KAZAKHSTAN - Review of Grain Storage and Transportation Infrastructure Issues

CONTENTS Abbreviations & Acronyms ...... 5 Executive summary ...... 3 1. Grain Storage Challenges and Opportunities ...... 6 1.1. Regulatory Framework ...... 6 1.2. Storage Services ...... 10 1.3. Storage Capacity ...... 11 1.4. Drying Capacity ...... 15 1.5. Storage Management ...... 16 2. Transportation Infrastructure Challenges and Opportunities ...... 20 2.1. Railway Transportation ...... 20 2.2. Road Transportation ...... 24 3. Conclusions and Policy Recommendations ...... 24 3.1. Grain Storage ...... 25 3.2. Transportation Infrastructure ...... 25 Appendix 1. Examples of Elevator Services Fees ...... 27 Appendix 2. Comparison of Elevator Services Costs ...... 28

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ABBREVIATIONS & ACRONYMS

AMIS Agricultural Market Information System Avg. Average B2B Business to business BCE The Budapest Commodity Exchange BM&F BOVESPA Bolsa de Valores, Mercadorias & Futuros de Sao Paolo BMR The Romanian Commodities Exchange BRICS Brazil, Russian Federation, India, China, South Africa BSE Budapest Stock Exchange CA Central Asia CAP Common Agricultural Policy CBOT Chicago Board of Trade CCC Committee of Customs Control CCP Central Counterparty CEO Chief Executive Officer CIS Commonwealth of Independent States CMB Turkish Capital Markets Board CME Chicago Mercantile Exchange CSRC China Securities Regulatory Commission Customs Committee of the Ministry of National Economy of the Republic of Customs Committee DAP Delivered At Point, according to Incoterms DCE Dalian Commodity Exchange EAEU Eurasian Economic Union EBRD European Bank of Reconstruction and Development ETS Eurasian Trading System EU European Union EXW ExWorks, according to Incoterms FAO Food and Agriculture Organization of the United Nations FCC Food Contract Corporation, JSC FOB Free On Board, according to Incoterms G20 Group of 20 GDP Gross Domestic Product GUK Grain Union of Kazakhstan Ha Hectare IGT Internetowa Gielda Towarowa IKAR Institute for Agricultural Markets IMF International Monetary Fund IOSCO International Organization of Securities Commissions JSC Joint Stock Company KAM KazAgroMarketing, JSC

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Kg Kilogram KICE Kazakhstan International Commodity Exchange KTZh , JSC KZT Kazakhstani tenge LIFFE London International Financial Futures and Options Exchange MATIF Marché á Terme International de France MCI Monthly Calculation Index MCX Multi-Commodity Exchange of India MMT Million Metric Tonnes MoA Ministry of Agriculture of the Republic of Kazakhstan MSP Minimum Support Prices MT Metric Tonnes MY Marketing Year OECD Organization for Economic Cooperation and Development OTC Over-The-Couter SAFEX South Africa Agricultural Futures Exchange SDGs Sustainable Development Goals SHFE Shanghai Futures Exchange Statistics Committee of the Ministry of National Economy of the Republic of Statistics Committee Kazakhstan ST RK Technical standard of the Republic of Kazakhstan TMO Turkish Grain Board TRQ Tariff Rate Quota TurkDex The Turkish Derivatives Exchange UN United Nations US United States USD United States dollar USSR Union of Soviet Socialist Republics VAT Value-Added Tax WGT The Warsaw Commodity Exchange

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Executive summary

Adequate grain storage and transportation infrastructure are critical components for efficient grain markets and may provide important contributions to the Sustainable Development Goals (SDGs). In particular, elevators’ grain storage and management functions provide essential linkages between farmers, traders, as well as domestic and international grain markets. However, depending on their market power, elevator operators may also dictate pricing and storage conditions to farmers and traders. Such dominant market power is particularly problematic in areas where the concentration of elevators is low. In addition, these grain storage constraints may be further augmented by weak transportation infrastructure. Figure 1 below shows the logistical linkages between grain storage and transportation infrastructure, in particular railways and roads.

Figure1: Kazakh Grain Logistics Chain

This Review examines key challenges and opportunities with respect to Kazakhstan’s existing grain storage and transportation infrastructure. Specifically, it assesses existing regulatory frameworks, policies and procedures, cost structures, and capacity gaps for both grain market components. It concludes by proposing a series of policy reforms and investments that would not only improve the efficiency of domestic grain logistics and markets, but also provide important contributions to the SDGs. In particular, the proposed grain storage and transportation infrastructure improvements would further strengthen domestic and regional food security (SDG 2), economic growth (SDG 8), infrastructure development (SDG 9), responsible value chains (SDG 12), and partnerships (SDG 17).

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1. GRAIN STORAGE CHALLENGES AND OPPORTUNITIES

1.1. Regulatory Framework

Grain Storage Enterprises Regulation

The Law on Grain imposed a number of critical limitations on the activities of grain storage enterprises. According to Chapter 5 of the Law on Grain, all grain elevators are recognized as “public service warehouses”.1 Although the rights and obligations of public service warehouses are regulated by the Civil Code, the Law on Grain also imposes several limitations on the activities of grain elevators: • PROVISION OF SERVICES. ELEVATORS CANNOT PERFORM ANY ACTIVITIES OTHER THAN STORAGE AND ISSUANCE OF GRAIN RECEIPTS. FOUR TYPES OF ACTIVITIES ARE EXEMPT: PRODUCTION AND SALES OF CERTAIN GRAIN PROCESSING PRODUCTS, FUEL STORAGE SERVICES (E.G. RENTAL OF FUEL AND LUBRICANTS STORAGE TANKS), AND PROVISION OF SPACE FOR TELECOMMUNICATION EQUIPMENT. • PRICING OF SERVICES. PRICING REGULATION IS GOVERNED BY THE LAW ON COMPETITION (N112-IV DATED 25TH DECEMBER 2008) AND MAY COME INTO FORCE WHEN AN ELEVATOR IS CONSIDERED TO HOLD A HIGH DOMESTIC MARKET SHARE (I.E. A MARKET SHARE OF MORE THAN 35 PERCENT FOR A GIVEN AREA).2 AS OF MAY 2015, OF THE ESTIMATED 345 ELEVATORS IN THE STATE REGISTER OF MARKET ENTITIES, 91 WERE CONSIDERED TO HAVE A DOMINANT OR MONOPOLISTIC POSITION. DOMINANT ELEVATORS CANNOT DISCRIMINATE AMONGST CONSUMERS OR IMPOSE ANY CHARGES OTHER THAN STORAGE FEES. HOWEVER, IT SHOULD BE NOTED THESE OBLIGATIONS ARE LIKELY TO CHANGE WHEN THE ENTREPRENEURS CODE BECOMES EFFECTIVE (1ST JANUARY, 2016) GIVEN THAT ELEVATORS WILL NO LONGER BE ON THE LIST OF REGULATED

1 IN THIS REPORT THE TERM “ELEVATORS” REFERS TO COMPANIES THAT RECEIVE, STORE, AND UNLOAD GRAIN REGARDLESS OF THE PRESENCE OF BINS OR SILOS. 2 THE COMMITTEE FOR REGULATION OF NATURAL MONOPOLIES AND COMPETITION PROTECTION OF THE MINISTRY OF NATIONAL ECONOMY ANALYSES THE MARKETS AND REGISTERS ALL ELEVATORS WITH A MARKET SHARE MORE THAN 35 PERCENT FOR A GIVEN AREA. THE MARKET SHARE IS CALCULATED USING A SPECIAL METHODOLOGY THAT TAKES INTO ACCOUNT THE OWNERSHIP STRUCTURE OF THE ELEVATORS. ELEVATORS INCLUDED IN THE STATE REGISTER HAVE TO REPORT THEIR FINANCIALS BOTH ANNUALLY AND QUARTERLY, INCLUDING INFORMATION ON CHANGES IN OWNERSHIP, SALES, AND PRICES. WHEN THE COMMITTEE FINDS SIGNS OF VIOLATIONS OF THE LAW (E.G. CARTEL AGREEMENT, ABUSE OF A DOMINANT OR MONOPOLY POSITION ETC.), IT MAY ISSUE A WARNING, INSIST ON CHANGES IN CONTRACTS, OR WITHDRAW ILLEGITIMATE INCOME. FAILURE TO FOLLOW THE COMMITTEE’S INSTRUCTIONS RESULTS IN A FINE. 6

MARKETS AND VIOLATIONS OF ANTIMONOPOLY REGULATION WOULD BE INVESTIGATED ON AN AD HOC BASIS. • USE OF ASSETS. ELEVATORS CANNOT TRANSFER THEIR ASSETS IN A MANNER THAT SIGNIFICANTLY WORSENS THEIR ABILITY TO STORE GRAIN AND MEET THEIR OBLIGATIONS. FINANCIALS OF AN ELEVATOR SHOULD BE AUDITED ANNUALLY AND OBLAST AUTHORITIES HAVE TO ANNUALLY INSPECT ELEVATOR’S PREPAREDNESS FOR NEW HARVEST RECEPTION. IN ADDITION, ELEVATORS CANNOT ISSUE GUARANTEES OR PROVIDE THEIR PROPERTY AS COLLATERAL FOR THE OBLIGATIONS OF THIRD PARTIES. • STORAGE MANAGEMENT. GRAIN STORAGE RULES ARE REGULATED BY GOVERNMENT REGULATION N1569 DATED 21ST DECEMBER 2011. STANDARD CONTRACT TEMPLATES BETWEEN ELEVATORS AND GRAIN OWNERS SHOULD COMPLY WITH GOVERNMENT REGULATION N1359 DATED 24TH OCTOBER 2001. ELEVATORS THAT STORE STATE GRAIN RESERVES HAVE TO GIVE PRIORITY FOR RECEIVING, STORAGE AND UNLOADING OF STATE GRAIN RESERVES. PRIORITY IS ALSO ASSIGNED FOR THE TRANSPORTATION AND CERTIFICATION SERVICES RELATED TO STATE GRAIN RESERVES. GRAIN RECEIPTS REGULATION

The Law on Grain experienced 35 revisions during the last 15 years that were mostly aimed at strengthening the regulation of the grain receipt system. The grain receipts system was introduced in the beginning of 2001 following the adoption of the Law on Grain. Today, grain receipts are issued in accordance with the Rules of Issuance, Circulation and Redemption of Grain Receipts approved by the order of the Ministry of Agriculture (N 112 dated 11 February 2005). Essentially, a grain receipt is a single form consisting of two parts: (i) a warehouse certificate; and (ii) a pledge certificate. The receipt proves acceptance of goods into custody by a warehouse. It is also a letter of guarantee containing about 30 quantitative and qualitative features of the commodity as well as information about the seller and buyer. The National Bank of Kazakhstan produces form sheets for grain receipts that contain several degrees of protection. A form sheet is issued as a single piece, but consists of two parts – warehouse certificate and pledge certificate – which can be subsequently circulated separately. Each part of a grain receipt must contain the mandatory information – the code, serial number of blank, identification and contacts of the elevator and the owner of the grain, grain quantity and quality and other information. When splitting pledge certificate from a warehouse certificate, a warehouse certificate receives a mark that shows the endorsees’ identification, contact information, date and nature of obligation secured by the pledge, its size, interest rate and due date. Given that grain receipts are recognized as non-equity securities, they can be used as collateral to obtain bank loans.

Elevators must be licensed to issue grain receipts and have to maintain a register of issued grain receipts. Typically, farmers deliver grain from their own storage facilities to elevators and receive grain receipts. A grain receipt is issued by an elevator for a certain amount of grain within three days after reception of grain for storage. In addition, at the request of a seller, the total amount of produce can be divided into several parts, and each part is assigned with a

7 separate receipt. The sale of a grain receipt automatically transfers ownership of the commodity to the receipt buyer. Sale is performed through endorsement (i.e. affixing endorsement on the back of a security) and the number of resale transactions is unlimited. The current holder of a grain receipt can submit the documents to an elevator, which in its turn must release the requested amount of grain. Upon this, a grain receipt is considered redeemed, and withdrawn from circulation. In case of the partial release of grain, the receipt is redeemed and a new receipt issued on the remaining part of the grain. Importantly, on February 1st 2012, Government adopted Rules of use of electronic grain receipt system (regulation N185) and the Ministry of Agriculture announced the introduction of an electronic register (database) of grain receipts in 2013. A web portal (e-grain.kz) is currently functioning in pilot mode, but the date for a full- scale roll-out of the system is still unknown.

Guarantee payments are made according to a fixed price on grain, which varies depending on region and quality. In 2003, the Government established a special company Kazagrogarant, JSC that provides payments to the warehouse receipts holders in the case of grain volume or quality losses in grain storage. According to the rules3, Kazagrogarant offers two options to elevators: (i) participant elevators pay an annual fee (KZT 60-70 per MT)4, while possible losses are covered by Kazagrogarant and later collected from the participant; or (ii) participant elevators pay an annual fee (KZT 30 per MT) and provides collateral5 equal to 5 percent of storage capacity to compensate the fund, while possible losses are covered by Kazagrogarant and later collected from participant or guarantor.

Efforts to regulate elevators’ grain receipts systems have failed as storage owners are unwilling to participate and trust in grain receipts continues to deteriorate. Although the elevator licensing procedure does not seem to be too complicated or costly, storage owners believe that the limitations imposed by licensing on their operations are overly strict. In particular, the restriction on using elevator assets as collateral for third-party loans is the most significant disadvantage of licensing. For now, the inability to participate in the grain receipt system does not seem to be relevant for traders who procure grain from producers at their own elevators. Furthermore, licensed elevators have at times issued more warehouse receipts than the volume of grain stored in their facilities. As a result, scandals with fictitious warehouse receipts have emerged from time to time. Unsurprisingly, financial institutions generally do not consider warehouse receipts secure collateral. The most common reasons for this receipts fraud are the desire to (i) obtain credits using receipts as a collateral to cover cash gaps during harvest season; and (ii) use stored grain in short-term trading operations during price peaks, while covering deficiencies during price falls. The denial to unload grain is often a sign of such receipt fraud. Experienced traders usually have their own black lists of elevators and accept receipts from trusted elevators only. Finally, it should be notes that relatively high fees, collateral requirements, and fixed prices in case of guarantee payments have pushed elevators also out of

3HTTP://KAZAGROGARANT.KZ/FILES/DERJATELAM/%D0%9F%D1%80%D0%B0%D0%B2%D0%B8%D0 %BB%D0%B0%20%D0%B4%D0%BB%D1%8F%20%D0%A5%D0%9F%D0%9F.PDF 4 HTTP://KAZAGROGARANT.KZ/INDEX.PHP?OPTION=COM_CONTENT&TASK=VIEW&ID=29&ITEMID= 133 5 ACCEPTED COLLATERAL INCLUDES GRAIN, BANK GUARANTEE, OR OTHER LIQUID ASSETS. 8 the grain receipt’s guarantee system. After 12 years of Kazagrogarants’ operations, only five elevators are members of the system and all of them belong to the FCC.

Grain Export Regulation

The Law on Grain specifies different grain export requirements. Exporting grain requires the following documentation: phytosanitary certificate, quality passport, certificate of origin, declaration of conformity and veterinary certificate (fodder crops): • Phytosanitary certificate. This certificate identifies the phytosanitary condition of quarantine products for export. Chief state inspectors and state inspectors on plant quarantine of territorial inspections of the Ministry of Agriculture issue certificates. Each parcel should have its’ certificate. To obtain the certificate, an individual or a legal entity must submit an application to a territorial inspection no later than 15 days prior to shipment of regulated produce. The application should include detailed information on the product – its’ volume, shipment details, and confirmation to provide samples for examination. • Quality passport. This passport identifies the actual indicators of grain quality and their compliance with the requirements of regulation on standardization and (or) terms of a contract. It is issued by a surveyor for each carriage or parcel. The procedure of grain quality examination and grain quality passport issuance is regulated by the Decree of the Government of the Republic of Kazakhstan dated 30 December 2011 N 1675. • Certificate of Origin. Entrepreneurs Chamber of Kazakhstan issues Certificates of Origin after submission of documents, confirming the origin of the grain. Among submitted documents are grain receipts, contracts and other information. • Declaration of Conformity. This Declaration (previously, certificate of conformity) is issued by a surveyor, who, following the analysis of tests protocols examines compliance of the grain with established requirements. The results of examination are recorded in the expert’s report. Based on this report, a surveyor decides on issuance of declaration of conformity, draws up the declaration of conformity and registers it in the Register of state system of technical regulation. The declaration is accompanied by protocol of all tests, taken out during the certification process. A copy of the declaration of conformity, along with other documents, is stored by surveyor for no less than one year after the expiration of the document.

Dissolution and Assets Disposition Regulation

The Law on Grain sets the specific order of elevators’ dissolution and bankruptcy. In case an elevator fails to meet the regulations, the relevant oblast administration can issue a fine. If the elevator repeatedly fails to follow contractual obligations or the amount of issued grain warehouse receipts is higher than the real volume of stored grain, the oblast administration applies temporary stewardship. This measure may only take place following a court decision. Temporary stewardship is performed by a Committee consisting of the Ministry of Agriculture, oblast administration, elevator management, and grain receipt holders’ representatives. If temporary stewardship does not help solve the problem, the elevator license is withdrawn, and the court decides on enforced liquidation

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1.2. Storage Services

Drying services account for the largest share in elevator services costs. Elevators provide and charge for several storage services, including for cleaning, drying, loading (to the bins or silos), storing, and unloading grain. Fees differ from elevator to elevator depending on the level of competition in the area. An elevator that has monopoly position typically charges more and vice versa. Under a typical scenario, average total cost of elevator services is estimated at USD 6.49 per MT. 6 The breakdown of the estimated cost presented in Table 1 shows that drying is by far the most expensive operation (41 percent), followed by unloading (22 percent) and storage (17 percent). An extra one month of storage would increase its’ share to 29 percent, but drying would still be the highest expense. It should be noted that drying fees depend in part on the type of fuel used (gas, diesel or electricity), whereas unloading fees vary depending on the type of transport (truck or grain hopper). Naturally, in reality, situations may diverge significantly from this scenario and variable climate conditions in particular can result in significant cost variations.7 Table 1. Elevator services costs decomposition Operation Costs (USD) Share Loading from truck 0.97 15% Drying 2.68 41% Cleaning 0.30 5% Storage 1.12 17% Unloading to grain hopper 1.41 22% Total: 6.49 100% Source: own calculation based on 6 elevator fees data

It is very common for elevator laboratories to underestimate the quality of farmers’ products in areas with limited competition. Underestimating grain quality is widely practiced by elevators with the exception of those solely used by traders for their own operations. Typically, in locations with higher competition understatement is relatively low and vice versa. There are various reasons why elevator management would underestimate grain quality. They include (i) hedging their risk of quality deteriorating during storage time; (ii) mixing their own low quality wheat with farmers’ higher quality wheat to then unload products that meet the relevant standards; (iii) receiving more revenue from surplus grain that was counted as admixtures or moisture; (iv) obtaining more cash income for additional services to be provided

6 THE TYPICAL SCENARIO ASSUMES THAT A PRODUCER DELIVERS GRAIN BY TRUCK, CLEANING REMOVES 2 PERCENT OF IMPURITIES AND 2 PERCENT OF MOISTURE, THE GRAIN IS SOLD WITHIN 1 MONTH, AND UNLOADED TO A GRAIN HOPPER. FOR THE COST ESTIMATIONS UNDER THIS SCENARIO, AVERAGE FEES FROM 6 ELEVATORS (GRANAR, IVOLGA, AMANKARAGAYSKIY, ATAMEKENASTYK, TOBOLSKIY, KRASIVOYE) SITUATED IN THE WERE USED (SEE APPENDIX 1). 7 FOR EXAMPLE, WITHIN ONE WEEK IN 2014, ELEVATORS IN OBLAST RECEIVED WHEAT WITH EXCESSIVE IMPURITIES AND ADMIXTURES FROM 2 PERCENT TO 10 PERCENT AND EXCESSIVE MOISTURE FROM 16 PERCENT TO 44 PERCENT. IN THE EXTREME CASE, DRYING COSTS COULD INCREASE UP TO USD 59 PER MT. TAKING INTO ACCOUNT THAT WHEAT LOSES 44 PERCENT OF ITS WEIGHT WHILE DRYING, AS WELL AS THE LOW QUALITY OF SUCH WHEAT (RESULTING IN LOWER PRICE), TOTAL COSTS MAY ACTUALLY BE A FEW TIMES HIGHER THAN THE REVENUE. 10

(such as cleaning or drying) at the expense of producers. Underestimation of grain quality may easily lead to 10-12 percent losses for producers. However, in many cases elevators are the only trading point in the area. Farmers therefore have no other option, but to accept the results.

1.3. Storage Capacity

Grain storage capacity has increased significantly in recent years and can now accommodate harvest peaks. Grain is stored at 3 types of facilities in Kazakhstan: elevators, on-farm storage, and mills. The grain storage capacity available at these facilities in 2015 is estimated at 27.86 MMT (see Table 2). Of this, 63 percent (17.50 MMT) is stored in elevators, 32 percent (8.98 MMT) on-farm and 5 percent (1.38 MMT) in grain storages at mills This capacity easily accommodates the average grain production volumes of the least 5 years (17.5 MMT) and exceeds the largest harvest in 2011 of 26.96 MMT by 901,000 MT.

Table 2. Estimate of total grain storage capacity in Kazakhstan in 2015 Estimate capacity (MMT) Share

Elevators 17.50 63% On farm storages 8.98 32% Mills and others 1.38 5% Total: 27.86 100% Source: own estimates, based on Statistics Committee monthly report series “Availability of grain and pulses in the Republic of Kazakhstan”

Elevator Storage Capacity

Old and new elevator capacity as of 2015 is estimated at 17.5 MMT. Elevators are mainly owned by traders or agro-holdings. In both cases, the main purpose of investing in elevators is the ability to store their own grain (either self-produced or acquired from farmer. Storage services to third parties are commonly considered as an important source of additional income, but secondary to the primary function of storage of their own grain. The Statistics Committee’s official statistics regarding elevator storage capacity only track capacity volumes of newly launched elevators. According to Statistics Committee data, there were no new launches before 2007 and the total amount of new grain storage capacity added during 2007-14 was 1.38 MMT (see Table 3). Elevators accounted for 51 percent of the new launched, whereas the peak year for additional storages was 2010 (after a bumper grain harvest in 2009). However, experts doubt the consistency of these official statistics. Estimates of both old and new elevator capacity based on traders’ knowledge and elevator databases result in a total number of 345 elevators in 2015 with a total capacity of 17.5 MMT (see Table 4). Under this approach, 38 new elevators with a total capacity of more than 1 MMT were identified as of 2015 (or 6 percent of total). 224 elevators (or 65 percent of the total) are located in key grain producing regions, including Akmola, North Kazakhstan, Kostanay, Karagandy, and East Kazakhstan oblasts. Their total capacity for 2015 is estimated at 13.6 MMT (or 78 percent of the total), whereas their average share during the last decade was 14.8 MMT (or 85 percent of the total). It should also be noted that

11 traders’ knowledge is biased towards North Kazakhstan. In fact, 90 elevators with a total capacity of almost 2 MMT are not known to traders (or 11 percent of total). Among this group of unknown elevators, 19 (0.4 MMT) are located in key grain producing regions such as the region.

Table 3. Grain storage capacity launch (000 MT) Utente 8/7/2015 3:02 PM Year Elevators Seed storage Fodder grain storage Other grain storages Total Comment [1]: SHALL WE GIVE ALSO 2005 0.0 0.0 0.0 0.0 0.0 LAUNCHES AS % OF EXISTING CAPACITY? 2006 0.0 0.0 0.0 0.0 0.0 2007 98.0 0.0 0.0 0.0 98.0 2008 0.0 0.0 0.0 2.9 2.9 2009 52.4 0.1 60.1 83.8 196.4 2010 140.6 7.0 44.3 187.3 379.2 2011 80.0 9.3 33.6 92.0 214.9 2012 56.0 0.8 34.1 78.5 169.4 2013 34.0 0.0 19.2 9.0 62.2 2014 240.8 0.0 14.4 0.0 255.2 Total: 701.8 17.2 205.7 453.4 1’378.1 Source: Statistics committee, annual reports series on investments and construction

TABLE 4. ESTIMATE ON NUMBER AND CAPACITY OF ELEVATORS BY AGE GROUP (2015)

TOTAL NUMBER СAPACITY (000MT) TOTAL CAPACI OBLAST NUMBE TY (000 OLD NEW N/A OLD NEW N/A R MT) AKMOLA 54 12 3 3’673 294 73 69 4’040 11 1 7 557 42 231 19 831 7 23 457 676 30 1’133 EAST 11 2 551 17 13 568 KAZAKHSTAN ZHAMBYL 4 8 321 181 12 502 WEST 11 1 782 9 12 791 KAZAKHSTAN KARAGANDY 6 13 197 275 19 473 KOSTANAY 41 5 3 3’859 80 57 49 3’996 1 4 35 157 5 192 MANGISTAU 2 122 2 122 PAVLODAR 17 576 17 576 NORTH 52 18 3’473 472 70 3 946 KAZAKHSTAN

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SOUTH 2 26 65 270 28 335 KAZAKHSTAN TOTAL: 217 38 90 14’546 1’010 1’947 345 17’503 SOURCE: COMPILATION BASED ON TRADERS’ ESTIMATES

Old elevators built in Soviet times have a rather high capacity compared to newly launched ones. Typically, on old elevator has an average capacity of 67,000 MT, whereas the average capacity of identified new elevators is only 27,000 MT. Among the “unknown” group, the average size is even smaller (22,000 MT). As a result, the vast majority of unidentified storage capacity is assumed to have been built in recent years. Importantly, an elevator’s grain receiving capacity may be limited by the number and size of the dump pits. If the elevator has only one dump pit, which is often true for old elevators, it can receive only one type of crop. If the elevator switches from, for example, wheat to barley, the equipment should be cleaned first, which takes some time. Therefore, trucks that deliver different types of crops have to wait until the next cycle. In this context, it is important to mention that the Almaty region, which has the largest share among unidentified storage capacity (0.68 MMT), also has the most diversified production (i.e. corn and soybeans), which could be stored in the same types of storages as wheat and barley.

Besides capacity, there are other major differences between old and new elevators. Differences worth highlighting include: • OLD ELEVATORS HAVE LOWER FILLING RATE THAN NEW ONES. IN ORDER TO MAINTAIN QUALITY, GRAIN IN AN OLD ELEVATOR IT SHOULD BE PERIODICALLY TRANSFERRED FROM ONE SILO TO ANOTHER. AS THIS PROCESS REQUIRES FREE SPACE, SILOS ON AVERAGE ARE FILLED AT 70 PERCENT OF THEIR FULL CAPACITY. THE DESIGN OF NEW ELEVATORS VENTILATES GRAIN WITHOUT TRANSFERRING IT. • OVERALL DESIGN OF SOVIET ELEVATORS IS MUCH LESS EFFICIENT THAN MODERN ONES, E.G. IT REQUIRES KILOMETERS OF CONVEYER BELTS, WHICH ARE COSTLY TO MAINTAIN. • MODERN ELEVATORS INSTANTLY MEASURE THE WEIGHT OF GRAIN LOADED TO THE GRAIN HOPPER. OLD DESIGN REQUIRES TRANSPORTATION OF HOPPER TO A WEIGH HOUSE AND THEN BACK IN CASE WEIGHT DOES NOT MATCH REQUIRED. • BINS MADE OF METAL STRUCTURES ARE WIDELY USED IN NEW ELEVATORS AND HAS SHORTER LIFETIME THAN REINFORCED CONCRETE STRUCTURES COMMON FOR SOVIET ELEVATORS. • OLD ELEVATORS NEED LOCOMOTIVE FOR GRAIN HOPPER MANEUVERING, WHILE MODERN ONES USE REVERSIBLE WINCHES. • GRAIN IN METAL BINS LOSES A NOTABLE AMOUNT OF WEIGHT THROUGH MOISTURE EVAPORATION, ESPECIALLY DURING THE WARM SEASON. REINFORCED CONCRETE PRESERVES GRAIN BETTER OVER LONG PERIODS. • SOVIET TIME ELEVATORS ARE MUCH MORE LABOR INTENSIVE THAN MODERN ONES, IN SOME CASES THEY REQUIRE 4 TIMES MORE PERSONNEL.

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• OVERALL CONDITION OF OLD ELEVATORS IS USUALLY OBSOLETE AND DEPENDS HIGHLY ON MAINTENANCE AND REPAIR INVESTMENT OF THE OWNER. IN MANY CASES, MODERNIZATION REQUIRES SIGNIFICANT RECONSTRUCTION INVESTMENTS.

On-Farm Storage Capacity

Total on-farm storage capacity as of 2015 is estimated at 8.89 MMT. The Statistics Committee reports on the number, area, and estimated capacity of grain storage owned by farms show that, as of the beginning of 2015, there were a total number of 4,892 storage facilities of all types (i.e. for grain, fodder grain and seed) with a total capacity 8.89 MMT. According to the Statistics Committee methodology, the capacity is estimated using the effective volume multiplied by the average weight of one cubic meter of grain. Another estimation may be done using monthly grain stocks data. According to the Statistics Committee reports, the historical maximum of grain stocks at farms during 2009-2014 was in November 2011 – almost 14.6 MMT.8 November is also the peak month, because harvested grain is still on its’ way to long- term storage. For estimation purposes, stocks at the beginning of February 2012 look more relevant, as 3 months after the harvest has already passed. At this date, grain stocks at farms in Kazakhstan were 8.47 MMT. This figure is relatively close to official statistics estimate of 8.89 MMT.

There are different ways in which grains could be stored on farms. In the simplest case, grain could be stored in covered piles or trenches, but this can only be a temporary solution because grain is vulnerable to insects, self-heating, etc. A basic barn, or any other facility that protects grain from the environment, is the most common way of storing grain among farmers, especially seeds for next season. A basic barn, or any other facility that protects grain from the environment, allows storage of dry grain only (~14 percent of moisture content) over longer periods. To minimize expenses, farmers store grain in their barns whenever possible and for as long as they do not need cash and the market price is not attractive. In addition, grain could be stored in long plastic bags (also called tubes or silo bags), which maintain an anaerobic environment inside. Plastic bags allow to store grain for at least half a year. While the use of plastic bags may significantly increase the capacity of on-farm storage, the actual amount is difficult to predict. Although this method it is quite inexpensive, it has some specific features. For example, special equipment is needed to load and unload grain to plastic bags, bags should be protected from punctures and kept air proof in order to maintain grain quality, it should be used on flat solid surface (not field), and grain should have excessive moisture content. Finally, metal bins are gaining popularity among medium and big grain producers in the northern part of Kazakhstan because they require less investments than the construction of concrete silos. However, they are not suitable for long term storage given moisture losses during the summer.

Mills

Mill storage capacity as of 2015 is estimated at 1.38 MMT. Given that Kazakhstan is among the top wheat exporting countries, the storage capacity of the milling industry is significant.

8 MONTHLY REPORT SERIES “AVAILABILITY OF GRAIN AND PULSES IN THE REPUBLIC OF KAZAKHSTAN” 14

However, direct data on mill storage capacity is unavailable. An estimate for 2015 was made on the basis of stocks data. The highest recorded grain stocks at mills were recorded in the beginning of January 2015 totaling 1.38 MMT.

Government Investment Support Programs

Current MoA investment support programs seek to increase annual grain storage capacity by 0.44 MMT by 2020. In 2013, the MoA developed and published its Master Plan for Grain Market Stabilization.9 Although the Master Plan has not been approved by any government agency and has no legal status, it contains a detailed action plan based on Agribusiness-2020, including figures on existing and forecasted grain storage capacity (see Table 5). On average, the annual grain storage capacity is forecasted to increase by 0.44 MMT by 2020. Investment subsidies are the main instrument of government policy supporting grain storage infrastructure development. Under the Master plan, the MoA has budgeted KZT 19.7 billion of government expenditure for subsidizing investments in grain storage during 2014-2020. However, falling oil prices have led to an overall state budget sequestration and budget plans on investment subsidies for grain storage construction will therefore most likely contract as well.

TABLE 5. MASTER PLAN ESTIMATE OF GRAIN STORAGE CAPACITY AND CONSTRUCTION FORECAST ITEM VOLUME (MMT) LICENSED ELEVATORS CAPACITY (2013) 13.9 ON FARM STORAGE CAPACITY (2013) 10.210 TOTAL GRAIN STORAGE CAPACITY (2013) 24.1 GRAIN PRODUCTION FORECAST BY 2020 21.1 GRAIN PRODUCTION FORECAST IN HIGH-YIELDING YEARS 27.0 GRAIN STORAGE CAPACITY SHORTAGE 3.0 FORECAST ON CONSTRUCTION OF GRAIN STORAGE 3.5 CAPACITY FROM 2013 TO 2020 SOURCE: MASTER PLAN “GRAIN MARKET STABILIZATION”

1.4. Drying Capacity

Although overall storage capacity seems adequate, bumper crops would put serious pressure on Kazakhstan’s existing drying capacity. While average grain production is projected to either remain stable or decrease in light of the likely decline in area under grains, existing drying capacity may be strained during high harvest years as a result of rainfed grain yields with excess moisture, which must be tested and dried before storage. According to the Statistics Committee, about 1.2 MMT of new grain drying capacity has been launched in Kazakhstan since 2005 (see Table 6). Although these numbers show that in 2007 and 2008 there

9 HTTP://MGOV.KZ/PROGRAMMA-AGROBIZNES-2020/ 10 MOA DATA ON-FARM STORAGE CAPACITY DIFFERS FROM STATISTICS COMMITTEE ESTIMATES MOST PLAUSIBLY BECAUSE MOA COUNTS NON-LICENSED ELEVATORS AS ON-FARM STORAGE CAPACITY. 15 were no dryers launched, Customs Committee’s data11 reveal that imports of driers took place throughout the 2005-2014 period.12 Similarly, although the highest number of new driers installed was recorded in 2011 (67 percent of the total installed capacity since 2005), imports of driers were significantly higher in 2007 and 2014. In light of these discrepancies and making a number of assumptions, the average price per MT of annual drying capacity is estimated at 6.2 USD and the estimated capacity of grain dryers launched since 2005 is closer to 6.1 MMT.13 This figure, which is twice as high as the estimated capacity of elevators built in Kazakhstan in the post-soviet era, is a rough estimate and should be treated with caution given that (i) total capacity will vary depending on actual annual run hours; (ii) import data covers dryers for all agricultural commodities and there is no possibility to extract information on grain dryers only; (iii) the number of imported driers since 2005 is 472 units (i.e. more than the number of elevators present in country) and (iv) no data on local production of grain dryers is available and the only known Kazakhstani grain dryers producer is small-scale and started operations only recently.

Table 6. Grain dryers launches and imports Year Launches, MT Imports, mln. USD 2005 n/a 1.6 2006 45.0 0.9 2007 0.0 7.9 2008 0.0 2.3 2009 20.0 1.2 2010 24.5 0.8 2011 795.0 5.3 2012 7.0 3.3 2013 187.8 5.6 2014 102.0 8.5 Total 2005-14 1’181.3 37.5

Source: Statistics Committee, Customs Committee

1.5. Storage Management

A key issue for traders and exporters in their dealings with elevators is their ability to change on- and unloading schedules in line with shifting priorities. Traders usually buy wheat right after they have found a buyer abroad. With some exceptions, contracts between farmers and traders are typically based on delivery to an elevator. In practice, however, elevators’ storage management priorities are guided by FCC procurement activities and elevator companies’ own grain storage management needs. As a result, traders’ activities are often paralyzed when FCC starts a massive grain procurement round or it starts moving grain reserves from elevators in the North to elevators in other parts of the country. Both issues came to the fore

11 HS CODE 8419310000, "DRYERS FOR AGRICULTURAL COMMODITIES" 12 DETAILED DATA ON DRYER IMPORTS BEFORE 2005 IS NOT AVAILABLE. 13 FIRST, THE IMPORT VALUE FOR CATEGORY “DRYERS FOR AGRICULTURAL COMMODITIES” IS CONSIDERED AS THE IMPORT VALUE FOR GRAIN DRIERS. SECONDLY, PRICE AND CAPACITY OF AN AVERAGE GRAIN DRYER WAS ESTIMATED USING AVERAGES FOR EXAMPLES OF GRAIN DRYERS (~USD 182’000, 40.8 MT PER HOUR CAPACITY) OF THE POPULAR VENDORS, INCLUDING PETKUS, SCAFCO, BONFATTI, VESTA, CHIEF INDUSTRIES. 16 during the bumper crops in 2009 and 2011. Although a trader and freight forwarding company must closely coordinate the timely arrival of railcars at the elevator, an elevator’s mother company may sometimes decide to unload its own grain at short notice. Given that own grain stocks are a higher priority for elevator management, others are moved around in the schedule. Delays in unloading, which in practice can be as long as two months, can also be used as an excuse for elevators to earn more on longer storage services or to force grain owners to sell at lower price.

Grain export trade procedures can take from 2 weeks to 3 months. Although there is anecdotal evidence of exporters having to wait 6 months to fulfill their contract, Table 7 presents a more typical scenario for completing grain export procedures (2 weeks – 3 months). Ultimately, the time needed to complete the procedures depends on elevator unloading capacity, roadway quality, availability of grain hoppers, and loading level of border station. In particular, grain hopper shortages during peak export months (October – January) are the most commonly reported issue by traders, which may lead to delays of up to three months. While traders put the blame for these delays with transportation companies and national railways, the latter holds traders’ and elevators’ shifting unloading plans responsible for the delays. Grain hopper delays may also appear in other jurisdictions in the event of overloading of receiving grain terminals or railway repair works.

Table 7: Grain Export Procedures

STAGE ACTIVITIES DURATION COST HARVESTING DEPENDING ON WEATHER CONDITION, N/A N/A THE GRAIN HARVEST IN NORTH KAZAKHSTAN REGION STARTS AT THE END OF AUGUST – BEGINNING OF SEPTEMBER. BARLEY IS THE FIRST CROP TO BE HARVESTED, FOLLOWED BY WHEAT. PRIMARY HARVESTED GRAIN IS TRANSPORTED N/A N/A TREATMENT FROM THE FIELD TO THE FARMYARD, (WEIGHING, WHERE IT IS WEIGHTED AND CLEANING, PRELIMINARY CLEANING OF DRYING) ADMIXTURES AND IMPURITIES OCCURS. THE RICHEST PRODUCERS HAVE THEIR OWN DRYERS THAT ARE USED MOSTLY DURING THE YEARS WITH EXCESSIVE RAINFALL. WHENEVER WEATHER ALLOWS, THE MOST COMMON PRACTICE IS TO DRY GRAIN BY MOVING IT FROM ONE HEAP TO ANOTHER ON-FARM GRAIN WITH 13-14 PERCENT MOISTURE N/A N/A STORAGE CONTENT IS MOVED TO THE FLAT ON- FARM STORAGE. TRANSPORT TO OPTION 1. PRODUCERS HIRE OR USE THEIR N/A AS OF 2015, ELEVATOR OWN TRUCKS TO TRANSPORT GRAIN TRUCK HIRE FROM THEIR FIELD/BARN TO THE COSTS KZT15 PER ELEVATORS. GRAIN WITH MORE THAN 13- MT PER 14 PERCENT MOISTURE CONTENT IS KILOMETRE, OR TRANSPORTED TO ELEVATORS EQUIPPED AROUND USD 8.1

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WITH DRYING FACILITIES OR TO THE PER 1 MT FOR 100 NEARBY MILL. THE NORMAL DISTANCE KM TRIP. FROM FARM TO ELEVATOR IS AROUND 50- 70 KM. SOME FARMS, LOCATED IN REMOTE AREAS, TRANSPORT THEIR PRODUCT FOR UP TO 250-300 KM. OPTION 2. SELL GRAIN TO A TRADER WHO WOULD TRANSPORT GRAIN TO AN ELEVATOR OR MILL. THIS ALLOWS FARMERS TO AVOID COSTS ASSOCIATED WITH TRANSPORTATION AND ELEVATOR SERVICES, BUT THE PRICE WOULD USUALLY BE LOWER THAN AN ELEVATOR

ON-LOADING STEP 1. WEIGH THE GRAIN N/A ELEVATORS STEP 2. CONDUCT LABORATORY CHARGE FOR ONE ANALYSES TO TEST QUALITY MONTH OF CHARACTERISTICS. STORAGE STEP 3. FARMER RECEIVES A DOCUMENT AROUND KZT 200 WITH STANDARD WEIGHT AND SERVICE PER MT. COSTS. STEP 4. WAREHOUSE RECEIPT ISSUED TO THE PRODUCER WHEN ELEVATOR SERVICES PAID PRODUCER PRODUCER SELLS GRAIN EITHER TO A N/A N/A SALE/TRADER TRADER OR THE FCC AS SOON AS PURCHASE POSSIBLE. TRADERS USUALLY BUY WHEAT RIGHT AFTER THEY HAVE FOUND A BUYER ABROAD. SUBMIT EXPORTER SUBMITS AN ELECTRONIC 2-3 DAYS N/A TRANSPORTATION REQUEST CONTAINING PLANS FOR PLAN TRANSPORTATION TO KAZAKHSTAN TEMIRZHOLY (KTZ – NATIONAL RAILWAYS OF KAZAKHSTAN) AND RECEIVES APPROVAL.14 TRANSPORTATION TO THE WEST THROUGH RUSSIA REQUIRES APPROVAL FROM THE CENTER OF TRANSPORT SERVICE OF RUSSIAN RAILWAYS. OBTAINING STEP 1. EXPORTER SUBMITS A REQUEST 1 DAY N/A PHYTOSANITARY TO THE COMMITTEE OF STATE CERTIFICATION INSPECTION (PART OF THE MINISTRY OF AGRICULTURE) FOR PHYTOSANITARY CERTIFICATION OF THE GRAIN. STEP 2. INSPECTOR TAKES SAMPLES FROM THE ELEVATOR, INSPECTS SAMPLES AND, WITHIN FIVE WORKING DAYS, COMMITTEE OF STATE INSPECTION SHOULD ISSUE THE PHYTOSANITARY

14 GRAIN EXPORT CONTRACTS ARE USUALLY BASED ON DELIVERY TO THE FOLLOWING KEY BORDER STATIONS: (I) AKSARAYSKAYA AND TOBOL STATIONS (MOSTLY USED FOR EXPORTING THROUGH RUSSIA TO BLACK SEA PORTS OR TO CAUCASUS); (II) SARYAGASH (TO CENTRAL ASIAN COUNTRIES AND IRAN); (III) PORT (TO CAUCASUS AND IRAN); AND (IV) DOSTYK (TO CHINA OR FURTHER TO SOUTH-EAST ASIA). 18

CERTIFICATE. COORDINATING STEP 1. EXPORTER SUBMITS A REQUEST UP TO 3 N/A GRAIN HOPPER FOR UNLOADING TO THE ELEVATOR MONTHS ARRIVAL STEP 2. EXPORTER SUBMITS REQUEST FOR IN PEAK RAIL CAR SPOTTING TO THE STATION PERIODS STEP 3. EXPORTER RECEIVES APPROVAL FROM RAIL SPUR OWNER (USUALLY – ELEVATOR). STEP 4. THE FREIGHT FORWARDING COMPANY COORDINATES THE ARRIVAL OF GRAIN HOPPERS TO THE ELEVATOR STEP 5. STATION NOTIFIES THE EXPORTER UPON THE ARRIVAL. AT THIS POINT, THE EXPORTER SHOULD FINISH PROCEDURE WITHIN 24 HOURS UNLOADING “LINEAR ELEVATORS” (I.E. WITH 1 DAY “LINEAR RAILROAD ACCESS), CAN UNLOAD GRAIN ELEVATORS” (E.G. TO BOTH RAILCARS AND TRUCKS. NOVOISHIMSKIY “DEEP ELEVATORS” (I.E. WITHOUT ELEVATOR) RAILROAD ACCESS) CAN UNLOAD GRAIN CHARGES KZT 530 TO TRUCKS ONLY. PER MT FOR UNLOADING TO RAILWAY CARS AND KZT 170 PER MT FOR UNLOADING TO TRUCKS. “DEEP ELEVATORS” CHARGE MORE FOR UNLOADING TO TRUCKS – AROUND KZT 500 PER MT

OBTAINING SURVEYORS WEIGH AND INSPECT GRAIN 1 DAY-1 ON AVERAGE, QUALITY QUALITY FOR EVERY RAILCAR AT THE WEEK PAPERWORK PASSPORT, MOMENT OF UNLOADING. MOST POPULAR COSTS ARE COMPLIANCE SURVEYORS IN KAZAKHSTAN ARE AROUND USD 2 DECLARATION, BALTIC CONTROL AND SGS. DEPENDING PER MT CERTIFICATE OF ON THE BUYERS’ NEEDS, THE TRADER ORIGIN MAY ALSO ATTACH CERTIFICATE OF ORIGIN. CENTRE FOR GOODS ORIGIN CERTIFICATION (PART OF THE NATIONAL ENTREPRENEURS CHAMBER) IS RESPONSIBLE BODY FOR ISSUING CERTIFICATES SUBMIT AFTER LOADING GRAIN HOPPERS AND N/A CUSTOM FEE IS DOCUMENTS FOR THE SURVEYORS’ INSPECTION AND EUR 50 FOR EACH EXPORT WEIGHTING, EACH HOPPER IS SEALED CUSTOM CLEARANCE AND THE FREIGHT FORWARDER OR DECLARATION EXPEDITOR FILLS A WAYBILL, ASSIGNS CODES TO THE CARGO, AND PREPARES A TELEGRAM CONTAINING THE CODES. 19

THEN, ALL DOCUMENTS ARE SUBMITTED TO CUSTOMS FOR EXPORT CLEARANCE. CHECKING ALL DOCUMENTS, INCLUDING CUSTOMS N/A N/A TRANSPORTATION DECLARATION, TELEGRAM AND PAYMENT AND TRANSPORTATION PAYMENT PROOF ARE APPROVAL SHOWN TO THE RAILWAYS OFFICER (SO DEPARTURE CALLED “TICKET WINDOW”) AT THE STATION. TICKET WINDOW CHECK THE PAYMENT AND APPROVES DEPARTURE OF THE GRAIN.

Legal arrangements for flour exports are the same as in grain trading. Usually, producers deliver wheat to mills themselves. In some cases, intermediary traders’ or mills’ own procurers approach farmers and buy wheat at lower price directly from the field. If mills work together with an elevator, the elevator will perform the drying and cleaning of the grain. Otherwise, mills accept only dry and clean grain. Contracts on flour supplies are relatively small (2000-3000 MT). Like grain traders, mills procure grain against export contracts and avoid keeping high stocks. Flour yield from wheat is usually 70-75 percent. Byproducts such as bran and grain residue yields account for the remaining 30-25 percent. After the milling process, flour is packed into 50 kg plastic bags, pelletized, and put in storage. Covered railroad cars are used for transportation. The tariff for covered railroad cars is usually 10 percent lower than for grain hoppers. The standard delivery basis in flour trading is DAP Saryagash, a border station to Uzbekistan, which is the main buyer and transit route to Afghanistan. Due to import tariffs in Uzbekistan, wheat and flour contracts are paid either through official bank transfers and/or unofficially in cash.

2. TRANSPORTATION INFRASTRUCTURE CHALLENGES AND OPPORTUNITIES

2.1. Railway Transportation

The number of grain hoppers in Kazakhstan has increased substantially in recent years. Before 2012, the only owner of grain hoppers in Kazakhstan was Kazakhstan TemirZholy, JSC (KTZ) – national railways of Kazakhstan. During the 2000s, the number of grain hoppers remained relatively stable (around 5,200 units). Due to anti-monopoly agency regulations, prices for KTZ’s grain hoppers were lower than for foreign ones, which led to fierce competition for KTZs’ inventory pool during peak months, including from renters abroad. As a result, hoppers were spending excessive time outside Kazakhstan and competition for hoppers also provoked a lot of corruption.15 Furthermore, KTZ was forced to rent additional hoppers from other CIS countries during peak seasons (primarily from Russia and ). For example, KTZ requested more than 23,000 grain hoppers from abroad to cope with the bumper crop in 200916 and 2,900 additional grain hoppers were rented in 2011. In order to make grain hopper pricing more flexible, KTZ transferred its grain hopper pool to a subsidiary company – Kaztemirtrans, JSC

15 TRADERS HAVE REPORTED THAT DURING PEAK MONTHS IN 2011 ADDITIONAL PAYMENT FOR ACCESS TO GRAIN HOPPERS WAS AS HIGH AS USD 1,500 PER UNIT. 16 HTTP://WWW.ZELDORTRANS-JORNAL.RU/PUBLIK/SODRUG/2008/JULY-08.HTM 20 and the antimonopoly agency approved a rent rate increase on grain hoppers in March 2012. Initially, traders struggled to get grain hoppers and tariff calculations from Kaztemirtrans AS The grain hopper pool transfer process coincided with the start of 2012/13 exporting season. In response, Kaztemirtrans started increasing its grain hoppers pool and procured 1,261 and 200 grain hoppers in 2012 and 2013 respectively. In addition, increased margins stimulated the inflow of private investments in grain hoppers. Altogether, the number of grain hoppers in Kazakhstan increased by 2,813 units (54 percent) during the 2011 – 2014 period (see Table 8). As part of this trend, it is worth noting that grain hopper factories in the former Soviet Union territory increased from 2 factories in 2011 to 5 in 2014. Combined with the Russian ruble’s devaluation, this increased supply led to a decrease of grain hopper prices from approximately USD 80,000 in 2012 to USD 27,000 in the beginning of 2015. However, other market players are reluctant to invest in grain hoppers because rent prices are volatile due to seasonality of exports and hence investment returns are uncertain.

Table 8. Grain hoppers owners in Kazakhstan Owner 2011 2013 2014 Kaztemirtrans, JSC 5’214 6,378 7,083 AGROMEAN, LLP 400 400 Samal-Trans, LLP 50 150 MS-Railways&Logistics, LLP 50 Daut-M, LLP 44 Nord TEC 300 Total 5,214 6,828 8,027 Source: own compilation based on kazakh-zerno.kz and Rusagrotrans reports

Railway transportation costs are more responsive to market supply and demand forces. Growth rates of transportation costs remained fairly steady until 2012. That year, the grain hopper pool was transferred to Kaztemirtrans, JSC, the price calculation scheme was changed, and the grain hopper rent was separated from the railway tariff. These measures immediately increased transportation costs, in particular for short distances (e.g. from Kokshetau-1 to Tobol station). Since then, transportation costs have been decreasing due to the increase in grain hopper supply highlighted above and more moderate demand (see Table 9). The exception are transportation costs to Aktau terminal, which have remained high since 2006 due to the relatively small capacity of this terminal (around 0.5 MMT annually). Furthermore, as railway tariffs are unified for all users, transportation companies now compete with each other by offering discounts on grain hoppers rent. Grain hopper rent rates increase during the peak export season, but discounts are offered to loyal customers in the hope of off-season rental contracts.

Table 9. Grain railway transportation costs from Kokshetau-1 station (USD/MT) delivery station DAP Saryagash FOB Aktau DAP Tobol DAP Aksarayskaya and condition: approx. distance (km): 1,700 2,400 500 2,100 export destination: Central Asia Iran and Caucasus Black sea ports Black sea ports 2006 18.55 38.30 5.06 19.41

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2007 18.84 38.46 6.15 19.71 2008 19.43 39.01 6.34 20.34 2009 19.01 38.25 6.20 19.89 2010 22.71 42.97 7.41 23.76 2011 25.75 46.85 8.40 26.94 2012 32.70 46.33 17.07 32.70 2013 29.69 42.49 15.91 29.69 2014 26.73 38.71 14.78 26.73 Source: traders’ data

Recent regional policy and investment trends are likely to further reduce the risk for bottlenecks in wheat exports in the future. Key regional policy and investment trends include: • Contracting wheat flour exports. While a major share of wheat exports to Central Asia is still in the form of wheat flour, the share of flour17 in wheat and flour exports has decreased from 70 percent in 2009 to 53 percent in 2014 as countries such as Kyrgyzstan, Uzbekistan, and Tajikistan have started to develop their own milling industries (see Table 10).18 Using a number of key assumptions, it is estimated that 1.2 MMT of additional exports in wheat to Central Asia would occur in response to the contraction in flour exports.19 This export volume would require an additional 1,000 grain hoppers, assuming that the turnover period is one month to Tajikistan and Afghanistan and 15 days to other countries.

TABLE 10. FLOUR SHARE IN TOTAL WHEAT EXPORTS 2009-14 AV. COUNTRY 2009 2014 EXPORTS20 (000 MT) AFGHANISTAN 79% 96% 918 KYRGYZSTAN 19% 13% 474 TAJIKISTAN 57% 25% 971 TURKMENISTAN 19% 100% 81 UZBEKISTAN 89% 56% 1 942 TOTAL CENTRAL ASIA 70% 53% 4 386

17 SHARE OF FLOUR CALCULATED IN GRAIN EQUIVALENT. CONVERSION FACTOR FLOUR/WHEAT IS 0.73 18 FOR EXAMPLE, KYRGYZSTAN IMPOSED A TARIFF ON FLOUR IMPORTS TO PROTECT DOMESTIC MILLERS IN 2009 AND 2013-14. UZBEKISTAN IMPOSED A 15% EXCISE TAX ON FLOUR IMPORTS IN 2011 AND LOWERED IT TO 11% IN 2013. TAJIKISTAN SET VAT AT 18% ON IMPORTED FLOUR AND 10% ON WHEAT IN 2013. 19 KEY ASSUMPTIONS INCLUDE (I) WHEAT AND FLOUR EXPORTS TO CENTRAL ASIA STAY CONSTANT AT THEIR 2009-14 AVERAGE (4.4 MMT); (II) UZBEKISTAN WILL MAINTAIN A 6% ANNUAL DECREASE OF ITS FLOUR SHARE IN IMPORTS (DOWN TO 15%); (III) KYRGYZSTAN WILL KEEP ITS FLOUR SHARE STABLE AT 15%; (IV) TAJIKISTAN WILL DECREASE ITS FLOUR SHARE TO 15%; (V) AFGHANISTAN WILL MAINTAIN A 6% ANNUAL DECREASE OF ITS FLOUR SHARE IN IMPORTS (DOWN TO 42% BY 2023); AND (VI) TURKMENISTAN WILL KEEP ITS FLOUR SHARE STABLE AT 90%. 20 BOTH WHEAT AND FLOUR. 22

SOURCE: OWN CALCULATIONS BASED ON CUSTOMS COMMITTEE DATA

• Aktau Port expansion. Investments in grain terminals in Baku, Ventspils, and Kherson sea ports have so far underdelivered given that exports have been trending towards nearby Asian countries that are equally landlocked. While the Ak-biday grain terminal in Aktau port on the Caspian sea currently has 0.5 MMT of annual transshipment capacity, the port’s planned expansion would increase transshipment capacity by 1.5 MMT. Together with a planned increase of vessels (from two to five), this would allow the shipment of larger volumes of grain to Iran, Azerbaijan and Georgia. As the route through the Caspian sea would allow shipments to bypass Russian railroads, the expanded terminal could cover all deliveries to Azerbaijan and Georgia (approximately 1 MMT). The Aktau port expansions would moreover improve access to the Georgia’s Black Sea ports and to additional markets in Europe and North Africa. • Increasing Chinese wheat imports and investments. Due to phytosanitary regulations and tariff rate quotas on wheat imports in China, Kazakhstani wheat exports are currently limited. However, there has been some growth from 0 prior to 2009 to 215,000 MT in 2014. As Chinese investors become more interested in Kazakh cash crops such as oil seeds and look to increase imports of grains and pulses, existing phytosanitary regulations and import tariff rate quotas might be eased. These exports to China would be further facilitated by Rusagrotrnas and Astyktrans plans’ to invest in the construction of a dry terminal in the special economic zone “Khorgos – Eastern gate” on the border between China and Kazakhstan. • New railroad to Iran. The opening of a new railroad linking Kazakhstan (Uzen station), Turkmenistan, and Iran (Gorgan station) in December 2014, which has an annual capacity of 3 MMT (expandable to 5 MMT), has shortened the distance between Kazakhstan and Iran, which were previously connected through Uzbekistan. This new route may open opportunities for access to the Persian Gulf through the Iranian port of Bandar Abbas (which is 1’500 km from Gorgan station) provided grain terminals are built in Iran to accommodate shipload lots.

Total estimated wheat exports are expected to increase by 3.2 MMT, but this increase would not add to current export volumes. Table 11 summarizes the trends described above. Although the projected increase of wheat exports by 3.2 MMT exceeds the FAO-OECD forecasts, these exports would actually be redirected from the western direction to the southern, while another part would be compensated for by the contraction in flour exports. While peak grain exports could increase the demand for grain hoppers to approximately 1,700 units, the current export developments do not seem to require higher grain storage capacity.

TABLE 11. TRENDS IN KAZAKHSTANI GRAIN EXPORTS AND ESTIMATED IMPACT ON INFRASTRUCTURE (IN GRAIN EQUIVALENT) RAILROAD EXPORTS COMMENTS S FLOUR EXPORTS CONTRACTION WOULD WHEAT FLOUR EXPORTS +1.2 MMT +1.2 MMT INCREASE DEMAND ON GRAIN HOPPERS BY CONTRACTION THE SAME AMOUNT.

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SHOULD TRANSPORTATION TO AZERBAIJAN AND GEORGIA VIA AKTAU PORT BE AKTAU PORT +0.5 MMT FEASIBLE, GRAIN HOPPERS WILL TRAVEL -0.5 MMT EXPANSION (TO IRAN) ON KAZAKHSTANI TERRITORY ONLY. HENCE, TURNOVER PERIOD WOULD SIGNIFICANTLY DECREASE. GRAIN WOULD BE RE-PACKED TO BAGS FOR COOPERATION WITH +0.5 MMT +0.5 MMT SHIPMENT THROUGH CHINA AND GRAIN CHINA HOPPERS WOULD NOT CROSS BORDER. NEW RAILROAD WOULD SHORTEN DISTANCE TO IRAN BY 800 KM, BUT FURTHER TRANSPORTATION TO BANDAR- ABBAS WOULD ADD 1’500 KM. DUE TO RAILROAD TO IRAN +1.0 MMT +1.0 MMT MOUNTAINOUS LANDSCAPE IN IRAN, TRANSPORTATION BY TRUCKS AFTER GORGAN STATION IS A PLAUSIBLE ALTERNATIVE. TOTAL +3.2 MMT +2.2 MMT

SOURCE: OWN ESTIMATES

2.2. Road Transportation

Grain transportation by trucks over long distances seems to be uncompetitive with railroads. In the World Economic Forum’s Global Competitiveness Report 2014-2015, Kazakhstan is ranked 28th in railroad and 113th in road infrastructure.21 Although trucks play a key role in grain transportation from farmers’ fields to elevators, the poor condition of roads in rural areas imposes prohibitively high costs for long-distance transportation. For example, railroad costs from Kokshetau to Tobol station (roughly 500 km) amount to USD 14.8 per MT, whereas a hired truck would charge USD 40.5 per MT for the same distance.22 Recognizing the obstacle posed by poor roads for development, the Government plans to invest in the construction of new roads and reconstruction of existing ones with a focus on the key routes linking different parts of the country. Altogether, there are 11 main road construction projects scheduled for implementation within 2015-2017 under the “Nurly zhol” program. The most notable ones are roads from the center to the South (Astana - Almaty), from the center to the West (Astana-Aqtobe - ), and from the center to the East (Astana – Oskemen). Furthermore, the transcontinental road “West Europe – West China” is scheduled for opening in 2016. This new road starts in China’s Lyanyungang port, crosses southern and western parts of Kazakhstan, and ends in Saint Petersburg. It would be connected with the main grain producing regions in northern Kazakhstan via the new road from Astana to Aqtobe.

3. CONCLUSIONS AND POLICY RECOMMENDATIONS

21 HTTP://REPORTS.WEFORUM.ORG/GLOBAL-COMPETITIVENESS-REPORT-2014- 2015/ECONOMIES/#INDEXID=GCI&ECONOMY=KAZ 22 CALCULATION BASED ON KZT 15 PER MT FOR 1 KM RATE FOR TRUCK DELIVERY. EXCHANGE RATE USD 1 = KZT 185 24

3.1. Grain Storage

Remove grain receipt regulations that duplicate regulations related to common use warehouses covered by the Civic Code. Despite all the efforts to strengthen the grain receipt system through stricter regulations, grain storage owners are unwilling to participate in the system and trust in the system has continued to deteriorate. Given that the Law on Grain stipulated that grain receiving enterprises are recognized as common use warehouses, it duplicates regulations covered by the Civil code, which contains 11 articles defining and regulating warehouses. Most importantly, the Civil code declares warehouse receipt as a security and specifies warehouse responsibilities. Regulation of common use warehouses has proven to be satisfactory. Separate regulation, especially regarding licensing, therefore does not seem to be necessary. Furthermore, the Law on Grain’s Regulation on state grain reserves formation and government support could be moved to the Law on Government regulation of agriculture complex and rural territories development. Lastly, the current initiative of Kazakhstan to establish a centralized database of warehouse receipts and roll-out a fully electronic system could further improve transparency and hence trust among market players provided data is easily accessible for all interested parties.

Direct investment support to increasing drying capacity and construction of additional storage facilities in areas with limited elevator presence. While overall storage capacity in Kazakhstan is adequate, even for bumper harvests, problems may occur in areas where the concentration of elevators is low. To increase competition for improved grain storage services in these areas, which the Anti-Monopoly Committee has already identified, the Government may direct investment subsidies and concessional loans for the construction of additional storage capacity at the level of elevators and farms. Furthermore, excessive moisture content can significantly limit the grain-receiving capacity of existing elevators even during moderate yield years. Government support could therefore stimulate farmers and elevators to invest in grain drying facilities. Given that the grain drying process is linked to dangerous operations with fuel or gas, and requires skills for proper grain treatment, supplemental training and advisory services will also be essential to improve skills of producers and technical staff in elevators

3.2. Transportation Infrastructure

Explore public-private partnerships to channel additional investments in rural roads. Trucks play a key role in transporting grain from the field to elevators, but the poor condition of roads in rural areas imposes significant additional costs on farmers. Investments in rural roads would not only enhance accessibility of trading points to farmers, but also improve overall quality of life in rural areas. However, current Government plans are concentrated on the development of main transport arteries. In addition, rural roads (re)construction would be costly given the size of the country and budget limitations. Public-private partnerships should therefore be explored as a vehicle to speed up investments.

Modernize the existing pool of grain hoppers and improve logistics management processes and practices. The railway tariff liberalization reform seems to have enabled more market- driven transportation cost structures and stimulated private investments in grain hoppers. As a

25 result, the current pool size of Kazakh grain hoppers exceeds average demand. Although the availability of grain hoppers may be challenging in times of a bumper crop or unusually high prices, especially when grain hoppers have to return from other countries under rental agreements, it does not seem opportune to increase the grain hopper pool size given that peak loads are relatively rare events. Instead, more effective grain logistics management could help minimize grain hoppers’ average turnover periods and empty car mileage. A decrease in the number or optimization of existing export procedures may be one way to shorten turnover. In addition, the formation and routing of “grain trains”, which transport grain to the same delivery point, could be another possible solution, but the technical and logistical aspects of the design and implementation of these types of measures requires additional research. At any rate, these measures would require close coordination among all grain market stakeholders, including grain traders, elevators, transportation companies and national railways. Finally, although the size of the grain hoppers pool seems satisfactory, the technical condition of the old grain hoppers is unknown. The gradual modernization of the old grain hoppers pool could help accommodate demand fluctuations as new types of grain hoppers have expanded capacity. Due to long payback periods, long-term financing would have to be offered to stimulate this modernization effort.

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APPENDIX 1. EXAMPLES OF ELEVATOR SERVICES FEES23

Amankara Atameken- Tobolskiy Elevator Item Units Granar Ivolga gayskiy Avg astyk elevator Krasivoye elevator Loading USD per MT from truck 0,8 1,1 1,1 0,8 1,0 1,0 1,0 Loading from grain hopper 2,4 3,3 2,9 USD per each Drying percent for 1 MT 1,5 1,1 1,2 1,3 1,5 1,5 1,3 USD per each Cleaning percent for 1 MT 0,2 0,1 0,1 0,1 0,2 0,2 0,2 USD per MT Storage per month 1,0 1,1 1,1 1,1 1,2 1,3 1,1 Unloading USD per MT to trucks 2,7 2,4 2,4 2,9 3,3 2,7 Unloading to grain USD per MT hopper 2,2 1,1 1,4 0,9 1,9 1,0 1,4 Spur fee USD 27,0 2,9 3,9 11,3

Source: traders’ data

23 FEES AS OF APRIL 2015 27

APPENDIX 2. COMPARISON OF ELEVATOR SERVICES COSTS24

10.00

9.00 8.65 8.27 7.89 8.00 7.31 1.95 6.75 6.76 1.02 7.00 2.16 1.35 1.08 0.92 6.00 2.38 2.51 1.95 5.00 2.29 2.17 2.11 0.32 0.31 USD per MT USD MT per 4.00 0.43 0.21 0.28 0.27 3.00 2.97 3.03 2.92 2.32 2.00 2.21 2.65

1.00 0.81 1.08 1.07 0.81 1.03 1.02 0.00

Loading from truck Drying Cleaning Storage Unloading to grain hopper

24 SERVICE COSTS FOR A TYPICAL SITUATION SCENARIO INCLUDING LOADING FROM TRUCK, 2% EXCESSIVE MOISTURE, 2% IMPURITIES, 2 MONTHS OF STORAGE, AND UNLOADING TO GRAIN HOPPER. 28