This chapter outlines the corporate governance framework of Kazakh SOEs – notably, how policies and practices align with the recommendations of the OECD Guidelines of Corporate Governance of State-Owned Enterprises. Specifically, it assesses national practices relative to the seven areas covered by the Guidelines, covering: (i) rationales for state ownership; (ii) the state’s role as an owner; (iii) SOEs in the marketplace; (iv) the equitable treatment of shareholders and other investors; (v) stakeholder relations and responsible business conduct; (vi) transparency and disclosure; and (vii) the responsibilities of the boards of directors of SOEs.
OECD Review of the Corporate Governance of State-Owned Enterprises in Kazakhstan
Corporate Governance
2. Assessment of Kazakhstan relative to the SOE Guidelines
Abstract
2.1. Rationales for state ownership
The state exercises the ownership of SOEs in the interest of the general public. It should carefully evaluate and disclose the objectives that justify state ownership and subject these to a recurrent review.
2.1.1. Articulating the rationales for state ownership
A. The ultimate purpose of state ownership of enterprises should be to maximise value for society, through an efficient allocation of resources.
Currently, Kazakhstan does not possess one single high-level ownership policy. Kazakh enterprises that belong to the quasi-state sector are regulated by a variety of documents which reflect in part the legal provisions outlining how state ownership is practiced and the conditions it is practiced under. Therefore, parts of these legal documents represent important aspects of what an ownership policy would ideally cover and can be said to constitute an “implicit ownership policy”. As mentioned earlier, the legal framework surrounding state ownership is constituted from, inter alia:
the law of the Republic of Kazakhstan “On State Property”
the Entrepreneurial Code
the law No. 415-II “On Joint Stock Companies”
the law No. 220-I “On Limited Liability Companies”
Budget Code of the Republic of Kazakhstan
Civil Code of the Republic of Kazakhstan
the law of the Republic of Kazakhstan “On the National Bank of the Republic of Kazakhstan”.
the law of the Republic of Kazakhstan “On the Sovereign Wealth Fund”.
Outlining rationales for state ownership allows the state to clearly position itself as an owner, and provide SOEs, the market, and the public with predictability and understanding of its objectives. Presently, the law on State Property, which is the core document governing state property, does not provide a clear rationale for state ownership of enterprises. However, recent efforts to reform the quasi-state sector have been motivated in part by a privatisation agenda and hence clarifying Kazakhstan’s rationales for state ownership has thus figured prominently. At this point in time, however, decisions on privatisation are taken on an ad hoc basis.
According to the law on State Property, a property of the state, including SOEs, may be subject to privatisation by auction or tender, bidding at a stock exchange, a two-stage procedure or direct sale. In the case of strategic assets owned by the state, the decision to privatise is subject to a special approval by the state authority. However, there are exceptions to which type of state property may be a subject to privatisation. The list of SOEs and other organisations part of the quasi-state sector which are not subject to alienation shall be approved by the government in co-ordination with the President. While the law on State Property does not include said list, it is stipulated that exempt quasi-state entities tend to be strategic in nature. There are also further caveats to alienating state property that is partially or wholly-owned by the National Bank of Kazakhstan.
Besides strategic and fiscal policy reasons for owning state property, the entrepreneurial Code positions further why the state may participate in entrepreneurial activities in the economy. Article 192 stipulates that such will be case when the following circumstances apply:
national security, the defence capability of the state or society interests' protection
use and maintenance of strategic facilities under state ownership
legal or natural monopoly by the state
the absence or low level of competition in the relevant product market
the state can participate in entrepreneurial activities through SOEs that have already been established.
Hence, while rationales of state ownership can be gleaned from various legal documents, their dispersion across different instruments of policy renders their application to the quasi-state sector vague. Furthermore, several exemptions to either the scope of the law itself, or the relevant legal provision that details the applicability of a given rationale, may result in inconsistencies and shift the ultimate decision-making power to the Presidential administration.
The lack of a high-level and holistic document which describes state ownership arrangements on the state level makes it difficult to establish an all-encompassing rationale for state ownership. Efforts to formulate a rationale for the existence of the quasi-state sector should ideally remain applicable to the entire pool of commercially driven SOEs in Kazakhstan, rather than to specific sectors or types of SOEs.
2.1.2. Ownership policy
B. The government should develop an ownership policy. The policy should inter alia define the overall rationales for state ownership, the state’s role in the governance of SOEs, how the state will implement its ownership policy, and the respective roles and responsibilities of those government offices involved in its implementation.
Various factors, such as the legal form of a SOE and its position in the ownership hierarchy as part of the portfolio of the sovereign wealth fund Samruk-Kazyna, influence how ownership is exercised in practice. The multitude of entities directly and indirectly involved in the ownership of SOEs poses a challenge to summarising expectations and defining an overall rationale for owning any given SOE.
The law on State Property determines the legal regime of state property and thus how state ownership is practiced. An enterprise owned by the state, any of its entities, or an enterprise owned by a regional administration classifies as state property and will therefore fall under the scope of the law. It defines the legal basis for the management of state property, and the legal grounds for acquiring and terminating rights to state property. A key specification of the document is to detail the roles across the various state entities involved in the management of SOEs. Other important areas cover:
The definition of state property, which is divided into republican property owned by the state treasury – directly or via funds of the republican budget, the National Fund of Kazakhstan (Samruk-Kazyna) and other legal entities – and communal property.
Procedures for exercising property rights, which includes outlining the competence of the central authorised body for state planning (MNE), authorised bodies for state property (MF), as well as the authorised body of the relevant industry (line ministry).
Procedures for nationalisation and privatisation of state property. Nationalisation may be carried out in exceptional circumstances. According to the law, nationalisation is an exceptional case (exceptional form) of alienation of property owned by individuals and non-state legal entities, and is carried out only after the complete exhaustion of all other possible forms of alienation of property provided for by the civil Code of Kazakhstan. Nationalised property is to be included in the register of state property, for which three entries of nationalised LLCs are found.
As noted in chapter 1 of this report, the prospective changes of the law on State Property are envisioning the standardisation of the legal form of SOEs with state participation as JSC or LLC. Newly classified SOEs are further set to be monitored by the MF, which will also hold responsibility over tracking KPIs and data collection of SOEs’ economic activity.
Standardising the legal forms of SOEs and formalising board nomination processes would align the law on State Property better with internationally accepted good practices. However, in practice there is a lack of procedural guidance on how to implement new amendments to the law in a timely manner. Prior to the current round of amendments, the law had been updated several times, most notably in January 2022, March 2022, and December 2022. Recent amendments further deepen structural challenges brought by multiple levels of ownership across the SWF, other holding companies and line ministries. To what extent the revised law on State Property can be instrumentalised for more structural reform of the quasi-state sector is unclear.
Overall, the size of the quasi-state sector, which encompasses a variety of commercial and non-commercial entities, poses a difficulty in organising the imposition of legal amendments to the law on State Property. Classifying all existing entities under a holistic system according to their economic activity requires a dedicated workstream and roll-out. Moreover, organising SOEs in line with legal provisions may further pose difficulties connected to establishing new procedures that are currently left unaddressed. There is a lack of a holistic plan of the roll out for the legal changes made.
2.1.3. Ownership policy accountability, disclosure and review
C. The ownership policy should be subject to appropriate procedures of political accountability and disclosed to the general public. The government should review at regular intervals its ownership policy.
As previously mentioned, the main policy document laying out state ownership, which is the law on State Property, is revised frequently. Although this could perhaps be said to provide regular opportunities to review the implicit ownership policy, it is hardly in itself a good practice. An excessive number of legal changes may hamper the ability of the public sector to keep abreast with regulatory expectations. It creates unreliable conditions and increases legal risks for enterprises. Introducing unexpected obligations might also lead to passivity and lower engagement in the reform process.
The ownership entity should have clearly defined relationships with relevant public bodies, including the state supreme audit institutions. Yet, in Kazakhstan, the ownership of SOEs is dispersed across multiple state entities involved in the management, oversight, and monitoring of SOEs. Each of these entities, which are the MNE, MF and respective line ministries, hold clearly identifiable functions which are laid out in the law on State Property.
Yet, some of the duties and responsibilities delegated to a given state entity have interdependencies with each other. For example, while the MF monitors and tracks key performance indicators regarding corporate governance of the quasi-state sector, the responsibility to inform and create new legal expectations lies within the MNE. Furthermore, industry-relevant line ministries might be involved in liaison and data collection and monitoring of a given SOE. This creates a complex communication pipeline that flows not only between ministries and SOEs, but also across ministries.
Furthermore, the exact role of national holdings and national management holdings, which often create an additional layer between the SOE and the state ownership entity, is left undefined in the law on State Property. This creates ambiguity, especially since national (management) holdings are responsible for delegating state owner objectives to the SOEs in their portfolio.
2.1.4. Defining SOE Objectives
D. The state should define the rationales for owning individual SOEs and subject these to recurrent review. Any public policy objectives that individual SOEs, or groups of SOEs, are required to achieve should be clearly mandated by the relevant authorities and disclosed.
State enterprises, including state-owned national holding companies, JSCs and LLCs of which a controlling stake in the authorised capital belongs to the state, are expected to implement five-year action plans, which define the main areas of activity and indicators of financial and economic activities.
These action plans are constructed based on 10-year development plans. Development plans are aligned with strategic policy documents issued by the Republic of Kazakhstan, and thus represent the objectives delegated by the state owner. Development plans are approved by the government of Kazakhstan, and their implementation is monitored based on the achievement of pre-set KPIs.
Action and development plans are specific to the SOE, SWF and SOHC that is expected to implement them. They outline key strategic and financial indicators that the enterprise is expected to meet within a given time frame. The action plan for Samruk-Kazyna additionally mentions indicators that apply to the fund group at large, such as the net asset value growth of its portfolio of SOEs, labour productivity, and the gross inflow of foreign direct investment. It also includes an indicator which tracks the share of electricity produced from renewable sources.
However, broad and high-level state-set objectives and motivations of state ownership are not articulated clearly. Furthermore, among the indicators that SOEs are monitored against, it is unclear which ones align with state-owner delegated objectives, and which ones are purely commercial in nature. In the Concept of State Property Management and Privatisation,1 it is mentioned that a list of objectives of the state for the management of various types of state property should be determined by relevant legal acts. Yet, other legal documents surrounding state ownership lack a pronounced rationale for state ownership, and it remains unclear which legal acts may be deemed as relevant to include such information.
2.1.5. Summary
Unless Kazakhstan defines a holistic and high-level ownership policy which clarifies the rationales for state ownership, the applicable scope of other legal documents which cover certain aspects of ownership arrangements will remain constrained to specific sample of SOEs. In the larger oversight of the quasi-state sector and the legal provisions that surround it, there thus are differences between how certain SOEs may be held accountable towards the state owner, as well as how the state itself is accountable as an owner.
Ownership arrangements in Kazakhstan are carried by a plethora of laws which are frequently revised and amended. The expectations and objectives communicated by the ownership entity to the SOE are often implicit and KPIs that stem from state-set five- and 10-year development and action plans are often not directly accessible to the public. All this, in combination with the breadth of the legal framework surrounding state ownership, further amplifies the role of the President as the ultimate decision-making power where unclear ownership arrangements are called to be addressed and resolved. The current system relies on a high degree of discretionary power vested in the President to create and change rationales for state involvement in the corporate economy.
When directly comparing Kazakhstan's practices with respect to the recommended outcomes detailed in the SOE Guidelines, Kazakhstan appears to deviate in certain areas. Most notably, in the SOE Guidelines, it is recommended to clearly state the objectives that underpin state ownership and to disclose the overall rationale for ownership ideally in the context of an ownership policy. Such rationales should underscore how state ownership provides value to society. While the state details rationales for ownership in various legal documents, such justifications fail to cover the SOE sector as a whole, and often only apply to certain sub-sections of enterprises. Kazakhstan misses an ownership policy that comprehensively covers the entire quasi-state sector, and further work to scope and outline said sector to ensure all SOEs are considered in any legal provision that it is subject to.
2.2. The state’s role as an owner
The state should act as an informed and active owner, ensuring that the governance of SOEs is carried out in a transparent and accountable manner, with a high degree of professionalism and effectiveness.
2.2.1. Simplification of operational practices and legal form
A. Governments should simplify and standardise the legal forms under which SOEs operate. Their operational practices should follow commonly accepted corporate norms.
As noted in chapter 1.3, the state, directly and via state-owned holding companies, currently holds 700 enterprises at the central level of government. The majority of these SOEs (46%) operate as LLCs, followed by JSC (32%), with differing corporate governance practices, which were noted throughout the paper (LLCs often being bound to less stringent rules). Each company type is governed by its own law which apply equally to JSCs and LLCs in the private sector. A third type of SOEs are the so-called state enterprises which have a separate legal form mandated by the State Property law.
Recent efforts have been made to align certain corporate governance practices, including the establishment of supervisory boards (with independent members) and committees, as well as disclosure requirements. Nevertheless, corporate governance standards and practices in LLCs and state enterprises, particularly related to board practices and internal controls, are typically weaker compared to JSCs, often lacking effective enforcement.
The planned reforms noted in chapter 1.6 - aimed at aligning the laws for state-owned enterprises - do not automatically equate to adherence to the same corporate governance norms as comparable privately-owned entities. Distinctions still exist in areas such as public procurement practices, bankruptcy or insolvency proceedings, access to financing and state guarantees, criteria for BODs, and the nomination and appointment practices of governing bodies. These will be clarified in the upcoming chapter.
2.2.2. Political intervention and operational autonomy
B. The government should allow SOEs full operational autonomy to achieve their defined objectives and refrain from intervening in SOE management. The government as a shareholder should avoid redefining SOE objectives in a non-transparent manner.
In Kazakhstan, the legal and regulatory framework for SOEs notes minor provisions related to governance and potential political interference. On the one hand, the model Corporate Governance Code for instance outlines the powers vested in the governing bodies of SOEs, aiming to limit direct involvement in day-to-day matters by the ownership entity. On the other hand, the state and ownership entities (including the holding company Samruk-Kazyna) retains authority to approve vital corporate documents, such as strategic plans and financial decisions, often resulting in competing objectives for SOEs.
In practice therefore the state – as a sole or dominant shareholder in most SOEs - may control a number of corporate decisions and thus limit SOEs’ operational autonomy, including with regards to hiring decisions. In addition, SOEs’ boards and executive management seem to be subject to a high degree of political intervention, as revealed by frequent dismissals of CEOs following announcements of the President. The Prime Minister is also sitting on the boards of Baiterek and Samruk-Kazyna.
Unlike most other countries, in Kazakhstan the President communicates clear guidance to state-owned enterprises, that are subsequently coined into implementable objectives by the relevant national authorities. Government ownership entities thus translate the President's strategic guidance for SOEs into action plans, with each point subsequently overseen by a responsible executor. The boards of the concerned SOEs are usually not consulted in the process, which is not in line with good practices. In addition, some state-owned enterprises are also assigned a special operator status. Here the government has the ongoing opportunity to intervene in their day-to-day operations, if this is considered as “strategic and needed for society”.
C. The state should let SOE boards exercise their responsibilities and should respect their independence.
As mentioned above, Kazakh SOEs have historically been subject to political interference, which has also been the case through political appointees on boards and in executive positions. Board members are generally required to act “in the interest of the company” and to apply a duty of care in their activities as given in the model Corporate Governance Code for SOEs. Despite this, there is currently no clear definition of the respective personal and state liability when civil servants (not to mention, state officials) are on SOE boards. There are also generally no guidelines nor Codes of ethics for members of the ownership entity and other state representatives serving as SOE board member in Kazakhstan.
In JSC and LLCs, boards are required to have a number of independent members appointed according to clearly set criteria of professional qualifications and independence. However, the widespread practice notes differently. Apart from boards not including the number of independent directors they should, they do not tend to be truly independent in addition. Even if there are independent directors, the OECD noted that they are still recommended to vote with the majority, are held responsible for SOE operations, and generally receive little to no renumeration.
The situation in SOEs overseen by holding companies is more mixed. Starting in 2013, Samruk-Kazyna undertook significant efforts to professionalise boards and improve their performance management framework, in the aim of enhancing their autonomy and independence. They also removed all politicians from the boards. At the same time, most of the BODs of subsidiaries remain composed of 7 members, in most cases with the majority stemming from Samruk-Kazyna.
As recognised by this report SK subsidiaries have undergone substantial corporate governance reforms, and notable progress has been achieved to mitigate the risk of undue political interference. However, there have been cases where BOD apparently faced pressures, often in the form of direct or indirect political influence on decisions reserved for SOEs' governing bodies, leading to resignations of board members. The mission team was told of several recent cases where, in particular, foreign independent directors chose to leave the boards of SOEs.
2.2.3. Centralisation of the ownership function
D. The exercise of ownership rights should be clearly identified within the state administration. The exercise of ownership rights should be centralised in a single ownership entity, or, if this is not possible, carried out by a co-ordinating body. This “ownership entity” should have the capacity and competencies to effectively carry out its duties.
Kazakhstan has not established a centralised ownership entity to exercise state ownership. As mentioned in earlier sections, ownership in Kazakhstan is de-facto practiced by various line ministries. Decision-making authority as attributed by the law on State Property is vested in the MNE, which acts as a state planning organ. It exercises its powers as foreseen by the law, acts of the President and the government of Kazakhstan. Next to the MNE, the MF takes responsibility of the monitoring and oversight of operational results of enterprises part of the quasi-governmental sector. Furthermore, the NBK and other ministries, such as the MIID, as well as national (management) holdings, further hold stake in practicing ownership on behalf of the state next to the planning and monitoring functions implemented by the MNE and MF. The following sections specifically shine light on the two most important state ownership bodies – the MNE and MF, as well as the de-facto state owner of the largest share of state assets: Samruk-Kazyna.
Additionally, national management holding companies and national holding companies also further add fragmentation and dispersion to the existing model. There is no single entity responsible and accountable for execution of the state ownership function (or for co-ordination). This also leads to the lack of an aggregate report and an overview on state ownership.
Legislation, policymaking and planning in the hands of the Ministry of National Economy
The main policy and planning body part of the ownership function of the state is the MNE. According to the law on State Property, the MNE shall be responsible for drafting and forming policies in the sphere of state property management and develop and approve normative legal acts that relate to the management of state property. Together with other authorised bodies for state property management, the MNE develops and approves strategic development plans and the model Corporate Governance Code for JSCs, which also is applicable to Baiterek, but not to Samruk-Kazyna.
However, SOE governance in Kazakhstan lacks a broadly applicable, holistic ownership policy that clarifies the degree of involvement of the MNE insofar as the ownership rationales and objective of state ownership of certain companies is concerned. The overall magnitude and powers of the MNE are thus not comprehensively recognised and are likely to be understated in the overall implied ownership function of the state. Despite its far-reaching activities in SOE oversight, as inter alia, the state body organising the selection of members of SOE supervisory boards or early termination of the term of a given board member, its role as policymaker adds an important additional feature highlighting the MNE’s authority. As the ministry overseeing the state budget, as well as being intricately involved in the policymaking process, the MNE is in a key position to conduct strategic fiscal planning.
Overall, the degree with which the MNE practices its law- and policy making powers appears to intersect with duties to supervise the management of the SOEs owned by it. Further to its role as fiscal planner of the state budget, its ability to influence strategic management of SOEs appears to create an imbalance between the powers of the MNE and other line ministries involved in the ownership of SOEs. This is additionally magnified by its role to act as the main contractor for public-private partnerships undergone in Kazakhstan, whereby it is part of the process in selecting suitable companies to carry out state-funded projects.
Monitoring of performance exercised by the Ministry of Finance
The MF complements the MNE’s role in practicing oversight of the quasi-state sector by monitoring operational performance and financial results of SOEs. On top of this, it is in charge of executing the process of privatisation or alienation of SOEs. As part of its monitoring function for the sake of maintaining an overview of strategically important assets, the MF also assesses the effectiveness of management of SOEs. As part of the Ministry of Finance and in accordance with Law No. 490/2003, the State Property and Privatisation Committee monitors SOEs in sectors of the economy of strategic importance.
As laid out in the law On State Monitoring of Property in Sectors of Economy Having Strategic Significance, No. 490/2003 one of the main mandates of the MF’s monitoring activities is to ensure economic security. This is defined as condition to protect national economics of Kazakhstan from internal and external conditions, processes and factors threatening its stable development and economic independence. The law identifies the extraction and processing of fuel and energy mineral resources (coal, oil, gas, uranium and metallic ores), machine industry, space activity, agro-industrial complex, water industry, chemical industry, transport and communication, production and electric energy distribution, as well as branches producing products of military-industrial purpose as economic areas of strategic importance.
In addition to monitoring the quasi-state sector’s financial performance and KPI achievement, the MF also upkeeps the register for state property. The register offers a centralised repository of information of SOEs, and includes financial results for some of them. The state register, as was observed by the OECD team, is not complete and have registered on its accounts only part of the information on properties of holding companies and communal properties. Thus, the MF is tasked with the monitoring of SOEs that are of strategic importance among others, and to organise this information to provide advice on privatisation, liquidation, or alienation of state property. It lacks enforcement powers that allow for the maintenance of economic security, but rather appears to influence decision-making by other line ministries ownership, as well as the government.
Samruk-Kazyna as de-facto owner of state-owned shares of SOEs
While the law on State Property lays out the responsibilities and authorities of the MNE, MF, NBK, and other line ministries involved in state ownership, its applicability does not cover Samruk-Kazyna and the portfolio companies owned by it. Samruk-Kazyna is regulated by its own law No. 550-IV/2012 and sets the strategic plans for itself and its portfolio companies independently from the oversight of MNE.
According to information received by the Kazakh authorities, as well as to computations made by the OECD Secretariat, Samruk-Kazyna manages 61% of the state-owned sector in terms of asset size. Thus, it effectively plays an oversized role in the state-ownership function and its share of total state ownership is comparable to the central ownership agencies (or holding companies) by some OECD countries claiming to practice “largely centralised ownership models”.
The special legal status of Samruk-Kazyna can to some extent be said to conflict with the competing objective vesting powers in a small number of responsible line ministries. While recent reform efforts made to the law on State Property increase the duties of responsibilities for the MNE and MF in a more centralised ownership model, Samruk-Kazyna's largely autonomous position in the state ownership hierarchy is a source of inconsistencies. As a result, Kazakhstan’s overall ownership model is effectively a hybrid that involves elements of both centralised and decentralised structures.
2.2.4. Accountability of the ownership entity
E. The ownership entity should be held accountable to the relevant representative bodies and have clearly defined relationships with relevant public bodies, including the state supreme audit institutions.
In the absence of a centralised ownership entity practicing oversight of the state-owned sector, the main responsibility of managing and overseeing SOEs is vested in line ministries, with the Presidential administration retaining the highest decision-making authority. Despite the lack of such a centralised body in the Kazakh ownership system, the law on State Property includes a rather detailed description of the respective responsibilities of the MNE and the MF. This ensures a certain degree of transparency and accountability within the existent state ownership model and improves oversight of allocated duties across the different ministries and could be argued to provide elements of an ownership co-ordination model.
The supreme audit chamber of Kazakhstan is the supreme institution of public audit that implements external public audit and financial control and is directly accountable and subordinated to the President of Kazakhstan. It is the highest body of state audit and is primarily responsible for selecting independent external auditors and for managing the state budget, though may conduct ad-hoc state audits of state-owned enterprises at the request of the Presidential administration. In 2021, the national gas company QazaqGaz was instructed to improve the transparency surrounding its procurement system, as well as to conduct changes in its internal employee policy. A full-scale audit was ordered to shine light on the company's activities.
2.2.5. The state’s exercise of ownership rights
F. The state should act as an informed and active owner and should exercise its ownership rights according to the legal structure of each enterprise. Its prime responsibilities include:
F.1. Being represented at the general shareholders meetings and effectively exercising voting rights.
The law on State Property differentiates between state controlled JSCs or limited LLPs, and JSCs and LLPs which do not have a dominating stake of state participation. In the case of dominant state control, the controlling block of stock or controlling stakes of participating in charter capital is more than 50% of the voting shares of JSCs or more than 50% of stakes of the LLP. According to Article 166, the authorised state body that is exercising rights of ownership and use of state block of shares, shall represent the interests of the state as the shareholder on issues referred to the competence of the general meeting of shareholders in accordance with the relevant legislation of Kazakhstan.
As elaborated in the prior chapter, the exact ownership interests are pooled from a variety of legal sources spanning areas of national security, the maintenance of oversight of national monopolies and markets with low level of competition, as well as strategic facilities. Given the low number of companies in the quasi-state sector that are not majority-owned, the state's representation of interests as an owner plays a prominent part in annual shareholder meetings. This particularly applies to large and significant companies owned by the state, which typically are more than 90% owned by the state. Conducive to Kazakhstan's dispersed ownership model, there may be different types of the state involved in maintaining state shares of a given company. This may create one-sided shareholder meetings dominated by majority owners of shares.
F.2. [The state’s prime responsibilities include:] Establishing well-structured, merit-based and transparent board nomination processes in fully- or majority-owned SOEs, actively participating in the nomination of all SOEs’ boards and contributing to board diversity.
Further to voting rights outlined above, state ownership bodies may also appoint representatives in SOE BOD of JSCs and LLPs in which the only shareholder is the state. As stated in the law on State Property, state ownership bodies may also suggest a candidate who, upon approval, is elected to the BOD in SOEs that are not wholly-owned.
A similar representative board member nomination system applies to portfolio companies managed under Samruk-Kazyna and Baiterek, which also position representatives on the boards of its portfolio SOEs. While each member of the BOD holds equal voting rights, there are special legal provisions on the liability of board members regarding voting decisions of strategic importance. If the board makes a decision that results in an economic loss, those board members that voted against the implemented strategic decision or who did not participate in the voting, are not held liable by law.
In a planned amendment to the law on State Property, the overall board nomination process is sought to be further refined. The planned amendment details that the MNE must approve a procedure for open recruitment of board members that have been nominated by state authorities as representative members. One aspect that is designed to make the procedure more transparent is the publication of a list of candidates, specifically of independent directors, that is maintained by the MNE. Such changes, while yet to be implemented, are welcomed to improve the effectiveness and overall balance of perspectives of boardroom discussions.
F.3. [The state’s prime responsibilities include:] Setting and monitoring the implementation of broad mandates and objectives for SOEs, including financial targets, capital structure objectives and risk tolerance levels.
SOEs in Kazakhstan organise their 5- and 10-year strategy based on respective action and development plans. As mentioned in prior chapters of the report, development plans are aligned with strategic policy documents issued by the Republic of Kazakhstan, and thus represent the objectives delegated by the state owner. Development plans are approved by the government of Kazakhstan, and their implementation is monitored based on the achievement of pre-set KPIs.
Action and development plans are specific to the SOE, and SOHC that is expected to implement them. They outline key strategic and financial indicators that the enterprise is expected to meet within a given time frame. The action plan of Samruk-Kazyna mentions indicators that apply to the fund group at large and is largely self-decided. It includes a variety of KPIs that can be grouped to be commercial and non-commercial in nature.
The MF is tasked with the monitoring of financial and non-financial performance of SOEs overseen by state authorities. Overall, the top-down setting of large-scale targets for SOEs appears to leave little adaptability for SOE boards to overcome and foresee long-term strategic risks as they dawn. Although the monitoring function of the MF allows to effectively maintain an overview of SOEs and their achievements, there appears little autonomy and flexibility for boards in engaging in defining strategies to attain the detailed 5- and 10- year strategic roadmaps.
F.4. [The state’s prime responsibilities include:] Setting up reporting systems that allow the ownership entity to regularly monitor, audit and assess SOE performance, and oversee and monitor their compliance with applicable corporate governance standards.
While there is no single centralised ownership entity in Kazakhstan and SOE monitoring, auditing, and assessment tasks are split across various responsible ministries and state audit institutions, the MF takes the lead in carrying out and overseeing most of them and publishing their results.
Reporting expectations on SOEs are found in various laws. The law on State Monitoring of Property in Sectors of the Economy of Strategic Importance No. 490/2003 requires state monitoring, including the observation, collection and analysis of information, for a small pool of SOEs. Currently, there are 133 enterprises which are considered to be of strategic importance and thus fall into the scope of the law. The results of the monitoring of strategic SOEs are to be shared on the electronic database of the state monitoring of state property, which is maintained by the MF.
State-controlled JSCs and LLPs, including national management holdings, national holdings, national companies of which the state is a shareholder, state bodies, individuals and legal entities that shall be parties to trust agreements, apart from Samruk-Kazyna, which has its own monitoring and assessment systems, are subject to the Resolution On approval of the Rules of conducting monitoring of management efficiency of state property No. 1546/ 2012. The main tasks of monitoring include:
a comprehensive analysis of the effectiveness of management of monitoring facilities in production, technical, technological, financial, economic, legal, environmental and other parameters and a holistic assessment of the state property in terms of the predictability of its development in accordance with the interests of the state;
analysis of fulfilment of obligations and conditions of concession agreements or public-private partnership agreements, trust management, property hiring (lease) of state property;
identification of problems and development of recommendations for further development of state enterprises and legal entities with the participation of the state (hereinafter referred to as the monitoring facility);
expert assessment of the prospects for the development of equipment, technology of monitoring facilities and their impact on the state of the regions;
creation and maintenance of an electronic database for monitoring objects;
creation of favourable conditions for ensuring economic growth of the state, maximum reduction of the degree of vulnerability of the economy from possible negative factors, promotion of investment inflow into the national economy.
When monitoring facilities, the above law foresees the monitoring data to be collected by independent experts who conduct on-site surveys. This data shall be drawn up in a report and primary materials that shall be stored in the form of an electronic report and then uploaded to an online register.
Once the monitoring procedure is drawn up, the respective state body or ministry tasked with the management of a given SOE must take monitoring results and recommendations issued by the MF into account for its own state property management results. It must then decide whether, in certain cases, to impose a disciplinary sanction on the head of the SOE in accordance with the law.
While there are assessment and monitoring systems in place, the dispersion of responsibilities cannot be undertaken at a central level, given the dispersed nature of ownership. Furthermore, Samruk-Kazyna and portfolio companies, again, are exempt from this procedure and instead follow their own protocol. As a result of this, there is a large stake of SOEs for which the state does not have a monitoring system in place.
F.5. [The state’s prime responsibilities include:] Developing a disclosure policy for SOEs that identifies what information should be publicly disclosed, the appropriate channels for disclosure, and mechanisms for ensuring quality of information.
The state bodies involved in practicing ownership of SOEs do not detail precise SOE disclosure requirements that apply consistently across the quasi-state sector. Instead, the disclosure and reporting expectations are found in various laws that apply to commercial companies in general. The main legal document which outlines disclosure requirements is the law On Accounting and Financial Reporting No. 234/2007, which establishes the system of accounting and financial reporting in Kazakhstan for domestic companies. It details a set of minimum requirements to be included in the financial reporting of companies, including those (partially) owned by the state.
Furthermore, all domestic listed companies, financial institutions, large unlisted companies, as well as “organisations of public interest” shall prepare their financial statements and annual reports in accordance with a single set of international standards. These standards are the IFRS (international financial reporting standards). Whether SOEs comply with these rules is analysed in detail in later sections.
However, Kazakh authorities have shared plans to implement aggregate reporting on entities owned by the state. Aggregate reports can serve as a useful tool to conduct comparative analysis by the state owner. For this reason, publishing aggregate reports may serve as a useful exercise in identifying needs or gaps in the current reporting obligations for SOEs, and to adequately fill them in the future.
F.6. [The state’s prime responsibilities include:] When appropriate and permitted by the legal system and the state’s level of ownership, maintaining continuous dialogue with external auditors and specific state control organs.
State ownership bodies are not put in a position to maintain dialogue with the supreme audit chamber, which acts as Kazakhstan's supreme audit institution (SAI), responsible for conducting state audits. As detailed in the law on Governmental Audit and Financial Control No. 393/ 2025, regulation regarding state audits and financial control are carried out by the President, the government, and the supreme audit chamber itself. The applicable principle of independence of the chamber’s work, which is the prevention of interference in governmental audit and financial control activities, may prevent this.
The extent to which the external auditor and state owner bodies exchange is unknown and not accounted for in the law surrounding external audits of enterprises belonging to the quasi-state sector.
F.7. [The state’s prime responsibilities include:] Establishing a clear remuneration policy for SOE boards that fosters the long- and medium-term interest of the enterprise and can attract and motivate qualified professionals.
As described in the JSC law and the model Corporate Governance Code, it is the exclusive competence of the remuneration committee of the SOE boards to set the remuneration level for the CEO and executive body members. As also mentioned in the relevant board sections, in practice, remuneration is usually established between the CEO and the state ownership entities. General remuneration policies foresee that the size of the remuneration depends on the complexity of SOE operations, personal competence and the candidate's competitiveness in the market and the SOE’s economic situation. Yet, whether this is consistent with long- and medium-term interests of the enterprise, and thus based on performance outcomes, is unclear.
The ownership entities can impose salary caps depending on the country's economic situation, as was the case during the COVID-19 pandemic. Remuneration does not appear to follow a standardised procedure delivering predictable and consistent remuneration outcomes across the quasi-state sector.
Samruk-Kazyna imposes holding-internal remuneration rules that apply to its portfolio companies in line with the Corporate HR Management Standard of the Samruk-Kazyna Group. Representatives of Samruk-Kazyna on the BOD of its state-owned enterprises that belong to its portfolio are subjected to a separate resolution of Samruk-Kazyna's management board, and appear to be decided in the context of opaque internal discussions and negotiations.
Samruk-Kazyna's large portfolio companies implement transparent procedures for non-representative board members, in line with the resolution and standard. Its largest portfolio asset, KazMunayGas, determines the remuneration policy alongside the performance of members of the board. Remuneration paid to members of the management board also include performance-related part to encourage such board members towards the strategic and priority goals outlined in measurable KPI scorecards.
2.2.6. Summary
The various legal forms and categories of SOEs in Kazakhstan result in the absence of standardised practices concerning corporate governance and law applicability. Kazakhstan has not established a centralised ownership entity to exercise state ownership (hybrid of twin-track and decentralised ownership), and is de-facto practiced by various line ministries. Holding companies constitute a de-facto (partial) centralisation of the ownership rights. As a result, the state in Kazakhstan cannot act as an informed and active owner.
Kazakh SOEs have also been historically subject to political interference, which has also been the case through political appointees on boards and in executive positions. Though increased transparency on the nomination and selection procedure would be welcomed to bring practices in Kazakhstan in closer alignment with international standards, the realisation of these planned amendments is still ongoing and presently an aim rather than a kickstarted reform effort. Another difficulty is that the state's role as an owner is dispersed across a multitude of different state bodies, as well as national (management) holding companies which tend to be out of reach of legal requirements that apply to other parts of the ownership function. These inconsistencies counter efforts to centralise ownership in the MNE and MF, while undermining the importance of Samruk-Kazyna as a de-facto owner of the majority of SOEs. There is currently no entity which assesses the performance of Samruk-Kazyna and other SOHC, rendering oversight difficult.
2.3. State-owned enterprises in the marketplace
Consistent with the rationale for state ownership, the legal and regulatory framework for SOEs should ensure a level playing field when SOEs undertake economic activities.
2.3.1. Separation of functions
A. There should be a clear separation between the state’s ownership function and other state functions that may influence the conditions for state-owned enterprises, particularly with regard to market regulation.
While existent laws provide some clarity regarding the exercise of ownership by those state institutions that have a portfolio of SOEs, they provide little guidance as to how ownership is to be exercised on a whole-of-government basis. The main priority of the existent legal framework on state property management is to practice and enable effective state entrepreneurship. Utilising property, production, sale of goods, and provision of services provided by SOEs, Kazakhstan seeks to obtain income to finance the capability of the state to protect the interests of society. Comparatively little attention is given to securing the separation of the state's role as an enterprise owner from its roles as regulator and policy maker, which must be characterised as problematic given the complex and dispersed ownership structures that prevail.
Thus, the responsibility for industrial/sectorial policies is intricate to discern from the state’s ownership function, with line ministries simultaneously performing ownership and regulatory functions. Additionally, line ministries participate in strategic decision making such as SOEs’ development plans, investment projects, and senior management appointment.
Ministries and their subsidiary bodies play a vital role in overseeing and regulating various industries in Kazakhstan, including those relevant to SOEs. They enforce industry-specific laws and rules, issue licenses and permits, monitor compliance, and promote fair competition within their respective sectors (alongside the competition agency).
Table 2.1 shows the overseeing and regulatory bodies of the selected 20 SOEs. A number of SOEs note the same overseeing and regulatory government body, rendering it difficult to separate the two functions. OECD interviews have also hinted at the fact that the functions are carried out within the same departments, for instance the Committee of State Property and Privatisation within the MF carries out all functions related to SOEs. When analysing the 700 SOEs in Kazakhstan, the OECD team noted that some ministries oversee up to 30 SOEs each, with the SOEs operating exactly in the sector which is regulated by these particular ministries.
As for Samruk-Kazyna, it aims to differentiate its powers as a shareholder of the SOE and the powers related to the performance of government functions. Within 9 SOEs directly owned and overseen by holding companies, there is the aim for a clear separation between the ownership and regulative function. Different government bodies and structures are responsible for regulating the activities of these SOEs and executing ownership rights, which reduces the risk of creating a conflict of interest. KEGOC – the electric power company – is for instance regulated by the Ministry of Energy, alongside the Committee for Regulating National Monopolies. The Committee approves their tariffs, and sits within the MNE.
Table 2.1. Information of selected 20 SOEs on owner, overseeing and regulatory bodies
Source: Information as of March 2023 provided by the government of Kazakhstan to the OECD team.
2.3.2. Stakeholder rights
B. Stakeholders and other interested parties, including creditors and competitors, should have access to efficient redress through unbiased legal or arbitration processes when they consider that their rights have been violated.
According to the Kazakh authorities, SOE stakeholders, including creditors and competitors, have access to the same means of redress, including legal or arbitration processes, as the stakeholders of private companies. Commercial disputes between SOEs are to be settled through the court system or, if established via contract between the parties, arbitration. The law on state property management notes that all subjects are equal before the law.
Overall, the rights of creditors, consumers and business partners are regulated by applicable laws and regulations, including the Civil Code, Bankruptcy law, Consumer Protection law, Competition law, Commercial Code, Foreign Investment law, Contract law, Intellectual Property law, and Labor law. Contentious procedures carried out before competent courts, as well as arbitral procedures, are regulated by the dispute resolution law.
The legal framework for contract disputes is set out in Article 27 of the civil Code noting the process of dispute settlements either in Kazakhstan’s courts or at international arbitration. Kazakhstan is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The Astana City Court and the Supreme Court both consider investment dispute cases, and the government has established a Specialised Judicial Board to resolve cases on investment contracts between large investors and government bodies. In some cases, the International Arbitration Centre and Court of the AIFC can also be made use of. In addition, the legality of a wide range of ADR mechanisms for disputes between two private parties has been codified in the Entrepreneurial Code and the law on Mediation (OECD, 2023[1]).
Kazakhstan put in place the law on Arbitration,2 which governs dispute settlement for both domestic and international businesses. For now, investors still note shortcomings in the legal regulation of arbitration procedures, in terms of the lacking impartiality and transparency. As a result, there have been cases of arbitration processes being instigated where there was a serious risk of conflict of interest due to undisclosed connections between the arbitration institution and one of the parties. These risks being particularly troublesome where one of the parties is a public body, whether an agency or an SOE.
2.3.3. Identifying the costs of public policy objectives
C. Where SOEs combine economic activities and public policy objectives, high standards of transparency and disclosure regarding their cost and revenue structures must be maintained, allowing for an attribution to main activity areas.
So far, Kazakhstan has not undertaken a comprehensive review of the SOEs that simultaneously undertake economic and public policy objectives, which would be needed to comprehend how the costs of public policy objectives are identified and disclosed across the entire SOE sector.
According to the State Property law, some SOEs operate within key sectors of the economy, which require SOEs to implement public policies. These include, for example, public service obligations placed on the national railway company or electricity provider. The list of national managing holdings, national holdings, and national companies that pursue public policy objectives is approved by the Kazakh government. The oil and gas sector is a good example which showcases the social burden on selected SOEs in Kazakhstan: for instance, KazMunayGas has a lost profit due the sale of artificially cheap oil to the domestic market in 2021.
According to some estimates, about three-quarters of all electricity generated in Kazakhstan is distributed at lower prices within financial and industrial groups. The remaining quarter goes to the regional retail markets, that is, the population, SMEs and budgetary organisations. Based on the information available, there appears to be limited transparency regarding the costs of these public service obligations.
Public policy activities (or so-called state objectives) are usually prioritised over the commercial interests of the SOE. Instructions on social obligations like one-off expenses or execution of social investment projects, and other additional obligations related to the core operations of the SOE, may come directly from the government body or its representatives in the SOEs’ boards in the form of action plans. Due to the absence of a separate accounting system in place that can separate state social expenses from commercial ones, it makes it difficult to attribute the exact costs and revenue structures behind economic activities and public policy objectives carried out by SOEs.
Recent sources note that the government is planning on acquiring shares of KazMunayGas through its National Fund at a non-market value. This can help to finance budget, social and infrastructure projects and add additional financing sources for state budget. Despite the fact that this change in the budget rules is mentioned in the republican budget, it violates fiscal policy. This type of transfer may motivate transfers from the National Fund to the republican budget, rendering it difficult to separate expenditure. Especially as changes to the Public Financial Management Concept in December 2022, now allow the National Fund to directly (and not through the budget, as it was earlier) lend to the Samruk-Kazyna.
An additional point relates to the low financial performance by some SOEs, which could hint at the existence of “informal” expectations from the state that are not purely commercial, for example maintaining employment levels or contributing to local communities (for instance in the case of KazMunayGas). In such a large and geographically fragmented country such as Kazakhstan, these type of objectives are often on the President’s agenda.
Samruk-Kazyna tends to receive requirements from the government to construct social projects. For this, SK has introduced a special type of dividend payment to the sole shareholder, allowing for expenses spent on social objects to appear on financial statements.
D. Costs related to public policy objectives should be funded by the state and disclosed.
The competition agency finds that there currently is a lack of a unified system for monitoring public policy obligations (or ‘state tasks’ as called in Kazakhstan). Government entities themselves have therefore raised the need to create a monitoring system which prevents hiding the double counting of subsidies.
The renewed Budget Code is planning on including so-called state tasks, disclosing information on national projects and thereby determining funding limits for specific areas of support.
Listed SOEs already disclose expenditures incurred in their financial statements, including costs associated with non-core activity, such as the construction of social assets and other activities. KazMunayGas disclosed in its 2022 annual report, that in accordance with the Government decree on the construction of a medical centre in Zhana-ozen town, the KazMunayGas croup accrued liabilities and paid KZT 12 597 mn (USD 26 322), classifying the expense as “distributions to Samruk-Kazyna”. However, we observe that expenses are classified differently across reports, rendering it difficult to assess the entirety of public policy costs – let alone attribute main activity areas.
Potential shareholders can access information regarding the implementation of public policies and the roles of national companies and operators in the stock emission prospectus while existing shareholders can receive information on public policy execution in the SOE annual reports and audited consolidated financial statements. However, it is essential to clarify that SOEs do not have separate accounting or management systems that allow for clear and transparent classification of all public policy execution results from the regular commercial operations. For instance, the costs for maintaining certain employment levels in selected regions of KazMunayGas are not reflected in its financial statements.
From 2021 to 2022, the amount of funds allocated for the implementation of state tasks/ special operators nearly doubled, with a total number of approved applications of 157 and 119, respectively. The anti-monopoly agency has been observing a lack of state control in these cases, with little monitoring of these cases. Also, today there is no specific criteria provided within the legislation to classify services as a state task: this can be used by state bodies for the non-competitive purchase of goods (works, services) from subordinate organisations.
2.3.4. General application of laws and regulations
E. As a guiding principle, SOEs undertaking economic activities should not be exempt from the application of general laws, tax codes and regulations. Laws and regulations should not unduly favour SOEs over their market competitors. SOEs’ legal form should allow creditors to press their claims and to initiate insolvency procedures.
Kazakh SOEs incorporated as LLC or JSC are not formally exempt from the application of general laws, tax Codes and regulations. Furthermore, in practice, both central and municipal SOEs have been the subject of several proceedings initiated by the Agency for the Protection and Development of Competition for the potential infringement of the Entrepreneurship Code and Yellow Pages rules. This indicates that SOEs are not systematically “protected” from competition law by virtue of their state ownership.
At the same time, Kazakhstan has legally created privileged conditions for SOEs, including granting special status and mandates, access to infrastructure, opportunities and financing. There are also many cases when national holding companies were excluded from selected legislation requirements. For instance, the security market law exempts SOHC from prudential requirements. Samruk-Kazyna is noted multiple times as an exception in the JSC law, and is additionally bound by its own law. It also has pre-emptive right to buy strategic facilities and bankrupt assets and the exclusion from some government procurement procedures.
Fully corporatised SOEs are subject to the same general laws and regulations applicable to private companies, but some SOEs established as state enterprises may benefit from some exemptions. Importantly, SOEs are not exempt from income tax.
Certain sectors are reportedly subject to particular attention by the competition agency, including the mining, electricity and telecom sectors, where SOEs have in the past been identified and sanctioned for engaging in anti-competitive behaviours and abuses of dominance – notably leading to the issuance in sanctions against firms. The agency has even identified a further concentration of market power across these sectors. Examples for distorting competition have been setting monopolistically high prices for needed inputs (transport/ oil), conflicts of interest and related party transactions, or cartel agreements. Another interesting development is the rise of anti-competitive actions of state bodies themselves.
In order to counter these trends, the agency is co-operating with the government and putting in place an action plan, focusing more on prevention in the following sectors:
1. Oil: The Action Plan provides for a number of measures to ensure equal access to oil, by adapting the cost of fuel and lubricants to the 2025 EAEU standard.
2. Coal: Work is planned to eliminate "unproductive" intermediaries.
3. Civil aviation: The roadmap aims at eliminating key barriers to the development of competition in the field of civil aviation (excessive state participation, limited access to infrastructure) and including, the sale of the state block of shares of QazaqAir and AirAstana, and extending the "open skies" regime until 2028, as well as securing non-discriminatory access for jet fuel retailers to airport refuelling complexes.
4. Construction: Until the end of 2023, the agency aims to curb the uncompetitive allocation of land plots through special economic zones and social and entrepreneurial corporations, and to toughen the responsibility of akimats in ensuring a transparent land sale/ market. The aim is to digitalise the process of purchasing property, and to enforce more scrutiny of the activities of a single operator (Kazakhstan Housing Company) when selecting engineering companies.
5. Healthcare: The plans include reducing excessive price regulation for medicine in the commercial segment and to reduce the level of state participation in the health sector. It also provides for a reduction in the share of non-competitive purchases for the storage and transportation of medicines and medical devices (Competition Agency, 2023[2]).
6. Telecommunications: The roadmap aims to demonopolise Kazakhtelecom and to ensure equal access to infrastructure between telecom operators, by introducing mandatory joint use of RFS and infrastructure (sharing).
2.3.5. Market consistent financing conditions
F. SOEs’ economic activities should face market consistent conditions regarding access to debt and equity finance.
In particular:
F.1. SOEs’ relations with all financial institutions, as well as non-financial SOEs, should be based on purely commercial grounds.
There have been several cases of interference by the state in market relations in the banking system and in the financial market more widely. After the financial crisis in 2008 in particular, the state began to actively offer state funding with low interest rates. This trend remains until today, with SOEs being among those corporate entities having facilitated access to loans. In 2021, the National Bank, the ARRFR and the government signed the Agreement on the coordination of macroeconomic policy measures for 2021-2023, in order to counter this trend – however, the plan has not come to fruit yet (Halyk Research, 2023[3]). In addition to offering cheaper loans, the state has also been increasing its ownership of commercial banks. The state recently became the owner of Bereke Bank and is increasing its ownership in the stock exchange, securities depository, and payment systems (Halyk Research, 2023[3]).
The Kazakh government's decision to increase state participation in commercial banks, particularly through the acquisition and subsequent activities of Bereke Bank, is apparently driven by the reported recognition of the bank's systemic importance, as well as the strategic intent to prepare it for a seamless transition to private ownership through effective restoration and rebranding measures.
Direct loans from the state to SOEs are not uncommon in Kazakhstan, and in addition SOEs can receive financial assistance from the government. This support may take the form of cash injections or other financial instruments. Kazakhstan’s government has extended budget loans to SOEs at close-to-zero rates and preferential treatment of certain SOEs when issuing government guarantees for SOE loans. These special treatments have also been outlined in the Entrepreneurship Code.
SOEs generally have three options for obtaining funding, not all of which can be said to offer access market consistent conditions regarding access to debt and equity finance. The main sources of finance for Kazakhs SOEs are:
equity capital through capital injections by its state-owner, including the form of government bonds, and fixed assets revaluation reserves
bond issuances
borrowing primarily through state-owned financial institutions (similar to Baiterek).
Moreover, for a number of SOEs raising capital in local and international financial markets proves to be difficult, since many find themselves at the early stages of establishing internationally-accepted corporate governance practices and standards of reporting and disclosure. Financially sound SOEs like KazMunayGas attract a significant portion of external debt from international bond markets. Majority of smaller SOE lending occurs within Kazakhstan.
This leaves many SOEs depending on state lending, which in many cases is provided on concessional terms. Concessional state lending has apparently contributed to the creation of a number of state monopolies in certain sectors of the economy financial market. Today, market lending has been almost completely replaced by the state in the markets: 1) mortgages; 2) leasing; and 3) agriculture (Halyk Research, 2023[3]).
F.2. [SOEs’ economic activities should face market consistent conditions regarding access to debt and equity finance. In particular:] SOEs’ economic activities should not benefit from any indirect financial support that confers an advantage over private competitors, such as preferential financing, tax arrears or preferential trade credits from other SOEs. SOEs’ economic activities should not receive inputs (such as energy, water or land) at prices or conditions more favourable than those available to private competitors.
The state is a major provider of finance for a number of sectors either as a purchaser of their services or through subsidies and direct transfers. As of 2020, the state budget directed 32% of its expenditures to the quasi-state sector. In some sectors (social, construction, mass media in particular), the state acts as the main purchaser of their services. “This type of intra-budgetary circulation of service purchasing may distort competition” (Competition Agency, 2023[2]). For instance in 2020, 96% of Zerde National Infocommunication Holding JSC’s revenues were received through the provision of IT services to various ministries.
The Kazakh government provides support to SOEs in various forms, including financial assistance, equity capital injections, or state property grants. SOEs gain privileged conditions compared to the private sector; they regularly receive support from the national budget, whether injections to equity (USD 1.25 bn 2020), subsidies (USD 1.25 bn in 2020), contracts awarded without competition, or market privileges; and have access to subsidised credit and direct links to government decision-makers. The holding companies also benefit from this situation: Samruk-Kazyna received USD 14 bn to finance its operations between 2008 to 2016.
The subsidiaries of Kazakhstan’s holding companies have particularly experienced preferential treatment. For example, the “Damu” entrepreneurship fund's primary role is to function as a lending institution for Kazakh SMEs. Similarly, it is among the main objectives of KazAgroFinance to issue preferential leasing programs to modernise Kazakhstan's agricultural complex. Many of the companies managed under Baiterek's portfolio act as financing vehicles for the local community and have a strong social component in their mission statements. It is not their sole goal to attain revenues, but rather to help Kazakhstan achieve its national development plans. As a natural consequence, parts of the portfolio of both Baiterek and Samruk-Kazyna continue to underperform, while other firms are pulling their weight. The agency for competition further conducted an analysis of Baiterek’s preferential measures, detecting:
better lending rates for larger infrastructure projects
priority treatment and accelerated consideration of applications when applying for support measures
setting monopolistically high prices (Competition Agency, 2023[2]).
The Baiterek group is set up with the purpose of providing preferential finance to preferred economic activities in consistence with the national development plans. However, considering the number of preferential treatments subsidiaries receive, this is being found to distort the competitive landscape in Kazakhstan. The competition agency finds that the favoritism and the creation of unequal conditions for doing business by the state causes significant damage to entrepreneurship and the investment climate (Competition Agency, 2023[2]).
In 2022, a total of penalties in the amount of KZT 2.1 bl were imposed following detected violations of the competition law, of which KZT 1.9 bl or 90.5% were recovered (in 2017 - 3.2 billion tenge). Most penalties result from cartel formations or the abuse of monopoly positions.
F.3. [SOEs’ economic activities should face market consistent conditions regarding access to debt and equity finance. In particular:] SOEs’ economic activities should be required to earn rates of return that are, taking into account their operational conditions, consistent with those obtained by competing private enterprises.
Among the main providers of equity and financing for the SOEs, the largest national 'funds' (Samruk-Kazyna, Baiterek, and former KazAgro) show decreasing returns on equity and productivity over time, despite receiving capital injections from the government.
2.3.6. Public procurement procedures
G. When SOEs engage in public procurement, whether as bidder or procurer, the procedures involved should be competitive, non-discriminatory and safeguarded by appropriate standards of transparency.
There have been numerous legal reforms of the public procurement system in Kazakhstan, which has created difficulties for public procurers adapting to the new laws. An excessive use of direct procurement from one single supplier, a high number of failed bids, as well as a lack of integration of the market conditions depict the current procurement system. The national e-procurement system has been expanded, making it technically possible for nearly all procedures to be conducted electronically now.
While integrity measures exist, Kazakhstan has not yet developed a procurement-specific strategy. It has introduced a complaints management system, but could enhance the direct involvement of relevant external stakeholders. Public procurement in Kazakhstan remains administrative rather than a strategic function. Many issues which are prevalent in the public procurement system of Kazakhstan also apply to SOEs, including the extensive use of single source procurement and the low level of competition in procurement procedures. Previously, there were important differences in the legal and regulatory frameworks of SOEs and the government procurement sector. The most recent reform eliminated some discrepancies, but potential for further alignment remains (OECD, 2019[4]).
The primary legislation governing public procurement in Kazakhstan is the law on public procurement 530-V/ 2008, which applies to all public procurement entities, including SOEs, as both bidders and procurers. The government has further committed to improving procedures, also mentioned in the President’s most recent state of the Nation address, raising the need for electronic procedures. This is important as the quasi-state sector remains a key player in the public procurement system, estimated at about 13% of GDP, slightly higher than the OECD average (12.6% in 2019).
Despite the legal provisions and political commitment, challenges related to transparency, fairness, and competition may still arise in practice. Certain practices – such as the separate public procurement system of SK - render it difficult to create an entirely transparent procurement system.
The state is a major provider of finance for a number of sectors either as a purchaser of their services or through subsidies and direct transfers. As of 2020, the state budget directed 32% of its expenditures to the quasi-state sector. In some sectors (social, construction, mass media in particular), the state acts as the main purchaser of their services. This type of intra-budgetary "circulation" of service purchasing may distort competition. For instance, in 2020, 96% of Zerde National Infocommunication Holding JSC’s revenues were received through the provision of IT services to various ministries. The competition agency thus launched 133 investigations in 2022, with regard to public procurement and granting projects to related parties (Competition Agency, 2023[2]).
The state task or special operator status further justifies the provision of certain services aimed at ensuring socio-economic stability and (or) socio-cultural development of the state. The presence of this mechanism of public procurement simplifies the implementation of particularly urgent, important and complex projects (for example, seismic monitoring, ensuring financing of a guaranteed volume of free medical care, monitoring of territories affected by rocket and space activities) by SOEs. The status as special operator provides certain entities with exclusive rights, which allows the opportunity to purchase goods from one single entity. For example, in 2022, more than a third of all government purchases stemmed from a single entity (about USD 5 bn) (Competition Agency, 2023[2]).
2.3.7. Summary
Under the current state ownership arrangements in Kazakhstan, there is no particular separation between the government’s ownership and regulatory functions. Line ministries undertake both regulatory and monitoring functions, as well as sectoral regulatory functions. Additionally, in terms of access to efficient redress through unbiased legal or arbitration processes, investors remain concerned about the reliability of domestic courts to adjudicate on disputes between private parties and the state or SOEs. Judicial corruption and integrity may dissuade foreign investors from entering Kazakhstan, and may discourage shareholders from pursuing dispute resolution through formal avenues.
Kazakhstan’s SOEs are currently accounted for in a fragmented manner and there is no ongoing monitoring of the cost and revenue structures behind public policy objectives. On top of the difficulty of accounting, there is a lack of planning in distributing funds to specific areas which are considered as national projects. SOEs currently do not separate commercial and non-commercial activities and accounts, and the state does not develop adequate and transparent compensation for public service obligations.
Kazakh SOEs incorporated as LLC or JSC are not formally exempt from the application of general laws, tax Codes and regulations. At the same time, Kazakhstan has legally created privileged conditions for SOEs, including granting special status and mandates, access to infrastructure, opportunities and financing – which has proven to distort competition in the country. The number of SMEs and their contribution to GDP in Kazakhstan is markedly lower than in OECD countries.3
2.4. Equitable treatment of shareholders and other investors
Where SOEs are listed or otherwise include non-state investors among their owners, the state and the enterprises should recognise the rights of all shareholders and ensure shareholders’ equitable treatment and equal access to corporate information.
2.4.1. Ensuring equitable treatment of shareholders
According to the MF, out of 700 SOEs, 174 enterprises have other shareholders apart from the state and holding companies. In 139 other companies the state and holding companies have holdings equal to or lower than 50%, i.e., non-controlling shares. This section covers SOEs in which the state or holding companies own controlling or majority shares. Minority shareholders of non-listed SOEs are dispersed and unorganised, rendering it difficult to monitor and assess the quality of interaction between minority shareholders and the SOE management. The minority shareholders of the six SOEs listed in the stock exchange usually individually co-ordinate and/ or via the Qazaq Association of Minority Shareholders.4
The state should strive toward full implementation of the OECD Principles of Corporate Governance when it is not the sole owner of SOEs, and of all relevant sections when it is the sole owner of SOEs. Concerning shareholder protection this includes:
A.1. The state and SOEs should ensure that all shareholders are treated equitably.
In an SOE where all voting shares are owned by one single shareholder, there is no requirement for general shareholder meetings. If other shareholders exist, the rules of convening and holding a general meeting, which are provided under the charter and JSC law, come into play.
Provisions regarding the equitable treatment of shareholders outlined in the JSC and LLC laws and applicable to corporatised SOEs with minority shareholders in the form of joint stock companies and limited liability companies. The state enterprises do not have shareholders but 100% state founders and thus minority shareholding is not applicable for this type of legal entities. In the non–listed 168 SOEs with minority/majority (private) shareholders, information regarding the shareholders’ composition can be found in the audited financial statements placed on the financial statements’ depository. The remaining six SOEs are listed on the Kazakhstan and foreign stock exchanges with generally low free floats in the range of 3% to 25% of shares.
The JSC law and SOE charter, broadly equivalent with applicable rules in most OECD countries, give the shareholders (as a whole) the rights to:
participate in SOE management (via voting in general meetings, and by using all other rights that are reflected in the JSC law and in the SOE charter);
the ability to access information on the SOE with written inquiries;
request the confirmation that he/she is the owner/nominal owner of the stock;
nominate candidates to the BOD;
challenge SOE executive body decisions in court;
receive a portion of SOE property upon liquidation;
participate in preferential share purchases or changes in shares;
propose agenda items for the general meeting of shareholders and obtaining information on the remuneration of BOD or executive body members (for shareholders with >5% ownership); and
demand the convening of an extraordinary general meeting of shareholders or go to court if the BOD refuses, as well as convene a BOD meeting and request an audit of the SOE at the expense of the shareholder (majority shareholders with 10% and more shares).
Shareholders usually utilise their rights without limitations and in case of disagreement have an avenue to court appeals.
If an SOE conducts a general shareholder meeting, it adheres to the equitable treatment of all shareholders by ensuring that all shareholders have to be notified about the meeting at least 30 days in advance via simultaneous dissemination of information in the media and on the financial statements' depository website. During general shareholder meeting shareholders can cast votes in person or through an authorised representative. The JSC allows the general meeting of shareholders, including minority investors, to:
amend and approve the charter and Corporate Governance Code
approve the general meeting agenda and transactions related to issuing/delisting stocks, bonds and convertibles
reorganise/ liquidate the SOE
compose and renumerate the BOD
select an audit company and approve audited financial statements
distribute dividends and determine the share value for unorganised market redemption
introduce or cancel the “golden share”
approve major transactions.
The model Corporate Governance Code notes SOEs that with multiple shareholders, have to ensure fair and equitable treatment for all and “safeguard minority shareholders from potential exploitation by individuals who possess the capacity to directly, indirectly, or otherwise influence the SOEs' decisions”.
However, since the model Code is not uniformly implemented there is often in practice a low level, or absence, of communication between majority and minority shareholders, and with the SOE. The disagreement between them usually relate to the situation where public policy objectives or SOE corporate decisions impact on minorities’ financial interests, forcing minorities actively engage with majority shareholder, regulatory agencies and use social media platform to attract public attention to protect their interests.
To balance the interests of all shareholders or provide more rights to minority shareholders, some SOEs may assign additional rights to them and reflect this in their corporate charters. For instance, additional rights of parties to nominate the BOD/supervisory boards and executive bodies members, specifics of items for voting and others. Usually, such arrangements take place in non-listed SOEs that have several major shareholders in the ownership structure.5 Usually disputes among major shareholders are resolved through negotiations between shareholders and the SOEs, with the option to appeal in court.
The general shareholder meeting may also overturn the executive body decisions, unless the SOE charter specifies otherwise. Decisions on the Corporate Governance Code, stock emission conditions, reorganisation and liquidation of the SOE, and the methodology to calculate the share value for buy-back must be taken by qualified majority voting (a majority of at least three quarters). The law does not impose restrictions or disclosure requirements on directors' dealings with the company's shares (EBRD, 2017[5]).
Shareholders may request a share buyback and use judicial mechanisms to enforce their rights if voted against in the general shareholders meeting. They can further request the:
reorganisation of the SOE
SOE’s stock delisting
major transactions
changes to the charter which may limit shareholder rights and modifies the buyback methodology.
Box 2.1. Disputes related to Kazakhtelecom minority shareholders rights
End of 2018, the BOD of Kazakhtelecom approved an acquisition of 75% of the voting shares in Kcell, whose shares listed on the London Stock Exchange and KASE. Kcell is registered and provides mobile communication services in Kazakhstan. Close to 16 000 minority shareholders approved the deal, while in December 2018, Kazakhtelecom received 13 applications with demands from individual minority shareholders to buy-back their shares due to their disagreement with the BOD on the acquisition. As a result, Kazakhtelecom conducted negotiations with minorities and purchased the shares from 6 shareholders at a price determined by the BOD, while 3 applications were withdrawn by the shareholders with no explanation. Shareholders who acquired the shares after the deal date and requested buyback were denied. Four minorities appealed to court as they disagreed with the price of the buyback, but without avail. Kazakhtelecom initiated a criminal prosecution against some minority shareholders (for insider trading), but ultimately the allegations were not confirmed, and the prosecutor’s office refused to open a case.
In the meantime, Kazakhtelecom’s general shareholders meeting changed the rules for calculating the value of shares during a buyback, which was initially approved by the shareholders in 2006. The case showcases that minority shareholders have access to legal mechanisms to protect their rights, while the JSC legislation needs to incorporate more clear provisions regarding the procedures of interaction between shareholders and the SOE in case of disagreements.
Source: information generated by OECD team from different sources, including Kazakhtelecom JSC, www.kz.kursiv.media/2020-06-22/kazakhtelekom-protiv-minoritariya-pochemu-sud-dvazhdy-prinyal-storonu/; https://news.bloomberglaw.com/esg/kazakhtelecom-insider-trading-probe-triggered-by-buyout-attempt-1
Another intricate legal provision in Kazakhstan is that the state can exercise a “golden share” right, which gives the right to veto decisions of the general meeting of shareholders, the BOD and the executive body on issues specified by the company's charter. The right to veto, certified by a golden share, is non-transferable. However, in practice, according to the MNE information there are no cases when the state or holding companies were certified as an owner of the golden share.
A.2. [Concerning shareholder protection this includes:] SOEs should observe a high degree of transparency, including as a general rule equal and simultaneous disclosure of information, towards all shareholders.
All SOEs are required to publish its financial statements on the financial statements depositary's and stock exchange's website according to the regulations outlined in the State Property law, securities market law and the relevant regulatory directive.6 Details regarding the SOE's affiliated individuals should also be available to the public. Shareholders have the right to access corporate documentation, and most companies provide a fair amount of information on KASE’s website.
The JSC law ensures that the general meeting agenda should be prepared and accessible at the SOE's office for shareholder review at least ten days before the meeting date. Upon a shareholder's request, the documents must be provided within three working days. Shareholders have the right to access the minutes of the general meeting at any time and can receive a copy thereof. The OECD team could not find any information on cases in which minority shareholders were not granted information on shareholder meetings. In LLCs, participants are to be notified 30 days in advance about the meeting by “a body or an individual who calls the general meeting”, which can be a corporate secretary in practice.
Certain documents (such as financial statements; share issuances) require prior approval by the BOD, and then approved on the general shareholders meeting. Thus, shareholders with representatives on the BOD have access to information earlier than minority investors, whose representatives may not be represented on the BOD.
In listed SOEs, the model Corporate Governance Code notes that an investor relations department should be established to handle shareholder and investor relations. It is also responsible for gathering, analysing, and preparing information for disclosure on the SOE's website. All six listed SOEs have investor relations departments that act as a communication channel between the SOE and shareholders.
To ensure the objectivity of the information on SOE websites, they are all requested to provide the same information:
SOE charter
development plans and strategic goals
internal regulatory documents
dividend policy and payment details
profiles of BOD and executive body members
financial statements and annual reports
procurement details
asset structure
related party transactions and significant transactions details.
The selected 20 SOEs and 6 listed SOEs showcase different levels of information on their websites, with the highest degree observed for listed SOEs. The state and holding companies do not have appropriate control mechanisms to ensure placement of required by law information on SOEs’ websites.
A.3. [Concerning shareholder protection this includes:] SOEs should develop an active policy of communication and consultation with all shareholders.
To ensure transparency and openness of decisions, the model Corporate Governance Code recommends communicating with fellow shareholders and representatives of SOEs on fundamental shareholder rights and corporate governance policy. The guidelines set by AA 1000 Shareholder Engagement Standard 120117 and details in the appendix of the Code enable minority shareholders to take part in the company’s management. The Code outlines various methods for engaging with stakeholders, including questionnaires, focus groups, stakeholder meetings, public gatherings, seminars, feedback tools, and advisory councils. However, in practice these proceedings were not followed in pre-trail means, at least by listed SOEs.
Based on information provided by the Qazaq Association of Minority Shareholders, in SOEs that are publicly listed, the communication with the minority shareholders usually take place via exchange of the written correspondence. Additionally, based on legal rights a minority shareholder or his/her representative can participate and discuss the issues in the general shareholders' meetings. However, it is worth noting that in practice, open discussions or consultations between publicly listed SOEs and minority shareholders on significant operational and investment matters have reportedly been lacking in many cases. Typically, minority shareholders that have concerns about corporate transactions write to the CEO or his/her deputy (any deputy depending on the functionalities and case) of the company, majority shareholders of the listed company, the “investment ombudsman”, or launch legal proceedings. The case below indicates poor communication and consultation between majority and minority shareholders and creates concerns regarding the ability of the BOD to conduct independent judgement and treat all shareholder interests equally.
Box 2.2. Disputes related to Kaztransoil minority shareholders rights
Kaztransoil (KTO) is a listed company those 10% of shares are floated on KASE. The President of Kazakhstan in his Address to the Nation on 1 September 2021 instructed to provide drinking water in the Atyrau and Mangistau regions. Based on this, KTO’s subsidiary instructed to conduct a reconstruction and modernisation of the main water pipeline "Astrakhan - Mangyshlak".
At the end of 2022, minority shareholders of KTO repeatedly appealed to the investment ombudsman, Samruk-Kazyna, Ministry of Energy and KTO and raised concerns that the implementation of the project costing KZT 110 bn using corporate loans may harm the interests of shareholders. As a result, during 2022-2023 KTO improved the financing conditions by attracting KZT 70 bn from the National Fund at lower interest rates, decreasing the project costs down to KZT 100 bn.
Source: information provided to OECD team by KTO and Qazaq Association of Minority Shareholders.
Kazakhstan has also established an investment ombudsman, designated by the Kazakh government to assist with safeguarding the rights and lawful interests of investors. The primary functions are to address investor concerns through non-judicial and pre-trial means, and to submit recommendations to improve Kazakhstan's legislation on investment activities. Thus, minority shareholders have access to the investment ombudsman as an alternative and additional avenue to resolve disputes related to SOEs. However, important concerns arise as the role of the investment ombudsman is carried out by the Prime Minister. In addition to his general role in the oversight of state ownership practices he also holds the position of the Chairman of Samruk-Kazyna’s BOD. This would seem to represent a conflict of interest, since all listed companies in Kazakhstan fall under the Samruk-Kazyna umbrella.
Depending on the ownership structure and percentage of shares of non-state shareholders of non-listed SOEs (in most cases this relates to private major shareholder), SOEs usually conduct preliminary consultations and communications with all shareholders on key transactions or decisions that should be taken by the BOD or general shareholders meetings. Such regular consultations allow to balance and preliminarily agree the positions of all shareholders, including term sheets before item will be included into agenda of governing bodies, leaving only critical unresolved issues for discussion at BOD or general shareholders meeting before their final decisions.
A.4. [Concerning shareholder protection this includes:] The participation of minority shareholders in shareholder meetings should be facilitated so they can take part in fundamental corporate decisions such as board election.
The JSC law provides some protections for minority shareholders, providing them with the right to vote at general meetings of shareholders. However, the extent of their influence on the management of the company may be limited, as the state often holds a controlling stake in these enterprises.
Shareholders owning, independently or together with other shareholders, 5% or more of the voting shares of the company, have the right to propose additional agenda items to the general shareholder meeting agenda, and demand compensation for losses caused by the company’s authorities. Shareholders representing 10% of shares may convene a shareholder meeting. Meanwhile, the JSC law in detail notes that major corporate changes require a supermajority at the general shareholders’ meeting. Conversely, there is no special provision in the JSC law to ensure minority shareholders (a) seat(s) on the BOD. The JSC law simply establishes that all shareholders have the right to propose their candidates to the BOD (whether majority or minority shareholder), after which the general meeting decides on the candidate.
Annex B on the composition of BOD of listed SOEs demonstrates that representatives of minority shareholders are infrequently present on the BOD of listed SOEs. Consequently, the ability of minority shareholders to take part in “fundamental corporate decisions” would seem to be in practice somewhat curtailed.
Although cumulative voting is in place, it does not apply in the case of a single director's resignation. When several members of the BOD are to be replaced, cumulative voting is used, however, the insignificant number of holding shares does not allow minorities to make an impact on general shareholders meeting voting results nor are minority representatives obliged to be elected as board members.
2.4.2. Adherence to the Corporate Governance Code
B. National Corporate Governance Codes should be adhered to by all listed and, where practical, unlisted SOEs.
A so-called national Corporate Governance Code applicable to all JSCs irrespective of state or private ownership structure has been developed by the National Entrepreneurial Chamber “Atameken” in 2021. The Corporate Governance Code of Samruk-Kazyna and the Model Corporate Governance Code were developed and approved years before in 2012 and 2018 respectively. Listed SOEs follow Samruk-Kazyna's Code, which generally have greater provisions related to corporate governance practices. Irrespective to the application of these two Codes, it does not appear that there is much monitoring being carried out by the SOEs, BOD and ownership entities on execution of the Codes’ requirements and the quality of non-financial disclosure. There is no reference to the National Corporate Governance Code in the MNE’s and Samruk-Kazyna's Codes and in the State Property Law.
Corporatised SOEs in Kazakhstan are obliged to adhere to corporate governance mandates in alignment with the JSC legislation, along with other relevant laws and provisions, such as the State Property law, SWF law and other government resolutions as applicable. Figure 2.1 indicates that several Corporate Governance Codes exist in Kazakhstan for SOEs, one that is applicable to controlled subsidiaries of the Samruk-Kazyna group of companies, and the other to the remaining SOEs in Kazakhstan.
Based on paragraph 182 of the State Property law, the MNE develops the model Corporate Governance Code for state-owned JSCs, which is in turn approved and applied by each individual SOE. The model Corporate Governance Code is obliged for JSCs and recommended for LLCs, the model Code does not cover corporate governance of state enterprises with the supervisory boards. Samruk-Kazyna and its group of companies applies its own Code. Every SOE should conduct an independent assessment of corporate governance at least once every three years, the results of which are publicly available on the website of each SOE. Kazakhstan’s model Corporate Governance Code, with its most recent update in September 2022, outlines corporate governance principles and encompasses various aspects, including:
defining objectives
shareholders' rights
stakeholder engagement
board responsibilities
management interaction
transparency and disclosure
internal controls
ethical standards
evaluations of corporate governance practices.
Samruk-Kazyna's Corporate Governance Code is approved by the sole shareholder and applicable to all JSC and LLC controlled by Samruk-Kazyna. The executive body of Samruk-Kazyna approves the same Corporate Governance Code for its controlled subsidiaries, while for subsidiaries with several shareholders the Code is recommended for approval by the general shareholders meeting. Samruk-Kazyna's Code is based on similar principles and provisions as the model Corporate Governance Code however includes greater details and exceptions.8 Among them is that Samruk-Kazyna's subsidiaries do not have government members on the BOD of subsidiaries. In addition, Samruk-Kazyna's Corporate Governance Code requires listed SOEs to publish in their annual reports on their adherence to the Corporate Governance Code. Currently, all listed SOEs are under the Samruk-Kazyna umbrella, thus adhering to the Samruk-Kazyna's Corporate Governance Code.
Figure 2.1. Corporate Governance Codes in Kazakhstan
Note: * SOEs with other shareholders may deviate from Samruk-Kazyna's Code upon approval by the general shareholders meeting.
** applicable to the Samruk-Kazyna's listed companies.
Source: legislation and relevant rules and internal documents reflected in the infographic.
Some of SK’s subsidiaries - with other shareholders - may choose to apply other regulatory norms in their Codes – if approved by the general shareholders meeting. Out of the 6 listed SOEs, only 4 companies (Kazatomprom, KazMunayGas, KEGOC and KazTransOil) follow Samruk-Kazyna' Code, while the remaining 2 (Kazakhtelecom and Kcell) have developed their own Corporate Governance Codes approved by the general shareholders meeting. While the Corporate Governance Code of the Air Astana JSC is approved by the general shareholders meeting and aligns with the principles, standards reflected in the AIFC Rule #FR0003 dated 2017.
To ensure the adherence to the model Corporate Governance Code provisions, the MNE developed the Rules for Assessing Corporate Governance of JSC SOEs Controlled by the State. The rules note that a corporate secretary can make an annual assessment and/ or independent consultant can do the same every 3 years. The assessments are based on the OECD guidelines on corporate governance of SOEs and other international recommendations on corporate governance adopted in Kazakhstan. The methodology for conducting a corporate governance assessment is very opaque and general, rendering it difficult to conduct a high-quality evaluation. The rules provide only five general elements for assessment:
corporate ratings
the negative influence of the shareholders on corporate governance practices
key positive aspects
disadvantages/shortcomings
recommendations for elimination/further improvement of identified inconsistencies.
The methodologies of the assessment of Samruk-Kazyna and its subsidiaries are developed by PWC and approved by the BOD and executive body of Samruk-Kazyna respectively. The methodology itself is more comprehensive than those of the MNE, and contains details, mechanisms, descriptions and assessment criteria to assign a corporate governance rating. The document covers the assessment of the effectiveness of the BOD and executive body, risk management, internal control and audit, sustainable development, shareholder rights, transparency, and contains additional requirements for the assessment of listed companies.
For both types of Codes, on top of the BOD self- and independent assessment, the BOD are given the responsibility to assess the adherence to the Corporate Governance Code. Corporate secretaries monitor and provide guidance to both the BOD and the executive body on the appropriate compliance with the Code's principles. They are also responsible for generating an annual report that outlines the compliance or non-compliance with the Code's principles and provisions. Once every 3 years, an independent consultant assesses the adherence to the Corporate Governance Code and assigns a corporate rating. These reports subsequently undergo regular assessment by the BOD committees, are approved by the BOD, integrated into the company's annual report and disclosed on the website. Instances where non-compliance with this Code's provisions arises are deliberated during committee and BOD meetings, resulting in decisions to improve the corporate governance within the SOE.
According to the 20 selected SOEs’ responses to the OECD questionnaire, 35% of the 20 selected SOEs do not undergo an independent assessment of their corporate governance practices, which is not in line with the Corporate Governance Codes. Among 35% of the selected SOEs (including SK-Pharmacy LLC), regular independent assessments are conducted, but their results are not publicly available. Only 3 SOEs, which represent 15% of the selected entities (Damu Fund, International Airport Nazarbayev N., QazExpoCongress), conduct independent assessments and publicly disclose their results. The remaining 15% of SOEs are LLC which are not required to conduct such independent assessments.
Listed SOEs consistently perform evaluations to ensure compliance with the applicable Corporate Governance Codes and make the results publicly available. Out of six listed SOEs four of them (Kazatomprom, KazMunayGas, KEGOC and KazTransOil) publish separate reports, while two (Kazakhtelecom and Kcell) integrated results into annual reports. Based on 2021 results of the independent assessment of the corporate governance of KazMunayGas, Kazakhtelecom and KEGOC improved their ratings from “BB” to “BBB”, Kazatomprom improved from “BBB” to “A”,9 while KazTransOil and Kcell did not conduct independent assessments.10
2.4.3. Disclosure of public policy objectives
C. Where SOEs are required to pursue public policy objectives, adequate information about these should be available to non-state shareholders at all times.
According to the model Corporate Governance Code, business transactions and associations involving the SOE, shareholders, and related parties are conducted in accordance with commercial principles defined by existing Kazakh laws (such as the Entrepreneurial Code). This is valid unless one of the principal objectives of the SOE pertains to executing or supporting the execution of public policies targeting the advancement of specific industries within Kazakhstan.
In practice, transparency about public policy objectives can be ensured in two different ways: (I) by categorising SOEs according to the nature of their operations; and (ii) by disclosing information about the PPOs of individual SOEs. Further to the first point, according to the State Property law, some SOEs operate within key sectors of the economy, that require SOEs to implement state/public policies. The list of national managing holdings, national holdings, and national companies that pursue public policy objectives is approved by the Kazakh government.
Table 2.2. Information on status of national companies and national operators
Source: SOEs websites, annual reports, relevant laws
Under Decree No. 376/ 2011, Kazakhstan has two national managing holdings, one national holding, and 20 national companies. In addition to the mentioned “national” statuses of SOEs, the government also assigns some SOEs with a “national operator” status and provides them with an exclusive right to act on behalf of the government in specific areas of selected industries. For instance, QazaqGaz, being a national gas operator, supplies gas to the domestic market by providing more than half of the country’s population with gas at low prices and cross-subsidises this loss-making business with gas exports. The law on Gas and Gas Supply No. 532-IV/ 2012 clearly lists all obligations and functions that have to be conducted by the national gas operator to ensure implementation of the public policy on gas and gas supply. Similar to QazaqGas, the roles and supplementary responsibilities that national companies and operators have (see Table 2.2) are outlined in relevant laws and governmental directives – openly accessible to the public. Listed SOEs provide comprehensive information about their status as national companies and operators that available to all shareholders (see examples below).
However, national companies and operators may not be limited only by the mentioned above specific law provisions. On top of the listed in the legislation key functions, national companies and operators may be forced by the government or major state shareholders to engage in activities outside of their core businesses. For instance, they may be engaged in acquiring assets other than on an arm’s length basis or involved in different types of transactions that goes beyond national operator legislation such as construction of a hospital/school/cultural object etc., that may impact on commercial interests of shareholders. Two cases can be found below in Box 2.3 and Box 2.4. showcasing that the functions of national companies and operators are not precise and clear.
In the case of Samruk-Kazyna and its subsidiaries, the Corporate Governance Code requires to disclose in the annual report if a socially significant project is undertaken. However, such disclosures usually take place post factum and are decided by the BOD, not the general shareholders meeting. This does not allow minority shareholders to oppose such decisions, forcing them to use other avenues to communicate their position (see example of such case in Box 2.3).
Box 2.3. Disclosure of public policy objectives and associated risks in Kazatomprom’s stock emission prospects
The details about the national company and national operator status of Kazatomprom and the execution of public policy objectives are outlined in the stock emission prospect, providing details of benefits and risks associated with its implementation. This information is accessible to all shareholders, including minority shareholders, during IPO:
The Company is the national atomic company of Kazakhstan and, among other things, is responsible for, and has a preferential right to perform and coordinate, mining uranium in Kazakhstan and exporting uranium and its compounds from Kazakhstan pursuant to the Decree of the President of Republic of Kazakhstan No. 3593 dated 14 July 1997.
The respective status of a national company in Kazakhstan allows the Group to benefit from certain privileges, including, among other things, obtaining subsoil use agreements through direct negotiation with the government rather than through a tender process which would otherwise be required. This effectively grants the Group priority access to such opportunities, including the high-quality and ISR-conducive deposits of natural uranium, which are abundant in the Republic of Kazakhstan.
If the Company were to lose its national operator or national company status as a result of a change in the government’s policy, due to the government’s loss of indirect control over the Company, or for any other reason, this could result in the loss of the Group’s priority access to new resources, such as uranium deposits, and otherwise have a material adverse effect on the Group’s business, prospects, financial condition, cash flows, results of operations and or the price of the Securities.
There can be no assurance that the government will not, through Samruk-Kazyna, cause the Group to engage in business practices that may materially adversely affect the Group’s ability to operate on a commercial basis or in a way that is inconsistent with the best interests of the Company’s other shareholders. In addition, the Group may be forced by the gGovernment, through Samruk-Kazyna, to engage in activities outside of its core businesses and/ or acquire assets other than on an arm’s length basis.
Additionally, the Company, as national operator, has certain functions including the following: (i) controlling Kazakhstan’s performance of the Agreement Suspending the Antidumping Investigation of Uranium from Kazakhstan, and usage of quotes for supply of Kazakhstan uranium to the U.S. market; (ii) assisting in implementing Kazakhstan’s policy on preventing of dumping processes on the uranium market within and outside of Kazakhstan; (iii) securing strict observance of quotas on export and import of uranium-bearing materials and equipment for producers operating within Kazakhstan;(iv) securing export, import and manufacturing of special equipment and technologies and materials of dual application pursuant to IAEA rules;(v) maintaining records on sales of atomic energy industry products; (vi) determining transportation routes and supply schedules of uranium-bearing raw materials to reprocessing facilities within Kazakhstan; and (vii) participating in the resolution of issues related to transit of foreign export production through Kazakhstan.
Source: (Kazatomprom, 2018[6])
Box 2.4. Disclosure of public policy details in the KazMunayGas NC JSC annual report
The Commission for Demonopolisation of the Economy is an advisory body operating under the Kazakh government. The primary role of the Commission is to formulate suggestions on demonopolisation in sectors such as telecommunications, railway infrastructure, media assets, and similar areas.
The disclosure of the acquisition of a 49% stake for the nominal value of 1 tenge, in accordance with the decision of the Commission for Demonopolisation of the Economy, was presented in the annual report and consolidated financial statements of KazMunayGas. This information was accessible to all shareholders.
Excerpts from the KazMunayGas annual report:
On July 1, 2022, in accordance with the minutes of the meeting of the Commission under the chairmanship of the Prime Minister of RK for the demonopolization of the economy, namely the market of fuels and lubricants, the Company acquired 49% interest in PetroSun, that specializes in the sale of liquefied petroleum gas and petroleum products. The acquisition price was 1 tenge. The difference between the consideration paid and the fair value of identifiable assets and liabilities of PetroSun at the date of acquisition was recognized as a contribution from Samruk-Kazyna based on instruction in minutes above and presented in the line “Acquisition of joint ventures” in consolidated statement of changes in equity in the amount of 10,989 million tenge (Note 26).
The difference between the consideration paid for the acquisition of 49% interest in PetroSun for 1 tenge and the fair value of identifiable assets and liabilities of PetroSun at the date of acquisition in the amount of 10,989 million tenge was recognized as a contribution from Samruk-Kazyna and presented in the line “Acquisition of joint ventures” in consolidated statement of changes in equity in the amount of 10,989 million tenge.
Source: (KMG, 2022[7])
2.4.4. Joint ventures and public private partnerships
D. When SOEs engage in co-operative projects such as joint ventures and public private partnerships, the contracting party should ensure that contractual rights are upheld and that disputes are addressed in a timely and objective manner.
The State Property law and JSC laws do not impose limitations on SOEs regarding the establishment and engagement in joint ventures, a decision lying with the BOD of the SOE. The resolution of contractual rights and disputes is governed by the Civil Code, JSC laws, and other legislative regulatory documents of Kazakhstan.
The law on Public-Private Partnerships (PPPs) No. 379-V LRK/2015 notes that SOEs can engage in public-private partnerships through various means, such as participating in legal entities, transferring property rights, attracting investments, and providing supportive services. SOEs can also contribute to the construction, operation, and modernisation of public-private partnership facilities, while exploring other compliant forms as per the laws of Kazakhstan.
In addition to outlining the partnership terms, the PPP agreement also encompasses provisions on the resolution of disputes through both judicial and non-judicial means, as well as procedures for handling corporate disputes. Disputes arising from the execution and termination of the agreement are settled according to the laws of Kazakhstan and the stipulations within the PPP agreement. However, as far as the mission team has been able to establish, no cases have so far had to be resolved. Moreover, out of 1,312 public private partnership projects implemented as of August 2023, merely four have been executed with the participation of SOEs in the form of social-entrepreneurial corporations.
2.4.5. Summary
It appears that – apart from the special case of golden shares – minority investors in Kazakhstan's SOEs have broadly the same rights and the same level of protection as is the case in privately owned companies. However, this level of protection is not internationally very high. The right to vote one's shares does not confer much influence when the state is a majority shareholder, and safeguards that exist in some other countries (e.g. majority-of-the-minority provisions) are not in place in Kazakhstan. This problem is highlighted by the fact that many Kazakh SOEs are subject to public policy objectives that, if implemented or changed with scant regard to the interests of non-state shareholders could lower rates of return and dividends to the detriment of the latter.
SOEs usually provide and disclose publicly information that is required by the legal framework, however it’s not a general practice to disclose more information on top of required ones, limiting it to minimum required level. Majority shareholders get access to the general shareholder meeting agenda items quicker than minority shareholders who do not have representatives at BOD level.
Despite having related provisions in the regulatory documents, SOEs are not keen to use an active policy of communication and consultation with the minority shareholders of the listed SOEs, mostly preferring to exchange written correspondence and court filings. While communication with the majority shareholders of the non-listed SOEs is usually conducted more regularly by the SOEs based on agreements reflected in the SOEs’ charters and using other avenues.
Although the public policy objectives and functions that SOEs are expected to fulfill as part of their national company and operator status are available in open sources, the phrasing and scope of these functions are often quite broad. This complexity makes it challenging to create a precise and comprehensive list of all the functions these entities should undertake. Clearly defining criteria and conditions that determine whether specific actions and functions of SOEs align with their status would enhance the transparency of decisions and directives for social functions from the Kazakh government. This would also improve predictability and expectations regarding the potential effects of these decisions on all shareholders, including non-state and minority shareholders.
Overall, despite having comprehensive regulatory norms that co-ordinates the processes and requirements of the general shareholder meetings, BOD and executive bodies, the practical implication of the Corporate Governance Codes remains challenging. Lack of controlling and monitoring of SOEs compliance to Codes impacts on independent judgement of members of SOEs’ governing bodies and may negatively affect to treating all shareholders equitably.
Thus, in relation to the SOE guidelines, there are challenges to ensure the equitable treatment of all shareholders, resulting from a non-transparent nomination of BOD members which may affect their ability to make independent judgements. SOEs and ownership entities do not actively involve minority shareholders of listed companies for consultations. The small floating size of shares does not allow minority shareholders’ representatives to sit at the SOE BODs, despite the legal rights to do so.
2.5. Stakeholder relations and responsible business
The state ownership policy should fully recognise SOEs’ responsibilities towards stakeholders and request that SOEs report on their relations with stakeholders. It should make clear any expectations the state has in respect of responsible business conduct by SOEs.
2.5.1. Recognising and respecting stakeholders’ rights
A. Governments, the state ownership entities and SOEs themselves should recognise and respect stakeholders’ rights established by law or through mutual agreements.
In Kazakhstan, the different legal forms of SOEs do not provide for the different treatment of employees (e.g. regarding remuneration, pension rights and job protection). The rights and obligations of employees are the same across all company types, although civil servants may enjoy additional privileges. In particular, employment relationships in Kazakh companies are regulated by the Labour Code No. 414-V KRZ/ 2015, which establishes employees' fundamental rights. It notes for instance that employees have the right to authorise representatives to negotiate on their behalf with the CEO or supervising department of the SOE.
Kazakhstan also established a mechanism like the Business Ombudsman to address business grievances and promote responsible business conduct. However, it seems as though employees of SOEs who had concerns related to their employment or labor rights typically reported such issues to relevant government labor or employment authorities, rather than the Business Ombudsman.
Since employees do not tend to own company shares, their ability to participate in shareholder meetings is limited. The quasi-state sector does not use stock options as a way to compensate employees, although some companies had tried to introduce this method previously.
Kazakhstan has implemented internationally recognised human rights instruments, including those stated in the International Bill of Human Rights and ILO conventions. An office of the Human Rights Commissioner oversees constitutional human rights and handles citizen appeals in case of violations. The country has not yet introduced a human rights strategy however and human rights challenges can exist in certain SOEs, particularly in sectors like mining or extraction.
In Kazakhstan, there are no specific policies or practices in place for providing stakeholders with timely and adequate information about SOEs, other than those outlined in chapter 2 of this report. The dissemination of information typically covers aspects of SOEs' legal structure, capital, management bodies, and more. In more detail:
The Commercial Register and relevant government registries provide information on the legal structure, capital, and management bodies of SOEs in Kazakhstan.
Certain SOEs publish additional information about their operations, financial performance, and corporate governance practices on their official websites. Listed SOEs have additional obligations to publish information, such as the compliance with the Corporate Governance Code.
The law on access to information (401-V/ 2015) allows interested parties to request specific information from SOEs in writing, to obtain information beyond what is publicly available.
In order to protect (foreign) investors, Kazakhstan has also signed a number of international investment agreements: These treaties typically protect existing investments against expropriation, and provide investors access to investor-state dispute settlement mechanisms. In addition to 47 bilateral investment treaties, Kazakhstan also adheres to a plethora of multilateral investment treaties. In total, around half of Kazakhstan’s investment treaties are concluded with adherents to the OECD Declaration on International Investment and Multinational Enterprises. Due to relatively broad provisions in most of Kazakhstan’s investment treaties, arbitrators are left with a lot of leeway: “vague standards that fail to clearly reflect government intent may undermine the right balance between investor protection and the power to regulate” (OECD, 2019[8]).
The Entrepreneurial Code which entered into force in 2016 replaced the previous Investment law, and other laws regulating and protecting investment activity. It aims to increase the consistency and transparency of the applicable legal rules for businesses, and investors specifically, and to thereby strengthen investor confidence. The government has further lifted foreign equity restrictions in air transport and fixed-line telecommunications, allowing for complete foreign ownership.
The government has made notable efforts over the last decade to modernise environmental legislation and address the legacy of the Soviet period, as reflected in an increase in the position in international rankings on environmental performance. The government has introduced environmental regulations to ensure stakeholder protection, although these are all rather recent endeavours and focused on ensuring equal access to public goods. These encompass broader legislations like the Environmental Code No. 212/ 2007, along with specific Codes related to subsoil and water, which also apply to SOEs in their operations. Companies, including SOEs, are required to prepare EIA reports before certain activities, outlining activities, potential risks, and socio-economic development prospects. After assessment, companies engage in consultations with communities and the government before making decisions.
However, challenges such as non-standardised EIA reporting, corruption and limited civil society participation may persist. Complex reporting and sometimes discretionary decision-making have impeded the correct assessment of the true extent of possible environmental impacts of business/ SOE activities. Some enterprises have complained about the lack of transparency of environmental regulations, and expressed concerns about irregular and inexplicable fines (OECD, 2019[8]).
Particular ownership entities have also taken on the responsibility for the well-being of stakeholders. For instance, SK has been undertaking environmental audits, and notable SOEs such as KazMunayGas and KEGOC have taken proactive steps in embracing social and environmental preservation initiatives. In addition, the Ministry of Labor and Social Protection of the Population has emphasised the significance of fostering social responsibility within enterprises, although without extensive details.
B. Listed or large SOEs should report on stakeholder relations, including where relevant and feasible with regard to labour, creditors and affected communities.
Kazakhstan’s model Corporate Governance Code and Samruk-Kazyna’s Corporate Governance Code provide guidelines on disclosure and reporting requirements for listed companies on aspects related to ESG. In theory, these are applicable to SOEs therefore.
In paragraph 167, the Samruk-Kazyna Code further notes that “in organisations whose shares are listed on the stock exchange, as well as participating in ESG ratings, reporting indicators undergo independent certification (verification) by a third party”.
The Kazakhstan Stock Exchange (KASE) has listing requirements that encourage or mandate ESG reporting by listed companies. These requirements include disclosures related to sustainability practices, social responsibility, and governance.
Listed SOEs follow international reporting frameworks such as the Global Reporting Initiative (GRI) or the United Nations Global Compact (UNGC) to report on ESG factors. Samruk-Kazyna for instance issues consolidated sustainable development reports based on GRI standards, which every subsidiary is now requested to do.
Companies engaged in activities with potential environmental impacts may be subject to specific environmental reporting requirements and regulations.
Kazakhstan has anti-corruption laws and regulations that apply to businesses, and companies may be expected to report on their anti-corruption efforts and measures as part of their corporate governance and compliance practices.
Some companies in Kazakhstan, including listed ones, issue separate sustainability or CSR (Corporate Social Responsibility) reports that provide detailed information on their ESG performance, social initiatives, and sustainability efforts.
Subsidiaries under Samruk-Kazyna are encouraged to incorporate non-financial KPIs to monitor the impacts of their operations, encompassing social, environmental, and anti-corruption dimensions. Overall, non-financial reporting in Kazakhstan is in its beginning stages and can vary among companies. Key SOEs have shown improvements in their reporting practices recently. For instance, entities like KazMunayGas, KEGOC, and Kazatomprom have consistently published non-financial reports. There are instances of enhanced disclosure practices as seen with companies like Samruk-Energy and Tau-Ken Samruk. While certain enterprises, such as Astana International Airport and Kazakhstan Temir Zholy (Kazakhstan Railways), express commitment to corporate social responsibility and international responsible conduct standards, their issuance of non-financial reports might not be explicitly documented.
While requirements on non-financial reporting have been partially expanded as recommended by the OECD in 2012, they remain weak in practice. However, some promising initiatives to promote transparency have emerged, such as the inclusion of a specific chapter on transparency in SK’s Corporate Governance Code. Additionally, KASE participates in the Sustainable Stock Exchanges Initiative has been declared compliant with the Extractive Industries Transparency Initiative, which is particularly notable due to the importance of the extractives sector. There are also clear intentions that suggest a greater alignment with various ESG reporting items for the large and/ or listed entities. This may come as a result of aiming to comply with foreign stock exchange listing rules, or to perform well in ESG ratings.
2.5.2. Internal controls, ethics and compliance programmes
C. The boards of SOEs should develop, implement, monitor and communicate internal controls, ethics and compliance programmes or measures, including those which contribute to preventing fraud and corruption. They should be based on country norms, in conformity with international commitments and apply to the SOE and its subsidiaries.
Kazakhstan has comprehensive anti-corruption laws that apply to all entities, including SOEs. The key piece of legislation is the law on Combating Corruption No. 410-V/2015 which establishes the legal framework for anti-corruption measures, defines corrupt practices, and outlines penalties for corruption offenses. It specifically notes that it also applies to the quasi-state and its members.
The criminal Code of Kazakhstan also includes provisions related to corruption and bribery offenses. It sets out criminal liability for individuals engaged in corrupt practices, including those within SOEs. Kazakhstan is also a signatory to international agreements and conventions aimed at combating corruption, including the United Nations Convention against Corruption (UNCAC), which also addresses SOEs.11
The model Corporate Governance Code obliges all SOEs to establish and implement internal controls, ethics, and compliance provisions. It stipulates that the Code of conduct and ethics should address conflicts of interest, confidentiality, fair business practices, and the protection and proper use of company assets. Based on the feedback provided by the 20 chosen SOEs, each one has formulated and ratified a Code of conduct and ethics. The State Property law further mandates that BODs, where established, create "anti-corruption policies" applicable to SOEs of all legal forms.
SOEs have initiated anti-corruption programs and communication channels, yet their effectiveness may vary. The model Code has also recommended for SOEs to put in place an ombudsman and compliance officers, but it remains questionable how many SOEs follow this rule and whether they are useful.
Despite the development of laws and Codes of conducts, Kazakhstan's SOEs, in sectors like oil and gas, continue to grapple with significant corruption challenges. The effectiveness of anti-corruption programmes remains questionable, partly lacking political will and the dispersed ownership which limits the capacity to oversee the entire portfolio of SOEs. It is also unclear to what extent the different ownership entities are involved in ensuring the effectiveness of anti-corruption programs and assessing their alignment with state expectations regarding integrity and anti-corruption efforts.
While a few SOEs in Kazakhstan have established comprehensive internal controls, ethics, compliance measures, and whistle-blower protection mechanisms, the functionality of these internal controls and programs might be inadequate. Monitoring generally seems to be an issue.
2.5.3. Responsible business conduct
D. SOEs should observe high standards of responsible business conduct. Expectations established by the government in this regard should be publicly disclosed and mechanisms for their implementation be clearly established.
In Kazakhstan, SOEs are expected to proactively mitigate risks and uphold high standards of responsible business conduct across various domains, including the environment, employees, public health and safety, and human rights. While the concept of RBC is still developing, Kazakhstan has introduced relevant regulations and policies to promote such practices.
As part of its commitment to the OECD Guidelines on Multinational Enterprises,12 Kazakhstan has established a National Contact Point (NCP) charged with promoting responsible business principles, handling related inquiries in the national context and providing a mediation and conciliation platform for resolving practical issues that may arise. The NCP sits within the MNE.
In general, awareness of RBC has increased in Kazakhstan in recent years. Numerous public and private initiatives have been established, with notable efforts to promote RBC by Samruk-Kazyna; the National Chamber of Entrepreneurs, Kazakhstan’s umbrella business organisation; and several civil society organisations. On a policy level, the Entrepreneurial Code includes a legal definition of social responsibility and commits the state to creating the conditions and not interfering with business activities in this area, a welcome development in light of previously reported practices that social responsibility projects amounted to a charity tax.
Although the government has yet to develop a coherent government strategy on RBC, individual Ministries have put in place RBC-related initiatives, albeit fragmented and on an ad hoc basis.
Samruk-Kazyna’s Corporate Governance Code is another notable effort, as it calls for transparency and accountability, respect for human rights, and environmental protection and envisions the development of action plans on sustainable development. Resulting from the Code, several SOEs have implemented RBC-related principles and standards, incorporating due diligence mechanisms at the supervisory and management board levels. For instance, entities like KazMunayGas have established committees responsible for health, safety, environment, and reserves, which formulate strategies, policies, plans, and risk assessments in these domains. Integrated management units have been instituted to monitor RBC-related risks, and the adoption of pertinent environmental, social (including health and safety), and anti-corruption policies is evident (OECD, 2017[9]).
Similar standards, due diligence practices, and disclosure mechanisms are noticeable in other SOEs, including KEGOC. Moreover, various SOEs have set up dedicated corporate social responsibility units tasked with implementing sustainability initiatives. Notably, some companies contribute to local communities in their operational areas, while other enterprises engage in cross-border co-operation to ensure the sustainability of shared resources, such as water reservoirs.
However, many SOEs are yet to adopt comprehensive RBC policies and institute due diligence mechanisms. A lack of clarity surrounding RBC, coupled with limited application beyond company operations and supply chains, remains a challenge. Additionally, certain sectors experience pronounced RBC-related issues. For instance, state-owned mines create significant emissions and contribute to environmental degradation, which is difficult in a country which is already experiencing the effects of climate change (OECD, 2017[9]).
2.5.4. Financing political activities
E. SOEs should not be used as vehicles for financing political activities. SOEs themselves should not make political campaign contributions.
The law on Political Parties in Kazakhstan prohibits state and municipal enterprises, institutions, organisations, and legal entities where the state and local governments hold at least 10% of authorised capital or voting rights, either directly or indirectly, from making contributions to support political parties. However, it is important to note that there might exist indirect methods of financing or supporting political activities, particularly at the municipal level. At the same time, the political regime in Kazakhstan may render political financing uninteresting in any case.
2.5.5. Summary
There are a number of laws/ regulations to ensure the protection of employees, creditors, consumers, and stakeholders in Kazakhstan. The country has ratified most relevant international conventions, yet issues with the protection of human and labour rights persist, also related to SOE activities. The issues result from 1) the discrepancy between the written law and its actual implementation; 2) the need for a more centralised and co-ordinated effort from the government to ensure SOEs' responsible behaviour and stakeholder protection; and 3) the limited effectiveness of these provisions for SOEs in particular.
ESG reporting has been developing in Kazakhstan, albeit being in its beginning stages. For the time being, however, there remain divergences in the individual SOE efforts (and dependent on the ownership structure), and dependent on the voluntary efforts of the SOE themselves.
SOEs have initiated anti-corruption programs and communication channels, yet their effectiveness may vary. The model Code has also recommended for SOEs to put in place an ombudsman and compliance officers, but it remains questionable how many SOEs follow this rule and whether they are useful. Thus, despite the development of laws and Codes of conducts on anti-corruption, Kazakhstan's SOEs, in sectors like oil and gas, continue to grapple with significant corruption challenges. The effectiveness of anti-corruption programmes remains questionable, partly due to resource limitations and the dispersed ownership structure which limits the capacity to oversee the entire portfolio of SOEs. It is also unclear to what extent the different ownership entities are involved in ensuring the effectiveness of anti-corruption programs and assessing their alignment with state expectations regarding integrity and anti-corruption efforts.
While a few SOEs in Kazakhstan have established comprehensive internal controls, ethics, compliance measures, and whistle-blower protection mechanisms, the functionality of these internal controls and programs might be inadequate. Monitoring generally seems to be an issue.
Overall, while steps have been taken by some SOEs to embrace RBC, a comprehensive and uniform approach is needed to address RBC challenges effectively across all state-owned enterprises in Kazakhstan. It is important to note that the promotion of RBC in SOEs is an ongoing process, and Kazakhstan may continue to refine its policies and practices in this regard.
2.6. Disclosure and transparency
State-owned enterprises should observe high standards of transparency and be subject to the same high-quality accounting, disclosure, compliance and auditing standards as listed companies.
2.6.1. Applicable disclosure standards and practices
The law On Accounting and Financial Reporting No. 234/2007 establishes the system of accounting and financial reporting in Kazakhstan. It is the main law outlining the reporting and disclosure obligations for the state-owned sector and domestic companies. In general, it foresees that financial reporting shall represent information on the financial position of a company, the results of the activity, and changes in the financial position of the company. The basic elements that are expected to be included in financial statements are the 1) accounting balance; 2) profit-and-loss report; 3) statement of cash receipts and disbursements; 4) statements on changes in the capital; and 5) an explanatory note.
According to the law, all domestic listed companies, financial institutions, large unlisted companies, as well as “organisations of public interest” shall prepare their financial statements and annual reports in accordance with a single set of international standards. These standards are the IFRS (international financial reporting standards), previously known as IAS (international accounting standards).
The legal definition of an organisation of public interest is not the same as what is considered a quasi-state enterprise. An organisation of public interest can be, inter alia, any JSC where the state holds a share in the authorised capital, a subsidiary of the former, a subject of state monopoly or special law and dependent legal entities.
There are exceptions to the definition which render the assessment of which state-owned entities qualify as organisations of public interest unclear. For instance, “non-commercial” JSCs, organisations extracting common minerals, and licensed legal entities working for exchange operations with foreign currency are exempt from the definition as organisation of public interest but may qualify as quasi-state enterprise.
If SOEs were to violate their reporting requirements of the law On Accounting and Financial Reporting, Art. 25 foresees that the company must take responsibility. Whether this entails the payment of fines, the liability of BOD for damages caused, or other penalties is not elaborated in the legal text. It is also not detailed which legislation will apply in such an instance.
Overall, the exact scope of the law which requires SOEs to comply with the IFRS is not comprehensively covering the public sector. Ambiguity in the legal definition of what is considered a “non-commercial” JSC, and reasons as to why a non-commercial public interest venture may be considered as a joint-stock company in the first place, reveals that SOEs in Kazakhstan do not strictly incur reporting obligations. Instead, the reporting standard applicable depends on the legal form a SOE may take, as well as how their individual operations and purpose may be interpreted (as either commercial or non-commercial in nature).
Table 2.3. Overview of disclosure practices of selected SOEs
2.6.2. Disclosure standards and practices of selected SOEs
A. SOEs should report material financial and non-financial information on the enterprise in line with high quality internationally recognised standards of corporate disclosure, and including areas of significant concern for the state as an owner and the general public. This includes in particular SOE activities that are carried out in the public interest. With due regard to enterprise capacity and size, examples of such information include:
A1. A clear statement to the public of enterprise objectives and their fulfilment (for fully-owned SOEs this would include any mandate elaborated by the state ownership entity).
There is no formal requirement in the law to compile periodic non-financial reports. Given that Kazakhstan lacks a holistic and high-level ownership policy outlining the mandate of SOEs, there is also no further description of how SOE mandates would be carried out under certain objectives in their annual reports.
Despite the lack of legal obligation to disclose SOE objectives, several large and listed SOEs include a description of their objectives in their management reports. This tends to cover the strategic goals as elaborated in the respective 10-year development plan which is agreed by the government shareholder. For instance, the sovereign wealth fund Samruk-Kazyna, as well as the national company Kazakhstan Temir Zholy, which is wholly-owned by Samruk-Kazyna, report on how their 10-year strategies relate to concrete objectives.
Many of the unlisted and small SOEs do not appear to report on non-financial objectives or achievements. Oftentimes, they do not publish annual management reports altogether, or only decide to disclose limited aspects of their strategic long-term goals. As a result, SOEs that are held as part of the portfolio of the national (management) holding companies tend to disclose more rigorously than those which are held under a different ownership structure. This also appears to hold true for to the analysed companies that are held on the subsidiary level of a portfolio SOE. For example, KazTransGaz Aymak, which is a subsidiary of QazaqGaz, details the same disclosure items as its parent company. QazaqGaz is fully owned by Samruk-Kazyna.
This divergence in disclosure practices reveals that the role of the national (management) holding companies is currently understated. While they elevate the overall standard of disclosure of objectives for their portfolio SOEs and their own economic activities, no clear line is drawn between the objectives set by the SOHCs independently, and which represents an interest from the state as a majority shareholder. This diminishes political accountability towards objective setters and creates a disconnect in how the state may mandate objectives to the SOE sector at large.
A2. Enterprise financial and operating results, including where relevant the costs and funding arrangements pertaining to public policy objectives.
The MF maintains a depository of financial statements made by public interest organisations. As mentioned before, public interest organisations are not the same as quasi-state sector entities, however, the overlap between the two categories of entities is estimated as large. The depository provides access to financial data stored in Russian language free of charge.
Most Kazakh SOEs that are JSCs and commercial in nature are required to report financial and operating results in their financial statements, in accordance with the IFRS. Nevertheless, there are legal exceptions to this rule that are difficult to interpret, given the ambiguous meaning of what a “commercial” or “non-commercial” JSC may be.
Among the analysed SOEs, it often remains unclear whether a given objective outlined in the annual report is delegated by the governmental body owning it. As such, it becomes almost impossible to report on the financial position of a given public objective.
A3. The governance, ownership and voting structure of the enterprise, including the content of any Corporate Governance Code or policy and implementation processes.
Many of the analysed SOEs lack transparency of their governance, ownership and voting structures. It is mostly large SOEs, JSCs, national (management) holding companies, or portfolio SOEs of a national (management) holding company that detail their shareholding arrangements clearly. Both Samruk-Kazyna and Baiterek lay out principles in their Corporate Governance Codes, which they also report in their respective annual reports. It appears that portfolio companies of the two holding companies are elevated to similar disclosure standards.
Out of the analysed SOEs, most are wholly-owned or majority-owned by the state or a national (management) holding company. Those quasi-state entities which do disclose their ownership arrangements will often include information on the powers of the sole or controlling shareholder. For the largest and most significant SOEs and SOHCs, this is typically accompanied by information on the internal dividend policy.
According to the JSC law, JSCs with state participation (except for Samruk-Kazyna) shall approve Corporate Governance Codes during the general meeting of the shareholders in accordance with the model Corporate Governance Code, which details a pre-set number of considerations.
Thus, the wide discrepancy between corporate governance disclosure standards across SOEs is likely to be a function of the model of state ownership. SOEs overseen as portfolio companies appear to benefit off greater reporting assistance from their respective parent holding. JSCs that are SOEs are held to certain standards of corporate governance by the law. Other SOEs, however, appear less likely to engage in corporate governance disclosure practices, and the exact number of SOEs which are affected by this is unknown.
A4. The remuneration of board members and key executives.
There is no legal requirement to disclose the remuneration of the BOD or key executives in SOE annual reports or financial statements. Nevertheless, the JSC law details that for JSCs, the Chairman of the BOD shall inform the shareholders of the company on the amount of remuneration and compensation paid to the members of the BOD and the executive body of the company. Any SOE that is also a JSC will therefore make remuneration information available to its shareholders.
Additionally, remuneration disclosure is dependent on whether an SOE falls under the scope of companies required to comply with listing requirements of KASE. KASE requires the total remuneration of and bonuses to the BOD, as well as the total remuneration to the executive body to be disclosed.
Thus, listed SOEs tend to include the aggregate remuneration of their key management personnel or board members. Not a single SOE among the ones analysed reports individual remuneration levels of board members. Typically, it is observed that SOEs share their remuneration policy instead of information on remuneration levels. Overall, wide discrepancies in practices can be identified, which are likely to arise from the incomprehensive applicability of the legal framework for disclosure across the quasi-state sector.
A5. Board member qualifications, selection process, including board diversity policies, roles on other company boards and whether they are considered as independent by the SOE board.
The JSC law provides that it is within the competence of the general meeting of the shareholders to determine the quantitative composition, terms of office, election and re-election and early termination, as well as the compensation of members for JSCs. There is no provision that asks for the disclosure of this information to the wider public.
For SOEs of which the state is the sole shareholder, the number of directors and the term of office of the BOD is determined by the state owner. In accordance with the finding above, the same remains true for SOEs that are JSCs and majority state-owned.
The selection of members of the BOD of JSCs is influenced by the requirement to have representatives of the shareholder as part of the board. Furthermore, executives are not able to become board members, and at least 30% or members should be independent. There are no qualification-related criteria pronounced in the law.
Disclosure on board composition, board member qualifications and whether they are considered as independent widely varies across the analysed SOEs. Despite the lack of legal requirements regarding the disclosure of SOE board member qualifications, boards of large and listed SOEs demonstrate a balanced mix of skills of board members as disclosed in their annual reports.
A6. Any material foreseeable risk factors and measures taken to manage such risks.
In Kazakhstan, there are no legal requirements for SOEs to disclose material foreseeable risk factors and the measures taken to manage such risk. As stated in the law “On Banks and Banking Activities in the Republic of Kazakhstan” No 2444/1995, the board of the National Bank of Kazakhstan requires banks and bank holdings to create and report on their risk management policy and to establish an internal control system. Therefore, this reporting item seems only applicable for few SOEs part of the financial sector.
Nonetheless, many non-financial state-owned entities include information on material risks in their financial statements, as covered by the IFRS. As part of the disclosure requirements described by IFRS 7, compliant entities are required to report on the nature and extent of exposure to risk arising from financial instruments. This entails qualitative disclosures on risk exposures for each type of financial instrument, management objectives and processes for managing such risks, and changes to these risks. Furthermore, it requires quantitative disclosures of the exposure to material risks, focussing specifically on credit risk, liquidity risk, and market risk.
A7. Any financial assistance, including guarantees, received from the state and commitments made on behalf of the SOE, including contractual commitments and liabilities arising from public-private partnerships.
In Kazakhstan, funding arrangements between the state and SOEs, as well as between SOEs on different levels of the ownership hierarchy, usually take the form of favourable borrowing arrangements, fixed interest rate borrowings and financial guarantees. While there is no national law that describes the obligation to report this information as part of the financial statements, these items usually fall into the scope of reporting requirements under the IFRS’ related party disclosures.
Many of the analysed SOEs which are compliant with IFRS, thus include an explanation of these funding arrangements in the notes of their financial statements. Out of the selected SOEs, none appeared to be involved in any PPPs. Thus, contractual contingencies and liabilities of PPPs were not reported on.
The JSC Kazakhstan Centre for Public-Private Partnership was established to implement the mobilisation of financial, managerial, technological, physical and other resources for their use in PPPs. The centres work is based on the law On Public-Private Partnerships” which law does not foresee any disclosures in relation to PPPs on the part of the enterprise. Rather, the centre’s work revolves around research activities surrounding PPPs and publishes hosts a database with ongoing projects. It is influenced by various Ministerial orders on the approval of several steps in the project pipeline, as well as issues relating to implementation of PPPs.
A8. Any material transactions with the state and other related entities.
As mentioned before, Kazakh SOEs, especially those belonging to the same holding company portfolio, tend to extend borrowing arrangements and financial guarantees to each other. The disclosure of these transactions is required under the IFRS for those SOEs compliant with it. These state funding arrangements are typically recognised as related party transaction with a shareholder, or other entity, or as government subsidy or loan.
While SOEs that comply with IFRS explain related party transactions as part of their notes of the financial statements, it appears that some of the assessed SOEs balance their financial positions under various types of reporting items. This may misrepresent some of the information reported in the financial statements.
For example, in the consolidated financial statements of the Damu Fund, it is mentioned that in 2014-2015, Damu received funds from Baiterek in the amount of KZT 200 bn at 0.15% per annum with a maturity of 20 years. This transaction was recognised as a government grant under below market rates in the profit and loss statement as per IAS 20.
In 2019, Damu further borrowed funds from Baiterek in the amount of KZT 16 bn at a rate of 0.1% per annum for a 15-year term. The main target of the loan was to pay off earlier issued securities. Damu concluded an absence of a connection to operational activities, which meant the difference between the fair value of the loan and received cash had not been recognised as a government subsidy, but as an operation with a shareholder. While this does not constitute wrongful reporting, practices such as the above may understate the extent of related party transactions between SOEs and the state.
A9. Any relevant issues relating to employees and other stakeholders.
There is no formal requirement to report on employees and other stakeholders for SOEs in Kazakhstan. Some large and listed SOEs will disclose this information as per internal Corporate Governance Codes and principles, however.
B. SOEs’ annual financial statements should be subject to an independent external audit based on high-quality standards. Specific state control procedures do not substitute for an independent external audit.
As mentioned in previous sections, the law on State Audit and Financial Control 393-IV LRK/2015 sets out expectations and provisions on the state audit function. The supreme audit chamber of Kazakhstan, which acts as the state auditor, is the responsible entity for overseeing the selection of external auditors to ensure the lawful management of republican state budget. It may perform ad-hoc state audits of SOEs as part of an order of the President of Kazakhstan. Such may be the case in instances of suspected shortcomings and violations in the financial and economic activities of the SOE and takes the form of a full audit of activities and subsidiaries, as was the case for QazaqGaz in 2021.
External auditors are required to be independent from the audited SOE and appointed by the general meeting of shareholders or board of the SOE. The non-existence of a rotation requirement for selected auditors brings upon various weaknesses in the safeguarding for conflicts of interest. Out of the SOEs analysed, three have maintained the same external auditor for the period of 2012-2021 (Table 2.4). One of them, the Institute of Economic Research, has changed its external auditor every year in the analysed timespan.
Lacking the legal requirement to rotate auditors over a given timeframe severely compromises the independence requirement. Effectively, in those cases, external auditors are revisiting their work periodically, and thus cannot assure that their assessments remain unbiased. Yet, changing external auditors often, as it is the case for the Institute of Economic Research, which switches to a new external auditing service on a yearly basis throughout the analysed period, is also not considered good practice. The rotation requirement would ideally strike a balance – not requiring external auditors to change too often nor too seldomly. The ability to enforce the law which requires independence of auditors overall is likely to be weakened by excessive as well as never occurring rotations of external auditors.
Table 2.4. External audit of selected SOEs
2.6.3. Aggregate annual reporting of SOEs
C. The ownership entity should develop consistent reporting on SOEs and publish annually an aggregate report on SOEs. Good practice calls for the use of web-based communications to facilitate access by the general public.
While the government of Kazakhstan does not yet publish an aggregate report on its SOEs, the MF maintains a repository of financial statements made by public interest organisations. The repository is accessible to the public online and allows to conduct searches for SOE audit reports for a given year. Among the downloadable PDF files of audit reports, financial information and the auditor's opinion is made available. The reports stored in the repository are drawn up in either Russian or Kazakh language, but are not available in English.
In practice, the repository allows to consult data on SOEs. Yet, the operation of the portal requires knowledge of firm-specific information to perform searches. It is not harmonised across companies and it lacks a comprehensive overview of the various SOEs and their comparable performance, hence generally does not enable an analytical assessment of the enterprises for which information is available. The plan of the government to put in place an aggregate report is thus welcomed.
2.6.4. Summary
Overall, SOEs in Kazakhstan do not incur a baseline set of disclosure and reporting requirements. Their disclosure and reporting standard is dependent on their legal form, whether they may be considered “non-commercial” in nature, their size, ownership entity, and listing status. As a result, there is a high degree of variability in disclosure practices observed across the state-owned sector.
SOEs that are also portfolio companies of national (management) holding companies tend to be held accountable to stricter rules on disclosure than SOEs which are comparably small and whose ownership responsibility lies in a given line ministry. Although disclosure standards for portfolio companies as expected by Samruk-Kazyna and Baiterek appear to be complied with more closely than disclosure requirements for other SOEs, elevated disclosure also reveals certain shortcomings in the corporate governance of SOEs in general.
Related party transactions between a portfolio company and its respective national (management) holding company, or among portfolio SOEs, tend to be large, and, in some cases understated by choosing to recognise them under different reporting items. It is further expected that for those SOEs that do not comply with IFRS, favourable borrowing arrangements, the issuance of financial guarantees and subsidies financed by the state budget may possible be not reported at all.
External independent audits of SOEs lack a rotation requirement that updates the external audit after an appropriate number of years. Currently, independent audits are conducted either too frequently or too seldomly, thus also weakening the independence of the external auditor for some of the SOEs.
When it comes to aggregate reporting on the state ownership level, the MF’s repository of financial statements offers a useful centralised data storage on SOE's auditor's reports and financial statements. However, the auditor's reports are often only published in either Russian and Kazakh language, and thus the primary audience for the data storage remains constricted. The information included in auditor's reports is also often not fully comparable to the information provided as part of financial statements drawn up in line with IFRS. The data repository also lacks an analytical element which allows to meaningfully compare and assess SOE performance with the information that is shared.
2.7. Responsibilities of the boards of state-owned enterprises
The boards of SOEs should have the necessary authority, competencies and objectivity to carry out their functions of strategic guidance and monitoring of management. They should act with integrity and be held accountable for their actions.
2.7.1. Board mandate and responsibility for enterprise performance
A. The boards of SOEs should be assigned a clear mandate and ultimate responsibility for the enterprise’s performance. The role of SOE boards should be clearly defined in legislation, preferably according to company law. The board should be fully accountable to the owners, act in the best interest of the enterprise and treat all shareholders equitably.
The mandates, rights, obligations and responsibilities of SOE BOD are generally outlined in the JSC and LLC laws, followed by regulatory documents developed by the MNE. As a general rule the boards of SOEs are granted rights and duties equivalent to those in private companies.
The JSC, State Property laws and the model Corporate Governance Code provide comprehensive provisions on BOD composition, terms, roles, responsibilities and accountabilities:
A BOD must be established in all JSC, including members such as state representatives13 and independent directors. Most of the SOEs’ governing bodies are organised as two-tier boards with separate a BOD and executive body.14 In rare cases, one-tier boards may be established.15
Terms for elected members is 3 years, with the option of renewal for up to 9 years. Further exceptions allow renewals on an annual basis.
The general shareholder meeting defines the board’s size, which is 3 to 11 members depending on the enterprise size.
The main duties of the board members are monitoring and eliminating potential conflicts of interest, protecting the interests of the SOE and shareholders, ensuring the integrity of the accounting and financial reporting system, conducting an independent audit, ensuring the disclosure of information, and treating all shareholders equally. The board has the authority16 to 1) make decisions on issuing shares and giving the preliminary approval of the annual financial statements and payment for audit services; 2) approve the regulations of BOD committees and define the composition, term of office, election and remuneration (salaries, bonuses) of the executive body members, corporate secretary and internal audit; and 3) approve selected internal regulatory documents, amongst others. Board members can attract experts (external or internal) to support its decisions, and the general shareholders' meeting can reverse board decisions.
Members have the fiduciary duties to carry out professional activities “with good faith and reasonability during conflicts of interest, when the members must act exclusively in the interests of the SOE”. Governing bodies are liable to the SOE and its shareholders for damages caused by their actions (or inactions). Before court procedures, a shareholder with more than 5% shares can request a BOD to call a meeting and redeem the damages caused by the activities of boards. A member of the BOD who did not participate or voted against a decision that violated established laws and charter has the right to court appeal.
Even though the executive body is obliged to execute all decisions of the general shareholder meeting and the BOD, the lack of clear division of control and management functions limits the ability of board members to check the executive body's activities or appeal its decisions in court. The responsibilities, liability, fiduciary duties, and conflict of interests are weakly monitored without any case law or judicial practice on these matters.
The LLC law provides an option to create a supervisory board or revision commission if this option is reflected in the company’s charter, with no legal requirement to appoint independent directors. The general term of the board can be a maximum of 5 years. LLCs’ – if they have one - usually have one-tier boards and the executive body may consist of either 1) a single person (general director or a CEO); or 2) a collegiate body (such as a management board) headed by a CEO. The main decision-making bodies of LLCs are the general participants meeting, while the supervisory board has basic rights to inspect activities of the executive body at any time and has unconditional access to all relevant documentation. The members of the supervisory boards are liable for losses caused to LLC and third parties due to their improper control over the activities of the executive body and may be held liable at the request of any of the partners of the LLC for compensation for losses caused by them.
In state enterprises without supervisory boards, the head of the enterprise is solely responsible for the activities of the enterprise. While state enterprises that operate in the healthcare and education sectors may create supervisory boards by the government approval. In such cases the supervisory board operates mostly as an intermediary body rather than a separate corporate governance body. The responsibilities of the board are established in the State Property law and are mostly related to the preliminary approval of key and strategic decisions before their final approval by the line ministry.17 The following key responsibilities of the supervisory boards deviate from the general corporate governance practices observed in the JSC and LLC SOEs:
agrees to the proposals of the line ministry on the appointment and dismissal of the head of the state enterprise
proposes amendments to the charter to the line ministry
develops proposals on key priority areas of operations to the line ministry.
Even though the legal framework and the model of Corporate Governance Code assigns the BOD with a clear mandate and responsibility for the SOE performance, in practice the boards face certain limitations that do not allow them to be fully accountable to the owners and treat all shareholders equitably:
On an annual basis shareholders send the Chair of the BOD (supervisory boards) the shareholder expectations,18 including strategic guidelines and KPIs for the upcoming years. To achieve these expectations the board prepares development and action plans, and at the general shareholders meeting the Chair reports on the execution of these expectations and adherence to the Corporate Governance Code. However, in fact, the results of the expectations merely impact the remuneration and decision on renewal or termination of terms of the executive body members. While the board members’ performance evaluation is limited with qualitative assessment like organisational excellence, clarity of strategic objectives, effectiveness of interactions among board members and shareholders, quality of board discussions etc. Thus, the responsibility of the board to owners is limited and not directly linked with the SOE performance. Rather the board’s self and independent assessment results are used by the general shareholders meeting to decide on term renewal and remuneration size for the board members.
Usually, SOEs or entire boards are replaced without any official explanation, rendering it difficult to assess how this links to the company’s performance. However, in most cases in which this occurred, there had been preceding criticism across the media and/or the President towards the CEO of the company.
Board members and the Chair are predominantly nominated by the majority shareholders. In all observed SOEs (except for Kazatomprom and SK Pharmacy) the board Chairs usually have an employment relationship with the majority shareholders, which may compromise the board’s independence in objective judgement and equitable treatment of all shareholders.
2.7.2. Setting strategy and supervising management
B. SOE boards should effectively carry out their functions of setting strategy and supervising management, based on broad mandates and objectives set by the government. They should have the power to appoint and remove the CEO. They should set executive remuneration levels that are in the long-term interest of the enterprise.
While SOE boards have been granted a number of powers, a number of apparent shortfalls remain. There is no legal definition of “undue influence” or “political interference” in BOD operations, and in practice SOE boards appear to have limited ability to carry out such key functions as setting strategy, supervising management and appointing and removing the CEO. Further, government bodies have the power to approve the final versions of strategic documents.
The BOD establishes a 10-year development plan based on strategic documents19 and the President’s addresses to the nation. The plan of national holdings and national companies is agreed on by the MNE (except for Samruk-Kazyna and its subsidiaries) and approved by the government, while the subsequent 5-year action plan approved by the BOD. Other SOEs require the approval of the development plan by their BOD or supervisory boards. State enterprises with supervisory boards approve their strategies by the decision of the line ministry, while the board serves as a preliminary approver of strategic documents with a right to make proposals. The numerous rules indicate that the dispersed ownership structure over SOEs in Kazakhstan renders it impossible to have clear/ aligned mandates and objectives.
Procedures for appointing management in SOEs are outlined in the JSC law and the SOEs’ charters. According to the law, the BOD (supervisory board) should decide on the removal or appointment of CEOs and set terms of contract and remuneration. However, government decree No. 784/ 2002 – once again depending on the type of SOE - requires government oversight bodies to provide the final consent on CEO selection and appointment. This renders it difficult for the BOD to independently monitor and, if necessary, change the top management. Table 2.5 notes the diverse appointment/ nomination and approval procedures, while also showcasing that CEOs can be appointed or removed on the recommendation of the Prime Minister of Kazakhstan, the government and Presidential Administration. This reveals direct political influence, which is not in line with the SOE guidelines.
Table 2.5. CEO appointment/ nomination/ approval process of selected SOEs
Note: The table consists of only 6 SOEs out of selected 20 SOE that require CEO appointment additional procedures on top of the JSC law provisions. The word “Chairman of the Management Board” is used interchangeably with “CEO”.
1. After expiration of President Decree #828 dated 29 March 2002, the new procedures of approval of the CEOs of national holdings and companies by the President Administration will not be disclosed publicly.
Source: Government Decree #784 dated 16 July 2002, President Decree #828 dated 29 March 2002 (expired on 31 July 2023) and President Decree #290 dated 31 July 2023.
In the case of Samruk-Kazyna, the appointment of CEOs in fully-owned subsidiaries requires preliminary approval by the parent company's executive body. As the CEO of SK is directly appointed by the government, this implies sharing the accountability and responsibility of the BOD for appointing and dismissing CEO with the state shareholder.
The overall process of CEO appointment is not particularly transparent and there have been allegations of undue political influence. The laws and regulations lack provisions of pre-established professional criteria for CEO selection, nomination and dismissal. The process rarely involves hiring an independent executive search company to assist with the selection. In most cases, the BOD considers only one candidate for the CEO position, and thus heavily relies on the proposals from ownership entities. This may be influenced by political connections rather than merit and professional qualifications. In practice:
1. the CEO nomination process starts with the ownership entity (line ministry, holding companies) selecting and preliminary approving candidates
2. hereinafter they aim to get the approval from required government structures, which is
3. transferred to the SOE’s boards for final appointment.
Preliminary approval and selection of the CEO by representatives of the ownership entity creates a potential conflict for the CEO. In effect, it shifts the CEO’s accountability for SOE performance from the BOD to the shareholder directly, thereby reducing the board’s role to, at most, a compliance-checking function.
The BOD (supervisory boards) officially appoints a CEO, who signs a management contract with the Chair of the BOD on behalf of the SOE, while ownership entities are not involved in this stage of the process. Management contracts with other members of the executive body are signed by the CEO.
State enterprises’ heads are appointed by the line ministry. The process of selection of the head and his/her performance measurement is conducted according to the rules developed and approved by the MNE.20 In the case of state enterprises with the supervisory boards, the board is responsible for the preliminary approval of the candidate before final decision of the line ministry.
The exclusive competence of the BOD, in particular its remuneration committee, is to set the remuneration for the CEO and management team. The Chair of BOD signs a management contract with the CEO, however, remuneration is usually agreed between the CEO and the ownership entities. The size of the remuneration depends on economics, the complexity of SOE operations, personal competence and his/her competitiveness in the market. While the specific methodology of setting remuneration remains unclear, there is no evidence as to whether the current remuneration caps take market-based pricing in a given sector into consideration. The ownership entities can impose salary caps depending on the country's economic situation, for instance, amidst the COVID-19 pandemic. The BOD conducts an evaluation of the potential bonus size depending on the executive body's performance and achievement of preset KPIs. KPIs are offered by the CEO and approved by the BOD on an annual basis.
2.7.3. Board composition and exercise of objective and independent judgment
C. SOE board composition should allow the exercise of objective and independent judgment. All board members, including any public officials, should be nominated based on qualifications and have equivalent legal responsibilities.
To ensure independent, objective, and effective decisions in the best interest of the SOE and fair treatment of all shareholders, the BOD and its committees should maintain a balance of skills, experience, knowledge and gender diversity (30% women recommended, but not obligatory). The model Corporate Governance Code defines basic criteria for the BOD’ member selection as work experience, education, special certificates (in specific industries), business reputation, absence of conflict of interest, and individual contribution to the board efficiency (if a term is renewed). However, the BOD composition faces several challenges:
To prevent state authorities’ intervention in the SOEs’ operations and to increase the responsibility for BOD decisions, the model Code requests shareholders to avoid the election of state body representatives as members of the BOD. This in fact contradicts the state property law requirement to have the line ministry and MF representatives on the BOD. Some SOEs can even have representatives from the Prime Minister’s office and the President’s Administration on their boards. This and potential government pressure through direct shareholders can lead to their involvement in the management process, create a conflict of interest and limit the time available for board discussions due to the politicians’ busy schedules.
In some BODs of SOEs, the government bodies responsible for overseeing and regulating these enterprises are the same agencies,21 which may hinder the separation of the state ownership function and other state functions.
The Ministry of Finance appoints its representatives, who serve as either the Chairman or Deputy Chairman of the committee on state property and privatisation, to sit on the SOE boards. This may potentially lead to lacking expertise to effectively contribute to the decision-making process, as these SOEs may operate in diverse industries and require specialised expertise. For instance, one representative may simultaneously serve on the BOD of an SOE in airport logistics, neurosurgery, pharmacy, and TV media industries.
The JSC law allows the CEO of the SOE to sit at the BOD, although he/ she has similar voting rights as other members. The selected 20 SOEs (Annex B) showcases that the majority have CEOs (15%), independent professionals (39%), and representatives of ownership entities (46%) sitting on their BODs. Ownership entities have at least two, and sometimes even up to four representatives on the boards of their subsidiaries – which can mean that they make up the majority of BOD members. This is the case for Samruk-Kazyna' subsidiaries, in which BODs are usually composed of seven members, out of which three represent the ownership entity, alongside the CEO. The BOD composition of the six listed SOEs consists of the holding companies (39%), CEOs (12%), independent directors (46%), and others (2%). Only Kcell has a minority shareholder representative from Freedom Finance JSC in its BOD. Although the law allows minority shareholders to have representative on the board, in reality, this does not occur.
The procedure for ownership entities nominating BOD candidates is not transparent. Usually, the ownership entity selects a candidate and proposes him/her to the general shareholders meeting for voting. Samruk-Kazyna, in co-operation with the Chair of the subsidiary BOD and two remuneration committees (subsidiary’s and Samruk-Kazyna's) defines the qualification criteria for candidates, and evaluates and shortlists candidates. In most cases, a candidate's current position within an ownership entity relates to the function of managing the asset, which a candidate is being nominated for. However, it is not a rule of thumb, and employees from other functions as well as individuals not related to shareholders can be nominated to the BOD. Independent search companies are rarely made use of. For instance, Qazaq Gas, Kazakhstan Temir Zholy, and the National Centre for Neurosurgery have one representative of the shareholder on the BOD who has no direct link to the shareholder’s organisation. In most cases, the general shareholder meeting considers only one candidate for one vacant position of the BOD member position, which limits the choice to select the best candidate among other possible candidates and eliminates the possibility to apply cumulative voting.
The supervisory boards of state enterprises are regulated by the separate rules developed by the MNE and covers the aspects of establishing the board, criteria of its members and members selection.22 The line ministry creates a nomination committee from its employees, that develops contest conditions and places a public announcement in the media and website of the line ministry. The State Property law establishes that these supervisory boards should consist of at least five members, which have no relationship with the state enterprise, 30% of which should be independent directors.
The relations between the members of the BOD and the SOE’s shareholders are formalised through contracts, specifying the rights, obligations, responsibilities to comply with the Corporate Governance Code, including devoting sufficient time to perform the functions, and nondisclosure of information. The model Corporate Governance Code requires BOD members to undertake an induction program. However, our survey noted that 60% of the SOEs do not provide training to prepare BOD members for their responsibilities. This may lead to challenges in effectively onboarding new members to the boards, resulting in a lack of preparedness to fulfil their responsibilities fully and efficiently.
Civil servants, politicians, and representatives (employees) of the holding companies are eligible to serve on the BOD or supervisory board of JSCs or LLPs with state participation, but they do not receive remuneration for these roles. While representatives of the shareholders who do not serve as their employees are eligible to receive remuneration from the SOE board membership.
The government bodies’ and Baiterek representatives sitting on the subsidiary boards can vote on agenda items and take all decisions under their personal discretion. Samruk-Kazyna's representatives however need to conduct internal consultations through a so-called strategic investment committee before making final decisions on votes. Eventually, the responsibility for the final vote lies in the hands of Samruk-Kazyna’s representative.
The duties of BOD members are usually terminated by the initiative of the ownership entity. During the termination process, the ownership entity does not provide a transparent or clear reasoning for the termination, more often referring to the expiration of contract terms or voluntary dismissal.
2.7.4. Independent board members
D. Independent board members, where applicable, should be free of any interests or relationships with the enterprise, its management, other major shareholders and the ownership entity that could jeopardise their exercise of objective judgment.
As noted in chapter 1 and in accordance with article 54 of JSC law, the number of independent directors (INEDs) should be sufficient to ensure the independence of the decisions made and the fair treatment of all shareholders, at least 30% of INEDs. The model Corporate Governance Code recommends increasing the number of independent directors up to 50% regardless of their listing status. LLCs have no legal obligation to have independent directors on their boards. According to the existing legal framework an independent member must meet the following criteria:
Not be affiliated with the JSC or have been affiliated within the three years prior to their election (except for serving as an independent director of the same JSC).
Not be affiliated with individuals or organisations that are connected by subordination to the JSC or have been so within the three years prior to their election.
Not hold a position as a public servant.
Not act as a representative of a shareholder in the JSC's body meetings within the three years preceding their election.
Not be involved in auditing the JSC or having participated in such an audit within the three years preceding their election.
Additionally, the independent member must fulfill any other requirements established by the laws of the Republic of Kazakhstan.
Be free from any material interests or relations with the SOE, its management, its property or other interested parties.
If an INED loses independence, this information needs to be brought to the attention of the shareholders to make appropriate decisions. INEDs are elected as Chairmen of board committees of strategic planning, HR and remuneration, internal audit, social and other issues.
The JSC law also requires concluding transactions with interested parties by simple majority of votes of BOD members who are not interested in its completion. So, in most of the cases such transactions are voted only by the INEDs. INEDs are requested to participate in discussions with possible conflict of interest:
preparation of financial statements and non-financial reporting
transactions with interested/related parties
the nomination of candidates to the BOD
deciding on the remuneration for them.
Samruk-Kazyna's CG Code establishes additional requirements to assess the independence of a director as he/she 1) has been an employer of the company or its group within the last three years; 2) had during the last three years a material business relationship with the company directly or as a partner, shareholder, director or general manager of the body or maintains such a relationship with the company; 3) received or is receiving remuneration from the company in addition to the director’s remuneration, participates in a share option of the company or in a performance-based payment scheme, or is a participant in the company’s pension scheme; 4) has a membership in BOD or has connections with other directors through participation in other companies or bodies; 5) represents a major shareholder; and 6) has served on the BOD for more than nine years since their first appointment.
All 20 observed SOEs align with the legal requirements stipulated by the JSC law in terms of INED composition. Although the LLC law does not note a minimum number for INEDs nor a mandate for them, SK Pharmacy LLC, voluntarily allocated 60% of its board membership to INEDs. The remaining three SOEs in LLC form do not have INEDs on their supervisory boards.
The state enterprises supervisory boards’ composition should contain 30% of INEDs, however the dedicated rule does not establish the criteria of independence. The general criteria for board member only stipulate that members should be free of any relationship with each other and with the state enterprise’s head, should not have an outstanding criminal record and a corruption offense, and should not be a head of bankrupt legal entity one year before board nomination.
Table 2.6. INEDs in the BOD of selected 20 SOEs as of 1 August 2023
Source: Government of Kazakhstan & OECD team calculations
In the vast majority of JSCs in Kazakhstan, INEDs — as well as other board members — are appointed and dismissed by the decision of the sole or dominant shareholder that is common practice in almost all countries. However, the process of setting INEDs criteria, competitive and transparent selection process finally defines the level of independence of these members. In case of Kazakhstan, we observe that only in 20% of cases out of 20 selected SOEs, the INEDs were selected through open contests that were publicly available on company or government body websites. The lack of a standardised and regulated process on the nomination/ selection of INEDs, may cause a potential bias and favouritism in their selection. The absence of a centralised database for INED candidates, tailored to the SOE render it difficult to conduct a fair and transparent selection process for them. The state level regulations do not contain a requirement to create a government nomination committee that will ensure transparent and competitive bases for candidates’ selection. The process of nomination of SOE BOD members rarely involves hiring an independent executive search company to assist with the selection of individuals who have no relationship with the shareholders and SOEs. In most cases, the general shareholder meetings or sole shareholder considers only one candidate for one vacant position of INED, which limits the choice to select the best candidate among other possible candidates.
Favouritism among INED candidates has led to special relationship between ownership entities and major shareholders of SOEs. Based on available information of selected 20 and the 6 listed SOEs, some INEDs tend to have strong relationships with holding companies that allowed some INEDs to be on the boards of at least 2 (subsidiary SOE) to 4 SOEs simultaneously within one holding group. For instance, one INED sits on the board of KazMunayGas, Kazatomprom, Samruk-Energy, Tau-Ken Samruk at the same time. The same case can be observed in the BODs of QazaqGas, KEGOC, SK Construction and Kazpost.
In such circumstances, it is difficult to evaluate the independence of a director, even if he/she meets the independence criteria set forth in the JSC law. With such direct dependence, independent directors are powerless to fulfil one of their central functions, namely “to ensure that the interests of all shareholders are respected”.
2.7.5. Mechanisms to prevent conflicts of interest
E. Mechanisms should be implemented to avoid conflicts of interest preventing board members from objectively carrying out their board duties and to limit political interference in board processes.
The JSC law obliges BOD’s to prevent conflicts of interest through 1) monitoring and, if possible, elimination of potential conflicts of interest at the level of officials and shareholders; and 2) monitoring the effectiveness of corporate governance practices in the company. BOD members must treat all shareholders fairly and make objective, independent judgments. The JSC law provides separate provisions on related party transactions, noting that the list of individuals and legal entities that are affiliated with the SOE must be made available to the public, and decided upon by the BOD simple majority voting by members who are not interested in its completion. The main mechanism to prevent conflicts of interest are enshrined in the Code of business ethics of the SOE.
High-level government officials and regulating/line ministry on SOE boards may perceive that they should decide according to their party line and the government’s overall objectives, rather than the company’s best interests. This remains as a significant risk, and effectively, there is no mechanism to eliminate this risk.
According to the latest amendments to State Property law, the MF is supposed to be given the authority to centralise the implementation of state ownership. Alongside the MNE, they are responsible for managing state property and monitoring the implementation of the line ministries of state policy on state property management. However, this setup has the potential to create a conflict of interest, particularly in SOEs where the MF has appointed its representatives as BOD members.
In general, despite having the legal framework in place and specific regulations in the Code of Corporate Governance to decrease the conflict of interests, implementation remains weak:
BOD members and INEDs are still elected in an in transparent manner, affecting voting decisions
the difficulty for government representatives in BODs to separate functions as a shareholder and other regulatory functions
the presence of high-level politicians and regulatory government bodies on BODs.
2.7.6. Role and responsibilities of the Chair
F. The Chair should assume responsibilities for boardroom efficiency, and when necessary in co-ordination with other board members, act as the liaison for communications with the state ownership entity. Good practice calls for the Chair to be separate from the CEO.
The Chair’s powers are elaborated in the JSC law, the model Corporate Governance Code, and further internal regulatory documents. Currently there are two-tier boards in Kazakhstan, which separates the roles of the Chair of the BOD and the CEO – head of the executive body. While the LLC law does not provide any provisions regarding the functions and roles of the Chair of the BOD, these provisions may be outlined within the SOE’s charter.
According to the JSC law, any member of the BOD can be elected as Chair, except the CEO, by a majority of votes of BOD members by secret ballot and can be re-elected at any time, unless otherwise provided by the charter of the SOE.23 In fully owned subsidiaries, the sole shareholder elects the Chair. State enterprises’ supervisory board Chairs are also elected by the majority of board member votes.
The model Corporate Governance Code provides more details on Chair functions that include:
planning meetings of the BOD, setting the agenda and ensuring timely receipt of information for decision making
building proper communication and interaction with shareholders, and consulting with major shareholders in key strategic decisions
ensuring monitoring and supervision of the proper execution of the BOD and general shareholders meeting decisions
in the event of corporate conflicts, taking measures to resolve them and minimise the negative impact on the SOE’s activities.
Each member of the BOD has one vote, and the decisions are made by a simple majority. The model Corporate Governance Code establishes that in case of equal distribution of votes, the Chair’s vote becomes decisive in SOEs, though in non-SOE JSCs, provisions regarding a casting vote should be outlined in the charter. Out of the 20 selected and 6 listed SOE, only 3 BODs are chaired by INEDs (Kazatomprom JSC, Kcell JSC, SK Pharmacy LLC), the remaining 23 boards are chaired by the representatives of the ownership entities (overseeing, owner, regulatory bodies and holding companies). Thus, the Chairs’ decisive voting in these 23 SOEs will predominantly represent the ownership entity – major shareholder interests in case of equal votes. Representation of the ownership entities in the SOE’s BOD Chair position does not allow them to exercise objective, independent judgment and treat all shareholders equitably.
While according to the legal and regulatory framework, the Chair of the BOD acts as the main contact point between the ownership entity and the SOE, a lack of dialogue between the owner and the BOD has been observed. It is the CEO that, in practice, acts as the representative and main contact point with the ownership entity and then informs the BOD of progress. Considering that the Chairs in the observed SOEs are the representatives of the ownership entities, and they are directly employed by the ownership, the Chairs’ independence is obviously compromised if his/her day-job is with the ownership entity.
2.7.7. Employee representation
G. If employee representation on the board is mandated, mechanisms should be developed to guarantee that this representation is exercised effectively and contributes to the enhancement of the board skills, information and independence.
The State Property law, JSC law and model Corporate Governance Code of Kazakhstan do not include any provisions, requirements, or directives concerning the inclusion of representatives from local self-government entities, trade unions, or other bodies authorised by labor collectives in the BOD meetings of SOEs.
2.7.8. Board committees
H. SOE boards should consider setting up specialised committees, composed of independent and qualified members, to support the full board in performing its functions, particularly in respect to audit, risk management and remuneration. The establishment of specialised committees should improve boardroom efficiency and should not detract from the responsibility of the full board.
The law governing JSCs requires all companies, regardless of size, business activity and whether or not they are publicly traded to have board committees. They are generally responsible for areas such as auditing; strategy and planning; nomination and remuneration; and ethics and integrity. These areas can be covered by one or several committees, except for audit issues that requires to be considered at a separate audit committee. Independent directors must chair these committees, but executives, the CEO, outsiders and external experts that are not members of the board, may also serve on board committees, except audit committee that should consist of exclusively of members of the BOD. The CEO cannot chair these committees.
The arrangement and functioning of the BOD committees, including their quantity and membership, are determined by the Committee's regulations, which are endorsed by the BOD, with a recommendation reflected in the model Corporate Governance Code to compose these committees with at least three members.
Among the observed 20 SOEs, 75% of them have committees under the BOD. Regardless of the legal requirements not all companies seem to have established committees. Out of 25% BOD without committees, 3 noted that this is due to the absence of such a requirement in the LLC law, and 2 of them face financial difficulties during their current stage of development, which has hindered the establishment of committees (see Annex B). 15% of the SOEs (Institute of Economic Research JSC, National Center of Neirosurgery JSC and NGEC KazGeology JSC) do not have separate audit committees, albeit mandated by the JSC law.
The JSC law and the Corporate Governance Code do not require listed companies to have a majority of independent directors on their committees. However, we observe that in most cases in which committees are established – particularly the audit committees - these are dominated by independent directors.
Committees should conduct a detailed analysis and develop recommendations on important agenda items before their consideration at the BOD meeting, while the final decision is made by the BOD:
The strategic planning committee considers the items related to the development of priority areas and strategy for the SOE, including SOE activities, its long-term value and sustainable development. It should be chaired by the INED, except for Samruk-Kazyna's strategy committee, which is chaired by the MNE.
The audit committee considers items related to external audit, financial reporting, effectiveness of the internal control and risk management systems, and compliance with the legislation. It also evaluates candidates for internal auditors and audit companies of the SOE. This committee should be chaired by an INED. In large and most significant SOEs, only independent directors are members of the audit committee and members are appointed by the BOD. The committee typically meets at least once a quarter, to review the results of the internal audits. The committee also reviews the SOE's financial statements and ensures that they comply with applicable accounting standards. The audit committee reports and gives recommendations to the BOD and communicates with the external auditor, if necessary. The committee is also responsible for ensuring that the internal audit function is adequately resourced and staffed with qualified personnel. They may also engage external consultants to assist with specific audit projects or to provide training to internal auditors.
The HR and remuneration committee determines the criteria for selecting candidates for members of the BOD and executive body, considers internal regulatory documents related to remuneration, regularly evaluates the activities of board members and executive body. It also makes preliminary decisions on appointment, sets KPIs, performance assessment, remuneration and succession of the CEO and members of the executive body, appointment and remuneration of the corporate secretary and internal audit service employees, composition of the BOD itself. The Committee should consist of a majority of independent directors.
When committees exist, their mandates, composition and working procedures seem to be well-defined and disclosed. The establishment of a separate risk management committee is not required by legislation or Code, though functions of risk assessment and management may be integrated within other committees such as the audit committee. Based on the observations of the OECD team in terms of the effective ability of BOD’s to exercise independent and objective judgement, it remains questionable how effective the work of the committees eventually is.
2.7.9. Annual performance evaluation
I. SOE boards should, under the Chair’s oversight, carry out an annual, well-structured evaluation to appraise their performance and efficiency.
The process of an annual evaluation of BOD performance is regulated by the model Corporate Governance Code. To improve the professionalism of the BOD and its members, each SOE’s BOD, its committees and members must conduct an annual self-assessment as well as an independent consultant’s assessment at least once every three years. The assessment includes aspects, such as the board composition, vision and strategy, succession plans, board functioning, interaction with shareholders and management, individual director effectiveness, committee activities effectiveness, information quality, quality of discussions, corporate secretary performance, process clarity, risk identification and assessment, and engagement with stakeholders. The results of the assessment are reviewed by the HR and remuneration committee, affecting the BOD members re-election, termination, and/ or remuneration. The regulations do not mention the Chair’s oversight role in this process. The results must be incorporated into the annual report of the SOE, which must be published on the website of the SOE.
Based on the results of the questionnaire of 20 SOEs, 45% of them do not conduct any self-assessments, while 35% carry out the self-assessment exercise without posting the results publicly. Among the observed SOEs, only the Damu Entrepreneurship Fund conducted a self-assessment and made the results public. Among the four observed LLCs, three of them (15%) do not conduct any self-assessments. However, SK Pharmacy LLC stands out as an exception and conducts both a self-assessment and an independent assessment. Nevertheless, the results of SK Pharmacy assessments are not publicly available.
In fact, some annual or sustainable development reports of the reviewed SOEs included the results of a self or independent assessment. Nonetheless, the annual reports are lacking crucial evaluation elements on succession plans, quality of discussions, engagement with stakeholders, shareholders, management, individual members effectiveness, misalignments, measures for improvement, etc. The information included in the reports rather appears as BOD’s annual activities reports rather than self or independent assessment results.
2.7.10. Internal audit
J. SOEs should develop efficient internal audit procedures and establish an internal audit function that is monitored by and reports directly to the board and to the audit committee or the equivalent corporate organ.
Kazakhstan’s SOEs can be audited in four different ways:
State audit and financial control bodies (supreme audit chamber) that audit the use of budgetary funds, efficiency of the state assets and reports to Parliament and the President.
Audit committee under the BOD that considers external audit, financial reporting, effectiveness of the internal control and risk management systems, compliance with the legislation and reports directly to the BOD.
External audit conducted by the independent auditor to audit the SOE's financial statements and assesses internal control systems. External auditors collaborate with the audit committee and its results are approved by the general shareholders meeting.
internal audit functions of SOEs which report their findings to the management and the BOD on financial and economic activities of the SOE, assessment of internal audit and control, risk management, compliance with legislation, and remain directly accountable to the BOD.
According to the JSC law, the SOE may establish an internal audit function in order to exercise control over financial and economic activities. It reports directly to BOD, and its employees cannot be elected to the BOD and executive body. Reporting to the BOD ensures that the internal audit findings and recommendations reach the highest level of oversight and decision-making authority within the SOE. The internal audit function collaborates with a professional audit council established according to the auditing legislation of the Republic of Kazakhstan. Article 53 of the JSC law outlines that one of the exclusive responsibilities of the BOD is to decide on various aspects concerning the internal audit service. This includes specifying the number of members, their tenure, selecting the head and members, and determining the conditions for their dismissal, as well as the remuneration and bonuses for its employees.
The model Corporate Governance Code establishes additional functions to the internal auditors on top of the general provisions provided by the legislation, such as:
assistance and advice to the BODs and employees of the SOE, co-operation with external auditor and consultants in regard of improvement of risk management and internal control system, corporate governance
conducting internal audits of subsidiaries
verification of compliance of executive body members and SOE employees with the legislation requirements regarding insider information, prevention of corruption, and compliance with ethical requirements
monitoring the implementation of the external auditor’s recommendations.
According to the LLC law, a means of overseeing the financial and economic activities of the executive body of an LLC is through the establishment of a revision commission. This commission can be composed of LLC participants or their representatives and comprises up to five individuals, unless the LLC's charter permits a larger membership. The revision commission's responsibilities can be fulfilled by an individual from the LLC or their representative, acting as a sole auditor. The selection of the revision commission or sole auditor is made by the general meeting for a duration specified in the LLC's charter, which must not exceed five years. Members of the revision commission (auditor) cannot simultaneously hold positions within the LLC's executive body.
2.7.11. Summary
The BOD’s approval of the CEO is rather considered as a formal approval stamp, than being given the right to nominate, appoint or remove the CEO, as provided by the SOE Guidelines. This makes it difficult for the BOD to fully exercise their monitoring function and assume responsibility for the SOE’s performance. State objectives are prioritised over commercial interests resulting from rendering it difficult for the BOD to effectively carry out its functions to independently set the strategy and supervise management without political interference.
The absence of legal requirements regarding board members' qualifications, coupled with a lack of competitive base for selection, transparency, and accountability in their selection and appointment, can be subjectively used to select a “favorite” or a “comfortable” member. The appointments may be influenced by political or shareholder connections rather than merit. Board members might have personal or business ties to the SOE and its shareholders, potentially affecting decision-making to the detriment of the company and the state. Generally, the lack of transparency and competition surrounding board appointments in Kazakhstan may prevent SOE boards from effectively exercising objective, independent judgment and treatment of all shareholders equally.
The majority of SOE boards are populated either by government bodies or holding companies - which may effectively add pressure for them in prioritising state and social objectives beyond company interests. This situation could potentially lead to adverse consequences for minority shareholders and the commercial interests of the company. Ensuring transparency in INEDs' appointments can help mitigate these potential issues and promote fair decision-making in the best interests of all stakeholders.
The requirements on the BOD’s self and independent assessment remain opaque rendering it difficult to make informed decisions on the re-election or termination of powers of board members. As the results of the selected SOEs’ questionnaires show, some of them do not conduct such assessments which is not in line with the model Corporate Governance Code requirements.
Thus, despite having a comprehensive legal framework and provisions of the SOE Corporate Governance Code, the execution of these provisions remains opaque. The lack of monitoring and controlling functions from the ownership entities and lack of responsibility for non-compliance makes these frameworks rather formal requirements than practical guidance.
Despite the fact that Kazakh BODs formally have a relatively large array of rights stipulated across different laws and regulations, their role remains rather constrained: on CEO’s nomination and dismissal, strategy setting, or being responsible for SOE performance. The current composition of most BODs – namely the majority being represented by majority shareholders - creates concerns on the objectivity of BOD decisions. On top of that, the lack of a transparent and competitive nomination of BOD members, including INEDs, may prevent SOE BODs from effectively exercising objective and independent judgement and treating all shareholders equally.
References
[2] Competition Agency (2023), ОТЧЕТ О СОСТОЯНИИ КОНКУРЕНЦИИ НА ОТДЕЛЬНЫХ ТОВАРНЫХ РЫНКАХ И ПРИНИМАЕМЫХ МЕРАХ ПО ОГРАНИЧЕНИЮ МОНОПОЛИСТИЧЕСКОЙ ДЕЯТЕЛЬНОСТИ ЗА 2022 ГОД, https://www.gov.kz/memleket/entities/zk/documents/details/486951?lang=ru.
[5] EBRD (2017), Corporate Governance in Transition Economies, https://www.ebrd.com/documents/legal-reform/kazakhstan.pdf.
[3] Halyk Research (2023), Проблемы государственного участия в экономике Казахстана.
[6] Kazatomprom (2018), Prospectus, https://www.kazatomprom.kz/storage/b5/lse_prospectus.pdf.
[7] KMG (2022), Annual Report, https://www.kmg.kz/upload/iblock/9b5/oi2bn0en04rjbgb8s3m1706o3sl851lg/KMG_AR2022_ENG%20(1).pdf.
[1] OECD (2023), Insights on the Business Climate in Kazakhstan, OECD Publishing, Paris, https://doi.org/10.1787/bd780306-en.
[8] OECD (2019), Istanbul Anti-Corruption Action Plan: Methodology for the 4th Monitoring Round, OECD, Paris, https://www.oecd.org/corruption/acn/OECD-ACN-4th-Round-Monitoring-Methodology-Amendments-2017-ENG.pdf.
[4] OECD (2019), Public Procurement in Kazakhstan: Reforming for Efficiency, OECD Public Governance Reviews, OECD Publishing, Paris, https://doi.org/10.1787/c11183ae-en.
[9] OECD (2017), OECD Investment Policy Reviews, OECD Publishing, Paris, https://doi.org/10.1787/19900910.
Notes
← 1. This concept was developed in 2000, during which the state ownership function was centralised within the Ministry of National Economy’s State Property and Privatisation Committee. Since then, the policy was transferred to the Ministry of National Economy, the Government established holding companies, and the State Property Law was developed.
← 2. Aligning it with the United Nations Commission on International Trade law (UNCITRAL) Model on International Commercial Arbitration, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and the European Convention on International Commercial Arbitration.
← 3. As of the end of 2020, SMEs employed 3.4 mn in Kazakhstan, or 38.6% of the total employed. SMEs produced a total output of KZT 32.7 trillion in 2020 and contributed 31.6% to GDP. In OECD countries SMEs make up over 99% of firms, are the source of 40-80% of all employment, and provide between 30 and 70% of GDP.
← 4. Since November 2022 the Association of Minority Shareholders also co-ordinates the non-listed companies’ minority shareholders
← 5. Air Astana JSC can be as an example of such case. Air Astana that has two shareholders in the ownership structure (Samruk-Kazyna JSC 51%, BAE Systems Kazakhstan Ltd 49%) based on paragraph 13.2. of the Charter defined that the board of directors consists of 8 or 9 members who are elected by the general meeting of shareholders by cumulative voting using voting ballots. The board of directors consists of 2 members proposed for election by Samruk-Kazyna, 2 members proposed for the election by BAE Systems, the President, 3 independent directors, and in the case where the board of directors consists of 9 members, 1 additional member determined by the shareholders. Paragraph 13.10 indicated that the Chairman of the board of directors is elected from among the candidates proposed by the Samruk-Kazyna.
← 6. Every government body that somehow regulates the SOE has its own requirement what exactly documents should be publicly available and should be disclosed on the financial statements depository. The main requirements on disclosure of SOE information is outlined in the Rules on keeping the register of state property developed by the MF.
← 8. Samruk-Kazyna's Corporate Governance Code has greater details compared to the MNE‘s code. For instance, the process of agreeing the SK participation in the state programme documents, in government consulting bodies, requirement of disclosure the execution of the low return or socially important investment projects with funding sources, conditions under which SK can intervene into subsidiaries operations, disclosure of any forms and conditions of co‑operation of listed subsidiaries with the government and state bodies, recommendation to have up to 50% of board composition as independent directors, election of the senior independent director, for 100% owned subsidiaries the Chair of the board of directors elected by the sole shareholder decision and description of the process of the board member election, the candidacy for the CEO is preliminarily agreed by the SK executive body, the government appoints the CEO of Samruk-Kazyna, etc.
← 9. Based on the Methodology of the corporate governance assessment of controlling subsidiaries of Samruk-Kazyna the rating is assigned based on the following scale from the lowest to the highest: C –1, B – 2, BB – 3, BBB – 4, A – 5, AA – 6, AAA – 7.
← 10. OECD team reviewed companies’ websites and other publicly available sources and did not detect the independent assessment results for recent years.
← 11. (1) Preventive Measures (Article 6): UNCAC's Article 6 emphasises the importance of implementing preventive measures to address corruption within both public and private sectors. It calls for measures to promote integrity, transparency, and accountability in the management of public affairs and in government-owned assets. (2) Management of Public Finances (Article 9): Article 9 of UNCAC focuses on the management of public finances, including the oversight of state enterprises and public procurement. It calls for measures to prevent corruption in the management of public assets, including SOEs. (3) Public Procurement (Article 9): UNCAC addresses corruption risks in public procurement, which often involves state enterprises. It promotes transparency, competition, and accountability in the procurement process to prevent corrupt practices. (4) Transparency and Reporting (Article 13): Article 13 encourages measures to promote transparency in the public administration, including the activities of SOEs. It calls for the development and maintenance of systems that facilitate public access to information. (5) Accountability of Public Officials (Article 15): UNCAC's Article 15 deals with the accountability of public officials. This includes officials in state enterprises, who are expected to be held accountable for any corrupt acts they engage in. (6) Criminalization of Corruption (Articles 15 and 16): UNCAC requires member states to criminalise various forms of corruption, including bribery, embezzlement, and abuse of functions. This applies to both public officials and individuals within state enterprises. (7) Recovery of Assets (Chapter V): UNCAC's Chapter V addresses the recovery of assets acquired through corrupt practices. This chapter can be relevant in cases where state enterprises are involved in corruption, and it provides a framework for recovering stolen assets.
← 12. Which provides recommendations on RBC in the areas of information disclosure, human rights, employment and industrial relations, environment, bribery and corruption, consumer interests, science and technology, competition, and taxation.
← 13. Except for Samruk-Kazyna‘s subsidiaries that are regulated by the separate NFW law.
← 14. According to legal documents in Kazakhstan an executive body is titled the management board.
← 15. According to the Air Astana JSC charter, the company has a one-tier board, and its executive body is represented by the CEO.
← 16. Samruk-Kazyna's law considers the delegation of some mandates and responsibilities of the general shareholder meetings to the board of directors and mandates and responsibilities of the board of directors to the executive body level.
← 18. OECD team was not provided by an example of such shareholder expectations to assess the practical implication of the code. According to of the MNE, such expectations usually communicated orally during board meetings. Based on SWF law Samruk-Kazyna's BOD has a Strategy committee chaired by the MNE that is used as a platform to communicate shareholder expectations to the Samruk-Kazyna and its subsidiaries and control their execution.
← 19. (1) Development Strategy of Kazakhstan until 2050, (2) National priorities (with 1-2 measurable indicators), (3) National development Plan of Kazakhstan (with strategic indicators) and National Security Strategy of Kazakhstan, (4) Plan for territorial development of the country, (5) the concept of industry development, National Projects, (6) development plans of state bodies, regions, cities of republican significance, the capital, national management holdings, national holdings/companies.
← 21. For instance, from the legal perspective the operations of the National Geological Exploration Company “KazGeology” are regulated by the Ministry of ecology, geology and natural resources, while the representatives of this ministry are set in the BOD of the SOE.
← 23. In the case of having another majority shareholder, apart from the state and other governmental and holding entities, the authority to nominate the Chair can be fixed in the SOE charters. For instance, Air Astana JSC board of directors’ Chair can be elected only from a candidate nominated by the Samruk-Kazyna.