Utilization Fee in Kazakhstan: Unfair Support for Some at the Expense of Others

I want to say a few words about the utilization fee, and first, a bit of background.

The principle of collecting a utilization fee is logical and operates in many countries worldwide. Many used materials cannot simply be taken to a landfill and buried as they contain harmful substances, and their decomposition severely damages the environment. Rusty cars should not be left in the middle of the steppe, cracked batteries should not leak alkali by the roadside, and car tires should not burn with black smoke in landfills. Such environmentally hazardous items must be disposed of in a special manner. Therefore, since 2016, Kazakhstan, like all civilized countries, has gradually introduced a utilization fee on the sale of many goods, starting with passenger cars, agricultural machinery, chemicals, and so on.

However, we all know how good ideas in our country turn into harm. Here too, the work of utilization was assigned without transparent competitive procedures to LLP “Operator ROP,” created two months before the competition and affiliated with a member of the former president’s family. Not only was a monopoly on this activity given to one private company, but this company, as is often the case with the chosen ones, did not spend all the money as intended—on processing and disposal of harmful substances. Instead, they directed funds to subsidize domestic car manufacturers, and some of the funds were even allegedly stolen by the company’s management, according to law enforcement agencies.

Now, it would seem, justice has prevailed; “ROP” has been transferred to state ownership, and everything should go right. But no. Kazakhstan is not new, but the same old. This is manifested in the fact that government agencies still operate non-transparently and undemocratically, without consulting and coordinating decisions with their employer—the people. In this case, the state funds from the utilization fee were turned into quasi-state property, but the very amount of the utilization fee continues to be considered and approved behind closed doors, without any justifications and evidence. For example, the utilization fee for cars and agricultural machinery was halved under the influence of mass indignation. But at the same time, no justification was presented to the public as to why it was reduced by half and not by one and a half or ten times.

Independent experts conducted their own calculations and estimated that the justified amount of the utilization fee for one passenger car should be only about one hundred thousand tenge. This is exactly how much is needed to recycle it into scrap metal. While now, even after a two-fold reduction of the previous utilization fee, its rate ranges from six hundred thousand tenge to several million. Again, the question arises: why are people being charged excessive amounts of money? It is clear that this used to be done to fill the pockets of one of the members of the ruling elite. But now, what is the point of setting an obviously inflated fee, why harm ordinary people who want to buy affordable cars?

Many experts believe that the utilization fee has simply become an additional protective mechanism for the domestic automotive industry. It is already protected from imported cars by a powerful barrier of several payments: a customs duty of 15%, VAT of 12%, inspection for compliance with technical regulations for each car (about two hundred thousand tenge), mandatory equipment of cars with the GLONASS system (temporarily suspended), the fee for initial registration (for cars older than 3 years it reaches 1.7 million tenge). Plus, there is also the utilization fee.

As a citizen of Kazakhstan, I support the development of domestic industry and would like Kazakhstan to produce its own cars, batteries, tires, office equipment, and so on. And I understand that the state can introduce prohibitive and encouraging measures to allow domestic industry to emerge and strengthen.

However, any such support measure should have a clear and calculated plan. For example, economists, technologists, and marketers should study the market and understand what volume of cars Kazakhstani plants can sell in the domestic and foreign markets. The next question: what price should cars have to be competitive in these markets? The next question: what is the cost price of cars at our plants? Then, what needs to be done and how much time is needed for the cost price of a car to become lower than the market price so that the cars become competitive? For example, five years are needed to build large productions that reduce the cost of parts or materials. When there is such a master plan, it clearly shows how much time and in what amount it is necessary to subsidize the domestic industry, through direct infusions from the state or by introducing customs duties, increased utilization fees, and so on.

Throughout this work, the goal and timeline should be visible because in a market economy no industry should be supported by the state indefinitely. After all, in such a case, it would mean that part of the country’s wealth, obtained from the taxes of all citizens, will be spent so that people who own production in one industry regularly receive profit at the expense of all other citizens of the country. Such an approach is fundamentally unacceptable.

As far as I understand, for many industrial sectors, the government does not have such a clear, thought-out, and calculated action plan. Purely short-term goals are pursued to protect certain industrial sectors in the foreseeable future. Such an approach at the state level is unacceptable. If an industry fundamentally has no prospect and no future because producing a particular product is economically unfeasible, then there is no point in supporting it with the taxes of all citizens. This is simply foolish. For example, with great desire, we could produce our own rockets, airplanes, sea vessels, and so on. But at what cost and to whom can we sell them? How much money needs to be invested in these productions to reduce the selling price of these goods to competitive levels? An insanely large amount! Therefore, we do not engage in this. So, who said that we need to support the automotive, battery, tire industries now? Is there any publicly available justification for such decisions for all the people, that is, for all taxpayers? I haven’t seen them.

Independent experts confirm that there are no such calculations. There is a feeling that the utilization fee in our country, or rather in the Customs Union, is used as a hidden protective measure against the import of automotive, agricultural, and other machinery. But this is wrong because the nature and essence of the utilization fee lie in collecting money from users of certain goods strictly for the intended purpose—to dispose of harmful substances from these goods.

Now several business associations are demanding transparency from the government in resolving the utilization fee issue, and they have grounds for this. According to the Entrepreneurial Code, any regulatory act that worsens the situation of entrepreneurs must undergo RIA (Regulatory Impact Analysis). That is, economic calculations must be made: how the adoption of this or that regulatory act will affect the business of a large number of entrepreneurs in Kazakhstan. If the negative consequences of such a regulatory act exceed the positive ones, such an act should not be adopted. This is a very correct and necessary article, but as we see, it is not always observed, as in this case.

The lack of openness and democracy of state bodies is manifested in this matter even in the fact that the localization of car production raises many questions and suspicions. There are jokes among the people that the assembly of imported cars in Kazakhstan comes down to just attaching the wheels, which arrived in the same wagon as the car itself. Or even to just filling the car tires with Kazakh air. There is information that at some European plants, workshops are opened only to partially disassemble ready-made cars for shipment to such underdeveloped countries as Kazakhstan, to formally assemble these cars there and deceive local laws. No wonder many cars are brought to Kazakhstan in closed containers, apparently, they do not want to show that they are practically in ready-made form.

Such rumors, jokes, and mockery are circulating among the people, and the government knows about them but does not take any measures to dispel them because the government is not subordinate to the people and is indifferent to the opinion and dissatisfaction of the people.

Independent associations have long been demanding access to factories for verification of production cycles and to ensure that assembly at Kazakhstani factories is indeed carried out and that localization is increasing each year according to the master plan. However, they are not allowed for a full-fledged inspection, and the government does not support transparency in this matter. So far, only one-day blog tours have been organized to the factories, which do not allow for a thorough verification of the production process. And this is not a private company issue—this is a state issue because the state, through its compulsory measures, forces an unlimited number of taxpayers and consumers to pay money out of their pockets so that several factories in Kazakhstan receive a profit.

This is wrong.

This material was written with the support of the Deputy Chairman of the Board of the Union of Independent Businesses of Kazakhstan, Shyngys Temir.