades of and hundreds of millions of dollars of externally sponsored reforms… Governments look better after reform but often are not better… [because the reforms are] designed with limited attention to context, [and] involve impressive-looking but hard-to- reproduce best practice interventions’ (Andrews 2013:xi).7 ‘…past attempts at public-sector and institutional reform have been inadequate primarily because they have been overambitious and focused on technical solutions. Failure to recognise actors’ incentives and interests… has undermined the effectiveness of attempts to reform the public sector’ (Bain et al 2016:12). In the late 1990s foreign aid agencies had already began developing what Carothers & De Gramont (2013:258) call ‘politically smart methods’ to improve on the first wave of governance programs, which had ‘operated on the same penchant for technical solutions [as in the past decades]… emphasizing the transmission of technical knowledge and the export of Western institutional blueprints’. Among these methods were ‘demand-side’ governance and participatory reform programs, where foreign aid actors set up channels for citizens to inform policymaking and to pressure governments to deliver institutional improvements. Another early effort to promote politically smart methods was centered in the first place on encouraging the use of analytical toolkits for understanding and acting on political contexts (ibid). It is this effort that later became the ‘thinking and working politically community of practice’. Thus, in the early 2000s DFID started mainstreaming the application of Political Economy Analysis (PEA) toolkits across its operations. This process was led by DFID’s governance team, which had developed the toolkits as an instrument for informing program design and implementation with assessments of recipient country politics (DFID 2005, 2009; Hendrie 2003). A number of other aid agencies followed suit (Bjuremalm 2006; EuropeAid 2008; Hazenburg 2009). The World Bank formally committed to integrating political economy analysis into its operations (Fritz et al. 2009, eds. 2014). In 2004 a group of foreign aid professionals with experience at inter alia DFID and the World Bank set up The Policy Practice Ltd, which has since promoted the PEA approach across the industry through trainings, policy papers and studies of PEA use in aid programs (Landell-Mills et al 2007; Duncan & Williams 2010; https://thepolicypractice.com/). As reported by the foreign aid policy literature on politically smart methods, by the late 2000s PEA was becoming a standard feature of governance-related programming at many aid organizations, which increasingly acknowledged the centrality of politics to development in public statements and official policy documents. And yet, the same literature consistently concluded that in practice foreign aid work on institutional reforms remained largely technocratic

7 Andrews (2013) assessed the World Bank’s, ADB’s and AfDB’s institutional reform operations in the 2000s to show that while most were evaluated as satisfactory in terms of delivering the promoted formal revisions, the majority of the corresponding countries did not see improvements in governance indicators according to World Bank and other rankings. 13

(Booth 2011; De Haan & Everest-Phillips 2007; Foresti & Wild 2009; Leftwich 2011; OECD/DAC 2008; Slotin et al 2010). The studies attributed this state of affairs to the following factors. First of all, for a variety of reasons many aid practitioners remained skeptical about the idea of brokering reform politics as an explicit working method. They considered it theoretically suspect, believed that it needlessly complicated their work, argued that it bureaucratized what aid actors were already doing informally, and/or contended that it amounted to meddling in recipient country politics. In addition, the financial model and performance evaluation standards that prevailed within the aid industry were geared against the open-ended, long term-oriented and politically-minded type of programming which the use of PEA was meant to encourage. Finally, it was proving difficult to translate PEA exercises into concrete operational advice and action. While discussing these challenges as they persisted into the new decade, Carothers & De Gramont (2013:3) concluded that in the 2000s foreign aid practice had only marginally evolved from a mode of transferring expertise and providing technical fixes to one of political facilitation: ‘To fulfill their central economic mission, aid organizations held fast to what can be called “the temptation of the technical”, the belief that they could help economically transform poor countries by providing timely doses of capital and technical knowledge while maintaining a comfortably clinical distance from these countries’ internal political life. These views took hold strongly in those early years [of the foreign aid industry, in the 1950s and 60s], exerted a powerful influence throughout the intervening decades, and are still prevalent in the development aid community today’. In the first half of the 2010s foreign aid policy literature on politically-informed methods continued to report that the widespread use of PEA toolkits was not bringing about a tangible shift towards a culture of approaching institutional reforms as politics (Booth 2013; Routley & Hulme 2013; Yanguas & Hulme 2014, 2015). Against this background, in late 2013 the foreign aid policy movement which had promoted the operational mindset of political facilitation set up the ‘thinking and working politically community of practice’, so as to better address the challenges facing its agenda. I turn to this development in the next section.

3. Thinking and working politically in foreign aid: the role of the technical In the early 2010s the supporters of politically smart methods in foreign aid concluded that in order to foster a genuine uptake of such methods they must move beyond advancing the use of PEA toolkits as an instrument for informing program design and implementation. The envisioned strategic shift was towards promoting a fundamentally different operational modality, centered on agile, continuous and hands-on political analysis, and on purposeful engagement with agency, power, and the power of ideas (Booth et al 2016; Fisher & Marquette 2014; Hudson & Leftwich 2014; Hudson & Marquette 2015). Consequently, an effort got underway to consolidate the work on politically smart methods around a novel, well-defined approach to running foreign aid operations. As part of this effort, in late 2013 and in 2014 a series of meetings among foreign aid professionals and researchers led to the initiation of the ‘thinking and working politically (TWP) community of practice’, intended as a coordinated platform for likeminded individuals and

14 initiatives (https://twpcommunity.org/; Green 2013, 2014ab, 2018ab).8 Since 2014, the TWP community of practice has issued a manifesto; convened on a periodic basis to discuss its mission; and established a secretariat for managing its research, operational work, conferences, and training events and material.9 With the initiation of the TWP network on the advancement of politically smart methods in foreign aid, more development NGO representatives became involved in what was now generally referred to as the ‘thinking and working politically’ movement. In the years that followed, the TWP community has also sought to focus more of its research on foreign aid programs that engaged in the practical side of development (Green 2017ab). Still, today TWP work remains centered on institutional reform interventions funded by official development agencies (Dasandi et al 2019). Moreover, the studies, workshops and trial projects that feature on the TWP community’s webpage can be largely credited to a handful of actors that have spearheaded the ‘thinking and working politically’ movement since before its incarnation as such in 2014.10 These actors are: the UK’s Overseas Develop Institute (ODI) think tank, working in close partnership with DFID; the Developmental Leadership Program (DLP) research initiative, funded by DFAT and based at the University of Birmingham; and the Building State Capacity (BSC) program at Harvard University, which often leans on the experience of the World Bank and is led by Matt Andrews.11 The secretariat of the TWP community is based at the University of Birmingham. It is financially supported by DFAT and DFID, and shares staff with the DLP. In the meantime ‘thinking and working politically’ became the unofficial shorthand for the operational modality championed by the TWP movement. In 2014 a research paper proposed that ‘politically smart’, ‘problem-driven’, ‘iterative’, ‘adaptive’, and ‘locally led’ should be seen as the core attributes of ‘thinking and working politically’ in foreign aid (Booth & Unsworth 2014). The TWP movement has since embraced these attributes as an explicit formula for the approach to which it believes foreign aid agencies should aspire (Green 2016; Dasandi et al 2016).12 The combination of the four terms (and their variations) designates a recasting of the foreign aid praxis which begins by defining institutional change as non-linear, erratic, complex, long-term and uncertain – as well as political. The argument continues as follows: in different contexts particular developmental goals can be reached via different and often unexpected institutional pathways; it is never certain before trying which issues can be tackled when and by what ‘best-

8 The first use of the term ‘thinking and working politically’ in a published paper is attributed to Leftwich (2011); before that, the term had occasionally appeared in internal DFID documents (Dasandi et al 2019). 9 The Doing Development Differently manifesto: https://buildingstatecapability.com/the-ddd-manifesto. Since 2013, the Oxfam- based Duncan Green (a DDD manifesto signatory and member of the TWP community of practice’s Steering Committee) has chronicled the TWP movement’s activities in his blog ‘From Poverty to Power’ (see Green 2013, 2014ab and 2018ab, and the selection of the blog’s entries in the bibliography). 10 Note that many ‘thinking and working politically’ authors wear two hats: they are academics and aid professionals. Also, the ‘thinking and working politically’ literature is never strictly academic. It is always oriented at the world of foreign aid practice. 11https://www.odi.org/our-work/programmes/politics-and-governance/adaptive-development-doing-development-differently; http://www.dlprog.org/; https://buildingstatecapability.com/ 12 As a research and practice collective, and as a platform for likeminded groups and individuals, the TWP community closely overlaps with similar but distinct initiatives. Foremost among these is the Doing Development Differently (DDD) movement. See TWP Community of Practice (2015) for a sense of the overlap. For an overview of the initiatives and approaches associated with the TWP movement, see Algoso & Hudson (2016), Parks (2016) and Teskey (2017). 15 fit’ means; hence, aid interventions should focus on searching for narrow, pressing, but realistically addressable policy problems, and on testing a range of targeted remedies through technical and political experimentation; local actors are much more capable than outsiders of working in this way, and should hence be given much greater control over institutional reform operations (Shutt 2016).13 In the past six years DFID in particular has sought to apply the ‘thinking and working politically’ mode in its foreign aid programs. Meanwhile, both the DLP and the ODI have published numerous case studies on such initiatives (when implemented by DFID and by other agencies) (Booth & Chambers 2014; Denney & McLaren 2016; Derbyshire & Donovan 2016; O’Keefe et al 2014; Piron et al 2016).14 The operational modality of ‘thinking and working politically’ has also made it into the guidelines and toolkits of foreign aid organizations, USAID among them (Rocha Menocal et al 2018). Nevertheless, the TWP community has continued to report that the working approach which it describes as politically savvy, locally led and geared at searching for technically solid institutional improvements in a problem-driven and experimental manner was far from becoming mainstream practice (Booth et al 2016; Green 2018b). For one, TWP authors have explained the modest extent of progress with reasons similar to those identified earlier for PEA’s limited impact (Unsworth 2015). At the same time, they have argued that the key problem was that the ‘thinking and working politically’ movement has not yet delivered enough empirical evidence to show that its approach was indeed more effective than standard methods: ‘…while there are interesting and engaging case studies in the literature, these do not yet constitute a strong evidence base that shows these efforts can be clearly linked to improved development outcomes. Much of the evidence used so far to support more politically-informed approaches is anecdotal, does not meet the highest standards for a robust body of evidence, is not comparative (systematically or otherwise), and draws on a small number of self-selected, relatively well-known success stories written by programme insiders’ (Laws & Marquette 2018:iii).15 Consequently, the ‘thinking and working politically’ community continues its effort to identify and understand the characteristics of foreign aid programs that are well placed to advance developmental gains by enabling institutional reforms that are politically viable, technically workable and appropriate for their contexts (Dasandi & Hudson 2017; The Developmental Leadership Program 2018; Hadley & Tilley 2017; Lopez Lucia et al 2017; Wild

13 In other words, the TWP community urges aid agencies to adapt to the messy nature of social change by scaling down and giving local partners freer rein to work by ‘placing small bets’ on different solutions and ‘learning quickly from mistakes’ (Kelsall 2016:3). To track progress, it proposes ‘blending design and implementation through a series of rapid cycles of planning, action and review, with scope to change direction or alter future activities based on what is learnt’ (Wild et al 2017:20). 14 The accent differs across research programs. Thus, ODI has also focused on exploring the contractual and operational arrangements across donor organization and implementing partners that could sustain flexible, politically-minded, experimental and locally led interventions (Booth 2014; Wild et al. 2015; Kelsall 2016; Bain et al 2016; Booth et al 2016). 15 See also: ‘Despite the interest and debates around TWP, there is an absence of an evidence base that demonstrates a clear positive effect on programme outcomes. Much of the evidence used so far to justify a politically informed approach is largely anecdotal and not systematically comparative…’ (Dasandi et al 2016:4); ‘…despite lots and lots of evidence that ignoring politics can be disastrous for aid effectiveness, if we’re really honest, we don’t have a very good evidence base for what works, when and why… Those of us in this thinking and working politically “space” make a lot of claims and demand a lot of changes without knowing for sure that we’re right, or even that we’re right in the right way…’ (Hudson & Marquette 2015:67). 16 et al 2017).16 Thereby, it persists with its quest to shift foreign aid practice from what it considers an ineffective ‘expertise transfer’ and ‘technical fixes’ view of institutional change, to a working mentality of proactively engaging with development as politics. However, up to date TWP research has not examined at length the political role of the foreign aid-funded activities that embody technical expertise transfer and the formulation of technical solutions to perceived institutional challenges. In other words, it has not built up a body of targeted empirical analysis on how such activities and their outputs are employed and dealt with in the politics of institutional reforms. Nor has it hammered out a related set of theoretical assumptions and hypotheses. As I argue next, this is a significant oversight from the perspective of the ‘thinking and working politically’ agenda and from a broader social science perspective. The transfer and use of technical expertise for the purpose of reforming the laws, regulations and practical conventions that (are meant to) govern social relations entails a range of activities. Broadly speaking, this range consists of research, analysis, content design and professional instruction on matters of government policy and administration. Such activities are a staple of governance and institutional reform programs. Their outputs comprise legislative blueprints, policy studies, training courses, technological solutions, and other types of technical products. In the study I introduce the term ‘technical work’ to denote the activities in question and their outputs. Do national actors largely ignore or discard foreign aid-funded technical work when competing over institutional reforms? Or do they treat the technical work as a resource in the political contest, in the sense of either mobilizing or resisting it as a means of influence? It is pertinent to consider whether and how the TWP literature has addressed the above questions as a starting point in its analysis. Why so? Because the governance aid that the TWP movement seeks to refashion into a practice that is consciously rooted in institutional reform politics has traditionally revolved around technical work. Some TWP research has accentuated the notion that the technical work facilitated by foreign aid actors has often been of little political significance to recipient country policy contests. Thus, for Andrews (2013) an important part of why foreign aid work has generally failed to improve public sector performance is its typical focus on formal institutions such as laws and administrative procedures, the reform of which is by definition centered on technical expertise and the formulation of technical solutions. According to Andrews, this focus has encouraged recipient country governments to readily pursue whatever legislative and procedural revisions their foreign aid donors promoted, in order to continue receiving funding. Many of the legislative reforms adopted in such an indiscriminate manner then proved unfeasible in practice and/or unsuitable for tackling the developmental challenges facing society. As a result, the new legislative and administrative provisions were left unimplemented. Consequently, Andrews argues that the way forward is for foreign aid agencies to reorient their institutional work towards

16 The TWP movement also continues to research the nature of the politics of institutional change and socioeconomic transformation in developing countries (i.e. the politics that foreign aid actors are meant to facilitate and broker) (Booth ed. 2015; Booth & Cammack 2013; Dávid-Barrett 2015; Kelsall et al 2010; Leftwich 2009; Phillips 2013; Rocha Menocal 2017). 17 promoting change to the informal norms and values which structure the behavior of state bureaucracies and their relations with society (see Unsworth ed. 2010 for a similar vision). However, many of the foreign aid programs examined as examples of ‘thinking and working politically’ in the TWP case studies listed in this chapter did promote legislative and procedural revisions as part of their activities. Moreover, the case studies in question present such reforms as either important or pivotal for advancing the broader changes to socioeconomic relations that were pursued by the aid actors. Overall, rather than dismissing formal institutions as misguided reform targets, the TWP community has advised foreign aid agencies to select all of their objectives according to the political and practical conditions in a given polity: ‘A politically smart approach may result in the same outputs as a traditional technically-led approach to programming (for example, new laws or reformed procedures). What should be different is (a) the choice of issues to engage with (those that are politically, as well as technically feasible); and (b) the improved likelihood that the reform will ‘stick’ because it is ‘owned’ by local actors’ (LASER 2015:4). Before the institution of the TWP community of practice, one of the movement’s founding authors had already proposed that a key condition of applying politically smart methods in institutional reform programs was ‘the important qualifier – not by politics alone’: ‘In short, effective and sustained development and change does not happen successfully by politics alone. Technical, administrative and practical components – as well as political processes - are just as essential for the for the successful building and maintenance of a deep tube-well or a waste management system, as for the establishment and consolidation of a constitution or a piece of legislation concerning rights, gender inequalities, health and safety, or institutional reform concerning, say, competition or aviation policy. Both political and technical dimensions are central to developmental outcomes There is no technical solution to a problem without a political solution; and the resolution of political problems will always require technical support and implementation (for instance in drafting water-tight legislation or regulations to an act’ (Leftwich 2011:2) Thereby, Adrian Leftwich argued that formal institutional revisions and the technical work behind them were necessary ingredients of any attempt to change a set of social relations in the direction of greater security, opportunity and equity for all. Likewise, the specific ‘thinking and working politically’ approach formulated by the TWP movement in 2014 is not an appeal for foreign aid actors to distance themselves entirely from formal institutional reforms and the use of technical expertise to advance the latter. Instead, it is a petition about how technical material such as legislative designs and policy analysis should be generated and delivered as part of foreign aid programs: experimentally, iteratively, in a problem-driven way, primarily by local actors, and (above all) while treating the technical work not as the essence of reform and the aid agency’s main task – but as a component of an overarching effort to broker and mediate the politics of institutional change. In sum, the ‘thinking and working politically’ community sees problem- driven use of technical expertise as a core aspect of its politically-minded working method. Likewise, it recognizes legislative change as a meaningful way of contesting the distribution of resources in society. Therefore, one would expect recent TWP literature to foreground the question of how the development of adequate technical solutions relates to political savviness and to reform politics in general, also regarding legislative change.

Yet, up to date the TWP research program has not undertaken a purposeful effort to elaborate empirically or theoretically on the connection between technical expertise and political tactics. Thereby it has overlooked a relationship that is a pivotal one in its approach to institutional reforms – an oversight which hence impairs its agenda. This is my central criticism of the TWP literature. Specifically, I argue that the literature’s deficit of explicit analysis on whether and how foreign aid does contribute through technical work to institutional reform politics weakens its conceptual search for an effective way of ‘thinking and working politically’. I also consider this deficit a significant oversight from a social science perspective, on the grounds that governance aid is a widespread international practice/ realm of politics.17 Accordingly, the main research objective of my study is to deliver a set of empirically-grounded findings and propositions on how the technical expertise provided and applied through foreign aid programs is absorbed by institutional reform politics in a particular country. While pursuing this objective, I focus on legislative and procedural reforms rather than on the enforcement of formal institutions or on informal institutional change. The reason for this choice is the persisting prevalence of the former type of reforms in foreign aid practice. In other words, I examine the role of foreign aid-funded technical work in legislative politics, defined as the political contest and bargaining around the initiation, drafting and passing of legislation (without looking at the implementation of new laws and regulations).18 Notwithstanding my criticism of the TWP literature, within it there are studies that occasionally discuss the role of foreign aid-facilitated technical work in institutional reform politics. In the first place, the studies in question are a set of papers that examine the experience of the international nonprofit aid organization The Asia Foundation in the Philippines. These papers helped me sharpen my analytical framework, as reported in the next section.

4. Thinking and working politically in the Philippines The international nonprofit organization The Asia Foundation is headquartered in San Francisco and has offices in eighteen countries across Asia. It acts as an intermediary between other foreign aid agencies and its local partners. The Asia Foundation in the Philippines first defined and documented its mode of operation as one that is politically-informed, problem- driven, locally led, and technically experimental in the early 2010s (The Asia Foundation 2011; Faustino 2012).19 At the time, it was already a partner organization within the DLP (one of the principal ‘thinking and working politically’ research initiatives). A couple of years later, the ODI

17 The field of anthropology does have a record of examining foreign aid interventions as arenas of political contest (Olivier de Sardan 2005). However, this research has typically looked at single community-based projects (Mosse 2005; Bebbington et al 2007; Li 2007). Accordingly, some development aid anthropologists have argued that it is necessary to begin covering national- level institutional reforms in ‘aidnographic’ research (Olivier de Sardan 2009; Eyben 2010; Lund 2010; Bierschenk 2014). 18 By restricting my analysis to legislative politics, I set aside the question of reform enforcement. As highlighted in the TWP literature, the laws and other formal institutional revisions introduced through foreign aid often do not end up functioning as intended. This is a problem, but it is not the subject of my research. Neither do I aim to assess the likely socioeconomic implications of the reforms examined in my case study, or to critique the ideology of development aid behind them. 19 For its work in the Philippines The Asia Foundation has received grants from AusAID and USAID, among others. 19

(another driver of ‘thinking and working politically’ ideas) pitched The Asia Foundation in the Philippines as a possible embodiment of the operational modality championed by the movement: ‘These two [reforms facilitated by The Asia Foundation]… suggest the meaning that should be given to the new mantra of ‘thinking and working politically’. They underline what really differentiates the reform approach that works. Thinking and working politically is about liberating and harnessing the potential of local reformers to shape and steer processes of change in flexible, politically attuned ways’ (Booth 2014:xi).20 In 2014 the DLP and the ODI issued several research papers on The Asia Foundation in the Philippines, some of which were (co-)authored by representatives of the latter organization (Booth 2014; Faustino & Booth 2014; Fabella et al eds. 2014; Sidel 2014).21 By depicting how The Asia Foundation’s working method enabled positive outcomes where other approaches had fallen short, these papers aspired to tackle the ‘severe lack of operational models that show what “thinking and working politically” can mean for a development organization, and how it can contribute to development results’ (Faustino & Booth 2014:1). Henceforth I refer to the research on The Asia Foundation in the Philippines as ‘the TAF studies (on the Philippines)’. The ‘developmental entrepreneurship’ method which The Asia Foundation employed in the Philippines was developed by the organization’s Manila director Jamie Faustino and his colleagues, based on their operational experience (Faustino & Fabella 2011b; see also Faustino & Booth 2014). Faustino (2012:2) defines ‘developmental entrepreneurship’ as a ‘practical model’, the protagonists of which use ‘entrepreneurial and coalition-building skills’ and ‘evolutionary principles to find technically sound and politically possible reforms’. The core component of this approach is what Faustino (ibid:9) calls ‘technical and political action’, which ‘brings together the technical and political dimensions of reform’ and ‘refers to activities that customize technical analysis and implement strategies’. In general, the TAF studies set out to convey how those who practiced ‘development entrepreneurship’ in the context of foreign aid programs in the Philippines combined technical skills with political ones to promote institutional change, and with what kinds of involvement by foreign aid actors. On multiple occasions, the studies observe more specifically how technical expertise was applied as a political means in this process, and with what effect on the course of the reform battles. Overall, such observations highlight two aspects of the role that foreign aid- funded technical work played in the legislative politics of institutional reforms in the Philippines: (i) the types of technical work that foreign aid actors were involved in, and the nature of their contributions; (ii) the ways in which the technical work facilitated or was meant to facilitate reform advancement through legislative politic, also given the character of the latter. In the remainder of the section I make an arc across the TAF studies’ findings on these two points.

20 See also: ‘For several decades, The Asia Foundation has been implementing development programs through a highly responsive, politically informed, iterative ‘searching’ model of assistance… While each program varies, this model is broadly characterized by a heavy emphasis on contextual knowledge and relationships combined with multiple small, nuanced and carefully targeted interventions working closely with local partners. This stands in sharp contrast to the conventional, pre- planned ‘projectized’ approach that has long been the standard in the development industry’ (ibid:iv). 21 The ODI has also published case studies on The Asia Foundation’s work in other countries (Denney 2016; Harris 2016). 20

Subsequently, in the chapter’s concluding section I discuss how the two sets of findings informed my three empirical research questions. Let’s begin with the types of technical work facilitated by foreign aid actors. For one, the development agencies featured in the TAF studies provided financial and practical support to national actors who devised policy solutions, formulated the analysis behind them, and pitched this content to other political players. The national actors supported in this fashion were typically identified as technical specialists who had solid professional credentials and political connections, and who were committed to social betterment.22 The TAF studies echo broader ‘thinking and working political’ literature by arguing that such national technical specialists were best-suited for the job of leading reform advancement in the context of foreign aid interventions because they had ‘the technical skills to recognize sound solutions and the political capacity to navigate complex socioeconomic and political terrains’ in their country (Fabella et al eds. 2014:1). The studies also report that foreign aid actors in the Philippines sometimes helped the national experts by providing them with additional policy research and analysis – either by engaging in such technical work directly, or by supplying material from other sources. Furthermore, they stress that by facilitating in different ways the costly tasks of generating, applying and articulating technical content, foreign aid actors increased the availability and strength of what was a politically vital resource. For example: ‘…a key message from this work is that getting the technical arguments clear—and doing the necessary research to back them up—is an important aspect of the politics… External agents can often assist this aspect of the process by conducting or funding research that can produce evidence in relation to such issues… policy advocacies have to be clear, persuasive, and most importantly, backed by facts and corroborating evidence. In acquiring the key support, reformers can use independently run studies and experiments (some done with support of international agencies) to provide evidence about the value of reform… Legislative advocacy can be an expensive battle... Support from donors can make a great difference’. (Fabella et al (eds.) 2014:7,189,190) The above TAF study extract comprises three conclusions on the ways in which foreign aid- funded technical work facilitated or was meant to facilitate reform advancement. Firstly, it notes that policy arguments (i.e. arguments on the benefits and drawbacks of particular policy measures) have the potential to influence the political contest around a reform if they are adequately backed by technical reasoning and evidence. Secondly, it observes that by providing the technical reasoning and evidence, technical work can bolster the political weight of policy arguments. Thirdly, it argues that foreign aid actors can be financially indispensable when it comes to making possible the technical work that is needed for reinforcing policy arguments as a means of influencing reform politics. Elsewhere, the TAF studies comment more specifically on how they see technically-backed policy arguments operating as a lever in legislative politics (all the while regarding technical work conducted with foreign aid input). On this point, their accent

22 For instance, in one of the examined cases the reform team was led by ‘a public intellectual with an interest in institutional economics and a land law specialist formerly in government’, the latter working for the non-profit firm Foundation for Economic Freedom (Booth 2014:viii). In another case, the core of the reform team was based at Action for Economic Reforms (AER), which describes itself as ‘a public interest organization that conducts policy analysis and advocacy on key economic issues’, ‘founded in 1996 by a group of progressive scholars and activists in the Philippines’(www.aer.ph) (ibid). 21 falls on technical reasoning as a tool of persuasion. Consider Faustino (2012:9), who observes that the primary aim of the technical work that goes into policy arguments is to persuade influential political actors to support a reform concept by technically framing the proposed measures as beneficial to their interests: ‘The principal purpose of political action activities such as briefings, presentations, policy papers, etc., is to convince those with political capital to spend it on reform. It requires the constant customization of analytical reports and presentations to fit the needs and perceived interests of each potential ally.’ Other authors offer concrete examples of this dynamic. For instance, Fabella (2011) describes how The Asia Foundation’s partners succeeded at securing their reform objective in part because the technical analysis which they sourced from the World Bank granted their policy arguments greater authority with the national political players whom they had to persuade to support the reform. While doing so, he points out the added value of foreign aid actors contributing technical knowledge and skills directly when there is insufficient expertise available domestically: ‘It is said that bad equilibrium cannot be upended without new impulses flowing from the outside to change the equation… The World Bank manuscript… was especially cherished by those tasked to push the agenda and seeking to change other peoples’ minds on the matter… The team – realizing its own technical limitations – recruited the best help available in the world, which… gave the enterprise added validity’ (Fabella 2011:81,94). Further TAF studies depict the national experts backed by The Asia Foundation using technical reasoning to make the promoted reforms sound appealing from the perspective of narrow private interests: ‘…members of Congress primarily interested in their pork barrel allocations and in the promotion and protection of their family business interests were likewise drawn into support for the Sin Tax Reform bill through explicit identification of the new revenues which would flow into their districts’ (Sidel 2014:14). ‘…the main task was to work on the two main associations of banks offering small-scale loans, to develop the perception that this measure would be good for their business…’ (Booth 2014:15). However, for one of the reforms examined, Booth (2014:ix) mentions that while deciding whether to support the initiative, policy players also considered its broader social implications: ‘Politicians came to support the bill for a variety of reasons, including a conviction that it would be good for social peace…’. A reform concept that comes across as conducive to ‘social peace’ could of course be attractive to decisionmakers because ‘social peace’ is favorable to their political interest. However, at face value the claim that a reform ‘would be good for social peace’ is what I define as a ‘public interest argument’ – an argument made about a reform from the perspectives of legitimacy, practical feasibility, socioeconomic utility, national welfare, and/or justice (rather than from the perspective of private interests). In the TAF studies, technically-buttressed public interest arguments are presented as politically significant above all when used in attempts to win the debate on the socioeconomic merits of a reform idea before a wider audience of decisionmakers and the general public. Thus, the efforts of The Asia Foundation’s national

22 grantees to market reforms with the help of technical evidence took place not only in-person and during closed meetings, but also (a) at open parliamentary sessions which would have been covered by the media and (b) directly in the media, i.e. before the general public. In the last two scenarios the policy arguments reinforced through technical expertise were above all public interest arguments. Furthermore, judging from the studies, the purpose of publicizing technically- backed pro-reform public interests arguments in parliament and the media was not so much to persuade decisionmakers that the revisions reflected society’s interests. Rather, it was to articulate the socioeconomic case for reform before a wider audience in such a convincing way that it would become politically risky/unattractive for state officials and members of parliament (MPs) to withhold their support. In other words, through their technical work foreign aid-funded national experts aspired inter alia to foster a situation where decisionmakers would be confronted with the prospect of facing peer criticism and popular disapproval for failing to act in society’s favor. For example, the dynamic in question features in Sidel’s (2014) study on a reform that raised the taxes on tobacco and alcohol. In this account, MPs faced considerable political pressure to endorse the contested measures because various specialists were convincingly promoting these in public as highly beneficial to society (thanks to a campaign coordinated by The Asia Foundation’s expert partners at AER [see footnote 19] that revolved around the publicizing of technical evidence): ‘Doctors were mobilized to make very visible appearances en masse, first in the House, and then in the Senate, with prominent specialists making impassioned presentations at hearings, delivering sound-bites to the media, and rallying a diverse range of medical associations to sign petitions, paid full-page newspaper advertisements, and formal letters in support of the legislation… AER’s experts, anti-smoking activists, and prominent doctors worked with the media to provide expert advice and information and to exert and amplify public pressure on members of Congress and senators in support of the reform legislation’ (Sidel 2014:15,13). According to Sidel, the reform’s success was facilitated by AER’s efforts to directly persuade key decisionmakers through technical reasoning that the reform was in their interest. In addition, it was facilitated by the public discrediting of the contra-reform campaign as antithetical to society’s interest. This discrediting effort relied in part on the technical work of procuring and articulating pro-reform technical evidence, orchestrated by The Asia Foundation’s partners: ‘…each component of the coalition played an important role in the passage of the Sin Tax Reform bill…. AER played a crucial role, providing a steady stream of expert briefings and background papers, carefully crafted presentations, rigorously reviewed data sets, and informal advice and political intelligence. As the legislative process unfolded, in fits and starts, alternating between drawn- out hearings, backroom horse-trading, and public grandstanding, AER activists remained in situ, unblinkingly focused on the sometimes mind-numbingly arcane details of various versions of the bill and projections of impact on public revenue and health… finally, the reform coalition owed much of its success to the effective framing of the Sin Tax Reform bill and mounting of a multi-media campaign in support of the legislation’ (ibid). However, note that at the end The Asia Foundation and its grantees had to compromise on many specific reform aspects in order to reach a political deal on the overall concept. This

23 suggests that at least a part of the foreign aid-funded technical work on the reform would have been aimed at devising and technically ‘selling’ reform concessions to attract particular allies (as opposed to persuading the latter of the advantages to be gained from the reform’s core measures): ‘…the specific provisions of the legislation changed – and were in some measure seriously watered down – as the bill moved from committee to the floor in the House and then the Senate, and once again in the bicameral conference committee …the final version of the bill… was characterized by compromises limiting the extent of excise tax increases on alcohol, scaling back the initial extent of excise tax increases on cigarettes, and earmarking some of the revenues for ‘livelihood projects’ in the tobacco-producing provinces…’ (ibid:12). Meanwhile, the TAF papers on an initiative to adopt a new system of cargo handling presented the publicizing of foreign aid-funded technical analysis in the media as the decisive factor that secured a positive reform outcome. In this case, the reform’s opponents lost the socioeconomic debate in the national media to The Asia Foundation’s national partners, who based their public interest arguments on technical analysis that had been conducted earlier by other foreign aid agencies.23 As a result, the contra-reform camp could no longer sustain enough political support for their position. Consequently, soon after the media battle a law introducing the reform was passed in parliament. For instance, Basilio (2011:25) describes how policy players with stakes in the standing Load-On/Load-Off (LO-LO) system of cargo handling tried deterring the shift to the Roll-On/Roll-Off (RO-RO) alternative by publicly framing the latter as technically misinformed in a way that was dangerous for society: ‘Newspaper articles attacking the RO-RO project began to appear, with liner-shipping executives citing safety as a prime concern and arguing that using RO-RO was like going back to the Jurassic Age’. Basilio’s commentary highlights that in the Philippines the use of technical reasoning as a means of influence in legislative politics was not exclusive to foreign aid agencies and their partners. However, in the cargo handling case the arguments articulated in the reform’s favor in the media by its foreign aid-funded champions were more credible. This made the pro-reform stance more politically marketable to decisionmakers who were apprehensive about popular disapproval and about facing peer criticism in public:

‘The strategy to celebrate consumer sovereignty by allowing choice of transport modality changed the whole policy environment and essentially eroded the… power of LO/LO… players’ (Faustino & Fabella 2011a:6). Hence, the TAF studies indicate that in the Philippines the ability of foreign aid actors and their national partners to influence reform outcomes through technically-backed public interest arguments rested to a considerable extent on the openness of the country’s parliamentary debate; on the freedom of its media; and on the sensitivity of its political decisionmakers to popular pressure and to public attacks on their credentials as guardians of society’s interests. In his paper

23 ‘Utilizing… past research studies conducted by the Japan International Cooperation Agency…, the Norwegian Shipping Development Company…, and the United States Agency for International Development..., development entrepreneurs, as early as 1991, pushed for the adoption of a market-oriented strategy that would effectively address and promote competition by offering the market an alternative sea transport system…’ (Basilio 2011:19). 24

Sidel (2014) expands on this notion, conveying how the political significance of technically- reasoned debate in parliament and the media stemmed from the general requirements of political competition in the Philippines. Specifically, he argues that while political competition in the country was still based on direct patron-client relations, to ensure political success it was also crucial to secure impersonal popular support. This could be achieved by effectively selling one’s policy position in public as beneficial to popular wellbeing. The Philippines was thus an ‘oligarchic democracy’ where ‘lively competition for elected office combines with the entrenched interests of an oligarchy and the importance of [state] machinery and money in voter mobilization…’ (ibid:6). However, over the recent years economic diversification, an expanding middle class, and the flourishing mass media have ‘weakened the linkages between local politicians and their constituencies, diminishing the importance of patron-client relations’ (ibid:7). As a result, political competition was becoming increasingly coupled to a national debate on the public interest: ‘…candidates for national office must now appeal directly to the national electorate – in the media, and in the polls – to become sufficiently ‘bankable’ to win the backing of major financiers…’ (ibid). In sum, in the examined TAF studies the role of foreign aid-funded technical work in reform advancement was underpinned by several interrelated characteristics of the Philippine legislative politics. These characteristics did not pertain to the official rules of the political system and legislative process (such as the formal division of authority between government and parliament, the structure of the legislature, or the laws in place on informing and consulting citizens). Instead, they entailed the actual manifestations of who participated in the legislative process; with how much say; through what kinds of platforms and channels; with the use of what means; and based on what assumptions regarding the factors that affected the chances of legislative success and the security of one’s political standing. Thus, in the TAF studies the characteristics of legislative politics that shaped how foreign aid-funded technical work was used to advance institutional revisions were: the media’s prominence as a platform for policy battles; the weight of popular opinion as a source of political pressure; and the political risk that came with failing to support reform ideas that were shown to match society’s interests. This insight was among the observations in the TAF studies that informed the empirical research questions of my study. Below, I conclude the chapter by presenting this core part of my conceptual framework.

A framework for empirical analysis: the research questions In 2011 I started a research project on the role of foreign aid-funded technical work in the legislative politics of institutional reforms in recipient countries. I had done so in response to the limited attention which this topic received from the ‘thinking and working politically’ stream of foreign aid policy literature, and from development aid studies and social science in general. In late summer 2013 I completed my fieldwork on business taxation reforms in Kyrgyzstan, which I had selected as my general case study (see chapter 2). Soon after, I proceeded to develop the empirical research questions which would provide a framework for my data analysis. This conceptual step was informed by the ‘thinking and working politically’ studies on the experience of The Asia Foundation aid agency in the Philippines. The ‘TAF studies’ made observations on

25 two pivotal aspects of the role that foreign aid-funded technical work played in the legislative politics of institutional reforms in the Philippines. Based on these observations, I formulated three research questions that would guide my empirical analysis. In the study’s concluding chapter, I also use these questions as a framework for discussing whether and how the observations in the TAF studies reinforce the core insights of my research. For one, the TAF studies discussed several types of technical work that foreign aid actors were involved in while advancing the reforms examined. As part of this, they specified how the foreign ad actors contributed to the technical work in question. The TAF studies featured national experts who designed reform concepts, developed the supporting analytical material, and presented the latter to various audiences, while being financed by foreign aid agencies. There were also examples of foreign aid agencies providing their national partners with additional policy research and design material, which was prepared either by the agencies themselves, or by other overseas actors. Accordingly, I decided that the first step in my empirical analysis should be to bring out the same sort of information for my case study reforms. My first empirical research question is therefore as follows: 1. What kinds of technical work did foreign aid actors engage in to advance the reforms, and how? Secondly, the TAF studies mentioned several ways in which the technical work enabled or supplied by foreign aid actors functioned or could function as a means of advancing reforms through legislative politics. In some instances, foreign aid-funded technical analysis was said to be directed towards persuading political decisionmakers that a reform reflected their private interests and/or the interests of society, in order to secure their support for draft legislation. In others, foreign aid agencies’ national partners used their technical expertise to articulate the socioeconomic advantages of a reform during parliamentary hearings and in the media. They did so in a way that made it politically risky for decisionmakers to opt out from supporting the idea. This also made it more difficult for the reform’s opponents to recruit political allies. Sometimes the TAF studies argued that such use of technical work by foreign aid actors’ national grantees contributed to a reform’s advancement and legislative approval. On other occasions, the studies observed more generally that technical evidence was a crucial resource in boosting the political appeal of reform ideas to decisionmakers – and that foreign aid actors often played a key role in ensuring the availability of this resource. The TAF studies also highlighted that in the Philippines foreign aid-funded technical work was important in this way because of several characteristics of the country’s legislative politics. These characteristics pertained to the actual practices of who participated in the politics, with how much say, by what means, through what spaces, and with what assumptions regarding how policy actors exerted influence (as opposed to the formal rules of the political system). They included the country’s active mass media culture; the political weight that popular opinion had in the country; and the perceived political costs of being associated with policy positions that were credibly shown to undermine society’s interests. The TAF studies’ portrayal of technical evidence as a political resource became the starting point of my second empirical research question, but without the studies’ accent on affirming the potential of such evidence to influence legislative battles. In other words, I decided that the main

26 aim of my study was not to determine whether and when foreign aid-funded technical work helped to successfully push reforms through legislative politics. Rather, it was to distill how and why foreign aid representatives and other actors (a) understood such technical work to operate as a means in legislative politics and (b) acted on this understanding. In my second research question I capture this focus by phrasing it in terms of the ‘purposes’ intended for the technical work, defined as the strategic aims towards which the latter was directed: 2. What purposes was the technical work meant to serve in the efforts to advance the reforms through legislative politics, how, and why? Thus, while the TAF studies set out to capture and explain whether and how foreign aid actors contributed to reform advancement (whether through technical work or otherwise), this has not been the primary objective of my research. However, the TAF studies’ argument that technical evidence did affect legislative outcomes in the Philippines inspired me to aim for a tentative analysis of the influence that foreign aid-funded technical work may have had in the case study reforms. This aim is reflected in my third empirical research question: 3. What can be said about the extent to which the technical work served the purposes envisioned? In the coming chapter I introduce the four business taxation reform case studies to which I applied my empirical research questions. I also present my research methods. Finally, I provide a general overview of my case country and of its legislative politics in the broader realm of private sector governance.

Chapter 2. Kyrgyzstan and business taxation: case selection and research methods

Known officially as the Kyrgyz Republic, Kyrgyzstan is a lower-middle income economy of 6.5 million people.24 In 2005 and again in 2010, growing political tensions in the country culminated in the deposition of Kyrgyzstan’s first and second elected presidents, Askar Akayev and Kurmanbek Bakiev. Both events involved violent street protests, which turned deadly in 2010. The protesters accused the two men of committing electoral fraud and of abusing state authority.25 However, both times the disgruntlement of rival political elites was a major factor behind the unrest. Thus, before his ousting in April 2010 President Bakiev had increasingly centralized state power and economic resources under the control of his family and allies. In May-June 2010, after Bakiev had fled Kyrgyzstan, inter-ethnic violence shook the south of the country (Matveeva 2011; McGlinchey 2011). Later that June a referendum was held on a new constitution, which was adopted with a 90% vote in favor and a 70% turnout (Huskey & Hill 2011). Thereby Kyrgyzstan became the only post-Soviet state in Central Asia with a mixed parliamentary-presidential form of government. The parliamentary elections of October 2010 and the presidential elections of October 2011 were assessed by international observers as competitive and unpredictable, if marred by irregularities (OESC/ODIHR 2010, 2012; Ruiz Ramas 2012). Kyrgyzstan’s third elected president Almazbek Arambaev took office in December 2011 for a single (and completed) six-year term.26 In 2011, why did I opt for a research design that focused on a single country, and why did I choose Kyrgyzstan? How did I then select my case study policy area and reforms, and how did I go about collecting and processing my empirical data? Finally, what did I learn about Kyrgyzstan’s legislative politics in general that was relevant for my analysis of the role played by foreign-aid funded technical work in the case study reforms? Chapter 2 addresses this set of questions. In the chapter’s first section I discuss the considerations behind my research design, my choice of case country, and my selection of private sector governance as the general policy area examined. In section two I explain how business taxation became the specific focus of my research, and introduce my case study reforms. I also present my research methods and empirical data sources. In section three I discuss my general observations on the character of legislative politics in the realm of private sector governance in Kyrgyzstan in 2010-2016. In part I do this to provide a broader political context for the case studies that follow. Furthermore, I use these general observations to support and reflect on the conclusions that I present in the final two chapters of my study. I end chapter 2 by introducing the structure of the case study chapters.

24 As of 2019, https://data.worldbank.org/country/kyrgyz-republic 25 My overview of the uprisings that took place in Kyrgyzstan in 2005 and 2010 is based on the following sources: Juraev (2008); Lewis (2008); Marat (2008); Temirkulov (2008); Koehler (2009); Bohr (2010); Gullette (2010); Jones Luong (2010); Matveeva (2010); Temirkulov (2010); Van Lohuizen (2010); Collins (2011); Hale (2011); Jones (2011) 26 As noted in the foreword, much has happened in Kyrgyzstan’s politics and government institutions since the end of my research period (2016) and in 2020 in particular. The post-2016 developments do not affect the thrust and relevance of my core findings. Therefore, they are not part of the analysis in this chapter. However, they raise questions about how these findings would differ in a Kyrgyzstan with a political system and conditions other than those that broadly held in 2010-2016 (as well as in other political settings in general). I spell out these questions in the study’s conclusion. 28

1. Research design and case selection The main objective of my research was to deliver a set of empirically-grounded findings and propositions on an underexamined topic, while prioritizing analytical depth and detail over breadth and scope for generalization. A research objective of this kind is served well by a single country and policy area analysis, which is therefore the basic design of my study. In 2011 I chose Kyrgyzstan as my case country based on two pragmatic assumptions, mediated by considerations of academic and policy relevance. The first assumption was that as a native Russian speaker I would find data collection easiest in the context of the post-Soviet space. Secondly, I assumed that it would be more practical to conduct research in a relatively open society. Kyrgyzstan ticked the box on the first assumption. It was also a good fit in terms of the second. Before the unrest of 2010, Freedom House had consistently rated Kyrgyzstan as politically more free than the other former Soviet states in Central Asia.27 By 2011 Kyrgyzstan regained its position in the Freedom House rating as the most open country in that region (it has maintained this position for the duration of my research). On Freedom House’s scale, Kyrgyzstan has also generally scored better than Azerbaijan, but on par with Armenia and worse than Georgia, Moldova and the Ukraine. So why select Kyrgyzstan over the latter four post-Soviet states for a research project on foreign aid? Because this choice is more compelling in terms of academic and policy relevance, given the limited attention Kyrgyzstan has received as a subject of development studies research, and given the country’s economic conditions. If we argue that foreign aid agencies should focus in the first place on the world’s poorest societies, new research on Kyrgyzstan is more pertinent to the development aid community than new research on the considerably wealthier Armenia, Georgia, Moldova and the Ukraine.28 The academic and policy relevance of studying foreign aid in the context of Kyrgyzstan is also reinforced by the fact that the country has not been very visible in development studies compared to countries in inter alia Africa and South (East) Asia that have similar economic profiles. In other words, Kyrgyzstan tends to be overlooked by development research – despite its high poverty levels, and despite the high volumes of officials development assistance (ODA) that it has received relative to its population size and GNI per capita.29 In 2010-2016 the percentage of Kyrgyzstan’s population living below the national poverty line has thus hovered at around 30%.30 The country’s GNI per capita rose from USD 850 in 2010 to USD 1,228 in 2018.31 However,

27 See Freedom House reports for Kyrgyzstan and other post-Soviet countries at https://freedomhouse.org/report/freedom- world/freedom-world-2018. 28 Armenia, Georgia and the Ukraine are classified as middle-income. Moldova is classified as lower-middle income (and as freer than Kyrgyzstan). However, in 2011 it had a significantly higher GIN per capita than Kyrgyzstan. Sources: https://www.cia.gov/library/publications/the-world-factbook/fields/208rank.html#KG; https://www.worldbank.org/en/where-we- work; http://hdr.undp.org/en/content/gdp-per-capita-2011-ppp. 29 ‘Official development assistance (ODA) is defined as government aid designed to promote the economic development and welfare of developing countries’ (https://data.oecd.org/oda/net-oda.htm). My statement on the relative volume of ODA is based on a comparison of the grants that Kyrgyzstan, Armenia, Bangladesh, Cambodia, Cameroon, Ghana, the Republic of Congo and Tajikistan had received per capita in 2011-2015 from OECD/DAC member countries and as multilateral ODA. I made the calculations in August 2017 using https://stats.oecd.org/qwids/. 30 It fell to 22.4% in 2018, https://data.worldbank.org/country/kyrgyz-republic 31 Atlas methodology, http://data.worldbank.org/country/kyrgyz-republic 29 according to this measure, in 2018 Kyrgyzstan remained the second poorest post-Soviet state (the poorest being Tajikistan). Kyrgyzstan is also a country of stark regional inequality: the moneyed capital city Bishkek, the surrounding Chui province, and the Issykul province (a tourist hub in the country’s north-east) have had significantly lower poverty rates than the other five provinces; the differences in living standards have been further exacerbated by Kyrgyzstan’s mountainous topography, with the worst poverty in the highlands (Asian Development Bank 2013b). Furthermore, despite Kyrgyzstan’s reasonable if erratic levels of economic growth, its citizens have faced a persistent deficit of adequate economic opportunities (see below).32 Regarding the selection of the study’s policy area, in 2011 my preliminary choice fell on private sector governance because of the direct relevance of this field to a population’s economic wellbeing (which is arguably the core concern of the development industry). Before explaining how I adopted a focus on business taxation, I end the present section with a brief snapshot of Kyrgyzstan’s economy during my research period. As indicated above, in the first fifteen years after Kyrgyzstan’s independence (1991) the country’s private sector did not develop in ways that would make it a source of sufficient employment opportunities and robustly growing incomes for the majority of the population. In the 1990s Kyrgyzstan stood out among the region’s former Soviet republics in terms of the high pace of its foreign aid-funded economic liberalization (Engvall 2011a; Asian Development Bank 2013). In 1998 it was the first member of the CIS to join the WTO. However, since then the country has struggled to diversify its economy, to develop competitive export-oriented agriculture and manufacturing, and to lift the bulk of its rural population out of poverty (Stronski & Quinn-Judge 2016). In 2011-2015 migrant remittances were the largest single source of Kyrgyzstan’s GDP, contributing on average around 30%. Approximately 10% of the annual GDP came from a single gold mine, Kumtor.33 In 2016, 48% of Kyrgyzstanis worked in agriculture, which contributed just 17.9% of the GDP (CIA World Factbook 2016). Industry made up 25.9% of the country’s GDP and employed an equivalent share of the population (ibid). Meanwhile, the figures for the service sector were 39.5% and 56.2% respectively (ibid). In part, these figures reflect the important place of trade in the country’s economy: in the 1990s-2000s, Kyrgyzstan became a major hub for the reexport of Chinese goods to neighboring Kazakhstan and Russia (Asian Development Bank 2013). The prevalence of Kyrgyzstan’s service sector over its industry will feature in the case study chapters as a major topic of national debate.

2. Research methods, the case studies, empirical data, and mode of analysis My general research method is qualitative inductive and interpretative analysis, in which I draw on a range of primary and secondary sources. The most important of these sources are first- hand interviews with the direct participants of business taxation reforms in Kyrgyzstan. Except for one international call, all interviews were conducted in-person in Bishkek during two

32 During my research period Kyrgyzstan’s GDP growth has fluctuated from -0.5% in 2010, to 6% in 2011, to -0.2% in 2012, to 10.9% in 2013, stabilizing at around 4% in 2014-2016 (https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=KG) 33 http://www.worldbank.org/en/country/kyrgyzrepublic/overview#1 30 stretches of fieldwork: mid-March to early August 2012, and early March to late July 2013. I selected my interview respondents through a combination of deskwork and the snowball method. In preparation to the 2012 fieldwork, based on online research I made a list of the foreign aid projects working on private sector governance in Kyrgyzstan and noted the reforms supported at the time. I also identified Kyrgyzstan’s main business associations. My first interviews with representatives of these project and associations resulted in further interview leads, and so on. I used the early months of the first fieldwork to develop a general sense of the foreign aid-funded private sector governance reforms taking place in Kyrgyzstan, of ‘who is who’ in this policy sector, and of the sector’s legislative politics. Gradually my interviews became more focused on the reforms that I found the most interesting. There were around ten such reforms, spanning taxation, business inspections, business licensing, customs procedures, and private sector justice. I also obtained additional insight by attending various types of policy meetings. Most of these meetings brought together state officials, business leaders and foreign aid actors. Others were exclusive to business leaders, or to business leaders and foreign aid actors. On returning to Amsterdam in August 2012 I decided that to build on the picture emerging from my findings I needed to examine a small number of reforms in greater detail over time. Therefore I decided to limit my second fieldwork to the policy sector of business taxation, from which I subsequently chose my case studies. Business taxation appealed to me as a research focus because among the sectors examined it had the most direct, extensive and politically contested implications for the distribution of economic wealth and opportunity in Kyrgyzstan. Table 1 is an overview of the four specific business taxation reforms that became my case studies. I selected these particular reforms because they offered interesting initial observations, and because they were narrow enough in scope to be covered within the practical confines of my research.

Table 1. Business taxation reforms examined as case studies

Chapter Case reform Aid actors involved Years examined

3 Scaling back the voluntary patent tax IFC-BEE, World Bank* 2010-2015 regime

4 Transferring the function of social IFC-BEE 2010-2013, with insurance payments administration from brief mention of the Tax Service to the Social Fund 2014-2015

5 Reforming VAT administration IFC-BEE, 2010-2016 USAID-REFORMA/BGI

6 Reforming indirect taxation policy USAID-REFORMA/BGI, 2012-2015 IFC-BEE**

* Two studies funded by the World Bank ** Input by an IFC-BEE aid agent in the last two years 31

All four of the case study reforms were supported by one or both of the following two foreign aid agencies: the International Financial Corporation (IFC) and the United States Agency for International Development (USAID). In 2008-2012, IFC representatives worked on three of the case study reforms through the agency’s Business Enabling Environment project (IFC-BEE, which was also known as the Investment Climate Advisory Services project).34 IFC-BEE was financed by the Swiss government. In 2013 the IFC placed its business taxation work in Kyrgyzstan under the new regional Central Asia Tax Project (IFC-CATP, financed by Switzerland and the UK).35 The two national experts who had formed the core of IFC-BEE’s business taxation team transferred to IFC-CATP. They continued working on the same issues as before, from the same location (the IFC office in Bishkek). Therefore, for practical purposes I treat the two projects as a single initiative (IFC-BEE). The USAID was first involved in two of the case study reforms through its REFORMA project, implemented from September 2011 to September 2014 by the international firm Deloitte Consulting.36 In October 2014 REFORMA was succeeded by the Business Growth Initiative project (USAID-BGI), which took over USAID-REFORMA’s work on business taxation and was also run by Deloitte.37 USAID- REFRORMA’s expatriate project manager and the project’s two national tax experts transferred to USAID-BGI. Once again, for practical purposes I use the combined acronym USAID- REFORMA/BGI when discussing the overall involvement of the two USAID projects in the case study reforms. However, I use their separate project titles when discussing concrete events. During my fieldwork in 2013 I arranged a second round of interviews with the aid actors involved in the four reforms selected as case studies, and conducted (follow-up) interviews with other relevant actors. I also attended numerous policy meetings. Overall, in the study I reference forty-nine interviews and thirty-nine respondents (nine respondents were interviewed both years; one was interviewed twice in 2012). Sixteen respondents were interviewed as representatives of foreign aid projects and aid agencies, with five expatriates among them. In the remainder of the study I refer to these respondents and to representatives of foreign aid projects/agencies in general as ‘aid agents’. Six respondents were interviewed as representatives of government agencies (the State Tax Service, the Ministry of Economy, the first deputy prime minister’s office, the president’s office, the parliament). In the tables below they are labelled as ‘government’. Note that in the study I primarily use the term ‘government’ as a collective reference to Kyrgyzstan’s ministries, government agencies, and senior/middle-ranking state officials (unless stated otherwise). The reason why I often cannot be more specific is that neither

34 For IFC references to the project, see https://disclosures.ifc.org/#/projectDetail/AS/561496 and https://ifcext.ifc.org/IFCExt/pressroom/IFCPressRoom.nsf/0/3E2286F08B96682A852575FD004A256E?OpenDocument. The IFC-BEE website and most of the other public information about IFC-BEE have been taken offline. However, I have copies and would be happy to share on request. See IFC (2010) and IFC (2013) for references to IFC-BEE as the Investment Climate Advisory Services project, and to the project’s website www.ifc.org/beekg. 35 The estimated project end date for IFC-CATP was July 2015 (https://disclosures.ifc.org/#/projectDetail/AS/597327). The other components of the original IFC-BEE project continued under the successor project Kyrgyz Republic Investment Climate, which was also launched in 2013 (https://disclosures.ifc.org/#/projectDetail/AS/599486). 36 https://www.usaid.gov/kyrgyz-republic/fact-sheets/usaid-reforma-project 37 https://www.usaid.gov/kyrgyz-republic/fact-sheets/business-growth-initiative (the project fact sheet does not mention USAID- BGI’s activities in the realm of business taxation, but see USAID 2015ab in the bibliography) 32 were my sources, while there was no opportunity to push them on the details. Similarly, my respondents often talked about ‘government leadership’ without specifying whom they meant. In such cases I report their use of this term without further specification. Judging from the few interview statements which were more concrete about the identity of ‘government leadership’, Kyrgyzstan’s policy players typically used this term to designate the prime minister and his team. Seventeen respondents were interviewed as representatives of non-governmental entities. Among them, eleven were affiliated with business associations (labelled as ‘business’ in the tables). The three respondents whom I classify as ‘private experts’ were either tax consultants or research staff at an organization supporting business associations. The ‘observers’ were an academic, a director of an academic institution, and an NGO representative. Fourteen of the respondents were women (seven aid agents, two state officials, four business leaders, and one private expert). I use ‘she’ to refer to all respondents.

Table 2. Respondents and interviews referenced in the study, totals per affiliation

Interview respondents Interviews

Aid agents 16 Aid agents 22

Government 6 Government 6

Business 11 Business 14

Private experts 3 Private experts 4

Observers 3 Observers 3

Total 39 Total 49

Table 3. Respondents referenced in the study, per year and affiliation

2012 2013 Interviewed both years

Aid agents 12 (1 twice) Aid agents 9 Aid agents 5

Government 2 Government 4 Government -

Business 7 Business 7 Business 3

Private experts 2 Private experts 2 Private experts 1

Observers 2 Observers 1 Observers -

Total 25 (26 interviews) Total 23 Total 9

In the study all respondents are referenced anonymously and without stating their specific affiliation, as agreed at the start of each interview. All respondents have unique referencing titles that provide the following information: - Professional category (aid agent, government, business, representative, private expert, observer) - Respondent number (per professional category) - Date of interview. The referencing titles are used consistently throughout the chapters. To provide greater visual clarity, I present the interview references in the following format: professional capacity # (year month day). I also use distinct formats for referencing other types of sources (see below). Note that when I make several consecutive references to a particular interview without any intervening material, I only indicate the interview details once, at the first reference. The interviews typically lasted between one hour and two hours. All were semi-structured. From the interviews I wanted to learn about the means by which different actors sought to defend their policy preferences and/or to advance them through legislative politics. More broadly, I wanted to learn about the factors which affected the course of legislative politics. Accordingly, my interview questions were directed at acquiring such insight.38 Most of the interviews were audio recorded. However, in the study I reference seven interviews with five respondents who asked not to be. I quoted these respondents only if I could clearly recall their statements when transcribing my notes immediately after the interviews. In some citations I have revised the respondents’ language and filled in omitted words, in order to provide for greater clarity, brevity and readability. For the same reason, I have cut out phrases that did not add to the point being made while not changing or contradicting the latter. I have also omitted my own interventions (in the citations ellipses indicate comments separated by more than a few seconds of interview time). I took great care to preserve the intended meaning of all comments. Thus, I refrained from editing statements which I deemed ambiguous. For my analysis I also consulted a range of secondary sources: academic studies; foreign aid project reports; various thematic surveys and other policy research published by aid organizations and other actors; formal press statements by (non-)governmental entities; (draft) legislation; online press articles. I use the following formats to reference these various categories of sources: Research, project reports, analytical commentary: Author (year month) (Draft) legislation: legislative document # (year month) Online news articles, official press statements: News outlet/ agency (year month day) Legislative documents, press articles, interviews and online links are referenced by footnote. All other sources are referenced in the main text (unless pertaining to a footnote). I differentiate

38 My respondents also frequently commented on the problem of implementing legislative reforms in practice, and on the notion that market access, product competitiveness and the availability of skills and capital were more important for Kyrgyzstan’s development than private sector governance. These are important issues. However, they fall beyond the scope of my research. So do other pertinent issues raised by my respondent about the aid industry more broadly. 34 among press articles published in the same outlet on the same day by adding ‘a/b/c’ etc. after the date. When citing multiple press articles published by the same outlet in a single year, I only state the year once. The details of all secondary sources can be found in the bibliography, which provides separate lists for legislative documents, press articles, press statements and the general literature. Some of the documents are no longer available online, but I can share them on request. Starting from August 2012 I monitored the coverage of the four case study reforms by Kyrgyzstan’s leading private sector news outlet http://www.tazabek.kg and by several other online news portals. (Note that in my analysis I treat the coverage of the reforms by these news portals as a proxy for wider media coverage. Accordingly, for stylistic purposes I use the terms ‘the press’ and ‘the media’ interchangeably, to designate the mass media in general). After returning from fieldwork in 2013 I decided to continue following the case study reforms through secondary sources until shortly before finishing my study. The contractual deadline for this was December 2014 (I had a four-year research position at the University of Amsterdam). However, due to personal reasons and other factors the research took until 2020 to complete. The unintended advantage of this was that I was able to observe the passing of legislation on all four case study reforms. The last law was adopted in June 2016. Therefore I have set June 2016 as the analysis cutoff date. While examining the case study reforms from August 2013 to June 2016, I thus relied on secondary sources and on educated guesses based on the political dynamics described in my interviews. The absence of direct primary data for this period posed a challenge to the certainty with which I could make my inferences. I dealt with this challenge by being thorough, honest and where necessary cautious and provisional in my analysis and conclusions. I adopted the same approach while making inferences from my primary data, in order to mitigate the methodological issues that limit the reliability of in-depth interviews as a research method (respondent subjectivity, memory failings, interest-driven bias, incomplete disclosure of information). In general, in order to bolster the validity of my descriptive and analytical inferences I triangulated as much as possible across my empirical material. The findings on foreign aid-funded technical work that I present in the concluding chapter 7 and 8 rest primarily on my case study analysis. However, in those chapters I also refer to my observations on the legislative politics of private sector governance in post-Bakiev Kyrgyzstan in general. I do so because these observations reinforce my analysis on why foreign aid-funded technical work was mobilized for particular purposes in the case study reforms, and on the extent to which it fulfilled these purposes. Therefore in the next section I introduce my observations on the legislative politics that characterized private sector-related policymaking Kyrgyzstan in 2010- 2016 in general. Thereby I also situate the case study reforms in a broader political context.

3. The legislative politics of private sector governance reforms in post-Bakiev Kyrgyzstan I begin setting the scene for the case study reforms with an outline of the formal rules of the legislative process in Kyrgyzstan in 2010-2016, as described in OESC/ODIHR (2014) and as confirmed by my primary research. In Kyrgyzstan during my research period, legislation could be initiated by the government, by members of parliament (MPs) and by popular initiative.

Legislative proposals initiated by the government were generally prepared by working groups convened at one of the ministries. These working groups would be typically listed as the proposals’ main authors. The draft laws would then registered in government and circulated among its ministries and agencies, where they would require ‘endorsement by at least half of the members of the Government before being submitted to the Government Office’ for final approval (OESC/ODIHR 2014:14). Once approved in government, the legislative proposals would be submitted by the prime minister to parliament, to be considered in three plenary readings (each preceded by discussions in parliamentary committees). Amendments would usually be made during the second reading. Bills adopted in the third reading would be sent to the president, who would sign them into force.39 Legislative proposal submitted to parliament by MPs would first be sent to the government. The opinions issued on such bills by the government would be published and circulated in parliament while they were being considered by the MPs. During the years of my research, what was the character of the above legislative process in practice in the realm of private sector governance? To answer this question, it helps to start by looking at the political changes that took place in Kyrgyzstan after the ousting of President Bakiev in April 2010. The new constitution adopted in Kyrgyzstan in June 2010 transferred ‘considerable - although not all - powers from the president in favor of the prime minister and the government, and the legislature’ (Fumagalli 2015:12). It replaced a system where the president controlled the line ministries and the parliament (as head of state and government) with a mixed parliamentary-presidential system in which the prime minister became the head of government. The new constitution also decentralized power within the parliament and expanded opportunities for membership in the legislature: ‘The number of seats in the Jogorku Kenesh [the Supreme Council, i.e. the parliament] was increased from 90 to 120 (art. 70). According to the new electoral law, introduced in July 2010, deputies are elected through a proportional system, which is also expected to help establish a stable party system. According to the constitution no single party can hold more than 65 seats, thus preventing the country from turning into a one-party regime. Parliament can over-ride presidential vetoes by a two-thirds majority vote (art. 81)’ (ibid:19). Political observers have argued that the constitutional changes of June 2010 were an attempt to reach a power-sharing arrangement among the country’s numerous elites to prevent the resurgence of political instability: ‘The post-Soviet political elite in Kyrgyzstan developed into a large predatory group that views the state primarily as a tool for private enrichment… The current multiparty parliament and coalition government, in this context, appear to be an optimal solution for providing the largest possible number of elites with some access to the “cake”’ (Juraev 2012:3). ‘The new constitution presumes that Kyrgyz political actors are driven by neopatrimonial links and therefore seeks to regulate them to the extent that no one political network captures too much power… [It] introduces new rules of competition for old political players with solid economic and political resources… [and] protects the privileges of the opposition by creating conditions for formal competition. Because the current constitution has allowed all interested political forces to participate in

39 The president would be able to veto the legislation, but not on the budget and on the taxation system (OESC/ODIHR 2014). 36

parliamentary elections, the parliament represents all of the most dominant political groups…’ (Marat 2012:326,330). Commentators have also concluded that under the new system politics and governance continued to revolve around the reshuffling of economic and administrative resources among the elites, albeit now a more pluralist way: ‘The egregious corruption of previous administrations has been transformed to some degree by a system that gives more equitable opportunities for monetary gain at least to a larger group of elite politicians and business families’ (International Crisis Group 2015:5). ‘The end result is a situation in which party leaders use their parties as patronage networks, allowing them to arbitrate between competing interest groups below them. In effect, the patronage system has adapted to the country’s new, more diffuse political system. In place of Bakiyev’s presidential patronage network in which wealth was concentrated in the hands of his family and close associates, the country now has a patronage system that is more pluralistic, but no more conducive to good governance’ (Stronski & Quinn-Judge 2016:3). According to Johan Engvall (2011b, 2014), the core function of the state had remained that of an informal ‘investment market’. Thus, in post-Bakiev Kyrgyzstan the elites continued to pay their way into government and parliament and to seek returns to such ‘investment’ (by skimming public money, advancing laws that favored their business interests, and by accepting rewards in exchange for supporting particular laws and the de facto terms of their implementation): ‘...decision-making policies, regulations, fiscal affairs, and the enforcement of rules have turned into commodities largely at the private disposal of officials…’ (Engvall 2015:42). Nevertheless, the practice of lawmaking did change after April 2010, with tangible implications for the foreign aid projects, business actors and state officials involved in advancing reforms to private sector governance. As reported by my respondents in 2012-2013, the legislative process became more contested, protracted and uncertain than it had been under Bakiev. By 2008 Bakiev had ‘created a pocket parliament’.40 As a result, ‘if Bakiev wanted to get something through the parliament, it was done in two days’.41 When requested by Bakiev, state ministers had to make legislative reforms happen, as ‘back then there was a different form of state administration, a president who said that “it must be done”, a heavy hand’.42 In contrast, after Bakiev’s ousting ‘the center of decision-making’ became ‘smudged’ between the decentralized parliament, the government, and the president; consequently, draft laws now took longer to pass through all the stages of consultation, and often stalled in the legislature.43 Furthermore, the parliament emerged as the crucial battleground for advancing reform provisions, with MPs gaining prominence as gatekeepers and as brokers of stakeholder interests. In the words of the respondents:

40 observer 3 (2013 May 22) 41 aid agent 7 (2012 May 23) 42 aid agent 6 (2012 May 19); echoed by business 8 (2013 May 13), business 1 (2013 May 30) 43 business 1 (2012 March 26); echoed by aid agent 10 (2012 June 27), aid agent 5 (2012 May 8), business 11 (2013 July 29) 37

‘Before all decisions were concentrated with one person. Now it is spread out. On the one hand the process is slower, as you must convince all these people. On the other, it is not one person deciding what should be done.’44 ‘In some ways, it was easier to work under Bakiev. If you got the support of the president’s family you could go ahead and no MP could pose a problem. There were fewer people whose consent you had to obtain.’45 ‘Most of the problems facing reforms are related to the adoption of legislative acts, for instance whether or not an issue will pass in the Jogorku Kenesh. Here in Kyrgyzstan, a lot of things hinge on legislation.’46 ‘On every issue there is presently bargaining going on, the MPs are involved. As in, the MPs defend various interests’.47 In the realm of private sector governance, what ‘various interests’ did the MPs defend? First of all, these were the commercial interests of the MPs themselves, most of whom owned businesses.48 Secondly, cabinet officials lobbied MPs in favor of particular draft laws, and sometimes against legislative proposals that had been approved by the government.49 Thirdly, respondents highlighted the lobbying of MPs by extra-parliamentary business actors who had the money to hire lawyers in order to develop and advance legislative proposals.50 In this respect, in Bishkek I encountered a sizeable group of business association representatives who were active in legislative politics without being directly affiliated with government or parliament.51 I use the terms ‘the business lobby’, ‘business leaders’, ‘business actors’, ‘the business community’, and simply ‘business’ to refer to such business association representatives. (In Kyrgyzstan’s public discourse, this group of policy players was generally denoted as ‘the business community’). By and large, in my analysis I do not differentiate between various associations, business sectors, business owners and potentially conflicting interests that comprised the ‘the business lobby’. The reason for this is that in most cases my respondents used ‘business’ and the ‘business community’ as collective terms, without specifying such differences. Hence, with some exceptions, in my analysis I bracket the competing business interests associated with the four case study reforms. What forms did the business community’s participation take in post-Bakiev legislative politics? For one, some business association representatives regularly lobbied state officials and MPs directly. Several business leaders that engaged in this type of lobbying openly discussed it

44 business 2 (2012 March 28) 45 aid agent 8 (2012 May 24); echoed by aid agent 6 (2012 May 19), business 1 (2012 March 26), private expert 1 (2012 March 26) 46 government 2 (2012 July 24) 47 business 9 (2013 May 27); echoed by aid agent 5 (2012 May 8) 48 aid agent 4 (2012 April 26); business 7 (2012 May 2); aid agent 8 (2013 June 4) 49 business 9 (2013 May 27); aid agent 11 (2012 June 29); government 3 (2013 June 14); government 6 (2013 July 31) 50 observer 2 (2012 July 5); observer 1 (2012 March 27); business 5 (2012 April 20); aid agent 3 (2012 April 17) 51 The business actors who usually appeared at policy meetings and in the press were the leading executives from around half a dozen business associations. The ‘usual suspects’ represented the Association of Suppliers, Producers and Distributors (Association of Suppliers); the International Business Club; the Association of Markets, Trade Enterprises and the Service Sector of Kyrgyzstan; the Chamber of Commerce and Industry; the Association of Jewelers; the Entrepreneurs Union of Kyrgyzstan’s council on tourism; and several (former) representatives of the Bishkek Business Club. Representatives of other (sectoral) associations also periodically attended policy meetings and issued public statements. Virtually all of the visible associations were Bishkek-based, with the exception of the Osh branch of the Young Entrepreneurs’ Association of Kyrgyzstan (JIA). 38 during interviews as a standard and legitimate practice that revolved around arguments pertaining to national wellbeing.52 In addition, it was common for business leaders to engage in franks policy discussions with state officials and MPs at various types of policy meetings organized for this purpose, many of which were covered by the media. I henceforth describe such events as being ‘inter-stakeholder’ and as comprising ‘a wider policy audience/ wider audience of policy players’. Thereby, I highlight the fact that they brought together multiple private and public sector actors, beyond the immediate sponsors and detractors of specific policy initiatives. Thus, during my fieldwork and in the years that followed, inter-stakeholder roundtables, seminars and other policy meetings on private sector governance took place on a continuous basis at government premises and private conference venues in Bishkek.53 Furthermore, there was a widespread practice of convening what my respondents referred to as public hearings in parliament. Such hearings implied the deliberation of specific legislative proposals with the participation of state officials and private sector actors.54 Also, during my research period law- making authorities were legally obliged to make all legislative proposals that had immediate social or economic relevance openly available online or in print for public viewing and feedback: ‘Draft laws that “directly involve interests of citizens and legal entities” or “regulate entrepreneurship” must be “offered for public discussion” by publishing them on the official site of the law-making body or in the mass media if the law-making body does not have an official site’ (OESC/ODIHR 2014:15). Several people whom I talked to in Bishkek highlighted that Kyrgyzstan’s business associations diverged considerably in their policy interests and political leverage, so that it was sometimes difficult for business leaders to adopt a common stance while negotiating with the government.55 Nevertheless, the associations regularly took up a collective political identity through the secretariat of the high-level public-private discussion forum called the Investment Council (see chapter 3). They also did so by convening issue-specific committees for the purpose of submitting contributions to draft legislation. Consider an interview comment on one such committee meeting, which highlights the different types of lobbying practiced by business: ‘Yesterday I recommended several channels for lobbying. We could do it through the ministry with which we are working and which has a group for supporting business. We could do it through the Investment Council. And we could do it through members of parliament. We have very good relations with parliamentarians. They have offered to support us if we have any ideas. They would take it onto themselves to lobby these ideas, to advance legislative initiatives.’56 In addition, in 2012-2013 respondents observed that under the post-Bakiev system of dispersed decision-making it had become more politically viable for business leaders to secure their policy preferences by exerting public pressure on the MPs and (through the MPs) on state officials. Specifically, considerable political weight was attributed by business leaders and other

52 business 1 (2012 March 26, 2013 May 30); business 3 (2012 April 5, 2013 June 12); business 7 (2012 May 2, 2013 May 29); business 2 (2012 March 28); business 4 (2012 April 12) 53 Such events were typically announced on business association websites. I attended several, with and without prior registration. 54 business 2 (2012 March 28); government 3 (2013 June 14) 55 aid agent 13 (2012 July 28); business 6 (2012 April 27); government 6 (2013 July 31); private conversation with a Kyrgyzstani academic in summer 2013 56 business 5 (2012 April 20) 39 respondents to the business lobby’s tactic of attaching (or threatening to attach) reputational rewards and penalties to policy standpoints in the mass media: ‘Today there is no monopoly on power. We see this as a good thing, as it makes it easier for us to use advocacy mechanism. We can approach state officials and say: “We will go to the parliamentary opposition, we will give them extra trump cards”. In such cases we present the officials with two policy options – a good one and a bad one. If they choose the good one, we say: “Yes, there was a problem, but the officials heard us, everything is fine”. If they do not solve the problem, we start saying: “The government does not want to take business into account, while we as business feed the country, generate the GDP, create jobs”. The opposition immediately starts raising its voice, saying that the government does not consider business. And that is a spiral of its own, which then unwinds.’57 ‘When the majority of business leaders is in favor of a reform initiative, it is difficult to lobby against it in parliament. They are the electorate, after all. When business leaders speak indignantly on television that the MPs are acting wrongly, the MPs are forced to react’.58 ‘When there is no support in parliament, business has one method left – the media. Because business owners are part of the people. The MPs are afraid [of legislative position being presented in the media as harmful to business], as they are meant to represent the people’.59 Notably, some respondents emphasized that the practices of blaming, shaming and positive endorsement in the mass media had real significance as means of advancing policy objectives in combination with the tactic of more straightforward deal-making, and/or because of the growing competition in money-driven lobbying: ‘Tools like social pressure are being used more and more now. A legislative document is developed, and then it is launched into official circulation. Say you don’t want to buy its advancement, or you cannot. Say a minister is not interested in launching the document and advancing it. In that case you begin to write to the newspaper. You use the press to weaken the minister, criticize him, point out the weaknesses of his work. Or you begin to praise the draft legislation. Now they are actively using the internet, print, and mainly television. Plus rallies. And this is because if you start bribing people, or if you simply try to win the interest of a minister who wants to get policy results, it is now more difficult to use this channel, because there are many competitors who promote alternative policy decisions. Suppose a minister wants to get a result. He is presented not with one possible decision, but three. How to choose among them? First, there is competition for loyalty – who offers more money or other material benefits. If this does not work out, you use public pressure. We have begun to do this more and more. This is a sign that competition in lobbying is growing’.60 ‘Policy decisions are taken depending on who in parliament appoints whom in government, and depending on what the relations among these officials lead to. Plus, often public opinion has a strong influence. No one wants to take political decisions that do not appeal to the people. Because elections are tomorrow. And so, as a business leader you create public opinion before initiating something. You give interviews every day, you swamp the press with letters. MPs also read newspapers and watch television. Then you initiate a legislative proposal’.61

57 business 3 (2012 April 5) 58 government 6 (2013 July 31) 59 private expert 1 (2012 March 26) 60 observer 2 (2012 July 5) 61 business 1 (2012 March 26); echoed by business 1 (2013 May 30) 40

In sum, based on my fieldwork and secondary sources I arrived at the following four findings about the character of legislative politics in the realm of private sector governance in post-Bakiev Kyrgyzstan. Firstly, I observed that decision-making in this policy area was competitive, decentralized, and slow-moving as a result. Many MPs and state officials had political power over the legislative process, used this power, and drew on the corresponding power of others. Secondly, I established that the legislative politics of private sector governance in post-Bakiev Kyrgyzstan involved a sizeable, coordinated and active cohort of business leaders external to government and parliament, who represented a number of prominent business associations. Thirdly, I found that the legislative politics were characterized by the frequent convening of various types of policy discussion meetings involving state officials, MPs, business leaders and other private sector actors. It was standard practice for the participants of such inter-stakeholder policy meetings to openly criticize each other’s policy positions. Also, the opinions raised at these meetings were habitually reported by the online press and by other news outlets. Finally, I observed that business leaders regularly criticized and/or applauded state officials and MPs directly in the mass media. This tactic was widely considered to be a consequential means of influencing legislative decisions. I will return to these observations in my concluding chapters. Presently, I turn to the business taxation case studies of my research by outlining their structure.

Case study analysis structure The next four chapters are the empirical core of my research, where I examine my four case study reforms from the perspective of the following research questions:

4. What kinds of technical work did foreign aid actors engage in to advance the reforms, and how? 5. What purposes was the technical work meant to serve in the efforts to advance the reforms through legislative politics, how, and why? 6. What can be said about the extent to which the technical work served the purposes envisioned?

The case study chapters share a structure that rests on a handful of guiding questions. These questions helped me develop my observations about how and to what effect different policy players treated foreign aid-funded technical work as a resource in the legislative politics examined. Thus, in all four chapters the first section introduces the case study reforms by addressing the following points: What was the policy issue at stake? What version of the reform did the foreign aid actors promote, and to what extent was this version adopted into legislation? After that, the chapters continue in either one or two analytical sections, which examine the engagement of foreign aid actors in the technical work on the case study reforms. Each of these sections covers the activities of a single aid actor. Thus, in chapter 3 section two looks at IFC- BEE, while section three covers the World Bank. In chapter 4 there is only a section two, on IFC- BEE. Chapter 5 has a section two on IFC-BEE and a section three on USAID-REFORMA/BGI.

Finally, in chapter 6 both the second and the third sections focus on USAID-REFORMA/BGI, but at different stages in the reform. The questions guiding the analytical sections are as follows: What kinds of technical work did the foreign aid actors engaged in on the reform and how? What was sought/expected from this by the aid actors and by other policy players? How did the other policy players engage with and respond to the technical work, and with what outcomes for the reform? In the final ‘case study findings’ sections of each empirical chapter I answer my three research questions for the reform being examined. I then combine these answers in chapter 7, where I discuss the four case study reforms taken together.

Chapter 3. Scaling back the voluntary patent tax regime

In June 2015, the government of Kyrgyzstan passed a decree that increased the costs of a simplified tax regime called ‘the voluntary patent’ and limited the range of businesses eligible for it.62 The IFC-BEE project promoted reforms directed at scaling back the voluntary patent tax regime at least until the end of summer 2013, starting from 2010. The World Bank made two indirect contributions to the legislative contest on this policy matter in 2012. For the voluntary patent reform case, I answer my empirical research questions in four steps. First, in section one I introduce the policy issue at stake. I also present the reform version promoted by IFC-BEE, and the extent to which this version was adopted into legislation. Next, in section two I examine the technical work that IFC-BEE engaged in on the voluntary patent system. I do so with a focus on what the project and other actors sought and expected from this technical work; on how the other actors responded to it; and on what this meant for the reform. Then, in section three I apply the same focus to the World Bank’s contributions. Finally, in the ‘case study findings’ section that closes the chapter I explicitly address the reform from the perspective of my research questions: What kinds of technical work did the foreign aid actors engage in on the issue of reforming the voluntary patent tax regime, and how? What purposes was this technical work meant to serve in the efforts to advance the reform through legislative politics, how, and why? What can be said about the extent to which the technical work served the purposes envisioned?

1. Voluntary patent tax reform and the revisions promoted by IFC-BEE In Kyrgyzstan people can register and conduct their business as ‘individual entrepreneurs’ or by setting up ‘legal entities’. Individual entrepreneurs with annual turnovers equal to or below the threshold for compulsory registration as a VAT payer (KGS 4 million until January 201663) can choose to operate under a simplified tax regime called ‘the voluntary patent’ if their business activities are included in the list of eligible categories, nearly all of which are in the trade and service sector (124 categories before September 2015, 81 after, see below).64 The eligibility list is determined by the government. The voluntary patent regime is much cheaper in real and administrative terms than Kyrgyzstan’s general tax regime. Businesses which use the voluntary patent system pay a substitute sum for regular revenue-based taxes by buying a ‘voluntary patent’ contract for a pre-set and renewable time period. This allows them to carry out one specific type of commercial activity in a particular district of the country. The voluntary patent regime exempts its users from regular tax accounting.65 The only records that they are obliged to keep are the patent contract, patent contract receipts, and an informal log of cash receipts. The voluntary patent system was introduced in Kyrgyzstan in 1996 in order to facilitate entrepreneurship among the country’s poorer citizens while bringing them into the fold of the

62 Tazabek (2015 September 4ab, June 18) 63 In January 2016, the VAT registration threshold was raised to KGS 8 million (see chapter 6). 64 The main exception is the textiles and apparel manufacturing sector. 65 Patent holders must still pay and report on their personal income, land and property taxes, and social insurance contributions. 43 taxation system.66 However, it quickly became a major avenue for tax evasion in the service sector. When businesses that used the voluntary patent reached the VAT registration threshold, the tax regime’s minimal accounting requirements allowed them to hide this fact from the Tax Service. By doing so they could continue working under the voluntary patent system in order to avoid paying regular taxes and in particular the VAT, the administration of which is considered to be especially troublesome. The near-total exemption from bookkeeping which the voluntary patent regime entails and its significant financial benefits have thus led to its proliferation even among businesses with turnovers well above the eligibility threshold. Over the years some basic adjustments were made to the system. For instance, patent rates were raised by an average of 45% in 2004 (IMF 2004i). In a more ambitious attempt, on December 30th 2008 President Bakiev adopted a decree that raised the voluntary patent rates further and cut the number of economic activity categories eligible for the regime. When that decree went into force on January 1st 2009 the business lobby protested the changes on the grounds that they jeopardized the economic viability of the country’s many smaller entrepreneurs. In response the government set up a commission to reconsider the matter. Consequently, in March 2009 a government decree was passed that restored the number of eligible categories and revised some of the new rates. However, the overall increase in patent costs remained in place (Information Agency 24 2009; Dolgih 2009; Diesel online forum 2009; IFC 2013).67 In 2010-2013 IFC-BEE promoted a twofold reform concept on scaling back the voluntary patent tax regime, which entailed: (a) restricting the regime to microentrepreneurs defined as businesses with annual turnovers much lower than the KGS 4 million VAT registration threshold; (b) in parallel, developing a new set of simplified tax regimes for small and medium businesses. The project argued that such comprehensive reforms were necessary to redress the tax evasion and unfair competition associated with the voluntary patent system, and to enhance business growth and productivity. IFC-BEE first presented the outlines of its reform idea in the ‘Investment Climate in the Kyrgyz Republic as Seen by Small and Medium Enterprises’ survey, which the project conducted in mid-2009 and released in 2010 (IFC 2010, see section two for the details). This 2010 IFC SME survey evaluated the voluntary patent system as follows: ‘Because the patent regime is very attractive, individual entrepreneurs have no incentive to graduate from the patent to the simplified or general tax regime. As a result, some individual entrepreneurs manage their operations in such a way as to remain under the patent regime… for example where (i) those individual entrepreneurs whose turnover is close to the KGS4 million turnover threshold hide part of their turnover in order to remain under the patent regime; and (ii) some individual entrepreneurs divide their operations into two and purchase a patent for each in order to remain under the patent regime… The patent regime therefore encourages evasion and creates unfair competition…’ (IFC 2010:124,123). The survey also argued that the general tax regime was being shunned in favor of the voluntary patent because it was procedurally too heavy for small and medium businesses and was unduly costly in real terms when it came to indirect taxation. Furthermore, it contended that the

66 private expert 3 (2013 June 7); Tazabek (2015 May 28) 67 business 3 (2012 April 5, 2013 June 12) 44

‘single tax’ – the simplified tax regime open to all businesses with annual turnovers equal to or below the VAT registration threshold68 – did not adequately perform its function.69 Consequently, in the survey IFC-BEE concluded that ‘reforms to both the patent and the simplified tax regimes are therefore needed’ (ibid:106). In addition it called for the simplification of general tax accounting and reporting and for a reconsideration of the real costs of indirect taxation. With respect to the general tax regime the survey proposed several specific reforms, some which will be covered in the coming chapters. As for what should be done to the voluntary patent, the survey suggested: ‘A medium-term objective might be the introduction of a new upper limit on turnover under the patent regime, with the result that this facility would be limited to the smallest businesses only. Such a ceiling should be significantly lower than the current ceiling for VAT’ (2010:129). In late 2012 the IFC-BEE completed its second survey of small and medium enterprises in Kyrgyzstan. This study, ‘Investment Climate in the Kyrgyz Republic as Seen by Business’, was published in early 2013 (IFC 2013, see section two for the details). In the 2013 IFC SME survey IFC-BEE reached the same conclusions about the shortcomings of Kyrgyzstan’s tax system as in 2010. The project’s reform advice remained the same too: restrict the voluntary patent to microentrepreneurs and revise the other regimes in such a way that they could effectively absorb businesses that no longer qualified for the patent. However, this time around IFC-BEE proposed the concrete annual turnover ceiling of KGS 1 million to deliniate microbusiness. It also explicitly defined the second part of its reform idea in terms of crafting a new system of progressively demanding tax regimes, presenting its specific recommendations as components of such a system. Where did Kyrgyzstan’s government stand on the matter? As I will show later in the chapter, by the middle of 2012 the government was proclaiming that the voluntary patent system must be made more demanding and restricted because it (a) undermined national tax income and (b) created a competitive advantage for businesses which violated the voluntary patent tax regime, and a situation where economic sectors excluded from the latter had to cover an unduly large share of the country’s tax revenue needs. According to an aid agent interviewed in May 2013, many policy players in Kyrgyzstan broadly subscribed to this position: ‘Yes, other businesses feel competition from patent holders. This is a generally recognized fact. For one, it creates unfair competition, distorts the terms of competition for so to speak honest business. At the same time, it leads to shortcomings in tax collection. Because under the patent regime hide businesses that should be paying a considerably larger amount. Big guys creating inconveniences for similar big guys who work under other regimes. And thus the latter complain’.70 Meanwhile, a part of the business lobby continued to object – as it had done before 2010 – that raising the costs of the voluntary patent and decreasing its coverage would be a severe blow

68 With some exceptions. 69 Under this simplified regime entrepreneurs pay a single monthly tax on turnover. Bookkeeping and regular reporting to the Tax Service are required. The 2010 IFC SME survey found that few businesses that could purchase the voluntary patent chose to upgrade to the single tax, because of its comparative disadvantages. It also established that businesses working in sectors that did not qualify for the patent often passed on the single tax option because in some ways it was less financially attractive than the procedurally heavier general tax regime. 70 aid agent 1 (2013 May 23) 45 to small and medium businesses and hence to the wellbeing of the population. Still, in November 2013 the Ministry of Finance opened for public commentary a draft decree that narrowed the set of economic activities eligible for the voluntary patent from 125 to 80, rearranged the remaining types of activity into new categories, and raised the basic (i.e. the highest permitted) patent rates.71 This legislative proposal excluded from the voluntary patent a much narrower cohort of businesses compared to the reform idea promoted by IFC-BEE. Based on the draft, on June 15th 2015 the government adopted a decree that streamlined the patent’s sectoral applicability and increased up to five-fold the basic patent rates for a considerable range of activities.72 Thus, the June 2015 decree bypassed IFC-BEE’s core suggestions on limiting the voluntary patent to microentrepreneurs and on developing a new regime for the rest of small and medium businesses. These suggestions remained uncodified at the end of 2016.

2. IFC-BEE’s engagement in technical work on the voluntary patent system In 2010-2013 IFC-BEE engaged in several types of technical work in a bid to persuade the government to endorse a legislative drafting initiative on the project’s voluntary patent reform idea. In the present section I examine IFC-BEE’s engagement in technical work on the reform, first for the years 2010-2011, then for the years 2012-2013. For each period I (a) present the technical work that IFC-BEE engaged in on the reform; (b) examine what was expected from this technical work by the project and by other actors; and (c) consider how the other actors responded to the technical work, and the consequences thereof for the reform.

2010-2011 The 2010 IFC SME survey was the first instance of technical work by IFC-BEE that provided published reform advice on the voluntary patent tax regime. As stated in the survey, the objective of the research initiative was ‘to assess the existing conditions for doing business in the Kyrgyz Republic in 2008 and to develop recommendations for improving them’ (IFC 2010:4).73 The survey named IFC-BEE as the entity responsible for the research product. Seventeen IFC and World Bank representatives were listed as contributors.74 Besides chapters on business registration, permits, licensing, technical regulations and non-tax inspection, the survey included a chapter on taxation. The 2010 IFC SME survey’s conclusions were primarily based on a quantitative analysis of face-to-face interviews with business owners and managers conducted on the basis of a closed and pre-coded questionnaire. The respondents sample covered 2,010 small and medium companies (defined according to number of employees), individual entrepreneurs and farmers

71 Tazabek (2013 November 27). The actual voluntary patent rates for each category are set per district by the Tax Service in consultation with local-level governments and business associations, based on assessments of local socioeconomic conditions and time-bound studies of sample business operations. The actual rates must not exceed the ‘basic’ rates. 72 The number of eligible activity categories was reduced to 81. Twenty-seven activities were fully excluded from the list, 42 categories were conflated into 16, and the details of 39 categories were revised (Tazabek 2015 September 4ab, June 18). Essentially, the decree revised the categories in the retail sector from designating product type to designating the type and size of the retail space. It also increased substantially the basic rates for lucrative types of retail operations. 73 The referencing period of the study was 2008, the research took place in mid-2009. 74 Judging from their names, at least five of the aid agents on this list were probably Kyrgyzstani nationals. Note that the survey report was issued by IFC-BEE under the project’s alternative name, Investment Council Advisory Services. 46 from across Kyrgyzstan’s seven provinces and various economic sectors. This analysis was supplemented with insights from a number of open interviews and focus group discussions. The study also assessed the existing legal framework. Later in 2010 IFC-BEE turned to further technical work in order in order to promote the initiation of legislative drafting on the voluntary patent reform measures suggested in the survey (which required the government’s endorsement). Specifically, in 2010 IFC-BEE proceeded to complement the survey findings with further research on how the existing tax regimes functioned on the ground, and on how they could be redesigned to incentivize businesses to leave the voluntary patent.75 To begin with, the project recruited foreign experts to deliver a study on these questions. As its main takeaway, this study recommended establishing turnover-based parameters for micro and medium businesses (in addition to the existing one for small businesses) and formulating a set of precise tax regimes for each category. Next, IFC-BEE encouraged and facilitated the reworking of the foreign experts’ advice into a reform concept by the Methodological Council on the Coordination of Fiscal Policy under the Ministry of Economy. The Methodological Council, as it was known in short, was created in 2009 as a high-level platform for government and private sector actors to deliberate and develop tax policy. The Methodological Council also comprised a narrow working group of government-based and private tax experts.76 In 2010 IFC-BEE provided operational support to the Methodological Council’s work on designing the new tax regimes, and helped organize inter-stakeholder discussions on the reform concept outside of the Council. The project also contributed direct technical commentary to the reform design process. In the words of a national private expert: ‘In 2010 an assignment was patronized by the IFC on small and medium business taxation. It was carried out within the framework of the Methodological Council. It was also all discussed at the Investment Council. A round table was carried out for businesses. The Methodological Council developed a policy concept. The IFC participated.’77 The Investment Council, which will feature regularly in the case study chapters, is Kyrgyzstan’s primary forum for high-level public dialogue between government and business.78 It is known in full as the Council on the Development of Business and Investment under the Government of the Kyrgyz Republic. Membership of the Investment Council is open to all registered business association. The Investment Council’s sessions take place once every three months at the seat of the government. The formal line-up of government, business and private expert speakers depends on the agenda of each session. Many other representatives of the three groups attend as audience. So do representatives of foreign aid agencies and projects. The media are present in large numbers. During the council’s sessions presentations are given on long- standing business demands, trending policy disputes, and on reforms at different stages in the

75 aid agent 2 (2013 May 23) 76 The other function of the Methodological Council was to resolve tax law disputes between government and business. 77 private expert 2 (2013 May 15) 78 http://www.investmentcouncil.kg/index.php/ 47 legislative process.79 At the end of what could be a heated debate, decisions are taken on what the government must deliver on each agenda item and by when.80 Investment Council decisions have the status of instructions approved by the prime minister and are considered binding. However, many pertain to early stages in the legislative process and are phrased in terms of assigning a set of actors to study a policy issue or to continue working on developing reform legislation.81 All Investment Council decisions are monitored by its secretariat, which publishes its reports online. The Investment Council secretariat consists of a core team of three to four private experts.82 In the months between the Investment Council sessions, the secretariat organizes regular policy consultations for business. It also develops written input, opinion statements and public letters to the authorities on legislative and other policy documents. So, how did the government respond to the new simplified tax regime concept that was developed by the Methodological Council with IFC-BEE assistance, and discussed inter alia at the Investment Council? In 2011 it eventually turned down the idea. According to the respondent who reported this outcome, the government did so while voicing its concern that the reform would jeopardize tax collection by provoking a backlash of even greater tax evasion: ‘During the presentation of this proposal the authorities said “yes, it is necessary”. But it also scared them. They immediately start to say that “if we change this, then everyone will immediately run into the shadows, no one will work under these new regimes, and our [annual tax revenues] plan will fall short”. And meeting the plan is objective number one for them, everything that places this under question scares them away’.83 As a result IFC-BEE suspended its work on promoting reforms to the voluntary patent.84 Meanwhile, by noting the government’s concern about meeting annual tax revenue targets, the respondent cited above touched on a situation that affected all four of my case study reforms. What situation was this? In the next few paragraphs I pause the discussion of the voluntary patent reform process to answer this question for the years 2010-2016. I do so to provide the necessary context for the analysis in my four case studies. In general, many of my respondents mentioned that the Ministry of Finance and the Tax Service – as the state entities primarily responsible for securing tax revenues to cover the needs of the national budget – were averse to all reforms that did not clearly strengthen the means of tax collection. The reason given for this attitude by the respondents was the continuous criticism that

79 The Investment Council was set up in 2007 on the initiative and with the financial support of the EBRD. During Bakiev’s presidency the Investment Council’s business membership was limited to a handful of associations, its sessions were closed, and only a few policy areas were eligible for discussion. 80 As witnessed during the session that I attended in spring 2013, and as reported by my respondents. 81 http://www.investmentcouncil.kg/index.php/en/about-the-council/minutes-of-the-council 82 The secretariat’s permanent chairman has served as minister of economy and finance in the 1990s, and has worked for foreign aid organizations in Kyrgyzstan. In 2012-2013 the secretariat’s main ‘expert on economic and fiscal questions’ was also a former government official and regular consultant to foreign aid agencies. Both men were customary speakers and participants at Bishkek’ legislative hearings, roundtables and other public-private policy meetings on economic matters. 83 aid agent 2 (2013 May 23) 84 aid agent 14 (2013 July 24) 48 the two organizations faced in government and parliament for falling short on the task of decreasing the budget deficit. For instance, consider the following statements: ‘For the Ministry of Finance, the most important thing is that there are no effects on the national budget. Any question where there is even a potential risk of a negative effect is contested. But it’s also possible to understand the ministry. Its officials are always very strictly questioned about the budget by the government, by the MPs. They are reprimanded, they are fired. Especially now when tax revenue collection plans are not being met.’85 ‘Any changes to filing procedures are a potential risk of falling short on tax revenues. Therefore of course, for any revision, tax officials object that it can lead to under-collection. The likelihood of this can vary from 0.01% to 90%. But in any case, they always say it.’ 86 In 2010-2016 the Tax Service’s tax collection performance was regularly discussed in government and covered by the media. So was the related exchange of criticism among state officials. Thus, the Tax Service chairman, the minister of finance, and provincial tax offices declared in periodic press statements the extent to which the tax agency and its local branches had reached the revenue targets for a given year. On a provincial level the targets were usually met, but the districts that failed to do so were explicitly listed.87 In addition, there was frequent media reporting about the prime minister, the minister of finance, and the Tax Service chairman reprimanding tax officials and district administrators for their poor performance on tax collection.88 Such reprimanding was often accompanied by comments on the shortages in the national funds available for social spending, and by the shaming of specific individuals.89 There was also occasional news of local government and tax officials being fired (inter alia) for missing tax revenue targets.90 Meanwhile, it was standard practice for MPs to criticize the minister of finance and other senior state officials for insufficient levels of tax collection; for the annual budget deficit, for inadequate budgetary planning; for the government’s inability to generate enough funds to cover public spending priorities; and for avoiding responsibility for all these problems. It was also standard practice for the media to report such criticism.91 What was the state of Kyrgyzstan’s tax revenues and budget deficit in the years of my research? In 2011-2014 the periodic country assessments issued by the IMF and the World Bank reported solid and rising levels of tax collection, which they attributed to changes in fiscal policy and procedure, to windfall revenues, and to favorable economic factors (IMF 2011; IMF 2012; IMF 2013ab; World Bank 2013; World Bank 2014; IMF 2014). However, while in 2013 the IMF applauded Kyrgyzstan’s performance on tax collection relative to its neighbors and to countries with similar GDP levels, in later reports it noted that this performance was in fact suboptimal:

85 government 4 (2013 June 20) 86 aid agent 1 (2013 May 23) 87 Information Agency 24 (2012 September 18, December 2; 2013 April 24); Tazabek (2013 April 15, July 17; 2014 February 1) 88 In Kyrgyzstan, some local taxes are collected by district governments. 89 Information Agency 24 (2013 April 12, October 21); Tazabek (2013 August 12, October 3, November 6; 2014 January 16, October 2; 2015 January 30) 90 K-News (2012 August 29; 2013 April 16); Information Agency 24 (2014 April 23); Tazabek (2014 April 30) 91 Tazabek (2012 November 13, November 16ab, November 19, November 27, December 6, December 13; 2013 March 25, May 14, November 29, December 2, December 12b; 2014 March 5, March 13, September 8, November 13; 2015 October 13, December 11, December 16, December 24; 2016 September 16, October 7, November 16) 49

‘At 24 percent of GDP, tax revenue in the Kyrgyz Republic is not insignificant… The Kyrgyz Republic is above the average compared with other low income countries… The Kyrgyz Republic compares favorably in terms of tax collections, including among countries in the [Caucasus and Central Asia] region’ (IMF 2013b:5-6). ‘The Kyrgyz Republic still has room to increase tax revenues. Over the past 10 years, tax revenues increased from 12 to almost 21 percent of GDP in 2014, slightly below the regional comparator countries of 23 percent of GDP. Tax capacity is estimated at 22.3 percent of GDP while the realized tax-to GDP ratio of 16.7 in 2011 implied a tax effort of 74 percent, below the average of comparator countries’ (IMF 2016a:11). ‘Staff and the authorities agreed that there is scope to increase tax revenues over the medium term. While overall tax collection at 25.5 percent of GDP appears relatively high, tax revenues excluding social contributions are below the regional average’ (IMF 2014:12). Likewise, on the one hand in 2011-2015 Kyrgyzstan succeeded at keeping its annual budget deficit below the levels agreed on with the IMF and adopted into the government’s annual budget plans. Moreover, the IMF country reports for the years 2011-2013 partially ascribed this success to moderation in fiscal policy and public spending: ‘The 2011 budget outcome was better than programmed, reflecting both higher nominal revenues and expenditure underexecution. The overall deficit decreased by 1½ percent of GDP in 2011 relative to 2010, and was 1¼ percent of GDP smaller than targeted’ (IMF 2012:4) ‘Notwithstanding adverse economic conditions, fiscal policy remained prudent. The 2012 fiscal deficit was 5.4 percent of GDP and below the targeted 6 percent of GDP, although somewhat higher than in 2011 owing to the expenditure carryover’ (IMF 2013a:5). ‘Restrained government spending and robust revenues helped bring the fiscal deficit down to 3.5 percent of GDP in 2013. This is much lower than the 5.2 percent of GDP the authorities targeted in the 2013 budget, and the 5.3 percent of GDP recorded in 2012 (World Bank 2014:10). On the other hand, for the next two years the IMF assessments stressed the largely circumstantial character of the country’s ability to contain its budget deficit: ‘In 2014 fiscal performance was better than anticipated at the time of the sixth review, largely reflecting one-off developments. The overall deficit including onlending reached 3.7 percent of GDP, compared to a projection of 4.2 percent’ (IMF 2015:8). ‘The overall fiscal deficit [in 2015] fell to 1.2 percent of GDP, well below the program’s target of 3.5 percent.... Revenues were better than anticipated due to one-off nontax revenues. Tax revenues, on the other hand, underperformed reflecting a weak economic environment…’ (IMF 2016b:7). In addition, the IMF and World Bank reports published since 2012 conveyed a tension between the agencies urging Kyrgyzstan to further streamline what they presented as inefficient, ineffective and insufficiently pro-poor public spending, and the government’s position that it could not forego certain outlays due to political pressure and economic necessity. For example: ‘The Government has indicated that it wants to undertake fiscal consolidation reform, but there are several political sensitivities to do so. For example, wages in the education and health sector have increased to help attract and retain better qualified staff… Making cuts to recently increased wages will not be politically possible in the near future’ (World Bank 2012:8).

‘While overall government spending is high, outcomes have been poor. The quality of health services remains poor, above 80 percent of 15-year-olds are considered illiterate (even though they attend school), wages in the public sector are low, and only two programs of social assistance are targeted to the poorest members of society’ (IMF 2014 July:13). Meanwhile, in 2013 my respondents highlighted that IMF representatives were highly frustrated with the what they saw as the government’s reluctance to commit to stricter fiscal policies in order to move towards financial self-sufficiency in covering the country’s high public expenditures.92 For the IMF the key issue with Kyrgyzstan’s persistently significant budget deficit was that it was largely financed by a stubbornly high (and mostly external) public debt, which was one of the most sizeable in the region and among countries with similar economic profiles (World Bank 2012; IMF 2013a; World Bank 2016a). 93 Thus, while in 2013 Kyrgyzstan’s public debt-to-GDP ratio finally decreased to the circa 43% that it measured before the economic and political crises of 2009-2010, in 2014 it jumped back to 51% (IMF 2015). Then, in 2015 it rose to 66.5%, thereby breaching the 60% legal threshold set by parliament (World Bank 2016a).94 The IMF responded by sounding alarm during a high-level mission to the country: ‘With public debt approaching critical levels… it is essential for the Kyrgyz government to resume and accelerate fiscal consolidation. Every effort should be made to keep the fiscal deficit in 2016 within the agreed 4.5 percent of GDP… This will require the implementation of additional revenue and expenditure measures...’ (IMF 2016c). In addition, both the IMF and the World Bank emphasized that while formally Kyrgyzstan had not moved from a medium to a high level of debt distress, the country’s sensitivity to external economic shock made its public debt situation riskier than suggested by its debt distress ranking (World Bank 2016a; IMF 2015; World Bank 2015; IMF 2016b; World Bank 2016a). Nevertheless, in September 2016 Kyrgyzstan’s budget deficit exceeded by 1.4% the 4.5% target agreed on with the IMF; the external public debt now measured 63% of the GDP (WB 2016b). In 2015-2016 and earlier, the country’s high levels of public debt and external borrowing were among the taxation-related problems which the government was regularly criticized for by the MPs, with customary reporting thereof in the national media.95 The related tendency of state officials to reject reform ideas that appeared fiscally risky and hence likely to invite such criticism will feature throughout my empirical analysis. To begin with, this tendency surfaced in the voluntary patent reform politics of 2012-2013, which I discuss next.

2012-2013 IFC-BEE resumed its engagement in technical work on voluntary patent reform in spring 2012. It did so as part of its production of the second IFC SME survey, which was published in

92 aid agent 15 (July 24) 93 ‘External public debt amounts to 95 percent of the Kyrgyz Republic’s total debt… China, the International Development Association (IDA – i.e. the World Bank) and the Asian Development Bank (ADB) represent 69 percent of total external debt, accounting for 36, 18 and 16 percent respectively’ (World Bank 2016a:14). 94 See chapter 6 for more on the economic context in which this happened. 95 Tazabek (2012 December 11; 2013 October 28, November 12, November 18; 2016 February 8, March 3, September 19, October 5) 51 early 2013.96 This survey once again advised the government to restrict the voluntary patent to micro-businesses. It also built on the 2010 edition by merging the rest of its tax policy advice into a concept of developing new simplified tax regimes for small and medium businesses. As part of this, the 2013 survey presented a blueprint that detailed on how the proposed system of progressively demanding tax regimes could look like (see table in IFC 2013:55).97 Besides addressing the voluntary patent issue in the second survey in this manner, in late 2012 IFC-BEE decided that it was time to resume dialogue with the government on the project’s new tax regimes reform idea.98 While reporting this decision in May 2013, an aid agent interviewee informed that in the preceding months IFC-BEE had raised the topic of the new simplified tax regimes concept during informal talks with its immediate partners in government.99 In addition, during that period the project made plans for further technical work on the reform. For one, such plans could be inferred from the 2013 IFC SME survey. The survey urged the government to pursue a comprehensive analysis of the financial effects of the standing tax regimes on the private sector. It framed this as a prerequisite step in the process of developing an alternative system. Moreover, to justify its advice and the proposed follow-up research, the survey emphasized the analysis that IFC-BEE had conducted so far on the functioning of Kyrgyzstan’s tax regimes as compared to international practice:

‘Several steps and additional analysis will be required to determine the precise design of a revised MSME [micro, small and medium enterprises] tax regime… The application of the patent regime should be limited to businesses… [that] generally operate at a subsistence income level. Many countries exempt subsistence-level income firms from income taxation; the… exemption threshold in this case is an indication of what is considered subsistence income by the tax laws. The Kyrgyz Tax Code applies a universal deduction instead of an exemption threshold. The universal deduction is 6.5 times the calculation base… amounting to an annual deduction of 7,800 Kyrgyz som ($169). This is not a suitable indicator for a subsistence-level income... Further analysis is required to determine an appropriate turnover-based threshold… The turnover rates of the simplified regime should be adjusted to harmonize the small business tax burden with the tax burden under the general regime. This requires additional research, such as a profit margin analysis for key sectors. However, differentiation between business segments should be limited to ensure easy application of the system. According to international experience, two to five sectors could be differentiated…’ (IFC 2013:56). The weight which the 2013 survey placed on promoting its reform idea thorough technical design and analysis suggests that IFC-BEE considered such technical work necessary for

96 The survey report names IFC-BEE as the project responsible for it (under the project’s alternative title, Investment Climate Advisory Services), but does not list the aid agents involved. The stated purpose and methodology of the 2013 IFC SME survey were generally the same as in the 2010 edition. 97 In the survey the reform idea was backed with the following arguments: ‘Such a redesign of the system would result in a higher tax burden for businesses above the micro level currently operating on a patent basis. These disadvantages would be compensated for by a reduced overall tax burden and lower compliance costs for businesses outside the patent regime, and by reduced unfair competition for businesses operating in the standard taxation regime. This balanced approach would also facilitate migration from the patent into the simplified tax regime’ (IFC 2013:56). 98 aid agent 2 (2013 May 23) 99 aid agent 2 (2013 May 23); echoed by aid agent 1 (2013 May 23) 52 convincing the government to endorse the proposed course of legislative revisions. My interview material supports this interpretation. Namely, in May 2013 an aid agent indicated that the project viewed the sector-specific research called for in the 2013 survey as a precondition for reengaging the government in a discussion on the new simplified tax regimes. IFC-BEE had thus decided to proceed with such research, and was searching for a national expert who could do the job: ‘At present the most important thing is to find a consultant who can analyze micro, small and medium business concretely across specific sectors.’100 However, as noted by the aid agent cited above, by spring 2013 the project considered it unlikely that it would persuade the government to endorse its reform concept in the near future. One reason given for the low expectations was that the government had consistently shown little interest in IFC-BEE’s suggestions on disciplining the voluntary patent system. How come? Because the authorities continued to fear the prospect of provoking a business outcry like the one that took place in 2009. While making this point, the respondent recalled the event as follows: ‘In 2009, when after the New Year businesspeople went to work and found that the voluntary patent rates had multiplied, or that their activity no longer qualified, they were horrified. And then they went out to rallies. The government got frightened and suspended the changes’. In May 2013, another aid agent gave a similar assessment of the government’s enduring reluctance to proceed with reforming the voluntary patent system: ‘There are no major moves forward on the voluntary patent. This problem is being discussed for a very long time. It is a very sensitive topic, there will be many opponents to this reform, and because of this the government treats it with great care. Everyone understands that the system is inadequate. But because the army of patent-holders is large, and the guys with the big money are organized, they are always ready to bring out and organize their smaller colleagues to defend their interests. As in, “look, you are being infringed on”’.101 In June 2013, so did a state official: ‘We are thinking about how to approach this one. But we have not yet taken it on concretely. It is very difficult to get rid of the patent. They tried in 2009, but the entrepreneurs caused such a havoc that we were afraid to push through. Yes, that is why we are apprehensive.’102 Changes inside the government were the second reason why by spring 2013 IFC-BEE had limited hopes for promptly securing the government’s approval of its reform idea.103 First, a new Tax Service chairman was appointed in September 2012. Then, in early 2013 responsibility for fiscal policy was moved from the Ministry of Economy to the more risk-averse Ministry of Finance. The two developments created even greater uncertainty about the government’s openness to reform experimentation. Hence, while IFC-BEE had initially planned to advance its

100 aid agent 2 (2013 May 23) 101 aid agent 1 (2013 May 23); see also: ‘As an expert I of course want extreme reform, but the government must consider business, and must carry out the reforms as painlessly as possible. Cardinal reforms, they are undeniably connected with a shock for a certain group of businesses that should not be using it. Of course they will lose from the reforms, and of course they will resist them’ (aid agent 1 2012 April 10). 102 government 5 (2013 June 20) 103 aid agent 2 (2013 May 23) 53 new simplified tax regime concept to the government at the start of 2013, by May 2013 it had decided to postponed this move until next winter. Was the project correct in expecting the government to discard its advice on revising the voluntary patent system as part of a broader overhaul of Kyrgyzstan’s tax regimes? In 2014-2016 the online press made no mention of legislative activity on IFC-BEE’s reform idea. This leads me to conclude that the government had indeed dismissed the project’s new tax regimes concept and responded with doubt to any related research that may have been conducted by IFC-BEE after spring 2013.

3. The World Bank’s engagement in technical work on the voluntary patent system In 2012-2013 the World Bank funded two studies that touched on the tax evasion connected to Kyrgyzstan’s voluntary patent system. The sources at my disposal do not provide information about the World Bank’s position on reforming the voluntary patent. Neither do they convey what the agency expected from or sought to achieve with the two studies. Therefore in this section I focus on how national actors engaged with the World Bank-funded research. First, in a subsection on the years 2012-2013 I introduce the content of the studies and the technical work behind them. I also discuss the reactions and aspirations associated with the research, and the consequences thereof for the voluntary patent reform contest. Then, in a separate subsection I examine how the World Bank-funded studies continued to feature in this contest in 2014-2015.

2012-2013 In September 2012 the World Bank presented the government with a study that calculated the amount of money passing through Kyrgyzstan’s wholesale and retail markets.104 This study – which I will call ‘the markets study’ – was conducted by two World Bank experts from outside of Kyrgyzstan.105 The media reported that in response to the markets study first deputy prime minister Djoomart Otorbaev ‘urgently convened a meeting with the heads of relevant departments to discuss how to legalize the shadow economy’, as he was ‘horrified’ by the World Bank’s findings on ‘how much money flows past the state treasury’.106 Note that ‘the shadow economy’ is a standard term in Kyrgyzstan’s public discourse, as are its variations, such as ‘the shadow sector’. These terms are used to designate all business transactions that escape national statistics. This could refer to the activities of businesses that operated informally, or to the undisclosed transactions of registered business entities. In comparison, in one of its reports on Kyrgyzstan the IMF uses the terms ‘non-observable sector’ for such formally unregistered transactions, stating that they are ‘estimated [at] between 24 and 40 percent of GDP’ (IMF February 2016:12). During the meetings that took place on the markets study in government in September- October 2012, Otorbaev employed the World Bank’s findings to call for a government-wide initiative on tackling tax evasion by businesses active in trade and other services. Otorbaev did not refer to the voluntary patent in his statements. However, implicitly the voluntary patent

104 The World Bank’s markets study was probably not public, as I was unable to find it on the World Bank’s page for Kyrgyzstan. 105 The nationality of the experts was not disclosed in the press (Tazabek October 31c) 106 Information Agency 24 (2012 September 18) 54 system was the subject of his message. The first deputy prime minister asserted that the government must develop ways to properly monitor business revenues in the service sector. Meanwhile, it is through the voluntary patent system that many service sector businesses avoided the requirement to provide the state with accounting records. Otorbaev’s argument was as follows. The World Bank’s turnover figures for Kyrgyzstan’s largest markets were much higher than had been estimated by the National Statistics Committee. This showed that the existing mechanisms for measuring business revenues did not adequately capture the service sector. In turn, this administrative shortcoming deprived the national budget of considerable tax income and placed an outsized fiscal burden on commercial activities that were monitored more strictly by the state. Hence it was critical for the government to bring the service sector under the radar of state statistics and into the hands of national fiscal and economic planning: ‘The first deputy prime minister claims that national statistics cannot calculate the real volume of the economy. “We must calculate the revenues correctly, as the World Bank’s indicators are much higher than our own. The service sphere holds the leading position in the economy. It forms 70 percent. If we cannot administer this sphere, we will not be able to develop the economy and forecast the budget”.107 ‘The government should but does not yet know how to tax the services sector. This opinion was voiced by first deputy prime minister Djoomart Otorbaev.“For example, industry, which only provides about 30% of GDP, pays 80% of the taxes. Accordingly, agriculture and the service sectors hardly pay anything. This is unfair and the government must address this and correctly tax the service sector.”108 ‘“…Our budget is under stress, we must direct the shadow revenues from the service sector into the official current. Today industry is under excessive fiscal strain”, said the first deputy prime minister.’109 Moreover, at the ‘consultations on the legalization of the shadow economy’ on October 31st 2012, Otorbaev mentioned having instructed the government to create an interagency commission that would meet regularly to develop measures of accounting for the informal sector. He also stressed the need to strengthen the work of this commission, and noted that so far government entities had submitted few concrete ideas on how to tackle the problems exposed by the World Bank’s study.110 Meanwhile, in the summer of 2012 the World Bank financed another research initiative that focused more broadly on the size and nature of the ‘shadow economy’ in Kyrgyzstan. In December 2012, the results of this research were published as the ‘Study of the Shadow Economy in the Kyrgyz Republic’ (Hasanov ed. 2012). The research initiative was commonly referred to by my respondents as ‘the shadow economy study’. It was commissioned by the Ministry of Economy and paid for by the World Bank Capacity Building for Economic Management project.111 The coordinating author was the Investment Council secretariat’s ‘expert on economic and fiscal questions’ Rafkhat Hasanov, working as a private consultant. Five other national private experts contributed to the shadow economy study. Among them were two tax specialists affiliated with the USAID-REFORMA project, also acting in private capacity.

107 Information Agency 24 (2012 September 18); see also Information Agency 24 (September 17a) 108Tazabek (2012 October 26) 109 Tazabek (2012 September 17a); see also Tazabek (September 17b) 110 Tazabek (October 31abc) 111 Hasanov ed. (2012); Tazabek (2012 August 30) 55

The World Bank-funded shadow economy study estimated that in Kyrgyzstan private sector revenues that eluded national statistics represented 39% of the total. Misuse of the voluntary patent regime was portrayed as a primary contribution to this figure. The patent was also depicted as a disincentive for business growth and as a cause of unfair competition.112 The study’s central recommendations ‘on the question of decreasing the shadow sector’ targeted the voluntary patent system (Hasanov ed. 2012:83). Specifically, the shadow economy study advised the government to adopt a ‘middle-term program for optimizing patent-based taxation’ (ibid). This reform concept centered on subjecting voluntary patent users to basic accounting, in order to bring them into the fold of fiscal visibility. The government was also to use the newly available accounting records to study businesses’ responses to targeted patent rate fluctuations. Thereby it was to determine the parameters of a future residual voluntary patent tax regime. The path towards the residual regime promoted in the shadow economy study revolved around raising patent costs and cutting the types of eligible economic activity. In sum, the shadow economy study called for a basic means of monitoring patent-based revenues in order to gradually make the system more expensive and restrictive in its sectoral coverage. Thereby it reflected the reform course promoted by the first deputy prime minister in response to the World Bank’s markets study. In a press release on the official presentation of the shadow economy study in December 2012, the Ministry of Economy announced its intention to act on the study’s recommendations: ‘The study is aimed primarily at developing measures to account for the informal sector of the economy, as a result of which a draft Government Program will be developed on reducing the volume of this sector. An Action Plan for its implementation will also be developed and submitted to a meeting of the commission on this issue…’.113 In 2013 there were further cases of state officials publicly citing estimates of the ‘shadow economy’s’ size and highlighting the government’s plans to adopt stricter accounting standards for voluntary patent holders.114 The reforms in question were also demanded in parliament: ‘The patent system is destroying the economy… This was announced at a Jogorku Kenesh meeting by MP Alla Izmalkova… “…It is necessary to leave the patent system, the tax authorities must develop a methodology for administering small taxes’.115 Was this reform rhetoric a sign that the research financed by the World Bank in 2012 had helped shift the voluntary patent policy contest in the direction of legislative action? There is interview evidence that by summer 2013 the national private experts behind the shadow economy study expected (or at least hoped) that their work would compel the government to proceed with a concrete legislative move on scaling back the voluntary patent system. Thus, in May 2013 one of the study’s authors observed that, based on the analysis, government leadership became more

112 In addition the study reported that the number of legal entities has been falling and that of individual entrepreneurs rising. This was framed as an expansion of the cohort of businesses which were likely to slip into the shadow economy by way of the patent. 113 Ministry of Economy (2012 December 20); see also Tazabek (2012 December 20), K-News (2012 December 20) 114 Tazabek (2013 February 12, statement by Tax Service chairman Iskhak Masaliev during a meeting with journalists); Tazabek (2013 September 25, statement by Otorbaev, during an Investment Council sitting); Tazabek (2013 December 12a, statement by the Ministry of Economy in an article on a parliamentary hearing). 115 Tazabek (2013 September 12). The cited MP criticized the patent system on more occasions (Tazabek 2013 May 20, June 16). 56 convinced of the fiscal urgency to begin the reform. In addition, the respondent’s comments suggest that the study results increased the political pressure on the Tax Service to address the voluntary patent issue. What is more, the aid agent indicated that the broader analytical work that had been carried out on the voluntary patent system by Kyrgyzstan’s private experts was gradually fostering the readiness of government actors to proceed with the reform: ‘In Kyrgyzstan we have been talking about the voluntary patent system for a long time. The idea that is pending from the beginning is to gradually remove all this. Today this is getting increasingly more endorsement because signals are coming from everywhere that legal business is shrinking, that legal entities are closing, that the number of people working on the voluntary patent is increasing. This increases unpredictability, uncontrollability of the situation, which is not appealing to the central state authorities. And the policy response to this should be what we are saying – phase out the voluntary patent. It was Hasanov that raised this topic. When he conducted the shadow economy study, he once again confirmed what is happening. When the study was published, it was unpleasant for the Tax Service. All insiders already knew about the situation depicted by the published results. However, now it was somehow confirmed. The government’s reaction was a milestone of sorts: “an evaluation was made, we can see that the situation is deteriorating.”… We constantly drip on their brains, remind them of the problem. They all understand that the system is wrong. The most important thing is to remind them, and at some point they will get to it. Documents are being prepared, programs are being written, meeting are held, the advice is included in government programs, and so the state machinery is starting to work on this…’.116 To what extent did 2013 mark the beginning of legislative activity on the reform ideas advanced in the shadow economy study and (earlier) by the first deputy prime minister on the basis of the World Bank’s markets study? In my press sample there is no evidence of legislative initiatives being launched that year on the introduction of compulsory accounting for voluntary patent holders. However, for the first time since Bakiev’s presidency, a formal legislative proposal was developed that revised the basic patent rates and the set of eligible economic activities, in line with the reform vision outlined in the shadow economy study. In November 2013, the Ministry of Finance opened a draft version of this proposal for public discussion.117 This suggests that the World Bank-funded displays of the fiscal and economic harm caused by the voluntary patent may have indeed inspired the government to set aside its fears of the business lobby and to proceed with reform legislation – be it only on modest measures that sidelined the core issue of inadequate statistics. In parallel, my research observations lend themselves to an additional inference. Specifically, I propose that state officials also perceived the pro-reform evidence in the World Bank studies as a means of defense against business criticism – a means which afforded them the political space to go head with a legislative move on deflating the voluntary patent system. I develop this inference further in the next subsection.

116 aid agent 9 (2013 May 31) 117 Tazabek (2013 November 27) 57

2014-2015 In February 2014, the Ministry of Finance submitted to government the legislative proposal on the voluntary patent that had been made public in November 2013.118 While the draft decree was being considered in 2014-2015, state officials recurrently signaled at media-covered policy meetings and in public statements that the advanced revisions were only the first step in a resolute government plan to minimize the voluntary patent system. They continued to argue as they had done in 2012-2013 that this system must be scaled back and subjected to stricter accounting, because it undermined budget revenues and distorted the relative tax burden across economic sectors. And they continued to back this message with the problem assessment that had been articulated in the World Bank-funded markets and shadow economy studies: ‘As noted by the Tax Service chairman Zamirbek Osmonov, experts mention different levels of the shadow economy, but it is at least 40%. One of the factors contributing to its expansion is the patent system. According to him, this system does not involve accounting. When the turnover of a patent- holding business reaches 4 million som it must switch to the general regime. But since there is no accounting this is almost impossible to control.’119 ‘First deputy prime minister Tayurbek Sarpashev announced that more than 70% of the national tax base is still provided for by industry. He considers this unacceptable, since taxes should be paid by everyone. “I have already voiced the idea that it is necessary to move away from and end the voluntary patent system. Even large enterprises such as stores with monthly turnovers reaching 10 million som operate on the patent, while paying 4-5 thousand som per month. This should not be the case, everyone should pay taxes”, he said.’120 My reading of such statements is that by recurrently voicing the analytical basis for voluntary patent reforms in the public arena, the government sought to legitimize the February 2014 proposal in the face of countervailing business pressure – which it continued to see as a tangible political threat. Public statements by Tax Service chairman Osmonov support the notion that in 2014-2015 the government still deemed voluntary patent reforms to be fraught with political risk emanating from Kyrgyzstan’s sizeable retail sector. They also suggest that the government was trying to placate business leaders about the February 2014 proposal by stressing that further patent reforms would be gradual, transparent and grounded in thorough technical analysis: ‘Regarding the voluntary patent system, the head of the agency noted that there is a legislative proposal to reduce the number of eligible economic activities to 80. “Today this proposal is under negotiation. We cannot but take into account the fact that its adoption may cause social discontent… Therefore, the legislative proposal should undergo preliminary public discussions, including with the participation of the business community,” he said… “We have been tasked with conducting an analysis on the further downsizing of this regime. However, the regime is used exclusively by individual entrepreneurs, who operate at bazaars and other retail outlets. And it will be very dangerous

118 Tazabek (2014 February 13abe) 119 Tazabek (2014 July 1), article on an event marking the Day of the Tax Service Employee 120 Tazabek (2015 January 16b), during a press conference; for similar statements by the then prime minister Djoomart Otorbaev see Tazabek (2014 February 20ab, May 21a) 58

to change the existing patent system in one go. Therefore, a draft phased reduction of patent-based activities is proposed…”.121 ‘Z. Osmonov believes that it is necessary to create equal business conditions and to move away from the patent system. “A cornerstone of the tax system is the principle of certainty. Therefore we want to create an interagency commission, which will include business representatives, to develop a program so that business knows in advance when we will leave the patent,” he said.’122 In fact, in the above comments Osmonov made use of World Bank-funded analysis in the sense of evoking the step-wise and research-based reform approach recommended in the 2012 shadow economy study. As noted regarding this approach by one of the study’s authors: ‘The patent system must be revised, but not tomorrow. It is necessary to develop a program for several years and to explain very clearly to people what will happen in the first year, in the second, in the third, and in the fifth.’123 So how did business opposition to voluntary patent reform manifest itself in 2014-2015? In other words, how did business react to the February 2014 proposal and to the government’s adjacent rhetoric on the need for further reforms – which drew on the analysis in the markets and shadow economy studies? The business lobby’s immediate response to the draft decree was to argue in press statements and in a public letter to the prime minister that the proposed revisions would be a severe blow to small and medium enterprises, popular wellbeing, and budget security: ‘According to the Bishkek Business Club, the adoption of this regulatory act will lead to: - An increase in the costs of local entrepreneurs and the decrease of their competitiveness in relation to foreign competitors; - A rise in consumer prices on most goods and services; - Short-term growth of budget revenues, which in the medium and long term will become lower than today's level; - Causing further declines in budget revenues, the withdrawal of most entrepreneurs into “the shadows” due to the unbearable burden of using the ‘expensive’ voluntary patent and the impossibility of working under the general tax regime, which is unsuited to small and medium businesses given the requirements of the VAT, VAT inspections, mandatory accounting. - An increase in national poverty levels due to the reduction of economic activity; - Unemployment growth due to the closure and bankruptcy of SMEs’.124 On February 13th, or two days after submitting its legislative proposal to government, the Ministry of Finance organized an open parliamentary hearing on the draft decree. During this public hearing and in the weeks that followed business leaders repeated their arguments against the proposal. Based on this opposition the government returned the draft to the Ministry of Finance for revisions, and set up a government-business working group for this purpose.125 By

121Tazabek (2015 May 28), article on a meeting between Osmonov and an IMF mission representative 122Tazabek (2014 July 1), article on an event marking the Day of the Tax Service Employee 123 private expert 3 (2013 June 7) 124 Tazabek (2014 February 11); see also Information Agency 24 (2014 February 10, February 13a), Vechernii Bishkek (2014 February 10), Tazabek (2014 February 13d) 125 Tazabek (2014 February 13abe, February 14, April 29, May 21b, November 25); Information Agency 24 (2014 February 13b) 59

January 2015 the Ministry of Finance submitted to government a new proposal drafted by the working group.126 This new draft was adopted as a government decree in June 2015. Just like the February 2014 proposal, the June 2015 decree streamlined sectoral eligibility and increased the basic patent rates, without introducing any further constraints to the system. Once the decree was adopted, business leaders urged the prime minister to reconsider its enforcement. In their request they repeated their earlier objections. In addition, they argued that if smaller businesses must operate under costlier and more complicated tax regimes, more time and state assistance was needed to help them with the transition – especially given the ongoing economic crisis.127 Thus, in 2014-2015 the business lobby openly advanced a compound socioeconomic case against the (draft) decree on voluntary patent rates and eligibility which the government presented as a first step in a comprehensive reform plan. Judging from press coverage, in their arguments business leaders did not directly dismiss the problem analysis presented in the World Bank-funded markets and shadow economy studies. Instead, they developed a range of separate analytical claims in favor of keeping the patent system intact in the name of the public interest. In addition, the business lobby repeatedly accused the authors of the February 2014 proposal of failing to show – as required by formal procedure – that the proposed revisions were necessary and would be beneficial to the public interest: ‘According to the analytical center BizExpert, the legislative draft has been developed with gross procedural violations. Moreover, the notice of justification, as a key document of argumentation for the bill, is not informative and has traits of a fictive document.’128 ‘As reported by the Bishkek Business Club, the draft resolution proposes annulling the voluntary patent option for 27 kinds of services. “…However, clear and detailed grounds for the annulment of the given categories of services are missing, which puts under doubt the rationality of the actions of the Ministry of Finance…”, states the report.’129 ‘Public organizations ask the head of government to exclude the proposed draft resolution from consideration. In their opinion, it is advisable to propose increases to patent costs only after analyzing and taking into account all factors, such as the recent increase in patent cost in 2010, the economic conditions of citizens and small entrepreneurs, their working conditions, real costs of living, purchasing power, inflation, unemployment, migration. The appeal notes that according to official figures the poverty level in Kyrgyzstan is 33.7%... . “But this is only according to official data. The real extent of poverty is not captured qualitatively by formal measures of subsistence… ”, the public organizations say.’130 In particular, while arguing that the draft decree had not been backed with sufficient technical evidence to demonstrate its socioeconomic soundness, the business lobby emphasized that the government had failed to conduct an adequate Regulatory Impact Assessment/Analysis (RIA). Note that in Kyrgyzstan all legislative proposals submitted by government on private sector matters must include a RIA, which compares the costs and benefits of a reform idea to the

126 Tazabek (2015 January 16) 127 Tazabek (2015 September 3) 128 Vechernii Bishkek (2014 February 10) 129 Tazabek (2014 February 10) 130 Tazabek (2014 February 14) 60 economy and society.131 During the public hearing in February 2014 the unmet RIA requirement was brought up as follows: ‘In addition to its detrimental effects on economy, the normative act was developed with gross legal violations. The draft resolution conflicts completely with paragraph 1 of Art. 19 of the Law “On regulatory legal acts”, according to which draft legal acts aimed at regulating entrepreneurial activity are subject to mandatory regulatory impact analysis in accordance with the methodology approved by the government. The Ministry of Finance, as the act’s initiator, did not organize a RIA working group, thereby clearly disregarding the law, said the Bishkek Business Club lawyer Burul Faridinova.’132 The June 2015 decree received a comparable verdict: ‘The price rise and the reduction in the range of patent categories was not founded on anything, the president of the Association of Suppliers Gulnara Uskenbaeva told Tazabek. In her opinion, the RIA was not conducted properly. “Nevertheless, the Ministry of Finance will not budge…”’.133 In other words, in 2014-2015 the business lobby argued in public that the government had not shown through technical analysis that the legislative revisions submitted in February 2014 were safe and necessary for economy and society. Nevertheless, the June 2015 decree came into force in September 2015 as planned. Judging from press articles on the topic, in the preceding two years state officials felt secure enough advancing the revisions while relying on one main argument to dismiss the objections raised by business. This argument was that higher basic rates did not imply an automatic rise in actual patent costs.134 Otherwise, the government’s rhetoric of reform justification rested on a broader assessment of the patent system as a socioeconomic problem: an assessment which had received a publicity boost in 2012 thanks to World Bank- funded research. In addition, the state authorities publicly reassured business leaders that further revisions to the voluntary patent will be gradual and evidence-based, as advised in the shadow economy study. At the end, business leaders did not succeed at blocking the June 2015 decree. However, in 2015-2016 no further legislative initiatives were launched on revising the voluntary patent tax regime as prescribed by Hasanov et al in their 2012 publication. Hence, on the one hand the government had found it politically valuable to repeat the main arguments of the World Bank-financed studies while battling with business over the February 2014 proposal. On the other, the absence of further legislative action suggests that the pro-reform evidence in these studies was considered insufficient as a means of enabling the authorities to withstand politically the business lobby’s criticism of more categorical reforms to the voluntary patent system.

131 The RIA instrument was introduced in Kyrgyzstan in 2007, on the initiative and with the support of USAID (USAID 2007) 132 Tazabek (2014 February13e); see also Tazabek (2014 March 27), reporting from the March 2014 Investment Council session 133 Tazabek (2015 November 5) 134 Tazabek (2014 November 25, April 29, April 4; 2015 September 4a); K-News (2015 October 13). Business, however, contested this argument: ‘[Business leader] G. Uskenbaeva informed that according to the decree local authorities can set the patent costs lower that defined. “But no one will do this. They will not let them do it, because all of our local budgets… are subsidized’ (Tazabek 2015 November 5). 61

Case study findings: reform analysis from the perspective of the research questions

What kinds of technical work did foreign aid actors engage in to advance the reform, and how? In 2010-2013, the main type of technical work that foreign aid actors engaged in on the case study reform was policy-oriented research into the status quo of business taxation in Kyrgyzstan. This research was funded by the IFC and the World Bank. It was largely conducted by Kyrgyzstani nationals, but with input from foreign consultants. One study was authored by foreign experts. Thus, in 2012 two non-national World Bank consultants assessed the revenues flowing through Kyrgyzstan’s largest retail and wholesale markets and presented their findings to the government. That year a World Bank project also funded a small group of Kyrgyzstani private experts to conduct a study on the size and nature of Kyrgyzstan’s ‘shadow economy’ (business transactions uncaptured by official statistics). This ‘shadow economy study’ was released as a formal report. It was circulated among Kyrgyzstan’s policy players and presented in detail in the online press. The study’s authors participated in the initiative in independent capacity. However, at the time some were based at foreign aid projects. Both the ‘markets study’ and the ‘shadow economy study’ conveyed the negative fiscal and economic effects of the voluntary patent system. The second study also advised the government on how to reform it. Meanwhile, the IFC financed two in-depth surveys on the conditions facing small and medium enterprises in Kyrgyzstan. These ‘IFC SME surveys’ were published and made openly accessible online in early 2010 and 2013. They addressed among other topics the effects of the voluntary patent tax regime on the country’s economy and private sector. The IFC-BEE project, which consisted primarily of Kyrgyzstani cadres, was the main entity responsible for coordinating the research and releasing the survey reports. Foreign aid agents external to the project contributed to the analysis. Moreover, in 2010 IFC-BEE hired foreign consultants to conduct follow-up research that built on the voluntary patent-related conclusions of the first IFC SME survey. While preparing similar follow-up research to the second survey in 2013, the project searched for a national expert to do the job. Besides carrying out research activities, in 2010-2011 IFC-BEE engaged in technical work on the voluntary patent by promoting and facilitating the development of a reform proposal based on the research delivered by foreign experts in 2010. The reform proposal was formulated primarily by national private experts, and was deliberated within the framework of the Methodological Council – a high-level public- private platform for discussing fiscal policy. IFC-BEE coordinated this process of reform design and deliberation and provided it with organizational support. The project’s representatives also participated in the substantive discussions on the reform proposal.

What purposes was the technical work meant to serve in the efforts to advance the reform through legislative politics, how, and why? In the first place, the foreign aid-funded technical work examined in the chapter was directed at prompting state actors who were ambivalent about the case study reform to endorse legislative drafting on particular ways of scaling back the voluntary patent system. The technical work was

62 meant to serve this purpose for the aid agents and private experts involved. It was to do so by delivering the statistical, legislative and analytical material which validated the public interest arguments in favor of the revisions, and/or discredited the public interest arguments against. Specifically, it was to substantiate the argument that the reforms would strengthen national tax collection and the country’s private sector, and/or that the revisions were urgently needed to achieve both ends. The policy players considered such use of technical evidence both necessary and potentially consequential for their efforts to advance the desired changes. The reason for this was that state actors in Kyrgyzstan were generally believed to be politically wary of facing blame for jeopardizing tax revenues, and of being accused by business of harming the private sector (especially in the media and at media-covered inter-stakeholder policy meetings). Thus, by technically substantiating the fiscal and economic judiciousness of their reform ideas, on some occasions policy players hoped to persuade state actors that it would be politically safe and even advantageous for them to back the measures. At other times, they hoped to oblige the government to endorse the reforms: by making it technically evident that not doing so meant risking public criticism for failing to act decisively in the interest of the national budget or the private sector. For instance, through its research and policy design efforts IFC-BEE sought to build up technical evidence on the inadequacy of the voluntary patent system, on the causes and consequences of its abuse, and on how the project’s reform ideas would address these problems. IFC-BEE considered such evidence a precondition for securing the government’s approval for legislative drafting on its reform concept. For one, it placed its bets on highlighting the tax evasion and unfair business competition fostered by the voluntary patent, so as to signal the political dividends to be gained from reform. Secondly, with its technical material IFC-BEE sought to reassure state officials that the proposed revisions were justifiable enough in fiscal and economic terms to withstand budget-related and business criticism. Thereby the project aimed to make its reform ideas appear less politically risky. Similarly, by confronting state officials with detailed evidence on the economically detrimental practices inspired by the voluntary patent, the authors of the World Bank-funded shadow economy study aimed for their analysis to prompt the authorities to proceed with the reforms encouraged in their research. The shadow economy study was meant to unsettle the government into legislative action by exposing the fiscal and economic damage caused by the voluntary patent. It was also intended to oblige the Tax Service to commit to developing reform measures, by making it evident to the wider policy community that the tax agency’s inaction was helping perpetuate serious tax fraud. Next, consider the response of first deputy prime minister Otorbaev to the World Bank’s markets study. This response was to announce at a series of press- covered meetings the launch of a government-wide policy design effort to combat the shadow economy. In these announcements, Otorbaev cited the study’s findings to problematize the government’s neglect of the matter. The official may have reacted as he did to the market study’s evidence on the soaring levels of patent-related tax evasion because he wanted to avoid being criticized for doing nothing to address a blatant affront on the budget. It is also possible that

Otorbaev seized the study’s tax evasion figures as an opportunity to oblige state agencies into action on a policy issue which many preferred to leave undisturbed. Later on, the World Bank-funded technical work was also employed by the government for the purpose of weaking the capacity of business leaders who explicitly opposed the reform to block a draft decree that modestly disciplined the voluntary patent. Once again, the World Bank’s markets and shadow economy studies were meant to serve this second purpose by bolstering the public interest arguments for reform with technical data and analysis. During the draft decree’s hearings and in the media, business leaders persistently denounced it as harmful for the private sector and as analytically unfounded in terms of its fiscal necessity. In turn, while preparing and advancing the legislative proposal, state officials recurrently reminded the policy community of the evidence-backed fiscal and economic arguments in favor of gradually deflating the voluntary patent system. They had inherited these arguments from the World Bank-funded research. The officials defended the draft decree (and themselves) against the business lobby’s attempts to deter it by justifying their broader voluntary patent reform plans with analysis borrowed from the markets and shadow economy studies. The business lobby’s resolve to analytically frame the draft decree in the media as a den of socioeconomic problems suggests that forcing the government to technically justify its legislative initiative in public was considered a meaningful political tactic. As I see it, the political value of this tactic was twofold. For one, business leaders had to employ it if they were to stand a chance of deterring the legislation. Secondly, the tactic also posed a viable challenge to the opponent. Thus, the government knew that in order to advance a draft decree that restricted the voluntary patent (and to mitigate the political risks of this effort) it would need to deflect the objections of fiscal and economic inadequacy which business leaders were bound to raise against the proposal before a wider audience. At the same time, the government also knew that having the ability to confront business leaders with reciprocal accusations would increase its chances of success. Hence, in order to proceed with the legislative initiative state officials needed to match the anticipated business criticism with a technically-backed counternarrative of public interest arguments. The World Bank-funded studies offered such a counternarrative.

What can be said about the extent to which the technical work served the purposes envisioned? There is tentative evidence that some of the foreign aid-funded technical work examined in the case study helped secure the government’s approval of legislative action, by alerting it to the accusations which it may otherwise face of failing to protect the country’s budget and business. For instance, according to an author of the shadow economy study, the World Bank-funded analysis had the desired effect of fanning the government’s growing aspirations to begin downscaling the voluntary patent. As indicated by the aid agent, this was achieved in part by providing further evidence on the reform being an opportunity for increasing tax revenues. In addition, by exposing new data on the fiscal harm inflicted by the voluntary patent, the study made it more difficult for the Tax Service to justify its legislative inaction (which rested on a desire to avoid the prospect of angering business). If true, this take on the shadow economy

64 study’s impact suggests that World Bank-funded research helped instigate the draft decree initiated by state actors in 2013 and adopted in June 2015. Furthermore, the intent with which business leaders mobilized technically-backed public interest arguments in public to contest the proposal is grounds to believe that it would not have survived this pressure if not for the counterarguments supplied by the World Bank’s studies. In other words, the government was able to undermine the business lobby’s capacity to deter the draft decree thanks to World Bank assistance. Through this assistance, state officials had obtained the technical evidence necessary for standing their ground in the public interest debate that all reform contenders had to engage in if they were to stand a chance of winning the contest. Still, after June 2015 no new legislation was submitted on the more ambitious voluntary patent reforms plans that state officials had publicized in 2014-2015, with supporting references to the World Bank’s analysis. My take on this outcomes is as follows. The limit to how far the technical evidence in the World Bank’s studies could persuade state officials to proceed with legislative action was defined by the government’s pronounced apprehension about business criticism. In addition, it was conditioned by the government’s worry that cardinal reforms could backfire to provoke even greater tax evasion. Both concerns were amplified by the fact that the reform was openly debated in the media and at regular (and often media-covered) inter- stakeholder policy meetings. Thus, after June 2015 the government did not dare challenge business interests any further, despite of the available evidence-backed public interest arguments in favor of proceeding with more restrictions to the voluntary patent. For the same reasons, while IFC-BEE made sure to procure technical evidence on the fiscal and economic benefits of its reform concept in order to stand a chance of persuading the government to endorse the idea, it believed that success was unlikely. As conveyed by my respondents, the project knew that its chances were limited by the authorities’ vested political caution when it came to reforms that appeared fiscally experimental and/or likely to provoke a serious backlash from business. IFC- BEE’s prediction was correct: judging from the data, its reform concept was never taken up for legislative action.

Chapter 4. The transfer of social insurance payments administration

In June 2015 Kyrgyzstan’s parliament passed a law that enabled the start of a reform pilot on the transfer of the social insurance payments administration function from the Social Fund of the Kyrgyz Republic to the Tax Service.135 IFC-BEE had expressed its support for this reform in the two SME surveys that it published in 2010 and 2013 (IFC 2010, 2013). The project also engaged in other types of technical work on the transfer. What kinds of technical work did IFC-BEE engage in on the reform, and how? What purposes was this technical work meant to serve in the efforts to advance the reform through legislative politics, how, and why? Finally, what can be said about the extent to which the technical work served the purposes envisioned? With these research questions in mind, I begin the chapter by introducing the case study policy issue. I do so in section one, where I also outline the reform version promoted by IFC-BEE and the extent to which this version was adopted into legislation. Next, in section two I examine the range of technical work that IFC-BEE engaged in on the reform; the aims and expectations that came with this technical work; the reactions to it; and the consequences of this for the reform. Based on the observations in sections one and two, in the ‘case study findings’ section at the end of the chapter I answer my three central research questions for the present case study.

1. The transfer of social insurance payments administration and the position of IFC-BEE The Social Fund of the Kyrgyz Republic (henceforth the Social Fund) is a government agency that is the executive body of Kyrgyzstan’s social insurance and pensions system.136 The status of the Social Fund is equal to that of a ministry. All businesses in the country must pay social insurance payments to the Social Fund to cover the costs of public pensions. Regular reports on the payments must be submitted to the Social Fund by all legal entities, but not by all individual entrepreneurs (IFC 2010, 2013). Since 2002 foreign aid projects have promoted several attempts to transfer the administration of social insurance payments from the Social Fund to the Tax Service, on the grounds that this would decrease the administrative costs borne by businesses and by the state bureaucracy.137 During one such attempt, in 2009 President Bakiev issued a decree which moved social insurance payments administration to the Tax Service (IFC 2010). While the transfer began in practice, an interagency commission of government and private sector actors was set up to develop the legislative amendments and procedural instructions necessary to formalize and complete the reform. The 2010 IFC SME survey released by IFC-BEE before Bakiev’s ousting expressed support for the 2009 decree on the transfer: ‘Once this measure becomes effective it is expected to have a positive impact on the incidence of inspections to which businesses are subject, since de facto inspections by the State Tax Service and the Social Fund will be merged. It will also result in the more efficient use of the resources of these two organizations’ (IFC 2010:120).138

135 K-News (2015 June 24) 136 http://socfond.kg/ru 137 Kim (2013b); aid agent 2 (2012 April 20) 138 See chapter 3 for a discussion of the 2010 and 2013 IFC SME surveys as technical work. 66

In April 2010, before the designated interagency commission could finalize its work, Bakiev was deposed as president. Soon after, his decree on the reform was nullified, and the function went back to the Social Fund (Kim 2013b). In 2011 the interagency commission was reconvened to continue preparing the legislative and operational framework for the function transfer.139 According to a public statement by a private expert who was closely involved in the process, the technical work which this interagency commission carried out in 2011-2012 was regularly discussed with a wider audience of government and business actors: ‘Work in this direction was open and transparent. The work of the interagency commission was repeatedly considered during sittings of the Investment Council’ (Kim 2013a). During the interagency commission’s meetings the Social Fund stood firm on its position that the transfer put the pensions system at risk because the Tax Service lacked the capacity to effectively administer social insurance payments (see section two). However, in October 2012 the commission submitted to government a package of legislative proposals on the reform. Consequently, the 2013 IFC SME survey noted that draft legislation on the transfer was ready and should be adopted asap in order to end the protracted deferral of a reform that was an important step in tackling the wider problem of excessive tax reporting obligations: ‘One of the key reforms in the area of simplifying tax reporting – which has been postponed several times – is a transfer of the administration of social insurance payments from the Social Fund to the State Tax Service... To date, several draft laws have been developed proposing a pilot in two rayons of Chuy oblast at the beginning of 2013. However, the pilots cannot take place until the draft laws have been enacted. The next steps in tax reform should be the unification of reporting to the Social Fund and to the State Tax Service and the synchronization of reporting terms, with subsequent transfer of functions across the entire country’ (IFC 2013:47). In March 2013, the legislative package was recalled from government by decision of the prime minister, in response to a letter from the Social Fund that warned against the harm which the transfer would inflict on the pensions system. This decision also disbanded the interagency commission and thereby formally ended the reform initiative. Nevertheless, by 2014 the interagency commission was reestablished and started working towards resubmitting legislation. In November 2014, the social insurance payments administration reform encouraged by IFC-BEE was endorsed by a government decree which presented a plan for moving the function to the Tax Service, subject to the results of a pilot. In June 2015, the parliament approved a law that named the government as the entity which decided which state agency administered the function. This enabled the implementation of the November 2014 decree.140 Consequently, the transfer pilot was launched in December 2015.141 In autumn 2016, due to implementation challenges, the Ministry of Economy proposed a decree that would extend the pilot’s timeframe.142 Thus, by the end of my research period the definite transfer of social insurance payments administration to the Tax

139 Aid agent 2 (2012 April 20); Kim (2013a) 140 K-News (2015 June 24) 141 Tazabek (2015 November 20, December 1); K-News (2016 February 26); Analitika (2016 March 2); Kabar (2016 February 16) 142 Tazabek (2013 October 13) 67

Service remained uncertain.143 However, legislation was in place that permitted the reform. And, practical work was ongoing to advance its realization.

2. IFC-BEE’s engagement in technical work on the transfer In the 2013 IFC SME survey, the requirement to submit social insurance payments to the Social Fund instead of the Tax Service was presented by IFC-BEE as an aspect of the undue procedural burden that fell on small and medium businesses in Kyrgyzstan: ‘Mandatory reporting (to the Social Fund and Statistics Committee) continues to be cumbersome and costly, particularly for small companies, which spend five percent of turnover on the procedures related to filing all reports. The total labor cost of mandatory reporting for SMEs and individual entrepreneurs amounted to 91 million Kyrgyz som...’ (IFC 2013:5). ‘Mandatory reports that Kyrgyz businesses must submit to the Statistics Committee and the Social Fund in addition to tax reporting are time consuming and viewed by businesses as an “information tax.” These reports are especially difficult for SMEs, 100 percent of which submitted them to the Social Fund and Tax Service and 96 percent of which filed them to the Statistics Committee in 2011. To reduce businesses' reporting burden, the administration of social insurance payments should be transferred from the Social Fund to the Tax Service’ (IFC 2013:8). While the policy issue of social insurance payments was not covered in detail by the analysis in the 2013 IFC SME survey, in 2011-2012 IFC-BEE engaged in legislative work on the reform. In the late 2000s the initiative on transferring social insurance payments administration from the Social Fund to the Tax Service was supported primarily by the USAID Business Environment Improvement (BEI) project.144 When Bakiev authorized the transfer in 2009, several tax experts employed by USAID-BEI were engaged in the interagency commission that started preparing the legislative amendments and operational provisions on the reform.145 After moving to IFC-BEE, at least one former USAID-BEI representative who was engaged in this assignment continued her involvement in the reform as a member of the interagency commission reconvened in 2011. In 2011-2012 this aid agent participated in the development and deliberation of the package of legislative proposals that was being prepared by the new commission. In addition, during those years some of the discussions on the reform took place under the auspices of the Methodological Council on Fiscal Policy, the work of which IFC-BEE was responsible for coordinating.146 Thus, in 2011 the IFC-BEE aid agent who curated the case study reform first lobbied for the inclusion of transfer provisions in a broader package of Tax Code amendments that the Methodological Council was drafting with the project’s assistance. However, the aid agent quickly discarded this objective, as it became clear that the transfer provisions would hinder the passage of the overarching legislative proposal.147 From then on, the Methodological Council acted as an occasional platform for the consideration of the technical work that was being

143 Information Agency 24 (2016 October 13, January 11) 144 The USAID BEI project was implemented in 2006-2011 by the Pragma Corporation. 145 aid agent 2 (2012 April 20), also for the remainder of paragraph 146 The Methodological Council was a high-level platform for private-public dialogue on fiscal policy development and deliberation. A narrow group of government and private experts formed its working core. See chapter 3 for the details. 147 government 3 (2013 June 14) 68 conducted by the transfer commission. For instance, one of the Methodological Council sessions convened by IFC-BEE in 2012 focused on the question. A legislative offsite organized by the project for Methodological Council members in the summer of that year was also due to prioritize the issue.148 What was the nature of IFC-BEE’s engagement in the Methodological Council’s consideration of the legislative provisions that were being developed by the interagency commission? Also, what was the nature of the project’s engagement in the drafting of the Tax Code amendments in 2011 through which it tried to advance the transfer? As suggested by the following interview statements, IFC-BEE’s participation in the technical work combined financial, operational and substantive contributions: ‘The IFC’s help is by far not of the least importance to the development of all of these packages of changes to the Tax Code. Their work with the Methodological Council, they support the experts to write and ground everything analytically. They finance it, in fact’.149 ‘We cross paths with IFC-BEE a lot. They support us with funds. The Methodological Council, the Council’s offsites, where we are placed under lock and key. And they also actively participate in the discussions. In other words, they offer two types of help’.150 ‘The project’s organizational role is a very large one: emailing, phone calls, assembling people, financing meetings. And if there is a request for experts, the IFC can provide them. It is necessary to continuously nudge the Methodological Council members to meet’.151 How did the Social Fund react to the technical work that was happening within and outside of the interagency commission with the involvement of IFC-BEE? According to an aid agent, by spring 2012 the Social Fund had dropped its erstwhile stance of absolute opposition to the reform.152 Instead, the Social Fund was now saying that it would agree to the transfer if certain technical issues were adequately dealt with to guarantee that the reform would not jeopardize public pensions. In April 2012, the aid agent noted that little legislative progress had been made by the interagency commission because the Social Fund had a strong ulterior motive for sustaining its resistance effort. Namely, the function of social insurance payments administration granted the agency which executed it direct control over incoming public money.153 However, the respondent did not mention the Social Fund using direct financial and relational means of influence to prevent the interagency commission from finalizing its legislative proposals. Instead, she informed that the commission’s work had not moved beyond discussion because it was

148 aid agent 2 (July 20) 149 business 7 (2012 May 2) 150 government 1 (2012 July 3) 151 aid agent 2 (2012 July 10) 152 aid agent 2 (2012 April 20) 153 See also: ‘The commission’s work took so long because during the working process Social Fund representatives tried to sabotage the commission’s work directly and indirectly. This attitude on the part of the Social Fund is based on – quite a natural corporate interest’ (Kim 2013b). See the Social Fund’s comments in the press to this particular accusation: ‘As reported today by the agency’s press service, the issue of transferring the function of social insurance payment administration to the Tax Service arises periodically under the influence of certain events, opinions or policies of specific individuals in the government. “And every time in the eyes of civil society the Social Fund appears as an agency that pursues only its internal interests and ambitions. The Social Fund does not agree with this assessment... The Social Fund is reproached for the opacity of its budget and spending. First of all, I would like to draw attention to the specificity of the Social Fund’s work…”’ (Tazabek 2013 March 20). 69 proving very difficult to formulate a solid case to discredit the Social Fund’s assertions that the transfer remained unsafe for the pensions system. For instance, as mentioned by the aid agent in a follow-up interview, in summer 2012 the Social Fund was insisting that in order to effectively administer social insurance payments the Tax Service must also take over certain other aspects of managing public pensions. The respondent was outright skeptical about this claim. Still, she indicated that technically solid counter-arguments were now needed to dismiss the Social Fund’s request.154 Thus, judging from the aid agent’s statements from April and July 2012, back then expectation inside the pro-reform camp was that it would only be able to submit legislation to government if it succeeded at invalidating the arguments raised by the Social Fund to defer this objective. Is there more evidence of the Social Fund responding to the reform design being developed by the IFC-BEE- backed commission with an effort to undermine the design’s technical credentials? Also, is there more evidence of the pro-reform camp procuring technical material to discredit the Social Fund’s objections, with the expectation that this would impair the Social Fund’s ability to defer the reform? Such further evidence is available. It surfaced in my observations on the Social Fund’s attempt in March 2013 to disband the interagency commission, and on the subsequent campaign by the pro-reform camp to revoke this decision. Below, I first discuss the March 2013 episode and its aftermath. Then, I say more about how the reform’s supporters expected their technical work to advance the measure through legislative politics in 2011-2012. Recall that in October 2012 the interagency commission submitted to government a package of legislative proposals which outlined the details of the social insurance payments administration transfer and of its pilot. (As note earlier, IFC-BEE was engaged in the drafting of this legislative package through one of its aid agents and by facilitating the Methodological Council as a platform for negotiating the reform content).155 However, in early 2013 the Social Fund sent prime minister Jantoroo Satybaldiev a letter which argued that the transfer would undermine the security of public pensions because the Tax Service lacked the specialist knowledge and operational capacity to effectively perform the contested function.156 Formally in response to this letter, on March 5th 2013 Satybaldiev issue a decision which recalled the October 2012 legislative proposals from government and disbanded the interagency commission.157 Some of my research material suggests that in addition to the letter the Social Fund lobbied against the October 2012 legislative proposals more broadly, also by appealing to the direct material interests of potential allies. Thus, after Satybaldiev recalled the legislative package, the Asian Development Bank (ADB) cancelled its plan to include a conditionality benchmark on the transfer in its budget support program.158 According to the aid agent who reported this change of heart, from

154 aid agent 2 (2012 July 10); echoed by government 2 (2012 July 24) 155 More generally, a business leader stated during an interview that these legislative proposals were developed with the help of foreign experts and foreign aid projects (business 7 2013 May 29). 156 aid agent 2 (2012 April 20); meeting at Investment Council secretariat (2013 March 12) 157 Kim (2013a); aid agent 2 (2012 April 20); meeting at Investment Council secretariat (2013 March 12) 158 The budget support initiative in question was the ADB’s Investment Climate Improvement Program in Kyrgyzstan, which had recently completed its Subprogram 2: https://www.adb.org/projects/41544-082/main#project-documents 70

Satybaldiev’s decision the ADB concluded that when it came to overpowering the private interests aligned with the Social Fund retaining the function, the prospects of success were too slim for a reform attempt to be worthwhile: ‘Apparently in this area the political economy has changed. And we are inclined to let it go because we understand that addressing the vested interests in this particular area might be very, very difficult. A lot of money is involved, there are too many stakeholders perhaps on the government side.’159 Pointing in a similar direction, at an informal Investment Council secretariat meeting convened on March 12th 2013 to discuss Satybaldiev’s decision, a business leader exclaimed that the Social Fund must have won over the prime minister by promising him some of the money that it appropriated from national pensions.160 Likewise, an aid agent interviewed in May 2013 mentioned a rumor that Satybaldiev was in fact persuaded to annul the interagency commission’s work by the Social Fund offering him a cut of its informal proceeds.161 Nevertheless, further comments by representatives of the pro-reform camp challenge the notion that a financial offer to the prime minister would have been necessary or sufficient to secure the March 5th 2013 decision. When asked in May 2013 whether the Social Fund had blocked the reform out of concern for public pensions, an aid agent answered with a clear-cut ‘no’ and noted (just like a year earlier) that social insurance payments administration was a function that offered opportunities for private enrichment.162 The respondent also emphasized that the Social Fund’s lobbying against the October 2012 proposals without the full knowledge of fellow commission members was a significant factor in its success at getting the prime minister to suspend the legislative package. However, the aid agent did not present this lobbying as a case of the Social Fund appealing to private material interests. Instead she portrayed it as public interest argumentation: ‘The Social Fund lobbied very toughly, voiced its position everywhere: We collect the payments more effectively. If the Tax Service collects them there won’t be enough for grannies’ pensions. The Ministry of Economy did not know this was happening. Otherwise it would have organized a counter-lobby’. Meanwhile, when at the Investment Council secretariat a business leader suggested that Satybaldiev was rewarded financially for repealing the legislative proposals, the secretariat’s spokesperson objected that the prime minister probably issued his March 5th decision because he struggled to dismiss to himself the Social Fund’s public interest warnings.163 There are other interview comments that support this position. For example, while explaining Satybaldiev’s decision, a pro-reform state official and a business leader emphasized the reluctance of government actors to assume political responsibility for any reform that could negatively affect public revenues. The state official added that during the transfer of social insurance payments administration operational hiccups were likely to cause some disruption in payments.164 Moreover, take the fact that a letter was sent to the prime minister on top of any in-person

159 aid agent 12 (2013 May 9); echoed by government 6 (2013 June 20) 160 meeting at Investment Council secretariat (2013 March 12); echoed by business 8 (2013 May 13) 161 aid agent 2 (2013 May 23) 162 aid agent 2(2013 May 23) 163 meeting at Investment Council secretariat (2013 March 12) 164 government 4 (2013 June 20); business 1 (2013 May 30) 71 lobbying against the legislative proposals. This suggests that the Social Fund found it important to be able to claim in public that its campaign had been based on solid public interest arguments. In other words, the Social Fund believed that it was valuable to issue a letter which provided official, technically-reasoned socioeconomic justification for the March 5th 2013 decision in the public arena. The pro-reform camp retaliated in kind against the Social Fund’s application of technically- backed arguments to attain the annulment of the interagency commission’s work. In June 2013 a state official mentioned that first deputy prime minister Djoomart Otorbaev had been lobbying prime minister Satybaldiev directly to retract his March 5th 2013 decision. As a result, Satybaldiev was at the point of agreeing to reconvene the interagency commission.165 However, while Otorbaev leveraged his personal influence to reclaim political ground from the Social Fund, other reform supporters acted to legitimize the transfer in the public arena – with the help of the legislative and operational framework developed in 2011-2012 with IFC-BEE assistance. Hence, the products of the technical work which the project had engaged in on the reform was mobilized in 2013 as part of an effort to overcome a political setback. First, at the Investment Council secretariat’s meeting on March 12th 2013, a secretariat representative urged business leaders to tackle the reform setback with a lobbying campaign that centered on public interest arguments instead of on blaming and shaming concrete individuals.166 Then, on March 18th fourteen business associations issued an open appeal to the president of Kyrgyzstan, urging him to support their demand to reverse the prime minister’s decision.167 The business lobby’s appeal expressed disdain at the underhand way in which the Social Fund had sabotaged the work of the interagency commission. It also highlighted the business community’s bewilderment at the fact that the prime minister suspended a legislative initiative which he had himself approved in June and October 2012 in Investment Council decisions. At the same time, the appeal presented the public interest arguments based on which business leaders and their allies in government had campaigned for the transfer of social insurance payments administration to the Tax Service. Also on March 18th, the director of the Chamber of Tax Consultants Tatiana Kim expanded on these arguments in a press statement reporting on the appeal. She did so by providing further figures on how the Social Fund’s administration of the contested function was inefficient, ineffective, prone to corruption, and at odds with international best practice.168 On March 20th the Social Fund responded with an elaborate press release. There, it challenged with technical reasoning the public interest arguments for reform and the notion that based on the interagency commission’s work the Tax Service would be able to collect the payments without jeopardizing the pensions system. Here are the key extracts from this response: ‘According to the press release, the main argument for the transfer is that it would reduce costs by centralizing the collection of taxes and social insurance payments. “This argument would be justified if

165 government 5 (2013 June 20) 166 meeting at Investment Council secretariat (2013 March 12) 167 Tazabek (2013 March 18). The appeal was also published in the Chamber of Tax Consultants’ newsletter (Kim 2013a). 168 Tazabek (2013 March 18) 72

Kyrgyzstan had an unfunded pensions system. But in our case, when citizens form their pensions individually, the issue becomes delicate. In the case of the Tax Service, which also collects other payments, there is no guarantee of complete transparency and of an absence of operational errors when moving data to citizens’ personal accounts. Therefore the savings from the transfer may turn into new costs. The Tax Service keeps records of payers not on a personified basis like the Social Fund, but by subject of activity. Because of this it is impossible to say that the transfer of a function that works on a personified basis will not require an increase in staff and administrative costs…”.’ ‘The Social Fund also states that if today the Tax Service is able to assume responsibility for personified social insurance payments collection and the subsequent transfer of data with minimal operational errors in a timely manner, the Social Fund would not have any objections. “However, there is the sad experience of 2010. Back then the break in the unified processes of the system led to the anonymization of insurance premiums, due to the lack of technical conditions for personified accounting by the tax authorities. Today the problem of accounting for insurance premiums by the Tax Service is still complicated by the difference in the information systems in the two agencies. While addressing this problem, the Social Fund and the Tax Service agreed on the need to create a new software package that meets the technical conditions of both departments. This requires considerable financial, labor and time costs”, the press service informed…’. “If the tax authorities do not have the necessary information and technical base, then the transfer would only increase the amount of anonymized insurance premiums. Who, in this case, will take responsibility for the citizens of the Kyrgyz Republic and cover all the costs of finding and returning to the citizens their legally due pension funds?”, the agency asks.’169 In turn, the pro-reform camp’s rebuttal of the accusations voiced by the Social Fund in the press was published in late March 2013 in the Chamber of Tax Consultants newsletter, as a commentary on the business lobby’s appeal to the country’s president (Kim 2013b). For one, in this commentary the Chamber’s director repeated the flagship public interest arguments in favor of the transfer. Furthermore, she deployed the IFC-BEE-backed reform design work from 2011- 2012 to refute the Social Fund’s claims that the Tax Service was not ready to take proper care of citizen’s social insurance payments: ‘The Social Fund’s letter, based on which the decision was made to suspend the interagency commission and to repeal the developed legislative package, does not contain a single argument which was not discussed during the more than 1.5 years of work and to which a solution has not been found’ (Kim 2013b).170 She then elaborated her position as follows: ‘The interagency commission decided that the personified accounting task will stay with the Social Fund. All of the technical aspects of the transfer have also been considered. The approach to the transfer is based on a very simple scheme: the taxpayers submit their reports to the Tax Service, and the Tax Service passes it to the Social Fund online through a designated communications channel. The problem of there being two information systems is fictional and is not connected to resolving the matter. As stated above, the only question that has to be solved is the transfer of information between the two agencies. During the commission’s work the question of developing a special IT module with ADB finances was also settled. The costs of this would not be high since this is just one of the modules, and not the most significant one, covered by the ADB’s work on developing an internal IT

169Tazabek (2013 March 20); see also the Social Fund’s press statement in Information Agency 24 (2013 March 20) 170 see also Tazabek (2013 April 16) 73

system for the Tax Service. Understanding very well the resonance and sensitivity of all processes related to pensions and social provisions, in order to avoid all risks, the members of the interagency decided not to speed up the process and to take a final decision, including on the transfer’s timing, only after assessing the results of the pilots. As for the launch date of the pilots, it was coupled to the completion of the IT module on social insurance payments’ (ibid). In sum, Tatiana Kim sought to technically substantiate the assertion that in contrast to the situation in 2010, by 2012 the interagency commission had arranged for and developed the procedural and technological content necessary to proceed safely towards the transfer: ‘The three months long experience of the Tax Service in administering social insurance payments [in 2010], as a result of which some premiums could have been depersonalized, cannot be an argument for deciding to annul the output of the interagency commission for several reasons, including the lack of a legislative basis for regulating the process in 2010 and the complete organizational and technical unpreparedness for the transfer at the time’ (ibid). From the pro-transfer counterstrike in March 2013 I infer that its supporters expected the technical refuting of the Social Fund’s claims in public to boost their chances of reviving the reform process. At the same time, the above press statements testify to my earlier inference that the interagency commission’s work in 2011-2012 was a technical tug-of-war during which (with IFC-BEE assistance) the transfer’s supporters strove to exhaust the Social Fund’s public interest arguments for deferring the reform. In a further illustration of this dynamic, during a meeting at the Investment Council secretariat a business leader lamented that the Social Fund sabotaged the transfer even if the pro-reform camp had been dutifully attending to all of the problems it raised. She added that the Investment Council was not pushing for the reform without the necessary preparations; on the contrary, it has been consistently saying to the Social Fund that ‘if you need five years, OK, let’s make it five years’.171 In other words, in 2011-2012 the interagency commission leveraged the technical solutions developed with IFC-BEE assistance to compel the Social Fund to approve the submission of legislative proposals to government. It did so by depleting the Social Fund’s reserve of credible objections to this move. In March 2013, the same technical material was mobilized to dismiss in public the objections which the Social Fund had revived outside of the commission, after the latter had submitted its legislative proposals to government.

Case study findings: reform analysis from the perspective of the research questions

What kinds of technical work did foreign aid actor engage in to advance the reform, and how? In order to promote the transfer of social insurance payments administration from the Social Fund to the Tax Service, IFC-BEE included some research on the topic in the two SME surveys that it published in early 2010 and 2013 (for an outline of the technical work behind these surveys, see findings section in chapter 3). In the surveys the project reported on the unnecessary costs to government and business of the Social Fund rather than the Tax Service managing social insurance payments. It also urged the authorities to push through with the transfer. In addition, in

171 meeting at Investment Council secretariat (2013 March 12); echoed by business 8 (2013 May 13) 74

2011-2012 IFC-BEE engaged in the development of legislative proposals on the reform’s procedural framework. This technical work was conducted by a designated interagency commission which included the Ministry of Economy, the Social Fund, the Tax Service, business leaders and private experts. IFC-BEE was primarily involved in the commission’s legislative activities and discussions through one of its national aid agents. IFC-BEE also engaged in the legislative drafting effort through the Methodological Council (a high-level public-private forum for fiscal policy development and deliberation). In 2011-2012, the technical work carried out by the interagency commission was considered several times within the framework of this forum. IFC-BEE was the foreign aid project officially responsible for coordinating the activities of the Methodological Council, which it provided with financial, operational and substantive support.

What purposes was the technical work meant to serve in the efforts to advance the reform through legislative politics, how, and why? With IFC-BEE support, in 2011-2012 the interagency commission’ pro-transfer members directed their legislative work at undermining the Social Fund’s capacity to deter the sending of legislative proposals to government. They sought to do so by devising a framework of procedural and technological reform provisions that would gradually discredit the Social Fund’s technically- backed public interest objections to the transfer. Judging from the interview material, the pro- reform camp considered such discrediting necessary as a means of making it politically unviable for the Social Fund to continued blocking the proposals’ submission. An important factor behind this was the political risk attributed by state actors to being associated with policy measures that were criticized in public for jeopardizing public pensions and/or ignoring the concerns of the private sector. The content of the interagency commission’s work was regularly discussed at media-covered inter-stakeholder policy forums. Therefore it was understood that once the Social Fund could no longer technically legitimize its position, its refusal to sign the proposals could be quickly branded in public as groundless sabotaging of a socially valuable reform. Senior state officials would find it politically risky to back the demands subjected to such criticism, which would weaken the Social Fund’s capacity to secure high-level support for its cause. The interagency commission’s legislative proposals were submitted to government in October 2012. Five months later, the Social Fund regrouped its technical evidence against the transfer and wielded it in a surprise attack that rested on the same logic of discrediting the socioeconomic merits of the opponent’s position in public. Thus, after received a written request from the Social Fund, in early March 2013 prime minister Satybaldiev retracted the draft legislation and disbanded the interagency commission. In the request and the ensuing press statements, the Social Fund argued in a technically-reasoned way that the Tax Service would be unable to handle the contested function without running additional expenses and impairing the pensions system’s security. In response, the pro-reform camp issued a series of its own press statements. Thereby it once again mobilized the reform content developed earlier with IFC-BEE assistance for the purpose of disrupting the Social Fund’s capacity to block the transfer (now aimed at sustaining its suspension). Specifically, in the press statements the transfer supporters sought to discredit the

Social Fund’s claims by detailing on how the interagency commission had gradually resolved the public interest concerns raised by the agency. Moreover, they spotlighted the technical evidence for the argument that the function’s management by the Social Fund was fraught with excessive costs to economy and society. Finally, they stressed the business lobby’s anger at the fact that the legislative proposals had been retracted in an underhand way, and despite the prime minister’s repeated approval of the reform design effort. The pro-reform camp’s technically-backed campaign in the media was also intended to make it more politically problematic for Satybaldiev to continue honoring the Social Fund’s request to freeze the reform. In other words, in spring 2013 the technical work that IFC-BEE had engaged in was also meant to serve a second, more specific purpose: that of obliging the prime minister to revert to his original position of reform endorsement. Judging from resolve with which both sides used technical material to defend the merits of their case in public, doing so was believed to be a viable means of weakening the opponent’s political standing (in particular by obliging decisionmakers to shun the rival position). Once again, this tactical outlook can be explained by the political risk attributed by state actors to pensions-related criticism and to legitimate sounding business discontent. I also propose that because of these political risk perceptions policy player had to be capable of adequately justifying their reform positions before a wider audience, if they were to stand a chance in the reform contest. Hence, it was at once a requirement and a lever of meaningful participation in legislative politics to defend one’s position in public with arguments of pension security and the government’s duties towards the private sector. Furthermore, and most importantly for my analysis, this practice relied on technical reasoning. Thereby it fueled the demand for technical work which could supply such reasoning, and for foreign aid engagement that could support this.

What can be said about the extent to which the technical work served the purposes envisioned? My reading of the case study material is that the extent to which the IFC-BEE-facilitated technical work fulfilled the purposes intended for it was defined by the interplay between three factors: it was conditioned by the political risk attributed by state actors to (a) pensions-related and (b) business criticism, where the effects of both concerns on the reform process were mediated by (c) the relative strength of the technical evidence provided by the transfer’s supporters and opponents. Thus, in 2011-2012 the Social Fund had to cooperate with the interagency commission while the latter was developing its legislative proposals. The drafting process had been formally endorsed by the prime minister. This endorsement was guarded by the business lobby, which would have reacted with a public outcry if the Social Fund tried to secure the dissolution of the interagency commission before it finalized its legislative proposals. In turn, the risk of such a public outcry would have discouraged pivotal state officials from sanctioning a move of this kind. Therefore, the most viable resistance tactic available to the Social Fund at the time was to draw out the interagency commission’s work by credibly arguing that its reform designs were still too likely to cause trouble for the pensions system.

Likewise, the pro-reform camp had to deal with the Social Fund’s objections at face value if it wanted to undermine its capacity for resistance (even if it believed that the agency’s arguments were a cover for narrow private interests). Otherwise, the Social Fund was bound to render the pro-transfer position politically unmarketable to senior state officials, who were wary of facing criticism for reforms that could be persuasively shown to jeopardize public pensions. Accordingly, this stretch of the reform contest was decided in favor of the transfer supporters once they had amassed the evidence to demonstrated that their reform designs took care of the pensions-related risks flagged by their opponent. Thereafter, it became counterproductive for the Social Fund to continue blocking the legislation’s progress in the confines of the interagency commission. The pro-reform camp would now be able to respond by persuasively accusing the Social Fund in public of baseless reform resistance that hurt the pensions system and showed a disdain for the private sector: a scenario which risked causing damage to the agency’s ability to attract allies in government and parliament. The legislative proposals on the case study reform were thus formalized in October 2012 thanks to the technical work carried out with IFC-BEE support by the interagency commission. Nevertheless, the Social Fund then managed to secure first-strike advantage by revamping its technical evidence against the transfer and using this material to undermine the reform in an unexpected public reprisal. Specifically, the Social Fund sent the prime minister a technically- backed request that spelled out the socioeconomic risks of the transfer. Thereby, it obliged Satybaldiev to suspend the reform by playing into his reluctance to endorse legislation that could be framed as a social hazard. As I was informed by my primary sources, the perceived political risk of discarding the Social Fund’s warnings would have been enough to sway Satybaldiev to suspend the reform. That is, even if the Social Fund did promise the prime minister a financial reward for taking the decision, this promise was unlikely to have been an essential or sufficient factor in prompting the suspension. Furthermore, the letter to the prime minister and the related press statements were also intended as preemptive measures against the counterstrike expected from the transfer supporters. As would have been anticipated by the Social Fund, the pro-transfer camp reacted to the reform’s suspension with a media campaign of technically-reasoned arguments against the accusations raised by its opponent. In sum, in March 2013 the two sides in the contest over the prime minister’s decision engaged in a frank exchange of technically-backed criticism in the media. Thereby, they did what they had to do to hedge and increase their chances of success at this point in the reform contest. At the same time, by publicizing their technically-backed arguments in the press, each side aspired to show that it would be more politically prudent for the prime minister to endorse their demands over those of the opponent. By 2014 Satybaldiev approved the resumption of the reform process. However, the legislative proposals had to be prepared anew. My explanation of this mixed outcome is this. On the one hand, the technical evidence broadcasted by the transfer supporters was too strong for the prime minister to risk provoking pensions-related and business criticism by fully ignoring this group’s demands. On the other, because of his desire to avoid the former line

77 of criticism, and because of the credibility of the technical evidence raised against the reform, the prime minister did not dare to turn back on the Social Fund completely.

Chapter 5. Reforming VAT administration

In April 2011, the government of Kyrgyzstan issued a decree that suspended the third copy of the VAT return form and its five attachments for a trial period, with an outlook at permanent revocation (IFC 2013). In June 2016, the parliament adopted a law that replaced the standing paper-based high-security VAT invoicing system with a system based on electronic invoice numbers.172 IFC-BEE promoted the first reform in 2010-2011 and the second in 2011-2013. USAID-REFORMA was launched in 2012. The project became involved in the second reform in mid-2013, when it decided to make VAT administration a focus of its fiscal component. USAID- REFORMA was a new project with fresh funds to spend on business taxation. Hence, it took over from IFC-BEE as the main foreign aid actor championing the shift to VAT invoicing based on electronic numbers. USAID-REFORMA and its successor project USAID-BGI advanced this reform at least until the end of summer 2015. They did so as part of their broader effort on promoting a comprehensive overhaul of Kyrgyzstan’s VAT administration procedures. The research questions which I set out to answer in the present case study are as follows. What kinds of technical work did IFC-BEE and USAID-REFORMA/BGI engage in on the case study reforms, and how? What purposes was this technical work meant to serve in the efforts to advance the reforms through legislative politics, how, and why? What can be said about the extent to which the technical work served the purposes envisioned? Before analyzing the case study reforms explicitly from the perspective of these questions in the ‘case study findings’ section, I proceed as follows. In section one I present the policy issue at stake, the versions of reform promoted by IFC-BEE and USAID-REFORMA/BGI, the arguments behind these reform versions, and the extent to which they were adopted into legislation. In the next two sections I examine the projects’ involvement in the case study reforms. In section two, I consider the types of technical work that IFC-BEE engaged in to advance the reforms, and how the project did so. I also consider what was sought and/or expected from this technical work by the project and by other actors, how the other actors responded to it, and the consequences of all this for the reforms. In section three I do the same for USAID-REFORMA/BGI.

1. VAT administration reforms in Kyrgyzstan and the revisions promoted by IFC-BEE and USAID-REFORMA/BGI In 1999 Kyrgyzstan adopted a system of so-called high-security paper-based invoices for administering the VAT. This system was meant to make it more difficult for businesses to obtain undue VAT credit and to get away with other malpractices. However, VAT fraud remained rife.173 In response, under the new 2009 Tax Code the paper-based high-security invoicing system was made stricter and more complex. Meanwhile, as a side-effect, it spawned a trade in counterfeit VAT invoices.174 In the post-Bakiev years the Tax Service treated the proliferation of

172 Parliament of Kyrgyzstan (2016 June 22, June 24) 173 legislative document 1b (2014 May) 174 legislative document 1a (2014 March) 79 the latter type of VAT fraud as a pressing problem.175 However, at the same time it argued that the high-security invoices were the best means available for enforcing VAT compliance in general, and should not be suspended unless an equally stringent control mechanism was found to replace them. In contrast, the business lobby, argued that the complicated high-security VAT invoicing system did serious damage to the private sector. Business leaders also took issue with numerous other aspects of the VAT administration system, such as the difficulty of obtaining VAT refunds and the general complexity of VAT compliance procedures. Overall IFC-BEE agreed with the business lobby. Thus, in the IFC SME business climate surveys from 2010 and 2013 the project argued that the burdensome and costly nature of VAT administration in Kyrgyzstan undermined private sector competitiveness and encouraged businesses to underreport their revenues in order to avoid qualifying for compulsory VAT-payer status. Based on this assessment, the 2010 IFC SME survey edition advised the government to decrease the number of obligatory VAT return copies and to repeal the mandatory status of the return’s attachments: ‘…businesses… have been required to submit a VAT return consisting of one form and five attachments amounting to 12 pages in total. The VAT return must be submitted in three copies… completing these attachments is a time-consuming process and the volume of information required can lead to mistakes and, subsequently, sanctions or penalties… Both the VAT return and the monthly invoice report place a heavy VAT compliance burden on businesses, quite apart from the burden of the 12 percent VAT rate. It is therefore recommended that the filing of attachments to the VAT return be made voluntary, and that VAT submissions be made in one copy…’ (IFC 2010:117). IFC-BEE continued to promote this reform until the passing of the April 2011 decree that simplified the VAT return as recommended by the project. The 2013 IFC SME survey positively acknowledged the latter development and called for further changes to VAT administration, in the direction of replacing the high-security VAT invoices with an electronic numbers system: ‘The reforms simplified VAT reporting, yet taxpayer costs remain significant. In the future, the Kyrgyz tax authorities should cancel invoices in hard copy… and shift to electronically assigning e-numbers to every invoice… This would reduce the administrative burden on both taxpayers and officials and encourage error avoidance’ (IFC 2013:47,57). In spring 2013 USAID-REFORMA joined the debate by conducting a study on indirect taxation policy and VAT administration in Kyrgyzstan (USAID 2013c, see section three for the details). In this study the project reported on the conflicting complaints raised by business and government about the VAT administration system, and broadly agreed with both camps: ‘During the conduct of REFORMA's Indirect Tax Policy Study, our advisors identified a number of administrative processes that affect the ability of the State Tax Service [STS] to efficiently and effectively manage implementation of the VAT regime. The private sector contends that the VAT system is needlessly burdensome in compliance requirements, which has been driving its advocacy efforts to increase the VAT registration threshold from 4 million to 10 million som. Among the specific problems voiced by the private sector are the following: (1) the mandatory use of security invoices in the STS’s attempt to curtail fraud; (2) excessive documentation required for the submission of monthly VAT reports; (3) widespread rejection of what are claimed to be legitimate VAT credits; (4) failure to

175 The overview of government and business attitudes in this paragraph is based on inter alia on USAID (2013g) and Information Agency 24 (2012 February 27). 80

remit VAT refunds to exporters. The STS counters these complaints with accusations of widespread VAT fraud on the part of the private sector as well as deliberate attempts by businesses to avoid reporting revenue above the 4 million som threshold that would trigger mandatory VAT registration. Overall, the REFORMA study concluded that VAT invoicing and reporting requirements penalize legitimate VAT taxpayers while failing to significantly curtail the incidence of fraud’ (USAID 2013g:26). Based on the indirect taxation policy study, USAID-REFORMA decided that VAT administration in Kyrgyzstan required a systemic overhaul involving multiple complementary and mutually reinforcing reforms. Consequently, it set out to pursue such an overhaul of the VAT administration system. The shift to electronic numbers was one of the central items in the project’s reform plan, which also included measures on simplifying VAT refund and registration procedures, developing new instruments for detecting and penalizing VAT fraud, and others.176 In January 2015, the Ministry of Economy submitted to government a legislative proposal on VAT administration that had been drafted by national private tax experts on assignment from USAID-REFORMA (USAID 2015a). The proposal was sent to parliament in May 2015.177 The draft law amended the Tax Code to introduce the electronic numbers VAT invoicing system. At the same time it made a range of further amendments to the Tax, Criminal, Administrative Liability and Criminal-procedural Codes. For instance, the proposal specified a set of new sanctions for VAT abuse. It also introduced Tax Code articles on a new type of VAT inspections and spelled out a system of simplified VAT reimbursement applicable to some businesses.178 USAID-REFORMA’s bill was approved by parliament in a first reading in June 2015, but did not make it any further.179 Instead, in June 2016 the parliament adopted a short law that introduced the electronic numbers system.180 The proposal for this law was submitted by a group of MPs. However, it largely consisted of the clauses on electronic numbers that had been part of USAID- REFORMA’s proposal from January 2015. In June 2016, the parliament also resumed the consideration of the USAID-REFORMA’s proposal, at first in its original form.181 The same month this proposal of twenty-four pages was revised and passed as a five-page law that made several concise changes to VAT registration, crediting and refund provisions. The more comprehensive measures advanced in the initial proposal were absent from the final law.182 By the end of my research period these measures had not been adopted into legislation.183

2. IFC-BEE’s engagement in technical work on VAT administration What kinds of technical work did IFC-BEE engage in to advance the case study reforms, how did it do so, and what were the project’s related aspirations and expectations? What did other

176 USAID (2013bdf; 2014bd); aid agent 10 (2013 July 9); see section three for more detail 177 legislative document 4 (2015 May) 178 legislative document 4 (2015 May); K-News (2015 May 26); Tazabek (2015 June 24) 179 legislative document 5 (2015 June) 180 Parliament of Kyrgyzstan (2016 June 22, June 24). The law was signed by the president on August 12th 2016 and went into force in November 2016 (legislative document 16 2016 August; Tazabek 2016 October 31, November 10). 181 http://www.kenesh.kg/ru/draftlaw/210827/show (link to the proposal’s history on the parliament’s website) 182 legislative document 15 (2016 June), comparison of Tax Code editions from before and after the law’s adoption at http://cbd.minjust.gov.kg/act/view/ru-ru/202445 183 Tax Code edition from December 22nd 2016, http://cbd.minjust.gov.kg/act/view/ru-ru/202445/870?cl=ru-ru 81 actors seek and/or expect from the technical work, what were their reactions to it, and what consequences did these reactions have for the reforms? These are the questions that guide the analysis in the present section, first for the years 2010-2011, then for years 2012-2013.

2010-2011 In 2010 IFC-BEE engaged in some research and analysis on the issue of VAT administration within the framework of its 2010 IFC SME survey. After publishing the survey in early 2010, what kinds of technical work did the project engage in to promote the VAT invoicing reforms which it recommended in the study? Broadly speaking, IFC-BEE became involved in the process of reform deliberation which unfolded in 2010-2011 between state actors and business leaders on the topic of VAT administration. This process often revolved around the technical discussion of reform provisions and was in this sense a type of technical work, which IFC-BEE supported financially, operationally and with technical expertise. In my interviews I came across several concrete examples of such engagement by the project. For instance, in 2011 IFC-BEE hosted on its premises a small and informal tax policy working group for a handful of business leaders and tax officials. According to a business leader, these meetings were a key setting for the negotiations which led to the April 2011 VAT return simplifications. The respondent also portrayed the IFC-BEE-facilitated working group as a forum where business leaders could present the Tax Service directly with their case for shifting to VAT invoicing based on the electronic number, in order to gauge the tax agency’s openness to this reform: ‘It was not without the IFC that we accomplished that the suspension of the VAT attachments. They presented us with their platform. There we bickered, bickered, and bickered out to an agreement.’184 ‘Last time we said that the high-security invoice should be suspended at the end of last year [2011]. There were discussions with IFC participation. There was a working group. Not formalized, within the framework of its project the IFC brought together experts – their own, the Tax Service’s, and us – at the IFC office, over a cup of coffee. We felt the ground re what the tax authorities are ready to do.’185 In addition, in 2011 IFC-BEE organized a formal roundtable between government actors and business leaders on the topic of VAT invoicing and reporting. An aid agent described this effort as the main intervention through which the project helped bring about the April 2011 suspension of the third VAT return copy and its five attachments.186 What aspirations did IFC-BEE have for the round table? According to the respondent, the project generally organized roundtables of this kind in order to create a chance for business leaders to directly confront tax officials with their arguments in a reform’s favor. In turn, through such direct debate the Tax Service could be brought to grasp and/or acknowledge the case for reform. If not, business leaders would proceed to raise their arguments more broadly in the media and at further inter-stakeholder policy meetings. In the case of the third VAT return copy and its five attachment, the aid agent’s

184 business 7 (2013 May 29) 185 business 7 (2012 May 2) 186 aid agent 1 (2012 April 10) 82 comments suggest that during the April 2011 roundtable the business lobby got the tax authorities to explicitly recognize some of its arguments for reform: ‘It is an ordinary working process. Business speaks, and the Tax Service has the opportunity to hear what business thinks. When tax officials introduce reporting standards they do not always realize how it affects businesses. When they hear this, and if they agree, they usually initiate changes themselves. When the advanced proposals are contentious, business associations are very active. They begin to raise the question everywhere, as in in the press, and to meet with government entities. In this case we organized a roundtable where they met and agreed on points of common understanding.’ A government official similarly highlighted the tendency of business leaders to promote their policy positions through public channels, and stressed the political weight of this practice, while discussing how she expected business to resist a tax reform that had been initiated by her agency: ‘They will spoil our mood a little during public hearings, during parliamentary hearings they will also try to undermine us… The media, the agitation of the masses, they engage in this. They will publicly pressure us, at roundtables, in the media. We will participate in such round tables, and I hope we will have enough strength.’187 The aid agent whom I cited last also noted that aside from facilitating the reform dialogue between government and business, IFC-BEE channeled technical advice and knowledge into this process (‘we simply support it at certain stages, where necessary with technical expertise’).188 Thus, during the 2011 roundtable which it convened on VAT administration, IFC-BEE arranged a presentation on Latvia’s successful experience with introducing VAT invoicing simplifications. According to the aid agent, this presentation nudged the Tax Service towards contemplating the suspension of the third copy of the VAT return and its five attachments: ‘It is a kind of political process. We initiated it, brought them together, invited an international consultant. He said “we also had a complex VAT return reporting on paper-based invoices, but then it proved redundant. You should also do so and so first, and then drop this instrument.” Everyone heard it there, and the tax officials begin to reconsider the extent to which they need it’. Still, the Tax Service did not respond to the policy discussions supported by IFC-BEE in 2011 by giving its final go-ahead to the reform. Instead, the go-ahead in April 2011 was prompted by an incident in which a business leader publicly framed the issue in a way that discredited the tax agency’s broader performance. However, the argument behind this discrediting rested on technical work that had been carried out with close involvement from IFC- BEE on a different reform to tax administration. In 2010-2011 IFC-BEE funded and managed the development and rollout of an online tax filing service – the first of its kinds in Kyrgyzstan. During the formal launching event of this digital service, a business leader argued that the new technology was useless because businesses were still required to submit the third VAT return copy on paper. According to an aid agent and a business representatives, it was this criticism that compelled the Tax Service to push through with the VAT form simplifications.189 In addition, the

187 government 1 (2012 July 3) 188 aid agent 1 (2012 April 10) 189 business 7 (2012 May 2); aid agent 1 (2012 April 10) 83 business representative noted that IFC-BEE spoke out to support the argument, and that thanks to this the ‘reform passed much easier’.190 IFC-BEE also contributed technical evidence to the inter-stakeholder policy discussion on replacing the high-security VAT invoices with a system based on electronic numbers. Specifically, in 2011 the project arranged a presentation in Bishkek on the introduction of the electronic numbers VAT invoicing system in Latvia, from which Kyrgyzstan had copied its VAT invoice. The presentation was given to an audience of government and business actors. The information provided by the Latvian experts was directed at disproving the Tax Service’s argument that the high-security invoices were a more effective instrument for controlling VAT payments than the system of electronic numbers: ‘Last autumn the IFC invited experts from Latvia. We met at the IFC platform. The experts said: “Yes, we adopted them as a temporary measure, as there was a lot of abuse after the USSR’s fall. Then we noticed that it is not very effective. To facilitate VAT flows we switched to electronic numbers”.’191 How did the tax agency react to the presentation on Latvia’s experience? According to the business leader who made the preceding statement, after the event the Tax Service remained ‘dead set against annulling the invoices’, claiming that it was not yet ready for the shift.

2012-2013 In 2012 IFC-BEE conducted further research and analysis on the shift to VAT invoicing based on electronic numbers as part of its work on the second IFC SME survey, which was published in early 2013 and advised the government to proceed with the reform. At the same time, in 2012-2013 the project continued to promote the inter-stakeholder dialogue which business leaders used to lobby in favor of the shift. What did business leaders expect to achieve through this dialogue and how? In April 2012, a business representative observed that the policy discussions facilitated by IFC-BEE and other aid actors would continue to act as an avenue for pressing state officials to introduce the electronic numbers system by challenging them to respond to the public interest arguments in the reform’s favor: ‘We annulled the third form. Now we will continue to say “let’s cancel the high-security VAT invoice”. We will say “why is a question that spoils the life of such a large chunk of business still not resolved?”, at the Investment Council, at the Methodological Council, etc.’192 Furthermore, in June 2013 the same respondent indicated that during the policy meetings which IFC-BEE convened between government and business the project would sometimes support the pro-reform arguments raised by business with its expert opinion:

190 business 7 (2012 May 2) 191 business 7 (2012 May 2) 192 business 7 (2012 May 2). In summer 2013 a state official also mentioned that high-security paper-based VAT invoicing had been discussed within the framework Methodological Council on Fiscal Policy, informing that ‘we had our last Methodological Council off-site on May 2nd to discuss VAT invoices’ (government 3 2013 June 14). Recall from chapter 3 that the Methodological Council was a high-level public-private forum for the development and deliberation of fiscal policy. Its working core consisted of a handful of state-based and private tax experts. IFC-BEE was formally responsible for coordinating the forum, and made regular substantive contributions to its work. For the Investment Council, see also chapter 3. 84

‘The IFC very often organizes platforms, with the Ministry of Economy, with the Tax Service. When at such a platform we said let’s suspend the VAT invoices, the IFC, as international experts, said “yes, we think they should be suspended, it is necessary to consider this question.”.193 The respondent’s vision of how the business lobby’s pressure would operate to advance the shift to electronic numbers rested on the notion that the Tax Service’s objections to the reform could only go so far in justifying its deferral. Consequently, the business leader envisaged that by confronting the Tax Service with its deficit of solid arguments against the reform the business lobby would eventually corner it into taking action: ‘Water cuts stone. When you drip, drip, drip – and I am already doing this for three years in a row – sooner or later it will be resolved. Because one time you answer “no, because”, the second time you answer ‘no, because’, the third time you answer, but the fourth and fifth time you have to answer something more than the words “because”’. Meanwhile, in spring 2013 IFC-BEE directed its technical work on another reform to VAT administration towards the purpose of advancing the suspension of high-security VAT invoices. To do so had been its plan from the start. In 2012-2013 IFC-BEE was working with the Tax Service to develop and install a system of automated risk-based tax audit. As part of this, it was building a computer module for tracking VAT invoices.194 In late spring 2013 the module was almost ready. Consequently, the project started to argue to the Tax Service that the new software made effective monitoring of VAT compliance possible without the high-security VAT invoices. As conveyed by an aid agent in May 2013, IFC-BEE had made a conscious gambit in linking the VAT tracking module with the prospect of suspending the invoices. Thereby IFC-BEE sought to elicit concrete reform steps on electronic numbers from the Tax Service: ‘The objective of developing the VAT-tracking module is not only to help the Tax Service, but, after the instrument is ready, to move the government towards simplifying VAT invoicing.’ 195 As stated by the aid agent during the same interview, IFC-BEE now planned to amplify the dialogue with the Tax Service on whether the latter ‘is ready for the next steps in simplifying the administration of invoices’, which ‘as understood by everyone’ entailed the suspension of the high- security VAT invoices. The business lobby soon joined IFC-BEE in arguing – inter alia before a wider audience of policy players and the press – that the new VAT-tracking module allowed the tax agency to effectively monitor VAT compliance without the high-security invoice: ‘…this month we discussed with the first deputy prime minister’s consultant and several times at the Investment Council that it is necessary to simplify invoicing in general and to annul the VAT invoice. Because at present the Tax Service has finally introduced some parts of its automated system, and now their module of tracing VAT invoices works somehow. When there is a single automated software system the need for invoices disappears. It is possible to issue unique numbers to companies.’196

193 business 7 (2013 May 29) 194 Information Agency 24 (2014 December 30) 195 aid agent 1 196 The business leader who made this comment in June 2013 also noted that at the formal event marking the completion of the VAT-tracking module IFC-BEE voiced its support for the argument: ‘For instance there was a meeting at the Hyatt, when the module was finished. The IFC organized it. We discussed the invoices, and the IFC spoke in favor’ (business 7 2013 May 29). At the December 2013 Investment Council session, a business leader argued that thanks to the introduction of the VAT-tracking 85

While IFC-BEE and its allies highlighted the favorable conditions created for the reform by the new VAT-tracking module, how did the Tax Service respond to this effort to prompt the start of legislative drafting on the shift to electronic numbers? In spring-summer 2013 the Tax Service continued to insist that the reform ‘must be introduced, but at a time when they themselves are ready’.197 It maintained that it was still too risky to proceed with the shift. What was the reasoning behind these claims? For one, the tax agency argued that the high-security invoice was an invaluable VAT compliance control mechanism because it pushed private sector actors towards self-regulation. As explained by an aid agent in May 2013, the Tax Service’s point was that many businesses meticulously completed the paper-based forms in order to avoid trouble with the tax authorities, and that this incentive would disappear under the electronic numbers system.198 In May 2012 a business leader described this position as follows: ‘The invoices, they are complicated after all, there is an appearance of order, and if we take them away, it can all collapse’.199 Similarly, in June 2013 a private expert noted that the suspension of the high-security invoices remained undecided because ‘the Tax Service is as of yet unable to propose and alternative instrument that would give them the feeling that they are collecting enough VAT’.200 In other words, the Tax Service contented that more analytical work was necessary in order to decide whether the agency could effectively control VAT flows under the electronic numbers system. The tax authorities’ default position was that ‘it’s necessary to look at it, it’s necessary to study it’.201 In addition, the Tax Service asserted that in many parts of the country the IT infrastructure was unequipped for the reform. Several aid agents portrayed this argument as a valid reason for postponing concrete action on the shift to electronic numbers. For instance, one aid agent explicitly agreed that for the time being it was injudicious to proceed with the reform. This respondent argued that while the Tax Service placed high hopes on the new VAT-tracking module, the state of IT infrastructure outside of Bishkek was such that the proper running of the software across Kyrgyzstan ‘is still at the level of science fiction’. Consequently, suspending high- security invoices ‘could lead to even greater fraud’ as ‘neither the Tax Service nor the taxpayers have the resources’ to make it work.202 Another aid agent conceded that the Tax Service needed time to get used to the VAT-tracking module before it could begin to reform the VAT invoicing system.203 Moreover, in May 2013 she mentioned a second technology-related point which tax officials raised to argue that the shift to electronic numbers would be untimely from a public interest perspective. This point pertained to the automated system of internal administration that was being installed at the Tax Service with module, by suspending the high-security VAT invoices ‘we simply decrease the burden on business without losing control’ (Tazabek 2013 December 18a). 197 aid agent 1 (2013 May 23) 198 aid agent 1 (2013 May 23) 199 business 7 (2012 May 2) 200 private expert 3 (2013 June 7) 201 government 6 (2013 July 31) 202 aid agent 16 (2013 July 25) 203 aid agent 1 (2013 May 23) 86 the Asian Development Bank’s (ADB’s) assistance. Thus, the tax agency argued that before it completed this process any attempt to revise taxation procedures risked disrupting the process of tax collection to the detriment of the national budget. Other aid agents also indicated that they recognized this as a credible objection to moving forward with electronic numbers: ‘We say that electronic numbers are needed, but when we recommend it to the Tax Service they say “no, our automated system is still not entirely in place, and the contacts database is not synchronized yet”. And yes, what kind of electronic system can there be in some regions? Some places do not even have computers. As in, the Tax Service places the accent on the technical side. They say that technical preparation is necessary, they want to play it safe.’204 ‘The Tax Service looks at all things digital with dread, as they must first finalize their automation, and then calculate things accordingly. They approach the annulment of the invoices very categorically. First, they will launch the automated database, and then it will be clear whether and how to proceed’.205 At the same time, some of the aid agents observed that the Tax Service would find the operational capacity to speed up the shift to electronic number if it were put under top-down government pressure to enact the reform: ‘If there was political will, they would tighten their belts, would work at an intensified pace, and would prepare the whole thing’.206 ‘Because there are no strict deadlines, the Tax Service is in no rush. If someone interferes, sets a concrete deadline, issues a government decision that from this date we change, then the Tax Service will be obliged to introduce the electronic numbers system. Accordingly, business is pushing for such a decision to be issued earlier’.207 However, as noted by both aid agents, the prime minister and other senior state officials were themselves highly risk-averse when it came to reform measures that concerned tax collection procedures. Hence, they were unprepared to push for a reform which the Tax Service portrayed as likely to disrupt the flow of tax revenues into the national budget. As I will discuss in the next section, in this context USAID-REFORMA decided that the way to advance the shift to electronic numbers was by engaging in technical work that would present the government with concrete guarantees of the reform’s fiscal prudence and economic benefits.

3. USAID-REFORMA/BGI’s engagement in technical work on VAT administration I closed the preceding section by reporting that in summer 2013 the Tax Service continued to insist that several conditions were still absent for a fiscally safe transition from high-security paper-based VAT invoices to a system of VAT invoicing based on electronic numbers. For one, tax officials argued that it was first necessary to identify alternative means of monitoring VAT compliance which would be as reliable as the high-security invoices. By itself, the VAT-tracking software that had just been introduced with IFC-BEE assistance was treated by the Tax Service as

204 aid agent 2 (2013 May 23) 205 aid agent 9 (2013 May 31) 206 aid agent 2 (2013 May 23) 207 aid agent 1 (2013 May 23) 87 insufficient for this purpose. Secondly, the tax agency noted that the IT infrastructure in many parts of the country was unfit for the proper functioning of an electronic numbers system. The Tax Service also pointed out that it was imprudent to begin the reform until the Tax Service completed installing and testing its new automated internal administration system (a separate reform funded by the ADB). Against this background of the Tax Service’s public interest objections to launching the reform, in spring 2013 USAID-REFORMA concluded that to turn the tide in favor of electronic numbers it was imperative to develop a more elaborate body of technical material which would show why and how the shift would boost rather than threaten national tax revenues. In the present section I examine the technical work that USAID- REFORMA and its successor project BGI engaged in on this objective. I discuss the nature of the technical work and of the projects’ engagement, the aspirations and expectations attributed to it, the reactions it got from other actors, and the consequences thereof for the reform. First I discuss these points for the year 2013, then for the years 2014-2015.

2013 After a series of meetings with government and business, in late 2012 the USAID- REFORMA project that had been launched that year decided to focus its fiscal reform component on indirect taxation.208 In February-March 2013 three foreign indirect taxation specialists commissioned by USAID-REFORMA visited Kyrgyzstan to review the state of affairs in this policy area and to propose scenarios for reform. The findings of the research mission were published in June 2013 in a document titled The policy of indirect taxation and tax administration (assessment and recommendations) (USAID 2013c), with contributions from a REFORMA- based national expert. Half of this seventy page-long study centered on VAT administration. Its conclusions were based on an analysis of existing procedures and possible alternatives, and on direct consultations with policy players. According to an aid agent, while talking to the foreign consultants and to USAID-REFORMA cadres in the weeks of the research mission, government and business actors flagged numerous aspects of VAT administration as pressing problems. This feedback inspired USAID-REFORMA to launch a project initiative on revising the VAT administration system, and to aim in particular at advancing the shift to electronic numbers.209 The project began its technical work in this direction with a detailed follow-up study on VAT administration. The decision to proceed in this way rested on an impression among project cadres that Kyrgyzstan’s inability to resolve its VAT invoicing troubles stemmed from the lack of solid technical evidence on what exactly must change and why. At some point in spring or summer 2013, USAID-REFORMA’s leadership concluded that what was needed in order to advance the shift to electronic numbers was an elaborate body of technical design and analysis on how to effectively overhaul the VAT administration system. As understood by some inside the project, here was an opportunity for USAID-REFORMA to be a game changer, given that it had the resources and mandate to deliver the technical design and analysis required. Thus, during an

208 aid agent 10 (2012 June 27); see also chapter 6 209 aid agent 10 (2013 July 9); USAID (2013d) 88 interview in July 2013 an aid agent commented as follows on the picture that had emerged during the research conducted by the foreign specialists earlier that year: ‘The issue is that it is very difficult to judge and that no one seems to be communicating clearly to what extent the reporting is complicated, at which moments, and what we should focus on to make the system more efficient and less corruption-prone. Even on fraudulent VAT firms there seems to be very little concrete information of how big of a problem it is, how much money is lost, how many such firms there are, which parts of the process exactly are corruption-prone, and how negative this is both for the budget and the economy.’210 According to the respondent, it was this experience of not being able to obtain clear answers from national actors that persuaded USAID-REFORAMA to design a follow-up study which would dissect the VAT invoicing process and deliver precise instructions on how to address its defects. The follow-up study would hence be directed at establishing the extent to which VAT reporting was a problem, and at spelling out the specific features that were an impediment for the private sector. In the words of the aid agent: ‘On the basis of this follow-up evidence-based study we hope to work with the counterparts in a very hands-on way on developing a proposal on how to reform VAT administration’.211 An internal report issued by USAID-REFORMA in October 2013 similarly informed that the project aimed to persuade the government to endorse legislative action on VAT administration with follow-up research and analysis that unpacked the nuts and bolts of VAT dysfunctionality and showed exactly how the problems could be tackled in a systemic manner: ‘The study [from early 2013] identified several recommendations to improve administrative processes in VAT registration and inspection that would have far greater impact on combatting fraud, but providing a concrete plan for VAT administrative reform required a more in-depth analysis of VAT administrative processes and procedures. Consequently, REFORMA designed a follow-on study to address specifically the Tax Service’s business processes associated with VAT administration, while determining where the major bottlenecks that exist in private sector compliance with VAT reporting. The goal of the study is to identify specific recommendations to improve the way in which the Tax Service administers the VAT regime to improve tax collections by reducing opportunities for fraudulent VAT activity while reducing private sector incentives to avoid VAT registration. The study will identify where the real burdens for VAT reporting and payment exist for the private sector and make recommendations for eliminating burdensome administrative requirements’ (USAID 2013g:26). How did USAID-REFORMA go about the technical work on the follow-up VAT administration study? In 2013 the project had two national tax experts among its permanent cadres. However, its explicit operational philosophy was to outsource as much work as possible to other Kyrgyzstani actors. Hence, in September 2013 USAID-REFORMA selected the private Kyrgyzstani firm MF Consulting to carry out the follow-up analysis on the status quo of VAT administration and to design a plan for revising the system (USAID 2014a). The two national experts who led the assignment as a representatives of MF Consulting were affiliated with the Chamber of Tax Consultants. One of them was the Chamber’s director Tatiana Kim. In addition,

210 aid agent 10 (2013 July 9) 211 aid agent 10 (2013 July 9) 89 in October 2013 ‘…REFORMA mobilized an international VAT advisor to work with MF Consulting in conducting the Tax Service business process review, undertaking surveys and focus groups and analyzing the results of these studies’ (USAID 2014a:5). In late 2013, when USAID-REFORMA launched its technical work on advancing the shift to electronic numbers as part of wider reforms to VAT administration, what was the attitude in government towards the prospect of suspending the high-security VAT invoices? At the time, state officials still argued that more technical guarantees were necessary in order to ensure that the transfer to electronic numbers would not undermine tax collection. Thus, at the Investment Council sitting in December 2013 the Tax Service stressed that as a precondition for reform a new VAT control mechanism must be found that could effectively replace the standing VAT invoices, and that further analytical work was required in order to achieve this: ‘On the suspension of the high-security VAT invoices the State Tax Service agreed, but with one condition – that it was necessary to introduce an alternative way of tightening control in this area. This was said on December 18 at the sitting of the Investment Council by the deputy chairman October Abdykaimov. “If we simply give up the high-security invoices, then there may be problems with fraudulent firms. There should be an alternative control option. Only then can we suspend the invoices,” he said. According to him, the issue requires further study and elaboration. “… Problems may arise with the budget, with the completeness of tax revenues. Secondly, in addition to legal factors there is the technical side.”’212 During the same event, while stating that the Ministry of Economy intended to eventually suspend the high-security invoices, a deputy minister noted that this must be done carefully, after conducting thorough analysis.213 However, in January 2014 USAID-REFORMA reported that the Tax Service, the Ministry of Economy and the Ministry of Finance had ‘expressed their willingness to change VAT registration procedures as well as to phase out the requirements for paper-based, high- security invoices’ (USAID 2014a:5). Consequently, USAID-REFORMA supplemented its contract with MF Consulting with the task of drafting a legislative proposal on these reforms (USAID 2014a). The two national private tax expert who represented MF Consulting proceeded with this task within the framework of a legislative working groups set up at the Ministry of Economy, whose lineup also included two officials from the ministry.214

2014-2015 USAID-REFORMA/BGI’s public newsletter from 2014-2015 suggest that during those years the project went ahead with its game plan of developing a comprehensive legislative and operational framework to enable a systemic overhaul of VAT administration (USAID 2014bd, USAID 2015ab). Judging from the content of this technical work, some of it was directed in particular at mitigating the Tax Service’s public interest reservations about electronic numbers. For one, the legislative work which the project engaged in targeted the tax agency’s argument that the high-security invoices had to be replaced with convincing alternative mechanisms for

212 Tazabek (2013 December 18b) 213 Information Agency 24 (2013 December 18) 214 legislative document 1a (2014 March) 90 monitoring and enforcing VAT compliance. Specifically, in 2014 the project’s grantee MF Consulting designed legislative provisions on a new type of VAT inspections and on new penalty measures for VAT fraud. These provisions rested on successful international practice. (As note above, MF Consulting engaged in this task as part of a working group at the Ministry of Economy). While reporting on its work-in-progress in June 2014, USAID-REFORMA continued to emphasize the analytical rigor to which it aspired in this policy design effort:

‘Based on surveys of both VAT-payers and State Tax Service officials, as well as a thorough review of VAT administrative processes, MF Consulting has redesigned and drafted Tax Code amendments to simplify invoicing procedures and improve the VAT credit and refund system. Proposed amendments eliminate the use of high-security invoice forms and replace them with a system for generating unique electronic invoice numbers, which REFORMA is supporting through software development for the State Tax Service… To combat VAT fraud, the proposed administrative changes strengthen voluntary VAT registration procedures and promote the adoption of a comprehensive system of preregistration surveillance that has proven effective in combatting fraud in other countries. MF Consulting also drafted amendments… to strengthen criminal liability for phantom businesses that carry out VAT fraud…’ (USAID 2014d:9). The citation above informs that the project also took up the task of developing the computer program necessary for adopting a VAT invoicing system based on electronic numbers. At the same time, in 2014 USAID-REFORMA became engaged in technical work which (again, judging from its content) was intended to address the Tax Service’s concern that its regional offices were operationally unprepared to roll out any new invoicing procedures. For instance, the project paid MF Consulting to produce a procedural manual for the Tax Service which included instructions on the prospective electronic numbers system and on the other measures in its legislative draft. Moreover, it promised to organize trainings that would help the tax agency use this manual: ‘MF Consulting also identified significant deviations among tax officials in the conduct of VAT administrative procedures... Consequently, MF Consulting drafted an Administration Procedures Manual for tax authorities to standardize procedures across all VAT administration functions’ (USAID 2014d:9). ‘MF Consulting will also draft chapters to be inserted when recommended procedural changes set forth in the proposed Tax Code amendments have been accepted into law. Before the end of the project, MF Consulting will train tax officials to use the documented operations manual’ (USAID 2014c:4). In addition USAID-REFORMA sought to demonstrate to state officials the operational soundness of VAT invoicing based on electronic numbers by sending them to Belarus and Kazakhstan, where they could observe the system in action. Notably, these study visits took place in February 2014 as part of the project’s wider support to Kyrgyzstan’s preparations for its impending accession to the Eurasian Economic Union single market bloc (EAEU, led by Russia): ‘REFORMA is sponsoring a study tour for State Tax Service and Ministry of Economy officials to Kazakhstan and Belarus to learn about VAT administrative requirements under the EAEU. The group

will also observe an automated VAT invoicing system, which the Kazakh tax service will soon introduce’ (USAID 2014b:5).215 In 2014-2015, how did Kyrgyzstan’s government and parliament react to the technical work carried out by USAID-REFORMA (and later BGI) on VAT administration? MF Consulting finalized its legislative proposal on electronic numbers and other VAT administration measures in June 2014. The bill did not reach parliament before the project’s September 2014 closing date as USAID-REFORMA had hoped for. Hence, successor project USAID-BGI took over the reform initiative. Under USAID-BGI, MF Consulting’s proposal was submitted by the Ministry of Economy to government in January 2015, sent to parliament in May 2015, and adopted by parliament in a first reading on June 24th 2015.216 At that point the legislative process got stranded (see below). While facing this situation, the project continued to engage in technical work on the practical side of the reforms. Thus, in May-June 2015 it conducted a large-scale training program for tax officials on the new procedures introduced in MF Consulting’s legislative proposal. As reported in a USAID-BGI newsletter in July 2015, by then the Tax Service had decided to begin adopting some of the revisions in the bill without waiting for it to pass in parliament. According to the newsletter, it was this decision that led to the project organizing the trainings. The newsletter also suggests that the Tax Service’s decision was informed by the agency’s desire to optimize its operations before assuming new responsibilities under the EAEU, the accession treaty to which came into force in August 2015: ‘Despite the delay in passing reform legislation, the STS [State Tax Service] determined to make changes in business processes even before legislation is adopted, particularly since the EAEU requires that the STS begin collecting VAT for trade transactions that was previously collected by the State Customs Service. Consequently, BGI subcontractor, MF Consulting, conducted a series of training seminars in May and June for STS officials throughout the Kyrgyz Republic. Roughly 170 tax inspectors participated in training that addressed administrative changes reflected in the proposed VAT amendments as well as those dictated by the EAEU. MF Consulting is also producing a training video for the STS to instruct inspectors nationwide and a brochure that answers taxpayer questions on the new VAT procedures’ (USAID-BGI 2015b:11-12). Did the trainings cover the provisions on electronic numbers? USAID-BGI’s newsletter is not explicit on this point. However, the centrality of the reform to MF Consulting’s proposal suggests that they did. So does another statement in the July 2015 newsletter, where the project explicitly mentions electronic numbers while promising to continue assisting with reform practicalities after the parliament adopts MF Consulting’s legislative proposal. As I see it, this promise was intended as a guarantee that the Tax Service will be able to implement the reforms promoted by the project without serious operational setbacks: Once Parliament passes VAT reform legislation, BGI will continue to help the State Tax Service implement process changes that will significantly simplify VAT administration, including assistance in securing electronic signatures from taxpayers who must begin to submit VAT reports through the

215 See also USAID (2014d). Kyrgyzstan signed its EAEU accession treaty in December 2014 and ratified it in May 2015. 216 BGI REFORMA (2015a); legislative document 4 (2015 May); legislative document 5 (2015 June) 92

internet. BGI will also monitor the impact of administrative improvements by surveying VAT payers’ (USAID-BGI 2015b:11-12). A short law replacing the high-security VAT invoices with an electronic numbers system was adopted in June 2016, i.e. a year later than anticipated by USAID-BGI in the above citation (see section one). This law was based on MF Consulting’s proposal, but excluded most of the other measures promoted by USAID-REFORMA/BGI as part of its reform idea on a systemic overhaul of VAT administration (the measures remained uncodified in December 2016). Hence, the stricter penalties for VAT fraud and the new VAT inspections designed by MF Consulting as new VAT compliance control mechanisms proved unnecessary for suspending the high-security invoices. In other words, at the end the government no longer treated these provisions as essential guarantees of a smooth transition to the electronic numbers system, having demanded such guarantees in the earlier years. Moreover, the adoption of legislation on electronic numbers in only in June 2016 suggests that, a year earlier, MF Consulting’s draft law got stranded because of measures which it proposed on other aspects of VAT administration (see below).

Case study findings: reform analysis from the perspective of the research questions

What kinds of technical work did foreign aid actors engage in to advance the reform, and how? IFC-BEE and USAID-REFORMA/BGI began their engagement in technical work on VAT administration with research. IFC-BEE assessed Kyrgyzstan’s VAT procedures in two surveys that examined how small and medium businesses experienced the country’s rules and practices of private sector governance (see findings section in chapter 3). Published in 2010 and 2013, the two surveys outlined the shortcomings of Kyrgyzstan’s VAT administration practices and provided reform recommendations. These centered on suspending the third copy and five appendixes of the VAT return form, and on shifting from high-security paper-based VAT invoices to an invoicing system of electronic numbers. The surveys’ analysis and advice on VAT administration was relatively brief and basic, as the topic was one of the many covered. In comparison, half of the seventy page-long study on indirect taxation funded by USAID-REFORMA in early 2013 addressed VAT administration. This study was conducted by three foreign consultants, with input from a national expert. It was based on conversations with national policy players, and on deskwork analysis of laws and administrative practices. The study’s evaluation of Kyrgyzstan’s VAT administration system was detailed and extensive, as were its reform recommendations. Replacing high-security VAT invoices with electronic numbers was one of its main proposals. What other kinds of technical work did the projects sponsor in order to promote the VAT administration reforms recommended in their surveys and study? IFC-BEE primarily advanced its ideas by engaging in the policy discussions on business taxation taking place between private and public sector actors in Bishkek. These discussions typically involved the exchange of analysis on the content and merits of the reforms under consideration, and hence comprised a type of technical work. IFC-BEE initiated, funded and provided practical support to various inter- stakeholder policy meetings that covered the topic of VAT administration. Some of these events

93 were formal and focused specifically on VAT procedures. Others were informal and/or revolved around business taxation in general. IFC-BEE also contributed substantive content to such meetings. More broadly, during the discussions it was common for IFC-BEE tax experts to state their professional opinions on the proposed reforms. Sometimes these opinions rested on the results of other technical work supported by the project (see next subsection). USAID-REFORMA/BGI became directly engaged in technical work on designing revisions to VAT administration and on drafting reform legislation. Based on the findings of its indirect taxation study, in the summer of 2013 the project decided to promote a comprehensive overhaul of Kyrgyzstan’s system of VAT administration. The shift to electronic numbers was a pivotal component of this plan. First, USAID-REFORMA enlisted the national consulting firm MF Consulting to conduct an in-depth follow-up study of the country’s VAT administration practices, and to develop a reform concept based on this research. A foreign consultant was recruited to assist with the assignment. Next, the project commissioned MF Consulting to draft a legislative proposal on its reform concept. The two private experts who represented MF Consulting drafted the bill on behalf of a working group convened at the Ministry of Economy for this purpose, which also included two state officials. In addition, USAID-REFORMA/BGI led the technical work on the practical side of the reforms. For instance, while its legislative proposal was being considered in parliament, the project hired MF Consulting to conduct trainings for regional tax inspectors on some of the novel procedures. Moreover, it promised to continue helping the tax agency with the operational side of the reforms once these were adopted into law. In the next subsection I give more examples of such operational assistance

What purposes was the technical work meant to serve in the efforts to advance the reform through legislative politics, how, and why? Primarily, the technical work supported by foreign aid actors in the realm of VAT administration was mobilized to prompt reluctant state officials to endorse concrete legislative steps on the two central reforms examined in this chapter (simplifying the VAT form by suspending its third copy and five appendixes; replacing the hard-security paper-based VAT invoices with a system of electronic numbers). Let’s begin with USAID-REFORMA/BGI. In part, the project directed its technical work on VAT administration at persuading hesitant state actors to advance the shift to electronic numbers, by providing various kinds of technical evidence that would invalidate the misgivings raised to justify the reform’s deferral. USAID- REFORMA/BGI employed a range of technical work to produce such evidence: developing new VAT compliance control mechanisms to compensate for the invoice suspension; delivering operational guidelines and trainings to assure the Tax Service that it would be able to handle the shift without disruptions to tax collection; developing software that generated the electronic numbers; organizing study visits abroad to demonstrate the reliability of the promoted system. IFC-BEE similarly employed the technical discussions that it facilitated on the case study reforms as a platform for its attempts to prompt the Tax Service to approve the advancement of reform legislation. During such discussions, IFC-BEE appealed to technical evidence in order to

94 persuade the tax agency that the promoted revisions would not undermine tax revenues. Thus, one of the specific concerns that the Tax Service raised as a motive for deferring the reforms was that they would significantly weaken its ability to monitor and enforce VAT compliance. In order to convince the tax agency otherwise, IFC-BEE relied in part on technical work that explicitly focused on the case study reforms. A case in point are the inter-stakeholder meetings initiated by IFC-BEE in 2011, during which a foreign expert invited by the project discussed her country’s successful transition to a simpler VAT form and electronic numbers. In addition, in order to persuade the Tax Service to initiate the shift to electronic numbers, IFC-BEE referenced technical work that it had conducted on a different reform to VAT administration. This reform was the development of a computer module for tracking VAT payments. While the module was being installed at the Tax Service, IFC-BEE and its business allies set out to argue to tax officials that thanks to the new software the high-security invoices lost their added value as means of controlling VAT compliance. The business lobby also used the technical discussions which IFC-BEE facilitated on the VAT and on other tax policy matters for the purpose of prompting state officials to approve legislative action on the case study reforms. In their attempts to achieve this purpose, business leaders framed the Tax Service’s fiscal objections as short on technical evidence. At the same time, they emphasized the plain and serious hurdles to business which the reforms were meant to ameliorate. Thus, business leaders used the project-facilitated meetings to argue directly to state officials that there were no paramount fiscal grounds for reform deferral; and that the changes were clearly and urgently needed to help the struggling private sector. On some occasions the business lobby substantiated its arguments with technical evidence that had been provided by IFC-BEE. During the debates, business leaders sought to come across as the party with the winning public interest arguments. It is possible that thereby they aimed to prompt the Tax Service to endorse legislative action by persuading it that the likelihood of reform causing fiscal damage was lower than that of it boosting tax revenues by helping business. However, it is more probable that the business lobby went foremost for the effect of obliging the Tax Service to advance the reforms: by exposing the tax agency’s objections as analytically weaker than the arguments in favor, so as to delegitimize its position. This inference rests on the chastising tone adopted by business, and on the reported firmness of fiscal risk-aversion among tax officials. It also rests on the fact that the reform discussions often took place before a wider audience of policy players and the media – which made them well-suited for manipulating the Tax Service’s reputational concerns. These observations link up to my explanation for why both aid actors and business leaders aspired to employ technical work in the ways described above for the purpose of securing the government’s reform endorsement. Firstly, behind such aspirations was the widespread understanding that state actors attributed significant political risk to the prospect of being criticized in government and parliament for advancing reforms that appeared fiscally perilous and/or could be credibly portrayed as such. Policy players knew that in order to mount a realistic attempt at securing the government’s approval, they had to credibly challenge its concerns about the fiscal risks involved in a reform.

To do so, they needed supporting technical evidence, which was hence in high demand among pro-reform policy players. Consequently, so were foreign aid contributions to technical work that could help produce and/or communicate such technical evidence to state officials. Thus, IFC- BEE and USAID-REFORMA/BGI were set on mobilizing technical evidence to show state actors with skin in the game that the reforms would not jeopardize tax collection: the projects recognized that otherwise there was little chance of persuading the fiscally risk-averse officials to endorse the revisions. The same reasoning informed IFC-BEE’s intent to convene regular technical discussions between government and business: the meetings enabled the project to publicize its technically-backed arguments on the reforms’ fiscal merits. Secondly, given that such publicizing was done in part by business leaders, IFC-BEE’s penchant for organizing inter-stakeholder policy meetings was defined by the project’s perception that business criticism was also considered a significant political risk by state officials. In addition, IFC-BEE understood that this attitude on the part of the government was amplified by the pervasiveness of public-private debate on private sector matters in the media and at media- covered events. Likewise, an awareness of the political risk attributed by state actors to business criticism fostered the business lobby’s interest in the technical discussions convened by IFC- BEE, and in the project’s provision of pro-reform technical evidence. Business leaders knew that state officials considered it politically risky to be accused by the business lobby of failing to adequately support the private sector. Consequently, they were determined to use the inter- stakeholder meetings facilitated by IFC-BEE as an opportunity to reprimand the Tax Service before a wider policy audience for hesitating to enact the reforms. To maximize the chances of such public pressure obliging the Tax Service to endorse the revisions, they sought to discredit the agency’s budget-security related objections as resting on weak technical foundations. As stated earlier, some of the technical evidence which they employed for this purpose was derived from other technical work facilitated by IFC-BEE. While the shift to electronic numbers was one of USAID-REFORMA/BGI’s pivotal reform objectives, the project also aimed to advance a comprehensive overhaul of Kyrgyzstan’s VAT administration. This broader reform plan comprised numerous procedural changes intended to make the VAT returns process fairer and easier for businesses. It also included measures designed to strengthen the Tax Service’s capacity to administer VAT flows – as desired reforms in their own right. The purpose of the project’s technical work on this broader reform plan was to broker a compromise between government and business on a revamped VAT administration system that would be more effective at securing tax revenues and at fostering private sector productivity. USAID-REFORMA/BGI sought to enable this compromise by devising reform content which would persuade both parties that the concessions required from them would be adequately offset by other measures. My hunch is that the project decided that uniting numerous ‘pro-business’ and ‘pro-fiscal security’ revisions in a single legislative package was the most politically promising way of securing any of these reforms to VAT administration.

For one, the project’s decision was defined by its awareness of the government’s anxiety about budget security-related criticism. USAID-REFORMA concluded that in order to stand a chance of addressing the VAT administration problems flagged by business, it would need to reassure state officials that the proposed solutions would not weaken fiscal revenues. Meanwhile, USAID-REFORMA also knew that the government was similarly wary of provoking a backlash from business. Accordingly, it concluded that in order to address the issues raised by the Tax Service it would need to compensate the business lobby. In sum, the project’s strategy to combine multiple ‘business-friendly’ and ‘budget-friendly’ reforms in a single proposal rested on the premise that this would mitigate the challenges which the reforms would face separately, due to the government’s concerns about the political repercussions of budget-related and business criticism. Once again, it appears that both concerns were amplified by the fact that in Kyrgyzstan in 2010-2016 it was standard practice for business leaders and state actors to engage in critical policy discussions that were often covered by the media.

What can be said about the extent to which the technical work served the purposes envisioned? My take on the data is that policy players were able to book progress on the case study reforms when there was a favorable alignment in the relative and/or combined strength of the following factors: (a) the apprehension in government about being reprimanded for pursuing fiscally risky reforms; (b) the government’s wariness of business pressure, and in particular of being subjected to business criticism before a wider audience; (c) the technical material supporting the reforms. For instance, for a while in 2010-2011 the Tax Service abstained from finalizing a decree on suspending the third copy of the VAT form. It did so on the grounds that the reform was too likely to undermine its ability to monitor VAT payments. The Tax Service did not waver from this position despite business leaders publicly dismissing it as overblown, and despite IFC-BEE inviting a foreign expert to speak about her country’s positive experience with a similar measure. This suggests that for some time the degree of political risk which the tax agency attributed to the prospect of facing budget-related criticism as a consequence of simplifying the VAT form eclipsed its worries about being criticized by business for postponing the measure. It also suggests that the Tax Service’s concerns about the former type of criticism outweighed the persuasiveness of the technical evidence mustered by the reform’s supporters. However, at some point in 2011 a business leader argued in public that by delaying the simplifications the Tax Service rendered useless the new online tax payment service that it had recently launched with IFC-BEE assistance. Thereby the business leader problematized the new software before a wider policy audience in a way that was difficult to deny. In response, the Tax Service approved the reform. The tax agency retained its fiscal reservations about suspending the third copy. However, these were now surpassed by the prospect of being publicly criticized by business for botching a different reform that was meant to be a landmark for the Tax Service. In the case of VAT invoicing based on electronic numbers, in late 2013 state officials continued to insist that alternative means for controlling VAT compliance must be developed

97 before it was fiscally safe to let go of the high-security invoices. The government sustained this position despite the argument promoted by IFC-BEE and business leaders that the new digital VAT-tracking module was enough of a safeguard. Thus, in the case of electronic numbers the government’s risk-aversion towards a reform which intervened with tax collection outweighed its concerns about business criticism. It also outweighed the technical persuasiveness of the pro- reform arguments championed by IFC-BEE. However, by the start of 2014 the government was formally cooperating with USAID-REFORMA’s legislative drafting effort on the shift to electronic numbers. USAID-REFORMA had joined the reform process a few months earlier. Back then it announced that it will conduct thorough research on VAT practices in Kyrgyzstan as a first step in devising new VAT compliance control mechanisms. By proceeding with this plan, the project demonstrated that concrete means of compensating for the suspension of the high- security invoices would be made available in the near future. I propose that the strength which the project’s technical work thereby had as evidence of the reform’s fiscal prudence convinced and/or compelled state actors to agree to a legislative initiative on electronic numbers. Nevertheless, the parliament only passed USAID-REFORMA/BGI’s provisions on electronic numbers in June 2016, after the project’s legislative proposal had been stripped of the new mechanisms for controlling the VAT (and of most other provisions). For one, this suggests that by then state officials were no longer worried about the potentially negative fiscal effects of suspending the VAT invoices to the extent that they would not approve the reform without the replacement mechanisms. How come? I propose that the government’s attitude had changed because since 2014 foreign aid actors had engaged in technical work which provided sufficient operational evidence to show that the electronic numbers would not turn into a fiscal fiasco. Some of this technical work was courtesy of USAID-REFORMA/BGI. In addition, it was probably crucial that in 2014 the ADB finished installing at the Tax Service a new automated system for internal administration. By 2016 the tax agency had had considerable time to get used to this new technology. It would have hence felt more confident about taking on further changes to tax procedures. After all, the aid agents whom I talked to in 2013 dismissed the Tax Service’s concerns about the need for alternative mechanisms for detecting VAT fraud and errors. However, they acknowledged the validity of the tax agency’s other public interest arguments for delaying the shift to electronic numbers: that regional tax offices were technically unprepared to ensure a smooth transition; and that the reform was too likely to disrupt tax collection while the Tax Service was still installing and testing its new internal administration system. There is a second implication to the fact that USAID-REFORMA/BGI’s legislative proposal got stranded in parliament, while its provisions on electronic number were adopted after most other measures were scrapped from the bill. Namely, these developments indicate that at the end the project did not succeed at brokering a compromise between government and business on an overhaul of VAT administration. My take on why this happened is as follows. The government’s fears of budget-related criticism and its desire to avoid the political risks associated with business pressure combined to make comprehensive reforms a politically improbable prospect (regardless of the extent to which USAID-REFORMA/BGI succeeded at devising a range of reforms that

98 appeared clearly beneficial to government, and a corresponding set of attractive measures for business). Among the many provisions in the project’s bill, something was bound to prove unacceptable to someone in government, parliament or business who was powerful enough to block the proposal. Meanwhile, if one provision was excluded, other measures in the bargain were likely to become unacceptable to other influential actors (who no longer felt adequately compensated for the concessions required from them). I suspect that it was a scenario of this kind that prevented the approval of the project’s original legislative proposal in parliament.

Chapter 6. Reforming indirect taxation policy

In December 2015, the parliament of Kyrgyzstan adopted a law that revised the country’s indirect taxation policy.217 As of January 2016, this law suspended the sales tax for all exports, and for all transactions which Kyrgyzstan’s businesses made outside of the country. As of June 2016 it also eliminated the sales tax on all domestic transaction subjected to the VAT that were made electronically. The revisions meant that VAT payers in Kyrgyzstan would no longer be subjected to dual indirect taxation, except for on domestic cash-based transactions. USAID- REFORMA became involved in indirect taxation policy reform in Kyrgyzstan in the first half of 2013. What kinds of technical work did the project engage in to promote the case study reform, and how? What purposes was the technical work meant to serve in the efforts to advance the reform through legislative politics, how, and why? Lastly, what can be said about the extent to which the technical work served the purposes envisioned? These are the research questions of the present case study, which I answer explicitly in the ‘case study findings’ section at the end. In order to arrive at my answers, first in section one I introduce the policy issue at stake. I also outline the reform advice advanced in USAID-REFORMA’s 2013 study and the extent to which this advice was reflected in the law adopted in December 2015. Next, in sections two and three I examine the technical work that USAID-REFORMA/BGI engaged in on the reform from the perspective of the aspirations, expectations and reactions associated with it. In the chapter’s second section I do so for the study that USAID-REFORMA conducted in 2013. In section three I look at the technical work which USAID-REFORMA/BGI engaged in after that.

1. Indirect taxation policy reform in Kyrgyzstan and the revisions advanced by USAID- REFORMA The new Tax Code that went into force in Kyrgyzstan in January 2009 decreased the VAT rate from 20% to 12%. In order to compensate for the fall in VAT revenues expected as a result, a new sales tax was also introduced (IFC 2010). The business lobby criticized the latter measure. It argued that the sales tax was harmful for the private sector because of its cascading nature and because of its overlap with the VAT (both are indirect taxes levied on the same tax base).218 The state authorities promised to phase out the sales tax by annually lowering its rate. However, after doing so by 0.5 % in 2010 the government announced that for the foreseeable future it was too risky to go any further, considering the precarious state of the national budget.219 By 2012 some national private tax experts and business leaders argued in favor of suspending the VAT rather than the sales tax.220 The case made against the VAT was that it was not fit for the social context of Kyrgyzstan. The VAT was described as the most corruption-prone and economically distorting tax in the country, because of its complex administration and because of Kyrgyzstan’s weak

217 legislative document 14 (2015 December); Tazabek (2015 December 31) 218 private expert 2 (2012 April 24) 219 private expert 2 (2012 April 24) 220 ‘Problems with VAT administration triggered a wave of public opinion to eliminate the VAT altogether and increase the sales tax rate to compensate for VAT collection shortfalls’ (USAID 2013g:25); see also Information Agency 24 (2012 February 27). 100 culture of tax compliance.221 Accordingly, the option of suspending the VAT was being examined by some of the government’s technical experts. However, state actors responsible for fiscal policy continued to object that they did not see a way of abolishing or scaling back the VAT without jeopardizing the national budget.222 USAID-REFORMA was launched in early 2012. Towards the end of that year the project decided to help Kyrgyzstan address the problem of the VAT-sales tax overlap.223 In June 2013 it published a study which advised the government on how to best reform indirect taxation policy (USAID 2013c, see next section). This study concluded that the overlap, the cascading nature of the sales tax, and the problems associated with the design and administration of the VAT made the indirect taxation system unduly costly for business. At the same time the study stressed that these problems must be addressed in a way that did not undermine tax revenues: ‘Crucially: under the current system taxpayers must fulfill obligations on two taxes. The business sector perceives the VAT as an extremely complex tax which requires considerable resources for the fulfillment of tax obligations that entail an incorrectly determined burden, which is placed on it unevenly and unjustly. The sales tax is perceived to be simpler, but also more problematic because of its cascading nature. The main aim of the study on the tax policy component is to overview two tax systems and to consider a set of possible options which have a neutral effect on the revenue side of the national budget for the purpose of rationalizing the system of indirect taxation and developing recommendation on the most acceptable approach to tax policy’ (USAID 2013c:3-4). As its preferred solution to the VAT-sales tax overlap, USAID-REFORMA’s study proposed eliminating the sales tax entirely and instead subjecting businesses under the VAT-registration threshold to a nominal VAT based on turnover, without the right to VAT returns.224 This solution also entailed increasing the VAT rate to 13% in order to compensate the budget for the projected loss of sales tax revenues. In addition the study considered alternative solutions to the VAT-sales tax overlap, and urged against them. It argued that the option of limiting the sales tax to businesses below the VAT registration threshold could only be a transitory solution because it would not spare Kyrgyzstan the costs of administering two indirect taxes. It also objected as follows to the option of suspending the VAT instead of the sales tax, and to the option of increasing the VAT registration threshold: ‘…given the substantial difference in the tax revenues coming from the VAT and the sales tax it simply appears impossible to offset the lost revenues with a higher sales tax rate. On substituting the VAT with the sales tax distortions to economic indicators could emerge because of the cascading sales tax with the higher rate necessary to compensate for the VAT. Kyrgyzstan would become a sales tax

221 private expert 2 (2012 April 24) 222 private expert 2 (2012 April 24); government 4 (2013 June 20); Information Agency 24 (2012 February 27). According to USAID-REFORMA, there were also other concerns behind the government’s position: ‘Despite growing popularity of this proposal, even among public officials, the Government is aware that the elimination of VAT would jeopardize its international trade competitiveness and its standing with international donors’ (USAID 2013g:25). 223 aid agent 10 (2013 July 9); USAID (2013a) 224 The options presented in the study were: A) annul the VAT, increase the sales tax; B) raise the VAT registration threshold to KGS 10 million C) replace the sales tax and/or the VAT with a tax on retail trade; Di) abolish the sales tax, decrease the VAT registration threshold to KGS 3 million, raise the VAT by 2%; Dii) suspend the sales tax for registered VAT payers, increase the VAT by 1.5-2% (second best option); Diii) abolish the sales tax, create a category of nominal VAT payers for businesses below the KGS 4 million threshold (subjected to a simplified system), set the VAT rate to just below 14% (recommended). 101

island in a VAT world… The experts also considered the possibility of raising the VAT registration threshold to KGS 10 million, which is the proposal insisted upon by the business community. This proposal, however, could exacerbate many of the problems currently faced by business. It will increase the incentive to avoid VAT registration… It will also increase the inequality in costs between those who are registered and those who are not’ (USAID 2013c:6). Moreover, in the study USAID-REFORMA announced its plans to develop a proposal on lowering the VAT registration threshold while helping Kyrgyzstan reform its VAT administration so as to make the VAT more suitable for smaller businesses. Finally, the study argued in favor of annulling the VAT exemption in agricultural processing. USAID-REFORMA promoted the revisions recommended in the June 2013 study until spring 2014, when it ended its formal activities on indirect taxation policy (see section two). When in December 2015 the parliament passed a law that potentially exempted all VAT-payers from the sales tax, this law did not resolve the VAT-sales tax overlap in the way that had been favored by USAID-REFORMA.225 Instead, the new law decreased sales tax coverage while bypassing the project’s core advice, which urged the government to raise the VAT rate and to abstain from reducing VAT coverage. Thus, the sales tax was suspended for exports, for transactions made outside of Kyrgyzstan, and for digital domestic transaction subjected to the VAT. Meanwhile, the VAT rate remained at 12% and the VAT registration threshold was raised from KGS 4 to KGS 8 million.

2. USAID-REFORMA’s study on indirect taxation policy reform The first kind of technical work that USAID-REFORMA engaged in on the case study reform was a research mission. In February-March 2013 three foreign consultants commissioned by the project visited Kyrgyzstan to assess the country’s indirect taxation policy and administration. Regarding the former, the consultants were tasked to ‘recommend the optimal solutions for VAT and sales tax policy based on an analysis of the potential impact that alternative solutions and economic scenarios have on tax receipts’ (USAID 2013a:5). As part of their research the consultants conducted deskwork and met with state officials and business leaders. The mission’s conclusions on how to best resolve the VAT-sales tax overlap were first presented separately to a handful of government and business actors in late March 2013 (USAID 2013g). The final report was published in June 2013 as Indirect taxation and administration (assessment and recommendations) (USAID 2013c). What was sought and expected from USAID-REFORMA’s research mission by the project and by other actors? How did national actors react to the project’s study? In rest of the section two I discuss the case study reform from the perspective of these questions. The first subsection examines Kyrgyzstan’s debate on indirect taxation policy in 2012, and that year’s decision by USAID-REFORMA to fund a study on the matter. The project’s research mission in 2013 and its immediate aftermath are examined in the second subsection.

225 legislative document 14 (2015 December); K-News (2016 February 4). For all cash-based transactions subjected to the VAT, the sales tax rate was kept at 1% in trade and at 2% in all other areas, with the exception of banking and telecom. For all other transactions, the sales tax rate was set at 2% in trade and at 3% in all other areas. The single tax rate was halved for all electronic transactions. The law was signed by the president on the same day, i.e. on December 31st 2015. 102

2012 In the last quarter of 2012 USAID-REFORMA met with national actors to discuss which issues the project should target in its taxation component. Both state officials and business leaders asked USAID-REFORMA to address the VAT-sales tax overlap.226 According to an aid agent, no other foreign aid actor was prepared to get involved with this politicized problem. And so, the project decided to step into the space.227 It was agreed that USAID-REFORMA would finance an indirect taxation policy study by foreign experts which would advise on the optimal course of reform. At the time, what did national actors expect from such a study? As stated in section one, in 2010-2012 the government generally maintained its position that any proposal on revising indirect taxation policy must be backed by evidence showing that it would not undermine tax revenues. This attitude aggravated the business lobby. In May 2012, a business leader observed that it had brought the efforts to resolve the VAT-sales tax overlap to a standstill. The respondent also highlighted that a public discussion was ongoing on the matter: ‘The Chamber of Tax Consultants’ director Tatiana Kim recently said, “let’s suspend this VAT and calm down”, in February 2012 or so, at the Investment Council. Then the internet published it. Some MPs, I believe, spoke in favor. Then again, someone in parliament or government said, “oh no, this cannot be done, it is necessary to calculate everything first!” We say let’s decide and leave one of the two taxes. Let’s suspend the VAT – “oh no, this cannot be done”. OK, let’s suspend the sales tax and do something about the VAT, say raise the threshold from 4 to 30 million. And here all “let’s” end.’228 In April 2012, a Kyrgyzstani private expert similarly reported that indirect taxation policy reforms were in a state of impasse. However, this respondent emphasized that further technical analysis was necessary in order to pitch a reform proposal. She also noted that a heavy workload prevented national experts from carrying out such an analysis: ‘I cannot say that anything has been reached. There is a nominal working group. We analyzed what information should be collected for developing an economic rationale for a reform proposal. But unfortunately, due to the busyness of the entire working group we have not met for a very long time and there are practically no results… For the moment, no concrete proposal has been developed. There is a shortage of capacity. Our working group at the Methodological Council should be working on it, but we are short on time.’229 What was it that made the VAT-sales tax overlap such a complex problem? According to the private expert, the challenge was to find a technical solution that struck a viable balance between the conflicting interest around indirect taxation policy. However, Kyrgyzstan’s tax specialists did not have sufficient time and expertise to develop such a politically-feasible technical solution. Consequently, analytical power from abroad was anticipated as a way out of the resulting reform impasse. In May 2013, this was the gist of the respondent’s explanation of why the government had reached out to USAID-REFORMA for assistance:

226 aid agent 9 (2013 May 31); aid agent 10 (2013 July 9); aid agent 16 (2013 July 25); business 10 (2013 July 12) 227 aid agent 10 (2013 July 9) 228 business 7 (2012 May 2). See chapter 3 for the Investment Council. 229 private expert 2 (2012 April 24). See chapter 3 for the Methodological Council. 103

‘The government had adopted the objective in its reform program – first for last year, then it shifted to this year – to develop a concrete proposal on what to do with these two taxes. The budget is against annulling the sales tax without raising the VAT. Business objects to raising the VAT to compensate for annulling the sale tax, and the Methodological Council experts also object to this. And thus such a contradiction emerged. And I think it was more to throw these matters off the government’s shoulders that the foreign experts were invited.’230 Another private expert similarly indicated that the launch of USAID-REFORMA was welcomed by the government and by national tax specialists as an opportunity to outsource a policy problem which required more time and expertise than was available in Kyrgyzstan: ‘An independent study is desirable. Otherwise we ourselves will start messing about. We have plenty of other responsibilities. The foreign consultants knew how indirect taxation policy choices happened in other places. The VAT had been introduced in many countries, and with much strain. Deloitte [which implemented USAID-REFORMA] is well known in the field of tax policy. So, the project appeared, and a request was underway.’ 231

The respondent also noted that by the end of 2012 the problem of dual indirect taxation ‘had indeed ripened’. Why would this have been the case? Some of the answers I received to this question suggest that after three years of facing business criticism for promising to address the issue but taking no action, the government was keen to appease the private sector with a policy effort on the matter. For instance, judging from comments made by a business leader, in late 2012 the government may have been particularly interested in showing its commitment to improving business conditions because it had just been reinstalled under a new leadership: ‘We, the business community, are talking about this question for three years now. After the formation of the new government I myself stated at a conference that “if you want to advance reform, start there at least”. And then the government made a request to REFORMA to carry out the study.’232 Similarly, an aid agent mentioned the appeals which business leaders made on the government to live up to its reform promises as one of the reasons why the authorities commissioned an indirect taxation policy study from USAID-REFORMA. Moreover, the respondent indicated that the World Bank Doing Business survey’s negative assessment of the sales tax had reinforced the political weight of the business lobby’s position: ‘The government includes this matter in its plans every year. But, as always, there are plans, while the government acts more carefully, considering our budget situation. The phrasing was always “to consider the question”. And so it seems that the peak has come when the government feels that it is time. And there is certain pressure from business. Also, the sales tax that dramatically decreased our Doing Business rating, due to its cascading nature.’233 According to the statements discussed so far, in 2012 state officials and national private experts expected a prospective USAID-REFRORMA study to identify a technical solution to the

230 private expert 2 (2013 May 15) 231 private expert 3 (2013 June 7) 232 business 11 (2013 July 29) 233 aid agent 16 (2013 July 25). Doing Business is an annual World Bank survey that ‘provides objective measures of business regulations and their enforcement across 190 economies and selected cities at the subnational and regional level’ and compares the scores and their yearly changes across the surveyed countries (https://www.doingbusiness.org/en/about-us). 104

VAT-sales tax overlap which would allow direct legislative headway by reconciling the core concerns of government and business. However, my interview material also suggests that some of these actors wanted the study’s recommended solution to embody an analytically-justified arrangement in which the sales tax was kept instead of the VAT. Consider the following comments by a national private expert: ‘I did not go to their final presentation because I understood that they will recommend what I already know. Initially, I posed a different question to them. Firstly, show to what extent the VAT has become a cascading tax. Secondly, assess whether there is a possibility to develop an ideal VAT system, and if not, propose an alternative in the form of a sales tax. This they did not do.’234 I elaborate on this finding in the next subsection, where I also demonstrate that USAID- REFORMA’s study on indirect taxation fell short of the national actors’ hopes and expectations.

2013 In the last citation above a private expert argued that USAID-REFORMA’s research mission should have assessed whether it was possible to correct the malfunctioning VAT. She then informed that the project disregarded this task. In a different interview another private expert highlighted that more national tax specialists (including herself) were of the opinion that the project’s study should have paid greater attention to the option of suspending the VAT: ‘Perhaps their assignment was not formulated correctly. Perhaps their thinking is such that they are used to working with the VAT and did not want to work with the sales tax. In short, at all these stages they presented this work, but it was not received with great enthusiasm’.235 At the same time the respondent noted that USAID-REFORMA’s foreign experts failed to deliver the analytically authoritative and elaborate solution which she – as a tax specialist working on the reform – had hope for from the project’s study: ‘We met several times, in public groups and in working groups. But to say that they presented something amazing, something that we did not know – no. Moreover, from these experts we expected more that they would draw on international experience and would carry out an analysis for us. For instance, how does this work in the USA, in Japan, perhaps it is possible to transfer this experience to our context? But they simply did various combinations of the VAT and the sales tax. This work, I would not judge it highly. Any more or less literate person would have been able to do it. It is always possible to play around with numbers, that is not the problem. What is needed are arguments.’ According to the private expert, the government was unlikely to commit to a concrete reform course on the basis of USAID-REFORMA’s research because the study’s technical analysis did not untie the political knot that kept the VAT-sales tax question stranded: ‘After being presented the study, first deputy prime minister Otorbaev said “go and complete it and bring me a version agreed on by everyone”. But this is impossible. As I was saying, in the document

234 private expert 3 (2013 June 7) 235 private expert 2 (2013 May 15) 105

there are almost unsurpassable contradictions if we fully take away the sales tax for VAT payers. The VAT rate should certainly not be raised, as our giant neighbor Kazakhstan has a 12% VAT rate.’236 An aid agent confirmed that more had been expected from the foreign experts than was delivered, while noting that USAID-REFORMA never intended for its study to spell out the reform decision which should be taken: ‘This research, it sort of did not fulfill expectations. Of course, none of the foreign experts can tell us “you must do this and this”. The study simply determined the options. If the sales tax, then what? If the VAT, then what? The question was not resolved, there was simply a study determining the options.’237 However, earlier I have shown that the project’s study did strongly favor a particular reform option, which consisted of suspending the sales tax, raising the VAT rate, and introducing a nominal VAT for small businesses. In 2013, how did state officials and business leaders respond to this advice and to the technical work behind it? In early July 2013, the final report of USAID- REFORMA’s research mission was presented to the Ministry of Finance, the Tax Service and business leaders at a meeting initiated by the project. According to an aid agent, during the event USAID-REFORMA cadres explicitly promoted the reform option recommended in the study: ‘There was a meeting, organized you could say under the auspices of REFORMA. The Ministry of Finance supported this initiative in order to meet with business. The Chamber of Commerce and Trade, the International Business Council, the Association of Suppliers were present, and the question was discussed that it is necessary to work in this direction. And not simply to work on revoking say the sales tax, but on the option proposed by the international experts. This option was to introduce a class of VAT payers below the VAT registration threshold. They would be nominal VAT payers.’238

The idea of a nominal VAT was in fact singled out as the study’s ‘one rational grain’ by one of the private experts who had expressed her disappointment with the research.239 At the July presentation, both state officials and business leaders responded to this core provision of the study’s recommended reform option with skepticism. They backed their skepticism with public interest arguments, and stressed that further analysis on the likely fiscal and economic effects of a nominal VAT was necessary before they could give this measure proper consideration. This reaction did not so much denote a concern that the study provided insufficient instruction on how the proposed approach would reconcile the competing public interest claims behind the VAT- sales tax dilemma. Rather, with their response state official and business leaders acted to defer legislative work on the project’s reform idea by requesting more technical detail. They argued that such detail would help them understand whether the solution on offer was safe and favorable from the perspective of their stance in the socioeconomic debate. In an aid agent’s words:

236 An IMF report from June 2013 challenged the claim that a higher VAT rate would undermine the regional competitiveness of Kyrgyzstani businesses: ‘An increase in the VAT rate would not result in lower investment or trade because VAT does not fall on businesses. In addition, under the VAT regime, taxes on inputs are credited against taxes on output. Another important feature of VAT is that it matters little that a country has a higher VAT than its neighboring country because under the “destination principle” VAT paid on a good is determined by the rate levied in the country of the good’s final sale with revenue accruing to that country’ (IMF 2013b:15). This argument did not surface elsewhere in my observations. 237 aid agent 16 (2013 July 25) 238 aid agent 16 (2013 July 25); Chamber of Commerce and Industry of the Kyrgyz Republic (2013 July 8) 239 private expert 2 (2013 May 15) 106

‘During the meeting we shared the nominal VAT concept with business. And they said “yes, but, but, but, what would be the rate of this nominal VAT? Propose a rate, and we will think”. The Tax Service immediately starts thinking of questions such as how they will do the accounting for this, for whom it will introduce new tax obligations, who will pay. Business has other questions – will small and medium businesses be able to handle it? The Ministry of Finance has another question – the rate must be such that it compensates for the losses incurred by the budget.’240 In addition to the above concerns, after the publication of USAID-REFORMA’s study business leaders and some state officials raised a more fundamental public interest objection to the reform version advanced by the project: that in the context of Kyrgyzstan’s social realities the VAT was too susceptible to abuse (as was also argued by the interviewed private experts). Based on this position, the business lobby had voiced to the project’s research mission a strong preference for the reform option of raising the VAT registration threshold to KGS 10 million (see section one). It argued that a higher threshold would encourage greater compliance on other taxes and would thereby offset the fall in tax revenues that would follow a decline in the number of VAT-payers.241 However, in their report the foreign experts stated that the risk of such greater tax compliance not materializing was too high, and dismissed the KGS 10 million VAT registration threshold on these grounds. USAID-REFORMA’s leadership followed suit.242 In response, business leaders and a government department that was responsible for private sector development questioned the validity of the analysis delivered by the foreign consultants. For instance, a business leader criticized the USAID-REFROMA study’ technical judgement on the VAT registration threshold by stating that foreign experts ‘do not understand where the shadow practices related to the VAT threshold come from’ in Kyrgyzstan.243 To clarify, the respondent noted that in Kyrgyzstan decreasing the VAT registration threshold would prompt more businesses to downplay their revenues, as more businesses would seek to avoid the dysfunctional VAT. Similarly, a state official working on private sector development argued that USAID- REFORMA’s analysis overlooked Kyrgyzstan’s social reality.244 Moreover, the respondent informed that her government department had in fact requested the study on the expectation that the insights provided by the research would help it advance its preferred reform option of suspending the VAT. According to the official, she and her colleagues had been working on this option prior to the project’s research mission. Their second-best option entailed raising the VAT registration threshold, on the grounds that this would improve tax compliance by allowing more businesses to qualify for the procedurally simple single tax.245 At the time of the interview the

240 aid agent 16 (2013 July 25). A business leader confirmed that the July presentation a representative of the Ministry of Finance stated that ‘this is all very interesting, but we cannot introduce any changes without certainty that they will not have a negative effect on the budget’ (business 10 2013 July 12). See also: ‘The Ministry of Finance’s representative warned the participants about the difficult situation with replenishing the national treasury, and underscored that any change must not be detrimental to the budget’ (Chamber of Commerce and Industry of the Kyrgyz Republic, 2013 July 8). 241 aid agent 10 (2013 July 9) 242 aid agent 10 (2013 July 9) 243 business 3 (2013 June 12) 244 government 4 (2013 June 20) 245 ‘On the objective of tackling tax evasion, our main idea was to try annulling the VAT after all, or to at least make it voluntary. When the single tax was introduced, KGS 4 million was a considerably high eligibility ceiling. Today this is a low threshold. 107 state official had just learned that the final study report advised against both of these reform options. Regarding this outcome, the respondent projected that USAID-REFORMA’s analysis would now act as a political obstacle to the revisions her team favored. She also suggested that this obstacle could be overcome with competing technical insight. Thus, the state official noted that the policy case advanced in the project’s study carried political weight because it had been formulated by people who were considered experts. At the same time she disputed the study’s analysis on the fiscal significance of the VAT. For one, the respondent questioned some of the underlying calculations. Furthermore, she devalued the study as a theoretical exercise conducted by foreigners who had failed to take into account the ways in which VAT operations became distorted in the context of Kyrgyzstan: ‘They are providing calculations, figures. Every question should be addressed by specialists. And I am not a specialist. But I can say with certainty that the VAT is the most corruption-prone tax. Although if we suspend it fully there will indeed be consequences. And perhaps it is necessary to assess these. As in, in their report it is written that it will be necessary to increase the sales tax five-fold to compensate for suspending the VAT. I do not know on what basis they made this calculation, I will have to look at it. But I, for instance, do not think that it will be necessary to raise it this much.’ ‘Of course, I agree with them fully that the VAT is a much fairer tax than the sale tax. This is what they are stressing. But you know, it is a corruption-prone tax and here the question is not straightforward. I am still convinced that in Kyrgyzstan it is necessary to annul the VAT for at least some time, from twenty to thirty years. REFORMA’s experts spoke out against annulling the VAT. But these are visiting people, they do not live in this country. They have experience, they studied textbooks, finished universities, but they will not be doing this in reality. They do not know our country like we see it.’ What did the state official expect to happen in the time to come, given the study’s advice? On the one hand, she acknowledged that the prospect of having to destabilize the entire tax system as a result was a credible and politically significant argument against suspending or downsizing the VAT. Thereby the respondent indicated that it will not be easy to advance these options: ‘To implement this in reality is a huge responsibility, and no one will take it, because the consequences could be very far-reaching. A complete restructuring of the whole system of revenue collection, cardinally. To be honest, I do not even know who should take up this responsibility.’ On the other, the respondent observed that – informally – the officials at the Tax Service, the Ministry of Finance and the Ministry of Economy were prepared to tentatively consider the idea of raising the VAT registration threshold. Moreover, she informed that given this situation her department had already been trying to disprove USAID-REFORMA’s conclusions to other policy players by pointing out the Kyrgyzstan-specific blind spots in the underlying analysis. Regarding what her team was to do next, she stressed that countervailing technical material must now be developed to demonstrate to the government that a higher VAT registration threshold was the most desirable reform option, if the option of suspending the VAT was off the table: ‘We are presently proving, convincing the opponents. We are trying to build up at least some grounds, to explain. Because we cannot just say it from nothing, we must show calculations. But as today it

Before small businesses fell under it, and even some middle-sized businesses. Today even the small ones do not fall under it. Therefore we would like to increase it drastically, to at least KGS 30 million’ (government 4 2013 June 20) 108

does not work to annul the VAT, we will try to annul it via a detour. We are now beginning to work at the level of calculations. It is not possible to simply bring this idea to the table. It is necessary to show – for one – the revisions themselves, and – secondly – all of the calculations, all of the consequences, the risk analysis. As in, to prepare a complete package. It is necessary to go and persuade. Basically, someone must go to the prime minister and explain everything to him, or to carry out consultations at his level. We will now work on this question. Most likely we will approach it from the perspective of raising the threshold. That is, if it will prove impossible to annul the VAT, which would be ideal.’ In sum, in their immediate reactions to USAID-REFORMA’s study my respondents from among state-based and private experts emphasized its analytical shortcomings. In particular, they criticized the study’s authors for not exploring the argument that in Kyrgyzstan it was better to work with the sales tax while suspending or limiting the VAT. The private experts claimed that by shunning a proper analysis of sales tax-centered reform options the research mission failed to deliver an original policy solution that would enable a compromise between the conflicting interests tied up with the reform. In government, a department that favored suspending or limiting the VAT was preparing to develop technical material to undermine the project’s conclusions. This plan rested on a belief that such analytical work was necessary if the department’s reform ideas were to remain competitive in legislative politics. Meanwhile, other government actors and business leaders argued (respectively) that it was unclear whether the revisions promoted in the study were safe for the national budget and for small and medium businesses. Both groups demanded a more detailed analysis of the reforms’ parameters and likely effects, as a precondition for further decision-making on the concept. In section three I examine how the reform’s legislative politics developed in 2013-2015, with a focus on USAID-REFORMA/BGI’s engagement in this process.

3. USAID-REFORMA/BGI’s engagement in technical work after the June 2013 study What was the government’s formal reaction to USAID-REFORMA’s indirect taxation policy study, and what were the consequences thereof for the case study reform? In response to the analysis presented by the project’s research mission, first deputy prime minister Djoomart Otorbaev invited USAID-REFORMA to support a working group set up at the Ministry of Finance ‘to focus on reviewing the tax policy options outlined by the REFORMA study and present a solution to the Government and the private sector’ (USAID 2013g:26); or, in other words, to ‘reach consensus on the resolution of indirect tax policy’ (USAID 2013e:6).246 This working group was initiated in late spring 2013 and became fully operational in July 2013. In the first part of this section I report my findings on the aims and expectations held by USAID-REFORMA cadres in 2013 with respect to the project’s involvement in the working group. In the second part, I turn my attention to the USAID-REFORMA/BGI’s engagement in technical work on indirect taxation policy reforms in 2014-2015. Throughout the section, I address the following questions: What kinds of technical work did the project engage in, and how? What was sought and expected from

246 Echoed by aid agent 10 (2013 July 9) 109 the technical work by the project and by other actors? How did the other actors react to this technical work, and with what consequences for the case study reform?

2013

By October 2013 ‘REFORMA has assisted the working group at the Ministry of Finance by providing conference room facilities in which to convene the working group and two tax advisors to participate in ongoing group discussions’ (USAID 2013g:26). While supporting the indirect taxation policy working group in these ways, formally the USAID project aspired to nudge the government towards its preferred reform option, for instance by means of the VAT administration study which it initiated in autumn 2013 (see chapter five): ‘The study will identify where the real burdens for VAT reporting and payment exist for the private sector and make recommendations for eliminating burdensome administrative requirements. This will encourage the Government to adopt REFORMA’s recommendations to eliminate or phase out the duplicative sales tax while bringing all private business into the VAT system throughout a simplified VAT regime’ (USAID 2013g:26). However, back in the late spring and summer of 2013 the experts whom USAID-REFORMA assigned to the working group did not expect the project’s reform preferences to necessarily emerge as the winning solution to the VAT-sales tax overlap. According to one of the aid agents, the project’s experts were still undecided about the reform option which they would advocate to the rest of the working group. First, the aid agents had to further analyze the likely fiscal and economic effects of each option:

‘We too act as consultants, discuss these questions. Perhaps we have not made up our mind yet about the options in REFORMA’s indirect taxation policy study. The main thing is to do a model, to calculate the influence on the budget, the rate.’247 The respondent also observed that the political effort to advance the reform would only begin after the working group presented its recommendations. This political effort would not be the responsibility of the working group experts: ‘No, our role as REFORMA experts is not to move senior government officials towards a decision. Our role is the same as that of everyone else in the working group, to simply determine the mechanism. Regarding the question of purely political advancing, the group will present its reform concept to the management of the Ministry of Finance, the Ministry of Economy and the Tax Service. They will then receive many questions from higher up. Advancing of the reform will be their task’ Still, at the same time the aid agent indicated that the formulation of a technically-solid reform design was a demanding job that had to be successfully completed in order to enable an effective political campaign on pushing through a solution to the VAT-sales tax overlap: ‘There is no strong reluctance in government to address the problem. On the other hand, the question ‘how’ arises. We must at least decide on our position, formulate a clear picture. Neither of us has such a clear picture, considering that the issue really does pose many questions which require the change

247 aid agent 16 (2013 July 25) 110

of operational processes – how this will all work. We, the working group members must decide, draw up a scheme, and only then present it.’ The project’s second tax expert similarly explained that once the working group finalized its reform concept, other actors would take over to lobby MPs to advance the proposal.248 According to this respondent, the working group’s main responsibility was therefore to secure a consensus on a single reform version within the business community: ‘Private experts work more on how to stake out certain concrete things lower down, to find a common opinion etcetera, and then to move aside. This is a very laborious process, it takes a lot of time. It means to form a collective opinion, and not to advance it afterward. At the level of business, at the lower level, to determine a set of positions, in the sense of “yes, we agree, this must be developed”. As in to say ‘A’, but not to do ‘B’ afterwards. And this ‘B’ means that you need to go to the MPs, to bring it home to them, so that they adopt it. And this private experts do not do’. The aid agent also suggested that the effort of enlisting allies in parliament will be more important to the fate of the future proposal than the nature of the policy option agreed on by the working group. However, she described herself as an exception to the general rule of private experts disengaging from reform advancement at the stage of parliamentary lobbying. Moreover, the respondent indicated that the success of the working group’s reform proposal would in part depend on the authority which she as a technical specialist had in parliament. This authority, she added, was substantial. It rested on an established record of providing technical advice to the MPs, who had few other sources of such advice at their disposal: ‘I presently work mainly at the level of the MPs. In the working group we discuss operational issues. I already see that the solution can be any. But it is important to ensure that this solution has a continuation. Hence I am currently working very closely with those who can bring these decisions to life. I see that any option is satisfactory, in the sense that it can be adapted, corrected. Most importantly, there must be a realistic opportunity to introduce it in the legislative sense. I must be an expert whom people listen to in parliament… MPs often approach me with different requests, in order to understand what kind of potential channels we have say for expanding the budget, for stabilizing it, for making the Tax Service’s work more effective, etcetera. Because the assistants that MPs have are by and large not experts in this realm. In the past two months I had a range of meeting with MPs. There were committee sittings. I prepared material for the committees, as in evaluations, regulatory impact analyses on laws, the texts of laws themselves, also in groups of businesspeople who maintain direct communication with MPs on concrete issues. It is a constant dialogue, constant trainings, constant influence so to say on their professional opinion, the shaping of their opinion on what is happening. They listen because there is nothing else.’ In addition the aid agent highlighted that the lobbying of MPs was only likely to deliver if mobilized for a reform proposal that had a technically-solid public interest logic. In other words, the credibility of the technical analysis behind the reform concept would determine its chances in legislative politics. It would be possible to recruit MP backers for any reform concept finalized by the working group, but only if the proposed revisions were effectively framed as beneficial to economy and society, with references to strong technical evidence:

248 aid agent 9 (2013 May 31) 111

‘As for the VAT-sales tax question, until now we have not yet worked with the MPs. Because first it is necessaryto reach a single opinion in the expert community. It is possible to advance any idea that has grounding, where we present an understanding that it will be good for the budget, for business. Any MP will immediately, with both hands, grab onto this idea and will advance it. Because it is a tangible result, it means tangible political points… The art of advancing legislation is this. First, to find people who can move an idea, for whom this is interesting, who have political influence. And then to supply them with all the necessary arguments, material, analysis and etcetera. To show them all the avenues, to supply them fully is such a way that any outside challenge would simply fail a priori.’ Furthermore, the respondent argued that once the working group developed a reform proposal the socioeconomic merits of which were effectively justified with technical reasoning, this proposal would quickly reach parliament. How come, according to the aid agent? Because the working group’s analysis was guaranteed to withstand any public interest objections from within the government. In particular, it was bound to convince state officials not to doubt the fiscal and economic judiciousness of the proposed reforms, and to consequently see the prospect of supporting the latter as beneficial to their political standing: ‘If we reach a satisfactory result, then it will be easy to advance this result to the MPs. There are no specialists in government who can act as opponents to what we do. To each argument we have ten counterarguments. And it is precisely because of this that we are specialists and work in this working group. The decisions that the working group will formulate, it will be impossible for any of the acting ministers or deputy ministers to overpower it. Of course they may start opposing it out of principle. But that can be dealt with if you do not enter into conflict and instead say, come on guys, this is for the good of the cause. And there will be a benefit for you, because there will be a result, and you will score yourself points as participants in the process.’ Thus, in 2013 USAID-REFORMA aid agents reported that the chances of a VAT-sales tax reform concept winning support in government and parliament would depend to a significant degree on the technical credibility of the legislative proposal that was to be developed with the project’s facilitation. In 2014-2015, to what extent did USAID-REFORMA/BGI’s engagement in the reform contribute to its legislative politics in the ways anticipated by the aid agents? I report my observations on this question in the next subsection, where I examine the technical work on indirect taxation policy supported by foreign aid actors in 2014-2015, and the aspirations, expectations and reactions that came with it.

2014-2015 In January 2014, the indirect taxation policy working group operating at the Ministry of Finance with USAID-REFORMA’s assistance was finalizing its reform proposal (USAID 2014a). However, in an internal report from April 2014 the project informed that ‘the complete lack of capacity of the Ministry of Finance to undertake fiscal policy decisions has severely delayed any progress in proposed policy changes’ (USAID 2014c:17). By the summer of 2014 USAID- REFORMA was no longer officially involved in the reform: the April 2014 report was the last project document available online that mentioned the initiative, with the first document appearing next being the June 2014 newsletter (USAID 2014d). Launched in October 2014, successor project USAID-BGI was also silent on indirect taxation policy (USAID 2015ab). However,

112 despite the project’s formal disengagement, after spring 2014 the reform’s legislative drafting process was characterized by sustained involvement from USAID-REFORMA/BGI aid agents. For one, in October 2014 several MPs submitted to parliament a legislative proposal on the VAT-sales tax overlap. This proposal annulled the sales tax for VAT-payers, raised the VAT rate to 14% and suspended the VAT exemption in agricultural processing.249 The accompanying Regulatory Impact Analysis (RIA) was written in April-May 2014 by a USAID-REFORMA aid agent, in private expert capacity.250 The RIA document also indicated that this expert was the main de facto author of the draft law.251 Meanwhile, by December 2014 a team of experts now convened at the Ministry of Economy was completing an alternative legislative proposal.252 In August 2015 this draft law was submitted to parliament.253 As stated in its RIA, the bill had been developed by the Ministry of Economy and the Tax Service, with the participation of experts from USAID-BGI, IFC-BEE and the Chamber of Tax Consultants.254 The team that wrote the RIA comprised two officials from the Ministry of Economy, a Tax Service official, the director of the Chamber of Tax Consultants, an IFC-BEE expert and a USAID-BGI expert other than the author of the October 2014 bill. Hence, in 2014-2015 aid agents from IFC-BEE and USAID- REFORMA/BGI helped develop the two legislative proposals on the case study reform that made it to parliament. What was sought and/or expected from this technical work, and how did policy players react to it when the proposals were being considered in government and parliament? Broadly, the legislative politics around the two legislative proposals centered on the trading of provisions that relaxed tax obligations in the private sector for provisions directed at compensating the budget for the advantages granted to businesses. The legislative proposal submitted to parliament by a group of MPs was adopted in a first reading in February 2015. During this reading one of the proposal’s MP backers argued that the reform was necessary in order to save large industry, which was being outcompeted by smaller businesses that enjoyed an unjustly low tax burden.255 The Ministry of Economy, the Tax Service and the business lobby claimed that, on the contrary, the draft law jeopardized the public interest. After the event, these actors continued to criticize the MPs’ proposal during inter-stakeholder policy meetings, in public appeals sent to senior state officials, and directly in the press. Throughout, the state officials and business leaders argued that the proposal’s VAT rate increase would undermine the competitiveness of national businesses vis-à-vis those of Kazakhstan – especially in the context of Kyrgyzstan’s upcoming accession to the Eurasian Economic Union (EAEU).256

249 legislative document 3 (2014 October); Tazabek (2014 October 27; 2015 February 12a) 250 The RIA is a mandatory analysis of a legislative proposal’s likely effects on the private sector (see chapter 3). 251 legislative document 2 (2014 June) 252 Vechernii Bishkek (2015 January 5). By then primary responsibility for formulating fiscal policy had been moved from the Ministry of Finance to the Ministry of Economy (USAID 2014c). 253 legislative document 9 (2015 August) 254 legislative document 10 (2015 August) 255 Tazabek (2015 February 12b) 256 Information Agency 24 (2015 February 18); Investment Council (2015 February 18); Tazabek (2015 March 20acd); see also the opinion statement by the International Business Council business association shortly before the February 2015 hearing (Vechernii Bishkek, 2015 January 5). The EAEU is a single market bloc led by Russia. Kyrgyzstan signed its EAEU accession treaty in December 2014 and ratified it in May 2015. The accession treaty came into force in August 2015. 113

Moreover, at a special hearing on the legislative proposal in March 2015 a senior state official noted that while the MPs’ intent to address the VAT-sales overlap was commendable, it was first necessary to examine more carefully how to best go about this challenge.257 In fact, at the time the government was expecting a designated working group at the Ministry of Economy to deliver study of this kind. Thus, soon after the first reading of the MPs’ legislative proposal, the government issued an official conclusions on the bill.258 In this conclusions it sided with the business lobby by stating that a higher VAT rate must indeed be avoided because it would harm Kyrgyzstan’s private sector during a difficult economic period. However, it also dismissed the MPs’ idea of suspending the sales tax in one go, on the grounds that the ensuing drop in tax revenues would be too steep and sudden. Finally, in a press statement reporting on its conclusion, the government informed that at the Ministry of Economy a working group was busy examining ways to phase out the sales tax without increasing the VAT rate.259 This suggests that the working group in question had been tasked to develop a reform design that was compatible both with the objective of budget security, and with the government’s position that the standing economic situation required protection for national businesses (It is safe to say that the working group included USAID-BGI and IFC-BEE experts: when the Ministry of Economy’s proposal was sent to parliament an aid agent from each project was listed among its authors). The difficult economic conditions stressed by the government in 2015 concerned more than the uncertainties of joining the EAEU. Starting from late 2014, the recession in Russia and Kazakhstan was being felt in Kyrgyzstan. See for instance the IMF’s reporting on this development and on the effects of the country’s impending EAEU membership: ‘External conditions have deteriorated substantially since last summer. The economic slowdown in Russia is exerting downward pressure on the Kyrgyz economy through remittances and trade. Furthermore, the sharp depreciation of the ruble and devaluation of the tenge have put pressure on the som, resulting in higher inflation…. Real GDP growth slowed to 3.6 percent in 2014, below potential (about 5 percent). Gold output declined to 4.6 percent following a surge in 2013… Trade was sluggish and only started picking up at the end of the year, as a result of the uncertainties of the accession to the EAEU’ (IMF 2015:5-7) ‘The pause in fiscal consolidation in 2015 is appropriate to accommodate the weak regional economic environment… Staff and the authorities were in agreement on the 2015 outlook, which is marked by adverse developments. The slowdown in the regional economies, especially Russia, and a lower gold output are expected to limit growth to 1.7 percent and weaken medium-term prospects… Inflation is expected to remain around 10 percent due to pressures on the som and limited effectiveness of monetary policy’ (IMF 2015:8,9).260

257 K-News (2015 March 20) 258 Information Agency 24 (2015 February 18); Investment Council (2015 February 18) 259 Tazabek (2015 February 23, March 3). At the parliamentary hearing on March 20th 2015 a state official also mentioned that a working group in government was busy searching for a solution to the VAT-sales tax overlap (Tazabek 2015 March 20e). 260 At the end, the economic troubles of 2015 were less severe than expected: ‘The economy has been resilient in 2015, despite significant external headwinds, thanks mostly to a good agricultural performance. Economic growth remained relatively robust in 2015, in spite of significant regional headwinds and depressed gold production… Consumption growth fell to 1.1 percent from 3 percent in 2014… The contraction in Russia and slowdown in Kazakhstan affected the Kyrgyz economy through exchange rate and trade channels… Exchange rate dynamics created uncertainty in the real sector of the economy, affecting decisions of small and medium companies as well as households, possibly driving the slowdown in private consumption, as well as credit and 114

In the second extract, note also the government’s decision to pause fiscal consolidation. As we shall see next, at the end of 2015 this decision translated into the adoption of indirect taxation policy reforms that benefitted the private sector at a considerable risk to the national budget. The Ministry of Economy’s working group first advanced its solution to the VAT-sales tax overlap by sending in a set of revisions to the bill submitted by MPs in October 2014, in preparation to the second parliamentary reading of the latter.261 The MPs’ legislative proposal was adopted in a second reading in June 2015, after it was brought in line with the criticism it had faced during and after the first reading.262 The MPs’ draft law thus was revised to keep the VAT rate at 12%; to suspend the sales tax only for export transactions and transactions abroad; and to postpone for a year the termination of the VAT exception in agriculture. Furthermore, the parliament incorporated into the proposal some of the amendments that had been sent in by the Ministry of Economy’s working group. In this way, a provision on raising the VAT registration threshold to KGS 6 million was added to the new version. In addition, the legislative proposal was supplemented with a provision on ending the profit tax exemption in agricultural processing per January 2017. The Ministry of Economy had also submitted an amendment on suspending the sales tax for domestic transactions subjected to the VAT a year after doing so for export transactions and transactions outside of Kyrgyzstan. This amendment was not accepted. The idea of suspending the sales tax on VAT-table transaction in two phases (first on exports and abroad, then domestically) formed the core of the separate legislative proposal written by the Ministry of Economy’s working group and submitted to parliament in August 2015.263 This legislative proposal also raised the VAT-registration threshold to KGS 6 million, kept the VAT rate at 12%, and annulled the VAT and profit tax exemptions in agricultural processing per 2017. In the bill’s supporting analysis the higher VAT registration threshold was defended as a measure that was necessary to boost the development of small businesses in the context of an economic downturn. The proposal’s authors also noted that the KGS 4 million threshold has been around for seven years, and that time has come to adjust it to the economic changes that had taken place during this period. However, did the authors of the draft law show that the fiscal costs of limiting the coverage of both the VAT and the sales tax would be offset by other measures? In other words, did they live up to the government’s demand for a reform design that protected the competitiveness of Kyrgyzstan’s businesses while minimizing the risk to the national budget? In the note of rationale attached to its legislative proposal, the working group framed the ending of tax exemptions as one means of compensating the budget for the proposal’s core provisions.264 Yet, the working group’s calculations revealed that this measure did not even come close to balancing the fiscal gap projected from suspending the sales tax on transactions subjected to the VAT, and from raising the VAT-registration threshold. (The annual losses from the latter investment. Meanwhile, the stark depreciation of the Russian rouble affected the real value of remittance inflows… further exacerbating downward pressures on domestic demand’ (World Bank 2016a:2). 261 legislative document 7 (2015 June) 262 legislative document 6 (2015 June) 263 legislative document 9 (2015 August) 264 legislative document 10 (2015 August) 115 measures were projected at KGS 8871.6 million. In contrast, the annulment of the tax exemptions was forecast to contribute KGS 261.1 million a year). The working group also suggested that the fiscal losses associated with their proposal would be offset by the gains expected from the restructuring of customs duties under EAEU membership, and from anticipated reforms to VAT administration. However, these claims were not supported by figures. In response, the parliamentary committees which considered the bill published evaluations which requested clarification on how its authors intended to compensate for the projected revenue losses.265 More broadly, the data suggests that the legislative proposal sent to parliament in August 2015 was blocked on the grounds of budget security (see discussion below). Consequently, in autumn- winter 2015 a further attempt at crafting a compromise solution to the VAT-sales tax overlap was expected from the aid agents and other tax experts who had been working on the reform. On December 8th 2015, the prime minister announced that an expert group had just submitted a new set of recommendations on the VAT-sales tax overlap, and that these had been approved by the government. In this public statement the prime minister specified that the expert group proposed suspending the sales tax for all electronic transactions subjected to the VAT while leaving it for all VAT-table cash-based transactions.266 Given their direct involvement in the reform so far, at least one and possibly all three of the aid agents behind the earlier legislative proposals would have been part of the expert group which developed this reform version. Only when the latter was ready did parliament proceed to vote on the bill from August 2015. The proposal was adopted in its original form during the first reading on December 24th 2015.267 Then, in preparation for the second and third readings on December 30th and 31st, the bill was revised at its core, from suspending the sales tax in two phases to suspending the sales tax on exports, on transactions abroad, and on non-cash domestic transaction subjected to the VAT.268 Possibly as a concession to business for the exclusion of cash-based transactions, the proposal was also amended to increase the VAT registration threshold to KGS 8 instead of KGS 6 million, and to postpone the termination of the VAT and profit tax exemptions until September 2018. Did the redrafting of the legislative proposal according to the electronic/cash-based distinction shift the forecast on the reforms’ effects in favor of the budget? Judging from public statements made just before and shortly after the proposal became law in December 2015, at least in the short term this was not the case. State officials and MPs admitted in public that the law on indirect taxation that was (to be) adopted on December 31st 2015 was expected to cause fiscal losses.269 As part of this, they emphasized that the law was directed at keeping Kyrgyzstan’s businesses afloat during a difficult economic period.270 In other words, state actors justified the reforms as a budgetary sacrifice necessary for preventing further economic decline. For instance:

265 legislative document 11 (2015 December); legislative document 12 (2015 December) 266 Tazabek (2015 December 8) 267 http://www.kenesh.kg/ru/draftlaw/227001/show (link to the proposal’s history on the parliament’s website) 268 Formally this change was made based on written amendments submitted by two MPs (legislative document 13 2015 December; legislative document 14 2015 December) 269 Tazabek (2015 December 23, December 29); K-News (2016 February 4) 270 K-News (2015 December 29b); Information Agency 24 (2015 December 25); Tazabek (2015 December 23; 2016 January 26) 116

‘As was noted during the sitting by MP Azamat Arapaev (SDPK), the whole world is in crisis, and the government is taking anti-crisis measures, going for budget losses of 3 billion som while creating conditions for exporters and for those who work on a non-cash basis’.271 Kyrgyzstan’s accession to the EAEU was incorporated into this argument. For example, at a parliamentary hearing in late 2015 an MP proclaimed that an annulment of tax exemptions under present economic conditions would be a heavy blow to Kyrgyzstan’s agricultural processors, because their competitors in other EAEU member states would remain exempted: hence the need to postpone the annulment from January 2017 to September 2018, despite the envisioned benefits of this measure for the national budget.272

Case study findings: reform analysis from the perspective of the research questions

What kinds of technical work did the foreign aid actors engage in to advance the reform, and how? USAID-REFORMA/BGI began its engagement in technical work on indirect taxation policy by carrying out a research and policy advice mission on the overlap between the VAT and the sales tax. At the start of 2013 three project-funded foreign tax specialists visited Kyrgyzstan to analyze different ways of revising the coverage of the two taxes, and to determine which scenario would be optimal for fiscal security and the economy. A national project-based expert contributed to the assignment. The final study report was published in June 2013. It comprised over twenty pages of legislative and economic analysis on alternative reform options, and was presented to various policy players. After the research mission, in late spring 2013 USAID- REFORMA became involved in the working group set up at the Ministry of Finance with the task of developing a legislative proposal on the VAT-sales tax overlap. The project supported this working group with funds and practical assistance. In addition, two of the project’s national aid agents became working group members (joining several state-based and private experts). Starting from summer 2014 USAID-REFORMA and its successor project USAID-BGI were no longer formally involved in the legislative work on the reform. However, USAID- REFORMA/BGI aid agents continued to participate in the process. In his capacity as a private expert, one of the project’s aid agents drafted a legislative proposal on the VAT-sales tax overlap which was submitted directly to parliament by a group of MPs. Meanwhile, together with an IFC- BEE aid agent, another USAID-REFORMA/BGI representative took part in the new indirect taxation policy working group at the Ministry of Economy, which developed an alternative legislative proposal. The bill drafted by this working group was submitted to parliament in August 2015. However, soon after the government requested the experts to develop a revised reform option, which was the one that passed in parliament in December 2015.

271 Tazabek (2015 December 29) 272 They also noted that the January 2017 date was too short notice and thus risks damaging Kyrgyzstan’s image among investors and leading to unforeseen losses in business profits (legislative document 11 2015 December, legislative document 12 2015 December, K-News 2015 December 29a). 117

What purposes was the technical work meant to serve in the efforts to advance the reform through legislative politics, how, and why? When USAID-REFORMA launched its research mission in early 2013, Kyrgyzstani officials and private experts wanted the project’s study to help broker a compromise between government and business on the issue of resolving the VAT-sales tax overlap. The national actors expected the research mission to serve this purpose by coming up with a novel arrangement for reconciling the two taxes that could form the basis for a politically viable legislative proposal. The combination of revisions devised by the mission would have to effectively address the main concerns of business leaders on the one hand, and the main concerns of fiscally-conservative state actors on the other. The demand for foreign aid engagement in technical work directed at this purpose had been fostered by the reform impasse that had emerged due to the tension between two lines of policy criticism facing state officials. For one, for some time the government had been under pressure from business to resolve the VAT-sales tax overlap. Business leaders were blaming the authorities for failing to deliver on their promises to address an issue that had troubled the private sector for several years. They often did so at media-covered inter-stakeholder policy meetings and directly in the press. State actors considered such business criticism a political risk, in particular because of its public character. Therefore in 2012 the government was eager to book legislative progress on the reform. However, business leaders promoted the reform option of suspending the VAT instead of the sales tax. This option was unacceptable to many key officials because of the underlying fiscal hazards; and because of the political threat which they associated with being criticized in government and parliament for jeopardizing the national budget. Due to the same concern, fiscally-conservative state actors also rejected the option of suspending the sales tax without raising the VAT rate. Meanwhile, national experts had been unable to develop a reform concept that was fiscally acceptable to the government but did not include a higher VAT rate. They lacked both the time and the specialized knowledge required for the task. This was a problem because any reform option that raised the VAT rate was likewise out of the question – it was clear that the business lobby would respond to this measure with a serious backlash. Accordingly, state officials were interested in USAID-REFORMA funding foreign experts to devise a combination of revisions that would be palatable enough to government and business (so at to advance the reform and to thereby appease the business lobby). National private experts were also frustrated with the reform standstill and keen to turn to USAID-REFORMA for assistance. One way of tackling the reform impasse would have been to design a solution to the VAT- sales tax overlap without resorting to the provisions that had been vetoed by either government or business. However, some national experts hoped that the project’s study would enable a reform compromise by demonstrating with solid technical analysis that the best reform option from a fiscal perspective was to suspend the VAT rather than the sales tax. This was the scenario favored by business and its allies in government. It was also the option which fiscally-conservative state actors had consistently rejected on the grounds that it would undermine tax revenues. Hence, while some national policy players wanted the project-funded technical work to serve the general

118 purpose of helping broker a reform compromise by designing an enabling combination of novel provisions, as part of this they also aspired for the study to serve a narrower purpose in a more targeted manner. They hoped that USAID-REFORMA’s analysis would either persuade or oblige the government to endorse a particular reform option. Specifically, they counted on the analysis to do so by presenting definite technical evidence that would invalidate the government’s fiscal reservations about this option. Such invalidation was sought after because it was understood that senior state officials would be reluctant to take the political risk of supporting revisions that appeared likely to prove fiscally reckless and/or to be criticized as such. For the project itself, its research mission was meant to persuade the government to agree to a process of legislative drafting on the reform option recommended in the study. The project’s management would have understood that to stand a chance of meeting this purpose, the technical work had to mitigate the political concerns in government about the reforms’ fiscal uncertainties. The foreign experts’ analysis was thus directed at showing the fiscal and economic advantages of their favorite option, while discrediting some of the alternatives as detrimental to the public interest. The study advised Kyrgyzstan to suspend the sales tax entirely, to raise the VAT rate, and to introduce a nominal VAT for small businesses. Once the Ministry of Finance’s working group had been set up in spring 2013 to advance the case study reform, USAID-REFORMA’s management counted on it to develop a legislative proposal that followed the study’s advice. It hoped that the project experts seconded to the initiative would build on the study to persuade their colleagues that the reforms favored by USAID-REFORMA were optimal for the budget and the economy. It also hoped that the working group would develop a technically-convincing legislative proposal on these measures, which would then pass in government and parliament. When it became clear that this scenario was unlikely to happen, the project engaged in alternative technical work to persuade state actors to endorse its preferences. Thus, in autumn 2014 a project expert drafted a bill on the second-best reform option in USAID-REFORMA’s study, backing it with analysis that underscored the fiscal and economic urgency of the proposed revisions. The formal purpose of the working group set up at the Ministry of Finance in spring 2013 was more open-ended. It was informed by the persistence of the reform impasse that had fostered the initial demand for USAID-REFORMA’s engagement. As stated by the first deputy prime minister, the working group was to reconcile the various concerns around the VAT-sales tax overlap in a way that would enable reform progress. The two project experts involved also envisaged this to be its general objective. With respect to how the working group would help broker a reform compromise, in spring 2013 one of the aid agents noted that it would build on the USAID-REFORMA study in order to establish which reform option reconciled fiscal security most effectively with improvements for the private sector. The second aid agent stated that the working group’s responsibility was to craft a reform proposal that would secure the support of the business lobby. This proposal would then be advanced in government and parliament by actors other than the working group experts (with the respondent as an exception). However, the aid agent also indicated that the experts’ analytical effort would nevertheless play a key role in securing political backing for the draft law.

119

Namely, once the working group succeeded at demonstrating that its reform concept was fiscally and economically beneficial, its technical analysis would be used by others to persuade pivotal MPs and officials that they stood to gain favorable publicity by advancing the bill. This anticipation on the part of the aid agent suggests that the political risk attributed by state actors to budget- and business-related criticism was matched by a perception that they stood to benefit politically from backing reforms which were effectively presented as socially advantageous on either front. The respondent also predicted that given the superior analytical skills inside the working group, its technical reasoning was bound to discredit the socioeconomic objections of any official who would continue to challenge the revisions. It would oblige such officials to make way for the experts’ reform concept. Hence, in the aid agent’s account, some of her technical work would help broker a reform compromise between government and business by serving a narrower, constituent purpose: that of prompting skeptical and uncommitted state actors to endorse or concede to the working group’s legislative proposal. In order to achieve this narrower purpose, the working group and the policy players who would advance the bill would focus on justifying it with technical evidence. In contrast, judging from the legislation developed, (aid agent) experts who participated in the indirect taxation working groups set up after spring 2014 were not intent on promoting a reform version which they considered optimal. Rather, the primary purpose and logic of their technical work was to enable a compromise between government and business by crafting a set of reform measures acceptable to both. Thus, in their legislative designs of 2014-2015 the experts made a series of successive concessions to both camps, which culminated in the final law. All of this legislative content entailed different combinations of decreasing the coverage of both the sales tax and the VAT without raising the VAT rate. This suggests that the experts’ technical efforts were now driven by the government’s new readiness to endorse reform measures which it had previously rejected as fiscally unacceptable, if provided with a minimum set of compensating provisions to mitigate the projected fiscal losses. The underlying reason, it seems, was that the government’s concerns about business criticism had increased relative to its concerns about being scorned for jeopardizing the national budget. The shift had been prompted by a regional economic downturn, and by the economic uncertainty that marked Kyrgyzstan’s accession to the Eurasian Economic Union. I expand on this finding in the next subsection.

What can be said about the extent to which the technical work served the purposes envisioned? What tentative conclusions does the case study offer about the success with which the technical work that foreign aid actors engaged in fulfilled its purposes of (a) helping broker a reform compromise between government and business; and (b) prompting ambivalent decisionmakers to approve or concede to a particular reform option, sometimes as part of an overarching compromise brokering effort? For one, the research data permits the inference that in late 2015 aid agents and other tax experts succeeded at helping broker a compromise law on the case study reform. It also suggests that the policy players did so by devising a set of revisions that struck the right balance for that political moment between (a) the level of the government’s desire

120 to appease the business lobby; (b) the level of its preparedness to accept measures that were likely to diminish tax revenues; and (c) the strength of the technical evidence required to persuade state actors that the fiscally-risky revisions they were about to accept were likely to cause no more than a certain amount of damage to the national budget. I propose that the relative strength of these three factors defined the political leverage of foreign aid-funded technical work throughout the course of the reform. Consider the specifics of this interpretation. In 2013 the project’s research mission failed to deliver a reform version which would have enabled a compromise between government and business on the VAT-sales tax overlap. USAID- REFORMA had sought for the mission’s analysis to persuade state officials that its reform advice was optimal for the budget and for the private sector. However, the government found the study’s preferred reform option too politically precarious, and not only because it involved a higher VAT rate and thus risked a serious confrontation with business. In addition, the new nominal VAT proposed in the study was considered too ambiguous in terms of its likely effects on tax revenues. When set against the government’s wariness of budget-related and business criticism, the analysis behind the study’s recommendations was not elaborate enough to either persuade or oblige state officials to endorse the proposed reforms. The authorities dismissed the study’s reform ideas as unsuitable for legislative follow-up, on the grounds that the underlying technical evidence was insufficient to convince them that those ideas were fiscally prudent. Business leaders also dismissed the proposed reforms on the grounds of weak technical evidence, but then regarding the benefits for the private sector. It is likely that this dismissal made the study’s advice even more unattractive for the government, given the political risk that state officials attributed to the prospect of facing public criticism from the business lobby. Would a more conclusive technical analysis have prompted the national actors to agree to the proposed revisions, whether out of conviction or because of an inability to justify rejection? Difficult to say. Still, by technically discrediting as fiscally ruinous the reform option of reducing VAT coverage, the study augmented the political challenge facing those officials who aspired to build support for this option in government. So much was suggested by a respondent whose department in government was lobbying other state actors in favor of restricting the VAT. According to the official, in order to stand a chance of success her team needed to respond to USAID-REFORMA’s study in kind: it needed to amass analytical evidence to refute the study’s technically-backed public interest arguments. The political weight assigned by the respondent to the study’s analysis also suggests an explanation for why private experts who favored suspending the VAT hoped that USAID-REFORMA’s research would endorse this option. Namely, the experts considered it possible for technical analysis which credibly showed the fiscal superiority of a reform to prompt the government to approve the latter. The December 2015 law on indirect taxation raised the VAT registration threshold from KGS 4 million to KGS 8 million, offered VAT payers a way to be spared the sales tax, and kept the standing VAT rate. Moreover, in 2015 several legislative proposals which contained a similar set of provisions came far in government and parliament, having been drafted by or with

121 amendments from a working group of (aid agent) experts. Possibly, these developments mean that in 2014-2015 policy players who sought to decrease VAT coverage succeeded (with foreign aid input) at delivering the evidence needed to persuade or compel the government to endorse this option. However, as stated earlier, I propose that the government’s new openness to previously inadmissible reform measures stemmed above all from an increase in the political significance attributed by state actors to business criticism, as compared to the budget-related kind (a change prompted by the advent of more precarious economic conditions). For one, the above shift in risk perception deepened the political unviability of the reform versions favored in USAID-REFORMA’s indirect taxation policy study, given that they revolved around measures strongly opposed by business. Central among these measures was raising the VAT rate, which became part of a legislative proposal on the study’s second-best reform option. In October 2014, this proposal (drafted by a prominent national tax expert based at USAID- REFORMA) was submitted directly to parliament by a group of MPs. However, by then the government had officially converted to the business lobby’s position that for the economy’s sake it was imperative to refrain from raising the VAT rate. During a media-covered hearing, the government and busines dismissed the VAT rate increase in the MPs’ proposal as unfit for the prevailing economic conditions. The bill was then revised at its core during its second reading. The fact that a leading tax expert had provided the technical analysis on the urgency and soundness of the original proposal’s measures did not make a difference in these events. The reason for this, I argue, was that by now most state actors considered the reforms pitched by the MPs as blatantly at odds with their political interests: given the criticism which these reforms were expected to trigger from business, and the augmented political risk associated with such criticism in the context of an economic downturn. The new economic conditions in mid-2014 onwards raised the pressure on state actors to resolve the VAT-sales tax overlap and made them more receptive to the business lobby’s reform preferences. Thereby, they also simplified the task of crafting a combination of reform provisions that would be accepted by government and business. As a testimony thereof, in August 2015 the Ministry of Economy’s working group succeeded at sending to parliament a legislative proposal that limited the coverage of both the sales tax and the VAT, with the VAT rate intact. The bill came that far even if it was evident from the supporting technical documents that the revisions stood to reduce fiscal revenues. However, judging from how things developed from there, at the time the government’s political leverage and its fears of budget-related criticism remained strong enough for it to insist on a reform version that addressed its concerns better than the August 2015 proposal. Namely, in autumn 2015 the (aid agent) experts involved in the reform were requested by the prime minister to redraw the proposal into a reform design that offered at least some means of mitigating the fiscal losses expected from the concessions to business. The new proposal suspended the sales tax domestically on digital VAT-table transactions only. Tentatively, this arrangement required more businesses to continue paying the sales tax than would have been the case if the sales tax was suspended for all domestic transactions subjected to

122 the VAT (the arrangement in the August 2015 proposal). The government accepted the digital/cash-based distinction as the best compensation it could get for agreeing to fiscally precarious measures demanded by business, given the standing economic situation and the political risks associated with it. Because of the latter, state actor were now willing to accept more uncertainty in the evidence attached to the compensating provisions, which in the final version far from guarantee a balancing of the projected fiscal losses.

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Chapter 7. Research findings across the case study reforms

The case study chapters 3 to 6 examined four sets of legislative reforms to business taxation that were advanced by foreign aid actors in Kyrgyzstan in 2010-2016. Each case study: (a) identified the types of technical work that foreign aid actors engaged in on the reforms, and the nature of this engagement; (b) distilled the purposes that the foreign aid-funded technical work was meant to serve as a resource in advancing the reforms, from the perspective of foreign aid actors and other policy players; and (c) developed an impression of how far the technical work had served the purposes envisioned. Chapter 7 pools together the empirical chapters’ findings to answer my research questions for the case study reforms taken together. In section one I answer my first research question by classifying the technical work that foreign aid actors engaged in into several categories. I also discuss the variation in the ‘how’ of this engagement. In section two I address my second (and central) research question, by reporting my findings on (i) the purposes that various policy players ascribed to foreign aid-funded technical work as a means of influence in legislative politics; (ii) how the technical work was expected to serve these purposes; and (iii) why it was sought after and/or understood to operate as envisaged. Turning to my third research question, in section three I consider the extent to which the technical work fulfilled its purposes across the case studies. Chapter 7 ends with a brief introduction to chapter 8.

1. What kinds of technical work did foreign aid actors engage in to advance the reforms, and how? The type of technical work that IFC-BEE, USAID-REFORMA/BGI and the World Bank engaged in the most was policy research and analysis. In addition, USAID-REFORMA/BGI participated extensively in formal policy design and legislative drafting. IFC-BEE also contributed to this kind of technical work, but less closely and profusely. Instead, the IFC project regularly supported technical discussions on business taxation policy matters between public and private sector actors. Furthermore, as part of their efforts to promote the case study reforms to VAT administration, both IFC-BEE and USAID-REFORMA/BGI were involved in developing administrative technology and organizing technical presentations to showcase the reforms’ merits. USAID-REFORMA/BGI also engaged in organizing professional trainings and in developing procedural guidelines. Some of the foreign aid support provided to the various kinds of technical work listed above targeted the operational side of the matter. However, most of it also comprised substantive contributions to the development and application of technical content: either directly through project cadres and consultants, or by way of funding national private experts. Kyrgyzstani project cadres and consultants typically led the foreign aid agencies’ engagement in technical work. However, there were also many contributions by foreign experts. In some cases these experts were the ones primarily responsible for the technical work.

Policy research, analysis and recommendations For a fuller picture of my findings, let’s begin with policy research and analysis. The main examples of this kind of technical work were the IFC SME surveys from 2011 and 2013, the

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World Bank-funded ‘shadow economy study’ from 2012, and the study on indirect taxation conducted by USAID-REFORMA in 2013. Each study comprised detailed research into the effects of the standing taxation system on fiscal revenues and on the private sector. The IFC and World Bank research also covered other areas of private sector governance. The four studies combined economic and legislative analysis with assessments of government and business experience, and discussed relevant practices in other countries. In addition, they developed policy recommendations to the government. Reports that were at least seventy pages long were issued on the study findings. The IFC survey reports were made public online and were issued in hard copy. The digital report of the World Bank’s shadow economy study was circulated among government, private sector and foreign aid actors. Its findings were also covered by the press. Copies of USAID-REFORMA’s study were likewise circulated in Kyrgyzstan’s policy circles. The latter study focused on a single realm of business taxation. Among the four publications it offered the most elaborate policy recommendations, targeting two of my case study reforms (chapters 5 & 6). The World Bank’s shadow economy study provided analytical statistics on several private sector policy areas, but focused on taxation. Its central reform proposal concerned the voluntary patent system (chapter 3). With varying levels of detail, the IFC SME surveys presented findings and reform ideas on all four case study reforms. Formally, USAID- REFORMA’s research and the World Bank’s study were commissioned by the government, the former with the encouragement of business. The IFC SME surveys were built into the IFC-BEE project design. Three foreign tax specialists led the research and analysis in the case of USAID- REFORMA’s study (the project invited them to Kyrgyzstan for this purpose). A national expert based at USAID-REFORMA also contributed to the assignment. In contrast, national IFC-BEE cadres coordinated the technical work on the IFC SME surveys. The survey’s research and analysis was primarily carried out by Kyrgyzstani nationals, with input from foreign experts. The shadow economy study was produced entirely by a group of national experts, with funding from a World Bank project. These national experts worked on the assignment as private consultants. However, at the time some were based at foreign aid projects. The four case study reforms also featured a number of smaller-scale foreign aid-funded research initiatives. Thus, in 2012 the World Bank produced a study on the volume of financial transactions at Kyrgyzstan’s major markets (a topic closely connected to the functioning of the voluntary patent tax system) (chapter 3). This ‘markets study’ was conducted by foreign experts affiliated with the World Bank. Insofar as I can tell from the data, it did not provide concrete reform advice and was not released as an official report. Instead, the market study’s findings were brough to the attention of the deputy prime minister responsible for the economy, who publicized them to other policy players. Also on the question of scaling back the voluntary patent, IFC-BEE planned and conducted follow-up research and policy design activities based on the findings of its SME surveys. After publishing the first survey, the project invited foreign experts to Kyrgyzstan to further examine the realities of the country’s tax regimes, and to design the outlines of an alternative system. After publishing the second survey, IFC-BEE set out to find national private experts who could expand on the foreign experts’ research. Similarly, USAID-

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REFORMA was persuaded by the findings of its indirect taxation study to launch a research and reform design follow-up on VAT administration (chapter 5). Two national private experts carried out this task. USAID-REFORMA enlisted these experts as representatives of the national firm MF Consulting, which became the project’s grantee for the assignment.

Formal policy design and legislative drafting Both IFC-BEE and USAID-REFORMA engaged in the legislative working groups set up by the government on the case study reforms. These working groups typically consisted of state- based and private experts, with some variation. They were tasked to develop reform concepts and legislative proposals (including the supporting analytical documents), and to present or submit these to government. The format in which the aid actors engaged in this kind of technical work varied across the reforms. However, in general it entailed both operational and substantive input, delivered in the first place by national aid agents and by Kyrgyzstani experts commissioned and/or supported by the projects. For example, in the voluntary patent reform case IFC-BEE encouraged the initiation of a working group that developed a policy concept on a new set of business taxation regimes (based on research that had just been conducted by project-funded foreign experts) (chapter 3). This working group was led by national private experts. However, state officials and business leaders were invited to discuss its work-in-progress at inter- stakeholder policy meetings, some of which were convened and facilitated by IFC-BEE. IFC- BEE cadres participated as experts in these discussions. In the case of social insurance payments administration, an IFC-BEE aid agent was a member of the interagency commission on the reform, which included state officials, business leaders and private experts (chapter 4). In 2011-2012 this aid agent participated directly in the commission’s legislative drafting and reform deliberation activities. In addition, she organized discussions of the commission’s legislative work at the Methodological Council (IFC-BEE was generally responsible for coordinating this private-public fiscal policy forum). Similarly, two national USAID-REFORMA aid agents were engaged as experts in the working group convened in 2013 at the Ministry of Finance to develop a legislative proposal on reforms to indirect taxation (chapter 6). USAID-REFORMA also provided operational support to this working group, inter alia in the form of office supplies and meeting space. At some point in spring 2014 the working group was dissolved, and USAID-REFORMA/BGI ended its formal engagement in the reform. However, one of the project’s experts continued her direct involvement in the legislative drafting activities on indirect taxation policy as part of the replacement working group that was convened soon after at the Ministry of Economy. This working group, which also included an IFC-BEE expert and a handful of state-based and private tax specialists, was responsible for developing most of the reform legislation submitted in 2014-2015 to government and parliament. While advancing the case study reforms to VAT administration, IFC-BEE did not engage in legislative working groups on the matter (chapter 5). In comparison, two national private experts financed by USAID-REFORMA led the drafting of a legislative proposal on VAT administration that partially focused on introducing VAT invoicing based on electronic numbers (a focal reform

126 in the case study). In early 2014 the project’s national grantee MF Consulting completed the research and reform design job that USAID-REFORMA had commissioned on VAT administration as a follow-up to its indirect taxation study. The project then contracted the two MF Consulting experts to develop a reform bill based on their findings. A working group was set up at the Ministry of Economy for this purpose. In 2015 the legislative proposal prepared by this working group was submitted to government and parliament. The bill was primarily designed by MF Consulting. The case of indirect taxation policy similarly involved a private expert affiliated with USAID-REFORMA acting as the main author of a legislative proposal on a reform option favored by the project (chapter 6). This expert, however, was based at the project. The bill that he had drafted was submitted directly to parliament by a group of MPs, whom he had enlisted for this purpose. In general, this USAID-REFORMA staff member stood out among the aid agents in the case studies by also being a leading private tax consultant. The aid agent regularly worked directly with MPs on the initiation and drafting of reform legislation.

Technical deliberation of policy matters, training and presentations, and technology development Besides engaging in research, policy design and legislative drafting, IFC-BEE was involved in the policy meetings during which public and private sector actors deliberated inter alia the technical side of the project-backed reforms. Examples of IFC-BEE engagement in this kind of technical work have already been mentioned in the preceding subsection for the voluntary patent and social insurance cases (chapters 3 & 4). In the case of VAT administration, technically- oriented inter-stakeholder policy discussions were the main type of technical work that the project engaged in to advance the examined revisions (chapter 5). For one, IFC-BEE initiated and facilitated such discussions. Some of the meetings were formal and focused on the case study reforms (e.g. a roundtable convened by the project in 2011). Others were general and informal (e.g. the casual talks organized on IFC-BEE premises for a handful of tax officials and business leaders to discuss various private sector taxation matters). Secondly, during the discussions it was common for IFC-BEE experts to state their opinions. IFC-BEE also engaged in additional technical work to inform these meetings on the subject of the case study reforms. Furthermore, technical material that had been produced with IFC-BEE input on policy issues other than the case study reforms was referenced at the meetings to promote the latter. Such additional IFC-BEE-funded activities comprised two further kinds of technical work that also featured elsewhere in the case studies. The first kind is the production and delivery of instructional material and professional trainings to support the advancement of legislative and procedural revisions. The second is technology development. For instance, for the VAT invoicing roundtable that it organized in 2011, IFC-BEE arranged a presentation by a Latvian expert on her country’s successful experience with the case study reforms (chapter 5). In another example from the same chapter, USAID-REFORMA/BGI’s grantee MF Consulting provided the Tax Service with operational guidelines and trainings on the new VAT administration procedures advanced by the project. In addition, USAID-REFORMA/BGI took state officials on study visits abroad to familiarize them with the electronic numbers VAT invoicing systems in other countries. With

127 respect to technology development, in 2011 the online tax payments platform which IFC-BEE had developed together with the Tax Service was brought up by a business leader at a policy meeting as an argument for finalizing the VAT form revisions (chapter 5). In the same chapter, IFC-BEE’s work on installing at the Tax Service a computer program for tracking VAT payments provided an argument in favor of replacing the high-security VAT invoices with electronic numbers. As for USAID-REFORMA/BGI, later on in the case study the project funded the production of the electronic numbers software. Did IFC-BEE, USAID-REFORMA/BGI and other policy players perceive and approach the different kinds of foreign aid funded technical-work outlined above as means of influence in legislative politics? This is the question that I turn to next.

2. What purposes was the technical work meant to serve in the efforts to advance the reforms through legislative politics, how, and why? To various degrees across the case studies, aid agents, state officials, business leaders and national private experts assigned three main purposes to foreign aid-funded technical work as a resource in advancing the examined reforms through legislative politics: ‘Securing support’: Prompting state officials and MPs who were reluctant to advance the reforms or had no fixed position on the matter to endorse legislative action on the proposed revisions. ‘Undermining resistance’: Weakening the capacity of state officials and business leaders who categorically opposed the reforms to deter their legislative advancement. ‘Enabling compromise’: Helping broker compromises between government and business that would make possible the passage of reform legislation.

There were two main ways in which foreign aid-funded technical work was envisaged to operate as a resource in reform politics. The first was associated with all three purposes attributed to the technical work in this capacity. It entailed the provision and application of technical evidence that substantiated the public interest arguments in a reform’s favor. The second was devising combinations of reform provisions which would be accepted by both government and business despite the inclusion of measures considered unfavorable by either. This way of operating concerned the purpose of ‘enabling compromise’, which pertained to advancing a given reform concept as a whole. However, the attribution of this purpose to foreign aid-funded technical work also comprised aspirations of ‘securing support’ for specific reform provisions. Besides IFC-BEE and USAID-REFORMA/BGI, the policy players who aimed for the technical work to serve the purposes of ‘securing support’, ‘undermining resistance’ and ‘enabling compromise’ included the state officials, business leaders and national private experts who patronized the case study reforms. Such national actors were either directly involved in the technical work, or tapped into it for the purposes envisioned. In other words, there was a demand among various types of policy players for foreign aid interventions to focus on technical work that could strengthen the public interest arguments in a reform’s favor, and/or could tailor a reform concept to reconcile the competing interests of government and business. Moreover, national policy players who

128 were averse to the revisions advanced by IFC-BEE and USAID-REFORMA/BGI also viewed the foreign aid-funded technical backing of pro-reform arguments as a politically significant activity. Why was foreign aid-funded technical work considered important as a means of ‘securing support’, ‘undermining resistance’ and ‘enabling compromise’ in the ways outlined above? It is possible that the related technical backing of pro-reform public interest arguments was typically intended to attend key policy players to the private economic and political benefits which they stood to gain from the revisions, as a bid for their support. The same strategy may have informed the foreign aid-funded crafting of compromise reform versions. It is also possible that some of the technical work acted as a vehicle for offering policy players financial incentives to endorse the reforms. These possibilities would imply that aid agents and other actors took technical work seriously because they believed in its potential for such political influence. However, I cannot assess these conjectures based on the collected research material. Instead, my observations have led me to infer that across the case studies foreign aid-funded technical work was understood to serve the three purposes in the ways envisaged because of the political significance that policy players attributed to two lines of public criticism. Firstly, across the case studies there was a perception among state officials that it was politically risky to face reprimanding in government and parliament for jeopardizing the national budget and public services. Secondly, state officials believed that it was politically risky to be criticized by the assertive business lobby for ignoring its concerns and for undermining the private sector. Both lines of criticism had a pronounced public dimension in the sense that in Kyrgyzstan there was an established practice of frank policy debate among public and private sector actors in the media and at policy events that were often covered by the latter. With respect to the first line of public criticism, state officials were apprehensive about facing blame for the fiscally adverse consequences that could follow from a reform (and, in chapter 4, for the negative effects that a reform may end up having on the security of public pensions). In addition, they considered it politically risky to advance reforms that were criticized as being imprudent, precarious or too uncertain in terms of their projected fiscal consequences. Note that I did not come across cases of state actors facing political repercussions for supporting reforms that were subjected to budget-related criticism. Rather, I found that a considerable level of political risk was attributed to the prospect of facing accusations from other government officials and MPs for jeopardizing the security of public finances. The second line of public criticism was a source of concern for state actors because of the sizeable, coordinated, outspoken and largely Bishkek-based group of business association leaders who were actively involved in legislative politics. This business lobby was treated in government and parliament as a source of political pressure to be reckoned with (as I also showed to be the case in chapter 2 for the broader realm of private sector governance). It is probable that business leaders mobilized different types of positive rewards and negative incentives that state actors took into account while making their policy decisions. However, the type of business pressure that was most pronounced in the case studies pertained to criticizing the government’s policy positions as

129 detrimental to the private sector and as dismissive of its opinions. Again, I did not find cases of state officials facing concrete political repercussions as a result of business criticism. What I did observe was their apprehension about the possibility of such repercussions. I also found that it was common and politically acceptable for business leaders, state officials and MPs to criticize one another before a wider policy audience and the general public. During the research period, Bishkek was the scene of frequent inter-stakeholder policy events. Media outlets embraced their freedom to report on the latter, and on the unfolding private sector policy disputes. Consequently, the budget-related and business criticism directed at state actors was often public. In the case studies and in the realm of private sector governance in general (see chapter 2), this public aspect came across as being central to the state actors’ concerns. In turn, because of these political risk perceptions in government all types of policy players appeared to believe that in order to stand a chance of securing a reform idea’s approval one had to credibly defend its fiscal and economic soundness, and to be able to do so on a rolling basis in public. What is more, technical evidence and reasoning was understood to be an important component of such defending. This perspective drove the demand for technical work that could mobilize the required evidence and reasoning, and for foreign aid engagement therein. Finally, there was often a tension between the government’s fiscal risk-aversion and the pressure on its officials to accommodate the wishes of the business lobby. Sometimes this tension translated into a demand for technical work that could help broker reform compromises by crafting legislative designs that would sufficiently insure the authorities against both budget-related and business criticism. Below I elaborate on my findings regarding the ‘what, how and why’ of the purposes that foreign aid- funded technical work was meant to serve in the case study reforms: first for ‘securing support’ and ‘undermining resistance’, then for ‘enabling compromise’.

‘Securing support’ & ‘undermining resistance’ Across the four case studies policy players approached foreign aid-funded technical work in the first place as a resource that could prompt state officials and MPs to endorse legislative action on the reforms (the purpose of ‘securing support’). In the voluntary patent and social insurance reform cases (chapters 3 & 4) policy players also employed technical work to weaken the capacity of business leaders and state officials to deter such legislative action (the purpose of ‘undermining resistance’). The key distinction between the two purposes pertains to the attitudes of the targeted policy players. In the case of ‘securing support’ the technical work was meant to influence decisionmakers in government and parliament who were skeptical about the reforms or did not have a fixed position. (It is possible that business leaders were also targeted in this way, but I found no explicit examples of this in the data). When directed at ‘undermining resistance’, the technical efforts were meant to frustrate the actions of state officials and business leaders who were opposed to the reforms in principle. (I did not come across specific cases of MPs being targeted in this manner). The way in which foreign aid-funded technical work was meant to ‘secure support’ and ‘undermine resistance’ was by supplying and publicizing technical evidence which substantiated

130 the public interest arguments in a reform’s favor (also by invalidated the public interest arguments against it). Such technical evidence included statistical data, legislative and economic analysis, opinion surveys, detailed reform blueprints intended to show a reform’s feasibility and desirability, information on related success in other countries, practical demonstrations, and reform-enabling technology. Why did policy players seek to draw on technical work that could validate the public interest arguments in favor of their reform positions, so as to ‘secure support’ for the revisions and to ‘undermine resistance’? For one, because state actors in Kyrgyzstan were apprehensive about the prospect of being criticized in government and parliament for jeopardizing the national budget. Secondly, because they also felt uneasy about advancing reforms that could provoke a vocal backlash from the business lobby. Both concerns were fueled by an established practice of critical media-covered policy debate among public and private sector actors. Moreover, the political significance attributed to budget-related and business criticism was mirrored by a desire among state officials and MPs to come across in public as champions of budget security and/or the private sector. The budget- and business-related risk perceptions among state actors led policy players to approach legislative politics in terms of the following assumption. In order to stand a chance of securing official support for a reform concept, it was necessary to ensure that the revisions could be viably defended against allegations of them posing a fiscal and/or economic hazard. The political risk attributed to accusations of this kind also meant that state actors who sought to promote a reform were wary of doings so without a credible shield of socioeconomic arguments in its favor. Crucially for my analysis, technical evidence and reasoning were widely conveyed as important to determining the political weight of such public interest arguments. In turn, this perspective fostered a demand among national policy players for foreign aid support to technical work which could help them (a) justify their reform positions as beneficial for the private sector and for fiscal security; and (b) request such justification from their opponents. For the same reason, through technical work foreign aid actors sought to ensure that their reform ideas could be credibly portrayed as being favorable to public finances and the private sector. And, like everyone else, they pressured the reform skeptics and opponents to provide technically-backed arguments to justify their positions, by highlighting countervailing technical evidence. To convey the specifics of how and why foreign aid-funded technical work was meant to ‘secure support’ and ‘undermine resistance’, it helps to examine my findings in terms of the effects intended for the purposes in question. I do this in the following subsections, illustrating each point with examples marked by arrows. I stick to this format in the rest of chapter.

The anticipated effects of ‘securing support’ Policy players aimed for two main effects when they counted on technical evidence to prompt uncommitted and hesitant state officials and MPs to sanction legislative action. Foreign aid actors primarily sought for the technical evidence to persuade the decisionmakers that their public interests reservations about the reforms were misplaced, and/or that the reforms would bring

131 socioeconomic gain. Thereby they aspired to assure the state actors that reform approval would not expose them to crushing accusations of having jeopardized the budget or the private sector.  Given the political pressure which the government faced to address the revenue losses and unfair competition associated with the voluntary patent system, state officials were interested in restricting the latter (chapter 3). However, they were also reluctant to endorse such reforms, out of concern that this would trigger business protests and would exacerbate tax evasion. Consequently, in its technical work IFC-BEE sought to prompt the government to approve the project’s voluntary patent reform concept by persuading it that the revisions would mitigate tax evasion and would be an attractive arrangement for the private sector. For this purpose IFC-BEE presented state officials with research findings and reform templates directed at substantiating the project’s claims.  State officials in general and tax officials in particular were skeptical about all reform proposals to simplify the rules of VAT administration (chapter 5). They suspected that such reforms would undermine the tax agency’s ability to monitor and induce VAT compliance, and would hence lead to criticism of their policy choices and performance. Meanwhile, IFC-BEE strove to prompt the Tax Service to streamline the VAT return and to proceed towards legislative action on replacing the high- security paper-based VAT invoices with a system of electronic numbers. In its application of technical work for this purpose, the project aimed to persuade the Tax Service with technical evidence that its reasons for reform reluctance were unfounded. E.g. it brought a Latvian tax expert to Kyrgyzstan to share her country’s successful experience with the promoted revisions.  USAID-REFORMA/BGI also worked on technical evidence that was meant to persuade the government that the shift to electronic numbers would not result in the Tax Service losing control over VAT flows (chapter 5). Thus, it commissioned national private experts to design new mechanisms for monitoring and inducing VAT compliance, to compensate for the suspension of the high-security invoices. In parallel, it strove to sustain the government’s cooperation on electronic numbers by engaging in technical work intended to assure the authorities that the shift would not disrupt the practical side of VAT collection. Namely, it developed technical content directed at demonstrating the reform’s operational feasibility/safety (e.g. tutorials and trainings for tax officials on the new system).  In 2012 the government was eager to resolve the standing overlap between the VAT and the sales tax, as it faced mounting business pressure to do so (chapter 6). However, it saw no fiscally prudent way of addressing the issue. It also feared to proceed otherwise, due to the political significance attributed by state officials to the prospect of being criticized for undermining the national budget. Having been asked to help address the problem, in early 2013 USAID-REFORMA funded foreign experts to conduct a study on indirect taxation policy in Kyrgyzstan and to develop reform recommendations. The project’s management sought for this analysis to persuade state actors that the reform option favored by the foreign experts was the one which would eliminate dual indirect taxation without undermining tax revenues. The study was also meant to convince the government that the alternative reform options either fell short of fully resolving the VAT-sales tax overlap, or clearly stood to exacerbate the country’s fiscal deficit and its problems with tax evasion. For policy players other than foreign aid projects, technical evidence was typically meant to oblige hesitating state actors to endorse legislative drafting, by making it difficult for them to justify reform postponement on public interest grounds. In other words, this is the main effect that such policy players aimed for when drawing on foreign aid-funded technical work for the purpose of ‘securing support’. The underlying logic was to put the state actors in a position where their insistence on reform deferment could be portrayed in public as causing undisputable harm to the national interest (a prospect that was considered politically risky in government).

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 In chapter 3 deputy prime minister Otorbaev used the findings of a World Bank-funded analysis on the negative fiscal and economic effects of the voluntary patent for the purpose of prompting disinclined state officials to commit to his policy design effort on curtailing the unregistered economy. Specifically, he sought to oblige them into compliance by criticizing reform inaction in public as damaging to the national budget and to Kyrgyzstan’s industry, with references to the findings. By repeatedly publicizing in government and parliament the World Bank’s calculations on voluntary patent-related tax evasion, Otorbaev aimed to make it more difficult for state officials who preferred inaction to drag their feet on his policy initiative.  In the case of VAT administration, business leaders drew on IFC-BEE-funded technical work to substantiate their pro-reform public interest arguments for the purpose of prompting state officials to endorse legislative progress on certain revisions (chapter 5). Thereby they aspired for the effect of obliging (more so than persuading) the Tax Service and other state actors to proceed as the business lobby desired. Facilitated by IFC-BEE, the inter-stakeholder discussions on inter alia the technical side of VAT administration offered a platform for the business lobby’s attempts to secure particular actions from the government. During such meetings business leaders aimed to corner tax officials into a situation where it became politically untenable for them to continue postponing the reforms. This entailed making it difficult for the Tax Service to deny that its arguments about the reforms’ fiscal perils stood on weaker technical grounds than the business lobby’s claims about their anticipated economic benefits. Some of the evidence that business leaders used for this purpose came from other IFC-BEE- funded technical work (e.g. the development of VAT-tracking software). In most of my observations, either persuading or obliging stood out as the main logic of policy players’ aspirations and efforts to ‘secure support’ for a reform by technically validating its socioeconomic credentials. However, it is probable that to some extent the majority of such intentions were directed at both effects. In a few instances I found an explicit overlap of this kind.  An aid agent who participated in a USAID-REFORMA-funded working group on resolving the VAT- sales tax overlap anticipated that its legislative proposal was bound to be approved in government (chapter 6). She argued that this was the case because the working group’s technical analysis would certainly be first-rate. Therefore, it was guaranteed to justify the advantages of the legislative proposal effectively enough to oblige unconvinced officials to make way: given that they would not have the technical capacity to credibly defend their reservations in public. In addition, the working group’s superior technical reasoning would appeal to state actors who were keen to side with reform proposals that would allow them to claim credit for championing the public good. Thus, the technical work would also persuade pivotal decisionmakers to support the draft.  The national private experts who produced the World Bank-funded shadow economy study aspired for their analysis to prompt the government to proceed with voluntary patent reforms along the lines proposed in the study (chapter 3). For one, with their findings they sought to persuade key state officials that by delaying the reforms the latter missed an opportunity to secure additional tax revenues (which stood to bring political credit). In addition, the study’s authors anticipated that the evidence on the damaging effects of the voluntary patent would oblige the reluctant Tax Service to take concrete legislative steps to discipline the system. The evidence was expected to do so by making the agency’s inaction look detrimental to the public interest. As I will show below, sometimes the effects of persuading or obliging state actors to endorse a reform were sought from technical work that was also directed at weakening the capacity of policy players who categorically opposed the revisions to deter their legislative advancement (the purpose of ‘undermining resistance’).

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The anticipated effects of ‘undermining resistance’ On some occasions in the voluntary patent and social insurance case studies, policy players aimed for the pro-reform technical evidence mobilized with foreign aid input to undermine the capacity of the reforms’ opponents to deter their advancement (chapters 3 & 4). There were two main effects that policy players aspired to as part of this objective. Firstly, the technical evidence was meant to make it difficult for a reform’s detractors to compel its proponents to admit the necessity of reform deferral. It was to do so by discrediting the socioeconomic legitimacy of the contra-reform position. As long the opposition could credibly claim that a reform jeopardized the budget or the private sector, attempts to push through the revisions could be legitimately denounced in public as blatantly overriding the national interest (a scenario which intimidated pro-reform state officials). Foreign aid-funded technical work was thus mobilized to turn the tables by delivering the evidence that weakened the fiscal and economic grounds for reform suspension or postponement (also by showing the urgent socioeconomic need for the revisions).  Most business leaders were categorically against any downscaling or disciplining of the voluntary patent tax regime (chapter 3). The government feared provoking business criticism by launching such reforms. However, at the same time it was keen to deflate the system (given the reprimanding it faced from other quarters for failing to address unfair business competition that sprung from the voluntary patent, and to secure the fiscal revenues missed because of related tax evasion). Therefore, when a draft decree was launched in 2014 to modestly restrain the tax regime, the government mobilized two World Bank-funded studies for the purpose of undermining business’ ability to deter its advancement. In 2014-2015, state officials recurrently borrowed from the World Bank-funded analysis of the socioeconomic damage inflicted by the voluntary patent to justify in public the government’s plans to gradually minimize the system. This legitimizing discourse on the reform in general was meant to erode the weight of the arguments raised by business leaders against the specific legislative proposal. Thereby, it was to help the government withstand politically the business lobby’s resistance to the bill.  The Social Fund was intent on obstructing the transfer of social insurance payments administration to the Tax Service (chapter 4). Business leaders strongly backed the reform. In 2011-2012 IFC-BEE supported the interagency commission that was developing a set of legislative proposals on the transfer. As part of this technical work, the commission’s pro-transfer members were steadily procuring procedural and technological content to deplete the Social Fund’s reservoir of technical claims for portraying the reform as risky for the pensions system. By eroding the socioeconomic legitimacy of the Social Fund’s position, they sought to gradually make it politically untenable for the agency to insist on postponing the submission of the legislative proposals to government. The commission’s work was regularly discussed before a wider range of policy players and the media. Accordingly, the pro-reform camp assumed that it would be politically unrealistic for the Social Fund to continue blocking the proposals without adequate justification, given the grounds for uproar that this would offer business. Vice versa, given the public criticism that this would trigger, the transfer supporters could not simply ignore the Social Fund’s demands to hold back the draft laws as long as the agency delivered sound socioeconomic reasons for the delay. In parallel, in the social insurance case study the technical backing of pro-reform public interest arguments was aimed at the effect of preventing the contra-reform camp from persuading a key ambivalent decisionmaker to support its position, by making it unattractive politically.

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 In 2012 prime minister Satybaldiev had formally endorsed the transfer. However, it was in his interest to avoid being criticized for undermining public pensions (chapter 4). The data suggests that the Social Fund successfully applied technical work to capitalize on this interest, compelling the prime minister to disassociate from what it showed to be a socially harmful initiative. Officially, Satybaldiev’s decision to suspend the reform in March 2013 rested on an appeal sent to him by the Social Fund. The appeal’s technically-backed assertion was that while the Social Fund had been competently managing the function, the Tax Service would definitely botch the job. In response, the transfer supporters acted to publicly dispel this claim. They publicized in the media the procedural details which they had developed earlier with IFC-BEE assistance, arguing that unlike the Social Fund the Tax Service was ready to handle the function without harming the pensions system. This campaign was meant to turn reform suspension into a more legitimate target of socioeconomic criticism, as compared to reform advancement. In general, it was to make it less politically viable for the Social Fund to pressure the transfer supporters to accept defeat. In particular, the pro-reform camp intended to weaken the Social Fund’s capacity to sustain Satybaldiev’s backing by making it politically imprudent for the prime minister to continue siding with reform suspension. In their press statements the transfer supporters also stressed that Satybaldiev and the Social Fund had acted behind the business community’s back, and had ignored the prime minister’s official endorsement of the diligent technical work carried out on the reform. This too was directed in particular at stoking the prime minister’s wariness of business criticism. Thus, in the broad sense the pro-reform camp’s technically-reasoned campaign was meant to serve the purpose of weakening the Social Fund’s capacity to deter the transfer. Meanwhile, one of the campaign’s specific objectives was to compel the wavering Satybaldiev to re-endorse the reform process. In other words, there was an overlap in the ‘undermining resistance’ and ‘securing support’ purposes attributed to the technical work examined in the case study. An overlap of this kind was not manifest as distinctly anywhere else in the case studies. My hunch is that with more data, it would have been. There is another way in which the transfer of social insurance payments administration stands out among the case studies. Namely, it contains concrete indications of policy players expecting means other than technically-backed public interest arguments to be decisive in the reform contest. For instance, some of my primary sources mentioned speculations that the Social Fund had presented prime minister Satybaldiev with financial incentives to suspend the reform. However, in such instances the respondents also insisted that technically-backed public interest arguments mobilized by the Social Fund still mattered. This and the persistence with which the competing sides in the contest sought to defend their positions in public suggests the following. In the case study, regardless of the relative weight attributed to technically-backed public interest arguments as a decisive means of influence, their voicing was seen as a precondition for success. In other words, policy players may have expected other resources to prove central in deciding the transfer battles. Nevertheless, there was a broad understanding that to do the job these other resources needed a credible cover of socioeconomic justification. This was the case because in Kyrgyzstan private sector reforms were guaranteed to face fiscal and economic criticism in public from those whose interests they challenged. Accordingly, unless the reforms were equipped with a sufficiently convincing counter-narrative, they were doomed to be a no-go for state actors who

135 were apprehensive about such criticism. This fostered a demand for technical work that could supply and promote such a counter-narrative, and for foreign aid engagement therein. I found further evidence for this conjecture in chapter 3. There, it pertained to the determination with which the two sides in the voluntary patent reform contest made sure to legitimize their positions in the media and at policy meetings with technically-backed public interest arguments.

‘Enabling compromise’ Some of the technical work that foreign aid actors engaged in on VAT administration and indirect taxation was envisaged as a means of helping broker a compromise between government and business that would permit the codification of the reform concepts (chapters 5 & 6). At the level of each reform as a whole, the way in which the technical work was expected to fulfill this ‘enabling compromise’ purpose was by devising a set of provisions that both parties would sign up to even if they disliked some of the details. Policy players’ wishes for foreign aid-funded technical work to be aimed at the design of such tradeoffs were defined by the tension between the apprehension that state officials felt about budget-related criticism on the one hand and business criticism on the other. In Kyrgyzstan in 2010-2016 the business lobby had considerable political power over the government. What is more, to a significant extent this power rested on the unease felt by state officials about the prospect of facing public criticism from and on behalf of business leaders for jeopardizing the private sector. The overall result was that state actors took the demands of business into account when deciding whether or not to endorse a reform concept or specific reform details. However, the government was also wary of advancing reform ideas which it deemed to appear too risky for the national budget. In particular, state officials were concerned about the criticism that such reforms were likely to attract in government and parliament, which often spilled over into the media. Meanwhile, the business lobby typically championed precisely this sort of reform ideas. Therefore, in chapters 5 & 6, aid agents, state actors and national private experts felt that the case study reform initiatives had to strike the following balance in order to stand a chance in legislative politics. On the one hand, they had to appear secure enough from the fiscal perspective. On the other, the anticipated business discontent could not be of a magnitude that state actors were unwilling to endure. Technical work was required to pull off this balance, which led to policy players looking to mobilize it through foreign aid. Consider how this played out in the case study of VAT administration (chapter 5).  USAID-REFORMA/BGI believed that a wide range of revisions were necessary to meaningfully strengthen Kyrgyzstan’s VAT administration system (chapter 5). The project decided that its best shot at securing these different measures lay in promoting them as part of a single, comprehensive reform plan. This decision rested on the premise that some of the project’s favored revisions were bound to be obstructed by business criticism, while others were bound to be questioned by the government as too likely to exacerbate tax evasion. The project’s technical work thus focused on developing a legislative proposal that presented both government and business with measures that credibly addressed their central grievances against the standing system. Thereby the aid actor aspired for both sides to calculate that the bill was worth accepting despite the unwelcome measures included in it (which, in turn, were meant to secure the approval of the opposite party). In this way the project’s

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legislative effort was intended to help broker a compromise between government and business that would permit the desired overhaul of VAT administration. In chapter 6 the tension between budget-related and business criticism translated into a demand for foreign assistance with crafting a combination of provisions which would allow state actors to appease the business lobby with reform progress, while bypassing measures which the government considered inadmissible from the fiscal perspective.  In 2012 state officials were caught between a desire for progress on resolving the VAT-sales tax overlap as was vocally demanded by business, and the lack of a fiscally acceptable reform version. The business lobby insisted on particular provisions that were a fiscal no-go for the government, unless offset by certain other measures. In turn, the latter measures were categorically rejected by business. National experts struggled to devise an alternative way of reconciling the two taxes that did not run into this problem. They were also frustrated with the resulting impasse. Consequently, when in early 2013 USAID-REFORMA recruited foreign experts to study the issue, there was a demand across national policy circles for the consultants to craft a reform version that would be palatable enough to both government and business to enable its legislative approval. In both chapters (5&6), some of the policy players who wanted to see the foreign aid-funded technical work operate in the way described above also sought for it to prompt ambivalent state actors to approve specific measures as part of the reform compromise. In other words, the technical work that policy players saw as a vehicle for ‘enabling compromise’ was also meant to serve the narrower purpose of ‘securing support’ for certain reform particulars. At this level, the technical work was expected to operate by validating the public interest arguments in favor of the desired revisions, as discussed in the preceding section. Consider the following examples.  The shift from high-security VAT invoices to electronic numbers was one of the main revisions advanced in the legislative proposal whereby USAID-REFORMA/BGI hoped to reach a compromise between government and business on comprehensive reforms to VAT administration (chapter 5). At the level of this specific reform, some of the project’s legislative work was directed at prompting skeptical state officials to endorse the shift. The way in which it was expected to serve this narrower ‘securing support’ purpose was by developing VAT compliance control measures to replace the high- security invoices. The technical credibility of these measures was meant to persuade state officials that the reform would not bring negative fiscal and political consequences.  For some national experts, the ‘compromise enabling’ purpose which they assigned to USAID- REFORMA’s analysis of the VAT-sales tax overlap also comprised a narrower, more partisan purpose: that of prompting skeptical state officials to approve a particular measure in their agreement with business (i.e. ‘securing support’) (chapter 6). Specifically, the experts counted on USAID- REFORMA’s study to deliver authoritative technical evidence which would show that the option of limiting the VAT (rather than the sales tax) was fiscally judicious and conducive to decreasing tax evasion. One bet was that such evidence would persuade the authorities that this option stood to bring fiscal gains rather than budget-related criticism. Another was that it would oblige state officials to brave downscaling the VAT, by exposing them to business criticism for rejecting what was credibly demonstrated to be the optimal reform version.  After the completion of USAID-REFORMA’s study in early 2013, the demand for technical work that would ‘enable a compromise’ on the VAT-sales tax overlap remained in place (chapter 6). A working group started operating at the Ministry of Finance with USAID-REFORMA support, formally tasked to design reform content that would reconcile the core demands of government and business. The two

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USAID-REFORMA aid agents in the working group appeared to understand this task to be its general purpose. However, they also aspired to help broker a reform deal which they considered fiscally optimal and conducive to private sector development. For the aid agents, the compromise brokering would thus involve targeting some of their technical effort at ‘securing support’ for particular measures, by analytically substantiating their value for budget and business. Judging from the legislative proposals submitted on the VAT-sales tax overlap in 2014-2015, the designated working groups active during this period were geared above all towards satisfying the requests of government and business for a reform design that better reflected their respective interests. In this way, the participating (aid agent) experts directed their technical work towards the purpose of ‘enabling compromise’ until both sides decided that they got the best deal possible under the current political circumstances. In other words, the experts who participated in the working groups were not (or no longer) intent on producing technical evidence to persuade or oblige state actors to approve a specific reform concept which they or their foreign aid sponsors considered optimal. After a fresh set of revisions, in December 2015 a law that mitigated the VAT-sales overlap was finally passed. This outcome suggests that the associated technical work eventually fulfilled the ‘enabling compromise’ purpose attributed to it. I expand on this inference in the next section.

3. What can be said about the extent to which the technical work served the purposes envisioned? First, let’s briefly recap on the main findings presented so far. The foreign aid-funded technical work examined in the case studies was most often envisioned to serve the purpose of prompting reluctant and uncommitted state actors to endorse legislative action on the advanced reforms. On some occasions, it was also meant to serve the purpose of weakening the capacity of state officials and business leaders who categorically opposed the reforms to deter their legislative advancement. The main way in which the technical work was meant to serve both purposes was by channeling technical evidence that substantiated the public interest arguments in favor of the reforms. The demand for foreign aid-funded technical work to operate in this way was defined by the political significance that state actors attributed to two lines of policy criticism: (a) criticism in government and parliament for jeopardizing the national budget and public services; (b) criticism from the business lobby for harming the country’s private sector. Being subjected to either line of criticism was perceived to be politically risky. In particular, this was the case because of the pronounced public character of the practice (it was common for the accusations to be delivered and amplified in the media and at media-covered inter-stakeholder policy meetings). As a result, in their efforts to secure the government’s endorsement of a reform concept, policy players believed that it was necessary to credibly support it with one or more of the following arguments: that the reform would not undermine (or would in fact bolster) fiscal security; that postponing the reform meant postponing a major improvement for the private sector; that the reform would not harm honest businesses. Technical evidence was considered to be something that increased the political weight of such public interest arguments. Therefore, there was a strong demand among aid agents and national policy players for foreign aid

138 engagement in technical work that could help supply or articulate such evidence. Moreover, in chapters 5 and 6 the tension between the government’s wariness of budget-related criticism and its concerns about business criticism led to aspirations for foreign aid-funded technical work to serve a third purpose. This purpose was to help broker reform compromises between government and business, by devising combinations of reform provisions which would be accepted by both despite the inclusion of measures deemed unfavorable by either. The above findings pertain to the central aim of my study, which was to bring out the role of foreign aid-funded technical work in legislative politics as understood by different policy players. Still, in my research I also wanted to formulate a cautious perspective on how far the technical work was effective at serving the purposes attributed to it, and on the factors that conditioned its influence. In this respect, I observed that the mobilization of foreign aid-funded technical work towards ‘securing support’, ‘undermining resistance’ and ‘enabling compromise’ was not generally followed by swift and conclusive approvals of the promoted measures. However, I did identify numerous instances where the technical work seemed to enable provisional or even conclusive reform progress by prompting policy players to proceed with legislative action, and/or by weakening the ability of reform opponents to prevent this. In chapter 6 I also observed how foreign aid agents participated in a protracted process of technical design that at the end helped broker a legislatively compromise between government and business. What does the research data suggest regarding the factors that may have defined the degree of success with which the foreign aid-funded technical work served the purposes envisaged for it? In the instances where I observed the technical work to deliver, the strength of the provided technical evidence appeared to matter. So did the technical ingenuity of the reform designs crafted to reconcile the demands of government and business. Still, I also formed the impression that the strength of the technical work mattered less than the level of political risk attributed to the public criticism that the reform was expected to avert or trigger. It thus seemed that reform supporters were able to capitalize on solid technical material to an extent that was conditioned by the strength of the concerns in government about facing fiscal and/or business criticism: as a result of reform endorsement or reform deferral, also relative to one another. Below I illustrate these propositions.

Limited immediate and lasting influence On most occasions in the case studies, foreign aid-funded technical backing of pro-reform public interest arguments was not readily followed by a reform idea’s endorsement. An important reason for this appears to have been the general reluctance in government to commit to major revisions in the realm of business taxation. In the first place, this reluctance rested on the substantial political risk attributed by state officials to the prospect of facing budget-related criticism in government and parliament, which was considered likely during any attempt to reform taxation. Thus, when presented with technical evidence on the fiscal soundness of measures that streamlined or altered the tax system, state actors usually maintained their risk- averse position and brushed aside the evidence. It was also common for state officials to feel

139 politically confident enough to ignore the business lobby’s foreign aid-backed use of technically- reasoned arguments to criticize the government for postponing reform. That is, state officials were usually more worried about being reprimanded for a reform’s harmful effects on the budget.  For instance, in 2011-2013 the business lobby struggled to compel the Tax Service to begin working on the suspension of high-security VAT invoices with its argument that there were no valid fiscal grounds for delaying the measure (chapter 5). In the face of such pressure, the tax agency and other state actors continued to object that the evidence for the reform’s fiscal safety remained inconclusive. They stuck to this position even when IFC-BEE teamed up with business leaders to argued that a new VAT-tracking software which the project had helped install at the Tax Service removed the added value of the high-security invoices as a VAT compliance control mechanism. Moreover, sometimes a reform idea that state actors judged to appear too risky from the fiscal perspective was also expected to provoke a strong negative (and public) reaction from business. In such instances, the government’s apprehension of business criticism cemented its refusal to approve the reform idea, even when detailed foreign aid-funded technical work was directed at demonstrating that honest businesses would in fact benefit from it.  In 2013 USAID-REFORMA’s indirect taxation policy study failed to prompt state officials to endorse legislative drafting on its preferred reform option (chapter 6). For one, the government dismissed this option on the grounds that the technical evidence presented in the study was not conclusive enough to guarantee that the revisions would not undermine tax revenues. Secondly, the reforms promoted in the study included measures that alarmed state actors because they had been criticized as socially harmful by business leaders. In a move that would have reinforced the government’s concerns about these measures, business leaders responded to the study by arguing that its technical evidence was insufficient to convince them that the advocated reform concept would be good for the private sector.  In 2010-2013 IFC-BEE was unable to persuade the government to endorse the project’s reform concept on revising the voluntary patent system with the research and analysis that it had engaged in to substantiate the fiscal and economic merits of its recommendations (chapter 3). Aid agents attributed this outcome to the government’s engrained suspicion that (contrary to the project’s technical reasoning) IFC-BEE’s reform ideas would in fact exacerbate tax evasion and would provoke business leaders to stir up private sector protests. The considerable level of political risk attributed by state actors to both budget-related and business criticism also meant that it was technically difficult to come up with combinations of reform provisions that sufficiently appeased the business lobby and did enough to mitigated the government’s fiscal worries. This was especially so given that the aid actors involved in such technical work were often guided by their own fixed ideas about which reform measures were best. Consequently, more often than not foreign aid-funded technical work did not succeed at fulfilling the purpose of helping broker a reform compromise between government and business.  In 2014-2015 USAID-REFORMA/BGI strove to broker a compromise between government and business on a comprehensive overhaul of VAT administration, by advancing a legislative proposal conceived as a system of complementary rewards and concessions (chapter 5). The stranding of this proposal and the eventual adoption of a much narrower law on electronic numbers suggests that the plan misfired as it comprised too many potential targets for criticism. In this interpretation, the legislative deal unraveled because one or more of its many provisions either caused too much trouble with business leaders, or got rejected by state actors as too risky for the budget.

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 Contrary to what was sought from it by some national actors, USAID-REFORMA’s indirect taxation study did not set out to devise a reform option that would avoid raising the VAT rate (an absolute no- go for business) while persuading the government that restricting either the sales tax or (preferably) the VAT would not jeopardize the budget (chapter 6). Instead, the study’s authors championed what they believed to be the optimal way forward. This entailed raising the VAT rate and replacing the sales tax with a new nominal VAT, which made business leaders suspicious and was questioned as too destabilizing by fiscally conservative state officials. Accordingly, the study did not deliver a compromise reform version that could be readily advanced in a legislative proposal. However, pro- business state actors did consider the study’s technically-backed fiscal warnings against restricting the VAT authoritative enough to pose a political challenge to their objective of promoting this measure. They thus prepared to amass countervailing technical evidence in order to tackle this challenge. In spring 2014 USAID-REFORMA/BGI let go of its ambition to secure approval for its preferred approach to resolving the VAT-sales tax overlap (chapter 6). Instead, the aid agents involved in the reform now seemed to focus on identifying provisions that would offer enough reassurance to both government and business to enable a deal on the matter. Even then, the technical work that they engaged in did not make the cut until December 2015, when (aid agent) experts made a set of major changes to the reform bill pending in parliament. These changes finally reflected the relative power of state actors and business leaders to control the reform’s content. As I see it, thereby the foreign aid-funded technical work eventually fulfilled its purpose of ‘enabling compromise’. I discuss this and other examples of success in the next subsection.

Numerous instance of partial or provisional success Despite the pattern of limited influence reported above, there were instances in all case studies where foreign aid-funded technical work appeared to contribute to partial or provisional reform progress by prompting decisionmakers to approve legislative action, or by weakening the ability of reform opponents to prevent this. In some of these cases the technical evidence leveraged for ‘securing support’ and ‘undermining resistance’ was seemingly strong enough to mitigate the level of political risk attributed by state actors to anticipated reform-related criticism.  By summer 2013 the Tax Service had not been persuaded or obliged by IFC-BEE-facilitated technical work to proceed with replacing the highs-security VAT invoice with electronic numbers (chapter 5). The agency ignored pro-reform business pressure, and insisted that IFC-BEE’s technical guarantees did not provide enough protection against fiscal losses. In contrast, at the turn of 2014 the government approved USAID-REFORMA’s plans for legislative drafting on the reform. Judging from the Tax Service’s earlier objections, the decisive piece of evidence behind this success was the project’s articulation of concrete ideas on the VAT control mechanisms which it would develop to compensate for the suspension of the invoice.  However, the VAT control mechanisms developed by USAID-REFORMA were scrapped from the laws that introduced electronic numbers in June 2016 (chapter 5). This suggests that by then such mechanisms were no longer needed to convince the government that the reform would not undermine tax revenues. How come? My explanation is that better technically-backed arguments had become available for this purpose. These arguments were more politically suitable than the VAT control mechanisms because, in contrast to the latter measures, the reform content behind them was unlikely to attract business criticism. The new arguments rested on (a) the operational support provided by USAID-REFORMA/BGI to the reform and (b) the completion of the ADB-funded project on the

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automation of the tax agency’s internal processes. As cases of technical work, ‘a’ and ‘b’ would have assured the government that the Tax Service would be able to introduce electronic numbers without major disruptions to tax collection, and without the need for compensating measures that would provoke criticism from business. In other cases, the technical evidence came across as credible to a point that state actors became more worried about facing criticism for postponing the reform or about missing out on the political rewards of its endorsement (both relative to their misgivings about the revisions).  In 2011 the business lobby obliged the Tax Service to finalize a set of simplifications to the VAT form, by referring in its pro-reform statements to the online tax filing service that had just been launched with IFC-BEE assistance (chapter 5). With explicit backing from the project, the business lobby argued during a media-covered policy meeting that by insisting on the fiscal necessity of the third VAT return copy (that had to be submitted in person) the Tax Service made the new online service useless for many businesses. This technically-backed argument did not mitigate the tax agency’s concern that suspending the third copy would weaken its ability to control for irregularities in the VAT flows. However, the evidence behind it was too strong for the Tax Service to ignore at the cost of provoking a public outcry. Thus, in this case the tax agency concluded that the scenario of facing business criticism posed a greater political risk than the fiscal uncertainties of the reform.  In 2012-2013 the pro-reform technical evidence in the World Bank-funded shadow economy study appears to have prompted state officials to proceed with legislative work on disciplining the voluntary patent system (chapter 3). Judging from the interviews, the study’s analysis may have helped persuade pivotal state actors that the political value of the reform’s prospective fiscal gains was worth the risk of business criticism. In addition, it may have helped oblige the Tax Service to take this risk, by exposing it to criticism in government and parliament for failing to engage in a fiscally and economically crucial reform. In several of the instances where foreign aid-funded technical work appears to have fulfilled its ‘securing support’ and ‘undermining resistance’ purposes, reform advancement was subsequently reversed, or halted after the adoption of a limited set of reform provisions. However, afterwards a reform could be revived with the help of foreign aid-funded technical work, and pushed further with partial success. Once again, such setbacks and revivals, and the degree of reform progress, were conditioned by how worried state actors felt about the reforms triggering budget-related or business criticism. Such concern mattered in absolute terms. They also mattered relative to the level of anxiety in government about inviting comparable criticism for reform deferral; and relative to the political value attributed by key state actors to the acclaim expected for the reforms. Moreover, the data also suggests that the outcomes of legislative battles depended on the weight of the technical evidence presented with foreign aid input relative to the weight of the counterevidence mobilized by the opposition. In other words, my take on the factors that defined the leverage of foreign aid-funded technical work in advancing the case study reforms is threefold. For one, the potential of public interest arguments to affect the course of legislative politics was conditioned by the credibility of the underlying technical backing. Secondly, technical evidence as a means of influence was leveraged with impact by all sides in the reform contests, i.e. whether foreign aid-backed or not. Finally, policy players’ ability to exercise such influence was defined by the direction in which and how far their reform positions

142 vs. those of their rivals stoked state actors’ concerns about fiscal and private sector-related criticism.  For example, it seems that in 2011-2012 the pro-reform members of the interagency commission on the transfer of social insurance payments administration gradually invalidated the Social Fund’s public interest objections to the extent that forced the agency to approve the submission of the commission’s legislative proposals to government (IFC-BEE participated in this technical effort) (chapter 4). Given the technical evidence amassed against its position, the Social Fund could no longer insist that the other commission members defer the proposals. If it did, it would be attacked in public for groundlessly blocking a socially imperative reform that was vocally backed by business. The prime minister would have been unlikely to side with the Social Fund if this happened, out of concern for being criticized for sabotaging public pensions and for neglecting his official reform pledges.  However, after the bills were submitted, the Social Fund gained first-strike advantage by launching a surprise attack of technically-backed arguments against the transfer, which it had revived and repackaged in a formal letter to the prime minister. This letter, which urged the official to suspend the reform, was believed to have done its job by capitalizing on the prime minister’s wariness of pensions- related criticism. The pro-reform camp reacted in kind, i.e. with press statements that technically refuted the Social Fund’s accusations and criticized the prime minister for negating his commitments to business. Thereby, it sought to turn the tables: i.e. to make it politically imprudent for the prime minister to continue adhering to the Social Fund’s request. By 2014 the prime minister agreed to revive the reform. However, the interagency commission had to develop its legislative proposals anew. This mixed outcome suggests that the pro-transfer evidence was persuasive enough to make the prime minister worry about the political repercussions of ignoring the business lobby’s anger and its claims that the Social Fund mismanaged the function. At the same time, it indicates that the Social Fund’s technical reasoning was also credible enough for the prime minister to fear the risk of being reprimanded for recklessly rushing the reform.  In 2014-2015, despite facing persistent and worrisome public criticism from business, the government advanced and adopted a decree of modest restrictions to the voluntary patent system. In my reading of the data, the government’s willingness and capacity to do so was informed by two World Bank- funded studies (chapter 3). State officials drew on these studies to legitimize their legislative effort and to deflect the business lobby’s accusations that the draft decree was fiscally unfounded and disastrous for the private sector. Why did the government mobilize the World Bank’s technical work in a way that helped it propel the reform, while bypassing IFC-BEE’s research on the topic? As I see it, a key reason for this was that the World Bank’s technical evidence was more detailed and concrete in exposing the link between the voluntary patent and tax evasion, and the urgency of this problem. Therefore, it was better suited for the purpose of undermining the capacity of business leaders to deter pro-reform legislation. The World Bank-funded research provided the government with a shield of amply credible public interest arguments to politically endure the business lobby’s criticism while pushing its draft decree into law.  Nevertheless, after adopting the decree the government did not proceed with its more ambitious voluntary patent reform ideas. How come? The reason for this, I argue, is that the authorities remained too apprehensive about the public criticism which such reforms would face from business. The pro-reform evidence in the World Bank studies did not have the weight to persuade state officials that by referencing it they would safely withstand business pressure while advancing further revisions. Finally, in chapter 6 I observed a shift in the relative level of political risk attributed by state actors to budget-related as compared to business criticism. The shift helped foreign aid-funded

143 technical work deliver on the main purpose envisioned for it. This purpose was ‘enabling compromise’ on the reform objective of mitigating the VAT-sales tax overlap.  Judging from the discussions that took place at policy meetings and in the media, by 2015 state officials had become more open to fiscally risky reforms due to a change in economic conditions. Since mid-2014 Kyrgyzstan’s private sector was facing a dual challenge: a regional recession, and the country’s impending accession to the Eurasian Economic Union. (Furthermore, parliamentary elections were scheduled for October 2015). Accordingly, state actors had become more apprehensive about business criticism. This concern was now more pronounced in government than the desire to avoid facing blame for jeopardizing the national budget. In my interpretation of the data, it was because of this shift that by 2015 the government was intent on finalizing the VAT and sales tax reform, and was prepared to do so according to the preferences of business. The economic changes thus helped establish the general outlines of a compromise that was impossible a few years back. The government was now ready to consider provisions that it had vetoed as fiscally unacceptable in 2012- 2013. In turn, it became easier for (aid agent) experts to complete what was a less demanding reform compromise framework with technical content that would satisfy business leaders while providing sufficient fiscal reassurance to state officials.  That said, in 2015 the government was worried enough about the fiscal risks of restricting both the VAT and the sales tax without raising the VAT rate to push for a reform design that offered at least a tentative means of compensating the budget for less copious indirect taxation. Hence, in autumn 2015 (aid agent) experts were asked to devise a reform version that rested on somewhat better chances of sparing tax revenues. This version included new ways of mitigating the fiscal risks of the core provisions. However, the analytical indications that these measures would make a real difference remained far from conclusive. Still, the government accepted the deal as the best one it could get, given the level of political risk which it now associated with business pressure. In sum, in 2014-2015 the government’s desire to appease the business lobby grew stronger relative to its unease at the idea of being criticized for jeopardizing budget security. This paved the way for foreign aid-funded technical work to help broker the December 2015 law on indirect taxation by crafting a legislative design that embodied a reform compromise heavily skewed towards the interests of business.

Closing remarks The central aim of my study has been to present a set of empirically-grounded findings on the role of foreign aid-funded technical work in the politics of several business taxation reforms in Kyrgyzstan. By doing so I have aspired to provide a starting-point for further research and debate on the foreign aid industry’s involvement in institutional reform politics around the world. However, what do my findings say about this involvement more broadly, and with what implications for where to take our research on the topic? This question is the focus of chapter 8 – the study’s conclusion.

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Chapter 8. Conclusion

Chapter 7 presented my findings and propositions on the role of foreign aid-funded technical work in the legislative politics of four reforms to business taxation that unfolded in Kyrgyzstan in 2010-2016. What do these results of my empirical research say more generally that could inform future examinations of foreign aid involvement in institutional reform politics around the world? In this final chapter I present what I consider to be the six core insights of my analysis, and suggest related directions for further research and discussion. First, I recap on the objectives, conceptual framework, and empirical findings of my study.

Research summary I opened the study by arguing that it was important to find out more about the role that foreign aid-funded technical work played in the politics of institutional reforms in recipient countries (adopting the term ‘technical work’ to designate all the activities of research, analysis, content design and professional instruction on matters of government policy and administration). I observed that such activities were standard components of foreign aid operations directed at advancing institutional reforms (i.e. reforms to laws, regulations, administrative procedures, and decision-making/working practices across the public sector and at its interface with economy and society). I also noted that foreign aid programs with an institutional reforms focus were a major branch of the billion-dollar development aid industry. I then flagged the problem that – nevertheless – little research was available on whether and how foreign aid-funded technical work operated as a means of influence in institutional reform politics. This, I argued, was a significant academic shortcoming and a significant oversight from a policy perspective. In the first sense it meant that political science and other relevant disciplines were overlooking a pervasive realm of political relations. In the second, it impaired the efforts of foreign aid actors to render their industry more effective, and reduced the depth of the debate about this industry’s purposefulness and legitimacy. In chapter 1 I also foregrounded a foreign aid policy movement that promoted a more politically-informed mode of ‘doing development’, and of supporting institutional reforms in particular. This ‘thinking and working politically (TWP)’ community has urged development agencies to part with what it has presented as a prevailing and misguided mode of running foreign aid operations: as exercises in transferring technical expertise and providing technical solutions to policy problems. In place thereof, the TWP movement has encouraged foreign aid actors to approach institutional reforms as a political contest. While championing this shift in mentality and methods, TWP authors have emphasized that skilled technical work remained crucial to the promotion of institutional reforms that could encourage developmental progress – provided that it was carried out in a politically savvy, problem-driven, iterative, adaptive and locally led manner. However, the TWP movement has not conducted explicit empirical research on whether and how foreign aid-funded technical work was being internalized by the politics of institutional reforms in different countries. Neither has it developed systematic theory on this

145 topic. In other words, the TWP literature has largely left unexplored the issue of what participation in institutional reform politics through technical work may entail in current foreign aid experience. I proposed that targeted research into the standing practices of such participation would be important in two ways. First of all, it would benefit the TWP agenda by helping its advocates flesh out how foreign aid to institutional reforms could become more effective by ‘thinking and working politically’ while it engaged in technical work in particular. Secondly, it would address a significant gap in academic knowledge. From there, I adopted the research aim of contributing to a better understanding of the role that foreign aid-funded technical work played in institutional reforms, by examining a particular country, policy area and arena of politics. For this purpose I selected Kyrgyzstan in 2010-2016, four case study reforms to business taxation, and legislative politics (defined as the political contest and bargaining around the initiation, drafting and passing of legislation). Moreover, I approached my research topic from a perspective that prioritized subjective experience. In chapter 1 I posed two open questions that reflected this perspective: Do the national actors who compete over institutional reforms largely ignore or discard foreign aid- funded technical work and its outputs? Or do they treat the technical work as a resource in the political contest, in the sense of either mobilizing or resisting it as a means of influence? To these questions could be added a third: do the foreign aid actors themselves see technical work as a resource in institutional reform politics? The focus of my empirical analysis has thus been on establishing whether and how foreign aid-funded technical work was perceived, employed and dealt with by different policy players as an activity that could affect the course of legislative battles. Specifically, I sought to determine the purposes which the technical work was meant to serve for the different policy players involved in the reforms, as well as how and why it was meant to serve these purposes (with ‘purposes’ defined as the strategic aims envisioned for the technical work). For each case study I first asked what kinds of technical work the foreign aid actors engaged in and how. At the end, I also formulated tentative propositions on the extent to which the technical work had served the purposes envisioned, and on the factors that had conditioned its extent of influence. The three respective research questions which I posed in my empirical analysis had been informed by a series of TWP papers on the experience of the USA-based development NGO The Asia Foundation in the Philippines. Considerably more often than other TWP literature, these ‘TAF studies’ made observations on how technical work that foreign aid actors engaged in operated as a means of influence in institutional reform politics, and with what outcomes. What were the main findings and propositions of my empirical analysis, as presented in chapter 7? For one, I observed that foreign aid actors provided operational and substantive support to a range of technical work in order to advance the reforms through legislative politics: policy research and analysis, policy design and legislative drafting, the technical deliberation of policy matters among national stakeholders, reform-related trainings and presentations, and associated technology development. From there, I found that foreign aid agency and project

146 cadres (i.e. the ‘aid agents’) understood this range of technical work to serve three main purposes in advancing the reforms through legislative politics. So did state officials, business leaders and national private experts. Firstly, for these different policy players technical work was meant to prompt ambivalent state actors to endorse legislative progress on the reforms. Secondly, it was meant to undermine the capacity of reform opponents in government and business to deter the proposed revisions. As a means of fulfilling these two purposes, the technical work was perceived to operate by providing and publicizing technical evidence that validated the public interest arguments in a reform’s favor (that is, arguments about national wellbeing and reform legitimacy and feasibility, rather than arguments appealing explicitly to private interests). The technically-backed public interest arguments were expected to persuade skeptical and uncommitted state actors that the promoted reforms were politically safe/advantageous because they were fiscally judicious and/or good for the private sector. In addition, they were expected to oblige hostile and ambivalent state officials and business leaders to consent to reform advancement, by delegitimizing the socioeconomic grounds for reform postponement. Such application of technical evidence was considered necessary and potentially consequential in the reform process because of the political risk that state actors attributed to two lines of public criticism: (i) criticism in government and parliament for jeopardizing the national budget and public services; (ii) criticism from the assertive business lobby for neglecting its concerns, and for undermining private sector productivity and competitiveness. In two of the case studies foreign aid-funded technical work was also ascribed the purpose of brokering compromises between government and business that would enable reform progress. The tension between state actors’ concerns about budget-related criticism on the one hand and business criticism on the other fostered the demand for foreign aid engagement in technical work directed towards this third purpose. At the level of each of these two reform as a whole, the technical work was expected to help broker compromises by delivering a combination of provisions that would be accepted by both government and business despite containing measures undesirable for either. In addition, it was expected to operate by delivering the technical evidence to substantiate the public interest arguments for constituent reform measures. Finally, based on a tentative analysis of the data I proposed that the examined foreign aid- funded technical work did not generally operate as envisaged to bring about swift and lasting reform advancement. However, I also observed numerous instances where the technical work did appear to fulfill its purposes to the extent that enabled partial and provisional reform progress. My explanation of this pattern was as follows. While the strength of the evidence presented through technical work did matter, whether or not it made a difference was conditioned by the degree to which state actors feared that the promoted reforms (or alternatively their deferral) would expose them to either budget-related or business criticism before a wider policy audience. In the remainder of the chapter, I translate the main empirical finding of my study into six core broader insights about the role of foreign aid in institutional reform politics. I also propose a number of corresponding entry point for future research. Furthermore, for each core insight of my study I discuss the similarities and differences with the related observations in the TAF studies.

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Core research insights and their implications for further study

The perceived political significance of foreign aid-funded technical evidence Above all, my research has shown that in the realm of business taxation reforms in Kyrgyzstan, policy players perceived and treated technical evidence as a resource that had real potential to encourage, constrain and enable the actions and decisions of the contenders in legislative politics. They did not deny that other means of influence mattered in the reform contest (think financial favors, deal-making and direct political intimidation). Neither did they claim that the actors who used technically-backed public interest arguments to justify their policy positions were exclusively or even primarily concerned about the socioeconomic benefits and risks of reform. However, time after time my respondents spoke as if public interest arguments and the technical evidence behind them were of tangible significance in shaping the course of past and prospective reform politics. Furthermore, policy players often appeared to act according to this perception. Much of the foreign aid engagement in technical work that featured in my case studies was envisaged to provide technical backing to pro-reform public interest arguments in ways that would align political relations in the reforms’ favor. There was a strong demand for such foreign aid support among aid agents and other actors. Foreign aid actors were the primary funders of the technical work taking place to produce and disseminate evidence in favor of the reforms examined. Meanwhile, some policy players approached the technical evidence supplied with the help of foreign aid actors as a challenge to their plans and interests. Hence, overall my study has shown that there is much substance in the claim that foreign aid-funded technical work gets taken up and taken on as a means of influence in institutional reform politics. This pivotal insight of my research echoes the related findings in the TAF studies on foreign aid to institutional reforms in the Philippines. The TAF studies also noted that (a) arguments about a reform’s public benefits had the potential to influence the legislative contest; (b) technical evidence conditioned the political weight of such arguments (as well as of arguments that spoke to private interests); and (c) that foreign aid agencies played a key part in enabling the production of such evidence through funding and substantive input. Moreover, for the TAF study authors, technically-backed policy arguments operated as a means in legislative politics in similar ways to those that I observed in Kyrgyzstan. For one, they persuaded policy players to endorse the reforms for their anticipated socioeconomic benefits (and, directly and indirectly, for their political and commercial value). In addition, they compelled policy players to concede to the reforms by making skepticism and hostility difficult to justify from a public interest perspective. Thus, together with these observations in the TAF studies, my findings on the perceived political significance of technical evidence validate my central research premise. Namely, they demonstrate that there are solid grounds for adopting a focus on technical work while investigating how and with what impact foreign aid actors (could) operate as part of recipient country reform politics. In particular, my analysis suggests that future research could further unpack and theorize the ways in which foreign aid-funded technical evidence is (or could be)

148 mobilized to (i) secure political support in legislative battles; (ii) sideline a reform’s opponents; and (iii) bring policy players with conflicting interests to agree on a compromise reform version.

The range of policy players ascribing political significance to foreign aid-funded technical evidence Another core insight of my study highlights one of the observations mentioned above. It pertains to the wide range of actors who signaled their perception that technically-backed public interests arguments were a consequential lever in legislative politics; and who indicated that there was a pronounced demand for foreign aid actor to enable such argumentation by engaging in technical work. Across my case studies, aid agents, state officials, business leaders, national private experts and MPs all approached technical work as a meaningful political resource. Far from ignoring or dismissing foreign aid contributions to technical work, national actors sought after such input so that it could help advance their agendas. Moreover, they held expectations about how the technical work could affect reform battles, and acted on them. This also meant that national policy players recognized when a foreign aid-funded technical effort did not deliver the evidence which they could mobilize to advance their reform preferences. Likewise, they noticed when the evidence delivered challenged their aims, and sought for it to be downplayed or disputed as technically deficient (also by mobilizing counterevidence). Meanwhile, foreign aid actors did not see technical work as simply an activity directed at transferring technical expertise or developing technical solutions to socioeconomic problems. Rather, they viewed the provision of technically-backed public interest arguments as a strategic endeavor that they had to engage in if they were to stand a chance of advancing their reform ideas through legislative politics. Thus, foreign aid actors persistently strove to demonstrate the socioeconomic judiciousness of their reform ideas through policy research and elaboration, presentations on successful overseas experience, and the development of enabling administrative technology. Thereby they set out to persuade policy players that endorsing the reforms was politically prudent, or to make reform deferral based on socioeconomic concerns a politically unviable prospect. Business leaders referenced the technical evidence produced with foreign aid input to bolster their own attempts at confronting state actors with critical public interest arguments in order to oblige them to support their reform demands. On their part, state officials drew on foreign aid-funded technical analysis to weaken the socioeconomic legitimacy of the business lobby’s resistance to the government’s reform initiatives. In this way, they sought to undermine the capacity of business leaders to pressure the government into abandoning these efforts. State-based private experts also made plans to procure technical evidence which would refute foreign aid actors’ technically-backed advice against particular reform options: they believed such countervailing evidence was necessary if they were to prompt pivotal decisionmakers to endorse their reform preferences. While discussing policy players’ experiences in applying technical work for political purposes, the TAF studies primarily focused on the relationship between foreign aid actors and the national private experts enlisted as grantees to advance institutional reforms. For instance, they indicated that such specialists were often keen to draw on foreign expertise in order to grant their pro-reform arguments more persuasive power and authority. The TAF studies did mention

149 how other national actors helped advance or tried to deter the reform efforts, but with little attention to whether these actors treated foreign aid-funded technical work as a means of political influence. Hence, here my research went beyond the TAF studies. It brought out how foreign aid- funded technical content became a resource in legislative politics by virtue of various national actors employing it for their aims, or mobilizing against it. Therein my analysis demonstrated that by exploring the national aspirations and responses connected to foreign aid-funded technical work we capture an essential part of what it means for foreign aid operations to constitute an integral part of recipient countries’ reform politics. Accordingly, in general I would encourage future research on the role of foreign aid-funded technical work in these politics to consider the full range of actors involved. However, some of my observations also suggest research questions about the attitudes of specific groups of policy players, including the aid agents. For example, how do aid agents negotiate between a project’s ongoing technical work intended to secure support for a reform idea, and their view of the political landscape as adverse to this outcome?

The embeddedness of foreign aid contributions to technical work in legislative politics The next core insight of my study is about the kinds of technical work that foreign aid actors engaged in, and about the place of aid agents in the legislative processes that involved these different activities. It concerns the all-round embeddedness of the examined foreign aid projects, their contributions and their cadres in the legislative politics of business taxation reforms in Kyrgyzstan. First of all, national aid agents were often involved directly as experts in the legislative working groups set up on the case study reforms. In particular, it was possible for such aid agents to participate in legislative politics at the stage of a bill’s consideration in parliament, as part of expert teams tasked with adapting the draft law to the course of the negotiations. What is more, one of the national project cadres featured in my analysis was a permanent insider of legislative drafting activities in parliament: as a private consultant, he provided regular policy advice and technical services to the MPs. Secondly, foreign aid actors regularly initiated and/or facilitated the formal and informal inter-stakeholder policy meetings during which national policy players expounded their technically-reasoned reform positions to convince or compel others to agree to their demands. Thirdly, the foreign aid-funded research on the examined policy issues was in several cases commissioned by the government. Such research then became a central reference point of inter-stakeholder reform discussions and formal legislative drafting. Fourthly, the debates in government and beyond on whether or not to advance a reform were sometimes directly informed by foreign aid actors’ related activities in the realm of technology development and professional training and instruction. Finally, across the case studies foreign aid actors funded national private experts who designed reform concepts and drafted legislative proposals, in the context of working groups set up in government. This is the main kind of foreign aid engagement in technical work that surfaced in the TAF studies. In contrast, my research depicted a wider range of ways in which the technical activities supported by foreign aid actors were closely integrated into the institutional reform politics of a given country. However, for the foreign aid-funded technical work that the

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TAF studies did cover, they similarly conveyed its reach into the inner arenas of legislative politics. Consider the national private experts whose work in producing and applying pro-reform technical evidence was funded by foreign aid actors. The TAF studies often presented such private experts as having direct and continuous access to state officials and MPs, some of whom their partnered with in the drafting and promoting of reform legislation. Such access entailed the experts presenting and negotiating their reform ideas during formal sessions in government and parliament, and during private meetings with state actors. A range of research questions could be formulated based on the TAF studies’ and my own findings on foreign aid actors’ embeddedness in legislative politics through their engagement in technical work. For instance: how do national aid agents negotiate between their function as project representatives, and their identity as national private experts with a history of participation in their country’s legislative politics?

Political openness as a key factor behind the role of technical evidence in legislative politics The fourth core insight of my case studies is that the tendency of policy players to view and employ foreign aid-funded technical evidence as a means of influence rested on the considerable openness and inclusivity of Kyrgyzstan’s legislative politics, and on the political significance of public pressure. During my research period, business taxation reforms in Kyrgyzstan were characterized by the active involvement of technically-versed business association leaders. The business lobby’s right to participate in the reform politics was broadly acknowledged and respected by other policy players. It was standard practice for state actors and business leaders to engage in critical debate at various types of inter-stakeholder policy meetings. The media reported freely on such events, and provided a platform for the expression of competing policy positions. State actors were apprehensive about public business criticism, and about (media- covered) budget-related criticism in government and parliament. They also considered it valuable to be associated in public with reform measures the fiscal and economic advantages of which had been credibly substantiated with technical analysis. Therefore, to stand a chance in reform politics, all contenders had to be capable of delivering technically-backed fiscal and economic arguments geared at selling their preferences to risk-averse and approval-hungry state actors, also by delegitimizing the preferences of their opponents. This fostered the demand for foreign aid input into to the production and articulation of technical evidence employed in such arguments. Furthermore, legislative progress sometimes required the crafting of reform content that would reconcile state actors’ desire to mitigate business criticism with their concerns about the politics risk of being reprimanded for fiscally reckless policy measures. In such situations, foreign aid actors aspired or were expected to direct their technical work towards this task for the purpose of enabling reform compromises. The TAF studies also highlighted a strong connection between the openness of legislative politics and the weight attribute to technical evidence as a political resource. For one, they portrayed the vocal mass media in the Philippines as a key channel through which foreign aid-funded technical evidence influenced reform battles. Specifically, they described how such evidence was mobilized in media campaigns that discredited the contra-reform position as being bad for the public interest, thereby bringing key

151 state actors to support or give way to the reforms advanced by foreign aid programs. More broadly, the TAF studies presented public opinion as consequential to the political standing of MPs and state officials in the Philippines. For this reason, state actors were inclined to side with policy measures that were convincingly presented as socially beneficial in the media; and to disassociate with measures which were effectively discredited as likely to cause socioeconomic damage. Moreover, from these observations we could deduce that the political weight of public opinion in the Philippines also led state actors to take heed of the technically-backed socioeconomic arguments voiced by foreign aid-funded private expert during closed negotiations. Judging from the TAF studies, in the Philippines there were plenty of private experts based at think tanks and advocacy groups who had the political skill and drive to create and deploy public opinion in the media and in parliament. As noted earlier, such experts were the main focus of the TAF studies’ observations on foreign aid-funded technical work as a means of influencing legislative politics. My study expands on this picture by spotlighting business leaders as another set of social actors who were deemed capable of mobilizing a broader public to exert political pressure on the government, and who drew on (foreign aid-funded) technical work for this purpose. However, it was beyond the scope of my research to unpack the concrete dynamics of business leaders securing desired reform decisions by publicizing favorable technical evidence in the media. I also did not seek to establish whether and how the public display of budget-related criticism translated into actual political risk and penalties for state officials. Both points represent directions for future research on the specifics of how foreign aid-funded technical work interacts with the creation and manipulation of public pressure as part of institutional reform politics. Now, let’s go beyond my case studies, to the broader material in chapter 2 on Kyrgyzstan’s political system during my research period. Based on this material, I propose that the sway which (the prospect of) public criticism had over policymaking on business taxation was related to a more general characteristic of the country’s legislative politics. The characteristic in question was also ascribed by the TAF studies to the situation in the Philippines. It pertains to the decentralized nature of political competition. In Kyrgyzstan in 2010-2016, multiple elite groupings competed for administrative and legislative power. Control over policy decision-making was dispersed within and across government and parliament. Thanks to these conditions, business leaders and other policy players could use the promise of public criticism to play off state actors against one another to a greater extent than had been possible before the constitutional changes of 2010 (i.e. when the president called the shots in all branches of government). Likewise, in the TAF studies the decentralized character of political competition in the Philippines was conveyed to reinforce the tendency of state actors to mobilize and mind public pressure delivered through the mass media. How would the purposes attributed to foreign aid-funded technical work as a resource in legislative politics differ in countries that have a centralized political system, without an active free press and a culture of public-private debate? This is a further line of inquiry for future research on foreign aid engagement in institutional reform politics.

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The discrepancy between the perceived and actual significance of foreign aid-funded technical work In my case studies there was a discrepancy between policy players’ perceptions regarding the purposes of foreign aid-funded technical work, and the limited extent to which the latter appeared to fulfill these purposes. As emphasized so far, policy players typically treated technically-backed public interest arguments as a significant means of political influence. There were also several instances where foreign aid-funded technical work appeared to enable provisional or partial reform progress by serving the purposes attributed to it. On these occasions the technical material came across as particularly solid and convincing. However, the technical evidence supplied with the involvement of foreign aid projects did not generally persuade or oblige state actors to fully embrace a reform. Neither was it likely to lastingly disable policy players’ efforts to deter the examined revisions. Likewise, in general, foreign aid-funded reform designs did not readily pave the way for legislative progress by enabling compromise. In terms of why, my impression was that the level of apprehension in government about facing fiscal or business criticism for reform endorsement usually overpowered the strength of the technical content leveraged to advance the revisions. Vice versa, credible technical evidence and attempts to craft policy tradeoffs were more likely to enable reform advancement when state actors already felt considerably anxious about the public criticism they could face for reform deferral. As for the TAF studies, for some reforms they observed that the strength of foreign aid- funded technical evidence was a central factor in securing political support or in neutralizing the opposition. More generally, several TAF authors concluded that in the Philippines technical evidence had influence in legislative politics, and thus merited foreign aid attention. However, the TAF studies did not prove or disentangled through granular reform analysis the relative causal contributions of technical evidence as compared to other factors. This qualification adds extra weight to the discrepancy in my research between the widespread perception that technically-backed public interest arguments were consequential to legislative politics, and the limited evidence of them making a difference. With that in mind, does foreign aid-funded technical work really warrant closer research attention as an integral part of institutional reform battles? For several reasons, I insist that it does. Firstly, our research could explore the cognitive basis of the discrepancy. One possibility here would be to look at whether policy players who specialize in technical work have a penchant for expecting too much from technical expertise, and to examine the implications thereof for foreign aid programs. Secondly, it could simply be the case that a more focused and granular study than my own would pick up on foreign aid- funded technical work having a much greater influence on reform politics. Finally, we could argue as follows. Public and private sector actors everywhere are likely to find ways to sideline pro-reform technical evidence in order to play it safe politically or to otherwise pursue their interests. However, this does not undermine the significance of the influence that foreign aid-funded technical work can occasionally have in legislative politics. Given the possibility of such occasional influence, it makes perfect sense for foreign aid actors and other policy players to persistently mobilize technical expertise a resource in reform battles, especially if it is their main source of political leverage. I believe that my empirical observations

153 support this argument. Thus, it is possible to claim that in my research I did not sufficiently examine the use of financial incentives, administrative compulsion, personal relations and deal- making by national actors (and aid agents) in their attempts to influence legislative politics. Sure, policy players may have engaged in regular, critical and open debate on the socioeconomic value of the case study reforms, with technical input and mediation by foreign aid actors. Meanwhile, the actual reform contests may have unfolded behind the scenes through other means, leveraged by inter alia by the aid agents and their partners. However, while to some degree this was probably true, it also remains the case that most of my respondents mentioned explicitly the potential political importance of technically-backed public interest arguments. Moreover, in the case studies there were a number of occasions where the influence of foreign aid-funded technical work appeared to be capped not only by overbearing political considerations, but also by the strength of countervailing technical evidence mobilized without external assistance. Therefore I settle on the conclusion that foreign aid-funded technical evidence did matter in the overall swirl of the examined legislative politics. I am the more committed to this perspective given that during the inter-stakeholder discussions covered in my research all policy players consistently sought to legitimize their positions with claims of technical evidence. From there I had inferred that even if such claims did not determine reform outcomes, policy players had to provide them in order to participate and stand a chance in the legislative contest. Would we observe such ‘performative’ politics when examining reforms advanced with foreign aid input in other countries? More generally, in the context of foreign aid engagement, how exactly does this mode of political competition factor into the wider politics of institutional change? These questions are another possible starting point for future research on the role of foreign aid-funded technical work in institutional reform processes.

Technical work as the crafting of reform content to enable political compromises The final core insight of my study is that the purposes that foreign aid-funded technical work was meant to serve in the reforms examined did not revolve exclusively around the technical backing of public interest arguments (important as policy players believed such backing to be as a lever in legislative politics). Thus, my analysis has shown that some of the foreign aid-funded technical work examined was above all an effort directed at providing general reform concepts with specific content that would make the reform idea sufficiently consistent with the interests of competing stakeholders. The primary task of such technical work was not to help defend the arguments in favor of the promoted reform measures. Instead, it was to devise an inventive combination of particular reform provisions that would be acceptable enough to both government and business to enable the passage of a compromise reform version. The TAF studies also mentioned foreign aid input into designing reform specifics that would fit the interests of influential political players whose concerns were not immediately aligned with the general reform concept. They described foreign aid-backed private experts working to adapt reform details to such interests, as part of broader negotiations that inevitably resulted in the dilution of the original reform ideas. Hence, the TAF studies confirm my finding that reform advancement in

154 the context of foreign aid operations may require political compromises the brokering of which calls for a particular type of creative technical effort: the formulation of reform provisions which combine into politically viable give-and-take deals among pivotal policy players. Future research on the role of foreign aid-funded technical work in legislative politics could critically explore this finding.

In one of my case studies the legislative work that a group of (aid agent) experts directed at mediating between the demands of government and business eventually led to the adoption of a law on the general reform objective. However, this law was skewed towards the commercial interests of the business lobby. Moreover, it revolved around measures that had been portrayed as fiscally harmful by the foreign aid project which had supported the reform process earlier on. Beyond this case, how common is it for foreign aid-funded technical work to translate into legislative revisions which contradict the original intentions of foreign aid actors and appear to benefit privileged political players? What do such outcomes mean for the purposefulness and legitimacy of foreign aid to institutional reforms? These questions, and the question of how faithfully foreign aid-backed legislative reforms are enacted after years of expensive policy battles, remain some of the most poignant in the discussion on the virtues and flaws of development cooperation.

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Bibliography

Includes separate lists for: - Literature references and online commentary - Legislative documents issued by Kyrgyzstan’s government and parliament - News articles published in 2010-2016 by the online press in Kyrgyzstan - Press releases issued by Kyrgyzstani organizations - Eurasianet, Kloop and other news articles from 2020 consulted for the Foreword - Selection of uncited ‘Poverty to Power’ blog entries on the TWP movement

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World Bank (2015, fall). Kyrgyz Republic: Biannual Economic Update. Resilience amid turbulence. Special Focus: Meeting the jobs challenge. Washington DC: The World Bank World Bank (2016a, spring). Kyrgyz Republic: Policy Challenges in a Difficult Environment (With a Special Focus on the Growing Burden of Public Debt). Kyrgyz Republic Economic Update No. 3. Washington DC: The World Bank World Bank (2016b, winter). Kyrgyz Republic: A resilient economy on a slow growth trajectory (With a special focus on Tax Reform). Kyrgyz Republic Economic Update No.4. Washington DC: The World Bank Yanguas, Pablo & David Hulme (2014, April). Can aid bureaucracies think politically? The administrative challenges of political economy analysis (PEA) in DFID and the World Bank. Effective States and Inclusive Development Research Center, University of Manchester Yanguas, Pablo & David Hulme (2015). Barriers to Political Analysis in Aid Bureaucracies: From Principle to Practice in DFID and the World Bank. World Development 74: 209-219

Legislative documents issued by Kyrgyzstan’s government and parliament Legislative document 1a (2014, March). Supporting document to legislative document 4. Regulatory Impact Analysis on the project: Law of the Kyrgyz Republic “On amendments and additions to certain legislative acts”. http://www.kenesh.kg/ru/draftlaw/210827/show Legislative document 1b (2014, May). Supporting document to legislative document 4. Note of Rationale to the Draft Law of the Kyrgyz Republic “On amendments and additions to some legislative acts of the Kyrgyz Republic”. http://www.kenesh.kg/ru/draftlaw/210827/show Legislative document 2 (2014, June). Supporting document to legislative document 3. Regulatory Impact Analysis on the draft law of the Kyrgyz Republic “On the introduction of additions and amendments to some legislative acts of the Kyrgyz Republic”. http://www.kenesh.kg/ru/draftlaw/151956/show Legislative document 3 (2014, October). Legislative proposal submitted to parliament by a group of MPs. On amendments and additions to some legislative acts of the Kyrgyz Republic (to the Tax Code of the Kyrgyz Republic, to the Law of the Kyrgyz Republic "On the enactment of the Tax Code of the Kyrgyz Republic"). Number and date of registration in parliament: No 6-25416/14, October 21st 2014. http://www.kenesh.kg/ru/draftlaw/151956/show Legislative document 4 (2015, May). Legislative proposal submitted to parliament, by government decree # 318 from May 25th 2015. On amendments and additions to some legislative acts of the Kyrgyz Republic (to the Criminal Code of the Kyrgyz Republic, to the Code of the Kyrgyz Republic on Administrative Responsibility, to the Criminal Procedure Code of the Kyrgyz Republic, to the Tax Code of the Kyrgyz Republic). Number and date of registration in parliament: No 6-15654/15, June 6th 2015. http://www.kenesh.kg/ru/draftlaw/210827/show Legislative document 5 (2015, June). Parliamentary decree No 5303-V from June 24th 2015, on legislative document 4. On the adoption, in first reading, of the draft Law of the Kyrgyz Republic "On amendments and additions to some legislative acts of the Kyrgyz Republic" (the Criminal Code of the

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Kyrgyz Republic, the Code of the Kyrgyz Republic on Administrative Responsibility, the Code of Criminal Procedure, the Tax Code of the Kyrgyz Republic). http://cbd.minjust.gov.kg/act/view/ru-ru/76389 Legislative document 6 (2015, June). Legislative proposal, legislative document 3 adopted by second reading in parliament on June 26th 2015. Law of the Kyrgyz Republic “On the Introduction of Additions and Amendments to Some Legislative Acts of the Kyrgyz Republic”. http://www.kenesh.kg/ru/draftlaw/151956/show Legislative document 7 (2015, June). Supporting document to legislative document 6. Comparison table for the draft Law of the Kyrgyz Republic “On the Introduction of Additions and Amendments to Some Legislative Acts of the Kyrgyz Republic”. Includes comparison with the Bill sent by the Ministry of Economy of the Kyrgyz Republic for approval by letter of 20.06.2015 No. 17-1 / 7705. http://www.kenesh.kg/ru/draftlaw/151956/show Legislative document 8 (2015, July). Supporting document to legislative document 9. Regulatory Impact Analysis on the Draft Law of the Kyrgyz Republic “On the introduction of additions and amendments to some legislative acts of the Kyrgyz Republic (to the Tax Code of the Kyrgyz Republic, to the Law of the Kyrgyz Republic “On the implementation of the Tax Code of the Kyrgyz Republic”). http://www.kenesh.kg/ru/draftlaw/227001/show Legislative document 9 (2015, August). Legislative proposal submitted to parliament, by government decree #587 from August 19th 2015. On the introduction of additions and amendments to some legislative acts of the Kyrgyz Republic (to the Tax Code of the Kyrgyz Republic, to the Law of the Kyrgyz Republic “On the implementation of the Tax Code of the Kyrgyz Republic”). Number and date of registration in parliament: No 6-21855/15 on August 26th 2015. http://www.kenesh.kg/ru/draftlaw/227001/show Legislative document 10 (2015, August). Supporting document to legislative document 9. Note of Rationale to the Draft Law of the Kyrgyz Republic “On the introduction of additions and amendments to some legislative acts of the Kyrgyz Republic (to the Tax Code of the Kyrgyz Republic, to the Law of the Kyrgyz Republic “On the Implementation of the Tax Code of the Kyrgyz Republic”)”. http://www.kenesh.kg/ru/draftlaw/227001/show Legislative document 11 (2015, December). Formal parliamentary commentary on legislative document 9, in preparation for 2nd readings. Conclusion of the Committee on Budget and Finance from December 28th on the Draft Law of the Kyrgyz Republic on the introduction of additions and amendments to some legislative acts of the Kyrgyz Republic (decree of the Government of Kyrgyz Republic from August 19th 2015, No 587). http://www.kenesh.kg/ru/draftlaw/227001/show Legislative document 12 (2015, December). Formal parliamentary commentary on legislative document 9, in preparation for 2nd reading. Conclusion of the Committee on Economic and Fiscal Policy of the Jogorku Kenesh of the Kyrgyz Republic from December 29th 2015, on the Draft Law of the Kyrgyz Republic On the introduction of additions and amendments to some legislative acts of the Kyrgyz Republic. http://www.kenesh.kg/ru/draftlaw/227001/show Legislative document 13 (2015, December). Legislative proposal, legislative document 9 as adopted in third reading on December 31st 2015. On the introduction of additions and amendments to some legislative acts of the Kyrgyz Republic (to the Tax Code of the Kyrgyz Republic, to the Law of the Kyrgyz Republic “On the implementation of the Tax Code of the Kyrgyz Republic”). http://www.kenesh.kg/ru/draftlaw/227001/show

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Legislative document 14 (2015, December). Supporting document to legislative document 14. Table to the legislative project “On the introduction of additions and amendments to some legislative acts of the Kyrgyz Republic (to the Tax Code of the Kyrgyz Republic, to the Law of the Kyrgyz Republic “On the implementation of the Tax Code of the Kyrgyz Republic”) for the third reading. http://www.kenesh.kg/ru/draftlaw/227001/show Legislative document 15 (2016, June). Legislative proposal, as adopted in parliament by third reading on June 30th 2016. Signed by the President on August 12th 2016. Law of the Kyrgyz Republic on amending the Tax Code of the Kyrgyz Republic. http://www.kenesh.kg/ru/draftlaw/210827/show Legislative document 16 (2016, August). Law of the Kyrgyz Republic No 166 from August 12th 2016. "On amending certain legislative acts of the Kyrgyz Republic (the Tax Code of the Kyrgyz Republic, the Criminal Code of the Kyrgyz Republic and the Code of the Kyrgyz Republic on Administrative Responsibility)". Accessed in October 2016 at http://cis-laws.ru/show-adoc/87893

News articles published by online press in Kyrgyzstan, per news outlet

Analitika, http://analitika.akipress.org/ 2016, March 2. The head of the State Tax Service Z.Osmonov: The State Tax Service must ensure that tax and non-tax revenues are collected in full. Глава ГНС З.Осмонов: ГНС должна будет обеспечить исполнение налоговых и неналоговых поступлений в полном объеме

Information Agency 24, https://24.kg/ 2012, February 27. How we could live if we just took the VAT and suspended it! Как могли бы жить, если НДС нам взять да отменить! Irina Dudka 2012, September 17a. Djoomart Otorbaev: Economic indicators do not correspond to the real state of affairs in Kyrgyzstan. Джоомарт Оторбаев: Экономические показатели не соответствуют реальному положению дел в Кыргызстане. Yulia Kostenko 2012, September 17b. Iskhak Masaliev: 70 percent of Kyrgyzstan’s population is employed in the informal sector of the economy. Исхак Масалиев: 70 процентов населения Кыргызстана заняты в неформальном секторе экономики. Yulia Kostenko 2012, September 18. The economy. A battle with the shadow. Экономика. Бой с тенью. Yulia Kostenko 2012, October 31a. The Deputy prime minister of Kyrgyzstan proposes taking control of the informal sectors of the economy. Вице-премьер-министр Кыргызстана предлагает взять под контроль неформальные сектора экономики. Yulia Kostenko 2012, October 31b. Djoomart Otorbaev: Two World Bank employees did what hundreds of Kyrgyzstan’s specialists could not or did not want to do. Джоомарт Оторбаев: Два сотрудника Всемирного банка сделали то, что не смогли или не захотели сделать сотни специалистов Кыргызстана. Yulia Kostenko

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2012, October 31c. Dzhambulat Bayzhumanov: Kyrgyzstan has large discrepancies in mirror statistics with China. Джамбулат Байжуманов: У Кыргызстана большие расхождения в зеркальной статистике с Китаем. Yulia Kostenko 2012, December 2. Iskender Alymbekov: In Kyrgyzstan, the tax collection plan is 101.2 percent complete. Искендер Алымбеков: В Кыргызстане план по сбору налогов выполнен на 101,2 процента. Yulia Kostenko 2013, March 20. The Social Fund of Kyrgyzstan: The collecting by tax officials of social insurance contributions will lead to problems in their collecting, and in the accounting and assigning of pensions. Соцфонд Кыргызстана: Если взносы по социальному страхованию будут собирать налоговики, это повлечет проблемы в их сборе, в учете и назначении пенсий. Irina Dudka 2013, April 12. The Prime Minister of Kyrgyzstan promises to dismiss the chief tax officer in two months if the collection plan is not met. Премьер-министр Кыргызстана обещает уволить главного налоговика через два месяца, если план по сбору не будет выполнен. Irina Dudka 2013, April 24. 259.1 million som in taxes have been collected in the Osh province since the beginning of the year. В Ошской области с начала года собрано 259,1 миллиона сомов налогов. Yulia Kostenko 2013, October 31. Based on the results of the STS collegium, the heads of several tax service branches received administrative penalties. По итогам коллегии ГНС руководители ряда органов налоговой службы получили административные взыскания. Darya Sytenkova 2013, December 18. Starting from 2014 the paper-based version of VAT invoicing will be suspended. С 2014 года отменят бумажный вариант отчетности по НДС. Darya Sytenkova 2014, February 10. Tatiana Kim: Raising the tax rate on the voluntary patent will lead to a reduction in budget revenues. Татьяна Ким: Повышение ставки налога на добровольный патент приведет к сокращению поступлений в бюджет. Darya Sytenkova 2014, February 12a. A change in the voluntary patent rate implies a reduction in the types of business activity from 125 to 80. Изменение ставки добровольного патента предполагает сокращение видов предпринимательской деятельности со 125 до 80. Darya Sytenkova 2014, February 12b. Ministry of Finance: In the budget of 2014 revenues from voluntary patents are envisaged in the amount of 1.698 billion som. Минфин: В бюджете 2014 года поступления от добровольных патентов предусмотрены в размере 1,689 миллиарда сомов. Darya Sytenkova 2014, February 13a. Patent.kg. How to kill the entrepreneur. Патент.kg. Как убить предпринимателя. Darya Sytenkova (14f40) 2014, February 13b. The head of the State Tax Service proposes to withdraw the draft decree on raising the basic rates for the voluntary patent. Глава ГНС предлагает отозвать проект постановления о повышении базовых ставок на добровольный патент. Darya Sytenkova 2014, April 23. The head of the STS department for the control of large taxpayers is demoted for a shortfall in tax collection. Руководитель управления ГНС по контролю за крупными налогоплательщиками понижен в должности за недобор налогов. Darya Sytenkova

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2014, October 16. In Kyrgyzstan, the government proposes to small and medium-sized businesses to submit tax report once a quarter. В Кыргызстане малым и средним предпринимателям правительство предлагает предоставлять отчет по налогам раз в квартал. Darya Podolskaya 2014, December 17. The taxpayer’s little joys. Маленькие радости налогоплательщика. Tatiana Orlova. 2014, December 30. Kyrgyzstan introduced an automated system for the accounting of VAT invoicing forms. В Кыргызстане внедрена автоматизированная система учета бланков счетов-фактур по НДС 2015, February 18. The business community opposes raising the VAT to 14 percent. Бизнес- сообщество выступает против повышения НДС до 14 процентов. Tatiana Kudriavceva 2015, May 20. From July 1, tax reporting for small and medium businesses will be quarterly. С 1 июля налоговая отчетность для малого и среднего бизнеса станет поквартальной. Tatiana Kudriavceva 2015, June 2. In Kyrgyzstan starting from today in small and medium enterprises submit tax reports once a quarter. С сегодняшнего дня в Кыргызстане малые и средние предприятия сдают налоговую отчетность раз в квартал. Tatiana Kudriavceva 2015, June 18. The types of business activity for which taxes are payed on the voluntary patent basis will decrease starting from September. С сентября сократятся виды деятельности, налоги по которым платят по добровольному патенту. Tatiana Kudriavceva 2015, December 25. Oleg Pankratov: It is decided to abolish the sales tax for exporters. Олег Панкратов: Решено отменить налог с продаж для экспортеров. Darya Podolskaya 2016, January 11. Traders do not agree with the increase in social insurance premiums and with the requirements of the State Tax Service. Торговцы не согласны с увеличением страховых взносов и требованиями ГНС. Tatiana Kudriavceva

Kabar, http://kabar.kg/ 2013, December 18a. Kyrgyzstan’s business associations propose switching from monthly tax reporting to quarterly. Бизнес-ассоциации Кыргызстана предлагают перейти с ежемесячных налоговых отчетов на ежеквартальные. Shirin Torogeldieva 2013, December 18b. The Council on Business Development and Investment of Kyrgyzstan approved a working plan for 2014-2015. Совет по развитию бизнеса и инвестициям Кыргызстана утвердил план работы на 2014-2015 годы. Shirin Torogeldieva 2014, October 16. Prime Minister Dj. Otorbaev: "The number of tax reports and payments for entrepreneurs and non-profit organizations will be reduced by a factor of 4". Премьер-министр Д. Оторбаев: «Количество налоговых отчетов и платежей для предпринимателей и некоммерческих организаций будет сокращено в 4 раза» 2014, December 22. Year 2014: Business compares the results with the National Strategy. Год 2014: Бизнес сверяет итоги с Национальной стратегией. Aktilek Tungatarov, executive director of the International Business Council.

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2016, February 16. Zamirbek Osmonov: “The preliminary appraisals of the pilot project on the administration of insurance premiums showed good results”. Замирбек Осмонов: «Предварительные итоги пилотного проекта по администрированию страховых взносов показали хорошие результаты»

K-News, https://knews.kg/ 2012, August 29. STS: Nazbek Satynbekov was fired from the tax agency for not fulfilling tax collection plans. ГНС: Назбек Сатынбеков был уволен из налоговых органов за невыполнение планов по сбору налогов 2012, December 20. In Kyrgyzstan the level of the shadow economy is 39% of the GDP. В Кыргызстане уровень теневой экономики составляет 39 % от ВВП. Madina Sheralieva 2013, April 16. Akim of Nookat district was fired for violations revealed in his work. Акима Ноокатского района уволили за нарушения, выявленные в его работе 2013, May 28. Changes will be made to the tax code. В налоговый кодекс будут внесены изменения 2014, June 10. Bekeshev proposes to allow small entrepreneurs to submit tax reports once a quarter. Бекешев предлагает разрешить мелким предпринимателям сдавать налоговые отчеты раз в квартал. Nurzada Tanyeva 2015, March 20. The State Tax Service and the business community supported the MPs’ proposal to abolish the cascade tax system. ГНС и бизнес-сообщество поддержали предложение депутатов по отмене каскадной системы налогообложения 2015, May 20. Small and medium businesses will now pay taxes on a quarterly instead of on a monthly basis. Теперь малый и средний бизнес будет оплачивать налоги ежеквартально, а не каждый месяц 2015, May 26. The government proposes to suspend the paper-based VAT invoices. Правительство предлагает отменить бумажные счет-фактуры НДС 2015, June 24. It is planned to transfer the administration of social insurance premiums to the Tax Service. Налоговой службе планируют передать функции по администрированию страховых взносов. Nurzada Tynaeva. 2015, October 13. The basic rate of the patent-based tax was explained to representatives of the business community. Представителям бизнес-ассоциаций Кыргызстана разъяснили базовую сумму налогов на основе патента 2015, December 29a. The government intends to abolish the income tax privileges in the processing industry starting from September 2018. Правительство намерено отменить льготы для переработчиков по налогу на прибыль с сентября 2018 года. Aigahysh Abdyraeva 2015, December 29b. The suspension of the sales tax for Kyrgyztan’s exporters is revolutionary. Отмена налога с продаж для кыргызских экспортеров – революционный. Aiganysh Abdyraeva

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2016, February 4. Oleg Pankratov: Due to the tax privileges extended to business, the government loses almost 20 billion som a year. Олег Панкратов: Из-за льгот бизнесу правительство недополучает почти 20 млрд сомов в год. Ulukbek uulu Yrysbek

Tazabek, http://www.tazabek.kg/ 2012, August 30. The question of the participation of the State Tax Service in a study on the shadow economy of the Kyrgyz Republic remains open, - Deputy Chairman of the State Tax Service O. Abdykaimov. Вопрос участия ГНС в исследовании по изучению теневой экономики КР остается открытым, - зампредседателя ГНС О.Абдыкаимов 2012, September 17a. First Deputy Prime Minister Dj. Otorbaev: Our budget is under strain. Первый вице-премьер Дж.Оторбаев: Бюджет у нас сейчас напряженный 2012, September 17b. We have not learned how to calculate income from the service sector, - First deputy prime minister Dj. Otorbaev. Мы не научились считать доходы от сферы услуг, - первый вице-премьер Дж.Оторбаев 2012, September 18. In the Talas region more than 211.2 million som in taxes was collected in the first 8 months of 2012. В Таласской области за 8 месяцев 2012 года собрано более 211,2 млн сомов налогов 2012, October 26. The government should, but at present does not know how to tax the service sector, says First Deputy Prime Minister Dj. Otorbayev. Правительство должно, но пока не умеет облагать налогом сферу услуг, считает первый вице-премьер Дж.Оторбаев 2012, October 31a. First deputy prime minister Dj. Otorbaev instructed to quicken the creation of an inter-agency commission to develop measures on accounting for the informal economy. Первый вице- премьер Дж.Оторбаев поручил ускорить создание межведкомиссии по выработке мер по учету неофициальной экономики 2012, October 31b. Dj. Otorbaev invited the National Statistical Committee to contact colleagues from other countries to exchange experience on studying the shadow economy. Дж.Оторбаев предложил Нацстаткому связаться с коллегами из других стран для обмена опытом в исследовании теневой экономики 2012, October 31c. Dj. Otorbaev on World Bank research on the potential of Kyrgyz Republic’s markets: Two researchers did what hundreds of government experts did not. Дж.Оторбаев по исследованию Всемирного банка о потенциале рынков КР: Два исследователя сделали то, что сотни специалистов правительства не сделали 2012, November 1. The National Statistics Committee will investigate large markets for the presence of the shadow economy, with the involvement of the State Customs Service and the State Tax Service. Нацстатком будет исследовать крупные рынки с привлечением ГТС и ГНС на наличие теневой экономики 2012, November 13. Deputy E. Kochkarova wonders how the government, based on "optimistic assumptions", can talk about the country's life for a whole year. Депутат Э.Кочкарова недоумевает, как правительство на основе «оптимистических предположений» может говорить о жизни страны на целый год

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2012, November 16a. MP Ch. Sultanbekova wonders why the government cuts articles on social spending and raises on the state apparatus. Депутат Ч.Султанбекова интересуется, почему правительство урезает статьи на соцрасходы и повышает на госаппарат 2012, November 16b. Deputy F. Kulov proposed to consider the responsibility of the government of O. Babanov for the implementation of the national budget. Депутат Ф.Кулов предложил рассмотреть ответственность правительства О.Бабанова по исполнению республиканского бюджета 2012, November 19. The majority coalition is to blame for the “failed” budget of 2012 and is looking for a scapegoat - deputy K. Dyikanbaev. Коалиция большинства виновата в «провальном» бюджете 2012 года и ищет крайнего, - депутат К.Дыйканбаев 2012, December 4. Public organization "Supporting PPP": The problems of Kyrgyzstan’s entrepreneurs are corruption, frequent inspections and the weight of the tax burden. ОО «Поддержка ГЧП»: Проблемами предпринимателей Кыргызстана являются коррупция, частые проверки и тяжесть налоговой нагрузки 2012, December 6. The Ministry of Finance is misleading the deputies of the Jogorku Kenesh, - MP N. Moldobaev. Министерство финансов вводит депутатов Жогорку Кенеша в заблуждение, - депутат Н.Молдобаев 2012, December 11. Deputy R. Aknazarov to Minister of Finance O. Lavrova: Why are we repaying domestic debt with external debt? Депутат Р.Акназарова министру О.Лавровой: Почему за счет внешнего долга погашаем внутренний долг? 2012, December 13. Deputy A. Artykov criticized the government for the proposal to amend the national budget for 2012. Депутат А.Артыков раскритиковал правительство за предложение внести поправки в республиканский бюджет на 2012 год 2012, December 20. The unofficial economy leads to corruption, - Minister T.Sariev. Неофициальная экономика побуждает к коррупции, - министр Т.Сариев 2013, February 7. The highest level of the shadow economy in the Kyrgyz Republic is observed in the areas of trade, the processing industry, transport and construction, - a study. Наибольший уровень теневой экономики в КР наблюдается сферах торговли, обрабатывающей промышленности, транспорта и строительства, - исследование 2013, February 12. State Tax Service: In Bishkek, out of the 260 thousand registered entrepreneurs, 25 thousand submit tax reports. ГНС: В Бишкеке из 260 тыс. зарегистрированных предпринимателей сдают отчетность 25 тыс 2013, March 18. Expert T. Kim: The business community reacted negatively to the recall of the draft law on the transfer of the social insurance payments administration functions to the State Tax Service. Эксперт Т.Ким: Бизнес-сообщество негативно отреагировало на отзыв законопроекта по передаче ГНС функций администрирования соцплатежей 2013, March 20. The constant and unbelievably stubborn lobbying on the issue of transferring the functions of collecting social insurance premiums to the State Tax Service is puzzling, - Social Fund. Постоянное неоправданно упорное лоббирование вопроса передачи функций сбора страховых взносов ГНС вызывает недоумение, - Соцфонд

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2013, March 25. 80% of taxes from pastures are not collected, why the STS does not collect? - deputy M. Sabirov. 80% налогов с пастбищ не собраны, почему ГНС не собирает? - депутат М.Сабиров 2013, April 15. In the first quarter of 2013, the plan for tax revenues was not met, - Minister of Finance O. Lavrova. В первом квартале 2013 года план по налоговым поступлениям не выполнен, - министр финансов О.Лаврова 2013, April 16. The business community of the Kyrgyz Republic considers inconsistent the government’s policy on the question of transferring the functions of collecting social payments to the State Tax Service. Бизнес-сообщество КР считает непоследовательной политику правительства в вопросе передачи функций сбора отчислений по госстрахованию ГНС 2013, April 23. The share of the shadow economy in Kyrgyzstan is 60%, - the government. Доля теневой экономики Кыргызстана составляет 60%, - правительство 2013, May 14. Deputy D. Dzhumabekov to Deputy Prime Minister T. Sarpashev: Why did we end 2012 with a deficit of 18 billion som? Депутат Д.Джумабеков вице-премьеру Т.Сарпашеву: Почему мы завершили 2012 год с дефицитом в 18 млрд сомов? 2013, May 20. The government is obliged to bring the economy out of the shadow, - Prime Minister. Правительство обязано вывести экономику из тени, - премьер-министр 2013, May 27. The government plans to eliminate the duplication of the VAT and the sales tax. Правительство планирует исключить дублирование НДС и налога с продаж 2013, June 16. The patent economy is killing the economy of entire Kyrgyzstan, - MP A.Izmalkova. Патентная экономика убивает экономику всего Кыргызстана, - депутат А.Измалкова 2013, July 17. According to the results of the first half of the year, Bishkek did not meet the tax collection plan. По итогам I полугодия Бишкек не выполнил план по налоговым сборам 2013, August 12. Tax Service Chairman I.Masaliev was appalled that the plan for the city of Osh was not fulfilled, and that the head of the municipal STS department was on sick leave. И.Масалиев возмутился, что план по городу Ош не выполнен, а начальник управления ГНС находится на больничном 2013, September 9. The government will amend the Tax Code to eliminate tax duplication. Правительство внесет изменения в Налоговый кодекс, предусматривающие исключение дублирования налогов 2013, September 12. The patent system is destroying the economy, VAT payers are in a grave condition, - deputy A.Izalkova. Патентная система разрушает экономику, плательщики НДС находятся в тяжелом состоянии, - депутат А.Измалкова 2013, September 25. De facto the service sector forms 70% of the economy, while only 10% of it pays taxes, - First Deputy Prime Minister Dj. Otorbaev. У нас сектор услуг де-факто составляет 70%, а платят налоги 10%, - первый вице-премьер Дж.Оторбаев 2013, October 3. Prime Minister Zh. Satybaldiev will consider the responsibility of a number of heads of government agencies for the execution of the revenue side of the budget. Премьер Ж.Сатыбалдиев рассмотрит ответственность ряда руководителей госорганов по исполнению доходной части бюджета

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2013, October 11. MP M.Mademinov believes that the government will again cut the budget for 2013. Депутат М.Мадеминов считает, что правительство снова урежет бюджет 2013 года 2013, October 21. Thirty STS departments did not meet the plan for January-September 2013 - the Ministry of Finance. За январь-сентябрь 2013 года по 30 подразделениям ГНС наблюдается невыполнение плана, - Минфин 2013, October 28. External debts may create many problems and, possibly, lead to default, - MP R.Zheenbekov. Внешние долги могут создать много проблем и, возможно, приведут к дефолту, - депутат Р.Жеенбеков 2013, November 6. Ministerof Finance O. Lavrova noted the poor work of the head of the State Tax Service I. Masaliev. Министр О.Лаврова заявила о плохой работе главы ГНС И.Масалиева 2013, November 12. Kyrgyzstan is slowly heading towards bankruptcy, - MP RC Tologonov. Кыргызстан потихоньку идет к государственному банкротству, - депутат ЖК Р.Тологонов 2013, November 18. Deputy O. Abdrakhmanov to the leadership of the Ministry of Finance: you can only take loans and grants, there is no control mechanism. Депутат О.Абдрахманов руководству Минфина: Вы умеете только брать кредиты и гранты, механизма контроля нет 2013, November 27. The Ministry of Finance puts forward for discussion changes in the basic rates of the voluntary patent-based tax by type of business activity. Минфин выносит на обсуждение изменения в базовую сумму налога на основе добровольного патента по видам предпринимательской деятельности 2013, November 29. The government should implement the republican budget by 100% or resign, - deputy D. Niyazalieva. Правительство должно исполнять республиканский бюджет на 100% или уходить в отставку, - депутат Д.Ниязалиева 2013, December 2. Deputy T. Baltabaev asked the Finance Ministry to directly tell the President that there is no money in the budget for projects in the country’s roadmap. Депутат Т.Балтабаев попросил Минфин прямо сказать президенту, что в бюджете нет денег на проекты дорожной карты страны 2013, December 12a. The government plans to introduce a new method of accounting for trade and to reduce the amount of non-observed economy in domestic trade. Правительство планирует внедрить новую методику учета товарооборота и сократить объем ненаблюдаемой экономики во внутренней торговле 2013, December 12b. MP K. Abdiev proposes to hear the ministers who are responsible for the receipt of funds in the budget. Депутат К.Абдиев предлагает заслушать министров, которые отвечают за поступление средств в бюджет 2013, December 18a. The Association of Suppliers proposes to move from monthly to quarterly reporting for SMEs. Ассоциация поставщиков предлагает перейти с ежемесячной на ежеквартальную отчетность для МСБ 2013, December 18b. The State Tax Service agreed with the abolition of the VAT invoice forms, but on the condition of creating an alternative control option. ГНС согласилась с отменой бланков счетов- фактур по НДС, но с условием создания альтернативного варианта контроля

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2014, January 16. Prime Minister J. Satybaldiev promised to dismiss the plenipotentiaries who will not fulfill the tax collection plan in two months. Премьер Ж.Сатыбалдиев пообещал уволить полпредов, которые не выполнят план сбора налогов за два месяца 2014, January 27. The Association of Suppliers of the Kyrgyz Republic proposed to simplify the administration of taxes and social payments. Ассоциация поставщиков КР предложила упростить администрирование налогов и социальных платежей 2014, February 1. Preliminary, the STS and the SCS have fulfilled the plan for collecting taxes for January 2014 by 100%, - Prime Minister Zh. Satybaldiev. Предварительно ГНС и ГТС выполнили план по сбору налогов на январь 2014 года на 100%, - премьер Ж.Сатыбалдиев 2014, February 10. The government wants to reduce voluntary patents on 27 types of services. Правительство хочет сократить добровольные патенты по 27 видам услуг 2014, February 11. The government wants to increase the costs of the voluntary patent in a number of categories of services by 2.5 times and more (list). Правительство хочет увеличить стоимость добровольных патентов по ряду категорий услуг в 2,5 и более раза (перечень) 2014, February 13a. The Ministry of Finance began discussions with the business community of the proposal on the approval of the basic rates of the voluntary patent. В Минфине началось обсуждение с бизнес-сообществом проекта об утверждении базовой суммы налога на основе добровольного патента 2014, February 13b. The Head of the State Tax Service I.Masaliev proposed to the Ministry of Finance to withdraw the proposal on the approval of the basic rates of voluntary patent-based tax. Глава ГНС И.Масалиев предложил Минфину отозвать проект об утверждении базовой суммы налога на основе добровольного патента 2014, February 13c. The basic rate of voluntary patent-based tax by type of activity is set by the Government of the Kyrgyz Republic, - Ministry of Finance. Базовая сумма налога на основе добровольного патента по видам деятельности устанавливается правительством КР, - Минфин 2014, February 13d. The initiative of the Ministry of Finance to increase the cost of the voluntary patent threatens with an inordinate blow to small and medium-sized businesses, - Bishkek Business Club. Инициатива Минфина по повышению стоимости добровольного патента грозит непомерным ударом по малому и среднему бизнесу, - Бишкекский деловой клуб 2014, February 13e. The draft resolution on basic voluntary patent rates tax propose the exclusion of 27 types of services. В проекте постановления об утверждении базовой суммы налога на основе добровольного патента предлагаются сокращения по 27 видам услуг. 2014, February 14. Public organizations have asked the head of government not to consider raising voluntary patent rates. Общественные организации обратились с просьбой к главе правительства не рассматривать повышение ставок добровольного патента 2014, February 20a. Kyrgyzstan’s industrial enterprises pay too much tax, - Dj. Otorbayev. Промышленные предприятия Кыргызстана переплачивают налог, - Дж.Оторбаев

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2014, February 20b. MP J.Zholdosheva to First Deputy Prime Minister Dj. Otorbaev: When will you start working? Депутат Ж.Жолдошева первому вице-премьеру Дж.Оторбаеву: Вы когда начнете работать? 2014, March 5. In all areas there is a budget shortage, - deputy of the city council A. Kenenbaev. Во всех сферах наблюдается нехватка бюджета, - депутат горкенеша А.Кененбаев 2014, March 13. There is a construction boom in Bishkek, but the taxes are scanty, - deputy of BGK M.Zheenchoroev. В Бишкеке идет строительный бум, а налоги собираются мизерные, - депутат БГК М.Жеенчороев 2014, March 27. The executive director of the Bishkek Business Club E. Dzhumanov made a statement about the Ministry of Finance putting pressure on business while implementing fiscal policy. Исполнительный директор БДК Е.Джуманов заявил о давлении со стороны Минфина на бизнес при реализации фискальной политики 2014, April 4. If today we raise the cost of the patent, I guarantee you that entrepreneurs will then increase the price of products by 20-30%, - acting head of the State Tax Service I. Masaliev. Если мы сегодня поднимем стоимость патента, то я вам гарантирую, что предприниматель на 20-30% повысит цену продукции, - и.о главы ГНС И.Масалиев 2014, April 15. Acting Chairman of the State Tax Service Z.Osmonov: Revision of the som 4 million VAT threshold must be subjected to in-depth study. И.о. председателя ГНС З.Осмонов: Пересмотр порога НДС в 4 млн сомов подлежит глубокому изучению 2014, April 29. Ministry of Finance: An increasing in the basic rate of the voluntary patent-based tax does not imply an automatic increase in the tax amount due for payment. Минфин: Повышение базовой суммы налога на основе добровольного патента не предусматривает автоматического повышения подлежащей к уплате суммы налога 2014, April 30. Kylychbek Dzhanykulov is relieved of his post as head of the Bishkek STS unit for not fulfilling the collection plan. Кылычбек Джаныкулов освобожден от занимаемой должности руководителя УГНС Бишкека за невыполнение плана по сбору 2014, May 7. MP D. Bekeshev proposes to reduce the frequency of reporting for small businesses. Депутат Д.Бекешев предлагает сократить периодичность отчетности для субъектов малого предпринимательства. 2014, May 21a. To increase budget revenues, it is necessary to raise the amount of taxes collected at the patent level - the government. Чтобы увеличить поступления в бюджет, нужно поднять налоговые сборы на патентном уровне, - правительство 2014, May 21b. The interagency commission instructed the Ministry of Finance and the State Tax Service to familiarize the business community with the list of the types of business activity that pay taxes through the voluntary patent. Межведкомиссия поручила Минфину и ГНС ознакомить бизнес- сообщество с перечнем видов деятельности, осуществляющих уплату налогов по добровольному патенту 2014, July 1. The patent system does not involve accounting, we must move away from this system, - head of the State Tax Service Z.Osmonov. Патентная система не предполагает ведения учета, мы должны отходить от этой системы, - глава ГНС З.Осмонов

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2014, September 8. The situation of the national budget cannot but worry us, - deputy K. Dyikanbaev. Ситуация, связанная с республиканским бюджетом, не может нас не тревожить, - депутат К.Дыйканбаев 2014, October 2. First Deputy Prime Minister T. Sarpashev instructed the head of the STS Z. Osmonov to dismiss the heads of departments of districts that did not fulfill the plan. Первый вице- премьер Т.Сарпашев поручил главе ГНС З.Осмонову уволить начальников управлений районов, не выполнивших план 2014, October 27. MPs U. Kochkorov, D. Bekeshev, A. Izmalkova and M. Bakirov proposed to suspend the sales tax for VAT payers from January 1, 2015. Депутаты У.Кочкоров, Д.Бекешев, А.Измалкова и М.Бакиров предложили отменить налог с продаж для плательщиков НДС с 1 января 2015 года 2014, October 30. The Ministry of Finance believes that the State Tax Service may have problems and difficulties in administering social contributions. Минфин считает, что у ГНС могут быть проблемы и затруднения при администрировании социальных взносов 2014, November 13. MP I.Isakov called the submitted budget for 2015 unrealistic. Депутат И.Исаков назвал нереальным представленный бюджет на 2015 год 2014, November 25. The parliamentary committee on fiscal and economy policy supported the changes in the basic rates of the voluntary patent-based tax. Комитет ЖК по экономической и фискальной политике поддержал изменения по базовой сумме налога на основе добровольного патента 2014, December 16. Parliamentary committee approved amendments to the Tax Code which simplify the terms for the submission of tax reports and the payment of taxes. Комитет ЖК одобрил поправки в Налоговый кодекс, упрощающие сроки представления налоговой отчетности и уплату налогов 2015, January 16a. The Ministry of Economy will reduce the list of the types of business activities carried out on the basis of the voluntary patent. Минэкономики сократит перечень видов предпринимательской деятельности, осуществляемых на основе добровольного патента 2015, January 16b. Next week the Ministry of Economy next will present a new fiscal policy for 2015- 2020. Минэкономики на следующей неделе презентует новую фискальную политику на 2015-2020 годы 2015, January 30. The head of the STS Z. Osmonov announced which districts did not fulfill the plans for 2014. Глава ГНС З.Осмонов озвучил, какие районы не выполнили планы по итогам 2014 года 2015, February 12a. The parliament approved in the first reading the bill on suspending the sales tax for VAT payers starting from 2015. ЖК одобрил в 1 чтении законопроект об отмене налога с продаж для плательщиков НДС с 2015 года 2015, February 12b. MP A. Izmalkova asked to support the suspension of the sales tax for VAT payers from starting from 2015 in order to save large economic entities. Депутат А.Измалкова попросила поддержать отмену НсП для плательщиков НДС с 2015 года для сохранения крупных хозсубъектов

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2015, February 23. The government: The state budget could lose at least 3.8 billion som from the suspension of the sales tax for VAT payers. Правительство: От отмены налога с продаж для плательщиков НДС госбюджет может потерять не менее 3,8 млрд сомов 2015, March 3. Parliamentary committee will hold public hearings on the elimination of duplication of VAT and the sales tax. Комитет ЖК проведет общественные слушания по исключению дублирования НДС и НсП 2015, March 20a. The parliamentary committee on economic and fiscal policy will hold an extended meeting on the suspension of sales tax for VAT payers. Комитет ЖК по экономической и фискальной политике проведет расширенное заседание по отмене налога с продаж для плательщиков НДС 2015, March 20b. The fact that 40% of business is in the shadows is also the fault of the government, it was forced to go there, - MP Z. Bekboev. То, что 40% бизнеса в тени — это тоже вина правительства, потому что его заставили туда уйти, - депутат З.Бекбоев 2015, March 20c. If the VAT rate is raised from 12% to 14%, all enterprises will go to Kazakhstan, - the Association of Suppliers. При повышении ставки НДС с 12% до 14% все предприятия уйдут в Казахстан, - Ассоциация поставщиков 2015, March 20d. If the Kyrgyz Republic raises the VAT from 12% to 14%, it will be at a disadvantage within the customs union, - the Ministry of Economy. Если КР поднимет НДС с 12% до 14%, то окажется в невыгодном положении в ТС, - Минэкономики 2015, March 20e. The cascading nature of the VAT negatively affects investment attractiveness and creates an administrative burden, - Ministry of Finance. Каскадная природа НДС негативно сказывается на инвестпривлекательности и создает административную нагрузку, - Минфин 2015, March 31. Parliamentary committee approved the proposal on changing the monthly reporting on taxes and insurance premiums in the business sphere to quarterly. Комитет ЖК одобрил предложение о переводе ежемесячную отчетность по налогам и страховым взносам бизнес-сферы на ежеквартальную 2015, April 8. The parliament is considering a bill that allows small businesses to pay taxes not once a month, but once a quarter. ЖК рассматривает законопроект, позволяющий субъектам малого бизнеса платить налоги не раз в месяц, а раз в квартал 2015, May 20. The President approved amendments to the Tax Code that provide for reporting on a quarterly basis. Президент одобрил поправки в Налоговый кодекс, предполагающие предоставление отчетности ежеквартально 2015, May 28. The patent system fosters the growth of the shadow economy, - head of State Tax Service Z.Osmonov. Патентная система способствует росту теневой экономики, - глава ГНС З.Осмонов 2015, June 24. The parliament submitted for voting a draft law which provides for the strengthening of the procedure for voluntary registration for the VAT. Парламент отправил на голосование проект закона, предусматривающего усиление процедуры добровольной регистрации по НДС 2015, September 3. Small and medium businesses are not ready for an increase in the basic rates of the voluntary patents. This is stated in the appeal of the National Alliance of Business Associations

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(NABA) to the government. Малый и средний бизнес не готов к увеличению базовой стоимости добровольных патентов. Об этом говорится в обращении Национального альянса бизнес- ассоциаций (НАБА) к правительству 2015, September 4a. The government decree did not increase the tax rate, but only reduced the voluntary patent-based types of activity, - State Tax Service. Постановление правительства не увеличило ставки налога, а только сократило виды деятельности на основе добровольного патента, -ГНС 2015, September 4b. Starting from September, the number of voluntary patent-based types of activity will be reduced from 124 to 81. С сентября количество видов деятельности на основе добровольного патента будет сокращено с 124 до 81 2015, September 18. The IMF suggested to Kyrgyzstan to raise the VAT rate to 15%, - Ministry of Economy. МВФ предложил Кыргызстану поднять ставку по НДС до 15%, - Минэкономики 2015, October 9b. Due to the provision of benefits and preferences, the budget loses 169.7 billion som. Из-за предоставления льгот и преференций бюджет теряет 169,7 млрд сомов 2015, October 13. The dollar is growing, while tax revenues are falling, - deputy E. Dokenov. Доллар растет, а налоговые поступления уменьшаются, - депутат Э.Докенов 2015, November 5. The head of the Association of Suppliers on the reduction of patents: Let’s wait for a tide of the shadow economy. Глава Ассоциации поставщиков о сокращении патентов: Будем ждать прилива теневой экономики 2015, November 20. The State Tax Service will conduct a pilot project on the administration of social insurance contributions in the October district of Bishkek and in the Sokuluk district of the Chui region. ГНС проведет пилотный проект по администрированию страховых взносов в Октябрьском районе Бишкека и в Сокулукском районе Чуйской области 2015, November 23. The State Tax Service considers it necessary to move away from the patent system within three years. ГНС считает необходимым отойти от патентной системы в течение трех лет 2015, December 1. The first phase of administering the social insurance contributions of individual entrepreneurs has started, - State Tax Service. Начат первый этап администрирования страховых взносов индивидуальных предпринимателей, - ГНС 2015, December 8. The sales tax will remain only for banking, finance and mobile telecom, - the government. Только для банковской, финансовой и мобильной сферы налог с продаж останется, - правительство 2015, December 11. Deputy D. Bekeshev: Every year, the expenditures of the national budget grow, we eat and think where else to take from. Депутат Д.Бекешев: Ежегодно расходы республиканского бюджета растут, съедаем и думаем, где еще взять 2015, December 16. Deputy A. Altybaev about budget losses for 2014: The lack of responsibility for actions and inaction reached its climax. Депутат А.Алтыбаева о потерях бюджета за 2014 год: У нас безответственность за действия и бездействия достигла апогея

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2015, December 23. The parliament submitted for voting a proposal on raising the VAT registration threshold from 4 to 6 million soms. ЖК отправил на голосование предложение о повышении регистрационного порога НДС с 4 до 6 млн сомов 2015, December 24. The year will be difficult and there are big budgetary risks, - MP. Год будет тяжелым и есть большие риски бюджета, - депутат 2015, December 29. Parliamentary committee approved the exemption of taxpayers from the payment of the sales tax on export transactions and transactions outside of the territory of the Kyrgyz Republic. Комитет ЖК одобрил освобождение налогоплательщиков от уплаты НсП с экспортных поставок и поставок вне территории КР 2015, December 31. A.Atambayev signed a law that suspends, from January 1 2016, the sales tax on export transactions and transactions outside of the territory of the Kyrgyz Republic. А.Атамбаев подписал закон, отменяющий с 1 января 2016 года обложение НсП экспортных поставок и их реализации вне территории КР 2016, January 26. In order to prevent an economic downturn in the Kyrgyz Republic, a number of measures had been taken, including a reduction of the tax burden, - Ministry of Economy. Для недопущения экономического спада в КР были приняты ряд мер, в том числе снижение налогового бремен, - Минэкономики 2016, February 8. MP to the government: you have exceeded the 60% of GDP threshold for external loans. Депутат ЖК правительству: Вы на сегодня превысили порог внешних займов в 60% от ВВП 2016, March 3. The debt level to GDP approached 60%, the government should take effective measures, MP O. Artykbaev. Уровень долга к ВВП приблизился к 60%, правительство должно принимать эффективные меры, - депутат О.Артыкбаев 2016, September 16. Each minister should be personally responsible for budget execution, for non- execution it is necessary to resign, - deputy. За исполнение бюджета на каждом министре должна быть персональная ответственность, за неисполнение необходимо уйти в отставку, - депутат 2016, September 19. A deputy is worried how in the future the Kyrgyz Republic will be able to repay its external public debt, which is close to $ 4 billion. Депутат волнуется, как в будущем КР сможет погасить внешний госдолг, который приблизился к $4 млрд 2016, October 5. MP R.Mombekov proposed renaming the Ministry of Finance into the Ministry of Loans. Депутат Р.Момбеков предложил переименовать Минфин в Министерство займов 2016, October 7. Deputy O. Babanov to the Ministry of Finance: a budget deficit is possible within the range of 6 billion som, but not 21 billion som. Депутат О.Бабанов Минфину: Дефицит бюджета возможен в пределах 6 млрд сомов, но не 21 млрд сомов 2016, October 13. The Ministry of Economy proposes to extend the duration of the pilot project on the administration of the social insurance contributions by the State Tax Service until July 1 2017. Минэкономики предлагает продлить срок проведения пилотного проекта по администрированию ГНС страховых взносов до 1 июля 2017 года

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2016, October 31. The Tax Service may refuse to assign taxpayers invoice numbers (cases and reasons). Налоговая может отказать налогоплательщику в присвоении номера по счет-фактуре (случаи и причины) 2016, November 10. The government decree on the introduction of a new mechanism for the procedure of receiving, using and accounting for VAT invoices came into force. Постановление правительства о введении нового механизма процедуры получения, применения и ведения учета счетов-фактур НДС вступило в силу 2016, November 16. If in 2015 there is a tax shortfall of 7 billion som, then the STS leadership should resign, - MP. Если за 2015 год есть недопоступление налогов на 7 млрд сомов, то руководство ГНС должно уйти в отставку, - депутат

Vechernii Bishkek, https://www.vb.kg/ 2013, May 27. The Prime Minister told about the reforms planned for 2013. Премьер рассказал о планируемых на 2013 год реформах. Svetlana Moiseeva 2014, February 10. Experts: An increase in patent costs is fraught with small businesses disappearing into the shadow. Эксперты: Подорожание патентов чревато уходом малого бизнеса в тень. Svetlana Moiseeva. 2015, January 5. Results of 2014: the main economic events through the eyes of business. Итоги- 2014: главные экономические события глазами бизнеса. Maksim Tsoy

Press releases issued by Kyrgyzstani organizations Ministry of Economy (2012, December 20). At the Ministry of Economy, a study was presented on the shadow economy, prepared by the expert community, and a Memorandum of Cooperation was signed on the cooperation between government agencies and civil society institutions in the fight against corruption. В Минэкономики презентованы исследования по теневой экономике, подготовленная экспертным сообществом, подписан Меморандум о сотрудничестве в сфере противодействия коррупции между госорганами и институтами гражданского общества. http://mineconom.gov.kg. Last accessed on December 21st 2012 Chamber of Commerce and Industry of the Kyrgyz Republic (2013, July 8). Representatives of the business community, the government and the USAID REFORMA Project discussed the results of the research on the policy of indirect taxation and tax administration. Представители бизнес сообщества, государства и Проекта USAID РЕФОРМА обсудили итоги исследования политики косвенного налогообложения и налогового администрирования. http://cci.kg/. Investment Council (2015, February 18) Business community opposes raising the VAT to 14 percent. Бизнес-сообщество выступает против повышения НДС до 14 процентов. Repost of the 24.kg article from the same date. Parliament of the Kyrgyz Republic (2016, June 22). The Jogorku Kenesh approved in the second reading a norm abolishing the forms of strict VAT reporting. ЖК одобрил во II чтении норму, отменяющую бланки строгой отчетности по НДС. http://kenesh.kg/ru/

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Parliament of the Kyrgyz Republic (2016, June 24). Bills considered on June 23, 2016 and put to the vote. Законопроекты, рассмотренные 23 июня 2016 года и внесенные на голосование. http://kenesh.kg/ru/

News articles and statements from 2020 consulted for the Foreword https://www.venice.coe.int/webforms/documents/?pdf=CDL-AD(2020)040-e https://www.hrw.org/news/2020/11/21/kyrgyzstan-bad-faith-efforts-overhaul-constitution

Eurasianet, https://eurasianet.org/region/kyrgyzstan December 10. Kyrgyzstan: MPs rush through approval for constitution referendum December 2. Kyrgyzstan: Constitutional Chamber nixes attempt to halt power grab. Ayzirek Imanaliyeva November 22. Kyrgyzstan: Hundreds rally against constitutional tinkering. Ayzirek Imanaliyeva November 18. Kyrgyzstan's proposed new constitution provokes widespread revulsion. Ayzirek Imanaliyeva November 10. New Kyrgyzstan leader vilifying free press. Ayzirek Imanaliyeva November 10. Kyrgyzstan: Lawmakers approve election delay and constitutional overhaul. Ayzirek Imanaliyeva November 4. Kyrgyzstan: Parliament reshuffle paves way for Japarov to cement power November 2. Kyrgyzstan: Protests flourish as crises mount on all sides October 16. Kyrgyzstan: Japarov seizes all levers of power. Peter Leonard October 15. Seizure of Kyrgyzstan nears completion as president steps down. Peter Leonard & Ayzirek Imanaliyeva October 14. Kyrgyzstan: In an uprising low on heroes, defence volunteers shine. Ayzirek Imanaliyeva October 14. Kyrgyzstan: Japarov's nomination as PM pauses crisis October 10. Kyrgyzstan: Former convict appointed prime minister. Ayzirek Imanaliyeva October 7. Kyrgyzstan: Taking power one building at a time. Peter Leonard October 6. As dawn breaks in Kyrgyzstan, protesters control government buildings. Peter Leonard October 5. Kyrgyzstan: Police and protesters clash in post-election mêlée. Ayzirek Imanaliyeva & Peter Leonard October 4. Kyrgyzstan: Competitive elections turn into rout for status quo. Peter Leonard & Ayzirek Imanaliyeva

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Kloop, https://kloop.kg/news/

December 23. The first version of the new Constitution is ready - it will be shown to MPs in early 2021. But this is not yet the end. Готов первый вариант новой Конституции — его покажут депутатам в начале 2021 года. Но это еще не конец. Yelena Korotkova December 20. A peaceful march for the rule of law was held in Bishkek. В Бишкеке прошел мирный марш за законность. Aigerim Ryskulbekova December 18. Omurbek Tekebaev called on his colleagues to vote and campaign for a parliamentary form of government. Омурбек Текебаев призвал коллег голосовать и проводить агитацию за парламентскую форму правления. Aizhamal Dzhamalkulova December 16. "This is a direct deception of the people." MP Nikitenko on a referendum on the form of government. «Это прямой обман народа». Депутатка Никитенко о референдуме по форме правления. Aidai Tokoyeva December 16. They violated the laws, did not inform the citizens. Independent observers criticize the adoption of the law on a referendum on the form of government. Нарушили законы, не проинформировали граждан. Независимые наблюдатели критикуют принятие закона о референдуме по форме правления. Aizhamal Dzhamalkulova December 13. A Sunday march against constitutional amendment took place in Bishkek. В Бишкеке прошел воскресный марш против изменения Конституции. Aidai Igrebayeva December 6. A Sunday march against constitutional amendment took place in Bishkek. В Бишкеке прошел воскресный марш против изменения Конституции. Aidai Igrebayeva December 3. The evaluative and erroneous judgments of the claimants. The arguments of the Constitutional Chamber about why the law on postponing parliamentary elections does not contradict the Constitution. Оценочные и ошибочные суждения заявителей. Доводы Конституционной палаты о том, почему закон о переносе выборов в парламент не противоречит Конституции. Aizhamal Dzhamalkulova December 3. "The failure of a historic mission." Saniya Toktogaziyeva slammed the decision of the Constitutional Chamber on the law to postpone the parliamentary elections. «Провал исторической миссии». Сания Токтогазиева раскритиковала решение Конституционной палаты по закону о переносе выборов в парламент. Yelena Korotkova November 29. A Sunday march against constitutional amendment took place in Bishkek. В Бишкеке прошел воскресный марш против изменения Конституции. Aidai Igrebayeva November 26. "We do not intend to legitimize it." MP Dastan Bekeshev and lawyer Saniya Toktogazieva refused to participate in the Constitutional consultations. «Не намерены легитимизировать». Депутат Дастан Бекешев и юристка Сания Токтогазиева отказались участвовать в Конституционном совещании. Mumduzbek Kalykov November 23. "The root of evil is not in the Constitution." Lawyers called the constitutional reform in Kyrgyzstan too hasty. «Корень зла не в Конституции». Юристы назвали поспешной конституционную реформу в Кыргызстане. Yelena Korotkova

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November 20. "Strengthening the president's authoritarianism will never improve the lives of citizens." Civil society representatives urge Kyrgyzstanis to unite against amendments to the Constitution. «Усиление авторитарности президента никогда не улучшит жизни граждан». Представители гражданского общества призвали кыргызстанцев объединиться против поправок в Конституцию. Aizhamal Dzhamalkulova November 20. What is wrong with the date proposed for the referendum and can the draft Constitution be amended? Begaim Usenova explains. Что не так с датой, предложенной для референдума и можно ли поправить проект Конституции? Объясняет Бегаим Усенова. Aizhamal Dzhamalkulova November 18. "Did not sign or did not see the document." Two more MPs said they did not initiate the draft of the new Constitution. «Не подписывали или не видели документ». Ещё два депутата заявили, что не инициировали проект новой Конституции. Aigerim Ryskulbekova November 17. MPs are not violating the Constitution and are informing citizens about what they are doing - the parliament responded to lawyers’ criticism. Депутаты не нарушают Конституцию и извещают граждан о том, чем занимаются — в парламенте ответили на критику юристов. Yelena Korotkova November 14. Why is the constitutional reform illegal and illegitimate? Почему конституционная реформа незаконна и нелегитимна? Editors & Saniya Toktogazieva November 8. A peaceful march was held in Bishkek against amendments to the Constitution. В Бишкеке прошел мирный марш против поправок в Конституцию. Aigerim Ryskulbekova October 28. Political movement "Umut Kyimyly" demands for parliamentary elections to be held on December 20. Политическое движение «Үмүт Кыймылы» требует провести парламентские выборы 20 декабря. Kamila Baimuratova October 27. Lawyers: Postponement of parliamentary elections will exacerbate the political crisis. Перенос выборов в парламент усугубит политический кризис — юристы. Yelena Korotkova October 27. I will become "ajo" - Japarov wants to relieve himself of presidential powers to participate in the elections. How legal is it? Стану «ажо» — Жапаров хочет снять с себя полномочия президента для участия в выборах. Насколько это законно? Aidai Tokoyeva October 24. Legal Clinic "Adilet": MPs and Sadyr Japarov violated the Constitution and parliamentary rules when they approved the postponement of elections and plans for constitutional reform. Правовая клиника «Адилет»: Депутаты и Садыр Жапаров нарушили Конституцию и регламент работы парламента, когда одобрили перенос выборов и конституционную реформу. Yelena Korotkova October 10. The absence of a quorum, threats, and a number of violations. Kasymalieva, Nikitenko and Bekeshev called the meeting of MPs in the state residence illegitimate. Отсутствие кворума, угрозы и ряд нарушений. Касымалиева, Никитенко и Бекешев назвали заседание депутатов в госрезиденции нелегитимным. Aizhamal Dzhamalkulova October 6. Why the events in Kyrgyzstan are illegal (and how they should be). Почему события в Кыргызстане незаконны (и как должно быть на самом деле). Aziza Raimberdieva

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From ‘Poverty to Power’ blog by Duncan Green Selection of entries (uncited in the dissertation) that chronicle the creation, activities and debates of the ‘thinking and working politically and ‘doing development differently’ platforms and programs (including by guest authors, from 2013 to 2019). Taken primarily from https://oxfamblogs.org/fp2p/tag/thinking-and-working-politically/. For more entries on the topic, see https://oxfamblogs.org/fp2p/tag/doing-development-differently/.

2013 November 27. Thinking and Working Politically: an exciting new aid initiative. https://oxfamblogs.org/fp2p/thinking-and-working-politically-an-exciting-new-aid-initiative/

2014 January 30. Can aid donors really ‘think and work politically’? Plus the dangers of ‘big man’ thinking, and the horrors of political science-speak. https://oxfamblogs.org/fp2p/can-aid-donors-really- think-and-work-politically-the-dangers-of-big-man-thinking-and-the-horrible-language-of-political- science/ June 4. Is ‘thinking and working politically’ compatible with results? Should advocacy ever be done in secret? Big questions at the LSE this week. https://oxfamblogs.org/fp2p/is-thinking-and-working- politically-compatible-with-the-results-agenda-should-advocacy-ever-be-done-in-secret-big-questions-at- the-lse-this-week/ July 10. Why ‘political economy analysis’ has lost the plot, and we need to get back to power and politics. https://oxfamblogs.org/fp2p/why-political-economy-analysis-has-lost-the-plot-and-we-need-to- get-back-to-power-and-politics/ October 9. DFID is changing its approach to better address the underlying causes of poverty and conflict – can it work? Guest Post from two DFID reformers. https://oxfamblogs.org/fp2p/dfid-is- changing-its-approach-to-better-address-the-underlying-causes-of-poverty-and-conflict-can-it-work-guest- post-from-tom-wingfield-and-pete-vowles/ October 28. Doing Development Differently: Report back from two mind-blowing days at Harvard. https://oxfamblogs.org/fp2p/doing-development-differently-report-back-from-two-mind-blowing-days-at- harvard/ December 17. Local First: an excellent (and practical) counterweight to the more top-down versions of ‘doing development differently’. https://oxfamblogs.org/fp2p/local-first-an-excellent-and-practical- counterweight-to-the-more-top-down-versions-of-doing-development-differently/

2015 January 6. Working With The Grain: an important new book on rethinking approaches to governance. https://oxfamblogs.org/fp2p/working-with-the-grain-an-important-new-book-on-rethinking-approaches-to- governance/ January 14. Is this the best paper yet on Doing Development Differently/Thinking and Working Politically? https://oxfamblogs.org/fp2p/is-this-the-best-paper-yet-on-doing-development- differentlythinking-and-working-politically/

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March 4. What would persuade the aid business to ‘think and work politically’? https://oxfamblogs.org/fp2p/how-can-we-persuade-aid-agencies-to-think-and-work-politically/ March 17. The best synthesis so far of where we’ve got to on ‘Doing Development Differently’. https://oxfamblogs.org/fp2p/adapting-development-best-synthesis-so-far-of-where-were-at-on-all-this- doing-development-differently-malarkey/ May 7. How do we get down to the nitty gritty on ‘Doing Development Differently’? https://oxfamblogs.org/fp2p/how-do-we-get-down-to-the-nitty-gritty-on-doing-development-differently/ July 23. What can NGOs/others learn from DFID’s shift to ‘adaptive development’? https://oxfamblogs.org/fp2p/how-are-dfid-ngos-and-others-shifting-to-adaptive-development/

2016 June 9. Where have we got to on adaptive learning, thinking and working politically, doing development differently etc? Getting beyond the People’s Front of Judea. https://oxfamblogs.org/fp2p/where-have-we-got-to-on-adaptive-learning-thinking-and-working- politically-doing-development-differently-etc-getting-beyond-the-peoples-front-of-judea/ August 2. If politics is the problem, how can external actors be part of the solution? New World Bank paper. https://oxfamblogs.org/fp2p/if-politics-is-the-problem-how-can-external-actors-be-part-of-the- solution-new-world-bank-paper/ September 13. How do you do ‘Adaptive Programming’? Two examples of Practical Experience help with some of the answers. https://oxfamblogs.org/fp2p/how-do-you-do-adaptive-programming-two- examples-of-practical-experience-help-with-some-of-the-answers/ October 20. The Sidekick Manifesto – count me in. https://oxfamblogs.org/fp2p/the-sidekick- manifesto-count-me-in/ November 22. Where has the Doing Development Differently movement got to, two years on? https://oxfamblogs.org/fp2p/where-has-the-doing-development-differently-movement-got-to-two-years- on/

2017 March 30. So is ‘Doing Development Differently’ a movement now? And if so, where’s it going? https://oxfamblogs.org/fp2p/so-is-doing-development-differently-a-movement-now-and-if-so-wheres-it- going/ June 13. Thinking and Working Politically: where have we got to? https://oxfamblogs.org/fp2p/thinking-and-working-politically-where-have-we-got-to/ August 3. NBA Superteams and Inclusive Growth: Doing Private Sector Development Differently. https://oxfamblogs.org/fp2p/nba-superteams-and-inclusive-growth-doing-private-sector-development- differently/ August 4. Looks like the NGOs are stepping up on ‘Doing Development Differently’. Good. https://oxfamblogs.org/fp2p/looks-like-the-ngos-are-stepping-up-on-doing-development-differently-good/

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October 3. Local thinktanks are natural allies in ‘Doing Development Differently’ so why not support them better? https://oxfamblogs.org/fp2p/local-thinktanks-natural-allies-in-doing-development- differently-so-why-not-support-them-better/

2018 February 13. How can a gendered understanding of power and politics make development work more effective? https://oxfamblogs.org/fp2p/how-can-a-gendered-understanding-of-power-and-politics-make- development-work-more-effective/ February 27. What makes Adaptive Management actually work in practice? https://oxfamblogs.org/fp2p/what-is-needed-to-make-adaptive-management-actually-work-in-practice/ March 23. What is really stopping the aid business shifting to adaptive programming? https://oxfamblogs.org/fp2p/what-is-really-stopping-the-aid-business-shifting-to-adaptive-programming/ April 7. Adaptive Management in Myanmar – draft paper on Pyoe Pin for your comments. https://oxfamblogs.org/fp2p/adaptive-management-in-myanmar-draft-paper-on-pyoe-pin-for-your- comments/ May 22. Can ‘Doing Development Differently’ only succeed if aid donors stay away from it? https://oxfamblogs.org/fp2p/can-doing-development-differently-only-succeed-if-aid-donors-stay-away- from-it/ June 28. Seven Rules of Thumb for Adaptive Management – what do you think? https://oxfamblogs.org/fp2p/seven-rules-of-thumb-for-adaptive-management-what-do-you-think/ July 3. Simplicity, Accountability and Relationships: Three ways to ensure MEL supports Adaptive Management. https://oxfamblogs.org/fp2p/simplicity-accountability-and-relationships-three-ways-to- ensure-mel-supports-adaptive-management/ November 13. Old Wine in New Bottles? 6 ways to tell if a programme is really ‘doing development differently’. https://oxfamblogs.org/fp2p/old-wine-in-new-bottles-6-ways-to-tell-if-a-programme-is-really- doing-development-differently/ November 27. Thinking and Working Politically – why the unexpected success? https://oxfamblogs.org/fp2p/thinking-and-working-politically-why-the-unexpected-success/ November 28. Working With/Against the Grain, the case for Toolkits, and the future of Thinking and Working Politically. https://oxfamblogs.org/fp2p/working-with-against-the-grain-the-case-for-toolkits- and-the-future-of-thinking-and-working-politically/

2019 February 6. Thinking and Working Politically in Economic Development Programmes – Some Sprints and Stumbles from a DFID Programme in Kyrgyzstan. https://oxfamblogs.org/fp2p/thinking-and- working-politically-in-economic-development-programmes-some-sprints-and-stumbles-from-a-dfid- programme-in-kyrgyzstan/

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