Investor Protection in Reality: Review of SIA’s Activities During 2014
Press release issued on December 30, 2014
Kyrgyzstan’s unfavorable investment environment means foreign investors will most likely face some sort of problems when doing business here. It is expected. What is important is how efficiently the problems can be solved. If problems are solved and publicized, it will send a positive message. Otherwise Kyrgyzstan’s struggles with attracting investors will continue.
SIA works with actual cases involving foreign investors facing problems. SIA identifies problems, and works with stakeholders to implement solutions. SIA’s first case has identified number of weaknesses in the system. On the positive note, the case, which was previously closed twice by GSBEP, got reopened. GSBEP, at a seminar held at JK, admitted that the reason for closing the case earlier was weak. Admitting weakness and taking steps to address it is a positive step by GSBEP.
But there are many weaknesses. For example the way investigations are currently conducted protect the wrongdoer and increase risk for the investor. During the investigation process the wrongdoer knows earlier on that he/she is subject to investigation. This gives the wrongdoer plenty of opportunity to take action to protect and/or hide evidence and stolen assets. In other countries, including some CIS countries, this risk is mitigated. Investigators act swiftly, by securing evidence before it is hidden or destroyed, and preventing the wrongdoer from transferring assets. This important step does not happen in Kyrgyzstan.
Another major weakness is the time delay. SIA’s first case has first referred to GSBEP in 2012. The current investigation was opened in January and the case is still in the initial investigation phase.
The investigation methods need updating urgently. The methods are probably from the Soviet era. To assist in updating, SIA secured support from some of the largest law firms in the world. SIA’s support to GSBEP was nominated for a Thomson Reuters Foundation sponsored Impact Award. Only three projects from the whole world were selected. No other Central Asian project has ever reached this level. This achievement generated positive publicity and opened doors for further support from other stakeholders. But support is only available if GSBEP and other state agencies cooperate.
SIA’s first case involves many serious allegations including investor fraud, intend to defraud two EU government funded institutions, tax evasion and providing false evidence to state agencies. With investor fraud cases, usually just a few persons benefit. The rest of the population do not benefit. In fact they lose. With SIA’s first case, further investment, including interest from industry leading EU companies, has been put on hold because of the problem. A lot of jobs would have been created, and government would have received tax revenues.
There is now a greater need to attract foreign investors. The economic crises in Russia, and the plunging ruble, will create significant challenges for Kyrgyzstan in the coming years. Kyrgyzstanis working in Russia may face job losses, or salary cuts. The remittance they send to Kyrgyzstan will be less when converted into dollars or soms. Exports from Kyrgyzstan to Russia will become less attractive. Kyrgyz companies will start laying off people, further worsening the unemployment situation. Lower disposable income will reduce consumer spending, triggering further job cuts and other cost cutting measures. This could be the start of a downward spiral. For a country already struggling, a downward spiral is the last thing it needs.
Government needs to take decisive action, to show in practice how investors are protected. Showing investor protection will be an important step towards realizing Kyrgyz private sector’s development potential. A more developed private sector will help to replace imports with domestic production, increase exports, create jobs and increase government revenue. Does Kyrgyzstan really need to import condensed milk from Ukraine, apples and beef from China and eggs from Kazakhstan when there are underutilized resources in Kyrgyzstan? Foreign investment and expertise is needed for private sector development. And one way to attract investors is to show that existing investors are being looked after. Passing good laws and making promises has not worked in the past, and its unlikely to work in future. Because laws are only effective if they are enforced, which does not always happen in Kyrgyzstan.
There is hope. Government’s initiative to establish the Investment Promotion Agency seems to be paying off. The Agency has already assisted investors facing issues. This is what was lacking in the past, a dedicated team of energetic and motivated staff focusing specifically on investments. The agency is new. While it has already shown some positive outcomes within a short period of time, its future may well depend on results, and continuing stakeholder support.