Chapter Three — Trade Facilitation 31

Chapter Three

Trade Facilitation ●● North-South corridor, which links the Northern Europe countries to the Persian With its common borders with China to the east, Gulf through Russia and Iran via Diny Nur- the Russian Federation to the north, the Caspian peisovoi – Oazis section (806 km), Iletsk – Sea to the west, and Kyrgyzstan, Turkmenistan and Aktau section (1,389 km), Kirgilda – Aktau Uzbekistan to the south, Kazakhstan is strategi- section (1,313 km). cally located on the transit route between Europe ●● Transport Corridor Europe Caucasus Asia and Asia. Indeed, all of the transport corridors con- (TRACECA), which links Europe and Asia necting Central Asia to Europe pass through Ka- across the Black Sea, the countries of the zakhstan, including the: South Caucasus, the Caspian Sea and the

●● Northern Corridor of the Trans-Asian Railway Central Asian countries via the Aktau – (TAR), which links Western Europe to China, Dostyk section (3,836 km). Korean Peninsula and Japan through Russia ●● Trade facilitation has been high on the and Kazakhstan via Dostyk – Petropavlovsk government’s agenda since the country’s section (covering 1,910 km), and Dostyk – independence, as a critical element for Aksu section (covering 2,188 km). achieving regional and global integra-

●● Southern Corridor of TAR, which links tion. Kazakhstan participates in 13 of the South-Eastern Europe with China and international conventions on infrastruc- Southeast Asia through Turkey, Iran, and ture, transport, border crossing facilitation Kazakhstan via Dostyk – Sary-Agach rail- maintained under UNECE (Table 3.1), and road section (1,831 km). the government has been deregulating international transport services to attract ●● Central Asian corridor, which links Central Asia via Russia with the EU countries (Sary- private operators. Agach – Semiglavy Mar railroad section However, the country’s remoteness from inter- (2,134 km). national markets and land-locked status creates

Table 3.1 - Kazakhstan’s participation UNECE Transport Agreements and Conventions191

Area Convention

Infrastructure ●● Agreement on Main International Traffic Arteries of 1975

●● Agreement on Important International Combined Transport Lines and Related Installations of 1991

Road traffic and road safety ●● Road Traffic of 1968

●● Road Signs & Signals of 1968

Vehicles ●● Vehicles Regulations of 1958

Other Legal Instruments ●● Work of Crews International Road Transport of 1970

Related to Road Transport ●● Contract for the International Carriage of Goods by Road of 1956

Border crossing facilitation ●● TIR Convention of 1975

●● Customs Container Convention of 1972

●● Harmonization of Frontier Controls of Goods of 1982

Dangerous goods and special cargo ●● Dangerous Goods by Road of 1957

●● Perishable Foodstuffs of 1970

19 The conventions listed in the table have been ratified by Kazakhstan. 32 Regulatory and procedural barriers to trade in Kazakhstan Needs Assessment additional costs, which are difficult to reduce. stan (2010), and the 1998 Law of the Republic of According to the 2012 World Bank Doing Business Kazakhstan on Measures for Protection of Domes- Survey, Kazakhstan ranks 176th in the world (out tic Market from Imports of Goods. of 183 countries) when it comes to trading across The government has also introduced amendments borders. Yet, this low ranking is also the result of to a number of laws in 2009 and 2010, as part of a heavy trade-related procedural and documentary broader effort to comply with the requirements of requirements. The World Bank Business Survey the CU. These amendments have resulted in: shows that it takes up to 76 days to export goods from Kazakhstan at an average cost of USD 3,310 ●● Cancelling the requirement for examining per container. Importing goods into the country the origin of goods completely manufac- is also a costly undertaking, which can take up to tured in Kazakhstan;20 62 days at a total cost of $3,290 per container. This ●● Limiting the period for issuing a phytosani- compares to an average of 11 days and USD 1,085 tary certificate to 5 working days;21 and, per container in the Organization for Economic ●● Excluding the veterinary certificate require- Cooperation and Development region. ment from the list of permits;22

Based on the results emerging from the joint UN- ●● Establishing a list of goods subject to vet- ECE business process analysis and the face-to-face erinary and sanitary-epidemiological in- interviews with traders state agencies, transport spection, as per the terms of the Customs operators and logistics service providers, this chap- Union Code. ter highlights key bottlenecks to trade facilitation in In addition, the government is in the process of Kazakhstan and proposes action-oriented recom- implementing a comprehensive customs mod- mendations for the Government’s consideration. ernization effort to ensure compliance with the These bottlenecks stem from the country’s over- Revised Kyoto Convention recommendations for land transport infrastructure (section 3.1), the lo- simplifying and harmonizing customs procedures. gistics sector (section 3.2), customs clearance and Spearheaded by the Customs Control Committee documentary requirements (section 3.3), border (CCC), this effort has involved the introduction of: control (section 3.4) and the existing arrangements underpinning the CU between Belarus, ●● A modern management information sys- Kazakhstan, and the Russian Federation (section 3.5). tem for generating information on the arrival of goods and transit shipments;

The analysis brings forward both the potential ●● Customs Automated Information System complexity of the clearance process and its doc- (CAIS) for tracking revenues from customs umentation. It also demonstrates that customs fees and trade taxes, monitoring non-tariff clearance is not the only factor undermining trade regulations, and managing declarations; facilitation. The transport of goods, handling, de- ●● An automated customs system to enable livery, and processing of payments for releasing traders to download and generate (free of goods are also challenging. charge) electronic customs documents23, 3.1 Customs clearance and documentary 20 The Law “On introducing amendments and addenda to requirements some legislative acts of the Republic of Kazakhstan on the activities of Chambers of Commerce”. The Kazakh customs regime has been the subject 21 The Law “On introducing amendments and addenda to of comprehensive reforms aimed at the consoli- some legislative acts of the Republic of Kazakhstan on dation of a modern system that provides traders issues of phytosanitary security” with transparent, predictable, and speedy clear- 22 The Law “On introducing amendments and addenda to some legislative acts of the Republic of Kazakhstan on ance of goods. All the laws that form the basis of issues of animal health”. Customs regulations have been amended, includ- 23 The term electronic document refers to information ing: the Customs Code of the Republic of Kazakh- structured in electronic formats such as the United

Chapter Three — Trade Facilitation 33

including the customs and transit decla- Traders also complained about what they de- rations, which were introduced in 1997 scribed as constantly changing procedures, noted and recently modified to comply with the that procedures are often implemented in a selec- requirements for establishing a Common tive and arbitrary manner, and singled out certain Economic Space with Belarus and the Rus- procedures for being time-consuming. The diffi- sian Federation.24 culties associated with the shifting procedures are ●● Risk management system for customs compounded by the lack of reliable up-to-date in- clearance formation on export-import procedures and regu-

●● Post-entry point clearance (i.e., after the relations. This comes across clearly from the sources lease of the goods). of information reported by the survey respondents. While all of the respondents stated that they ●● An automated system for generating trade- related statistics. rely heavily on customs, the majority said that they only obtain information upon written requests. ●● Linkages with the e-Government portal. They also stated that the published information on At the time of writing this report, preparations the Customs website is sub-optimal both in terms were underway to establish a single window facil- of clarity and level of detail. Customs aside, the ma- ity, with a view to fostering coordination between jority reported heavy reliance on buyers and sup- the different government agencies, cutting down pliers along with freight forwarders, noting that further on red tape and achieving migration to a these sources provide up-to-date information re- paperless environment. garding procedures and regulations in Kazakhstan The results of the UNECE needs assessment sug- and in partner countries. Trade associations and gests that there remains room for further improve- trade promotion agencies, usually a key source ment. Most of the traders reported having to of trade-related information, did not figure in the submit several documents, the number of which respondents’ list of information sources. Moreover, varies depending on the nature of the product several traders noted their dissatisfaction with the and, in some cases, is aggravated by discrepancies services provided by customs brokers, explain- between the Kazakh regulations and those im- ing that these services are expensive and of low plemented in partner countries. Indeed, some re- quality. spondents said that they submit 2 to 3 documents Furthermore, several traders contested the man- on average, while others reported having to sub- ner in which existing customs legislation is imple- mit up to 20 documentary requirements. mented, particularly in relation to the classification Moreover, traders reported different periods for and valuation of goods. The traders’ dissatisfaction obtaining trade documents. For example, the two with the implementation of Customs legislation is traders who participated in the business process echoed at the national level, and finds expression analysis reported having to submit 5 to 6 docu- in the number of cases brought before civil courts. ments on average for customs clearance. One re- As shown in Table 3.6, around 80 per cent of these spondent said that it takes up to 4 weeks to pre- cases involve appeals of Customs rulings. pare the documents in question, while the other said that he obtains the documents in 7 working The table points to a number of issues. The first re- days (Annex I). lates to the number of cases brought before civil courts over the past few years. This number has as- sumed an increasing trend following the establish- Nations/Electronic Data Interchange for Administra- tion, Commerce and Transport (UN/EDIFACT) and the ment of the CU, reflecting the specific challenges Extended Mark -up Language (XML). The term is there- generated by the CU legislation, and these are dis- fore, not to be confused with PDF or word documents. cussed in section 3.5. The second issue concerns 24 These requirements are established in CU Commission decision No. 421 of 2010 “On approval of the structure the traders’ recourse to civil courts of justice for and format of electronic copies of customs declarations”. settling disputes. This trend is mainly due to weak- 34 Regulatory and procedural barriers to trade in Kazakhstan Needs Assessment

Table 3.2 - Number of cases involving appeals of Kazakh Customs rulings (January 2010-November 2012)

No. of cases No. of cases No. of decisions No. of decisions No. of cases Year brought before involving appeals in favour of in favour of under review civil courts of Customs ruling Customs traders 2010 543 419 263 59 97 2011 736 589 396 80 113

January-November 822 657 456 87 114 2012

Source: Kazakh Customs Control Committee. nesses in the existing dispute settlement mecha- Respondents reported submitting between 2 and nism. Under the existing procedure, disputes are 20 documents, the number of which varies de- handled by Councils of Experts, which bring to- pending on the nature of goods, with sunflower gether public associations and bodies and operate seed and rolled metal sheet occupying the top list under the supervision of line ministries. However, of products entailing excessive documentary re- the decisions of these councils are not final and quirements (Table 3.3). binding. Rather, they are issued in the form of recommendations, causing traders to circumvent the Moreover, some documentary requirements in- dispute settlement procedure altogether in order volve the submission of several support docu- to save time. ments, with negative consequences on transaction costs.26 Exporters cited the certificate of origin In addition, traders reported their dissatisfaction (COO) as the most difficult to obtain, due to the with the existing advanced rulings procedure. The additional support documents requested by the Customs only provides advanced ruling on the Chamber of Commerce and Industry through its rules of origin and on tariff classification. Only 12 re- 16 branches. These support documents include spondents said that they use these services, and the notarized copies of the procurement documents majority noted that obtaining advanced rulings is of each product component, the preparation of time consuming, especially because it involves the which varies depending on the nature of the prod- submission of several documentary requirements. uct in question. For example, an exporter of heat Below is a discussion of the key obstacles identified and sound insulation materials explained that he by the respondents to the UNECE questionnaire usually has to submit up to 15 procurement docu- on trade facilitation. The obstacles are divided into ments, the preparation of which may take up to 7 two groups, with the first reflecting the obstacles working days. In contrast, an exporter of pumping reported by exporters and the second by import- stations said that he usually invests 15 working ers. A discussion of the use of electronic documents days to obtain the notarized procurement docu- comes next, leading to proposed recommendations for the government’s consideration. Lading or air way bill, Certificate of Origin and any other specific documentation as specified by the buyer, or as re- 3.1.1 Obstacles reported by exporters quired by financial institutions (Letter of Credit terms or as per importing country regulations). Imports Documenta- The results of the UNECE questionnaire on trade tion includes: Purchase Order from Buyer, Sales Invoice of supplier, Bill of Entry, Bill of Lading or Air way bill, Packing facilitation suggest that Kazakh exporters are sub- List, Certificate of Origin, and any other specific documen- jected to documentary requirements over and tation required by the buyer, or as required by the finan- above those associated with customs clearance. 25 cial institution of the exporting country. 26 A detailed discussion of the procedures associated 25 Exports Documentation usually includes purchase order with obtaining some of these documents in provided from Buyer, Sales Invoice, Packing List, Shipping bill, Bill of in Annex 1. Chapter Three — Trade Facilitation 35

Table 3.3 - Exports facing excessive documentary requirements by product and target market

Product No. description of Reported target market (HS code docs abridged) Russian Sunflower seed 20 Federation Rolled metal 20 Uzbekistan sheet Heat and sound insulation 13 Poland material Russian Rubber chips 10 Belarus China Ukraine Federation Soft wheat 8 Afghanistan Iran Kyrgyzstan Lithuania Tajikistan Turkmenistan Uzbekistan and Rye Soft drinks 8 Kyrgyzstan Tajikistan Uzbekistan (water) Soap 8 Kyrgyzstan Tajikistan Uzbekistan ments, though he did not specify the number of ed being held back by the delayed response from documents he has to submit. the authorities in question. For example, an exporter of copper matte said that it takes up to 15 work- For exporters of sunflower seed, obtaining the ing days to obtain an export permit, which, in this COO requires submitting a certificate from the Vil- case, is issued by the Ministry of Industry and New lage Council testifying that the product in ques- Technologies. Others complained about additional tion is grown in the claimed district or area, along documentary requirements in the form of support with notarised copies of procurement documents. documents. For example, an exporter of wheat and The procurement documents, which comprise rye said that in addition to the export contract, trad- contracts with peasants and tax receipts, take up ers are requested to submit certificates testifying to 14 working days to obtain. This is especially be- that they operate in domestic markets. cause the Village Council often rejects the procurement documents submitted by the trader due to For exporters of products with waste content, ob- discrepancies in the weight measurements of the taining permits is complicated by the Kazakhstan’s village scale and the Council’s scale. Traders drew SPS and veterinary requirements, which do not attention that the certified capacity of the village necessarily correspond to those implemented in scale (i.e., the approved maximum weight limit) is partner importing countries. For example, an ex- 1 kilogram only, and the exporters, who rely on the porter of rubber chips reported significant delays village scale to weigh their products for packag- in obtaining a permit for exporting to Ukraine. ing, often exceed this limit. The respondent in question explained that the Kazakh Ministry of Environment Waste Manage- Respondents also cited export permits among the ment Committee classifies rubber chips as waste 27 most difficult to obtain documents. Some report- and, therefore, conditions the issuing of the permit to the submission of up to ten supporting docu- 27 Although Kazakhstan has dismantled the system of ments. These documentary requirements extend export permits, permits remain obligatory for products which can be used for military applications and those the period of obtaining the export permit to al- with dual use. most 30 working days. 36 Regulatory and procedural barriers to trade in Kazakhstan Needs Assessment

The difficulties associated with obtaining export cedure, traders only need to present the stamp of permits also stem from the procedures and regu- the servicing Kazakh bank, including the contract lations underpinning the issuing of this documen- register number (CRN). Although the procedures tary requirement. First, the products subjected to for obtaining the stamp are published on the Na- this requirement are broadly defined, rendering tional Bank’s website, exporters seemed to be at an extensive list that includes common consumer loss as to whether the new procedure applies, and goods such as mobile phones and copying ma- reported that they still follow the old procedure, 28 chines. Second, permits are issued following the which, as shown in the business process analysis “one batch, one license system” (i.e., the licence (Annex I), is time consuming. This suggests that the may be used for customs declaration purposes implementation of the new regulation has been only once within the period of the licence valid- slow and/or that traders are not well informed ity), so that exporters have to go through this pro- about the new procedure. It is worth noting that cedure several times over the course of any given the new law maintains the currency-control meas- year for the same product. ures. This means that traders have to register the Yet another challenging documentary require- export contract with the Kazakh bank, pay the ment for Kazakh exporters is the veterinary cer- registration fee and submit various additional sup- tificate, particularly for those exporting sunflower port documents. through/to Uzbekistan. Here the difficulties arise The assessment also reveals that Kazakh export- from the administrative and regulatory procedures ers often accrue additional costs due to abrupt of the Uzbek authorities. The survey respondents said that obtaining the veterinary certificate might changes in transit countries procedures. A case take up to 30 working days, due to delays in ob- in point is the procedures governing the export taining the approval of the Uzbek Ministry of Ag- of non-ferrous metals by road via Uzbekistan. As riculture. explained by one of the respondents, who exports copper alloy ingots to Turkey, transit through Uz- Other non-tariff barriers facing Kazakh exports re- bekistan became an expensive undertaking fol- late to the absence of clarity over applicable proce- lowing Uzbekistan’s decision to ban transit of base dures. This problem, which, as shown below, is also metal and subject non-ferrous metals to transit li- common to importers, is caused by what the trad- censing requirements. The respondent in question ers described as constantly changing procedures said that he was unaware of the new regulations, and regulations. A case in point is the transac- and only learnt about them from the Uzbek Cus- tion certificate, also referred to as the “transaction toms during the advanced stages of the export- passport”, which is issued by an authorized Kazakh ing process. He added that the new procedure Bank. Intended to stem capital outflow and money proved to be “very long and complex”, especially laundering, this certificate ensures traders’ compli- because it required the approval of the Uzbek Min- ance with currency regulations for goods valued in istry of Defence. As such, the trader, who found excess of the equivalent of USD 50,000. himself pressed to release his shipment of cop- In January 2012, the government issued a new law, per alloy ingots, decided to obtain permission for which replaces the transaction passport with con- re-exporting the shipment. He then re-imported tract record numbers. 29 According to the new pro- the shipment back to Kazakhstan, and transported it by rail to Turkey through the Russian Federation. 28 As per Resolution No. 104 of the Government of the Republic of Kazakhstan “On approving the List of The company spent an entire week to finalize the Goods Subject to Export Control” as of February 2008. procedures associated with this alternative route, 29 The Law of the Republic of Kazakhstan dated 9 Janu- and suffered significant financial losses. ary 2012 No. 531-IV ЗРК “On Introducing Amendments to Certain Legislative Acts of the Republic of Kazakh- on 28 January 2012, introduces amendments to the stan in relation to Currency Regulation and Currency “Currency Regulation and Currency Control” Law of Control Issues”. The new law, which came into force 2005, and National Bank Law of 1995. Chapter Three — Trade Facilitation 37

Table 3. 4 - Imports facing excessive documentary requirements by product and supply source

Product description No of Reported supply source (HS code abridged) documents Sinks and similar sanitary ceramics 8 China Turkey Bicycle 8 China Paints 10 China Helicopters 8 Germany Medical equipment, microscopes 10 Germany Air Purifier 8 Germany Water Filter 8 Israel Canada United States Poland Washing powder 8 Israel Germany Kitchen sinks 15 Italy Measuring, testing, navigating 8 Netherlands United Kingdom Japan and control equipment Electric Motors 15 Poland France United Kingdom Yachts 8 Russia Boric salt 8 Turkey Plastic pipes 10 Turkey Palm Fatty Acid Distillate 8 Ukraine

3.1.2 Obstacles reported by importers and Trade). Some drew attention to complex and time-consuming procedures, and this was the Just like exporters, importers seem to be subjected case of traders importing goods of strategic im- to additional documentary requirements over and portance. For example, an importer of helicopters above those associated with customs clearance.30 explained that to issue the permit, the Ministry of Importers reported having to submit up to 15 doc- Industry and New Technologies has to submit an uments for clearing goods, thereby inflating costs official request to the Ministry of Transport and (time and financial wise). Communications. The latter would communicate As shown in Table 3.4, the number of documents its decision to the Committee of National Security, varies depending on the nature of goods, with which would then advise the Ministry of Industry electric motors and kitchen sinks occupying top and New Technologies as to whether it could issue list of products involving excessive documentary the import permit. This procedure may take up to requirements. 15 days from the day of submission of all document requirements to the Ministry of Industry and Moreover, the importers singled out certain docu- New Technologies. mentary requirements for being difficult to obtain, and described import permits as the most chal- For importers of sanitary engineering products lenging due to red tape. The respondents reported deemed as potentially posing undue risk to pub- that it takes up to three weeks to obtain this docu- lic health, obtaining an import permit requires ment, which is issued by the Industry and New the approval of the Ministry of Environmental Technologies (previously the Ministry of Industry Protection Department of Ecological Regulation. As explained by a survey respondent, the said de- 30 Imports documentary requirements usually involve Purchase Order from Buyer, Sales Invoice of supplier, partment has to make a formal (statutory) deter- Bill of Entry, Bill of Lading or Air way bill, Packing List, mination as to whether the product in question Certificate of Origin, and any other specific documentation required by the buyer, or financial institution or contains hazardous substances, and then submit the importing country regulation. its opinion in the form of an official letter to the 38 Regulatory and procedural barriers to trade in Kazakhstan Needs Assessment

Ministry of Industry and New technologies that Traders also singled out certain procedures as be- proceeds to issue the import permit. Similarly im- ing particularly time consuming. In particular, trad- porters (as well as exporters) of ozone depleting ers importing goods that are subject to quarantine substances noted that obtaining import (export) complained about the lengthy imported food re- permits, requires submitting in addition to copies quirements (IFR) procedure. According to this proof contracts, agreements, certificate of registration cedure, the trader has to provide the Ministry of and the certificate of compliance, a notarized copy Agriculture with phytosanitary certificates issued of an ecological insurance.31 Obtaining this insur- by official state organizations dealing with quaran- ance policy, issued by the Ministry of Environmen- tine or plant protection of the exporting country, tal Protection, is a process in itself, which may take which takes 1-2 weeks. The Ministry of Agriculture up to 5 working days. also may request additional documents describ- ing the production process, where, who and what Other difficult to obtain documents cited by re- was processed in the products. spondents include the transit permit. Respondents reported having to submit up to 10 documents, Once it receives the support documents, the Min- which require separate clearance by up to 5 agen- istry of Agriculture proceeds to issue a quarantine cies, so that obtaining the permit may take up to 30 clearance certificate or the import quarantine per- days. For traders importing chemical products ob- mit (IQP)32 for the respective border control agen- taining transit permits is complicated by cumber- cy responsible for the verification of phytosanitary some administrative procedures. For example, ob- standards. Issuing this certificate takes between taining transit permit for importing sodium sulphite 10 to15 days, particularly in view of the number of from China for re-export to the Russian Federation departments involved including: quarantine and may take up to three weeks, as the request has to administrative unit of Agriculture (10-15 days), the be first processed by the Ministry of Industry and Laboratory of the Ministry of Agriculture (10-15 New Technology, which in turn sends it by Kazak days), the Ministry of Agriculture finally author- post to the Committee of Science of the Ministry of izes the release of imported goods. This means Education and Science. The latter then submits the that completing the IFR procedure may take up to request to the Ministry of Transport, which then re- 30 days. Moreover, each batch of products is sub- sends the request and the entire set of documen- jected to physical examination at border crossing tary requirements to the Ministry of Industry and checkpoints (see section 3.4). new Technology for issuing the permit. Traders also reported experiencing significant Traders also cited the “certified statement declara- delays during customs clearance due to incom- tion”, also referred to as the “certification of prod- plete or incorrect documentation. In some cases, ucts”, which is required to claim preferential treat- such delays are mainly due to the Customs restric- ment accorded to the imported goods in question tive application of rules of origin. For example, a under bilateral or regional agreements. The decla- trader who has been importing the same type of ration, basically a claim of preferential treatment, marine propulsion engines from Germany over provides a testification to the effect that the im- the last three years reported experiencing signifi- ported goods are in accordance with the rules of cant delays during clearance because the customs origin stipulated in the agreement. The traders raises questions as regard the correctness of the explained that this declaration is only issued in COO issued by the relevant German authority. Karaganda, capital of the Karaganda province, and Other traders said delays were inevitable in cases requires the submission of the original copy of the where the Kazakh government does not recognize customs declaration.

32 IQPs are documents specifying the order, conditions of 31 Pursuant to the Rules for Issuing Permits for Import, import and selling of products of plant origin that are Export of Ozone Depleting Substances”, No. 508 of June under quarantine, and are valid for one year from the 2007. date of receipt. Chapter Three — Trade Facilitation 39 declarations of conformity issued by the export- dure cannot be completed. In such cases, and at ing country. In such cases, the trader is required to the discretion of the declarant, goods can be: (i) re- obtain a declaration of conformity (or certificate moved immediately from Kazakhstan; (ii) taken to of conformity from the State Certification Center a temporary storage warehouse; (iii) delivered to (KAZMEMST), which is issued following a lengthy the customs authorities at the point of destination process that could take up to 30 working days. This in accordance with internal customs transit pro- period does not include the time needed for test- cedures. However, the time and additional costs ing the products, which may take up to 60 working associated with providing the additional docu- days given the limited number of testing labora- mentation prompts traders to accept the Customs tories. valuation (and avoid proving the value of the declared goods altogether), especially if they are ex- Still other traders singled out customs valuation pecting to receive new consignments during the methods as causing significant delays. Several (60 days) grace period. traders drew attention that the tax authorities do not base their estimations on the value of goods Traders also complained about treasury’s proce- reported in the Customs Declaration.33 Instead, dure for payment approval, noting that while at the Kazakh Customs bases its estimates on its own the border bank terminals offer efficient services, pricing system, even though the trader presents the treasury is slow in processing payments. Some support documents confirming the value of goods traders noted that it takes up to 2 days to receive (cash, receipts) and the country of origin (certifi- the payment confirmation, so that the release of cate of origin). goods is delayed.

The problem arises when the Customs estimates Further complicating the import process are the do not reflect the actual value of the goods as es- changing customs regulations. For example, an tablished in the relevant contractual terms. This exporter of cotton cellulose, whose company is was the case of several survey respondents. The located in Shymkent export processing zone, re- importers reported that the Customs estimates ported losing the benefits associated with pref- usually lead to higher valuation, especially in cases erential agent status when importing by road where the goods were obtained at a favourable from China following the Customs decision to price. They also reported that proving the actual relocate the clearance of imports from China value of imports only results in additional transac- to four cities in Kazakhstan. The respondent ex- tion costs, given the range of additional support plained that his company was requested to clear documents requested by Customs, which vary by its goods at the Customs post in Almaty, causing product. significant delays and increases in the production costs. It is worth noting that traders have up to 60 days to prove the value of declared goods, and failing Other traders stated that they find the classifica- to pay the VAT means that the clearance proce- tion of customs clearance posts confusing. As of August 2012, customs posts have been organized 33 According to the Kazakh Customs Code, VAT on im- under four categories, including: Clearance Cent- ports is invoice-based, whereby the amount of VAT er, Energy, Special Economic Zone, Production, is determined based on the total cost of imports, 34 including cost, insurance, and freight value, report- Airport and Border. In principle, all goods are to ed in the special invoice that is provided by the ex- be cleared in Clearance Centres, irrespective of porter. This value, reported by the importer in the the transport mode used, except for chemical and customs declaration, is used as the basis for calculat- ing the amount of VAT. The tax authorities then add the amount of customs duties and excise taxes that must be paid during customs clearance. Code of the 34 Order of the Customs Control Committee No. 459 of Republic of Kazakhstan on Taxes and Other Compul- 20.08.2012, available online at: http://e.customs.kz/ sory Payments to Budget as amended on 1 January wps/wcm/connect/ru/portal/uchastniku_ved/infor- 2012, Article 276-8. mation/ca/description_ca/prikaz 40 Regulatory and procedural barriers to trade in Kazakhstan Needs Assessment other products35 which should be cleared at the noting that it features electronic data interchange Energy post. Similarly, all goods are to be cleared in (EDI). 36 the Production Posts, irrespective of the transport mode used. In cases where goods that should be However, of the 33 interviewed traders, only 11 re- clearance at Energy posts are shipped into a city ported using e-docs, including invoices, customs or a region that is located far away from the near- declarations and transit declarations. Most of the est Energy Post, then the trader could clear the remaining traders said that they were unaware goods in the nearest Clearance Centre or Produc- that these documents exist. Others noted that they tion Post. In practice, importers of manufactured do not see any benefit, since customs still requests goods explained that perishable and consumer traders to submit the documents in hard copies. goods could not be cleared at Production Posts. It is worth noting that the Kazakh Customs Code Moreover, some Airport posts are located far away denotes that customs declarations are to be sub- from airports, and it is up to the officials to decide mitted to the customs authority of destination in as to the specific Production post or Clearance hard (paper) and soft (electronic) copies. The sub- Center that will process and release the goods in mission of a hard copy is still required by law, and question the submission of an electronic copy is emphasized as a question of “right”. Still others drew at- Another trader, who imports depilatories, perfum- tention that while they appreciate the importance ery and other cosmetic preparations, stated that of switching to e-documents, they are unable to in 2011, the government introduced an additional do so due to the lack of funds and/or internal hu- test for electromagnetic radiation, which is time man resources. consuming and involves an equivalent US$100 in fees. The trader said that he only learnt about this Traders who use e-documents prepare and submit requirement the last minute, as he proceeded to their customs declarations using rented or leased clear the imported products. software, which in itself suggests the lack of internal IT resources. These traders also complained 3.1.3 Use of electronic documents about the inflexibility of the customs e-docs system, error-rates and the costs associated with up- The Kazakh customs has introduced electronic dates, which undermine their ability to reap ex- documents (e-docs) as early as 1997, which saw pected benefits. the launching of customs and transit declarations. These documents have been recently modified to In particular, some reported that the server in ensure harmonization with CU partners, and their Astana is often “unavailable”. Others highlighted 37 use was further promoted with the introduction interoperability problems, noting that they sim- of a modern e-customs system. Customs officials ply cannot connect to the Customs server given added that the e-system is also designed to facili- the heterogeneity between IT systems. This prob- tate information sharing among Customs offices lem is further complicated when they receive e- and between Customs and other state agencies, documents from suppliers and freight forwarders, noting that these are “incomprehensible” to the 35 These goods include: lubricating materials and tech- 36 niques used for the oil or grease treatment of textile The term electronic data interchange refers to the materials, leather, fur or other materials, other than electronic transfer from computer to computer of com- preparations containing as basic constituents, petro- mercial or administrative transactions using a specific leum oils or oils obtained from bituminous minerals, standard for structuring the data/information in elec- anti-knock, antioxidants, gum inhibitors, thickeners, tronic document formats. Thus organizations might re- anti-corrosion agents and other prepared additives, place administrative documents with appropriate EDI for mineral oils (including gasoline) or for other liquids message(s). used for the same purposes as petroleum products, 37 Interoperability is said to occur when the different goods coming to the enterprise (organization) of the types of computers, networks, operating systems, and fuel and energy complex in the subsoil use contracts, applications exchange information in a useful and and goods under the Commodity Nomenclature of For- meaningful manner based on common communica- eign Trade of the Customs Union. tions protocols and standards. Chapter Three — Trade Facilitation 41

Customs. Yet others explained that they find e- formation and documents with a single entry. In Customs system prone to “computer errors”. Still designing this facility, the government may con- others said that they find the system complicated, sider using UNECE/CEFACT Recommendations and complained about the lack of “online” help and Guidelines on Establishing a Single Window, desks to respond to their queries. commonly referred to as Recommendation 33.38 The Recommendation identifies three basic mod- 3.1.4 Proposed recommendations els, which the government could choose from:

While Kazakhstan has gone a long way in modern- 1. A Single Authority that receives informa- izing its customs administration, the results of the tion, and disseminates this information to survey point to the need for additional targeted all relevant governmental authorities, and efforts to reduce documentary requirements. Ka- coordinates controls in the logistical chain. zakhstan is not the first country to face this chal- 2. A Single Automated System for the col- lenge; a lesson learnt from previous development lection, dissemination and integration of experiences. These experiences suggest that the information and data related to trade that first step would be to assess every documentary crosses the border. requirement not only on its own right but also in 3. An automated Information Transaction relation to the overall flow of information. This also System through which a trader can submit requires rethinking the management informa- electronic trade declarations to the various tion system, with the aim of ensuring that traders authorities for processing and approval in submit information only once, so that repetitive a single application. In this approach, ap- keying of the same data is avoided, or at least, re- provals are transmitted electronically from duced to a minimum. governmental authorities to the trader’s computer. A first step in this direction would be to align trade documents with international standards. In align- As the government proceeds along the above- ing these documents, the Kazakh authorities may mentioned lines, it could also consider taking im- wish to consider using the UN/CEFACT Core Com- mediate measures to: ponent Technical Specification (CCTS), which pro- ●● Promote mutual trust and partnership be- vides a conceptual framework for modelling docu- tween customs and the trading commu- ment components in an e-business realm and in a nity; technologically independent manner. This exercise ●● Further streamline trade-related proce- is essential for streamlining documentary require- dures; ments and ensuring data interoperability among ●● Further streamline regulatory and adminis- the various parties engaged in trade transactions. trative procedures associated with obtain- Once this exercise is completed, all trade-related ing trade documents; procedures should be revised with the aim of ●● Reduce documentary requirements to a phasing out regulatory and administrative proce- minimum; dures that add little value to business processes. In ●● Further develop the existing dispute settle- this respect, the UNECE/CEFACT business process ment mechanism; and, analysis model could serve as a reference frame- ●● Expand the range of reasonably prices work for guiding the revision. customs brokerage services available for Only after undertaking these steps should the traders. government proceed to establish a single win- Table 3.5 provides a set of detailed measures that dow facility, which allows for the preparation, the government may wish to consider: filing, tracking, storage and seamless flow of all 38 The text of the recommendation along with case studies trade documents by enabling all parties involved on its implementation are available online at: http://www. in trade and transport to lodge standardized in- unece.org/cefact/single_window/welcome.html 42 Regulatory and procedural barriers to trade in Kazakhstan Needs Assessment

Table 3.5 - Outstanding needs and recommendations for customs clearance and documentary requirements

Outstanding needs Recommendations

Promote mutual trust ●● Prepare guides and white papers explaining the basic objectives, terms and and partnership between interpretation of regulations and procedures deemed by the private sector as customs and the trading difficult. Priority should be given to the procedures governing the issuing of trade community documents that pose particular difficulties for traders.

●● Prepare guides explaining the procedures and regulations governing the use of e-documents.

●● Establish a help desk for disseminating reliable up-to-date border crossing rules and their interpretation. This help desk could be housed in one of the trade support associations, which could maintain an inventory of procedures and rules, disseminate regular updates to its members and to the trading community at large, conduct regular assessments of traders’ needs and respond to their inquiries.

●● Encourage traders to carry out regular self-assessments using a checklist provided by the Customs.

●● Establish a customs to business partnership programme, whereby traders who pass the Customs audit could then be accorded significant benefits similar to those provided to AEOs.

Further streamlining ●● Establish clear directions for guiding the development of new procedures. Such of trade-related directions should ensure that new procedures are based on clear cost-benefit analysis; administrative and are embedded in laws; are clearly articulated to avoid different interpretations; and, regulatory procedures are applied to all traders in a transparent manner.

●● Revise procedures that result in increasing transaction costs:

—— Consider exempting special economic zones from the requirement of using the relocated customs t centres for imports from China to major cities.

—— Consider revising the procedures related to the implementation of the contract record numbers that have replaced the transaction passport, with a view to reducing the documentary requirements associated with implementing currency control. In this respect, the government may wish to consider reducing the number of support documents that the trader needs to submit to register the export contract with a Kazakh bank.

●● Reconsider the existing categorization of customs posts. Clearance posts should be strategically located within close proximity to transport and logistics facilities.

●● Improve customs valuation methods drawing on international best practices, as these allow for taking into account the specifications and terms of supply established under contracts/agreements. In so doing, the government may consider drawing on the WTO Valuation Agreement and World Customs Organization (WCO) Valuation Compendium.39

●● Streamline the administrative measures associated with VAT payment approval with a view to reducing the waiting time to one day. In addition, establish a shared, single database of legal and natural persons, so that traders would have to submit (and obtain) only one “taxpayer registration number”.

●● Further develop the procedure for advanced rulings by:

—— Expanding the scope of this procedure so that it includes the valuation of goods.

—— Streamlining the administrative procedures associated with implementing this procedure, with a view to reducing the waiting time to one day. In so doing, accord preference to e-business solutions, and ensure that such solutions are structured within the context of a single window arrangement.

●● Consider introducing pre-arrival clearance

●● Consider separating the release of goods from clearance based on WCO guidelines.

39 WCO Valuation Compendium is available online at: http://www.wcoomd.org/en/topics/valuation/instruments- and-tools/val_customs_compendium.aspx Chapter Three — Trade Facilitation 43

Outstanding needs Recommendations

Further streamlining ●● Analyse the administrative and regulatory procedures underpinning the issuing of administrative and of trade documents with a view to removing unnecessary procedures and trade regulatory procedures documents.

for processing and ●● Consider replacing the existing paper-based procedures with e-based procedures. issuing documentary Such procedures should be implemented within the context of a single window requirements facility (see below)

●● As a first step, the government may wish to reduce administrative and regulatory procedures associated with processing and issuing the following documents Certificates of origin —— Establish a new procedure for guiding the issuance of certificates of origin. In particular, the government may wish to consider: (i) revising its rules of origin, as these appear to be restrictive with respect to some raw materials and products; and (ii) streamlining the administrative procedures to cut down on red tape. In so doing, the government may consider conducting a thorough examination of the procedures and internal rules of all the local branches of the Chamber of Commerce to identify the factors causing discrepancies in the treatment of companies with similar types of goods

—— Equip Village Councils with modern weighing scales and allow for a certain degree of tolerance in cases where the consignment exceeds the capacity of the weighing scale. Export permits —— Consider determining the list of goods subject to export control at the ten-digit SITC level.

—— Reconsider the current one batch, one license system, so that the export permit may be used for several batches within the period of the licence validity and reduce the waiting time to one day.

—— Streamline the administrative procedures for obtaining export/import permits for ozone depleting substances Veterinary certificates Harmonize administrative and regulatory procedures associated with issuing veterinary certificates for sunflower with those applied in partner countries, particularly in Uzbekistan. Ecological insurance policy Streamline the administrative procedures for obtaining an ecological insurance policy. ●● Consider undertaking the following:

—— Embark on consultations with the Uzbek government to reduce the documentary requirements for obtaining transit permits through Uzbekistan. As both Kazakhstan and Uzbekistan are signatories to the TIR Convention, traders should not be requested to submit additional support documents

—— Harmonize SPS and veterinary regulations and requirements with main trade partners.

—— Further develop the existing waste classification system, as envisaged in the Kazakh Environmental Code, with a view to aligning this system with international approaches to reduce hazardous substances in products. Most notable are the Basel Convention on the Control of Trans-boundary Movements of Hazardous Wastes and their Disposal; the Stockholm Convention on Persistent Organic Pollutants; and, the International Atomic Energy Agency (IAEA) Safety Guide on the classification of the whole range of radioactive waste. 44 Regulatory and procedural barriers to trade in Kazakhstan Needs Assessment

Outstanding needs Recommendations Reducing documentary As a first step, the government may wish to consider eliminating the following support requirements to a minimum documents: —— For export permits: (i) the requirement of submitting certificates testifying that traders operate in domestic markets; (ii) for potentially hazardous products, and based on the revised system for the classification of waste products, consider reducing the number of documentary requirements.

—— For certificates of origin: the requirement of submitting notarized copies of the procurement documents for each product component.

●● In the medium term, the government may wish to consider revising regulations, as embedded in the Kazakh Customs Code, which establishes the submission of paper- based trade documents as a requirement.

●● Consider replacing all paper-based documents with e-documents. In the short-term, the government may consider phasing out paper-based documents where e-docs are already available.

Further developing the ●● Revise the existing laws so as to vest the Council of Experts with the right to make existing dispute settlement binding decisions. mechanism

Expanding the range of ●● Establish advanced training programmes for customs brokers on issues related reasonably priced customs to customs clearance and brokerage services. Such programmes could be hosted brokerage services available and maintained in specialized associations, particularly the Kazakh Association for to traders Customs Brokers.

Establish a single window ●● Align trade documents to internationally recognized standards.

facility ●● Based on the above, reduce the number of trade documents to the minimum. Particular emphasis should be given to removing documentary requirements that add little value for guiding decisions and eliminating the duplicate submission of data.

●● Analyze existing regulatory and administrative procedures underpinning export and import transactions using the UNECE/CEFACT Business Process Analysis Methodology. To ensure in-depth examination, the analysis should be conducted at the product level. In this respect, the government could choose to focus on key exports.

●● Based on the results of the business process analysis, remove all procedures that add little value to the export-import transactions.

●● Establish a single window facility using internationally recognized best practices.

3.2 At the border control application of simplified customs procedures to bona fide traders and their representatives, and Efforts to speed up border control procedures at the creation of a unified electronic information commercial crossing points have involved imple- database for tracking and detecting violations of menting the principle of integrated control by del- customs legislation. Thus, risk management was egating certain control functions to Customs. At used on a limited basis, with only those accorded the time of writing this report, the Kazakh Customs bona fide status41 benefiting from reduced border was responsible for carrying out vehicle control, control procedures. amidst preparations to assume the responsibility for sanitary and quarantine control functions. This was the case until February 2010, which saw the adoption of the “Law On Approval of the Cri- Efforts have also involved integrating risk man- teria for Assessing the Risk of Foreign Economic agement as a key element in carrying out border Activity”. The Law expands the scope of risk man- control functions.40 Initially, this involved selective

40 The term risk management is to be understood here 41 As per the terms provided under Chapter 6 of the Code in the sense defined by WCO as coordinated activities of the Republic of Kazakhstan “On Customs Affairs in by administrations to direct and control risk. See, WCO the Republic of Kazakhstan”, which was adopted on 30 (2010) June 2010. Chapter Three — Trade Facilitation 45 agement to cover all Kazakh exporters and im- The needs assessment suggests that there remains porters; provides the criteria for ranking traders room for improvement, as the principle of selec- by risk category (low, medium and high), with risk tive control is yet to be fully implemented by the understood as the potential for non-compliance different border control agencies. Officials from with Customs laws; accords traders assigned low the CCC reported that around 24 per cent of im- risk ratings the benefits of reduced border control ports and exports are physically inspected. This procedures; and, puts the CCC in the driver’s seat contrasts with best practices, whereby less than as the main party for spearheading risk manage- 5 per cent of goods are subjected to this method of border control.46 ment.42 The results of the UNECE trade facilitation ques- The year 2010 also saw the launching of a risk as- tionnaire show that actual incidents of physical sessment methodology, which provides a frame- inspection are higher than 24 per cent of commer- work for applying selective control so that only cial traffic. As shown in Table 3.6, it is often the case consignments deemed risky are taken up for at certain points for Customs to physically inspect 43 screening and physical examination. The im- all commercial traffic (i.e., 100 per cent of consign- plementation of this methodology has benefit- ments). This suggests that the level of physical in- ed since November 2010 from the introduction spection reported by the CCC indicates targeted, of the Selective Control and Risk Management as opposed to actual, levels. It may also be the case (SCRM) information system, which facilitates the that some customs control points report fewer construction of risk profiles using data gener- incidents of physical inspection, pointing to mis- ated from the customs declaration and other management. documentary requirements based on prede- Moreover, border control is complicated by the termined guidelines and indicators established involvement of several agencies. The CCC of- in the methodology and the above-mentioned ficials stated that border control is carried out Law. by, in addition to Customs, the Border Servic- In addition, the CCC launched pre-clearance no- es of the Committee for National Security and the Ministry of Agriculture. However, in prac- tification and introduced container scanning and tice, these are not the only agencies involved. spot-checking at the Southern borders, as a first As shown in Table 3.7, commercial traffic is step toward furnishing all border crossing points sometimes subjected to physical inspection 44 with state of the art inspection equipment. The by, among others, railway authorities.47 Moreo- rehabilitation of border crossing points will also ver, some agencies carry out physical inspec- see the establishment of an Import and Export tion in an excessive manner (i.e., 100 per cent One Stop Shop facility to streamline vehicle in- of the consignments as opposed to sampling), spection.45 suggesting a lack of proper coordination. Thus, physical inspection seems to be the norm, with 42 The “Law On Approval of the Criteria for Assessing the Risk of Foreign Economic Activity” was approved by the negative consequences for transaction costs, Ministries of Finance and Economy and Budget Plan- especially since most of the crossing points lack ning in February 2010. adequate equipment. Traders reported that 43 See, the “Methodology to Determine the Degree of Se- most of the physical checks are done manually, lectivity of Action to Prevent and (or) to Minimize Risks”, approved by the CCC in May 2010. so that delays are quite long. 44 Pursuant to the CU Commission Decision, no N688, “Common Model Requirements to Equipping Crossing 46 A case in point is New Zealand’s Customs. See, New Points” adopted by the Decision of the CU Commission Zealand Customs Services (2011) “Trade Facilitation in June 2011. Implementation Case Study-Risk Management: New 45 As per Government Resolution “On Conception for One Zealand’s Experience”, October. Stop Shop for Import-Export Operations”, adopted in 47 For details on the involvement of the Chamber of Com- July 2011. merce in border control, see the annex. 46 Regulatory and procedural barriers to trade in Kazakhstan Needs Assessment

Table 3.6 - Breakdown of exports subjected to physical inspection by product and type of control (per cent)

Type of inspection and agency

Product 47 (HS abridged) Railway Customs Sanitary & Veterinary KazAgreks KazAgreks Quarantine Fumigation Fumigation Protection) Phyto-sanitary expidemiological (Ministry of Health Inspection Authority) Inspection Authority) Inspection Authority) (Food quality control) (Food (State Plant Quarantine Quarantine Plant (State (State Plant Quarantine Quarantine Plant (State Quarantine Plant (State

Rubber chips 100 100

Soft wheat and N/A 100 100 100 100 100 rye

Oil pump 10

Flour 30

Heat and sound 100 insulation

sunflower oil and sunflower 100 seed

Soft drinks 5

Glass finer 100 100

Medicine

Water pump 100

Cotton cellous 100

Sunflower seed 50 50

Refined lead, 100 copper matte

Barley and 100 wheat

metal sheet 100

copper alloys 100 100 100

sunflower oil 100 100 100 and wheat

Paints and N/A 100 varnishes

48 To be more specific, this inspection is undertaken by the Department of Committee of State Sanitary-Epidemiological Surveillance of the Ministry of Health Protection. Chapter Three — Trade Facilitation 47

Table 3.7 - Breakdown of imports subjected to physical inspection by product and type of control (per cent)48

Product Sanitary and phytosanitary Radiation Border Customs (HS abridged) epidemiological control Commission Services Harvesting machinery 15 Flour 70 Heat and sound insulation. 100 Industrial fatty acid 100 Electric motors 100 100 Unalloyed steel tubes 100 Cotton callous 100 Mayonnaise 100 Fertilizers 100 Wheat and barely 100 Metal sheet N/A Copper alloys N/A Plastic pipes 100 Gear motors 5 Sunflower oil Paints 100 Kitchen sinks 100 100 Metric motors 100 100 Boilers 50 50 50 Dressing materials and platters 100 Air purifiers 35 Washing powder 70 Device for geodetic monitoring 10 Boats 100

Exports and imports that are not subjected to ●● Information on value of goods in the coun- physical inspection are requested to submit addi- try of departure: export declaration or its tional documentary requirements. Respondents certified translation reported that nearly all their goods are treated as ●● Information on value of goods in terms of “risky”, with those originating from certain coun- article, trade mark, brands, models if these tries, particularly China, Indonesia, Republic of data are not specified in the foreign trade Korea and Kyrgyzstan, assigned the highest rat- contract (attachment, specification), in- ings. In such cases, traders are obligated, as per voice, accounting documents the Procedure for Control of Customs Value, to ●● Packing lists submit additional documents including, among ●● Accounting records as received others:49 ●● Reasons for getting discounts for certain ●● Price lists of producer of imported goods or shipment of goods and its amount, if such its commercial offer discount is stipulated by foreign trade agreement, but not determined by amount 49 See the Procedure for Control of Customs Value (at- ●● Information on loading, unloading, trans- tachment three). The procedure was approved by the Customs Union Commission under Decision No. 376 of shipment of goods (if several types of September 20, 2010. transport were used) 48 Regulatory and procedural barriers to trade in Kazakhstan Needs Assessment

●● Documents proving construction, assem- the necessary information that addresses risks bly, maintenance of goods made after im- identified through risk assessment.50 portation to the territory of the Customs Union, with respect to the goods like indus- At the same time, risk assessment is based on a trial machinery or equipment. narrow set of criteria. The current approach features a narrow focus on risks presenting threats to Moreover, and as shown in Annex 1, traders are public revenue. Risks identified by Law are limited often delayed by divergent interpretation and to incorrect classification according to the harmo- application of procedures by border control nized system, with the consequent misapplication agencies. In some cases, the application of proce- of import and other taxes; tax exemption when dures tend to be particularly taxing. For example, not applicable; incorrect country or provider ori- drivers have to leave their vehicles to have their gin; preferential rates abuse; incorrect valuation; passports checked, which slows the border cross- untrustworthy behaviour of traders; and, coun- ing process. terfeiting (piracy). Similarly, the risk assessment The need for further developing border control is methodology attaches great importance to the evident. As a first step, the government may con- traders’ financial viability, as measured by size of sider taking additional measures to achieve inte- their operations, the value of their exports/im- grated control. This could involve delegating fur- ports and level of indebtedness to Customs and ther responsibilities to the Customs. In situations tax authorities. These criteria along with the man- where control requires specialized knowledge and ufacturing sector that the trader operates in form skills, inspection functions could be organized in the criteria for risk assessment. such a way so that they are carried out jointly and This almost exclusive focus on revenue concerns simultaneously by the respective agencies. There is dictated by the daily problems facing Customs, is also the need to speed up the rehabilitation of which relate to curbing the smuggling of goods commercial crossing points with modern, non-in- as well as combating commercial fraud, whereby trusive scanning equipment, keeping in mind that traders attempt to evade or minimise the payment modern equipment is only a means for detecting of duties and taxes. Officials from the CCC report- risks and do not in themselves reduce risks. Yet ed high incidents of illicit trafficking of prohibited another immediate measure would be to remove items, particularly drugs, and contraband.51 As procedures that add little value to risk manage- justified as such a focus may be, it means that in ment. For example, drivers should not leave their practice, individual agencies are left with much vehicles to have their passports checked, and the discretion to decide as to additional criteria for risk number of agencies responsible for carrying out identification and assessment. In addition, the law control functions should be reduced. and the needs assessment methodology do not describe the treatment and follow-up actions for There is also a need to further develop cross- each of risk level, other than stating that traders border risk management. Thus far, efforts seem assigned low risk ratings will benefit from reduced to be centred on developing risk assessment inspection procedures. techniques, which, while essential, are only one component in risk management. Risk assessment There is, therefore, a need to adopt a more com- comprises a series of technical processes intended prehensive set. In general, governments risk typol- to identify and quantify individual risks, and these ogy includes, among others: processes involve risk identification, risk analysis and risk evaluation. Its results form the basis of risk 50 See WCO (2010) Customs Risk Management Compen- management, which involves the coordinated ac- dium tivities by different government bodies to control 51 For example, officials from the CCC stated during the face-to-face interviews that in September 2012 risk through the systematic application of man- Customs stopped the smuggling of narcotics weighing agement procedures and practices that provide over 180 kilograms. Chapter Three — Trade Facilitation 49

●● Political risks to government institutions This broad definition should form the basis for iden- and overall stability tifying risk criteria. There is a need to develop addi-

●● Operational risks associated with various tional criteria for, among others, traders, transporters, agencies of the country being unable to freight forwarders, Customs brokers, insurance com- function and provide services, sometimes panies and other international supply chain interme- due to failure of automated systems. diaries. This would allow for selecting transactions for specific checks, according to trader, agent, origin ●● Compliance risks associated with failure to obey laws or regulations of goods, commodity code, duty rate, routing, value, and so on. Moreover, the risk assessment criteria and ●● Economic risks that increase costs or de- associated indicators should cover both proven risks crease revenues (i.e., risks that have occurred and which the authori- ●● Health and safety risks to the health and ties have a record of), and potential risks (i.e., sus- safety of a country‘s citizens pected risks, such as the development of a new com- ●● International risks in regard to international modity to which the owner assigns a trade mark then relations becomes the target of intellectual property rights ●● Risks to critical infrastructure violations). The World Customs Organization (WCO) produced customs-related risk indicator guides that Striking a balance between the requirements of could be used to improve the risk profiling system.52 ensuring unfettered cross-border trade and control could be best achieved by first defining risks This broad definition and risk assessment criteria not in relation to their sources, but in relation to should be established in a risk management policy, the entire set of procedures and processes over specifying the overall objectives and key priorities which Customs authorities exercise their respon- regarding risk management as well as organiza- sibilities. Such an approach is important as it al- tional structures and resources to be applied to the lows for looking into non-financial sources of risk management of risk. The risk management policy and brings into the spotlight trade facilitation, should also provide a detailed description of treat- which is also an important area for which Customs ment and follow-up actions for each of risk level. This shoulders the responsibility. Viewed from this per- description could be implemented within the con- spective, risks could be divided under three areas, text of inspection selectivity programmes, which including effective and efficient collection of -rev usually routes goods through different channels of enues; community protection and security and customs control. These routes may include Green trade facilitation (see Table 3.8). lane for goods that do not need further processing and can be released; the Yellow lane for documen- Table 3.8 - Suggested classification of tary checks; the Red lane for physical checks; and risks the Blue lane for possible post-clearance audit.53

Risk Areas Risks Needless to say, the success of any selective con- 1. Effective and 1.1 Fraud trol programme is very much a function of the efficient collection 1.2 Lack of competent staff management information system underpinning of revenue 1.3 Integrity it. Border control agencies need to have continu- 2. Community 2.1 Narcotics protection and 2.2 Weapons of mass destruction security 2.3 Intellectual property rights 52 See WCO (2010) Risk Management Compendium; and violations WCO Framework of Standards to Secure and Facilitate 2.4 Environmental health Global Trade (SAFE Framework). 53 3 Trade facilitation 3.1 Ineffective procedures This is the case of the selectivity module under the Automated System for Customs Data (ASYCUDA), 3.2 Lack of coordination with other which was developed by the United Nations Confer- agencies ence on Trade and Development (UNCTAD). Detailed 3.3 IT Failure information on this system are available online at: Source: WCO (2010) Customs Risk Management Compendium. http://www.asycuda.org/ 50 Regulatory and procedural barriers to trade in Kazakhstan Needs Assessment ous and unfettered access to all the required in- January 2010, the CU involves the removal of tariff formation on border-crossing operations (data on and non-tariff barriers between the three partner goods, vehicle and driver), so as to decide on their countries. The implementation phase only com- need to participate in the documentary checks menced during the second half of 2010, following and/or in-depth physical inspection. While the the adoption in July 2010 of the Customs Code of government has introduced an automated system the Customs Union, which provides for: (i) applica- to support selective control, the system does not tion of uniform tariffs; (ii) common customs pro- allow for a single window interface for advance in- cedures; (iii) common rules for goods declaration; formation sharing and reporting, and for ensuring (iv) common rules for customs duty determination the efficient use of resources. For example, the dif- and collection; and (v) common rules for customs ferent government authorities may, for example, clearance and customs control. programme joint inspections and ensure that reporting is done in such a way so that the results of Progress to date has involved the abolishment of physical checks can be used for different purposes. customs control within the CU territory, including the dismantling of control points along the Thus, in short, the government has to further Russian-Belarusian border in January 2011 and the strengthen border control with additional meas- Kazakh-Russian border in July 2012. In addition, ures to achieve integrated control based on risk separate agreements and arrangements were con- management. To ensure proper planning and cluded to facilitate the harmonization and mutual overall oversight, the government may consider recognition of documentary requirements. Most establishing an inter-agency risk management notable are: committee. The idea is to centralize oversight in Unified Customs Tariff Regulations (including, but a manner that fosters inter-agency coordination. not limited to, a common commodity classifica- Typically, the functions of the risk management tion nomenclature and a customs tariff) provides committee should include:54 for the unified customs duties for goods imported ●● Preparation and advice on risk appetite, into the territory of the CU. tolerance and strategy for the senior man- Unified Customs Non-Tariff Regulations of the CU, agement team and the Director General; which allow imposing certain economic limita- ●● Review of risk management reports for high- tions on cross-border trade activities within the level risks, in particular those strategic risks CU territory, such as quantitative restrictions, ex- which inform long-term decision making; clusive export and/or import rights with respect ●● Analysis of the risk management process to certain goods, expert supervision, foreign trade and its effectiveness; and licensing and special foreign trade constraints (in- ●● Review of organizational internal controls cluding such constraints imposed for the purposes and their effectiveness. of compliance with certain international sanctions Table 3.9 provides a summary of the recommenda- and/or for protection of the legitimate national tions for the government’s consideration: interests of the member states, such as homeland security and public health). 3.3 Issues related to the Customs Union Agreement on Mutual Administrative Assistance be- The needs assessment points to a number of is- tween Customs Authorities, which stipulates, among sues related to the Customs Union (CU) of Belarus, other things, sharing information about risks of viola- Kazakhstan and the Russian Federation. These is- tion of national and CU customs legislation. sues partly stem from the fact that the CU remains A Single List of Products Imported to the CU, in the early implementation stages. Established in which defines products that are subject to manda- 54 See WCO (2010) Customs Risk Management Compen- tory conformity assessment (with issuance of the dium. uniform documents). Chapter Three — Trade Facilitation 51

Table 3.9. - Outstanding needs and recommendations for border control

Outstanding needs Recommendations Establishing a Expand the application of risk management to include all border control agencies. While comprehensive Customs may spearhead the implementation of a modern risk management system, all border cross-border risk control agencies need to adopt and implement such a system based on a clear strategy and management system action-plan. Expand the scope of risk assessment criteria. Establish a risk management policy, with clear definition of administrative structures and resource allocation. Further develop the existing management information system. Establish an inter-agency risk management committee. Kazakhstan could consider implementing the WCO Standards to Secure and Facilitate Global Trade (SAFE Framework), which provides is a holistic approach to balancing supply chain security and trade facilitation. It sets forth principles and standards on advance cargo information, risk management, equipment for non-intrusive inspection, the Authorised Economic Operator (AEO) concept, and on integrating supply chain management into a single coherent instrument.

Simplification, Revise decisions on cross-border procedures to ensure greater clarity and precision, provide rationalization and clear instructions for implementation, and reduce discretion in interpretation by customs standardization officers. of cross-border Streamline border procedures both for the railways and the border agencies. procedures Further Improve interface connections between the information systems of the railways and border strengthening control agencies within the country. of inter-agency Establish a common approach to risk management across border agencies, based on the inter- coordination at the nationally recognized principles enshrined in the Kyoto Convention borders Establish a central body for assuming the task of developing and overseeing the implementation of a common approach to risk management. Improving inter- Improve the interface connections between the Chinese and Kazakh railway and customs agency coordination information systems. at the main border Simplify the procedures for obtaining transit permits, and reduce the number of documentary crossing points requirements. This could be done based on a detailed analysis of the procedure in consultation between Kazakhstan with the Chinese authorities in order to ensure that the needs and considerations of the relevant and China authorities in both countries are adequately addressed.

Unified list of goods that are subject to import and tainty amongst traders with regard to temporary export licensing requirements. exceptions. 55 For example, the CU Commission established temporary exceptions to the free move- Unified list of goods subject to sanitary - epidemi- ment for certain goods. These goods will continue ological surveillance to be subjected to customs clearance and include: A unified register for intellectual property rights, Goods to which one of the member states applies whereby, pursuant to the CU Code, traders are re- anti-dumping, compensatory and/or special (i.e., quired to register trade names and trademarks so preferential) duty rates as to prevent the importation of counterfeit products into the customs territory. Vehicles imported into a member state when ac- quired by individuals of another member state The three partners are in the process of develop- for personal use (at present time, this exception is ing the required laws for removing internal non- supposed to remain until 1 January 2013) tariff barriers; a process that may take until 2015. In some cases, the transition periods may only be 55 CU regulations should be introduced into and even- completed in 2020. As a result, many aspects of tually replace the corresponding national rules and standards currently in effect in each member state. Do- customs activities are still carried out based on na- mestic laws apply if it is expressly provided for by the tional regulations and standards, causing uncer- CU laws or to the extent that has not been regulated. 52 Regulatory and procedural barriers to trade in Kazakhstan Needs Assessment

Goods subject to export duties in one of the mem- stones, some types of mineral raw material, phar- ber states, which are exported from this member- maceuticals, radio electronic equipment, high-fre- state to another member-state in respect of which quency devices, alcoholic products, encryption/ such export duties are applicable cryptographic facilities, and goods with cultural value. As some of these product categories are not The exceptions procedure also applies to goods included in Kazakhstan’s list of products subjected for which customs duties are established at rates to export/import control, the government had to lower than the unified customs rates of the Cus- revise the list, which has been recently expanded toms Union. In the case of Kazakhstan, this ex- to include precious metals. The government had ception applies to a large number of items (409 to also develop legal procedures for the issue of in total) and is supposed to be applicable until licenses and authorizations with respect to pro- 1 January 2015. Thus, traders have to operate un- hibited or restricted goods. der conditions of shifting procedures, which trans- late into a high degree of uncertainty. The results In addition, traders noted that the CU requirement of the survey show that uncertainty is aggravated of detailed descriptions for products with 10-digit by a lack clarity regarding the application of the HS code numbers is increasing transaction costs, new CU laws and procedures. since they have to pay EUR 20 for each additional page attached to the cargo declaration. They also The results of the survey also suggest that Kazakh- drew attention to the fact that the Registry of Sup- stan’s ability to exploit the trade potential pre- pliers from Third Countries tends to be restrictive, sented by the CU is undermined by a number of and that they experience difficulties in obtaining challenges. The first relates to the additional costs veterinary import permits. They explained that associated with the implementation of the CU the CU legislation stipulates that a trader should rules and regulations. Traders reported incidents submit an application, in a standard form, with of repeated certification for imported goods that indications of the country of departure and track- are not included in the “Single List of Products Im- ing route. However, it is often the case that their ported to the CU”. According to the CU legislation, suppliers deviate from the indicated route. In such such goods cannot be released when they move cases, the shipment is held at a Customs post until from one CU country to another, even if customs the trader obtains a new permit. Moreover, sev- clearance has been performed in the country of eral traders noted that exporters are requested 56 entry. In practice, this means that such these to obtain certificates of origin for every shipment, goods need to be certified again, which increases even if the different shipments consist of the same transaction costs. This was the case of a trader who product(s). For example, if a trader is exporting the imports alternating current (AC) motors via the same good to 15 countries, he is expected to ob- Russian Federation, who reported that he has to tain 15 certificates of origin. certify the product in question more than once. The point was also made that some new docu- Similarly, the Unified List of Goods that are Subject mentary requirements, which were meant to fa- to Import and Export Licensing Requirements has cilitate trade, have resulted in increasing trans- resulted in creating additional non-tariff restric- action costs. This is particularly the case of the tions. This list currently features six categories of Certificate of State Registration of the CU, which goods, which are not allowed to circulate in the replaces the sanitary-epidemiological conclu- CU territory and another 27 categories, which are sions (Hygienic Certificate) for some of the prod- subjected import/export limitations. The latter in- ucts included in the unified list of goods subject cludes, among others, precious metals, precious to sanitary - epidemiological surveillance (see Box 3.1). 56 Decision of the Customs Union Commission N0. 319 of 18 June 2010. Available online at: http://www.tsouz. This document, obtained from the Ministry of ru/kts/kts17/pages/p6_319.aspx health, is issued for a single merchandise category Chapter Three — Trade Facilitation 53

Box 3.1 List of Good for which the Certificate of State Registration is required •• Mineral water, bottled potable water, energy drinks, alcoholic production; •• Specialized foodstuffs, including baby food, dietary products, nutritive for athletes, nutraceuticals, raw materials for nutraceuticals, organic products; •• Foodstuffs produced using genetically modified organisms; •• Cosmetics; tools and products of oral hygiene; •• Disinfectants, disinfectants and disinfestations; •• Household chemicals; •• Personal hygiene objects for children and adults; •• Products meant for contact with foodstuffs (except the tableware, table belongings, manufacturing equipment) and others and it may include only the same products (homo- should stamp the statement on imports of goods geneous products containing the same ingredi- and payment of indirect taxes (the “Statement”) as ents and produced using the same technological confirmation of payment of indirect taxes within process) and is valid for the whole period of the ten business days from the date when a taxpayer production or product shipment throughout the submits four copies of the Statement in writing CU territory. In practice, and according to an im- and other supporting documents specified in the porter of chemical products (surface active agents Tax Code. Traders described this procedure as time other than soap), obtaining the certificate may consuming, and some reported having to submit take up to two months, in view of the range of several support documents. documentary requirements. The traders note that much of the delay is caused by the difficulties as- Yet another set of challenges relate to Kazakh- sociated with obtaining the certificate of origin. stan’s readiness/ability to comply with the CU rules and procedures. The previous section showed that Traders also noted that CU arrangements have Kazakhstan has to address a number of challenges rendered it more difficult to obtain the status of before migrating to a paperless environment, and bona fide traders or Authorized Economic Opera- traders highlighted concerns regarding the CU e- tors. As per the terms of the CU Code, obtaining docs requirements, noting that Kazakh customs this privileged status requires providing a guar- may not necessarily have the required capacity antee, referred to as General Security for Customs and experience in managing such declarations. payments and taxes, in the tune of EUR 150,000,57 The same applies to risk management, and this an amount which traders find prohibitive, espe- challenge is complicated by the fact that the risk cially those belonging to the SME sector. management system at the CU level remains work in progress. The CU arrangements stipulate that In addition, the clearance of goods within the Cus- customs control should follow the principle of toms territory is often complicated by the fact that selectivity based on a risk management system,58 Kazakh nationals cannot clear their goods in either and that the three partners should share informa- Belarus of the Russian Federation. This results in tion about risks of violation of national and CU cus- additional costs as Kazakh traders have to rely or toms legislation.59 However, the risk management Russian or Belarusian customs brokers to clear their systems of the three members vary in terms of risk goods. Similarly obtaining payment confirmation technologies, management techniques, and de- from the tax authorities of CU members is time gree of automation. consuming. Under the rules, the tax authorities 58 As per CU Code. 57 See, Article 39 of the CU Code and Article 61 of the 59 As per the Agreement on Mutual Administrative Assis- Kazakh Customs Code. tance of Customs Authorities. 54 Regulatory and procedural barriers to trade in Kazakhstan Needs Assessment

Moreover, the definition of what should be shared ●● The value of goods specified in a statement remains unclear. While the CU Code defines risk as or obligations does not comply with the the potential for non-compliance with customs submitted documents of proof; legislation of member countries of the Customs ●● It has been determined that the transac- Union, in practice, basic types of infringements tion price per unit of goods specified in a and crimes in the field of customs are defined in statement or obligations deviates from the the national codes of administrative offences and received minimum price of the goods; criminal code of each member country. This ren- ●● It has been determined that the costs spec- ders it difficult to arrive at a clear definition of risk ified in Sub-Clauses 1) – 3) of Article 276-8 criteria and indicators. Moreover, different liabili- of the Tax Code of the Republic of Kazakhstan ties for offences in the field of customs could po- have been understated; tentially lead to higher incidents of customs viola- ●● The statement specifies an incorrect tions in member states with less stringent laws. currency rate. The amount of payable VAT is determined by calcu- Experts also drew attention that the Kazakh Adjust- lating an average price of the good in question us- ment Rules,60 which were adopted in 2010 within ing the price of similar goods (and if such goods are the context of the CU risk increasing the traders’ unavailable, the price of homogenous goods) im- VAT liability. According to the CU Adjustment rules, ported into the territory of Kazakhstan from other Custom authorities may adjust the amount of VAT CU members during the last ninety days. If, taking payable on taxable imports if: 61 into account the accepted minimum deviation (as defined in the Adjustment Rules), a calculated aver- ●● The value of goods has been determined age price exceeds the price stated in the customs without taking into consideration of the declaration, the Customs may impose additional pricing principle provided for in Article VAT on the difference between the average price 276-8 of the Tax Code of the Republic of and the one stated by the importer. The problem Kazakhstan; with this method is that it does not take into ac- 60 Resolution of the Government of the Republic of count the specifications and terms of supply estab- Kazakhstan No. 1249 dated November 28, 2010 on lished under contracts/agreements, thereby run- Approval of Rules for Taxable Import Volume Adjust- ning the risk of increasing the traders’ tax burden. ment within the Customs Union. The Kazakh Gov- ernment integrated the Adjustment Rules into the national Customs Code. Table 3.10 provides a list of needs that the Kazakh 61 Rules for Taxable Imported Volume Adjustment within government may wish to bring to the attention of the Customs Union, Clause 5. the CU Commission:6263

63 Chapter Three — Trade Facilitation 55

Table 3.10 - Outstanding needs and recommendations for the attention of the Customs Union

Outstanding needs Recommendations

Improve inter-agency ●● Introduce interface connections between the information systems of the coordination at the borders railways and the border agencies (particularly customs) within the CU territory. In so doing, Kazakhstan and its CU partners may consider following the systems adopted within the context of the EU funded Transport Corridor Europe- Caucasus-Asia (TRACECA) initiative.

●● Establish a common approach to risk management, as explained in section 3.4.

Further simplification, ●● Expand the list of products included in the Single List of Products Imported rationalization and to the CU.

standardization of ●● Reduce the number of products included in the Unified List of Goods cross-border administrative Subjected to Import and Export Licensing Requirements. and regulatory procedures ●● Streamline and simplify the existing procedures for issuing the Certificate of State Registration.

●● For cargo declarations: Consider reducing the level of description for products with the 10-digit HS code, and revise the pricing policy so as to reduce the cost of additional pages.

●● Simplify the procedures associated with importing veterinary products

●● Consider revising the procedures for issuing certificates of origin. One approach would be to require such certificates for each product, as opposed to each shipment.

●● Consider simplifying the procedures for issuing the payment confirmation, and reduce the waiting time to one day.

●● Consider regulations that would allow traders to clear goods in their country of residence.

●● Consider expanding the Registry of Suppliers from Third Countries.

●● Consider further developing the CU Adjustment rules. In particular, improving customs valuation methods drawing on international best practices, as explained in section 3.3.

Further develop the ●● Consider consolidating the existing systems into a common risk management CU common risk management system, as explained in section 3.4.

system ●● Consider revising the terms for granting AEO status for traders operating in the CU territory. It would be useful to avoid setting a threshold for determining financial solvency, as this threshold differs from one industry to another. This approach find roots in international best practices62 as well as the experiences of other countries.63

Strengthening the ●● Establish a coordinating committee to conduct regular consultations with public-private dialogue and the private sector representatives concerning the CU procedures and cooperation documentary requirements.

●● Establish a customs to business partnership programme, as explained in section 3.4.

62 Rules for Taxable Imported Volume Adjustment within the Customs Union, Clause 5. 63 Rules for Taxable Imported Volume Adjustment within the Customs Union, Clause 5. 56 Regulatory and procedural barriers to trade in Kazakhstan Needs Assessment

3.4 Overland transport infrastructure: As for the road network, it stretches over 88,4000 rail and road networks km, with East Kazakhstan, Almaty, Karaganda, and Kotanay regions having the longest net- Kazakhstan’s overland transport system, including works. Five international roads, around 23,000 km railway and road networks, carries 90 per cent of all in total, pass through Kazakhstan. These include: cargo in the country. The rail network stretches over 19,293 kilometres (km), of which 14,319 km is avail- ●● Almaty— Astana — Kostanai (route М-36) able for railway services. These services connect the with exit to Chelyabinsk (Russia) country with China, Kyrgyzstan, Uzbekistan and the ●● Almaty — Petropavlovsk with exit to Omsk Russian Federation (of the 15 railway border points, 11 (Russia) are with the Russian Federation; 2 with Uzbekistan; 1 ●● Almaty — Semei — Pavlodar (route М-38) with Kyrgyzstan; and 1 with the People’s Republic of with exit to Omsk China). About 30 per cent (or 4,296 km) of the railway ●● Almaty — Shimkent (route М-39) with exit tracks are electrified, and the railway network’s inven- to Tashkent tory of rolling stocks comprised 1,772 locomotives and 107,833 freight wagons at the end of 2011.64 ●● Shimkent — Aktobe — Uralsk (route М-32) with exit to Samara (Russia) The railway system is operated by the state-owned Transport development is guided by the “Pro- Joint Stock Company (JSC) “Kazakhstan Temir gramme for Development of Transport Infrastruc- 65 Zholy” (KTZ), and supervised by the Ministry of ture of the Republic of Kazakhstan for 2010-2014”. 66 Transport and Communications. KTZ owns the The Programme identifies investment programmes national railway network and around 40 per cent for the development of road and railway networks of the country’s stock of freight wagons, which ( as well as civil aviation, water transport); stipu- is equivalent to 42,234 wagons (Table 3.11). The lates the modernization of the transport sector’s remainder (65,599 wagons) is in the hands of pri- institutional setup and legislative framework; and vate operators, of which only a limited number are emphasizes capitalizing on the country’s potential Kazakh . Moreover, most the wagons are for bulk as a transit country between Europe and Asia. transport, reflecting the country’s heavy reliance on the export of raw material. Consistent with this Programme, the government launched a number of road and rail development Table 3.11- KTZ inventory of freight projects. Key road development projects involve wagon by service the construction of the international “Western Eu- rope–Western Republic of China corridor”, which Freight wagons by service Number of cars starts from Orenburg (Russian Federation) and Auto 54 ends at Korgas (the People Republic of China), Bulk 38,014 passing through five Kazakh oblasts (regions) and Intermodal 4,164 involves 2,624 km of roads in Kazakhstan. Moreo- Mineral cargo 2 ver, the new roads under construction in Kazakh- Total 42,234 stan will be of Class I and II and will, therefore, be Source: Kazakh Ministry of Transport and Communications. equipped to carry higher volumes of transit traffic. Other projects involve the renovation of roads, 64 The Agency of Statistics of the Republic of Kazakh- stan (2012) Statistical Yearbook-2011. particularly key sections within transit corridors 65 KTZ is 100 per cent owned by the State via the Na- and national roads by 2014 (Table 3.12). tional Welfare Fund “Samruk-Kazyna”. 66 As per the terms of “On railway transport” Act of Decem- As for railway development, major projects include ber 2001, the Ministry of Transport and Communications the construction of the railway link Uzen- Turkmeni- is responsible for the implementation of public policies stan along the international North – South corridor, targeting the railway system, as part of its boarder mandate of coordinating, regulating and controlling the to connect Kazakhstan with Gulf States and Iran. Yet functioning of the country’s transport sector. another project is the Korgas (Kazakhstan) - Zhe- Chapter Three — Trade Facilitation 57

Table 3.12 - Key road sections slated for renovation over the period 2010-2014

Road sections within transit corridors Road sections within national corridors

●● Omsk – Pavlodar – Maikapshagai, ●● Almaty – Ust-Kamenogorsk.

●● Astrakhan – Atyrau – Aktau –Turkmenistan border ●● Usharal – Dostyk.

●● Shuchinsk – Kokshetau – Petropavlovsk ●● Zhezkazgan – Petropavlovsk.

●● Russian border –Uralsk – Aktobe ●● Kyzylorda – Pavlodar – Uspenka – Russian border.

●● Astana – Kostanai – Chelyabinsk ●● Beineu – Akzhigit – Uzbekistan border.

●● Aktobe – Atyrau ●● Local motor road networks.

●● Astana –Yereimentau – Shiderty

●● Kurty – Burylbaital

Source: Program of Accelerated Industrial and Innovative Development of the Republic of Kazakhstan for 2010-2014. tygen (China) railway link to facilitate cross-border ticipation in the transport sector’s development, trade with/through China, which has been his- within the context of public private partnerships torically conducted via the Dostyk (Kazakhstan) – (PPPs) arrangements. Achievements to date have Alashankou (China) railway link. These projects form involved adopting the 2006 “law on Concessions”, part of a broader effort to re-establish Kazakhstan’s which allows for awarding the private sector long- strategic position in the complex web of routes term lease concessions (for up to thirty years) over along the historic Silk Road linking Asia to Europe a range of state-owned assets outside oil and gas via Central Asia, South Asia and the Middle-East. extraction.68 The concessions are based on the build-transfer-operate model (BTO), whereby the In addition, efforts are underway to reform Kazakh- title of the facility is transferred to the State imme- stan’s national railway operator within the context of diately upon completion of construction with the the “Strategy of JSC NC KTZ Development till 2020”, understanding the investor will operate the facility which seeks to bring about functional separation during the concession period to recover the capi- between infrastructure development and services tal and earn reasonable profits. In 2008, the Joint delivery. This separation, commonly referred to as “un- Stock Company (JSC) “Kazakhstan Centre of Pub- 67 bundling of functions”, is intended to increase the lic-Private Partnership” was created to promote participation of the private sector (since it allows for and expand the scope of PPP arrangements.69 discerning those components that could be subcon- tracted on a competitive basis), and separate the man- The assessment suggests that there remains room agement of passenger services and freight services. for further improvement. Traders and representatives of railway and truck operators reported a The KTZ development strategy also involves mod- number of bottlenecks, which stem from the lack ernizing the company’s rolling stock. It stipulates of adequate infrastructure facilities, the slow pace writing off around 54 per cent of its freight cars, 68 per cent of main-line locomotives, as well as 68 The said Law was meant to provide a legal basis for 82 per cent of switch engines and passenger cars concession arrangements, which first emerged in 2005. The first concession agreement, granted in July 2005, by 2020 due to the end of service life. The strategy involved the construction the railway section “Station also envisages the acquisition of modern, state-of- Shar-Ust-Kamenogorsk”. This was followed in Decem- art locomotives and freight wagons. ber 2005 by the concession agreement for the construction of the interregional electric power transmis- sion for the North Kazakhstan –Aktobe region. The above-mentioned efforts are underscored by 69 A detailed description of the Kazakhstani Centre of an emphasis on increasing the private sector’s par- Public-Private Partnership mandate and activities is available on the Center’s website at: http://kzppp. 67 The unbundling involve the separation of, among others, kz/en/page/view?id=1. For a crisp discussion of the transport and non-transport activities, of transport infra- changes during the early nineties till 2008, see US- structure and operations, of different lines of business AID (2008) “Kazakhstan: PPP opportunities in a young (passenger versus freight services), functions or regions. country: the challenge is around the corner”. 58 Regulatory and procedural barriers to trade in Kazakhstan Needs Assessment

Figure 3.1 Breakdown of Kazakh freight turnover by transport mode

Maritime 1%

Pipelines 22%

Rail Road 50% 27%

Source: Agency of Statistics of the Republic of Kazakhstan, Statistical Yearbook 2011. of the transport sector’s liberalization effort, and Yet another reason for the lower use of road trans- the lack of proper legislation and equipment for port is the poor quality of the road network for curbing cargo theft. Below is a discussion of these both international and local traffic. The network bottlenecks along with key recommendations for consists mainly of Class III stretches of local and the Government’s consideration. international road networks that are in need of re- pair or complete reconstruction. In addition, some 3.4.1 Lack of adequate infrastructure rural areas remain poorly connected to major cities, thereby undermining agricultural and indus- As previously mentioned, the surveyed traders trial development. prefer to transport their exports and imports by rail, and this applies to the entire community of The traders’ preference for the rail transport does not traders. Available statistics show that railways ac- mean that the railway system is without problems. count for around 50 per cent of total freight turno- The system, which was established during the pre- ver (or 223.6 out of 446.8 tons-kilometres) at the independence period, lacks the required infrastruc- end of 2011 (see Figure 3.1). ture, technologies and skilled manpower to meet the traders’ increased demand for tailored services, qual- The lower use of road transport is mainly due to a ity, speed, competitive pricing and reliability.71 lack of road flexibility. In Kazakhstan, the permissible dimensions for standard road transport are A pressing obstacle reported by all traders is 18.5 m (length), 2.6 m (width) and 4.0 m (height). the shortage of cargo containers for transport- This measurement includes the cargo and the truck, ing goods by trains and by trucks. This prob- and the maximum permissible weight is 38 tons. lem is mainly because Kazakhstan’s exports are Vehicles require a special permit when transporting bulkier than its imports, so that empty contain- oversized cargo and these vehicles are by definition ers are often left in exporting countries waiting longer, wider, or taller than the above specifications. for enough cargo to bring back.72 In some cases, Obtaining permits for oversized and mass cargo is time consuming, even though the Government has ments of Invisible Oversize and Over mass Cargoes” of reduced the waiting period for application review August 2011. 71 from 15 days to 5 days, and increased the validity of The Programme was adopted pursuant to the Govern- ment’s resolution 1006 of 2010. such permits from 3 to 6 months.70 72 For a detailed discussion of how the shortage of rail wagons impact the traders’ competitiveness, see the 70 In accordance with the Government Resolution “On business process analysis (Annex I). Adoption of Rules for Arranging and Carrying out Ship- Chapter Three — Trade Facilitation 59

this problem is also caused by the low stock of ●● The existence of natural monopolies; rail wagons in importing countries. This is par- ●● The existence of asymmetric information be- ticularly the case of traders exporting wheat to tween transport operators and regulators; Iran. These reported that grain wagons returned ●● The need for private investment in infra- from there after 40 days. With trucks, the lack structure facilities; of cargo containers is also associated with the ●● The need to assign risks between operators country’s low population density. Trucks often and government. travel long distances, and the probability of having products to send back from sparsely popu- This means that reform efforts should emphasize lated areas is low. effective regulation and regulatory institutions as opposed to eliminating regulation altogether. The needs assessment also revealed the need While this imperative constitute the premise of to improve the efficiency of rail links and termi- the government’s Programme for Development nals. Traders noted the lack of client-oriented of Transport Infrastructure of the Republic of Ka- services and the suboptimal quality of avail- zakhstan for 2010-2014, the different state agen- able services. Moreover, experts reported that cies seem to have conflicting preferences as to the cross-border trade with/through China is ham- appropriate legal framework for supporting the pered by the incompatibility between the Chi- Programme’s implementation. nese and Kazakh customs and railway information systems, which results significant delays These differences find their strongest expression that can reach up to 6-8 days. Still other factors in the negotiations over the draft law “On intro- are the differences in track gauge (and thus the ducing amendments and addenda to some legal need to change locomotives), traction power acts of the Republic of Kazakhstan on the issues supply and signalling systems and a general of transport”. The approval process saw the exclu- lack of inter-operability, as China uses inter- sion of proposed provisions (which were to be national gauge tracks while Kazakhstan uses added to the Budget Code) for the allocation of the Russian Federation’s standard. In addition, funds from the national budget for financing the several traders emphasized the necessity of development and procurement of traction roll- improving trans-loading facilities at the border ing stock (i.e. locomotives). The negotiations also crossing point of Dostyk. ended with a decision to maintain State control over railroad freight rates, as enshrined in the As Kazakhstan cannot develop a significantly “Law on Natural Monopolies and Regulated Mar- more diversified export mix in the immedi- kets” and implemented by the Natural Monopolies ate and medium terms, the shortage of cargo Agency.73 This means that freight managers will containers can be mitigated by increasing the continue to see their competitiveness eroded by railway system’s stock of cargo containers, and the cross subsidy of passenger services, which are improving the efficiency of the rail links and ter- often given priority in overall railway development minals. planning. The implication is that freight trains will continue to suffer serious disadvantages, because 3.4.2 Slow pace of the transport sector’s the rates they charge do not necessarily suffice for liberalization effort covering the infrastructure and maintenance costs associated with their operations. The nature of the transport sector, as a corner- stone for the support of socio-economic develop- In addition, the different state agencies are yet to ment, and the difficulties associated with achiev- agree on the proposed amendments for further ing economies of scale and scope means that any developing PPP arrangements. These changes attempt to improve the legal framework governing the transport sector should take into account, 73 The law is available (In Russian) at: http://online.zakon. among others: kz/Document/?doc_id=1009803&sublink=30018 60 Regulatory and procedural barriers to trade in Kazakhstan Needs Assessment involve the modification of a number of laws, in- tee a minimum level of income for the concession- cluding, among others, the law on Concessions, aire and allow for the participation of consortiums the Budget Code and tax Code.74 The proposed of several private sector entities in the PPPs. The amendments are intended to: government also needs to establish a proper risk assessment methodology for guiding the design Provide additional guidelines and to further clari- of PPP terms and arrangements and involve the fylegal terms private sector in the design and construction of in- Launch new measures for sharing commercial frastructure facilities, even when these are owned and managed by the public sector. In such cases, risks. For example, one of the proposals stipulates private sector can be used in: (i) putting the ini- that the government should guarantee the con- tial project together; (ii) assembling the necessary sumption of a percentage of the service delivered/ partners to complete the scheme; and (iii) procure- produced by the concessionaire, as this would mit- ment and operational management. igate the demand risk, facilitate project financing, and increase competition for the tender. Yet an- At the same time, the government would need other proposal states that the government should to consider abolishing State control over railroad set a maximum threshold for income, with the freight rates. This would require establishing a idea of accruing the excess revenues within a spe- method for guiding pricing policies. Development cial account to cover increased maintenance costs. experiences elsewhere suggest that such methods are not particularly difficult to establish, especially Ensure a level playing field for the private and pub- since freight railways do not involve externalities, lic sectors through clarification of terms and the as compared to, for example, sparse networks of clarification of procedures for conducting tenders. inter-urban passenger railroad links where exter- Allow for launching other PPP models. For exam- nality effects (i.e., rural access to medical and other ple, the Government could consider Build-Oper- social services) may be large. ate-Transfer (BOT) concession agreements, where- 3.4.3 Lack of proper legislation and equipment by the transfer of facilities occurs at the end of the for curbing cargo theft operational concession period. Several traders reported high incidents of cargo The above-mentioned shortfalls suggest the need theft at Kazakh railway stations. As explained for boosting the transport sector’s liberalization ef- in the annex, cargo security seals are often un- forts. As the level of local entrepreneurial skills and locked and then put back again by cargo thieves funding sources are sometimes limited, the pace after removing the goods. Traders added that re- of regulatory reform must be sequenced. Yet, the porting theft incidents is of limited help because government could undertake a number of imme- it is often not possible to link the theft to a par- diate measures, so that it could eventually limit its ticular railway, and noted that some insurance involvement to the provision of basic access and companies avoid insuring goods transported by utility services, with the private sector owning and railway. Cargo theft is also a common problem to providing transport service facilities. traders who transport their goods by road. Trad- In addition to reforming the legal framework along ers explained that their goods are often stolen the lines of the above-mentioned proposals to while in transit, particularly when transported via promote PPP, the government needs to establish Uzbekistan. In most cases, the goods are stolen generic and sector wide methodological manuals during inspection. for guiding PPPs; reduce the threshold for partici- Existing laws on cargo safety denote that the con- pation (which is currently at 20 per cent); guaran- signor (i.e., the party sending the goods) should 74 The proposed changes are available (in Russian) at: take the necessary measures to provide for the http://kzppp.kz/en/page/view?id=25. cargo’s safety, while the railway operators should Chapter Three — Trade Facilitation 61 guarantee the safety of cargoes during transporta- are particularly vulnerable to cargo theft.77 At the tion.75 The carrier shoulders the bulk of the respon- regional level, the government should consider sibility, and is expected to ensure safety of the entering into cooperation agreements with its im- cargo from the moment of reception till delivery mediate neighbours to tighten security measures to consignee. The accountability for loss, shortage, against cargo theft. damage (spoiling) of cargo, is passed to the consignee the moment the consignment is delivered Furthermore, insurance companies should consider to its intended destination.76 reasonable information sharing across cargo community and tailoring policies to reflect the cargo An immediate step to curb cargo theft would be theft problem. For example, companies may imple- to commit railway operators and carriers to mini- ment standard requirements to obtaining a policy mum security requirements by considering leg- or coverage, which commit insured trucking com- islation that would standardize or mandate secu- panies, yard owners or carriers to implementing rity systems. There is also a need to intensify the certain strategies or systems. In return, the com- presence of security forces at national railway sta- panies would factor the equipment and strategies tions at commercial crossing points. Yet another that have been implemented by the insured party measure would be to create a central reporting in question into premium ratings and deductibles. system, whereby traders, insurance companies, law enforcement agencies, carriers and transport For their part, traders should invest in modern operators would be asked to fill out standardized equipment. Security seals, commonly used to pre- incident reports on a regular basis (i.e., not only vent theft, are not effective since they can be easily cargo theft incidents). Such a centre could help unlocked. Companies should consider using lock- respond not only to specific incidents and for ing seals, which feature a combination of a lock possible recovery of stolen products, but also al- with seal features built-in, and carriers should use low for detecting and reporting to state agencies, modern systems (i.e. GPS systems) to track products transport operators and carriers areas/sectors that remotely. Table 3.13 provides a summary of the outstanding needs and proposed recommendations.

75 Articles 41 and 33 of Law No. 266 of Republic of Kazakhstan “About railway transportation” adopted on 77 An example of such systems is the one established by 8 December 2001. Cargonet (www.cargonet.com), which is an American 76 Article 76 of the Law of Republic of Kazakhstan No. 266 national cargo theft database and secure information “About railway transportation”, adopted on 8 Decem- sharing system dedicated to cargo theft prevention ber 2001. and recovery. 62 Regulatory and procedural barriers to trade in Kazakhstan Needs Assessment

Table 3.13 - Outstanding needs and recommendations for the overland transport infrastructure

Outstanding needs Recommendations General Speeding up the pace ●● Reform the legal framework to promote PPPs of the transport sector’s ●● Establish generic and sector wide methodological manuals for guiding PPPs. liberalization effort ●● Reduce the threshold for participation in PPPs. ●● Guarantee a minimum level of income for the concessionaire and allow for the participation of consortiums of several private sector entities in the PPPs. ●● Establish a proper risk assessment methodology for guiding the design of PPP terms and arrangements. ●● Involve the private sector in the design and construction of infrastructure facilities, even if the facilities in questions are expected to owned and operated by the public sector. Railway Improving the railway ●● Improve the range and quality of services at rail terminals capacity at the main border ●● Align Kazakh customs and railway information systems with international standards crossing points with China (see recommendations under section 3.3 for further details). ●● Align track gauge, traction power supply and signalling systems with international standards. ●● Undertake new investments in transloading facilities, particularly at the Dostyk and Korgas border crossing points ●● Invest in those stretches along the railway route China-Urumqi-Alashankou-Dostyk- Moscow-Brest where trains need to change their undercarriages due to different rail standards

Curbing cargo theft ●● Rehabilitate the existing stock of railway freight wagons using modern anti-theft technologies ●● Introduce modern systems for ensuring secure trade, such as security fences, trembler alarms, forensic markers and modern closed circuit television (CC TV) security cameras ●● Intensify security presence at major border crossing points. ●● Revise the existing laws to commit railway operators and carriers to minimum security requirements ●● Prompt insurance companies to ensure reasonable information sharing ●● Traders should be assisted to invest in modern equipment. The government may consider establishing special credit facilities for this purpose ●● Establish appropriate cooperation mechanisms for combating cargo theft with immediate neighbours Increasing the storage ●● Give priority to storage facilities in the cities of Karagandy, Shymkent, Aktobe, and capacity in cities that are Aktay located at critical rail nodes Improving the quality and ●● Promote investments in modern rolling stock by attracting local and foreign supply of rolling stock investment ●● Promote the establishment of credit schemes for local rolling stock owners, so as to enable them to undertake required investments. Road Improving the capacity of ●● Invest in bringing existing networks up to Class I and Class II road quality standards road networks ●● Build new roads, where needed, to improve in-country and border connectivity

Improving the quality and ●● Promote investments in modern truck fleets, including foreign investments. supply of truck fleets ●● Promote the establishment of credit schemes for local truck/trailer fleet owners, so as to enable them to undertake the required investments. ●● Consider increasing gross vehicle mass limits, as each extra ton on the vehicle means lower unit costs and this could provide an incentive for truck/trailer owners to invest in modernizing their fleets. Chapter Three — Trade Facilitation 63

3.5 Logistical services ern part of the Almaty region at the main border with China. The centre will feature a dry port facil- Kazakhstan has over 70 enterprises offering logis- ity to enable the interim storage of semi-finished tics services, including express and courier com- goods for manufacturing or merchandise for do- panies, customs brokers and freight forwarders, mestic and regional markets. The government is multimodal transporters, manufacturers and trad- also considering the establishment of a facility in ers. Express and courier companies are mainly rep- the vicinity of Shymkent city at the main border resentative offices of multinational corporations, with Uzbekistan, as there are considerable delays which oversee domestic distribution and have for vehicles crossing this border. warehouses and truck fleets. Locally licensed customs brokers, freight forwarders and multimodal The needs assessment suggests that the exist- transporters offer services that involve shepherd- ing logistical services leave much to be desired. ing cargo through customs clearance and send- The traders described arranging for the trans- ing it by rail or road to its final destination. Several port of goods as particularly difficult, and com- freight forwarders offer integrated solutions. As plained about the lack of adequate warehous- reported by the survey respondents, such services ing facilities, especially for perishable goods. include: preparing and processing documentary The traders also reported that they are often requirements, arranging for storage, arranging for hesitant to send cargo in containers, because insurance, customs clearance and logistical ser- they lack clarity on the technical and documen- vices. Kazakhstan also has a number of logistics tation requirements and due to the high costs centres and free-trade zones. The two most well- for shipment. known logistics centres are the High Tech Logistics The problems reported by traders cannot be un- Centre in Almaty and the DAMU-Almaty industrial derstood in isolation of the overall conditions logistics centre. The first centre is used for the de- of transport services, particularly those related consolidation of imported goods from the Russian to the multi- modal transport industry. This in- Federation and Europe, after which the goods are dustry is still in its infancy. Only a few freight redistributed within the country or to other parts forwarders are able to offer integrated (global) of Central Asia. The second offers integrated logis- multi-modal services. These are mainly foreign tics services such as storage, handling, transport, companies (to be more specific, the branches of customs clearance, and repacking. Alongside the international companies), since the bulk of local logistics centers are a number of exhibition com- forwarders are only familiar with transporting plexes for production, warehousing, transporta- cargoes using conventional rail and truckload tion and the final sale of products. These com- methods. Moreover, there is no specific legisla- plexes house facilities for showcasing products for tion or framework for multi-modal transport. As wholesalers and, to a lesser degree, retail custom- a result, the rules and regulations for each of the ers. The goods exhibited usually originate from individual modes used must be applied, so that China and the Russian Federation, and then are liability regimes are different. The occupation trucked to the complexes, which have warehouses of Multi-modal Transport Operator is not recog- and trucking depots for loading and unloading nized, so that undertaking multi-modal trans- operations. port under one contract is not possible. Separate The government intends to establish 10 logisti- contracts need to be concluded for each specific cal centres by 2015. These centres will be spread mode, and traders often have to enter into con- throughout the country, including in Special Eco- tracts with forwarders in each country along the nomic Zones (SEZs), airports and transport sta- transport corridor In addition to inflating trans- tions. Most notable among the logistics centres port cost, this results in unclear responsibilities that will be established in SEZs is the centre locat- and liabilities and opens the door for misusing ed in the “Khorgos - Eastern Gate” SEZ, in the east- different legal interpretations. 64 Regulatory and procedural barriers to trade in Kazakhstan Needs Assessment

The results of the survey also suggest that trad- to be made to ensure quality and operational ers could benefit from advanced training in the efficiency. Indeed, successful experiences show area of logistics management. Such training that companies should develop different logis- should focus on: enabling companies to devel- tics strategies for specific product lines, specific op logistics strategies, identifying the impact of countries or specific customers. Table 3.14 pro- imminent changes in the supply chain and the vides a summary of the outstanding needs and organizational or functional changes that need proposed recommendations.

Table 3.14 - Outstanding needs and recommendations for logistical services

Outstanding needs Recommendations The limited capacity of logistics service providers Establish advanced training programmes in logistics, especially in integrated logistics and multi-modal transport, supply chain management, innovative technological applications

The traders’ limited experience in logistics Establish advanced training programmes in the area of logistics management. management, with a special emphasis on the development of logistics strategies. The lack of integrated multi-modal transport Develop the legal framework for allowing multi-modal transport services to be carried out under one contract Establish the required insurance and credit schemes for supporting multi-modal transport Develop the capacity of local freight forwarders Further develop Kazakhstan’s Freight Forwarders Association with targeted training so that it could assume a lead role in developing the freight forwarding industry Establish advanced training programmes for local freight forwarders, with a special focus on multi-modal transport and International Federation of Freight Forwarders Associations (FIATA) related areas. The limited use of containers While developing the multi-modal transport industry would go a long way in addressing this problem, the government should also consider: Developing container terminals Investigating options for lowering the cost of container shipping, such as incentives for the return of outgoing containers in order to have a larger stock of available containers