KAZAKHSTAN - Review of Grain Storage and Transportation Infrastructure Issues CONTENTS Abbreviations & Acronyms ............................................................................................................ 5 Executive summary ......................................................................................................................... 3 1. Grain Storage Challenges and Opportunities .......................................................................... 6 1.1. Regulatory Framework ..................................................................................................... 6 1.2. Storage Services ............................................................................................................. 10 1.3. Storage Capacity ............................................................................................................ 11 1.4. Drying Capacity ............................................................................................................. 15 1.5. Storage Management ...................................................................................................... 16 2. Transportation Infrastructure Challenges and Opportunities ................................................ 20 2.1. Railway Transportation .................................................................................................. 20 2.2. Road Transportation ....................................................................................................... 24 3. Conclusions and Policy Recommendations ........................................................................... 24 3.1. Grain Storage .................................................................................................................. 25 3.2. Transportation Infrastructure .......................................................................................... 25 Appendix 1. Examples of Elevator Services Fees ........................................................................ 27 Appendix 2. Comparison of Elevator Services Costs ................................................................... 28 2 ABBREVIATIONS & ACRONYMS AMIS Agricultural Market Information System Avg. Average B2B Business to business BCE The Budapest Commodity Exchange BM&F BOVESPA Bolsa de Valores, Mercadorias & Futuros de Sao Paolo BMR The Romanian Commodities Exchange BRICS Brazil, Russian Federation, India, China, South Africa BSE Budapest Stock Exchange CA Central Asia CAP Common Agricultural Policy CBOT Chicago Board of Trade CCC Committee of Customs Control CCP Central Counterparty CEO Chief Executive Officer CIS Commonwealth of Independent States CMB Turkish Capital Markets Board CME Chicago Mercantile Exchange CSRC China Securities Regulatory Commission Customs Committee of the Ministry of National Economy of the Republic of Customs Committee Kazakhstan DAP Delivered At Point, according to Incoterms DCE Dalian Commodity Exchange EAEU Eurasian Economic Union EBRD European Bank of Reconstruction and Development ETS Eurasian Trading System EU European Union EXW ExWorks, according to Incoterms FAO Food and Agriculture Organization of the United Nations FCC Food Contract Corporation, JSC FOB Free On Board, according to Incoterms G20 Group of 20 GDP Gross Domestic Product GUK Grain Union of Kazakhstan Ha Hectare IGT Internetowa Gielda Towarowa IKAR Institute for Agricultural Markets IMF International Monetary Fund IOSCO International Organization of Securities Commissions JSC Joint Stock Company KAM KazAgroMarketing, JSC 3 Kg Kilogram KICE Kazakhstan International Commodity Exchange KTZh Kazakhstan Temir Zholy, JSC KZT Kazakhstani tenge LIFFE London International Financial Futures and Options Exchange MATIF Marché á Terme International de France MCI Monthly Calculation Index MCX Multi-Commodity Exchange of India MMT Million Metric Tonnes MoA Ministry of Agriculture of the Republic of Kazakhstan MSP Minimum Support Prices MT Metric Tonnes MY Marketing Year OECD Organization for Economic Cooperation and Development OTC Over-The-Couter SAFEX South Africa Agricultural Futures Exchange SDGs Sustainable Development Goals SHFE Shanghai Futures Exchange Statistics Committee of the Ministry of National Economy of the Republic of Statistics Committee Kazakhstan ST RK Technical standard of the Republic of Kazakhstan TMO Turkish Grain Board TRQ Tariff Rate Quota TurkDex The Turkish Derivatives Exchange UN United Nations US United States USD United States dollar USSR Union of Soviet Socialist Republics VAT Value-Added Tax WGT The Warsaw Commodity Exchange 4 Executive summary Adequate grain storage and transportation infrastructure are critical components for efficient grain markets and may provide important contributions to the Sustainable Development Goals (SDGs). In particular, elevators’ grain storage and management functions provide essential linkages between farmers, traders, as well as domestic and international grain markets. However, depending on their market power, elevator operators may also dictate pricing and storage conditions to farmers and traders. Such dominant market power is particularly problematic in areas where the concentration of elevators is low. In addition, these grain storage constraints may be further augmented by weak transportation infrastructure. Figure 1 below shows the logistical linkages between grain storage and transportation infrastructure, in particular railways and roads. Figure1: Kazakh Grain Logistics Chain This Review examines key challenges and opportunities with respect to Kazakhstan’s existing grain storage and transportation infrastructure. Specifically, it assesses existing regulatory frameworks, policies and procedures, cost structures, and capacity gaps for both grain market components. It concludes by proposing a series of policy reforms and investments that would not only improve the efficiency of domestic grain logistics and markets, but also provide important contributions to the SDGs. In particular, the proposed grain storage and transportation infrastructure improvements would further strengthen domestic and regional food security (SDG 2), economic growth (SDG 8), infrastructure development (SDG 9), responsible value chains (SDG 12), and partnerships (SDG 17). 5 1. GRAIN STORAGE CHALLENGES AND OPPORTUNITIES 1.1. Regulatory Framework Grain Storage Enterprises Regulation The Law on Grain imposed a number of critical limitations on the activities of grain storage enterprises. According to Chapter 5 of the Law on Grain, all grain elevators are recognized as “public service warehouses”.1 Although the rights and obligations of public service warehouses are regulated by the Civil Code, the Law on Grain also imposes several limitations on the activities of grain elevators: • PROVISION OF SERVICES. ELEVATORS CANNOT PERFORM ANY ACTIVITIES OTHER THAN STORAGE AND ISSUANCE OF GRAIN RECEIPTS. FOUR TYPES OF ACTIVITIES ARE EXEMPT: PRODUCTION AND SALES OF CERTAIN GRAIN PROCESSING PRODUCTS, FUEL STORAGE SERVICES (E.G. RENTAL OF FUEL AND LUBRICANTS STORAGE TANKS), AND PROVISION OF SPACE FOR TELECOMMUNICATION EQUIPMENT. • PRICING OF SERVICES. PRICING REGULATION IS GOVERNED BY THE LAW ON COMPETITION (N112-IV DATED 25TH DECEMBER 2008) AND MAY COME INTO FORCE WHEN AN ELEVATOR IS CONSIDERED TO HOLD A HIGH DOMESTIC MARKET SHARE (I.E. A MARKET SHARE OF MORE THAN 35 PERCENT FOR A GIVEN AREA).2 AS OF MAY 2015, OF THE ESTIMATED 345 ELEVATORS IN THE STATE REGISTER OF MARKET ENTITIES, 91 WERE CONSIDERED TO HAVE A DOMINANT OR MONOPOLISTIC POSITION. DOMINANT ELEVATORS CANNOT DISCRIMINATE AMONGST CONSUMERS OR IMPOSE ANY CHARGES OTHER THAN STORAGE FEES. HOWEVER, IT SHOULD BE NOTED THESE OBLIGATIONS ARE LIKELY TO CHANGE WHEN THE ENTREPRENEURS CODE BECOMES EFFECTIVE (1ST JANUARY, 2016) GIVEN THAT ELEVATORS WILL NO LONGER BE ON THE LIST OF REGULATED 1 IN THIS REPORT THE TERM “ELEVATORS” REFERS TO COMPANIES THAT RECEIVE, STORE, AND UNLOAD GRAIN REGARDLESS OF THE PRESENCE OF BINS OR SILOS. 2 THE COMMITTEE FOR REGULATION OF NATURAL MONOPOLIES AND COMPETITION PROTECTION OF THE MINISTRY OF NATIONAL ECONOMY ANALYSES THE MARKETS AND REGISTERS ALL ELEVATORS WITH A MARKET SHARE MORE THAN 35 PERCENT FOR A GIVEN AREA. THE MARKET SHARE IS CALCULATED USING A SPECIAL METHODOLOGY THAT TAKES INTO ACCOUNT THE OWNERSHIP STRUCTURE OF THE ELEVATORS. ELEVATORS INCLUDED IN THE STATE REGISTER HAVE TO REPORT THEIR FINANCIALS BOTH ANNUALLY AND QUARTERLY, INCLUDING INFORMATION ON CHANGES IN OWNERSHIP, SALES, AND PRICES. WHEN THE COMMITTEE FINDS SIGNS OF VIOLATIONS OF THE LAW (E.G. CARTEL AGREEMENT, ABUSE OF A DOMINANT OR MONOPOLY POSITION ETC.), IT MAY ISSUE A WARNING, INSIST ON CHANGES IN CONTRACTS, OR WITHDRAW ILLEGITIMATE INCOME. FAILURE TO FOLLOW THE COMMITTEE’S INSTRUCTIONS RESULTS IN A FINE. 6 MARKETS AND VIOLATIONS OF ANTIMONOPOLY REGULATION WOULD BE INVESTIGATED ON AN AD HOC BASIS. • USE OF ASSETS. ELEVATORS CANNOT TRANSFER THEIR ASSETS IN A MANNER THAT SIGNIFICANTLY WORSENS THEIR ABILITY TO STORE GRAIN AND MEET THEIR OBLIGATIONS. FINANCIALS OF AN ELEVATOR SHOULD BE AUDITED ANNUALLY AND OBLAST AUTHORITIES HAVE TO ANNUALLY INSPECT ELEVATOR’S PREPAREDNESS FOR NEW HARVEST RECEPTION. IN ADDITION, ELEVATORS CANNOT ISSUE GUARANTEES OR PROVIDE THEIR PROPERTY AS COLLATERAL FOR THE OBLIGATIONS OF THIRD PARTIES. • STORAGE MANAGEMENT. GRAIN STORAGE RULES ARE REGULATED BY GOVERNMENT REGULATION N1569 DATED 21ST DECEMBER 2011. STANDARD CONTRACT TEMPLATES BETWEEN ELEVATORS AND GRAIN OWNERS SHOULD COMPLY WITH GOVERNMENT REGULATION N1359 DATED 24TH OCTOBER