the pragma corporation financial protection initiative

The Pragma Corporation

Financial Protection Initiative

November-February Quarterly Report

(For the period ending February 21, 2001)

For the

U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT

GENERAL INFORMATION

CTO USAID/CAR Rick Gurley

PROJECT MANAGER Mohammad Fatoorechie

TEAM LEADER David Lucterhand

ALMATY, KAZAKHSTAN

The Pragma Corporation Financial Protection Initiative

November-February Quarterly Report (For the period ending February 21, 2001)

A. PROJECT OVERVIEW

I. PROJECT DESCRIPTION The Pragma Team works with the National Securities Commission (“NSC”), the Kazakhstan Stock Exchange (“KASE”), the National Bank of Kazakhstan (“NBK”), the Pension Regulatory Body/State Accumulation Fund, the Ministry of Labor, and broker/dealers to implement the Financial Protection Initiative Project.

In September 2000, Mr. Rick Gurley, the CTO for the USAID/CAR Mission, approved the Work Plan that set forth the priorities of the Project through its completion date. The priorities of the Project for this period are noted in the boxes below by component.

The project update for this quarterly report will correspond to the activities set forth in the action plan described below and be reported by component.

II. SIGNIFICANT EVENTS AND ACHIEVEMENTS

II. SIGNIFICANT EVENTS

• PROJECT WORK PLAN COMPLETED AND APPROVED BY USAID

• LARIBA BANK TO ISSUE MORTGAGE BACKED BOND IN APRIL/MAY

• GOVERNMENT INDICATES ITS INTENT TO PRIVATIZE THE STATE ACCUMULATION PENSION FUND BY FALL

• NEW INSURANCE LAW NOW IN FORCE

• NATIONAL MORTGAGE COMPANY UP AND RUNNING

• SOCIAL POLICY WHITE PAPER COMPLETED AND SUBMITTED TO THE GOVERNMENT

III. PROJECT EXECUTIVE SUMMARY This report provides details on the events and activities summarized below, as well as other events and activities regarding the USAID Financial Protection Initiative, as implemented by consultants for the Pragma Corporation (The Project), for the period from November 22, 2000 to February 21, 2001. The report is comprised of five components: Financial Instruments, Pension, Insurance, Mortgages, and Social Policy. Each component section of the report will have a summary with specific activity tasks identified and the status of each task with appropriate commentary, relevant attachments, and reference to administrative issues, if any.

Pragma attorneys, working in cooperation with attorneys from the National Securities Commission and Deputy Governor of the National Bank, Konstantin A. Kolpokov, secured a breakthrough ruling from the Ministry of Justice on registration procedures governing the pledge

USAID FPI Project: Second Quarterly Report

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of financial assets to multiple pledge holders. This decision paves the way for the Lariba mortgage-backed security issue; the bond appears to be on track for launch sometime in April or May 2001.

In a meeting with FPI project consulants, USAID, the U.S. Embassy and Deputy Prime Minister Oraz Jandosov, Mr. Jandosov indicated that the Government intended to have the State Accumulation Pension Fund (SAPF) ready for privatization by October 1, 2001. He indicated his support for the FPI’s technical efforts to clean up the duplicate accounts at the SAPF and to support the process. He also pledged to have the SAPF halt all advertising.

A basic insurance law embodying internationally accepted principles was passed in December of 2000. The new law addresses all of the 17 core principles mandated by the International Association of Insurance Advisors as they pertain to life and “general” insurance. This law, along with planned actuarial training, will help the Kazakh insurance industry to grow to the point that citizens need no longer go offshore to have their insurance needs met.

As part of an ongoing working group, the Project and the National Bank set up the first National Mortgage Company in the CIS by the end of 2000. The Project brought in consultants from the Urban Institute in Moscow to help with writing procedures manuals, loan standards and documentation, and will write a business plan for the NMC. The NMC buys mortgages from commercial banks and insure them, as well.

The Government was asked by the president of Kazakhstan to produce a new social policy plan. The Government through the Ministry of Labor, in turn, asked USAID to assist in analysis and preparation of the study. By the beginning of February, the Social Policy component of the Project produced a White Paper for the Ministry of Labor, and resulted in a series of policy recommendations and options that the Government may use for implementing a new social policy. While the Project had already completed mobilization to begin implementation of its work plan, resources had to be diverted to meet the short-term requirement of completing the Social Policy White Paper. Consequently, the time required for implementing some aspects of the work plan for insurance and pensions increased.

IV. PROJECT STAFFING The following personnel were engaged in project activities this quarter:

David Lucterhand, Chief of Party, Financial Instruments

Steve Moody, Resident Senior Advisor, Financial Instruments, Mortgage

Paul Pieper, Resident Senior Advisor, Pension, Social Policy

Richard Webb, Resident Senior Advisor, Insurance, Social Policy

Robert Van Leeuwen, Senior Advisor, Social Policy

Robert Hobart, Senior Advisor, Insurance


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B. FINANCIAL INSTRUMENTS COMPONENT

I. COMPONENT DESCRIPTION This Report provides details on the events and activities relating to the Financial Instruments Component of USAID’s Financial Protection Initiative, as implemented by the Pragma Corporation, during the period November 22, 2000 through February 21, 2001, inclusive.

The primary purpose of the Financial Instruments Component is the development of new investment-grade instruments, which (1) fill financial needs unmet by the current commercial banking and corporate and municipal finance communities in Kazakhstan; and, which (2) expand the selection of corporate or municipal securities in which private Pension Fund asset managers may invest. Secondarily, the Financial Instruments Component is intended (1) to extend the Kazakhstani yield curve of the corporate bond market by facilitating the issuance of longer maturities and (2) upgrade the quality of new issues by introducing credit enhancement techniques and by improving both bond indentures and investment memoranda.



• MORTGAGE-BACKED SECURITY: HONG KONG SHANGHAI BANK (KAZAKHSTAN) AGREES TO ACT AS DCA ADMINISTRATOR AND BONDHOLDER REPRESENTATIVE, SECURES SERVICES OF KPMG TO AUDIT MORTGAGE POOL QUARTERLY. MINISTRY OF JUSTICE OPINES ON MORTGAGE POOL REGISTRATION PROCEDURES.

• SOCIAL OBLIGATIONS BOND: PRAGMA REPRESENTATIVES MEET WITH DEPUTY PRIME MINISTER DZHANDOSOV ON SOB RELATED ISSUES

• MICROLENDING SECURIZATION: KCLF (TALDYKURGAN) DECISION ON BOND ISSUE ON HOLD PENDING CHANGES TO ROK TAX LAW

• WAREHOUSE RECEIPTS: PRAGMA CONTINUES RESEARCH ON POTENTIAL WAREHOUSE RECEIPTS PROJECT

• NATIONAL MORTGAGE COMPANY OF KAZAKHSTAN: PRAGMA SUGGESTS MORTGAGE INSURANCE PROGRAM

III. EXECUTIVE SUMMARY

LARIBA BANK MORTGAGE-BACKED SECURITY All parties to the Lariba Bank mortgage-backed security have reached agreement, and drafting of the component contracts and agreements continues. The bond indenture is being redrafted to incorporate the language of the supporting documents.

The documentation has been restructured to accommodate contractual payment arrangements among Lariba, HSBC and KPMG. Documentation now consists of the following:


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• Prospectus (Indenture): A combination of indenture and offering memoranda that must be approved by the National Securities Commission and, because Lariba is a financial institution, the National Bank of Kazakhstan.

• DCA Guarantee Agreement: The tripartite agreement which sets forth the terms and conditions of the USAID guarantee to bondholders and nominates HSBC as Bondholder Representative and administrator of the guarantee itself. The signatories are: USAID/CAR for and on behalf of USAID Washington, Lariba Bank, and HSBC.

• Agency Agreement: The tripartite agreement which establishes HSBC as Bondholder Representative and the contractual relationship between HSBC and KPMG, setting forth procedures the latter will follow in conducting its quarterly review of Lariba’s mortgage pool. The signatories are: Lariba Bank, HSBC and KPMG.

• The Pledge Agreement: Kazakh law requires a separate pledge agreement describing the object and term of the pledge, and identifying the pledgor and pledgee(s). Said agreement must be registered with the local registration authority (BTI). The signatories to the agreement are Lariba Bank and HSBC as Bondholder Representative for and on behalf of all current and future bondholders of record. (See attachment 1)

In addition, there are three attachments to the indenture (Prospectus):

• Sample Power of Attorney for Private Individuals

• Sample Power of Attorney for Legal Entities

• Mathematical Rationale for Mortgage Pool Sampling Procedure: This document sets forth the statistical methodology for determining the minimum number of mortgages which KPMG must review quarterly in order to assure “reasonable certainty” of the viability of all mortgages in the pool.

Past experience suggests that the various documents will undergo constant revision until the date of submission.

Of particular concern during development of this issue has been pledge registration. In order to be considered valid in courts of law, pledges must be registered with local registration authorities. As set forth in the civil code, registration procedures do not accommodate a pledge whose component parts might from time to time change, as will individual mortgages in Lariba’s mortgage pool. Additionally, pledgeholders and bondholders might fluctuate from time to time as a result of trading in secondary markets. Therefore, in early December, Pragma met with attorneys at the Almaty Real-Estate Registration Centre to discuss modification of existing procedures in order to accommodate a “master pledge.” Initially receptive to Pragma’s suggestions, the Centre’s management eventually expressed concern at having to authorize procedures that might have lasting consequences throughout the country, and requested that we clear our ideas with the Ministry of Justice in Astana.

With the assistance of attorneys at the National Securities Commission, Pragma chief counsel Mirgul Taimova drafted a proposed procedure that, in the case of multiple pledgees, would allow the pledgees’ (i.e., bondholders’) representative to sign the pledge agreement on behalf of all current and future bondholders of record. In case of need, the bondholders of record could be


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established at any time in full detail by referring to the list of current bondholders which, under the terms of the bond indenture, the bond issuer is required to maintain.

After two weeks of deliberation, the Ministry of Justice ruled in favor of Pragma’s proposed procedure with only minor changes. (The Ministry of Justice letter is in attachment 2.)

First, the ministry ruled that a pledged mortgage pool, or any other pool of financial instruments whose component parts might from time to time change during the term of said pledge, are analogous to “goods in circulation,” and their pledge should therefore be governed by the statutes governing “goods in circulation,” which allow for the substitution of goods pledged. (For example, individual components of the contents of a warehouse might change; however, as long as the assessed value of the warehouse’s contents remain fixed, the pledge is still valid.)

Second, the Ministry of Finance ruled that the Pledge Agreement could be signed by Lariba Bank and the Bondholders Representative for and on behalf of all current and future bondholders of record. Again, since actual bondholders might change from time to time due to trading in secondary markets, the Minister of Justice ruling allows bondholders to be identified as those individuals and corporations whose names appear at any given time in the registry of the Registrar for the issue.

Thus, the largest single legal impediment to issuing a mortgage-backed security has been removed, and documentation can proceed for an April or May launch.

SOCIAL OBLIGATIONS BOND As mentioned in the last Quarterly Report, higher oil prices this year have had the effect of lowering the urgency on the part of the akimats for issuing social obligations bonds. In meetings early in November, Kambar Shalgimbaev, Deputy Akim of Mangistau Oblast, informed us that tax receipts in the current year are running at very high levels, and the oblast will have no problem financing many of the projects envisaged for the SOB out of budgetary funds. For that reason, Shalgimbaev pressed us to include an airport cargo terminal—a pet project of the akim—in the list of potential infrastructure development projects.

Substantial reorganization of ROK government and agencies has also produced some confusion, both at Pragma and among akimats and oil companies, as to who is actually monitoring this project at the government level. The responsibilities for oil company PSA appear to have been moved to Ministry of Energy, while overall budgetary responsibility remains with Ministry of Finance. In order to get a clearer reading of the situation, Pragma representatives met with Deputy Prime Minister Dzhondosov on February 15 in Astana.

The meeting resulted in a memorandum from Dzhandosov to the various ministries and akimats involved in the project, encouraging them to move ahead as quickly as possible. (The Dzhondosov memorandum and ministry responses is in attachment 3.)

During this period, Pragma also continued refining drafts of the Letter of Intent between the akimats and the prospective oil company issuers. The draft Letter of Intent simply sets forth the two essential aspects of the deal: (1) that oil companies will issue bonds, the face values of which are tied to specific social infrastructure improvement projects in the oblasts; and (2) that the bonds represent satisfaction of the oil companies’ social obligations in the amount of the bond issue during the term of the bond. The significance of the Letter of Intent is that, once


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signed, the akimats and the oil companies will have actually agreed to start the process of selecting projects and issuing bonds. (The draft Letter of Intent is in attachment 4.)

THE MICROLENDING PROJECT

Ms. Janice Stallard, Regional Director of ACDI-VOCA’s microlending program in Taldykurgan, the Kazakh Community Lending Fund (KCLF), informed Pragma that anticipated changes to Kazakh tax law might require KCLF to reregister with a new charter. Should reregistration become necessary, then bond issuance might become a reality; KCLF’s current registration as an “association” does not give it the right to issue debt securities.

WAREHOUSE RECEIPTS The Parliament’s ratification of the new Law on Grain in January 2001 put added emphasis on Pragma’s research into the development of a warehouse receipts program in Kazakhstan. The law makes specific reference to “grain receipts” as vehicles for financing the agricultural sector.

In February, Pragma representatives met with ACDI-VOCA representative Jeremy Strauss to determine if cooperation between the two organizations on a warehouse receipts program might be possible. ACDI-VOCA conducted a similar program in Bulgaria in 1997.

MORTGAGE INSURANCE

In January, after several meetings of the National Bank Working Group on the National Mortgage Company, Pragma drafted a memorandum to the Chairman of the National Bank setting forth its concern that the proposed mortgage development program would not have the desired results if a mortgage insurance were not included. (The memorandum is in attachment 5.)

IV. ADMINISTRATIVE ISSUES

SUES The Senior Advisor for the Financial Instruments is Steve Moody. During the period under review, Mr. Moody was absent during December 19-27.


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V. DESCRIPTION OF STATUS AND TASKS

1. Development of Financial Instrument

Mortgage-Backed

Security

• Secured DCA Guarantee Administrator

• Secured Bondholder Representative

• Secured Lariba Shareholders’ Resolution

• Prepared Draft Bond Indenture

• Secured Ministry of Justice Ruling on Procedures for registering Master Pledge (Mortgage Pool)

Social Obligations

Bond

• Identified Prospective Water Purification Projects in Atyrau and Mangistau Oblasts

• Completed Draft Letter of Intent between oil companies and akimats

• Completed Presentation for Oil Companies

Microlending Project

• Performed Financial Analysis of KCLF

• Determined Structure of Potential Bond Offering

• Made Presentation to KCLF Board of Directors

• Researched KCLF Legal Status and Reregistration Requirements

• Researched KCLF Banking License

Warehouse Receipts

Project

• Met with ACDI-VOCA concerning potential Warehouse Receipts Program in Kazakhstan

• Researched Structure of Kazakh Grain Market and Ownership of primary grain elevators


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2. Legal Reform

National Securities

Commission

Working Group

• Contributed draft language and commentary to new unified NSC/KASE bond registration regulation

• Contributed draft language and commentary to NSC minimum requirements for bond indentures and investment prospectuses.

National Bank

Working Group

• Agreed with Governor of Nation Bank to coordinate efforts on a comprehensive reform of Bankruptcy Law, Pledge Law and related elements of Civil Code

• Initiated the merger of the legal components of the NBK Financial Instruments and Mortgage Lending Working Groups

• Reviewed resumes and conducted interviews with applicants for attorney positions at NBK

• Identified for NBK Working Groups the primary defects of existing Pledge Law

Pledge Registration

• Held preliminary meetings with BTI (Registration Center) on procedures for registering master pledge of mortgage pool

• Secured Ministry of Justice Ruling on Procedures for registering Master Pledge (Mortgage Pool)


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3. Untasked Activities/Accomplishments

Bond Index

• Developed Clean Price Bond Index and Portfolio Performance Indicator

• Index and Indicator made available to public by Reuters New Service

• Publication of Pragma Index Methodolgy in Rynok Tsennykh Bumag

Atyrau Mortgage Lending Project

Provided legal and financial analysis assistance to Atyrau Oblast for local mortgage lending program

LIST OF ATTACHMENTS

1. Lariba MBS: Pledge Agreement

2. Lariba MBS: Ministry of Justice Ruling

3. Social Obligations Bond: Dzhondosov Memorandum and Ministry Responses

4. Social Obligations Bond: Letter of Intent

5. NBK Working Group: Marchenko Letter


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C. PENSION COMPONENT

I. COMPONENT DESCRIPTION This Report provides details about the events and activities relating to the Pension Component of USAID’s Financial Protection Initiative, as implemented by the Pragma Corporation, during the period November 22, 2000 to February 20, 2001.

The Pension Component’s purpose is to ensure that Kazakhstan’s pension system provides a suitable income for retired, disabled, sole survivors or other Kazakhstani citizens no longer able to provide for themselves. The Pension Component’s objective is to develop a strong, competitive accumulation private pension system, which is well regulated and safeguarded against systemic risk, yet enables the private pension system to flourish to the mutual benefit of all involved. Specifically, the FPI seeks to 1) establish an effective regulatory body to supervise all components of the accumulation pension system; 2) assist in the privatization or liquidation of the State Accumulation Pension Fund (SAPF); 3) provide technical assistance to monitor, evaluate and respond quickly to specific issues that threaten the continued development of the accumulation system.


• PENSION CONTRIBUTIONS TO PRIVATE FUNDS REACHED AN ALL TIME HIGH OF 70% OF TOTAL CONTRIBUTIONS IN DECEMBER 2000, AND 65% FOR THE YEAR.

• THE MERGERS OF PENSION FUNDS ABN-AMRO WITH CASPIMUNAIGAS AND UMIT WITH TRADE UNIONS WERE BOTH COMPLETED. THE PHILIP MORRIS CORPORATE PENSION FUND WAS LICENSED. THERE ARE NOW SIXTEEN PENSION FUNDS IN KAZAKHSTAN.

• AS OF FEBRUARY 1, 2001, TOTAL PENSION ASSETS IN THE SAPF HAVE DECLINED TO 38% OF TOTAL PENSION ASSETS. THE SAPF’S SHARE IS PROJECTED TO DROP ANOTHER 2-4% OVER THE NEXT THREE MONTHS AS A RESULT OF ACCOUNTS BEING CLEANED AND THE TRANSFER OF PHILIP MORRIS CONTRIBUTORS.

• THE DEPUTY PRIME MINISTER HAS INDICATED THAT THE SAPF WILL BE PRIVATIZED BEGINNING IN THE THIRD QUARTER OF 2001.

• THE COMMITMENT IS DESIGNED TO UNIFY REGULATORY BODIES; THE SCHEDULE AND STRUCTURE REMAIN TO BE DECIDED.

• THE KAZAKH WEEKLY, ‘PANORAMA’, INTERVIEWED PAUL PIEPER AND THE DEPUTY CHAIRMAN OF ABN AMRO BANK, UMUT SHAYAKHMETOVA. THE RESULTING ARTICLE (SEE TRANSLATION; ATTACHMENT 1) HIGHLIGHTED THE DEFICIENCIES OF SAPF, IN PARTICULAR THE DUPLICATION OF ACCOUNTS, AND ADDRESSED THE IMPEDIMENTS TO CREATING VALUE BEFORE SAPF CAN BE PRIVATIZED.

III. EXECUTIVE SUMMARY


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The current quarter has seen significant positive developments on a number of fronts related to the development of the accumulation pension system. First, the private funds completed their most successful year ever by attracting 65% of all contributions during the year. The market is consolidating and strengthening as the smaller, less efficient funds merge with the larger, more efficient ones. With the appointment of Oraz Jandosov as Deputy Prime Minister, the pension system has its best high level political support ever. The environment is right to move forward on these key initiatives. The government has given its commitment to support privatisation of the SAPF by the third quarter and to the creation of an independent regulatory body.

On the negative side, our concerns about recordkeeping are increasing. The Narodny Bank Pension Fund recordkeeping system failed in December and was not properly backed up. The State Center for Benefit Payments (SCBP) system stalled in December and transfers to pension funds were delayed for two weeks. This is an area that will require considerable strengthening in the months ahead.

In addition, the Project completed an analysis of alternative fee structures and provided the information to the regulatory and policy making bodies. We continue to work to fully implement the market-to-market valuation, perfect the unified reporting system, and on other technical issues.


All long-term personnel are on board and operating effectively. We anticipate the need to have an expatriate consultant to provide expertise to improve recordkeeping systems for about six weeks.


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V. DESCRIPTION AND STATUS OF TASKS

Task 1 – Establishing an Effective, Efficient Unified Regulatory Body

Defined Activity Progress Made During Quarter/

Proposed Future Actions Prepare a strategy and timetable for achieving the establishment of a unified, independent regulatory body (within 30 calendar days of the start of the activity)

• The previous draft will be revised consistent with instructions received from Mr. Jandosov in our meeting of February 16. It discusses the technical aspects of the unification and the key political decisions

Supporting political efforts to establish a unified regulatory body

• Key members of the Economic Policy Council appear to favor consolidating all financial sector supervision. We are working with the Bank Supervision Project to come up with some background and initial ideas on this issue so that they can be sent to Mr. Jandosov and discussed with Mr. Marchenko.

Establishing standardized (uniform) reports, methodologies, normative acts, and supervision

• Unified reporting

• Common methodologies

• Unified supervision

• The FPI continues to work on the full implementation of the Unified Information Center located at the NSC. The UIC will collect primary information from pension funds, asset managers and bank custodians in one location and make it available to all regulators. The UIC will serve as the technical platform for unifying supervision operations. Currently, the system cannot be fully implemented because the reporting system for custodial banks is not automated. The Project is working on that effort.

• The FPI joined working groups to develop a uniform reporting system based on the UIC, reducing the number of reports and developing common standards among funds and asset managers for calculating daily unit values, investment income, etc..

• Work continued to formalize the activities of the Market Valuation Committee. Draft internal regulations were adopted and the FPI met with GoK officials at the presidential administration and MINFIN to press for adoption of international accounting standards.

• The FPI is preparing an analysis of the impact of unifying asset management companies and pension funds, and a more standard fee structure.


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Task 2 – Privatization or Liquidation of the State Accumulation Pension Fund


Proposed Future Actions Prepare a plan for eliminating the State Accumulation Pension Fund as a dominant market force (within 45 days of the start of the activity)

• The plan was prepared and discussed with the Deputy Prime Minister. The timing is agreed upon and the plan is proceeding.

Resolve technical issues related to the privatization of the SAPF

• Clean up duplicate accounts

• Prepare financial analysis

• Prepare a preliminary design

• The SAPF had ceased working on cleaning accounts. The Project took steps to raise the profile of this issue. We have now begun working again with the SAPF. The Crystal Lane software development company and the FPI completed a software package that will support the SAPF’s efforts to 1) eliminate the creation of new duplicate accounts, and 2) to identify potential existing duplicate accounts. The software is being used in pilots and a final system should begin working during the next quarter.

• The SAPF told the FPI that using the new software and existing resources, it is likely that the SAPF will be able to eliminate 300-400,000 duplicates per year (of the estimated 1.6 million total). This slow pace is due to the strict legal restriction which only permits accounts to be merged with the signed written consent of the affected contributor. At the SAPF’s estimated pace, the process of eliminating duplicate accounts would take from 3-5 years.

• The FPI has developed initial ideas on a plan to eliminate the duplicates by the third quarter by requiring employers (by government decree) to support the process of working with employees/contributors to meet legal requirements associated with merging accounts. This plan was discussed with the Deputy Prime Minister who is fully supportive and wants the accounts cleaned by September 1, 2001.

Strengthen political support for the privatization of the SAPF

• Build support from donors, international investors, etc.

• Provide local counterparts with supporting analysis

• The Minister of Labor, the SAPF and private funds have come out in opposition to the privatization of the SAPF. This is a coordinated effort by the Minister of Labor.

• To overcome this, the FPI team met with the Deputy Prime Minister and received a commitment to support privatization of the SAPF during the third quarter of 2001.


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Task 3 – Monitoring, Evaluation and Quick Response


Proposed Future Actions Identify the key threats to the pension system and a plan for monitoring them (within 30 calendar days of the start of the activity)

• The key threats were discussed in meetings with USAID and the Government. Efforts are underway to address each issue.

Improve recordkeeping • The FPI met with the Minister of Labor in February to discuss concerns about the SCBP’s performance and to offer support. The Minister has been very unwilling to open up the issue to outside assistance.

• The FPI developed a concept to improve recordkeeping to international standards and discussed alternatives with the Deputy Prime Minister. No final decision has been made.

• The Project IT team is supporting the Committee in the development of a COBIT based systems standards and auditing system.

Improve policies and supervision

• The Committee requested assistance on the development of improved recordkeeping and terms of reference are being prepared.

• A legal working group is preparing draft amendments to the pension law. The goal is to complete a set of amendments by February 28, 2001 and submit to Parliament by April. The amendments will include those required to privatize the SAPF.

LIST OF ATTACHMENTS

1. Translation of electronic copy of article by Nikolai Drozd in ‘Economics and Finance’ section, Vol. 4, ‘Panorama’ newspaper, 07.02.01


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D. INSURANCE COMPONENT

I. COMPONENT DESCRIPTION This Report provides details on the events and activities relating to the Insurance Component of the USAID Financial Protection Initiative, as implemented by the Pragma Corporation, for the period November 22, 2000 through February 21, 2001, inclusive.

The purpose of this Component is to assist the National Bank of Kazakhstan in developing a strong Department of Insurance Supervision (DIS). The major objectives of this Component are to upgrade the legal and regulatory environment for the insurance industry to a level compatible with international standards of insurance commerce; to strengthen the DIS so that it is able to effectively monitor Kazakhstan’s insurance market by implementing improved regulatory and supervisory functions; and to ensure that the DIS staff receives the training and education required to effectively implement their regulatory mission to the insurance sector.

The results sought from this Component are the development of capable, reliable insurance regulation and supervision in Kazakhstan; a legal and regulatory framework in Kazakhstan’s insurance sector consistent with international standards; the institutional infrastructure necessary to support life insurance activities (actuarial capacity, information systems, etc.); and a private life insurance industry.

ADSTRATIVE ISSUES


• INSURANCE LAW NOW IN FORCE

• FURTHER PROGRESS MADE ON DRAFTING THE REGULATIONS REQUIRED UNDER NEW INSURANCE LAW

• REVIEW AND ASSESSMENT OF PROCEDURES AND PRACTICES OF DEPARTMENT OF INSURANCE SUPERVISION NOW COMPLETED

• FURTHER PROGRESS MADE ON DEVELOPING KAZAKHSTAN SOCIETY OF ACTUARIES

• ARRANGEMENTS MADE FOR ADDITIONAL ACTUARIAL TRAINING IN KAZAKHSTAN

Details of these and additional accomplishments are described in the Executive Summary and in the Description and Status of Tasks sections of this report.

III. EXECUTIVE SUMMARY With respect to the activities of the Department of Supervision (DIS), Pragma engaged the services of a consultant, Mr. Robert Hobart, who completed his assessment, recommended improvements, and analyzed the training needs of DIS staff. His final report was submitted on 7 December 2000, a week ahead of target. Based on his findings, a framework for training was developed, and organization of training activities was begun. Mr. Hobart’s recommendations are to be implemented by Pragma during the course of 2001, with initial training to commence in late April.


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His main conclusions were that: (1) the existing organizational structure of the DIS is adequate; (2) the existing IT resources of the DIS are adequate; (3) the legislation is deficient in the areas of corporate governance, related party transactions, and market conduct/consumer protection; (4) it is necessary for the DIS to develop a risk-based approach to supervision; and, (5) the insurance industry does not trust the DIS to keep information confidential.

He identified the following five areas for training: (1) general understanding of the insurance market and operations of insurance companies; (2) understanding of risk-based supervision and techniques; (3) financial analysis techniques and practices; (4) examination methodology and practices; and, (5) market conduct and consumer matters. He also identified two areas (financial analysis and examination methodology) that will require additional on-site consulting work, and preparation of procedures, forms and manuals.

In terms of development of the legal regulatory structure, amendments to the proposed insurance law were considered and some of them were introduced into the draft of the legislation that had been tabled in Parliament. After more than a year’s work with the Department of Insurance Supervision (DIS) and representatives of the insurance industry, the insurance legislation was approved by the Senate, passed by the Parliament, and signed by the President, Nursultan Nazarbaev. Official notice of passage was published on 10 December 2000, and the bill became law on 20 December 2000, twelve days earlier than the target date. An English translation of the law as passed is in process and will be distributed shortly.

Passage of the legislation was followed immediately by intensive work in developing the policy and drafting the regulations that are required under the new law. Twenty-six regulations have been identified as being required in the near future (consolidation may reduce this to as few as 20). A total of 15 regulations have been identified as priority items, and are currently in various stages of drafting. The DIS set a target date of 28 February 2001 for completion of 10 of these regulations, with the rest to be completed by 31 March 2001. Pragma remains involved in developing and drafting the policy underlying these regulations.

Pragma assumed responsibility for ensuring that the Kazakhstan Actuarial Society was legally registered as an association. Pragma also provided legal support to the proposed Society in connection with the preparation of the documents, helped to establish the internal structure of the Society and continues to provide legal support with respect to its registration. The formal organizational documents have been drafted, discussed and submitted to the Ministry of Justice for approval. Once negotiated with and approved by the Ministry of Justice, the Society will come into existence. It is expected that the Society will be completely registered by the first week of March 2001.

Pragma proposes to assist the Society in gaining observer status at the International Association of Actuaries (IAA). The consultant to be engaged to conduct actuarial training (see below) will make representations on behalf of the Society at the IAA’s Annual Conference in Portugal in April 2001.

Initial discussions were held with the Governor of the National Bank of Kazakhstan with respect to the establishment and maintenance of a National Actuarial Center that will gather, process and make available demographic and other data required by the government, the insurance industry and others. Pragma will contribute some resources, as will the NBK. More detailed plans are to be developed.

Considerable energy was devoted to organizing actuarial training, which is scheduled to begin next quarter. This included identifying and hiring a consultant (Mr. Michael Sze), identifying the


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materials required, translating a large volume of material from English to Russian, identifying local personnel to be trained as future trainers and arranging the necessary facilities and support personnel. Pragma has arranged to provide additional actuarial training at the basic and advanced levels. The basic training will follow similar training provided through USAID last year, and will be given in two three-week sessions in March and June 2001. The advanced training will be given in a two-week session in October 2001. Dr. Michael Sze - who provided the training during 2000 - will also provide the training during 2001.

Pragma was also involved in initial discussions aimed at combining banking supervision and insurance supervision under one regulator. While not technically within the terms of the TOR or the contract, any such amalgamation would have supervisory implications on both the banking and the insurance side.

IV. ADMINISTRATIVE ISSUES The Senior Advisor for the Insurance Component is Mr. Richard Webb. During the start-up phase of the FPI Project, he also assumed responsibility for winding down the operations of the previous USAID contract (IMCC Pension Reform), and for matters related to the Social Policy Component (responsibilities shared with Mr. Paul Pieper). The IMCC responsibilities were completed at the end of December 2000. The Social Policy responsibilities were completed in early February 2001.


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Task 1 – Supervision / DIS Efficiency Defined Activity Progress Made During Quarter/

Proposed Future Actions Assess Department of Insurance Supervision (DIS)

• Current procedures and practices

• Organizational structure

• Supervisory framework

• use of information technology

• staff capabilities and training needs

• within 60 days of start of contract

• date for production of User Guide to be established within 30 days of start of contract

other relevant areas

• Pragma engaged the services of Mr. Robert Hobart, Superintendent of Financial Institutions for British Columbia, Canada, to conduct this assessment

• Mr. Hobart commenced his duties on 23 October 2000

• During his time in Kazakhstan, he worked closely with the DIS and met with a number of industry representatives

• Mr. Hobart completed his duties and submitted his report on 7 December 2000, a week ahead of target

• Prior to returning to Canada, he discussed his report with Rick Gurley (USAID), Zhanat Kurmanov (Director of the DIS), and Pragma representatives

• Mr. Hobart’s general findings were:

• There are more than enough staff, but reductions in staff would require improvements in efficient use of staff

• The focus and degree of oversight by the DIS requires refinement

• Few DIS staff have any industry experience

• None of the DIS staff have been in their positions for more than a year

• The existing organizational structure of the DIS is adequate

• IT equipment and resources are adequate but they are not used as efficiently as they could be

• The legislation is deficient in the areas of corporate governance, related party transactions, and market conduct/consumer protection

• The DIS must develop a risk-based approach to supervision

• The insurance industry does not trust the DIS to keep information confidential

• Mr. Hobart’s recommendations for areas of training are:

• General understanding of the insurance market and operations of insurance companies

• Understanding of risk-based supervision and techniques

• Financial analysis techniques and practices

• Examination methodology and practices

• Market conduct and consumer matters


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• Mr. Hobart identified required development work (e.g. procedures,

manuals, forms) in the following areas:

• Financial analysis

• Examination methodology

Develop framework for upgrading supervisory procedures and practices

• Within 60 days of start of contract

• The initial framework has been developed, based on the recommendations contained in Mr. Hobart’s report, and consists primarily of

• Intensive training of DIS staff

• Development of manuals and procedures with respect to financial analysis and examination methodology

• Additional framework matters may be identified after review of other general legislation that affects insurance companies (see third box in Task 2 – Legal Reform below)

Implement framework

• Date for production of User Guide to be established within 30 days of start of contract

• Arrangements to develop and provide the required training are underway (see next Box)

Develop and deliver training

• Based on TNA

• date for production of User Guide to be established within 30 days of start of contract

• other specific areas

• identify foreign opportunities

• Training will consist largely of the training needs identified by Mr. Hobart, supplemented by such other training needs as may be identified in the future (e.g. specific products, developing regulatory practices, etc.)

• Training was scheduled to begin in February; however, due to other operational responsibilities and activities, the DIS will be unable to devote its attention to training until May 2001

• Training is now scheduled to begin in May 2001

• The Director of the DIS has advised that, due to other operational responsibilities and activities, training will have to be conducted on a half-day basis, with the maximum duration of each session being two weeks

• This rules out an intensive, continuous training program, as originally planned, and requires revision of the original time schedule

Develop and implement certification exams for relevant industry participants

• Areas (if any) in respect of which certification examinations are to be required will be identified in consultation with DIS

• This is a longer-term issue and is currently a low priority

Develop and implement dispute resolution regime

• One of the areas of required DIS training identified by Mr. Hobart involved alternative dispute resolution

• Implementation may face legal difficulties, including amendment of other legislation

• Richard Webb discussed this matter with the Director of the DIS, whose preference is to keep this activity internal, informal and low-key, due primarily to resource constraints


20

Task 2 – Legal Reform


Proposed Future Actions Develop and pass legislation

• In November and December 2000, the legislation was approved by the Senate, passed by the Parliament, and signed by the President

• Official notice was published on 10 December 2000, and the legislation became effective on 20 December 2000, 12 days earlier than the target date

• The law is currently being translated into English

• The English version will be distributed to interested parties within and outside of Kazakhstan

• Mr. Webb discussed with the Director of the DIS the need for maintaining an inventory of required changes to the legislation, and making periodic amendments

• Such changes are required on an on-going basis in all jurisdictions, and are more pronounced in the first few years following major legislative revision

Develop and promulgate regulations

• The DIS has reviewed the legislation, identified all regulatory authorities, determined which regulations are currently required (26 – perhaps to be reduced to 20, due to consolidation of matters), prioritized all required regulations, and assigned responsibility for drafting

• Divided between four persons, with Mr. Webb reviewing and coordinating

• Mr. Webb has drafted preliminary versions of the regulations relating to capital, reserves, and licensing of actuaries

• He has also reviewed preliminary drafts of regulations relating to asset diversification and liquidity

• The DIS has set a target date of 28 February 2001 for completion of 10 of the regulations, with the rest to be completed by 31 March 2001

• As the regulations reach final form, they are to be translated into English and given to Mr. Webb for review and comment

• It will be necessary to ensure that some regulations accord with regulations relating to pensions (e.g. asset valuation, permitted investments, etc.)

Assess rules and regulations


• Other legislation affecting the insurance legislation is being collated and translated into English

• Low priority - assessment will follow the promulgation of all necessary regulations under the new insurance law


21

Develop short-term plan (approved by DIS) to reform rules and regulations


• Date for production of User Guide to be established within 30 days of start of contract

• This will follow completion of the assessment of the rules and regulations (see preceding Box)

Develop and implement consumer protection measures, including

• Trade practices

• Consumer disclosure requirements

• The proposed legislation contains some consumer protection measures; however, initial concentration is to be on solvency and capital adequacy of companies, with more detailed consumer protection measures to follow

• Market conduct involves rights and contractual matters, which are covered by the Civil Code, rather than the insurance law

• Accordingly, this will require changes to the Civil Code

• One of the areas of required DIS training identified by Mr. Hobart involved market conduct, marketing practices, complaints, and consumer education

• Richard Webb discussed consumer protection measurers with the Director of the DIS, who is of the view that activity in this area should be restricted to consumer education and disclosure of information

Develop and implement rules for licensing

• Brokers

• Actuaries

• Auditors

• Companies

• Other relevant industry participants

• These will be set out in the regulations currently under development

Develop and issue other required regulatory documents

• Guidelines

• Rulings

• Interpretation bulletins

• Best practices papers

• These are longer term goals, and reflect maturity of the supervisory process, and fine-tuning of the legislation and regulations

• Richard Webb discussed the eventual need for such instruments with the Director of the DIS

Task 3 – Actuarial Matters


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Proposed Future Actions

Assist in establishing Society of Actuaries

• Graduates of the actuarial training program (founding members) continue to meet on a weekly basis to develop the Society and standards

• Mr. A. Kasimovsky of Pragma continues to meet with the group to offer technical and legal support

• Mr. Kasimovsky drafted the initial Charter and Constituent Agreement of the Society and discussed them with the founding members

• The documents were amended to reflect the comments of the founding members

• The documents were submitted to the Ministry of Justice and registration is in process

• Following registration Pragma will

• Assist in developing actuarial standards

• Assist in developing contacts with actuarial associations in other countries

• Michael Sze (actuarial trainer engaged by Pragma) is to lobby for observer status with the International Association of Actuaries, at its annual meeting in Lisbon, Portugal in April 2000

Assist in establishing actuarial unit at the DIS

• This is a longer-term objective

• The activity will be pursued after further actuarial training and identification of actuarial needs of the DIS

Assist in establishing and maintaining actuarial database at DIS

• On 17 January 2001, a proposal for the development of a detailed plan for establishment of a National Actuarial Center was submitted to the Chairman of the NBK

• Subsequently, Mr. Webb and Mr. Paul Pieper of Pragma discussed various aspects of this matter with the Director of the DIS, including the identification of possible personnel and the initial tasks of the Center

• The Director of the DIS advises that consideration is being given to whether the center should be a division of the DIS, lodged with some non-governmental body (such as the Society of Actuaries), or established as an independent entity


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Develop and deliver actuarial training

• Basic

• Advanced

• Goal of courses

• To qualify another 14 actuaries at the basic level

• To qualify a number of basic level actuaries at a more advanced level

• To train some students to become trainers themselves

• To involve the Actuarial Society of Kazakhstan in future training, including refresher courses

• Basic level training for up to 40 students is to be provided in two sessions

• First session from 12 to 31 March 2001

• Second session from 22 to 30 June 2001

• Advanced level training is to be provided in four sessions

• First session from 11 to 29 October 2001

• Successful Second Session students and their equivalent from the 2000 training would be eligible for this training

• Remaining three sessions to be provided during 2002

• Training to be developed and provided in part by Mr. Michael Sze, who provided the initial training in April and July 2000

• Some materials to be translated into Russian

• Some training to be given in Russian

• Need for additional basic courses to be assessed at end of 2001

Task 4 – Guaranty Fund


Proposed Future Actions Seek approval of the DIS to develop feasibility plan

• The Director of the DIS has expressed qualified interest in pursuing this activity; however, a final decision depends upon the level of development of the insurance industry

• Approval will be sought again at the end of the first year of the contract

If the DIS approves, assist in development of plan

• Months 12 to 24

• Development of the plan is to occur (if at all) only during the second year of the contract


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Task 5 – Develop Plan for USAID Interventions to Strengthen the Private Insurance (Primarily Life) SectorTask 5 – Develop Plan for USAID Interventions to Private Insurance (Primarily Life) Sector



Assess

• Market

• Current

• Future

• Legal and regulatory environment

• Industry

• Actuarial capacity and needs

• Initially, USAID indicated that it wished to have this assessment performed as soon as possible

• Subsequent discussions indicated that this matter is to be given a lower priority and is to be proceeded upon during the second year of the contract

Prepare plan • This will follow engagement of a consultant during the second year of the contract

Other Matters Not Specifically Identified in the Contract, But Which May Affect as

Smoke on the Horizon – Other Matters Not Specifically Identified in the Contract, But Which May Affect Identified Areas

Nature Progress Made During Quarter/

Proposed Future Actions • Consolidated

Supervision • The USAID Banking Supervision project is exploring the

possibility of consolidated supervision of financial groups, and has developed several possible approaches

• Consolidated Supervision would have a direct impact on the regulation and supervision of insurance companies which are part of such groups (either as subsidiaries, parents or sisters of other financial institutions (FIs))

• Any bank/insurance consolidation should be consistent with possible consolidations in the pension/securities area

• It is possible that all types of FIs could eventually be consolidated under one regulator

• It is uncertain whether or not consolidated supervision will be implemented, or even what form it may take (e.g. full legal consolidation, administrative streamlining and sharing of resources, information sharing, etc.); however, it is necessary that all FI sectors be involved in its development


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• Current Pragma thinking is that legal consolidation should occur (if at all) only when the individual component parts are better-established

• In the meantime, measures should be implemented to promote greater cooperation

• This could include the establishment of a committee of all FI regulators, which would meet on a regular and frequent basis to exchange information and develop common approaches

• It could also include increased information-sharing arrangements at working levels


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E. MORTGAGE COMPONENT

I. COMPONENT DESCRIPTION This Report provides details on the events and activities relating to the Mortgage Component of USAID’s Financial Protection Initiative, as implemented by the Pragma Corporation, during the period November 21 through February 21, 2000, inclusive.

The primary purpose of the Mortgage component is to provide technical, advisory, and training assistance to banks and NBFIs willing to start mortgage lending market operations. Further, the legislative and regulatory framework for supporting the mortgage lending industry must be developed.


• NATIONAL MORTGAGE COMPANY FORMED

• MEETING WITH GRIGORY MARCHENKO, HEAD OF NATIONAL BANK RE: REQUEST OF NBK FOR ASSISTANCE TO NATIONAL MORTGAGE COMPANY; USAID REQUEST FOR ASSISTANCE WITH SOLVING COLLATERAL PLEDGE ISSUES

• LETTER SENT TO MARCHENKO REGARDING MORTGAGE INSURANCE

• MORTGAGE INSURANCE WORKPLAN DRAFTED

• FIRST MORTGAGE TRAINING SEMINAR COMPLETED

III. EXECUTIVE SUMMARY In late November, Pragma participated in a series of mortgage working group meetings that led to the establishment of the National Mortgage Company (NMC). Several of these meetings were dedicated to determining shareholder structure. Ultimately, the mortgage work group settled on capital of $25 million and an ownership structure based on the following: NBK 20%, EBRD 20%, IFC 20%, banks 20%. In accordance with this formula, the NB has invested approximately $7 million, but the absence of a business pan is a barrier for other institutions. Pragma advised the NMC that such a plan was a precondition for investment by any other institution.

Early in January 2001, USAID received a letter from National Bank of Kazakhstan Governor, Mr. Grigory Marchenko, requesting that USAID provide technical assistance to the NMC.

In response, USAID requested Pragma to determine what assistance could be provided from current funds to meet this request. After review, forty days of LOE were allocated. Separately, USAID requested from USAID/Washington additional funds to provide technical assistance beyond the forty day period. A meeting was held with Governor Marchenko in response to this request to describe what USAID would be doing. A second topic covered the need for technical direction from the Ministry of Justice that instructs the Almaty Registration Center on how to register demand rights (related to the Lariba MBS issue) and how the NBK could assist in this matter. This is described in more detail in the financial instruments component.


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A specialist from the Institute of Urban Economics (IUE) was contacted and began assistance by developing a paper which details the main direction of work and goals of the NMC (See attachments 1and 2) and underwriting standards the NMC will need to use.

Providing technical assistance to the NMC involved discussion with Maiko Sagindykova, Chairman of the NMC, on the importance of using public mortgage insurance to encourage primary mortgage lending. Recognizing the importance of the subject and the need for support from Governor Marchenko, we produced a paper which highlighted the importance of public mortgage insurance within the context of the American experience and sent it to Governor Marchenko and Chairman Sagindykova for their consideration.

Governor Marchenko directed deputy governor Abdullina Naleeya and chairman of the mortgage working group to review the paper and recommend to him a course of action. Mrs. Sagindykova indicated that she thought the paper was convincing and was proactive regarding the need for developing public mortgage insurance. Governor Marchanko told Chairman Sagindylova that he would give his thoughts on the subject at a later date.

Concurrently, we asked and received from the Urban Institute a draft work plan that would have the development of public mortgage insurance as its objective. Educating our counterparts as to the importance of public mortgage insurance to the success of primary mortgage lending will be a major objective. It is likely that a proposal to the government to establish such insurance will have to be made.

Lastly, trainers from IUE completed delivery of the first module pertaining to the basics of mortgage lending. Twenty-three persons attended the first course. Of those who attended, 15 were from financial institutions, 2 from the National Bank, 3 from the National Commission, and 3 from local government. A questionnaire was distributed to evaluate course material, content and teaching;. 29% of participants indicated that the course was excellent and the rest of the participants rated it positively. (For the list of participants and results of the course evaluation, see attachment 3) The first of three examinations was given that will have a total of 160 questions. A passing qualification is set at 120. As a result of the meeting with Governor Marchenko, related to technical assistance to the National Mortgage Company, he agreed that staff from any financial institution wanting to do business with the NMC would have to have the designation of Certified Mortgage Lender. To reinforce the requirement, he designated Mrs. Abdullina Naleeya, Deputy Governor and Chairman of the National Bank Working Group to sign the certificate of those completing the qualifying course.


1. Action on requested funds for assistance to the National Mortgage Company.

2. LOE and Budget to be dedicated for technical assistance from EA Ratings for development of ratings capability in Kazakhstan.

3. Establishing a timetable and identification of appropriate personnel for delivery of DIS training.


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Task 1 – Legal and Regulatory Reform

1 – Legal and Regulatory Reform


Proposed Future Actions • Assessment of

Rules and regs. for the mortgage sector

• Work plan for reform of rules and reg.s.

• Work plan for development of mortgage default insurance

• Assessment of rules and regulations relevant to default insurance and recommendations for development of such a product, including relevant data collection

• Implementation of work plan for reform of mortgage lending rules and regs, including development of needed legislation

Completed by IUE

Completed by IUE

Completed by IUE

Completed by UI

This phase is underway with detailed review of legislative initiatives and drafting of relevant laws.


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Task 2 – Creating Fully Trained Mortgage Banking Personnel


Proposed Future Actions • Review of mortgage

banking courses and materials developed by Housing Sector Reform Project

The review was completed through consultation with Pragma’s COP and IUE staff in Moscow.

• Framework for mortgage banking training developed

The framework was completed through consultation with Pragma’s COP and IUE staff in Moscow. The first of three courses was delivered in February. The next course will be offered in March.

• Development of strengthened modules for:

1. Alternative mortgage instruments; including spreadsheet program for class use.

2. Features of different mortgage securities-“mortgage bank model” use of guarantees

3. Adjust courses to Kazakh situation; develop local case studies

4. Development of loan servicing simulation software

The curriculum was customized taking into account Kazahstani practices.

Training of Kazakh Trainers-Trainers will attend CML courses; training includes preparation of lecture outlines for use by new trainers and direct training

Two trainers from the Almaty Bank Training Center attended course I and are expected to complete the qualification coursework (Course II and III). They are expected to offer the next series of training courses with technical assistance from IUE.


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3 – Develop Action Plans for Mortgage Lending Infrastructure and Plans

Task 3 – Develop Action Plans for Mortgage Lending Infrastructure and Implement Selected Plans


Proposed Future Actions • Appraisal: Formation

of Independent Appraisal Association

• Devise or adjust methodology for appraisal of property thus is being mortgaged.

• Mortgage risk insurance: Establish methods and terms of mortgage risk insurance

An independent appraisal association has been formed in Kazakhstan. Meetings were held to asses the standards of practice currently in use. Preliminary findings indicate that most standards evolved from methodologies used to value construction projects and the evaluation of assets for use in bank lending. Competition with previously established associations is possible.

Discussions are underway with an interested USAID Contractor in Kyrgystan to create economies of scale by providing technical assistance in appraisal techniques using experts from the society of appraisers in Russia.

This is an ongoing activity that is being discussed at the NB working group level. A paper drafted by Pragma was submitted on the subject for consideration by the Governor of NBK.

• System of registration of real estate rights and transactions

Assessment for the establishment of independent credit rating agency and work plan preparation

Current levels of deficiency are being identified through the MBS activity of the FI component and in some cases remedied when able in order to proceed. Based on findings, the TA necessary to achieve the objective will be determined.

EA Ratings has completed an assessment of conditions for the establishment of a ratings capability in Kazakhstan. A proposal was received from EA Ratings to present a series of seminars on ratings methodology and to conduct sample ratings exercises. The proposal is being reviewed against budgetary levels established and component objectives.

Task 4 – Rules and Procedures of Retail Mortgage Lending


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Task 4 – Rules and Procedures of Retail Mortgage Lending


Proposed Future Actions Assessment of:

Bank internal rules and procedures for retail, mortgage banking

External rules and regulations for retail banking.

Completed as part of the IUE assessment.

Completed as part of the IUE assessment.

Work plan to establish rule and procedures for retail mortgage lending

Completed as part of the IUE assessment. Results will be reflected in updated CML coursework.

Standards for mortgage underwriting, loan documentation rules, mortgage contracts

This was updated for inclusion in CML coursework that was delivered in February.

LIST OF ATTACHMENTS

1.The plan for the National Mortgage Company (Kopeikin wrote this. A copy is in my mortgage folder)

2. The schematic for the National Mortgage Company

3. Memorandum “Results of the First Course on Mortgage Lending”


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F. SOCIAL POLICY COMPONENT

I. COMPONENT DESCRIPTION

This Report provides details on the events and activities relating to the Social Policy Component of USAID’s Financial Protection Initiative, as implemented by the Pragma Corporation, during the period November 21, 2000 through February 20, 2001.

The Social Policy Component was added to the FPI in October at the request of USAID Mission Director, Mr. Glenn Anders. The purpose of this component is to support a government working group headed by the Minister of Labor and Social Protection, Mr. Alikhan Baimenov, to provide recommendations to the government for a new social policy by January 31, 2001. The Project was given responsibility to coordinate a USAID technical working group consisting of technical specialists from the FPI and Pension Reform Projects from the Office of Market Transition, and the Zdravplus Project from the Office of Health. The Social Policy Component consists of: (1) preparation of a description of the current system; (2) analysis of the current policies and programs relating to social protection; (3) examination of current economic and demographic information for Kazakhstan; and (4) preparation of recommendations related to the development of a new social policy for Kazakhstan.


• COMPLETED “CONCEPT FOR THE DEVELOPMENT OF A SOCIAL POLICY IN KAZAKHSTAN” AND PRESENTED ENGLISH AND RUSSIAN COPIES TO THE GOVERNMENT.

• PROVIDED TECHNICAL SUPPORT TO THE NATIONAL BANK AND THE MINISTER OF LABOR IN THE PREPARATION OF THEIR CONCEPT PAPERS

• LEVERAGED APPROXIMATELY 300,000 EUROS IN TECHNICAL ASSISTANCE FROM TACIS FOR FUTURE SUPPORT

• DEVELOPED A STRONG BASE OF TECHNICAL DATA AND ANALYSIS TO SUPPORT FUTURE SOCIAL POLICY DESIGN EFFORTS

III. EXECUTIVE SUMMARY The quarter was an intensive period of technical analysis and report writing. Ten analytical papers were prepared that examined the pension system, the disability system, unemployment, labor markets, social spending, legal issues, etc.. These papers were used as a basis for the final paper and the recommendations. (Complete list at end of Section V)

The analytical work was completed in December and an initial draft concept was prepared. The draft was reviewed and adjusted by the international technical specialist in January. A draft final report was prepared and submitted to the Government in early February. That draft was


33

subsequently translated and submitted as a draft final to other members of the Social Policy Working Group in Russian on February 16, 2001. (See attachment 1)

IV. ADMINISTRATIVE ISSUES The FPI completed funding for Mr. Robert van Leeuwen on January 31, 2001. A TACIS procurement is underway and Mr. Van Leeuwen should return by the end of February under TACIS funding.

IV. DESCRIPTION AND STATUS OF TASKS

Task 1 – Description of Current Social Policy



Preparation of Descriptions of the following:

• Legal Framework for Social Policy

• Current financing structure

• Administration structure

• Employment and Labor

• Pensions

• Disability and Survivorship

• Health

• Poverty and Special Benefits

• A series of working papers were assigned to individual specialists and groups of specialists in November.

• Working meetings were held with representatives of the World Bank, the Asian Development Bank, the UNDP, TACIS, the International Labor Organization and others to determine what existing donor programs support social protection in Kazakhstan.

• The legal team analyzed legal acts related to the provision of social protection in the Republic of Kazakhstan and prepared working papers.

• The fiscal team collected documents from the Ministers of Finance and Revenue related to current revenues and funding related to social protection, analyzed the expenditure patterns of local and national budgets, and prepared a working paper.

• The administrative team continued to discuss personal identification systems with representatives of the MLSP, the SCBP, MVD, and MGD to determine the procedures related to the issuance of personal identification numbers. They prepared a short paper describing how a unique identification system could be established in the context of the existing systems.

• The employment group prepared three different working papers that examined specific aspects of the labor market, unemployment and existing assistance programs.

• The health group prepared a paper describing issues in the current system and proposing a model for its improvement. Also, a paper was prepared on healthcare spending.

• Another group looked at the structure of assistance for those living in poverty and how it is currently being delivered.


34

Task 2 – Analysis of Policy Options


Proposed Future Actions Analyses of the current system and potential options is occurring in the following areas:





• Pensions


• Health


• An analysis was completed on pension adequacy and specific recommendations made for protecting certain groups whose replacement rates will be insufficient to provide an adequate pension.

• An analysis was completed of the current disability scheme and the demographic tendencies related to disability.

• An analysis of labor markets and unemployment was completed.

• An analysis was prepared of current spending tendencies and projections for social programs.

• The team completed an analysis of the current personification system.

• A description was prepared of the current benefit structure.

• An analysis of the health sector was prepared.

Task 3 – Preparation of a Concept for a New Social Policy



Prepare a concept paper that addresses the following areas :



An initial draft concept was prepared dated December 26, 2000.

That draft was reviewed and revised by the technical specialist, Rob van Leeuwen, and a second draft submitted.

A draft final concept was submitted to USAID in early February. It was translated and submitted to counterparts on February 16.


35



• Pensions


• Health


LIST OF ATTACHMENTS

1.”Concept for Development of a Social Protection Policy for the Republic of Kazakhstan”, USAID Social Protection Policy Working Group, 23 February 2001

Attachments

Attachments Section B. Financial Instruments Component

PLEDGE AGREEMENT Almaty The Open Joint Stock Company, Joint Bank �Lariba-Bank�, hereafter referred to as �Pledgor�, in the person of the Chairman of the Board, Mr. A.G. Boichenko, acting on the authority of the bank�s Charter, on the one hand, and Bondholders as of registry #___, maintained by the independent registrar, _________, hereafter referred to as �Pledgees�, in the person of the Closed Joint Stock Company, �HSBC Bank Kazakhstan�, empowered as Bondholders� Representative on the authority of the attached powers of attorney, and acting in the person of the Chairman of the Board, _____________ , acting on the authority of the company�s Charter, have concluded agreement as follows:

I. SUBJECT OF THE AGREEMENT 1.1. In accordance with the present Agreement, the Pledgor shall pledge to the

Pledgees its legal demands on lease-to-purchase contracts and mortgages concluded and to be concluded between the Pledgor and its clients (said legal demands hereafter being referred to as the �Pledge�).

1.2. The Pledge shall secure the principal of the bond, which will be issued in the

amount of US $1,000,000 (one million USD). The Term of the bond will be 3 (three) years. The Bond Indenture governing the issue has been registered by the National Securities Commission of the Republic of Kazakhstan on �__�_________ 2001, registration #____.

(Note: The bond shall be issued in tenge in an amount equivalent to US$ 1,000,000 at the official rate of the National Bank of the Republic of Kazakhstan on the day of issue.) 1.3. On the first day of each quarter during the Term of the bond, the Pledgor is

obliged to make the value of the Pledge no less than US $1,200,000 (one million two hundred thousand USD). At no time during the remainder of the quarter shall the pledge have a value less than US $1,000,000 (one million USD).

1.4. The Pledgor shall guarantee that pledged assets are not encumbered or otherwise subject to dispute.

1.5. The pledged assets shall continue to be owned and used by the Pledgor. The Pledgor is not allowed to pledge as collateral assets that have already been pledged under the present Agreement.

1.6. The pledge shall secure the principal amount of the issue and, in the event of default, the compensation of all expenses of the Pledgees� Representative incurred in the sequestration and liquidation of said pledge.

II. RIGHTS AND DUTIES OF THE PLEDGOR

2.1.0 The Pledgor shall: 2.1.1 maintain the value of the pledge at a level of from $1,000,000 (one million) to $1,200,000 (one million two hundred thousand) USD, as set forth in Article 1.3 above; 2.1.2. conclude new lease-to-purchase contracts and mortgages to replace prepaid or matured contracts and mortgages out of which the legal demands arise; 2.1.3. maintain a registry of all lease-to-purchase contracts and mortgages, including retired and newly concluded agreements; 2.1.4. not take actions which might result in the reduction in the value of the pledge; 2.1.5. take actions necessary to protect the pledge from third party encroachment; 2.1.6. make it possible for the Pledgees� Representative to monitor the pledge on a quarterly basis; 2.1.7. within two business days, inform the Pledgees� Representative of any changes to the constitution of the pledge or third party claims against the pledge; 2.1.8. submit the pledge agreement for registration to the Republican State Enterprise �Almaty City Real Estate Registration Center�. 2.2.0 The Pledgor may: 2.2.1 alter the pledge, provided that the value of the pledge does not fall below

the minimum level stated in Article 1.3 above;

2.2.2 until such time as the pledge shall be liquidated, remedy Pledgees� claims against the pledge by fulfilling its obligations under the Bond Indenture.

III. RIGHTS AND OBLIGATIONS OF THE PLEDGEES�

REPRESENTATIVE 3.1.0 The Pledgees� Representative shall:

3.1.1 quarterly carry out agreed upon procedures to verify the pledged assets as set forth in the Bond Indenture and the Agency Agreement and report to the Bondholders on condition of the pledge;

3.1.2 on a timely basis, report to the Bondholders any instance of the Issuer

being unable to fulfill his obligations under the bond.

3.2.0 The Bondholders� Representative has the right to: 3.2.1 require the Pledgor to take measures necessary to maintain the

minimum value of the pledge; 3.2.2 demand prepayment of principal and accrued interest on the bond: - on grounds provided for in the Bond Indenture registered with the

National Securities Commission on �___�___________2001, #_____; - if the Pledgor transfers assets pledged under the present Pledge

Agreement to any subsequent pledge; IV. RAISING CLAIMS AGAINST THE PLEDGE

4.1 If, due to circumstances under the Pledgor�s control, the Pledgor fails to

perform its obligations in accordance with the Bond Indenture, the Pledgees� Representative may make claim against the pledge in order to satisfy the rights of the Pledgees.

4.2 The pledge shall be liquidated in out-of-court procedures as set forth by law.

V. SETTLEMENT OF DISPUTE 5.1 The parties shall endeavor to settle all disputes through negotiations. 5.2 When a dispute cannot be settled negotiation, it shall be settled following

procedures established by the law of the Republic of Kazakhstan.

VI. TERM OF VALIDITY OF THE PLEDGE AGREEMENT 6.1 The pledge shall remain valid until the Issuer has entirely fulfilled its

obligations under the Bond Indenture.

6.2 In case obligations secured by the pledge have been only partially fulfilled, the pledge shall be maintained in the amount stated in Article 1.3. herein, until the Pledgor fulfills its obligations according to the Bond Indenture.

6.3 The present Agreement shall terminate when:

- the Pledgor has satisfied the obligations secured by the pledge; - the pledge has been liquidated at public auction to satisfy the claims of the

Pledgees� Representative, or when its liquidation has been deemed impossible.

7 ADDITIONAL CLAUSES

7.1 The present Agreement becomes effective from the moment of its registration

with the Republican State Enterprise �Almaty City Real Estate Registration Center�.

7.2 All matters not covered by this Agreement shall be settled in accordance with the law of the Republic of Kazakhstan and other legal acts.

7.3 The Pledgor shall bear all expenses related to the conclusion of this Agreement and its registration with the Republican State Enterprise �Almaty City Real Estate Registration Center�.

7.4 This Agreement shall be drawn up in two copies in Russian, each having equal legal force.

8 LEGAL ADDRESSES Pledgor: Legal Address______________ Mailing Address____________ Phone/Fax_________________ Pledgees� Representative: Legal Address______________ Mailing Address____________ Phone/Fax_________________ Pledgor: P ____________________________ ____________________________ This Agreement is registered with the Republican State Enterprise �Almaty City Real Estate Registration Center�. Registration #_______________ Registration Date________________

НационРеспупо

г. Алматы,

Комитет регистрационной службы МинисРеспублики Казахстан, рассмотрев Ваше письмо от 29по вопросу регистрации залога движимого имущследующее.

I. Ситуация изложенная в Вашем письмрегулирована действующим законодательством,государственную регистрацию залога движимДействительно Закон Республики Казахстан «О редвижимого имущества» не предусматриваерегистрации залога со множественностью зпроцесс обращения которых очень динамичен.гражданским законодательством республики совершение одним лицом сделок от имени другполномочия, основанного на доверенности, решении сула либо административном акте.

Полагаем, что выход из данной ситуациВами, а именно, введение фигуры Представителя зоблигационеров не противоречит действующему Республики Казахстан и имеет возможность быть действии.

Однако необходимо учитывать, что в статьей 21 Закона Республики Казахстан «О редвижимого имущества» регистрирующий орган несев установленном законодательством порядке зправил регистрации залога движимого имущеснеполноту внесения сведений и искажение инфодвижимого имущества, предоставленной ему длвнесения в реестр

КАЗАКСТАН РЕСПУБЛИКАСЫ

ЭД1ЛЕТ МИНИСТРЛ1П Т1РКЕУ КЫЗМЕТ1 КОМИТЕТI

РЕС

МИНИСТЕРСТВО ЮСТИЦИИ

ПУБЛИКИ КАЗАХСТАН

альная комиссия блики Казахстан ценным бумагам

ул. Айтеке би, 67

терства юстиции января 2001 года ества, сообщает

е не достаточно регулирующим ого имушества. гистрации залога т возможность алогодержателей, Вместе с тем, не запрещено

ого лица в силу законодательстве,

и, предложенный алогодержателей-законодательству реализованным в

соответствии со гистрации залога т ответственность а несоблюдение тва: неточность, рмации о залоге я регистрации и

КОМИТЕТ

залога движимого имущества Убытки, причиненные нарушением порядка регистрации, выдачи информации, искажением информации, подлежат возмещению регистрирующим органом.

В соответствии со статьей 308 Гражданского кодекса Республики Казахстан регистрирующие органы обязаны вести реестр зарегистрированного залога движимого имущества и принимать меры по защите интересов залогодержателей, не допускать отчуждение заложенного имущества без согласия залогодержателя.

Реестр должен включать данные, предусмотренные статьей 12 Закона «О регистрации залога движимого имущества», а именно, в числе других данных, данные о залогодателе и залогодержателе, их адреса (реквизиты).

В соответствии с Законом Республики Казахстан «О регистрации сделок с ценными бумагами», сделки с ценными бумагами подлежат обязательной регистрации в реестре держателей ценных бумаг

Полагаем, что в Договоре о залоге, представляемом на регистрацию, должно быть определено в интересах кого действует Представитель. Поскольку, учитывая динамику возможного обращения залогодержателей, и соответственно невозможность указать их всех в Договоре о залоге, предлагаем обозначить их как «облигационеров, согласно реестру № _ независимого регистратора (реквизиты)».

Таким образом, регистрирующие органы в Реестр зарегистрированного залога движимого имущества, а именно в графу «Залогодержатель», внесут запись согласно представленного Договора о залоге.

Кроме того, обращаем внимание, что в соответствии с пунктом 2 статьи 9 Закона «О регистрации залога движимого имущества», Представитель залогодержателей должен представить регистрирующему органу документ, подтверждающий его полномочия действовать от имени залогодержателей-облигационеров.

2 Полагаем, чго ситуация, пряреленная Вами в пункте 2 «Справки по вопросу регистрации залога движимого имущества", приложенной к Вашему письму, по своей правовой природе схожа с залогом товаров в обороте, требования к которому установлены Статьей 327 ГК РК

Так, а соответствии с этой статьей залогом товаров в обороте признается залог товаров с оставлением их у залогодателя и с предоставлением залогодателю права изменять состав и натуральную форму заложенного имущества при условии, что их общая стоимость не становится меньше указанной и договоре о залоге.

В Вашей ситуации также подразумевается право залогодателя (эмитента) заменять одни права требования другими правами требования по мере прекращения одних договоров и возникновения других договоров, но при этом стоимость совокупности прав требования не должна быть меньше общего объема эмиссии либо иной, указанной в Договоре о залоге.

Пункт 3 статьи 327 ПС РК устанавливает обязанность залогодателя товаров в обороте вести книгу записи залогов, в которую вносятся записи об условиях залога товаров и обо всех операциях, влекущих изменение состава или натуральной формы заложенных товаров на день последней операции.

Такая же обязанность, по нашему мнению, должна быть возложена и на залогодателя (эмитента), который должен вести книгу о всех операциях, осуществленных им с составляющими предмет залога правами требования.

Данное требование обусловлено, прежде всего, тем, что в данном случае законодатель не ставит во главу вопроса индивидуализацию предмета залога, и предметом залога могут быть товары, определенные лишь родовыми признаками. В то же время индивидуализация предмета залога в данном случае достигается путем отражения сведений о заложенном имуществе в вышеназванной книге записи залогов, которую обязан веста залогодатель (эмитент). В этой книге должны быть отражены необходимые для индивидуализации предмета залога сведения, а именно информация о договорных обязательствах эмитента, из которых вытекают его права требования и т.п., так как не может быть залога без такой конкретизации предмета залога, которая позволила бы обратить взыскания на него и однозначно выделить его из массы других предметов. Это же подтверждает требования статьи 307 ГК, предусматривающей в качестве существенного условия, установленного законодательством, указание в договоре предмета залога.

Также необходимо учитывать, что в соответствии с пунктом 2 статьи 32" ГК залогодатель вправе заменять выбывшие товары только на те, которые были предусмотрегны в договоре о залоге товаров в обороте. Поэтому необходимо признать существенным условие договора о перечне товаров, на которые

можно заменять выбывающее имущество В рассматриваемой ситуации и также должно быть соблюдено такое требоание.

Данные положения, предоставляющие залогодателю (эмитенту) право самостоятельно изменять состав заложенного имушестза без согласования с залогодержателями на предусмотренное имущество и с требованиями о внесении сведений об этих изменениях в учет, им же и ведомый, предъявляют повышенные требования к Представителю залогодержателей по ведению контроля за операциями залогодателя (эмитента) с предметом залога. В противном случае риск нарушения залогодателем условий залога совокупности прав требований будет отнесен на залогодержателя, так как законодательством не предусмотрены основания признания недействительности сделок залогодателя с предметом залога, нарушающих условия договора о залоге.

Таким образом, полагаем, что Договор о залоге, представляемый на государственную регистрацию, должен быть составлен с учетом вышеизложенных положений, что снимет необходимость регистрации изменений и дополнений при заключении новых договоров эмитента, в соответствии с которыми возникают права требования, составляющие предмет залога, а также при смене залогодержателей-облигационеров.

Заместитель председателя Г. Коваленко

КАЗАХСТАН РЕСПУБЛИКАСЫ ПРЕМЬЕР-МИНИСТРIНIН ОРЫНБАСАРЫ

ЗАМЕСТИТЕЛЬ ПРЕМЬЕР-МИНИСТРА РЕСПУБЛИКИ КАЗАХСТАН

МФ - Досаеьу Е.А. (созыв) МЭТ - Кулекееву Д.А. МЮ - Рогову И.И. V Акиму Атырауской области - Даукееву С.Ж. Акиму Мангистауской обл - Киинову Л.К. Прошу совместно продолжить работу по рассмотрению проекта секьюритизации социальных обязательств компаний- подрячников Не задерживайте « 7» марта 2001 г № 20-22/ 436 К письму МЭТ от 1902.2001 г. № 1-891/6

У. Джа'

Корпорация «Прагма»

480091, г. Алматы, ул. Айтеке Би 67, к. 413-415, 420-422

Министерство финансов Республики Казахстан, рассмотрев Ваше письмо от 27.02.01г. сообщает следующее.

Предложенный проект схемы секьюритизации социальных обязательств не предусматривает государственного заимствования, либо выдачи государственных гарантий.

Согласно предложенной схеме, эмитентом выступит компания, несущая обязательства перед местным исполнительным органом по ежегодному перечислению определенных сумм на развитие социальной сферы региона. Целью операции является мобилизация денежных ресурсов для реализации крупных региональных социальных проектов. Схемой предусмотрено, что погашение, а также обслуживание будут производится эмитентом из сумм, изначально определенных для ежегодного перечисления на развитие социальной сферы региона.

При этом необходимо учитывать, что помимо недополучения средств в объемах начисленного вознаграждения эмитентом, применение указанной схемы сопряжено с затратами на обслуживание эмиссии ценных бумаг со стороны местного исполнительного органа. В результате, объем направляемых на реализацию проекта средств уменьшится на сумму обслуживания и, при приведенной в схеме ставке в 12%, сроке обращения 5 лет, составит порядка 60% от обязательств компании по развитию социальной сферы региона в этот период.

Кроме того, неизвестна позиция компаний, несущих социальные обязательства, относительно участия в предложенной схеме. Реализация схемы предполагает определенные затраты этих компаний на мероприятия, связанные с получением листинга «А», а сама схема должна вписываться в рамки собственной заемной политики указанных компаний.

Министерство финансов Республики Казахстан считает, что целесообразность применения данной схемы для реализации конкретных региональных проектов должна определяться в рамках

025520 ©

действующего законодательства, совместно местным исполнительным органом и компанией, несущей обязательства по ежегодному перечислению сумм на развитие социальной сферы региона.

В связи с вышеизложенным, представляется целесообразным внести проект секьюритизации социальных обязательств на рассмотрение местных исполнительных органов для определения и разработки конкретных проектов, при непосредственном участии компаний- потенциальных эмитентов.

Первый вице-министр Б. Жамишев

Министру экономики и торговли Республики Казахстан

КУЛЕКЕЕВУ Ж.А. О секьюритизации социальных обязательств

Уважаемый Жаксыбек Абдрахметович, Национальная комиссия Республики Казахстан по ценным бумагам, рассмотрев в соответствии с поручением Заместителя Премьер-Министра Республики Казахстан У. Джандосова от 19 января 2001 года № 436 проект Корпорации ПРАГМА Агентства США по международному развитию (USAID) о секьюритизации социальных обязательств, сообщает следующее. Считаем, что реализация представленного проекта в значительной степени будет способствовать развитию социальной сферы регионов и рынка ценных бумаг республики, поскольку позволит решить наиболее существенную на сегодняшний день проблему казахстанского фондового рынка - дефицит негосударственных эмиссионных ценных бумаг. В случае успешной реализации проекта будет решена проблема недостатка финансовых инструментов для размещения пенсионных активов негосударственных накопительных пенсионных фондов компаниями по управлению пенсионными активами. Однако в связи с тем, что основными приобретателями выпускаемых облигаций будут являться компании по управлению пенсионными активами, предлагаем при доработке представленного проекта учесть следующее: 1) в целях обеспечения сохранности пенсионных накоплений граждан механизм

выплаты процентов по облигациям должен быть регламентирован более детально, в частности, предлагаем указать, что регулярность выплат по процентам должна гарантироваться следующим образом: банк-попечитель вычитает сумму, необходимую на выплаты процентов, от части основной суммы, составляющей фонд для выплаты процентов, и производит выплаты согласно расписанию. Остаток фонда для выплаты процентов может быть инвестирован, что сократит стоимость средств для акиматов;

2) в состав комиссии по утверждению проектов, подлежащих финансированию за счет привлеченных средств, предлагаем включить представителя Правительства Республики Казахстан.

Исполнительный директор-член Комиссии Шалгимбаева Г.Н

Исполнитель: Иванина Т.Е., тел.: (3272) 62 04 16

Заместителю Премьер-Министра Республики Казахстан Джандосову У.А.

На ваше поручение от 19 01 2000г №436 О секъюритизации социалъных обязательств

Уважаемый Ураз Алиевич!

Министерство экономики и торговли, рассмотрев совместно с Министерством финансов Республики Казахстан и Национальной комиссией Республики Казахстан по ценным бумагам согласно Вашего поручения от 19 января 2001 года №436 проект Корпорации ПРАГМА Агентства США по международному развитию (USAID) о секьюритизации социальных обязательств, сообщает следующее:

Считаем, что реализация представленного проекта в значительной степени будет способствовать развитию социальной сфсры регионов и рынка ценных бумаг республики, поскольку позволит решить наиболее существенную на сегодняшний день проблему казахстанского фондового рынка - дефицит негосударственных эмиссионных ценных бумаг,

При этом, следует подчеркнуть. что заключение о целесообразности схемы секьюритизации социальных обязательств можно сделать только при рассмотрении конкретного проекта, с конкретными условиями, сроками и формами использования средств.

Поскольку в процессе заимствования будут участвовать местные исполнительные органы, необходимо обеспечить соответствие процедур и документов при определении проекта действующему законодательству Республики Казахстан в части согласования региональных инвестиционных программ, установления лимитов заимствования и долга.

Процесс выбора доходов от выпуска проектов, подлежаших

финансированию из облигаций, должен включать обязательное согласование с местными представительными органами.

С уважением,

Исп Исабеков НГ, тел. 118126

Ж.Кулекеев- Министр

Letter of Intent Draft

To efficiently develop the social infrastructure of the Region, _______________ Company (hereinafter referred to as Issuer) and Akim Office (hereinafter referred to as Akimat) (hereinafter both referred to as Parties) agreed to pursue cooperation to implement Issuer�s social commitments to _____________ Oblast through issuance of bonds. The bond issuance shall be supported by the future Issuer�s payments to improve social development of the Region and shall allow to obtain required lump sum financial funds upfront to fund large social regional projects.

The Parties agreed to follow the following procedures to implement social obligations of Issuer.

Issuer shall issue, distribute and repay bonds to implement its social obligations to the Oblast over a specified period of time. Funds that will be raised through distribution of bonds shall be used to fund social projects in the Oblast. The Parties shall form a Selection Committee, identify its membership, approve its working procedures and authorize it to supervise how the Issuer implements its social obligations and how the social projects are implemented in the Oblast to ensure transparency of this process. The Selection Committee shall be authorized to select social projects, Contractor who will implement social projects, and Financial Operator who will monitor financial operations within the framework of Issuer�s social obligations and social projects in the Oblast. The Issuer shall take required efforts to include its bonds in A-listing of the Kazakhstani Stock Exchange.

List of terms used in this Letter: Interest on bonds � one time or regular payments on bonds which Issuer makes either before their principal payment, or when the principal payment is made in compliance with the Terms and Conditions of Bond Issuance;

Bond � a security which gives its holder the right to receive a face value of the bond or any other material equivalent from the entity who issued this bond at the date specified in the Terms and Conditions of this Bond Issuance. A bond also gives its holder the right to receive interest on the bond in accordance with the Terms and Conditions of this Bond.

Principal Payment � purchase of issued bonds at their face value by the Issuer;

Contractor � legal entity who constructs facilities and installs equipment, or performs other operations associated with implementation of social projects in the Oblast; Social Projects � construction, refurbishment, upgrade of facilities of social infrastructure and other scope of work related to development of social infrastructure of the Oblast (medical care, housing and utilities, education, roads, airports, etc.);

Social Obligations � obligations of Issuer of securities to allocate its funds to finance social projects of the Oblast;

Terms and Conditions for Bond Issuance � Issuer�s document which includes basic information about the Issuer, its financial status and scheduled bond issuance, including issuance procedure, distribution, circulation and principal repayment, interest payment on the bonds, as well as the rights of bondholders and Issuer�s

responsibilities should Issuer fail to follow its obligations. This document shall be compiled in accordance with the existing legislation.

Financial Operator � a legal entity who supervises financial operations within the framework of Issuer�s Social Obligations and implementation of social projects in the Oblast.

Based on the above, the Akimat suggests that Issuer should make a contract on implementation of its social obligations and social projects with the following terms and conditions:

1 Subject of Intent: 1.1 This Letter specifies procedures and terms and conditions for funding of

social projects of _________________ Oblast which make up Issuer�s obligations. Issuer issues bonds to raise funds which partially or completely cover the value of Issuer�s social obligations to _________________ Oblast up to the principal payment deadline.

1.2 Parties have agreed to set up a Selection Committee and authorize it to supervise implementation of social projects of _________________ Oblast.

2. Formation and Authority of Selection Committee 2.1.The membership of Selection Committee shall include representatives of Issuer,

Akimat, specialists of ROK Ministry of Finance (after appropriate coordination), ROK Investment Agency (after appropriate coordination), ROK National Bank, ROK National Securities Committee, independent experts, legal and financial advisors. The Chairman of Selection Committee shall be a representative of Akimat.

2.2.Selection Committee shall work based on the Schedule approved by the Parties.

2.3.Selection Committee shall review and select the social development projects prepared by the Akimat for further funding. Selection Committee shall determine basic parameters of the social projects (scope and type of work, cost estimate, completion schedule, etc.).

2.4.Contractor shall be selected based on the bidding results. Selection Committee shall have the right to determine Contractor selection criteria.

2.5.Selection Committee shall determine basic requirements for contractual terms and conditions. The Contract should include an appropriate guarantee, scope of work and amount of investments required for implementation of social projects in the Oblast.

2.6.After the Contract has been signed, the Contractor shall start to work according to the schedule and terms and conditions, included in the Contract. After the project has been completed the Contractor shall commission the social project (the completed work) to Selection Committee.

2.7.Selection Committee shall be responsible to select Financial Operator.

2.8.The Parties shall issue a power of attorney in compliance with the ROK existing legislation to authorize the Chairman of Selection Committee to make a contract with Financial Operator. Selection Committee shall make a team resolution as per terms and conditions of the contract with Financial Operator.

2.9.Selection Committee shall authorize Financial Operator to monitor allocation of funds raised through distribution of bonds. Selection Committee shall supervise operation of Financial Operator within the relevant framework.

3. Functions of Financial Operator: 3.1. On the instruction from Selection Committee, Financial Operator shall supervise

allocation of funds raised through distribution of bonds.

3.2. Financial Operator shall instruct the Bank which will accumulate funds raised through distribution of bonds to make relevant payments to companies identified by the resolutions of Selection Committee.

4. Issuance of Bonds: 4.1. Issuer shall issue bonds in compliance with the ROK legislation. The Terms and

Conditions of Issuance of Bonds shall establish procedures and conditions, distribution, circulation of bonds and principal payment, interest payment, rights of bondholders, responsibilities of Issuer should it fail to meet its commitments.

4.2. Funds raised through distribution of bonds shall be used to implement social projects of the Oblast, approved by Selection Committee.

4.3. Bond issuance shall cover Issuer�s social obligations to the Oblast in the amount and over the life of the issued bonds.

4.4. Bond issuance and distribution costs (bond issuance registration fees, listing fees, audit service cost, independent registrar cost, charges of the Central Depositary) shall be pain by Issuer.

4.5. Issuer shall pay interest on bonds and make principal repayment according to the schedule specified in the Terms and Conditions for Bond Issuance. Issuer shall use its own funds to pay interest on bonds.

4.6. If interest on bonds of a particular issue exceeds the internal value of the raised funds, Selection Committee shall make a decision to compensate the balance between the amount of interest on bonds of this particular issue and the above average internal value of the raised funds. In this case, the total amount of cost which Selection Committee shall be obliged to pay as an interest on bonds, shall be sources from the raised funds which shall be deposited in a separate account monitored by Financial Operator. These separate account funds shall be used to fill up the interest amount on a regular basis.

4.7. Issuer shall use its own funds to make principal repayment. Such funds shall be scheduled upfront to repay social obligations.

4.8. If Mineral Resource Use Contract between Issuer and ROK Investment Agency is cancelled, Issuer shall retain the right to make principal payment ahead of time. This right shall be included in Terms and Conditions of Bond Issuance.

4.9. If Mineral Resource Use Contract between Issuer and ROK Investment Agency is cancelled, Issuer shall take irrevocable obligations to use its own funds to make complete principal payment at the face value of issued bonds.

Akimat _____________________________ Stamp

______________________________ JSC Stamp

THE PRAGMA CORPORATION F i n a n c i a l P r o t e c t i o n I n i t i a t i ve U S A I D / R e p u b l i c o f K a z a k h s t a n K a z a k h s t a n , A l m a t y 4 8 0 0 9 1 67 Aiteke Bi St., Rms. 413-415, 420-422

КОРПОРАЦИЯ ПРАГМА Программа по развитию финансового р ы н к а и с о ц и а л ь н о й з а щ и т е U S A I D / Р е с п у б л и к а К а з а х с т а н

4 8 0 0 9 1 К а з а х с т а н , г .Алм а т ы ул. Айтеке Би 67, к . 413-415,420-422

Telephone:

Fax: +7(3272) 63 94 84 +7(3272) 63 96 09 +7(3272) 63 93 23

Телефон: Факс:

+7(3272) 63 94 84 +7(3272) 63 96 09

+7(3272) 63 93 23

Memorandum To: Gregorii A. Marchenko, Governor, National Bank of Kazakhstan From: David C.M. Lucterhand, Director, Pragma Corporation

Stephen S. Moody, Senior Advisor

CC: Maiko Sagindykova, Chairman, National Mortgage Company of Kazakhstan Gary Linden, Director, USAID/OMT Rick Gurley, Private Enterprise Officer, USAID/OMT Date: 18 January 2001

Re:Re:Re:Re: Mortgage Insurance

In discussions with Mrs. Sagindykova concerning proposed operations of the National Mortgage Company (NMC), questions have arisen about the purpose and structure of certain mortgage guarantees, which we have suggested the NMC undertake.

Veterans Administration (VA) and Federal Housing Authority (FHA) mortgage insurance programs have long been features of the US system of housing finance, and we think a similar feature is particularly appropriate in Kazakhstan under the current circumstances. We are not suggesting that Kazakhstan abandon its advocacy of the Malaysian model of housing finance. We fear, however, that adopting the Cagamas model without parallel origination incentive programs will not result in a sustained rate of new mortgage creation. Combining the Cagamas model with a mortgage insurance feature, on the other hand, would clearly encourage mortgage origination and smooth out three critical areas in which circumstances in Kazakhstan differ most significantly from those of Malaysia fifteen years ago.

1. Absence of existing mortgage stock In 1986, when Cagamas was created, the existing stock of private home mortgages in Malaysia totaled $6.4 billion. Malaysian commercial banks had an ample supply of seasoned mortgages to refinance through Cagamas, and consequently mortgage origination was not an issue critical to the success of either Cagamas or the mortgage industry. That is not the case in Kazakhstan. Excluding certain government mortgages in

Astana, the existing stock of private mortgages in Kazakhstan today probably amounts to no more than $3.0 million. More important, demand for mortgages under current conditions may not be strong enough to support NMC�s mandated activities, much less make those activities sustainably profitable. Mortgage origination is critical to NMC�s success, and a mortgage insurance program is a clear incentive to origination. 2. Absence of legal basis, plat survey and established foreclosure

procedure Malaysian commercial banks have been active in mortgage lending since 1950. By the time Cagamas was created, the most difficult legal issues associated with mortgage lending, including claim to title and enforceable foreclosure procedures, had been firmly established in Malaysian case law, much of which was inherited from British Imperial rule. With legal impediments to mortgage lending removed, Malaysian banks could concentrate on credit risk, the mainstay of their business. In Kazakhstan, on the other hand, commercial banks face an inadequate legal basis for mortgage lending, uncertain claim to real property title and untested foreclosure procedures. A mortgage guarantee program effectively mitigates foreclosure risk for participating commercial banks, and makes NMC itself the single strongest advocate for legal reform and improved title registration procedures. 3. Relative weakness of the commercial banking sector Cagamas was created to provide liquidity to the Malaysian mortgage banking sector during a national financial crisis. The banks themselves were mature, relatively strong institutions with years of experience with a full array of financial products and services, including mortgage lending and insurance. As important, the Malaysian credit consumer was likewise relatively well acquainted with financial products and services. By contrast, NMC will provide liquidity to a mortgage banking sector which, for all intents and purposes, does not yet exist. Kazakh banks themselves are relatively new and inexperienced, and the population they serve largely unacquainted with financial products and services. It stands to reason then that, to jump start the mortgage industry, NMC will have to provide something more than liquidity. Given the inexperience of commercial banks in mortgage lending and the necessity for substantial mortgage origination, perhaps the most effective assistance NMC can provide to the banking sector is a mortgage insurance program.

The term �guarantee� is a misnomer. US government mortgage guarantees are actually mortgage insurance programs; recipients pay premiums to the insurers, which may be either private companies (PMIs) or two specific US government agencies�the Veterans Administrations (VA) and the Federal Housing Authority (FHA/HUD). In the US, conventional mortgages require a down payment of at least 20 percent; the loan amount (LTV) is therefore 80 percent of appraised property value. Lenders require mortgage insurance in cases where the potential homebuyers are unable to make a 20-percent down payment. Contrary to uninformed belief, FHA mortgage insurance is not subsidized; in fact, priced at from 1.75 to 2.25 percent of loan value, FHA insurance is more expensive than most private mortgage insurances,

which typically charge about 0.5 percent of loan value. (The primary reason for the difference in pricing is that FHA insures 100 percent of the loan while private insurers normally insure only the top 30 percent of the loan. However, private insurers also have more stringent credit requirements than FHA.) Both private insurers and FHA insure lenders against unrecoverable losses due to default and foreclosure. Most losses in residential mortgage default and foreclosure are recoverable; claims paid by insurers typically represent only a small fraction of total loan value. Delinquency and foreclosure rates in the US are currently very low, ranging from 0.25 to 0.9 percent of total loan value depending on the region of the United States. Deloitte Touche projects that the FHA Mortgage Insurance Fund will run a surplus of $1.0 billion a year for the next five years. The fund currently maintains a 3.66 percent capitalization ratio. In the case of NMC and Kazakhstan, there are three pertinent issues here. First, the success of NMC and the Kazakh mortgage industry depends on a relatively rapid rate of mortgage origination from the inception. New to the business, however, Kazakh commercial banks will naturally be slow to expand their mortgage portfolios even under current extremely conservative terms�30 percent down payment, and interest at from 21 to 25 percent per annum�which severely constrict the number of potential homebuyers and Kazakhstan�s potential total mortgage pool. An NMC mortgage insurance program, which indemnified banks against foreclosure risk for homebuyers unable to make a full 30 percent down payment, would increase the number of potential homebuyers without relaxing other credit requirements. Second, in the absence of credit bureaus and personal credit histories, credit requirements themselves become somewhat arbitrary, and credit risk analysis somewhat less of a science and more of an art�like reading tealeaves. In the initial stages of mortgage origination, an NMC mortgage insurance program would perform the traditional insurance function of distributing risk: instead of concentrating all risks of arbitrary credit requirements in the commercial banks, NMC insurance would distribute foreclosure risks over the entire pool of participating Kazakh homebuyers, whose contributions to the NMC Insurance Fund (insurance premiums) would be calculated to cover all foreseeable, unrecoverable foreclosure losses in the system. The banks would still have to manage performance risk (delinquency and late payments) and servicing. Further, the NMC insurance premium would add a second lever of control over the rate of mortgage credit formation. Keep in mind that NMC eventually controls the rate at which banks write mortgages by raising or lowering the interest rates at which it buys mortgages from participating banks. NMC could also exercise control over the rate at which potential homebuyers seek mortgages by raising or lowering its insurance rates. Last, in the final analysis, a mortgage lending program of the type envisaged under the auspices of NMC realizes its full value as a stimulus to economic development only when it spurs new construction for all but the lowest levels of income in the economy. The best way of stimulating new construction is lowering the costs of housing finance. And the most prudent means of lowering the cost of housing finance is lengthening the term over which mortgage loans are amortized. Extending loan amortization periods in Kazakhstan cannot be accomplished quickly, but it will be accomplished much sooner if a mortgage insurance program assumes some of the risks of extended yield curves. Though not intended specifically for this purpose, mortgage insurance nevertheless effectively mitigates some of the risk associated with long term lending.

In concluding, we would reiterate our concern that providing liquidity alone may not be sufficient to accelerate the rate of mortgage creation under the current conditions in Kazakhstan. For that reason we would recommend that NMC consider certain incentives to mortgage lending, among them a mortgage insurance program which entails neither risk nor expense on the part of the Kazakh government. The details of that program�what percentages of mortgages are insured for which segment of potential homebuyers and at what rates�must, of course, be thoroughly researched and concretely set forth in NMC�s business plan. While we unreservedly recommend an NMC mortgage insurance program, we would not recommend importing the FHA model unmodified; all models require significant reconfiguration in order to serve NMC�s needs under Kazakhstan�s prevailing and foreseeable conditions.

Attachments Section C. Pension Component

Translation of electronic copy of article by Nikolai Drozd in �Economics and Finance� section, Vol. 4, �Panorama� newspaper, 07.02.01 Experts and practitioners in the pension savings market believe that quantitative growth in the pension system has not yet resulted in qualitative changes. In an interview with �Panorama�, Umut Shayakhmetova, Deputy Chairman of ABN-AMRO Bank Kazakhstan and Paul Pieper, Senior Consultant to the USAID-funded Financial Protection Initiative, discussed a number of issues which have recently arisen in the pension savings market and which are causing undisguised concern on behalf of market experts, numerous funds and asset managers alike. Following a year of dynamic development, during the last phase of which emerged new instruments in the form of actively issued corporate bonds predominantly intended for pension fund investment, the current condition of the Kazakhstani pension system is characterized by a noticeable halt of this dynamic. According to Mr. Pieper�s assessment, ��the quantitative growth in the pension system has not brought any qualitative changes�. In addition, from Ms. Shayakhmetova�s point of view, it is obvious that the tardy development of a legislative and regulatory framework is fraught with the intensification of risks for the whole system. The main apprehensions that asset managers and funds are experiencing are connected with limited existing opportunities for the investment of pension assets. Even given last year�s success, when the volume of domestic bonds issued exceeded $130 million, the pension market, according to Ms. Shayakhmetova, could have �swallowed� much more. Here we are certainly dealing with an obvious disparity between supply and demand that resulted in the depression of the value of domestic security yields. The surplus of pension money has resulted in the development of a �synthetic spread� � an artificially understated yield according to which domestic securities with a BB investment rating have, in effect, become equal to AA or A class securities, despite the comparatively lower risks associated with investing in the latter. In the event that there are no changes in the securities supply, the government will be confronted with a serious need to increase the quota of nonresident securities purchases i.e., the so-called �capital leakage� so frowned upon by all. Mr. Pieper, however, is not worried about this prospect, believing that regulations governing the opportunities for securities investment by nonresidents can be reconsidered every three to six months in light of the currently prevailing economic situation. In general, both he and Ms. Shayakhmetova are skeptical about the prognosis for potential volumes in the securities market this year. According to Ms. Shayakhmetova, the major domestic issuers will not necessarily issue the same volume of bonds as they did last year. Even appeals by the administration to invest in manufacturing enterprises are impractical due to the absence of financial transparency on the part of potential borrowers. In Ms. Shayakhmetova�s opinion, the government is highly inconsistent in enforcing the requirement for transparency of market players. Therefore, the government�s call to invest in manufacturing is purely rhetorical. Meanwhile, according to Panorama�s interviewees, the market might also be interested in securities issued by minor companies who are not �A�-rated, provided

they are guaranteed by banks or major enterprises who, in turn, have their own risk ratings. New financial instruments could also be attractive, irrespective of the company that issues them. Ms. Shayakhmetova�s overall recommendations relating to insufficient investment opportunities were focused on the possibilities of getting out of the blue chip market, making accounting standards more transparent, ��lightening the tax load and rooting out corruption.�(the latter notion being understood by investors as �proper management�, first and foremost), and eliminating corruption on the part of government officials. The fund has huge appetites. Ms. Shayakmetova pointed out that, when the 10% government shareholding in the �Tengiz Chevroil� Joint Venture was put on sale last summer, the State Accumulation Pension Fund (SAPF) would certainly not have been considered a sound alternative to a strategic investor such as Chevron. However, it was fully capable of �digesting� a portion of this block of stocks, equal to 0,5% or 0,25 % of the joint venture. Both of our sources are certain that all of the pension funds will not walk away from the bond market at the same time. Nevertheless, the National Securities Commission (NSC) theoretically assumes this possibility, which compels it to search for an antidote, such as the creation of a new institution - investment funds. Simultaneous abandonment of the market would cause the kind of drastic decrease in security values that no one can afford. Moreover, according to Ms. Shayakhmetova, asset managers are currently afraid to sell anything, as reinvestment is very expensive and companies would have to purchase back the same securities they sold, but at higher prices. The situation with the SAPF, around the privatization of which �a political intrigue has evolved�, still remains a serious irritator for private funds. Mr. Pieper mentioned numerous organizational and technical problems that, if not settled, could prevent the Fund�s privatization. The interviewees cautiously remarked upon the weakness of its information base and the insufficiency of funds available for investment therein. In addition, the confusion that the so-called �double Social Individual Codes� has caused is beyond doubt. The SAPF, that, as of now, should have only about 32% of available assets, actually has 40-41% - in other words, 8-9% of all pension savings are �accidental assets� of the SAPF. The latter has not made any effective efforts to rid itself of this money, although USAID has indicated the need for �purging� the Fund�s base. It is clear that, in the final result, the Fund does not have a claim against its contributors� money. It will, however, receive the commission from the investment income. Generally, it seems that the Fund�s management has elected to maintain the current number of contributors to the Fund as a basic policy, which is inconsistent with the initial intention of the reform. Mr. Pieper believes that any discussion of privatization is fairly meaningless until the base is purged and potential investors can make an objective assessment of the level of contributions actually available to the Fund. Kazakhstan has international obligations to privatize the SAPF which, in truth, are not directly related to having achieved a level lower than the 35% target level of all savings in the pension fund system that the government established for itself. According to Ms. Shayakhmetova, the way in which the privatization process is carried out and whether transparency will be assured is extremely crucial. Ms. Shayakhmetova pointed out that this danger

is also connected with the fact that, today, pension funds represent quite a strong and still growing financial power. This has become clear not only to banks but to major companies who are potential issuers. In connection with this, the fear arises that a fairly attractive SAPF capable of influencing many financial processes in the country will be handed over to an elite group during privatization. It is in the government�s best interest to receive the highest price that can be obtained through open bidding with the participation of independent observers. The involvement of the EBRD, which, as is common knowledge, has an investment interest in the SAPF, as well as that of other potential international investors in the privatization process, could guarantee the openness and honesty of the procedures. In Ms. Shayakhmetova�s opinion, the participation of private accumulation pension funds (APFs) in the privatization should not be limited in any way. Their participation would increase competition and result in the maximum possible purchase price. Under such circumstances even the triumph of one of the strongest APFs, such as APF Narodny Bank, would not have fatal consequences for the market under the current regulatory structure, said Ms. Shayakhmetova. An assessment of the technical basis of operations of another key market entity - the State Center for Benefit Payments (SCBP) - is no less dismal. Expectations of the operations system are not quite hypothetical, since the last malfunction occurred in late December, and the timely transfer of funds to the APFs was halted. As a result of this service failure, which lasted from December 18 to January 3, the pension system received investment income of from 7 to 13 million Kazakh tenge less than it should have, according to the APFs� assessments. The probability of an even longer stoppage this year is acknowledged as a likely possibility. In view of this, Ms. Shayakmetova believes that the need for finding an alternative to the SCBP is urgent. Such an alternative could be created by the funds themselves. However, its operations would be stringently regulated by the pension system regulatory authorities and by the antimonopoly committees. Mr. Pieper believes that this is fully technically possible. He says that the fact that the SCBP will be needed in regions lacking APF branches is easily surmounted by the introduction, for example, of a rule that the fund is obliged to open a branch in locations where it has a sufficient contributor base. The structure created by the funds themselves will certainly be operated in the interests of the APFs� clients. The other alternative - employers making transfers directly to a custodial account at an APF, as it is practiced in most countries - seems less realistic. Doubts arise due to the absence of complete information concerning the pension savings system and the possibility of abuse. Furthermore, there are a number of legislative problems, among which Ms. Shayakhmetova specifies the absence of insurance regulation as an integral element of the pension system, as well as the current use of a procedure for estimating the yield of funds that produces unrealistic results. The existing system, which is tied to average market yield, actually forces the funds to behave with a �herd instinct�, causing them to imitate each other�s actions and, to underestimate, for example, long term investment risks. The absence of a secondary securities market forces the funds to favor bonds, the yields of which are discounted only upon sale, due to the absence of any kind of corrections in the growth or reduction of rates. According to Ms. Shayakhmetova, a possible scenario for improvement here could, for example, be to

stop tying the commission to the fund�s total assets. USAID suggests a system that would tie the commission, taken from total assets, to the receipt of investment income. The passive behavior of contributors, the majority of whom still do not view their pension savings as their �own� money, still remains the most acute problem in the market. Therefore, recommendations made to potential depositors in search of a fund should take various factors into account: shareholders, affiliation, management, investment policy, the level of services and the fund�s transparency. It seems that the main reason for the skeptical attitude of Panorama�s interviewees is not the scale of existing problems as much as it is the absence of a clear governmental position towards their resolution and a program of progressive market development. Their frustration can also be accounted for by the absence of structures and officials who would be entirely accountable for reform implementation and who would oversee regulatory activities in the market. As a result, the critical issues are either being neglected by everyone or are being tackled all at the same time, and from different standpoints, by various government structures. Ms. Shayakhmetova reminisced about the time Kazakhstan received a tranche for pension reform from the World Bank when, as a matter of course, �money in return for reforms� was in effect and, thanks to outside influence, progress was ensured. Nikolai Drozd

Attachments Section E. Mortgage Component

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Draft as of 09/02/2001 Approved by

Republic of Kazakhstan National Bank Board Resolution Dated

«______»__________2001г. № «______»

Major provisions regarding activities of �Kazakhstan Mortgage Company�,

Closed Joint Stock Company The Contents: Preamble. Chapter 1. «General Provisions». Chapter 2. «Activity objectives and the procedure for establishing Kazakhstan Mortgage Company». Chapter 3. «Requirements towards mortgage loans the right of claim to which is to be purchased by the Kazakhstan Mortgage Company». Chapter 4. «Insurance within the mortgage lending system». Chapter 5. «Authority, rights and obligations of the Kazakhstan Mortgage Company». Chapter 6. «The Procedure for Kazakhstan Mortgage Company�s communication with lending banks and the procedure for acquisition of the right of claim with respect to mortgage loans and mortgage certificates». Chapter 7. «Mortgage securities issued by the Kazakhstan Mortgage Company». Chapter 8. «Creating conditions necessary for successful implementation and introduction of mortgage lending system». Chapter 9. «Final Provisions».

These Provisions have been elaborated in compliance with the Republic of

Kazakhstan Civil Code, Republic of Kazakhstan Presidential Decrees, exercising the power of Law �Concerning Banks and Banking Activities in the Republic of Kazakhstan� and �On the National Bank of the Republic of Kazakhstan�, Republic of Kazakhstan Presidential Decree, exercising the power of Law �On Real Estate Mortgage�, Republic of Kazakhstan Law �On the Securities Market�, the Concept for Long-term Home-building Finance Mortgage Lending System Development in the Republic of Kazakhstan, and other legal regulatory acts. The Provisions establish general procedure for activities engaged into by the Kazakhstan Mortgage Company (hereinafter � �Company�) with respect to acquisition of mortgage certificates and the rights of claim to mortgage loans, issued and originated within the limits of the Republic of Kazakhstan. They also establish the ways for raising funds, including by way of issuance and placement of mortgage securities. The provisions also regulate Company�s relations with lending banks, investors, insurers and real estate appraisers.

30

Chapter 1. General provisions 1. The major goal of introduction of the housing finance system, inclusive of

mortgage lending, is to increase the volume of solvent demand for housing. Establishing its own requirements with respect to acquisition of rights of claim towards mortgage loans of lending banks that are fit for acquisition, the Company shall facilitate the development of mortgage loans secondary market and the growth of creditworthy demand as the mortgage lending expands and mortgage securities get circulating in the market. Thus, the Company will encourage the expansion of homebuilding capacities and will promote to equal distribution of financial risks among the process participants.

2. The following terms are used in the execution of these Provisions: 1) Real Estate Mortgage Lending stands for issuing of a loan on

collateral of real estate. This grants a lender right to get a satisfaction out of the cost of mortgaged property subject to provisions of the effective legislation (to impose a foreclosure) in the event when a debtor has failed to discharge his/her obligation secured by the collateral.

2) Real Estate Mortgage is a type of collateral under which the collateralized property remains in mortgagor�s (borrower�s) possession and use.

3) A Lending Bank is a second-tier bank (possibly an entity partially engaged in the conduct of banking transactions). This Bank in accordance with the License, issued by the National Bank, extends to a natural entity a retail targeted loan to purchase living quarters upon collateral of property under purchase;

4) The Mortgagee is a lender who exercises the right of foreclosure on the mortgaged property by virtue of the contract on living space mortgage in the event when the borrower fails to discharge his/her obligations under the lending agreement;

5) Insurance - insurance of mortgaged property that remains in mortgagor�s use is on responsibility of the latter. The mortgage contract charges the mortgagor with the responsibility to proceed with insurance on his/her own with respect to the mortgage contract and personal insurance. The borrower may also choose to purchase voluntary insurance of his/her civil liability.

6) Borrowers� underwriting is a range of measures aimed at selecting (qualifying) borrowers and determining their creditworthiness in compliance with the Company�s rules;

7) Primary Mortgage Market is an aggregate of operations in connection with mortgage loan issuance;

8) Mortgage bond is a long-term security, issued upon collateral of claim rights or mortgage certificates;

9) Mortgage loan purchase is an acquisition by the KMC of rights of claim with respect to an issued mortgage from a lending bank or mortgage certificate;

10) Quotation rates of the Company are rates at which the Kazakhstan Mortgage Company can, contingent upon conditions of mortgage loans issuance, acquire rights of claim from lending banks. The quotation rates

31

are daily published by the Company on the Web-site or disseminated through REUTERS.

11) Secondary mortgage market is a market in which the rights of claims under already issued mortgage loans are being purchased and sold, including loans in the form of pools;

12) Mortgage certificate is a document attesting to a number of rights of its lawful holder. These rights are as follows: the right to receive discharge under monetary commitment collateralized by real estate mortgage, specified in the mortgage contract, without providing any other additional evidence on the existence of this commitment; and the right of collateral of property specified in the mortgage contract;

13) The pool of mortgage certificates or mortgage loans is a group of mortgage certificates or mortgage loans having similar characteristics (usually, it is one and the same type of mortgaged property, the same terms and interest rates). The investors purchase participation in such pools or mortgage-pool collateralized securities in the secondary market;

14) Annuity payouts are regular monthly payments allocated to repay the principal under the mortgage loan, as well as premium amounts for the term of mortgage contract;

15) Credit history is a package of documents under mortgage loan originated by a lending bank during a period starting from a date the mortgage contract is signed and up to the date the right of claim under the mortgage contract is transferred to the Company.

Chapter 2. Objectives and Procedure for Establishing the Kazakhstan Mortgage Company

1. The Company�s activities should facilitate the growth of solvent housing

demand, liquidity increase and reduction of interest risks that arise in the event of inconsistency of initial lenders� assets and liabilities structure. The goal of the Company is also to contribute to indirect fund raising for construction of the housing.

2. The Company is engaged in the purchase of rights of claim under long-term mortgage loans, issued by banks for the purpose of purchasing housing on the territory of the Republic of Kazakhstan. The volume of each loan should not exceed the amount equal to $30,000 USD. In separate cases, the amount of a loan may approach to $100,000 upon the Company�s decision.

3. The Company is being established in the form of a closed Joint Stock Company. It is a commercial entity that shall pursue activities as issuer in the mortgage securities market. It will also engaged in separate types of banking operations in compliance with the License, issued by the Republic of Kazakhstan National Bank.

4. The Kazakhstan Mortgage Company may engage in activities pursuing the goal of implementing the mechanism of lenders refinance. That can be done for the account of raising long-term resources from the following sources:

- credit lines and loans extended by Banks and other financial organizations, including international banks and organizations;

- issuance of mortgage securities, secured by rights of claim under issued mortgage loans or mortgage certificates.

5.The charter capital of the Company during the initial stage will amount to $1 (one) billion Tenge that will be subsequently expanded.

32

The implementation of the mechanism of capital efficient expenditure for acquisition of rights of claim under mortgage loans or mortgage certificates, and the issuance of mortgage securities will be carried out on step-by-step basis.

During the first stage the Company�s activity will be focused on accomplishing the following objectives: 1) Resolving the issue with respect to the Company�s charter fund management. 2) Implementing a pilot project pursuant to devised Plan by way of investment of the authorized capital of the Company in mortgage loans. The initial stage of the pilot project must be implemented using the example of acquisition of right of claim under one or several mortgage loans based on the normative documentation of the Company, regulating the Company�s claims towards mortgage contracts and procedures and the rules of Company�s relations with lending banks (Attachment 1). During the second stage, the following issues will be resolved based on procedures for raising funds and Company�s interaction with investors (Attachment 1): 1) Developing business plan. 2) The issue regarding raising credit line of international investors. 3) The issue regarding raising resources by way of issuance of mortgage securities.

6. The bank account of the Company initially will be opened with the National Bank. Further on it is possible to open accounts with other banks of the Republic of Kazakhstan, selected by the Company upon a recommendation of the National Bank.

Chapter 3. Mortgage loans to be purchased by the Kazakhstan Mortgage

Company 1. A lending bank issues mortgage loans in the national currency (Tenge). It

is also possible to issue indexed loans taking the level of inflation into account. 2. Mortgage loans should be long-term and they are provided for a term

from 2 to 10 years. 3. Mortgage loans to purchase housing are provided to natural persons �

residents of the Republic of Kazakhstan. 4. The size of a loan should not amount to more than 70% of the market

value of the housing under purchase as at the date it is actually purchased. The purchased housing is the object of mortgage under the mortgage contract.*

5. The Borrower shall make an initial payment to a lender for the account of his/her own funds in the amount not less than 30% of the cost of housing under purchase.*

6. The amount of the principal and payments under it are being paid in the form of a monthly payment estimated in the form of annuities.

7. Evaluating the cost of the mortgaged property is required under the execution of the contract for retail mortgage lending. The value of the property is appraised by lending banks jointly with independent appraisers in compliance with the requirements established by the Company. The list of appraisers is approved by the Company.

8. The right of borrower�s possession title to real estate under collateral must be registered at the Real Estate Center. Besides, real estate mortgage (contract on collateral) is also subject to state registration.

Chapter 4. Insurance in the system of mortgage lending

33

1. Mandatory insurance of estate pledged to the Bank and personal insurance under contract is an obligatory condition of mortgage lending.

The insurance is carried out at insurance companies holding a License from an authorized state authority. The Company approves the list of insurers.

2. The Bank has right to insure on its own the loan issued to a borrower by executing a contract on voluntary risks insurance with an insurance company.

In the event of court liquidation of an insurance company, the borrower must again conclude insurance contracts with another insurer.

Chapter 5. Functions, rights and obligations of the Kazakhstan Mortgage

Company. 1. The Company has the following main functions (Attachment №1): 1) Purchases rights of claim under long-term mortgage loans

(mortgage certificates), issued to enable purchasing housing on the territory of the Republic of Kazakhstan, or purchases mortgage certificates;

2) Issues mortgage securities secured by the rights of claim acquired from banks, or secured by mortgage certificates. *these provisions may change

3) Signs with the National Bank of the Republic of Kazakhstan an agreement for provision of information regarding financial standing of lending banks. Besides, the Company establishes a database on lenders and borrowers.

2. After the rights of claim under loans are redeemed by the Company from a lending bank, the rights of claim under mortgage loans issued by lending banks are deemed to belong to the Company.

3. The Company carries out a periodic inspection of a certain portion of purchased mortgage loans either independently or with recourse to an independent auditor. If in the course of the audit low-quality or non-standard loans are revealed, the lending bank must remedy the violation or buy out loans or mortgage certificates. In the event of unsatisfactory service, the Company will have right to terminate the servicing contract with the lending bank and pass loans over for servicing to another lending organization.

4. The Company has right to establish criteria of assessing loan repayment probability. These criteria are required for the registration of mortgage loans issued by lending banks. The criteria consist of analyzing the borrower�s creditworthiness, assessing the value and condition of property transferred to the Bank as collateral. The Company has right to develop the major parameters with respect to collateral evaluation, obligatory for the registration of mortgage loans fit to be bought by the Company.

5. The Company buys out from lending banks the rights of claim under issued by them by initiating purchase through its own application or through proposals made by banks.

6. The Company shall review the data provided by banks on the subject of compliance of the mortgage loan, the right of claim under which can be purchased by the Company, with the uniform criteria and standards of the Company.

7. Subsequent to receiving a written proposal from lending banks with respect to the sale of rights of claim under mortgage loans, the Company must submit to Banks

34

an answer in writing with regard to its agreement or complete (partial) refusal to purchase rights of claim under mortgage loans according to a list submitted.

8. The Company has right to conclude agreements for information supply with the state and other agencies, who have this information on the borrowers at their disposal, and use this information, incorporating it in the Company�s database.

9. The Company shall organize and conduct training courses to improve qualifications of professionals in the area of mortgage lending, as well as provide consulting services on the issues associated with activities pursued to introduce the mortgage lending system.

Chapter 6. The procedure for Company�s interfacing with lending banks. 1. A lending Bank executes with the Company a contract on qualified

purchase of rights of claim under mortgage loans. The Contract may establish an obligation on behalf the Lending Bank to redeem the rights of claim from the Company, which ceased to meet the Company�s conditions.

2. Housing Mortgage Loans are issued by second-tier banks (organizations engaged in separate types of banking transactions), holding a License for the right of engaging in credit transactions. The Banks engage in the provision of mortgage loans in accordance with domestic policy and general conditions of conduct of credit transactions. The also engage in these activities in accordance with the Regulations for maintaining documentation with respect to the lending engaged into by second-tier banks and Company�s requirements towards mortgage loans fit to be purchased by the Company.

3. The originals of documents with respect to issued mortgage loans shall be transferred to the Company for custody.

4. The Company shall conclude a contract on trust management of the funds with the lending Bank or another bank. Pursuant to this Contract, the lending bank, who has granted the Company the right of claim under mortgage loan under the contract on the acquisition by the Company of rights of claim under mortgage loans (or any other Bank), shall continue the servicing of a mortgage loan and transferring to the Company regular monthly payments relative to mortgage loans, the rights of claim under which have been purchased by the Company net of the lending bank�s service commission. Besides, both lending banks, who directly have issued these loans, and other banks can engage in the servicing of mortgage loans, according to the Contract on Trust Management of Company�s Assets.

5. The rights of claim under mortgage contracts are redeemed given the agreement of the both parties. Consequently, subsequent to receiving a notification from the Company in writing with respect to its consent to purchase rights of claim under mortgage loans, the lending Banks will notify the Company in writing of their wiliness to sell mortgage loans. Besides, the written notification of second-tier banks should comprise the list of mortgage loans, the rights of claim under which the banks must transfer to the Company, and the borrowers� credit background, according to the list of mortgage loans.

6. Within 10 days as from the date the transfer transaction is registered, the lending Bank shall advise the borrower of the transfer of the right of claim to the Kazakhstan Mortgage Company.

35

7. Within the scope of the contract executed with the Company and throughout the entire term of the Contract, the lending Bank shall provide for a timely oversight of the borrower�s payment of mortgaged property tax. The Bank will also make sure that the borrower has adequate personal insurance and whether he/she has insured the object of real estate mortgage.

8. Mortgage loans, the right of claim under which has been purchased by the Company, will not be included in the bankrupt�s estate in the event of the lending bank�s bankruptcy. Pursuant to the Contract on trust management of the rights of claim under loans placed in servicing, the Company has right to transfer loans to another lending organization for their servicing in compliance with the Republic of Kazakhstan effective legislation.

9. The Bank managing loans by virtue of trust management Contract shall report to the Company in established by the Company format.

10. The Company may envisage the lending bank�s right to buy out a package of mortgage loans, earlier transferred to the Company, should new rates proposed by the Company as at the date of contract revision be unacceptable for Bank.

11. The regime for disbursing payments as per rights of claim transferred by the Bank to the Company shall be determined on a monthly basis.

12. Documents originals with respect to the mortgage loan, the right of claim under which has been purchased by the Company, shall be transferred to the Company. The lending bank shall continue charging fees with respect to loans, the rights of claim under which have been transferred to the Company, and undertakes to transfer fees to the Company or any third person indicated by the Company, upon the Company�s request. Transferred fees will be net of servicing commission.

13. The rights if claim under mortgage loans and mortgage certificates transferred by lending banks under the trust management contract shall not be included by lending banks in their balance sheets. The rights of claim mortgage certificates purchased by the Company shall be considered the Company�s assets.

14. The Bank shall exercise control over save keeping of the mortgaged real estate and report to the Company regarding the current status of mortgaged living premises, according to the rules established by the Company.

Chapter 7. The Procedure for Acquisition by the Company of Rights of

Claim under Mortgage Loans, or acquisition of mortgage certificates. 1. The Company shall purchase rights of claim from banks and provide

banks with required liquidity. Lending banks, which have issued housing loans, shall transfer to the Company rights to claim from a borrower a discharge of his/her obligation, secured by real estate collateral.

2. The Company has right to purchase rights of claim under mortgage loans and mortgage certificates based on quotation rates, established by the Company, within allocated limits.

3. The rights of claim under mortgage loans are purchased based the cost that prevails at the date of mortgage loans transfer to the Company, i.e. amount of the principal that has not been repaid as at the date mostly approximated to the date of purchase (not earlier than the end of a moth preceding the date of purchase), with the possibility of discount.

36

4. The rights of claim under standard mortgage loans are purchased by the Company at lending banks for the account of the Authorized Fund of the Company.

Chapter 8. Purchasing rights of claim under mortgage loans. 1. The Company effects purchase of rights of claim under mortgage loans

with the obligation of reverse buyout. Lending banks assume an obligation to buy out back from the Company the rights of claim under mortgage loans that ceased to meet the Company�s requirements. The banks shall transfer rights of claim under such loans in the amount equal to the debt with respect to the principal of a loan with the discount. Since transfer of rights of claim with respect to such loans, the lending bank�s role is limited to the loan servicing in the framework of trust management.

2. In the event of a purchase of rights of claim with the obligation of reverse buyout, the following conditions should be observed:

1) The purchase of rights of claim with respect to mortgage housing loans is financed in the amount not exceeding $30,000 USD. In individual cases, upon the Company�s decision, the loan amount may reach $100,000 USD.

2) The loans must conform to uniform requirements (standards), established by the Company.

3. The conditions of Company�s purchase of rights of claim with respect to mortgage loans with the obligation of return buyout:

1) The Company has right to purchase rights of claim under mortgage loans with the floating commission rate that can be reconsidered during a period, established by internal regulations of the Company (should not exceed 1,5 years);

2) The Company has right to engage in the purchase of rights of claim with potentially convertible rate that can be reconsidered during a period, established buy internal regulations of the Company (should not exceed 1,5 years);

3) The Company has right to engage in purchasing rights of claim with the fixed rate that does not vary until complete repayment of the mortgage loan.

4. In exceptional cases, the Company may purchase loans that can not be redeemed by banks back. In this case, the credit risk will be borne by the Kazakhstan Mortgage Company. Mortgage loans will be written off the balance sheet of financial institutions (lending banks) and excluded from the estimate of capital adequacy coefficient weighted in consideration of risks. The Company will buy out these loans only from banks being participants of the system of guarantees (insurance) of retail deposits, and complying within three months with prudential norms as at the date of purchase contract execution.

The loans for the remaining period shall be sold completely to the Kazakhstan Mortgage Company at the fixed rate, without any period for price conditions revision.

Chapter 9. Securities issued by the Kazakhstan Mortgage Company

1. Mortgage securities issued by the Company must be fit for purchasing by pension funds and insurance companies of the Republic of Kazakhstan, as well as banks.

37

2. Transactions executed in mortgage securities of the Company are registered according to the Republic of Kazakhstan legislative requirements.

3. The Company guarantees timely and complete payment of the investment income to purchasers of mortgage securities of the Company (investors).

4. Mortgage securities issued by the Company are used in the market of mortgage securities to place assets of pension and insurance funds, as well as other institutional investors.

5. The Company has right to issue the following mortgage security types: 1) Coupon instruments � debt instruments yielding fixed and variable

income; 2) Discounted debt instruments � bonds issued at the price lower than

their face value; 6. Mortgage securities with fixed coupon rate have the term of circulation of 1,5

to 10 years. Securities are furnished with coupon of the fixed rate, established at the level of issue. The bonds are repaid within a certain term at face value with the interest. Early repayment of bonds can be envisaged in the Decision on mortgage securities issue.

7. The discounted securities are securities with the term of 1 to 12 months, issued at the price lower than the face value. They are subject to repayment at face value at the day of repayment.

8. The issue of mortgage securities is carried out by the Kazakhstan Mortgage Company upon the expiry of mortgage loans pool origination.

9. The Company has right to issue bonds with floating rate that may circulate up to seven years and have the interest rate established in accordance with the Decision on securities issue. The interest rate can be reestablished each 3-6 months, i.e. in accordance with payment intervals, subject to compliance with the Issue Decision.

Chapter 10. Creating conditions required for successful introduction and

implementation of the mortgage lending system. 1. The National Bank can establish the quantity of mortgage loans, issued

by banks in interest correlation to the value of loan portfolio of a Bank; (in perspective it should not be less than 5% of total loan portfolio of the Bank).

2. In order to encourage mortgage lending, the National Bank may envisage a special procedure for mortgage lending stimulation. It can provide for a specific procedure for mandatory reservation of requirements towards liquidity of lending banks with respect to the sold rights if claim under mortgage loans and mortgage securities.

10. The Company may be granted a state guarantee for mortgage securities; 11. In order to encourage mortgage lending, the National Securities Commission

of the Republic of Kazakhstan may establish a limit (quote) of mortgage securities purchase for institutional investors.

Chapter 11. Final Provisions 1. Introducing the system of mortgage lending is a sign for creating a

market system of long-term retail mortgage lending for the purpose of purchasing.

38

2. Purchasing housing on credit is not only the basic form of the housing problem solution, but it is also a basic sphere of the economic activities key role in which is given to second-tier banks.

3. The State will facilitate the mortgage market development through establishment of general rules providing for efficient interface of all participants of the mortgage lending process.

Chairman G. Marchenko

SCHEME OF COORDINATION OF KAZAKHSTAN MORTGAGE COMPANY WITH ITS PARTNERS IN THE MORTGAGE MARKET AT

THE INITIAL PERIOD

Appendix No.1 To Main Provisions of activity of CJSC

�Kazakhstan Mortgage Company», approved by the Decree of the Board of the National Bank of

the Republic of Kazakhstan «___»________» 2001 года

№

39

BORROWER

LENDING BANK

KAZAKHSTAN MORTGAGE COMPANY

INVESTORS

Requirements to mortgager loans imposed by KMC

Form of a document: Suggested manual for assessment of solvency of a borrower, rules of granting, legalization and servicing of mortgage loans (to be approved by KMC)

Procedure and rules concerning relationship of KMC and lending banks

Form of a document: A set of documents concerning relations of KMC with banks (Framework agreement, agreement on cessation of demand rights with regard to mortgage loans, contract on trust management)

Procedure of attracting funds and establishment of relationship with investors (including asset management companies

Form of a document: Draft of a law, or amendments to the Instruction of the |NSC, draft of resolution concerning the issue on mortgage securities

Note: In future issues related ti insurance of credit risks, mortgage lending if commercial real estate, lending for construction and major repairs of housing can be considered

Provisions concerning management of KMC�s own capital,

Plan of implementation of a pilot project, Business plan (to be approved by KMC

Financial plan, risk management, management

GOVERNMENT, NATIONAL BANK,

NATIONAL SECURITIES COMMISSION

Main provisions of KMC activity

40

THE PRAGMA CORPORATION F i n a n c i a l P r o t e c t i o n I n i t i a t i ve U S A I D / R e p u b l i c o f K a z a k h s t a n K a z a k h s t a n , A l m a t y 4 8 0 0 9 1 67 Aiteke Bi St., Rms. 413-415, 420-422

КОРПОРАЦИЯ ПРАГМА Программа по развитию финансового р ы н к а и с о ц и а л ь н о й з а щ и т е U S A I D / Р е с п у б л и к а К а з а х с т а н

4 8 0 0 9 1 К а з а х с т а н , г .Алм а т ы ул. Айтеке Би 67, к . 413-415,420-422

Telephone:

Fax:

+7(3272) 63 94 84 +7(3272) 63 96 09 +7(3272) 63 93 23

Телефон: Факс:

+7(3272) 63 94 84 +7(3272) 63 96 09

+7(3272) 63 93 23

Memorandum To: David Lucterhand

From: Alsоu Khoussainova

Date: May 2, 2001

Re:Re:Re:Re: Results of the First Course on Mortgage Lending № Name of Organization Particpant Result

(60 � max) 1 Caspian Bank

Asem Tursynkhanov

52

2 Almaty Merchant Bank

1. Igor Alexin 2. Zhannat Adamkulova

43 37

3 TuranAlem Bank OJSC �BTA IPOTEKA�

1. Saltanat Dzharasova 2. Sagindyk Kusainov

44 56

4 Bank Centercredit

Lidiya Lysenko 51

5 NUR Bank НУРБАНК

1. Marat Utegenov 2. Baurzhan Nugymanov

42 54

6 Komirbank Комирбанк

1. Dina Tultayeva 2. Rafkat Menseitov

48 54

7 Lariba Bank ОАО СБ «ЛАРИБА-БАНК»

1. Altynshash Raviljevna 46

8 Bank Valut-tranzit Банк Валют-транзит

1. Almira Taizhanova

49

9 Akimat of Atyrau region Акимат Атырауской области

1. Mensyly Koshbaganbetova 2. Imangalieva Zhannat

46 51

11 National Bank of Kazakhstan Национальный банк Казахстана

1. Zhiger Basen 2. Dilnara Kanimova

48 51

41

12 HSBK

Народный банк Казахстана

1. Vitaly Makhmutov 2. Saule Intemirova 3. Timur Biiceitov

42 44 41

13 NSC НКЦБ

1. Zaura Zhumabaeva 2. Ajan Battalova 3. Botagoz Zhakipbayeva

42 49 45

14 Kyzylorda Regional Direction of Economy Кызылординское областное управление экономики

1. Zhansultan Matayev 46

Results of the questionnaire: Of the 24 participants, seven considered the lectures to be excellent. The rest gave good marks. To the question, �Which of the lectures do you consider the most interesting and useful for you?�, most of the participants mentioned the lectures on legal themes, such as �The legal basis of mortgage lending� and �Legal provision of the process of mortgage lending�. Some participants also mentioned the lectures �Characteristics of the main risks in mortgage lending�, �Underwriting Procedures� and �Foreign experience in foundation of the system of mortgage lending�. Some of the participants would like the themes on risks, underwriting procedures and legal aspects to be continued next time. With respect, Alsu Khoussainova

42

Attachments Section F. Social Policy Component

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Concept for Development

of a Social Protection Policy

for the Republic of Kazakhstan

Prepared by:

USAID Social Protection Policy Working Group

February 23, 2001

This paper was prepared by the USAID-funded Social Protection Policy Working

Group. The views expressed herein do not necessarily represent the views of the U.S.

Agency for International Development or the U.S. Government.

FINAL REPORT

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44

TABLE OF CONTENTS

EXECTIVE SUMMARY ��...ii

I. INTRODUCTION ��..1

II. CONSTRAINTS ON DEVELOPMENT OF A NEW SOCIAL PROTECTION POLICY ��4

III. OVERVIEW OF EXISTING SOCIAL PROTECTION SYSTEM��..�7

IV. DEFICIENCIES OF THE CURRENT SYSTEM ��.10

V. GENERAL POLICY ISSUES AND RECOMMENDATIONS ��..15

VI. ISSUES AND RECOMMENDATIONS RELATED TO SPECIFIC COMPONENTS OF THE SOCIAL PROTECTION SYSTEM ��25

VII. INITIAL ANALYSIS AND COMMENTS ON SPECIFIC SOCIAL PROTECTION ISSUES ��.31

VIII.NEXT STEPS FOR DEVELOPING AND IMPLEMENTING A SOCIAL PROTECTION POLICY ��..37

APPENDIX �A� THE CURRENT SYSTEM OF SOCIAL PROTECTION BENEFITS IN KAZAKHSTAN��39

APPENDIX �B� SOCIAL PROTECTION POLICY IN HEALTH CARE ��48

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EXECUTIVE SUMMARY

This paper was prepared as the result of a request in August 2000, from the President of the

Republic of Kazakhstan, Nursultan Nazarbayev. In response to his request, a working group

consisting of representatives of several government ministries and agencies (Government Working

Group), and directed by the Minister of Labor and Social Protection, Mr. Alikhan Baimenov, was

organized and charged with development of a new social protection policy concept for the

Government. At the request of the Minister, the U.S. Agency for International Development

(USAID) organized the USAID Social Protection Policy Working Group (USAID Working Group),

managed by The Pragma Corporation, to support the Government Working Group. The purpose of

this paper is to provide a summary of the findings and recommendations of the USAID Working

Group to members of the Government Working Group for consideration in the development of a

new social protection policy for Kazakhstan.

Scope of the Paper

The mandate given to the Government Working Group was to identify the constraints and

deficiencies of the current system of social and health benefits, and to develop a new concept for

social protection. Because this paper is intended to complement the efforts of the Government

Working Group, its scope is also limited to consideration of the following areas:

1. Social risks, including :

a. mortality (includes old age pensions, survivorship, and burial benefits)

b. disability (includes short- and long-term disability, industrial accidents and occupational diseases); and

c. unemployment

2. Healthcare

3. Poverty

Constraints to a new social policy

For all its political and ideological implications, social policy is, first and foremost, a component of

national economic policy. Unlike other components of economic policy, however, social policy

focuses specifically on improving the well-being of those citizens whom by circumstances of

accident, ill health or other misfortune are prevented from being economically active and

supporting themselves. Social problems cannot be solved separately from economic problems.

Perhaps the most daunting obstacle to the development of a comprehensive, integrated social policy

for Kazakhstan is the uncertain structure of the economy itself.

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Kazakhstan�s economy is in transition. In spite of two and a half years of economic stability, hard

currencies still play the dominant role both as a store of value in the form of corporate deposits in

commercial banks and as �mattress money� among the general population. And, because the

supply of tenge cannot fund all transactions in the economy, certain segments of the economy still

engage in barter and other less-than-transparent forms of exchange, giving rise to a large

�informal sector� whose dimensions are ill defined, but which is estimated to be greater than 50%

of the economy. The presence of a large informal sector distorts all economic reporting and makes

statistical analysis extraordinarily difficult for planners and policymakers.

Additional constraints include the physical size and geographic diversity of the country, and the

uneven distribution of the population. This creates a problem for standardization and delivery of

social benefits. For the past decade, Kazakhstan has also been characterized by demographic

instability making it difficult to accurately project demographic trends, including the number of

citizens that will require additional social benefits in the future. Another constraint relates to the

human resource base such as the lack of experienced actuaries to conduct social policy research and

manage public or private social insurance systems. Finally, the technology required to plan,

maintain and administer social policy is unevenly distributed throughout government; government

offices in the regions, where accurate processing and reporting is essential, are particularly poorly

equipped. These constraints should be carefully considered in the design of a new social protection

policy.

Deficiencies in the existing social protection system

The USAID Working Group focused on identifying fundamental deficiencies in the existing social

protection system, principally, those deficiencies that preclude the system from fulfilling its purpose

as a sustainable, social safety net for citizens. Several deficiencies were identified and are

discussed in the body of the paper. These deficiencies can generally be classified into the following

three categories:

• incentives: some aspects of the current system create inappropriate incentives for

Kazakhstan�s current economic situation, and encourage reliance on social benefits and

discourage formal sector employment;

• Fairness: the current system does not provide uniform benefits to all citizens, or

differentiate between those who contribute to the system and those who do not; and

• Transparency: There is no personal identification system or database to track those who

receive benefits and how benefits are distributed.

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General recommendations regarding a new social protection system

The initial efforts to develop a new social protection policy should concentrate on: 1) restructuring

the current system to create the proper incentives, including a restructured healthcare system and a

limited system of social insurance for formal sector workers; and 2) achieving greater transparency

in the administration of public benefits by implementing an administrative system based on a

personal identification number for all citizens. Any increase in funding or expansion of benefits

should not be considered until a proper legal and administrative structure for social protection is

established, and until policy makers can draw a clearer distinction between what is subsistence

income and poverty, and what levels of expanded benefits projected tax revenues can fund.

Within the framework of the those general recommendations, the USAID Working Group

specifically recommends that:

1. The Government should develop and adopt specific objectives and values consistent

with Kazakhstan�s current economic policies as the foundation for a new social

protection policy;

2. The benefit structure should be organized according to risk, and should include

three general categories: social risks, healthcare and poverty;

3. The benefit structure for social risks (pensions, disability, survivorship, etc.) should

be expanded to include three separate pillars:

• First Pillar: a minimum benefit guaranteed to all citizens, funded from the state budget and designed to provide subsistence level assistance (social assistance);

• Second Pillar: a social insurance, funded by premiums paid by employers or employees, to provide tax-paying, formal sector workers with benefits related to their salary levels (social insurance); and

• Third Pillar: supplemental insurance, funded by employers or individuals, to supplement Pillars I and II (voluntary insurance);

4. An appropriate economic indicator should be developed to which social benefits can

be linked;

5. A national data base should be developed for the entire population, using a unique,

personal identification number; and

6. Until a transparent administrative system can be implemented, funding for benefits

should not be increased above existing levels.

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Recommendations related to the specific components of the social protection system

In addition to the general recommendations, sufficient analysis was completed to permit the USAID

Working Group to make specific recommendation regarding the reform of the accumulation

pension system and the current healthcare system.

Accumulation pension system

The USAID Working Group recommends that three specific changes be made to the accumulation

pension system :

• An independent, unified regulatory structure is required to manage the accumulation

pension system;

• The State Accumumulation Pension Fund (SAPF) should be privatized to permit the

development of a more competitive and fair pension market; and

• Pension payouts should be made as lump sums for small amounts, and either scheduled

withdrawals or annuities for larger accumulations.

Healthcare system

The USAID Working Group recommends that the reform of the current healthcare system be

implemented within the following framework:

• Matching state budget health expenditures and free benefits by prioritizing expenditures

based on a determination of the most essential benefits, generally defined as the following:

primary health care, maternal and child health care, immune-prophylactics, infectious

diseases, and emergency care.

• Reducing health system inefficiencies in accordance with the specific recommendations

contained herein.

Analysis and comments on other issues related to the social protection system

In addition to the specific recommendations for pensions and healthcare, the paper

includes the preliminary analysis of issues related to other components of the social

protection system, and provides commentary on how specific components may be

49

49

developed within the general framework proposed by this paper. These comments are

intended to serve as the basis for further analysis and discussion, and the eventual

development of specific recommendations.

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I. INTRODUCTION

A. Background

In an August 2000 speech to the Government, the President of the Republic of Kazakhstan,

Nursultan Nazarbayev, highlighted the need for a new social protection concept and expressed his

desire to increase the number of those productively employed and to improve the lot of those

living in poverty. The Government Working Group directed by the Minister of Labor and Social

Protection, Mr. Alikhan Baimenov, was organized and charged with development of a new social

protection policy concept for the Government.

The purpose of this paper is to provide recommendations for development of a social protection

policy to members of the Government Working Group. The conclusions and recommendations

contained in this paper represent the collective work of the USAID Working Group managed by

The Pragma Corporation as part of the USAID-funded FPI. In addition to the FPI, the USAID

Working Group included specialists from the USAID-funded Zdravplus Health Reform and the

Pension Reform Projects. The USAID Working Group was organized in November 2000, in

response to a request from the Minister of Labor and Social Protection. The conclusions and

recommendations in this paper are based on analyses completed to date. Development of a

complete social protection concept will require additional months of analysis, more discussions,

and specific decisions by the Government. As such, the recommendations in this paper are

preliminary and focus primarily on providing a framework for continuing the development of a

comprehensive new social protection policy for Kazakhstan during the coming months.

The development of a new social protection policy is an evolving process, but one that must have

a long-term vision. To be effective, a social protection policy must progress within the framework

of a country�s economic, demographic, cultural, technical and political realities. However, as a

country develops economically, its social protection policy must be structured in such a way that it

can expand to benefit the populace as a whole. Therefore, the process requires continuous

monitoring, preparation of technical analyses and recommendations, and discussion of and

agreement on different policy options among various stakeholders within a general social

protection system framework. Specific benefit structures and levels, delivery mechanisms, and

administrative systems for each component of the reformed social protection system can be

designed and adjusted within this general framework.

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B. Scope of the Paper

Social protection has been defined as the �effective means, allowing the establishment of a

necessary level of solidarity between people receiving income from their work and people who do

not receive such income because of their age, health status or the impossibility to find a job�.1

Thus, by definition social protection involves economic transfers from the economically active

population to the socially vulnerable population.

The International Labor Organization (ILO) defines social protection policies as those that

encompass:

1. promotion of sustainable, gainful activities in a decent work environment;

2. prevention of, or compensation for occurrence of, major social risks through social

insurance mechanisms;2

3. provision of social assistance mechanisms targeted at vulnerable groups or individuals who

are not participants in social insurance schemes;3 and

4. access by individuals to fundamental rights and services, such as proper housing, education

and healthcare, and the respect for fundamental principles of law and individual security.

In addition, the Council of Europe and the ILO identify nine areas of social risk: old age, death of

the breadwinner (survivorship), short-term disability, long-term disability, industrial accidents and

occupational diseases, unemployment, sickness, and maternity and child rearing.

The scope of this paper is limited by the mandate given to the Government Working Group. Their

mandate was to examine the current system of social and health benefits, determine their

deficiencies and develop a new concept for social protection. Because this paper is intended to be

complementary to the efforts of the Government Working Group, it focuses on the following three

general areas:

1 TACIS Glossary of Social Terms 2 In this paper, social insurance is defined as the complex of policies and measures that allows the working population to protect itself against major social risks (death, disability, old age, unemployment). It is insurance in the sense that premiums and benefits are paid in relationship to workers� wages, rather than maintaining a minimum living standard. It is social in the sense that the insurance is available to all workers at a reasonable cost. In contrast, non-social insurances may deny coverage to individuals classified as �bad risks�, leaving them without coverage. Social insurance can be administered publicly or privately.

3 In this paper, social assistance is defined as the complex of policies and measures that provides all citizens with guaranteed benefits to support a minimum living standard.

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1. Social Risks, including :

a. Mortality (includes old age pensions, survivorship, and burial benefits)

b. Disability (includes short- and long-term disability, industrial accidents and

occupational diseases); and

c. Unemployment

2. Healthcare

3. Poverty

Under the category of social risks, the nine risks listed by the ILO have been consolidated into

three general categories of related risks. Mortality includes all risks associated with the loss of

life. Disability includes all issues related to the risk of a person becoming partially or totally

impaired and unable to provide for his own needs, regardless of the cause. Unemployment

includes issues related to the risk of loss of employment.

Healthcare focuses on minimizing risks associated with illness. In this paper, it is treated as a

separate category of risk because it requires the establishment and management of a complex

delivery and financing system that set it apart from the other areas of social protection.

Poverty includes all issues related to those who are unable to adequately provide for themselves,

even after the risks described above have been addressed by the social protection system. In

listing poverty as a separate category, this paper does not draw a bright line between social risks

and poverty, as the targeted population is often one and the same.

Other important issues, identified by the ILO but not addressed in this paper, include:

• optimization of the tax structure in order to increase revenue, stimulate formal sector

employment and provide for a distribution of the tax burden consistent with what is

deemed fair by broad layers of society;

• controls and administrative measures to increase tax and legal compliance, and to fight

corruption;

• policies to increase safety in the workplace and improve work conditions;

• strategies to improve the level and structure of wages without causing distortions in the

labor market;

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• education policies and spending;

• law enforcement and human rights policies.

Although these issues are not specifically addressed and analyzed, they are mentioned in the paper

where necessary to the understanding and analysis of other areas.

II. CONSTRAINTS ON DEVELOPMENT OF A NEW SOCIAL PROTECTION POLICY

As successor state to a Soviet republic, Kazakhstan ten years ago inherited from the Soviet Union

a socialist, command-administrative economic structure and a system of social programs which,

for better or for worse, met the perceived needs of that economy. For the past ten years, reform

has concentrated on transforming Kazakhstan into a market-oriented economy and, while retaining

certain legacies of its Soviet past, the Kazakh economy today is largely one of private ownership

and free enterprise. Market forces have largely replaced state ownership and command-

administrative pricing, and private pension fund investments drive the expansion of local capital

markets. Foreign investment has revitalized the country�s oil field infrastructure and dramatically

increased Kazakhstan�s oil production and export. In many respects, economic reform in

Kazakhstan has been particularly successful.

With the exception of the pension system, reform of the social system has not even begun. One

legacy Kazakhstan retains, virtually unreformed, is the Soviet system of social benefits, and it is

probably reasonable to assume that today�s inherited Soviet programs meet the needs neither of

the new, market-oriented national economic policy, nor of the current levels of unemployment,

impoverishment and economic disenfranchisement among the general population. A new social

policy is clearly required that strikes a balance between present need and future expectations in

Kazakhstan.

A. Social Policy as a Component of Economic Policy

For all its political and ideological implications, social policy is first and foremost, a component

of national economic policy. Like other components of economic policy�monetary policy, fiscal

policy, labor and trade policy�it shares a single national objective: improving the well-being of

the citizenry. Unlike other components of economic policy, however, social policy focuses

specifically on improving the well-being of those citizens whom accident, ill health or other

misfortune prevents from participating fully in the national common good. In the long run, sound

social policy, like sound economics, pays measurable dividends to citizens and government alike.

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In that regard, it is sound practice to establish from the outset what social policy can and cannot

achieve. Social policy alone�no matter how generous and broad-reaching its benefits�cannot

redress the ill effects induced by mass impoverishment, prolonged unemployment and the

disenfranchisement caused by economic transition. Social problems cannot be solved separately

from economic problems.

Nor can social policy alone overcome the obstacles posed by what is referred to as the �informal

sector.� The informal sector is a complex socio-economic phenomenon found to a greater or

lesser extent in emerging economies worldwide. In Kazakhstan, the informal sector is estimated

to account for more than 50% of economic activity. Experience to-date suggests that the informal

sector cannot be eliminated by dictate; it can however be marginalized�not eradicated�by fully

coordinated initiatives in economic, monetary, tax, labor and social policy reform. But the surest

and fastest cure for the ills of the informal sector is sustained economic growth in the formal

sector.

While it is clear that economic policy plays a leading role in solving Kazakhstan�s most troubling

economic problems, it should be equally clear that certain specific agents in the economy will

never benefit fully from economic policy�s general solutions. There will always be the indigent,

the unemployable and the disenfranchised, and some will always elect to keep their relationships

with society informal. While the primary role of social policy is to manage the risks to which all

are susceptible, social policy plays a secondary, but equally important, role in managing society�s

expectations. Social policy cannot promise benefits that government cannot deliver and the

economy cannot sustain. Social policy is subject to constraints inherent in the specific

environment in which it is developed.

B. Physical and Economic Constraints on Social Policy

Physical constraints to the design and implementation of social policy in Kazakhstan fall into

three broad categories.

First, a number of constraints derive from the physical size and geographic diversity of the country

and the uneven distribution of the population throughout it. In densely populated areas the

standardization and delivery of services are, of course, easier and cheaper than in remoter, less

populated areas, where the means of delivery must often be more mobile and maintaining

standards of service can be problematic and costly.

Kazakhstan is also faced with demographic instability that has dominated the period since

independence. Today, Kazakhstan has a population of approximately 15 million citizens, nearly 1

million less than a decade ago. The period since independence has been marked by high

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emigration, lower birthrates, and increasing mortality rates. While the population has decreased,

the number of disabled has increased, especially among children. Statistics in recent years

indicate that demographic stability may be returning for some risk categories and for certain

population groups, such as, mortality among urban males, but the general demographic situation

remains unstable. Demographic instability makes it difficult to accurately predict both population

growth and the number of the population that will require new social benefits in the coming years.

Second, a number of constraints derive from the limitation of human resources, especially in the

areas of research and planning. The lack of experienced actuaries presents one such deficiency in

both social policy research and the technical know-how required to manage social insurance

systems, whether private or public. And even though social policy is still more art than science,

social policy planners trained in contemporary techniques of analysis, evaluation and projection

are few in Kazakhstan�s civil service.

Last, the technology required to plan, maintain and administer social policy is unevenly

distributed throughout government; government offices in the regions, where accurate reporting is

essential, are particularly poorly equipped. Exactly what equipment will be necessary and where

it should be deployed must be determined by thorough systems analysis in the early stages of

policy planning.

Economic and budgetary constraints on social policy are fairly straightforward. Like people,

government cannot spend money it does not have or will not have. Present needs must be tailored

to fit future means; the sustainability of social benefit programs is essential to managing society�s

expectations and building its trust. The revenues that fund social programs should be as insulated

as possible from exogenous economic shocks, such as collapsing crude oil and minerals prices.

Kazakhstan has vast reserves of oil and minerals, but government cannot realistically set their

future price.

Kazakhstan�s is an economy in transition. Perhaps the most daunting obstacle to the development

of a coherent, integrated social policy for Kazakhstan is the uncertain structure of the economy

itself. The presence of a large informal sector distorts all economic reporting and makes

statistical analysis extraordinarily difficult for planners and policymakers. Particularly

troublesome are accurate calculations of real per capita income and subsistence levels without

which, of course, appropriate levels of social policy benefits cannot be estimated. Further, from

the macroeconomic perspective, one can argue that designing a specific national social policy is

impossible, if policymakers cannot predict with reasonable certainty the rate of job creation in the

economy for a given future period. In this regard, jobs must be related to some defined minimum

wage.

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This further suggests that the process of designing and implementing an expanded benefits

program is integrally tied to drawing a clearer distinction between what is subsistence income

and what is poverty, and between the levels of benefits that projected tax receipts can fund. A

realistic minimum wage is also needed to replace the �minimum wage indicator� (minimal�nyi

rasschetnyi pokazatel�, or MRP) as the measure of minimal income�the universal unit, shared by

both economic and social policy, against which government can realistically measure both the

levels of social benefits and the tax burden that supports them.

There are several measures that should be undertaken immediately to ensure that benefit

programs can be effectively implemented, delivered and accounted for when government and the

economy are ready for the installing of new social policy. These key administrative and technical

measures are discussed in the paper, along with other recommendations for improving existing

services.

III. OVERVIEW OF EXISTING SOCIAL PROTECTION SYSTEM

In addition to identifying the factors that constrain development of a new social protection system

in Kazakhstan, an analysis was made of the specific characteristics of Kazakhstan�s existing social

protection system to identify where the system is deficient. A complete description of the benefits

structure of the current system is found in Appendix A. This section provides an overview of the

existing social protection system as the foundation for understanding the deficiencies in the

system and the recommendations provided thereafter.

A. Legal Framework

Kazakhstan�s social protection system consists of more than 120 separate legal and normative acts

including the Constitution, Republican laws, governmental and presidential decrees, and

regulations. Although numerous laws and amendments have been enacted since independence,

the general legal and philosophical framework developed during the Soviet period remains largely

intact.

The most comprehensive and dynamic changes to the social protection system were made in 1997

with the adoption of pension reform. The new pension law removed many special categories of

benefits and created a three-pillared pension system based on state benefits, mandatory

contributions by all workers, and voluntary contributions. The pension law takes an integrated

view of the risks associated with old age security and provides a comprehensive state of

government policies and responsibilities related to that risk. It represents the best example of

post-independence social reform legislation in the social protection system.

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Under the current legal framework, some benefits are guaranteed to citizens (entitlements), while

others are provided at the discretion of the government. Of the guaranteed benefits, the most

important are free healthcare and old age pensions (from the pay-as-you-go solidarity pension

system). All targeted social assistance to low-income individuals/families is at the discretion of

the government.

In general, the current legal framework is characterized by a lack of consistency. This appears to

be primarily due to the absence of a unifying philosophy and absence of a foundation for policy.

Laws within the system are not always consistent and definitions are often contradictory or

unclear.

B. Benefit Structures

The benefits provided by the current social protection system consist of the following:

• old age pensions;

• state benefits (disability, survivorship, and old age allowances);

• special state benefits (WWII veterans� and dependents� allowances, disabled support, families

of deceased soldiers, special services for pensioners, mothers of many children, etc.);

• healthcare; and

• administrative costs and other social payments, such as early retirement and burial benefits.

• targeted social assistance (maternity payments, burial benefits for workers and unemployed,

housing subsidies, unemployment benefits, mothers of many children, etc.); and

• other social assistance (homes for disabled, rehabilitation centers, etc.).

Pensions constitute the single largest benefit in the system in terms of the number of recipients and

the total budget. The responsibility for management of benefits is divided between the national

and local governments. The national government is responsible for delivery of pensions, state

benefits and special state benefits. Local governments are responsible for the delivery of targeted

social assistance. The two share responsibility for healthcare.

C. Financing

Under the current system, all benefits, except accumulation pensions, are funded directly from the

state budget. In the year 2000, the Government of Kazakhstan will spend 218 billion tenge on

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social protection, approximately 10 percent of GDP.4 Social spending is divided between the

Republican and local budgets. In 2000, 153 billion tenge was allocated to the Republican budget

and 65 billion tenge to local budgets.

The government imposes a social tax of 26% of payroll to finance social benefits. During Year

2000, income from social taxes will fund approximately 43% of social assistance spending. All

revenues collected as social taxes flow directly into the state budget and are treated as general

revenues; Kazakhstan has no special or sequestered social accounts in the budget. Likewise, there

is no internal balancing of amounts collected and expended for social benefits; deficits in social

taxes collected are covered from general revenues. Currently, Kazakhstan has no off-budget,

social, or other, funds through which it provides benefits, except for the accumulation pension

funds that collect and manage the pension accumulations of future retirees in a regulated

environment.

D. Management

The Prime Minister is ultimately responsible for the effective development and administration of

the social protection system. Through deputy prime ministers, he provides oversight to the

respective government ministries that have responsibilities for the system. With respect to the

roles of ministries within the social protection system, the Ministry of State Revenues is

responsible for collecting social taxes, accumulation pension contributions, and other revenues

from other taxes. The Ministry of Finance is responsible for allocating funds and the Ministry of

Labor and Social Protection (Ministry of Labor) and Agency for Health are responsible for

determining eligibility, and the levels of funding required to provide social and health protection

in accordance with the law and deliver benefits to the recipient.

E. Administration

The State Center for Benefit Payments (SCBP), operating under the direction of the Ministry of

Labor plays the principal role in administering the payment of social benefits. Through its rayon

offices, the SCBP manages payment of solidarity pensions and other social benefits. Originally, it

was responsible for collecting a 15% social tax to fund the solidarity system, but, since collection

of all taxes was centralized in 1999, the SCBP�s role has become solely that of a payment agent

for all social benefits funded from the Republican budget, with the exception of healthcare and

targeted social assistance, which have separate payment systems. The SCBP is responsible for

issuing Social Identification Codes (SIC) to persons participating in the accumulation pension

system and acts as the clearinghouse for the payment of contributions from employers to pension

4 This budget is equivalent to more than $1.5 billion U.S. dollars based on an exchange rate of 144 tenge per

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funds. The Agency for Health has a separate structure and system for administering the delivery

of healthcare services.

F. Accumulation Pension System

By creating the accumulation pension system, the State delegated management of pension assets

to private pension funds. The State is responsible for regulating the pension funds to ensure

statutory compliance. There is no central management of the accumulation pension system. The

National Bank of Kazakhstan�s Department of Bank Supervision, the Committee for the

Regulation of the Activities of Pension Funds, operating under the Ministry of Labor, and the

National Securities Commission provide regulatory oversight for the custodial, recordkeeping and

investment activities of the accumulation system respectively.

IV. DEFICIENCIES OF THE CURRENT SYSTEM

No social protection system is without weaknesses. The deficiencies identified in this section are

characterized as fundamental deficiencies that preclude the system from fulfilling its purpose as a

social safety net for citizens. The items identified in this section were prepared based on an

analysis of the system, and discussions with participants in the administration of the system, and

international donor organizations.

Current benefit levels are not sufficient

Individual benefit levels provided by Kazakhstan�s current social protection system are

insufficient to provide most recipients with the level of financial support needed to meet minimal

living standards. As a result, most current benefit recipients must also rely on other sources of

income, such as family support, other social benefits, or informal sector income.

The current system is not transparent

The current social protection system is not transparent, i.e., does not have a quality control

mechanism that assesses how effectively benefits are reaching those that the legislation targets. It

is also unclear to what extent benefits are being paid to persons not entitled to receive them.

The analysis of the USAID Working Group indicates that as many as 4% of pension payments are

made to persons not entitled to receive them, e.g., persons who have died or emigrated, and no

studies have been done to document underpayments of benefits to eligible individuals. Because

the system is not transparent, these improper payments cannot be identified and corrected to

ensure that the correct amount of benefits is given to eligible individuals as required by law.

dollar, or an equivalent of approximately 15,500 tenge ($108 US dollars) for every citizen of Kazakhstan.

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Means-testing is unreliable when a high percentage of the population works in the informal

sector

Means-testing is the process of screening those who are eligible to receive benefits to ensure that

their income does not exceed the eligibility limits established by legislation. Establishing

effective means testing is always difficult, even in countries with developed systems of tax

collection and income registration where almost the entire economically active population is

employed in the formal sector. In Kazakhstan, means testing is not used to determine eligibility

for social benefits. However, it is used to establish eligibility for targeted social assistance

payments (payments made to those living in poverty). The targeted social assistance means tests

currently in use in Kazakhstan, and proposed in new legislation, rely on income declarations

prepared by applicants. However, in a country where more than half of the economically active

population works in the informal sector, many transactions are settled in cash or effected by

barter. This makes means testing nearly impossible to properly administer.

The issue is not whether the rich will make fraudulent declarations in order to qualify for benefits

because the levels are too low to interest them. It is more a problem that the �upper tier poor�,

who have sufficient income to sustain themselves, may manipulate the declaration process to

obtain benefits, diverting already scarce resources from the �lower tier poor� for whom they were

targeted. This process dilutes benefit levels to the point that they are too low to help the �lower

tier poor� live at subsistence levels.

The relationship between wages and state benefits is distorted

The national minimum wage currently stands at 2,680 tenge/month, whereas the minimum

pension benefit is 3,500 tenge/month. A disabled person, who has been medically certified to be

80% to 100% disabled, receives a minimum of 6,815 tenge/month in state and special state

benefits. Unemployed persons assigned to social work projects are entitled to at least the

minimum wage, but compensation is not uniform across the country. For example, in wealthier

areas, such as Astana, those performing social work projects receive 1.5 times the minimum wage.

The minimum wage in Kazakhstan is less than 20% of the national average wage. This distortion

in relationship between the level of wages and the social benefit structure creates disincentives to

seek productive employment.

In order for a social protection system to create certain economic incentives for persons to work,

the minimum social benefits should be less than the minimum wage. Also, the relationship of the

minimum wage to the average wage should fall within an acceptable range (generally between

30% and 60%). In Kazakhstan, as in other CIS states, the minimum wage is used more as a tool

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for computing certain fines than as the minimum legally acceptable level of wages. A sufficiently

high and enforceable minimum wage must be established.

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The current system does not create incentives to pay social taxes

Except for the accumulation pension system, Kazakhstan�s social protection system does not link

benefit levels to payment of social taxes. Disability, survivorship and other benefits are paid from

the budget at the same level for all citizens irrespective of wage levels or whether a recipient pays

social taxes. This system creates an incentive to 1) under declare income, and 2) evade payment

of social taxes. In the formal sector, it is a common practice for employers to pay part of salary as

�official� salary and an additional amount in cash. By doing so, they reduce their social tax

liabilities and reduce the amounts that an employee has to contribute to the accumulation system.

In the informal sector, workers pay social tax by patent on a voluntary basis. However, there is no

incentive to purchase a patent and enforcement is lacking.

Many social protection systems include three pillars, 1) a state benefit; 2) a mandatory social

insurance; and 3) voluntary insurance. The first pillar is designed to provide a basic state benefit to

maintain a subsistence level lifestyle for all citizens upon the occurrence of defined socially

protected events. The second pillar provides a benefit linked to a person�s income level from

wage-work, and is designed to preserve the person�s lifestyle. The third pillar allows a person to

choose the level of their lifestyle if an insured event occurs. A three-pillared system creates

incentives for persons to participate as they receive benefits based on their contributions. Apart

from old age pensions, the current system in Kazakhstan has only the first pillar to provide a

minimum safety net through a system of budget-financed benefits.

Targeted social assistance benefit levels are not uniform across the country

Currently, targeted social assistance benefits are not uniform because:

1. The level of benefits is not established by law, but at the discretion of local authorities.

The level of the benefit depends on local priorities and the size of the local budget. This

means that levels of targeted social assistance in Astana city can be significantly higher

than in the surrounding oblast.

2. Benefits are only payable to families with a per capita income of less than two times the

Calculation Index (CI). 5 Since the cost of living differs by as much as 50% between the

highest cost oblast and the lowest cost oblast, purchasing power varies considerably with

the same benefit.

5 The CI is a basic unit established by the Government to serve as the basis for calculation of many state benefits. The Government adjusts and publishes the CI quarterly. Currently, it is 725 tenge.

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The inequality caused by different costs of living around the country is being addressed in the

draft law on targeted social assistance currently before the Parliament. Under that law, the current

level of income required to qualify for benefits (2 X CI) will be replaced by a regional poverty

line, taking into account adjustments for regional costs of living.

Inequality developed by regional authority might be a reasonable policy in a large federal system

with autonomous governmental structures, such as the U.S. or the Russian Federation. However,

absent political considerations, in a Republican structure like Kazakhstan�s, it seems logical to

centralize decisionmaking on benefit levels and minimum guarantees, albeit with regional

variations.

Current and planned targeted social assistance benefit structures create disincentives to

increase formal sector employment and enterprise efficiency

Current targeted social assistance programs are directed at families with per capita monthly

income less than 1450 tenge/month which is two times the CI or (�qualifying level�). Under the

current system, a family receives a targeted social assistance benefit payment in addition to any

income the family receives below the qualifying level. Families whose income approaches the

qualifying level may experience an economic incentive to hold income just below the qualifying

level, unless increases to income would exceed the amount of the benefit.

The draft law on targeted social assistance would reduce this problem since income will only be

supplemented up to the poverty line, i.e., the amount of the supplement decreases as the poverty

line is approached. Nevertheless, this approach represents a de facto 100% marginal tax burden

on salary growth for families with per capita income below the qualifying level. In some

countries, targeted social assistance is provided only to groups that are unable to earn a living

because of old age, disability, unemployment, etc. In Kazakhstan and other CIS countries,

targeted social assistance goes to all poor including members of the working population whose

income levels are inadequate. This is a form of subsidy for low added-value and/or inefficient

enterprises, since they can afford to pay below subsistence-level wages knowing that the state will

supplement these wages with social assistance. (This issue is closely linked to the absence of a

meaningful minimum wage, as discussed earlier).

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The healthcare system is inefficient and underfunded

The current healthcare finance system6 is characterized by an imbalance between the level of state

health budget funding and the level of free services guaranteed by law. The population receives

substantially fewer free services than those promised by the state. Therefore, a funding gap exists

between promised and delivered free services. This gap consists of two components � under-

funding of the state health care budget and inefficiency of the current health care system. The

population subsidizes this funding gap by informal out-of-pocket payments at the point of health

service delivery. Voluntary insurance through insurance companies and self-insurance defined as

formal payments at the point of service delivery cover health benefits that are not guaranteed by

the state.

The current health care delivery system is extremely inefficient. It uses more resources to achieve

health care results that could be achieved with fewer resources. One of the most profound

inefficiencies is the imbalance between the hospital and primary care sectors. Hospitals consume

approximately two thirds of the health care budget. The hospital sector, including the extensive

specialized health programs for tuberculosis, sexually transmitted diseases, oncology and

psychiatry, is overdeveloped. The primary health care sector, which should be the foundation for

a cost-efficient and clinically effective health care system is underdeveloped, under-financed, and

under-utilized. The delivery system should be changed to direct patients to primary care

physicians at polyclinics. Incentives should exist for primary care physicians to refer patients

quickly to specialists when needed. However, for that to occur primary care physicians need to be

better trained in modern clinical standards. Today, illnesses that should be treated effectively and

inexpensively at the primary care level are instead treated, at high cost, in hospitals or by

specialists in hospitals.

V. GENERAL POLICY ISSUES AND RECOMMENDATIONS

Prior sections of this paper provide a context for discussion of specific issues and

recommendations related to the adoption of a new social protection system. The purpose of this

section is to discuss issues related to the general social protection system within the context of the

constraints and deficiencies identified above. The recommendations are general and focus on

establishing the necessary foundation for the social protection system of the future.

A. Underlying Values and Objectives

6 An extensive discussion of the healthcare system can be found in Appendices �B� and �C�.

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Agreement on the values that should serve as the foundation of the system is an important first

step toward a new social protection policy. The values frame other decisions regarding the

structure of a new concept and provide consistency to decision making. A fundamental problem

with the system today is the inevitable tension created by a system designed based on Soviet-era

values attempting to operate in today�s economic and social environment.

Given Kazakhstan�s current economic path, this paper recommends that the fundamental values

and objectives of the new social protection concept should:

1. Support economic growth

A fundamental precondition of economic growth is work. Persons employed in the formal sector

with adequate salaries can provide for their own needs and insure themselves against major social

risks. The greater the level of formal sector employment, the greater the possibility to fund social

protection benefits. Therefore, the system should contribute to an increased readiness of

employees and employers to be part of the formal sector, to pay social taxes and declare income

fully. To the extent that persons are unable to work in the formal sector because there is

insufficient demand, the system should provide incentives for citizens to engage in other useful

activities in the informal sector or social work projects.

The system should stimulate individual responsibility rather than reliance on the state. Individuals

who are able-bodied should generally take responsibility for their own future and the well-being of

their families. A system of universal personal identification numbers for all social benefits should

be implemented to improve management and discipline in the system.

2. Be fair to all citizens

�Fair� means different things in different countries. In some societies, �fair� means that all should

share equally. In others, �fair� means that each person receives rewards consistent with their hard

work, efforts, and achievements. The latter view is predominant in market economies, tempered

by support for the subsistence needs of all citizens. The new system should apply a standard of

�fair� that provides all citizens with basic benefits, yet provides benefits related salary for those

that work, put forth effort and achieve. The reformed system should have a �hybrid� view of

fairness based on a blend of the two extreme views.

Furthermore, the system should be administered so that all benefits are provided without regard to

sex, race, religion, or political affiliation, based solely on the fulfillment of the qualification

criteria established in the law. The government guaranteed minimum benefit package should

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provide a similar living standard for all citizens, taking into account the costs associated with their

place of residence.

3. Operate effectively and efficiently

As discussed previously, Kazakhstan is a large country, with a population separated by many

miles, and scattered among remote locations. This circumstance requires a system that can

provide coverage to the entire population, across the vast territory of Kazakhstan without incurring

undue administrative costs. Second, there is a weak culture of transparency and accountability. In

the past, this has led to many instances of official corruption, embezzlement and other financial

problems with public funds. Third, there is a large informal sector in the country and formal

sector wages are often not fully declared. The reformed system should have the objectives of

operating effectively and efficiently.

Effective means that:

• Benefits are well-targeted, that is received by those entitled to and/or most in need of them.

• Access to the system is easy for potential beneficiaries.

Efficient means:

• Transparent and well-managed, with minimum potential for corruption or embezzlement.

• Duplication and overlapping of benefit payments is minimized.

• Cost-effective and simple to minimize confusion and operating costs.

These underlying values and objectives should be translated into specific policies for Kazakhstan.

In the remainder of this section, the paper discusses recommendations related to three fundamental

areas of a reformed pension system:

• Benefit Structure;

• Financing; and

General Recommendation No. 1: The objectives of the reformed social protection system should be to:

• Support Economic Growth • Be Fair to All Citizens • Operate Effectively and Efficiently

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• Administration

B. Benefit Structure

The current social protection system is excessively complex. It is organized based on numerous,

distinct categories of benefits, consistent with the Soviet system from which it evolved. In contrast,

a more comprehensive social protection system uses social risks as its organizational principle,

creating a more coherent and integrated system. In a risk-based system, benefits accrue with the

occurrence of a risk, not by virtue of status or other criteria. For instance, a benefit for disability is

provided based on the occurrence of the protected event, irrespective of whether it was caused by

industrial accident, participation in war, motor vehicle accident, or birth defects. The need for

health care exists independent of the nature or name of the disease. The reformed system should be

structured by risk and benefits grouped into categories of related risks.

Organize the social protection system by risk

This paper recommends consolidating the reformed social protection system into three main

categories:

• Social Risks (including three subcategories: old age and death, disability and

unemployment);

• Healthcare

• Poverty

The social risks associated with old age and death include all areas that relate to mortality risk

including pensions (solidarity and accumulation systems), annuities and other life insurance

products, survivorship benefits, and funeral benefits. The disability category should include all

issues that relate to a person�s incapacity to work for any cause including short-term disabilities due

to illness or injury, on or off the job and long-term disability related birth defects or permanent

injuries from whatever cause. Unemployment includes risks and benefits related to loss of

employment.

Healthcare focuses on minimizing risks associated with illness. It is treated as a separate category

of risk because it requires the establishment and management of a complex delivery and financing

system that set it apart from the other areas of social protection.

Poverty includes all issues related to those who are unable to adequately provide for themselves,

even after the risks described above have been addressed by the social protection system.

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General Recommendation No. 2: The reformed social protection system should be structuredbased on the following categories:
• Social Risks, including - Old Age and Death

- Disability - Loss of Employment • Healthcare • Poverty

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blish a three-pillared benefit system for social risks

all social risks, the current benefit structure based solely on state benefits should be replaced

a three-pillared system as follows:

First pillar: a minimum benefit guaranteed to all citizens, funded from the state budget and

designed to provide subsistence level assistance (social assistance);

Second pillar: a social insurance, funded by premiums paid by the employer or employee, to

provide tax-paying, formal sector workers with a benefit related to their salary levels (social

insurance);

Third pillar: supplemental insurance, funded by employers or individuals, to supplement pillars

I and II (voluntary insurance).

three-pillared approach will apply to all categories of social risks including old age pensions

eady in effect); survivorship; burial benefits; disability; and in a more limited way to

loyment and healthcare, but not to targeted social assistance.

er the proposed restructured system, Pillar I benefits will continue to be funded and provided by

state. Upon meeting eligibility requirements, all citizens will be entitled to receive Pillar I

efits. The benefit levels will be designed to provide subsistence benefits for all social risks,

lthcare and to alleviate poverty.

ar II is designed to insure formal sector workers against social risks with benefit levels tied to

r salary levels. Pillar II insurance may be mandatory for all employers, or a selected group. The

rance may be provided by a state operated social fund or private insurance companies.7 The

e decision of whether to establish a state social fund or use private insurers depends on a number of ors. One of the most important of these is pooling of risks. In some cases, risks can be pooled by private rance companies without leading to discrimination and excessive differences in premiums among risk

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specific structure of social insurance associated with each risk (survivorship, disability, health etc.)

must be analyzed and designed separately. In some cases, there is a reason to insure several related

risks as one, e.g., survivorship, burial and pensions.

Under the recommended structure, Pillar II will provide a benefit equal to the difference between

the Pillar I benefit (which the worker will receive from the state) and the amount to which the

worker is entitled under Pillar II, calculated as a percentage of wages (a complete actuarial analysis

will be completed for each Pillar II benefit). For example, a worker with a monthly salary of 10,000

tenge insured for a disability benefit equal to 70% of salary is entitled to a total benefit of 7000

tenge. If the Pillar I benefit is 5000 tenge and the worker becomes disabled, he will receive 5000

tenge from Pillar I and 2000 tenge (the difference between the Pillar I benefit and the total Pillar II

benefit) from Pillar II.

The recommended design takes into account that the insurance industry is just beginning to develop,

by shifting only a limited percentage of responsibility for social benefits to that sector. With time,

the role of social insurance could be increased as technology advances and improved data for

mortality and disability tables become available. The development of a differentiated benefit for

Pillar II participants will also create an incentive for more accurate reporting of incomes, as workers

will receive benefits based on their salaries. In contrast to the Pillar I system, the Pillar II system is

designed so that workers can maintain relatively the same income after the occurrence of a benefit-

triggering event. Additional analysis will be needed to define the benefit levels and costs associated

with Pillar II insurance for specific components of the social system.

Pillar III is designed to provide the option of insurance for those who want to voluntarily insure

against selected social risks. Pillar III insurance can be funded by employers or individuals.

Initially, Pillar III development will be relatively small, but as demonstrated by the pension system,

its importance will increase over time.

Establish a single indicator to which all benefit levels will be linked

groups, as is the case with disability and survivorship insurance tied to pension fund membership in Latin America. In other cases, risks have been pooled on a state or national basis to maintain lower premiums and

General Recommendation No. 3: A three-pillared social protection structure consisting of

Pillar I social assistance, Pillar II social insurance, and Pillar III voluntary insurance

should be established for all categories of social risk

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A fundamental problem with the social benefit system is the lack of a single indicator to which all

benefits can be linked. A single indicator should be agreed upon as the basis for all calculations in

the system. The most logical choices are the subsistence minimum or the minimum wage. Tying

benefit levels to the subsistence minimum would ensure that benefits levels are sufficient to provide

a social safety net. However, from a political and administrative perspective the subsistence

minimum has a number of disadvantages:

• It will be difficult to explain to the population why benefits are lower than the subsistence

minimum if they, in fact, turn out to be;

• The subsistence minimum is difficult to define precisely and depends in part on societal

expectations. Changes in expectations may create upward pressure on the indicator making it

difficult for the government to budget properly;

• The subsistence minimum has no explicit link to the level of benefits the economy can afford.

The minimum wage appears to be a better indicator. However, in the current system minimum wage

does not serve the purpose of establishing the legal minimum pay for workers. A realistic minimum

wage should be established based on careful analysis. The real minimum wage can then be

considered as the indicator to which benefits are linked. The relationship between the minimum

wage and benefit levels should be adjusted over time so that a more clear distinction develops

between the level of wages and social assistance benefits.

Whichever of the two is selected as an indicator, the link between minimum benefits and the

indicator should be flexible providing the government with the ability to temporarily increase the

indicator faster than benefit levels if needed.

C. Financing

avoid discrimination. Other important factors related to the decision are the costs associated with each and the level of technical experience in managing a risk based fund.

General Recommendation No. 4: Social benefits should be linked to a yet-to-be-

determined, meaningful, economic indicator

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One of the constraints on any new policy concept is the availability of funding. Currently all costs

related to the social protection are financed from the state budget, except the 10% contribution

employees make to the accumulation pension system.

The Republican budget is operating with a deficit, projected at 2.4 % of GDP for Year 2000. That

deficit is projected to decrease each year, eventually disappearing about Year 2006. In 1999, the

social tax was increased from 21% to 26% to offset the drop in revenues that resulted from the

Russian crisis, but even today funds only about 53% of social spending. Recent increases in oil

prices make prospects brighter, but are not reliable in the long term. The country is still financing

the transition costs of the pension reform that began in 1998. All of these conditions indicate that

fiscal restraint should be applied when considering any changes to the social protection system.

This paper initially recommends that to be financially sustainable, total costs for the reformed

system should not be higher than the cost of the current system. The total burden on employers and

employees should not increase above the current level of 36% of wages (includes 26% social tax

paid by employer and 10% pension contribution paid by employee) and the budget deficit should

not increase as a percentage of GDP.

The government currently plans to reduce the social tax rate from 26% to 22% (or perhaps 21%) of

payroll beginning in January, 2002. When that reduction occurs, the burden on employers will be

reduced by 4% to 5% of payroll. That amount is enough to fund a modest Pillar II social insurance

benefit for formal sector employees. Until wages increase significantly, this paper recommends that

Pillar II social insurance premiums be paid by the employer. But this needs to be tied to an

increased and enforceable minimum wage, given data showing that social insurance premiums are

often passed on to the employee through reduced wages or lack of a wage increase. Later, as wages

grow, the benefits may be expanded and part of the cost shifted to the employee.

Another possible way to increase benefits is by improving system efficiency. The analysis of the

USAID Working Group indicates that significant savings may be realized by improving the health

delivery system. In addition, research indicates that by requiring a personal identification number

for all benefit recipients, the pension system would save 4-5%. Initially, these savings may be large

enough to fund the costs associated with restructuring the system by establishing a nationwide

personification system and database, and other transition costs. Later, savings from improved

efficiency could be directed to improving benefits.

Proposals to fund the development of new or expanded social benefits beyond the financial

parameters discussed above should be considered only if, or when, additional special funding

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sources can be identified, or additional budget funds become available. In any case, careful

consideration should be given to whether or not additional sources are sustainable.

B. Administration

To more effectively manage social protection benefits, a nationwide system of personal

identification and a national database of all citizens should be developed. For efficiency reasons the

database should be shared by the social and health benefit systems. By making a personal

identification number mandatory for all persons receiving social benefits, improved control could be

exercised over duplicate benefits for which the person is ineligible, and pensions or other benefits

made payable to individuals who have emigrated or died. The personal identification number

should also be used to link the tax committee to the database to track the payment of taxes by

individuals receiving benefit payments and making pension contributions. The development of the

database would reduce paperwork and provide improved service to the population. The data

collected by the system could be used to assist in making comprehensive analyses and forecasts.

In order to be effective, the national information system should:

• cover the entire population (including children);

• assign each person in the database a unique identification code;

• be updated continuously;

• have the capacity to process inquiries from several ministries and departments; and

• contain a minimum set of data for use by the Ministry of Labor and Social Protection, the

Health Agency, the Ministry of State Revenues, the Immigration Service, and the Ministry of

Internal Affairs.

General Recommendation No. 5: Initially, the reformed social protection system should notimpose higher costs on the economy than those of the current system. Funds to finance reforms or improvements should come from:

• Efficiencies achieved through more effective targeting and efficient administration • Employer/Employee contributions tied to equal reductions in social tax rates

General Recommendation No. 6: An information system should be developed that provides each citizen with a personal identification number. A national database should be developed to control all benefit payments and contributions to the system on the basis of the personal number

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This system will require a political decision to be made regarding the integration of existing

identification systems:

• TRN (taxpayer registration number), managed by the Ministry of State Revenues for tax

purposes;

• SIC (social individual code), managed by the Ministry of Labor and Social Protection for

management of the accumulation pension system; and

• IPP (identifier of a physical person), managed by the Ministry of Internal Affairs in the

issuance of personal identification cards (PIC).

There are several options for transitioning from the multiple systems to a single database and

personal identification number. The following appear to provide the best options:

1. Gradual inclusion of the SIC number to the PIC, with the possibility of developing a

technology to permit automatic reading of the card (during the integration process, both the PIC

and the SIC would both continue to be used);

• continued use of the SIC, with the PIC being used exclusively for social protection matters; or

• gradual substitution of the SIC by the IPP, and introduction of the IPP as a unique code for all

state purposes.

All of these areas are technically viable, but in the end require a political decision from the

Government.

VI. ISSUES AND RECOMMENDATIONS RELATED TO SPECIFIC COMPONENTS OF THE SOCIAL PROTECTION SYSTEM

In the previous section, issues that affect the general social protection system were identified and

discussed, and policy recommendations made. Those represented the fundamental issues that

must be decided to establish the proper foundation for a reformed social protection system. In the

areas of pensions and healthcare, sufficient research has been completed to permit the USAID

Working Group to make specific recommendations regarding some issues. In this section, those

issues and recommendations are discussed.

A. Old age pensions

The USAID Working Group has prepared extensive analyses of the pension system. The work

is divided into two main categories: administration and benefits.

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1. Administrative issues

For the past three years, a three-pillared pension system has been operating in Kazakhstan.

This year, the accumulation pension system will reach $1 billion (US) in assets. With growth,

comes the challenge to improve the system, and provide more effective protection for a pool of

ever-growing assets. Based on analysis of the pension system, the USAID Working Group

recommends the following:

• Integrated management and supervision of the accumulation pension system should be

strengthened by establishing a single, unified, independent regulatory body.

• The SCBP�s effectiveness in supporting the accumulation pension system should be improved,

or a suitable alternative found.

• The State Accumulation Pension Fund (SAPF) should be privatized or liquidated in order to

neutralize its current negative impact on the development of fair and equal market competition.

• The commission fee structure should be optimized in order to stimulate proper development of

the accumulation system.

• The availability of financial instruments in the securities market should increase over time,

creating potential for asset diversification in the investment portfolios of pension funds.

• A database for all social beneficiaries is to be set up to protect against abuses by benefit

recipients (emigrants) and state officials (dead souls).

Administrative efficiency and transparency need further improvement. To date, the SIC number

which is mandatory for the accumulation pension system has not been made mandatory for payment

of solidarity pensions or other benefits. The analysis of the USAID Working Group indicates that

as many as 100,000 persons (approximately 4% of the total) currently receiving pensions may not

be eligible because they have either emigrated or died. Because the pension system represents such

a large percentage of the total social protection budget, improving its efficiency by even a few

percentage points through improved administration would result in significant savings. The USAID

Working Group recommends that SIC numbers should be required for all persons receiving social

benefit payments from the SCBP.

Analysis also indicates that in order for the accumulation system to operate effectively and develop

properly, the existing, multi-institutional supervisory structure must be replaced by a single,

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independent body (unified regulator) with broad powers to manage and supervise all aspects of the

accumulation pension system, including the operations of the SCBP. The unified regulator must be

adequately funded so that it can attract qualified personnel, develop capable information systems

and provide proper regulatory oversight to the pension system.

The SAPF was established as a transitional measure to help the population develop confidence in

the accumulation pension system. It has served that purpose, but has also been an obstacle to the

development of a competitive pension market. The system now has mature private funds that can

provide services to contributors throughout the country. The public has gained confidence in

private pension funds and the purpose for creating the SAPF has been achieved.

2. Benefits

The policy of pension payouts is an important issue that has been analyzed for the past several

months. Currently, because the accumulation system is young and pension accumulations are

small, payouts are being made as lump sums. Models from Latin America suggest two other

methods: scheduled withdrawals and annuities.

1. Lump Sums � lump sum payments allow the retiree to withdraw all or any part of his pension

accumulation at the time of retirement. Lump sums have the disadvantage that a retiree can

consume a lump sum amount and demand support from the state when the accumulation is

consumed. However, for small accumulations it represents a viable payout mechanism with

essentially no administrative costs.

2. Scheduled Withdrawals � under a scheduled withdrawal plan, equal payments are made on a

regular basis to the retiree. The amount of the scheduled payments is supervised by a

regulatory body and is based on the retiree�s life expectancy. Normally, the retiree opting for

fixed withdrawals is required by law to purchase an annuity upon reaching a certain age

(normally 70 years) to ensure that he will not become a burden on the state if he outlives his

pension. In case of early death, the unpaid pension accumulations are transferred to the retiree�s

heirs.

3. Annuities � an annuity is an insurance product that the retiree purchases at the time of

retirement with his pension accumulations. The insurance company selling the annuity agrees

to provide the retiree with income for life, and assumes the risk that he will outlive his

accumulations. Mathematically, this provides the best retirement benefit to a retiree, but he

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loses his accumulation if he dies shortly after retirement. Joint survivorship annuities can be

purchased which provides a fixed income for the life of the longest-lived spouse. Purchase of a

joint life annuity would help offset the disparity between the replacement rates of men and

women. If further research shows a beneficial result, it may be wise to make the joint

survivorship annuity mandatory for married couples. In case of small accumulations, annuities

might be made payable quarterly, semiannually or annually.

The debate about the choice between these options has been influenced by two issues:

• Over the first ten years of pension reform accumulations are expected to be relatively small and

administration costs associated with paying them out in installments are thus expected to be

relatively high;

• Pension accumulations have the status of private property under the law and contributors want

to protect their own money. This strong legal status facilitated acceptance of the pension

reform.

Scheduled withdrawals are not an answer to small payouts, as payouts under a responsibly managed

scheduled withdrawal program are likely smaller than comparable annuities. Nevertheless, the legal

status of pension accumulations and the perceptions of contributors are important to the success of

the system. Therefore, the USAID Working Group recommends as follows:

• Lump sum payments should be made for accumulations up to a maximum limit (not less than

100,000 tenge).

• For accumulations that exceed the maximum limit for lump sum payouts, the contributor should

be given the choice between scheduled withdrawals and the purchase of an annuity. The

annuity may be single or a joint-life.

B. Healthcare

Extensive analysis of the healthcare delivery system has been performed over the past several years

and pilot projects have been developed to test the most effective ways to create a more effective

system to deliver guaranteed healthcare benefits to the entire population. Currently, healthcare

delivery is based on the model developed during Soviet times and is very inefficient. As a result,

free benefits guaranteed to citizens are not being delivered. Restructuring the delivery system will

achieve greater efficiency and maximize the healthcare benefits available to the population. The

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USAID Working Group recommends that the reform of the current healthcare system be

implemented within the following framework:

1. Matching state budget health expenditures and free benefits by prioritizing expenditures based

on a delineation of the most essential benefits, generally defined as the following: primary

health care, maternal and child health care, immune-prophylactics, infectious diseases, and

emergency care.

2. Reducing health system inefficiencies through incorporating into the health system the

following new elements, and functions:

• Changing the role of the population in health care. The population should be given and

should take more responsibility for their health status by both exercising their rights and

reducing health risk factors associated with their lifestyle. At the heart of this changing role

should be the empowerment of people to choose a primary care practice in a democratic

process of free open enrollment. This requires a sufficient number of primary care practices

from which people can choose and a provider payment system that allows providers to

spend resources according to operations needs.

• Restructuring primary care. Primary care by definition is the most cost efficient and

effective type of health care and therefore should be funded and developed as a priority in

relationship to outpatient specialty and diagnostic care as well as hospital care. Primary care

should be completely restructured and strengthened through the creation of new primary

care practices, upgrading of clinical skills of primary care physicians, and integration of

vertical programs, including infectious diseases and maternal and child health into primary

care.

• Restructuring hospital care. The inefficient hospital sector should be restructured and

excess capacity reduced by rationalizing hospitals and creating new general profile hospitals

to replace specialty hospitals.

• Creating conditions for the implementation of new provider payment systems. New

provider payment systems, already enacted into law were designed to encourage

competition, provide incentives to reduce inefficiencies of operations, improve quality and

equity, and allow providers to use resources according to operational and competition

driven needs. To implement the new payment systems certain preconditions should be met:

the Treasury system rules should be changed to allow providers the freedom and flexibility

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to use state budget funds according to operational needs; fragmented health budget from

various administrative levels within an oblast should be pooled into the obalst health

budget; and the rules of the state procurement of health benefits, GosZakaz should be

amended.

• Changing the rules on state procurement of benefits in health care. The current rules of

(GosZakaz) do not provide a mechanism that takes into account the natural uncertainty of

health purchasing and delivery. For that reason its use in health care is recognized as

inappropriate by the Agency on Health and the Agency on State Procurement. The new

provider payment systems are designed to accommodate this uncertainty by seamlessly

linking the rules of provider payment with benefits and providers in a technically sound and

practical fashion. Therefore, the rules of the new provider payment system should be

approved as the rules of GosZakaz in health care.

• Establishing the function of a single-purchaser of health benefits. When Mandatory

Health Insurance (MHI) was introduced in Kazakhstan, two state institutions

administratively independent from each other were responsible to pay providers, the

Ministry of Health and the MHI Fund. The lack of coordination between them and their

contrasting health policies lead to the implementation of two different provider payment

systems with contradictory incentives for providers. This sent mixed signals to providers

and did not promote efficiency or quality improvements. To avoid such failures in the

future, single public health purchaser (single-payer) should be established to ensure that

financial incentives for providers are consistent, functions are not duplicated, and

administrative costs are reduced.

• Pooling of fragmented local health budget funds to the level of the oblast. Competition in

health care presupposes the existence of two essential health system elements -- alternative

providers, and a provider payment system that allows funds to �follow� the patient to the

provider of choice so that the provider is reimbursed for delivering services to the customer.

Fragmented health budgets on different administrative levels are an impediment to the

functioning of these elements. Therefore, to make competition among providers possible

and improve equity fragmented health budget funds from lower administrative levels should

be pooled at the level of the oblast health budget.

• Refraining from introducing another public source of funding until reforms are

completed. The state health budget should be the sole public source of funding until the

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health system is reformed and ready to use efficiently another public source of funding -

mandatory insurance.

Because of the need for healthcare is universal, the free minimum system will remain very

important. However, once effective reforms have been implemented, the foundation will be in place

for a private medical insurance industry to develop. Private insurance can supplement the state plan

and be purchased on a group or individual basis to insure health expenses not covered by the free,

minimum system.

VII. INITIAL ANALYSIS AND COMMENTS ON SPECIFIC SOCIAL PROTECTION ISSUES

Because decisions regarding fundamental issues have not been made regarding funding and the

general structure of the social protection system, it has not been possible to prepare specific

analysis or make detailed recommendations regarding all several component parts of a reformed

social policy. This section, discusses issues that have been identified and the research that has

been completed to date. . The discussion represents the preliminary thoughts and views of the

USAID Working Group on changes that should be made to the existing system. In most cases,

significant further research and analysis is required to refine these ideas and determine the best

approaches for Kazakhstan given the constraints discussed herein.

A. Old age pensions

In addition to the issues discussed above for which specific recommendations were given,

there are several additional issues that require further discussion and analysis regarding the

pension system.

1. Administrative issues

The SCBP has the responsibility to 1) assign all participants SIC numbers; 2) maintain a database of

the employment history for each participant; and 3) receive, transfer and keep a database of all

transfers from employers to the accumulation pension funds. Three years into the reform, there are

still delays in issuing SIC numbers and the database contains numerous duplicate SICs. The

employment history database for system participants has still not been developed. Delays in

transfers are increasingly common and numerous duplicate accounts exist in the transfer database of

the SCBP. Further analysis should be completed to determine how to improve the SCBP�s

operations or eliminate its role from the accumulation pension system.

2. Benefits

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Replacement Rate (Pension Salary) Levels

During the past year, important analysis of the replacement rate levels associated with the

reformed pension system has been completed, including:

• First yearly actuarial report �Forecast of the pension expenditures of the government of

the Republic of Kazakhstan�, 1999.

• Preliminary version of the second yearly actuarial report �Long-term fiscal expenditures

on state pensions and social benefits�, 2000.

• �Report of pensions adequacy for different employed groups and recommended measures

for overcoming pensions inconsistency�, 2000.

Initial results indicate that, under certain scenarios, pension amounts may not provide certain groups

of the population with adequate pension income. This means that retired persons from these groups

may have to rely on minimum guarantees provided by the state because their accumulations will be

insufficient. Additional projections of long-term replacement rates should be completed to confirm

and determine the potential scope of this issue. If current analyses are confirmed, changes to the

accumulation system may be needed to insure higher replacement rates.

Three possible solutions are to:

• Increase the contribution levels to more than 10%. This would leave the structure of the pension

system as is, but might not be compatible with the recommendation to avoid raising system

costs above current levels.

• Provide a flat rate, minimal social benefit for persons whose pensions do not reach a certain

level. This is consistent with the practice in some developed countries. It creates an incentive

to participate in the pension system and spreads the risk associated with individual pensioners:

the accumulation part of the pension is subject to the financial risk of investment yields not

keeping up with inflation while the social benefit part is subject to the political risk that future

generations will not be able to fund the cost of providing old age benefits for the current

generation.

• Stimulate the development of private and occupational pension plans such as those that exist in

Western countries, while acknowledging that state pensions are likely to provide only modest

replacement rates.

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The issue of replacement rates should be further examined and analyzed to determine a

recommended course of action.

Disparity of Replacement Rates for Men and Women

Another feature of pensions from the accumulation system is that old age pensions for females are

generally lower than for males. This is due to a number of factors, including 1) women generally

live longer than men, 2) women generally work fewer years because of time spent in childbearing

and childrearing, 3) women generally receive lower wages than men, and 4) women retire five years

earlier than men. Replacement rates for men and women may be equalized somewhat by 1)

equalizing retirement ages, and 2) encouraging married pensioners to purchase joint life annuities.

Additional analysis will have to be completed before a firm recommendation can be made on this

issue.

B. Survivorship

Benefits

Survivorship benefits for old age pensioners were previously discussed. The analysis of the USAID

Working Group indicates that implementing a lifetime survivorship benefit for widow(er)s prior to

retirement would be very costly, unless pension accumulations are used. Therefore, the initial

proposal is to maintain the Pillar I survivorship benefit targeted only at underage dependents. The

Pillar I benefit would consist of a flat minimum benefit paid from the budget. It is proposed that a

Pillar II benefit be added to �top up� the Pillar I benefit to percentage of the deceased, formal sector

breadwinner�s salary. The percentage of salary paid will depend on the number of dependents in

the family.

Administrative arrangements

The Pillar I benefit will be managed by the state. The management of the Pillar II social insurance

component could be managed as part of the accumulation pension system. Each pension fund

would purchase a blanket policy for all contributors from a private insurance company, thus pooling

the mortality risk of all contributors to the pension fund.

Financial aspects

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The Pillar I survivorship benefit will be financed from the budget. The premium for the Pillar II

social insurance component will be a percentage of wages and be paid by the employer. The

premium will be calculated as part of the future analysis to be performed.

C. Burial benefits

It is recommended that burial benefits be eliminated as a state benefit except for indigent persons

with no family. Burial benefits could be included as a mandatory social insurance, tied to

survivorship benefits, for formal sector workers. Individuals can purchase Pillar III private life

insurance for small amounts to cover this social risk. Pension accumulations can be used to cover

burial costs for retirees opting for lump sums or fixed monthly payments and, a burial benefit can be

included in the cost of an annuity.

D. Disability

Short-term disability should be the responsibility of the employer and cover workers for a

maximum period of one year. Mothers should be paid for temporary (up to 60 days) for maternity

leave. The principal issues are with long-term disability coverage.

Benefits

Disability is a difficult risk to insure, because apart from purely medical considerations, the

individual, the employer, politicians, trade unions and the general economic situation all exert

influence on whether someone is disabled or not. It is important that benefits not be too attractive

and that labor market information not be taken into account when determining if benefits should be

provided. The list of qualifying illnesses should be limited and well defined. Both the employee

and (in case of work-related disability) the employer should experience a significant financial cost

in case of disability.

It is recommended that a Pillar I minimum state benefit be provided, complemented by a Pillar II

benefit based on wages. In cases where disability is the fault of the employer, the employer should

provide an extra, wage-related benefit. This extra benefit should provide a higher percentage of

wages than the combined Pillar I and Pillar II system, and have no ceiling.

Administrative arrangements

International best practice shows that a mix of state- and private benefits yields the best result.

However, because some employment is much more dangerous than others, pooling risks and

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discrimination are two important factors. The private insurance market will target high wage, low

risk sectors, and may refuse to insure some industries. That may result in unacceptably high

premiums for some employers. In Kazakhstan, disability insurance could be managed by an

accumulation pension fund. This would create a risk pool composed of several types of employers

and overcome to some extent the discriminate effect of employer-based plans. However, because in

most instances all employees of an enterprise belong to the same pension fund, it may be necessary

to create an even broader risk pool. One possible solution is the creation of a state disability

insurance fund. Due to lack of infrastructure, a limited pool of human resources, the past

experience of government-managed funds, and the costs associated with establishing and managing

such a fund, it should be viewed as a longer term option, if at all.

Financial aspects

Many countries fund disability benefits on a pay-as-you-go basis using current contributions. The

advantage of the pay-as-you-go system is that initial costs are relatively low. Its main disadvantage

is that it represents a hidden liability for future workers. The low initial cost of a pay-as-you-go

system can act as an incentive for system administrators, politicians and trade unions to be liberal in

qualifying persons to receive benefits.

It is recommended that a Pillar I benefit continue to be financed from the budget. The Pillar II

benefit could be financed on a funded basis, that is, assets to cover all future disability payments

should be allocated at the time a person qualifies for a disability benefit.

E. Unemployment

Benefits

Little research has been completed on unemployment. However, the initial thinking is that

government-funded support (Pillar I) for unemployment should focus on job search assistance,

retraining and public works. A limited cash unemployment benefit could be provided from a Pillar

II social insurance system. The size of the benefit would depend on the number of years the

applicant had paid premiums into the system. For example, a person could receive one month of

benefit for every year of premiums paid into the system. Both the premiums and the benefit levels

would represent a percentage of wages.

The benefit could be paid as a lump sum or a monthly benefit that is terminated if new employment

is found. The first option has the advantage of administrative simplicity and creating a greater

incentive to initiate an immediate job search, while the latter is likely to be less costly to the system.

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F. Poverty Poverty is a broad category that requires considerably more analysis. However, this paper

recommends that initial efforts target benefits at maternity and child rearing.

Benefits

Families with small children are among the most vulnerable in society. Parents are generally young

also and just starting their careers, generally with lower salaries. Furthermore, child rearing takes

time and attention away from economic activities.

Demographic trends indicate that generally mortality rates are recovering, while infant mortality is

worsening. Disability rates continue to rise�most particularly among children, and the health of

mothers and children is generally deteriorating. If these trends are not reversed, the state will incur

ever-increasing costs related to healthcare and disability for this group in the future. Children are

the future, and must be properly fed, cared for, and educated to ensure the future development and

progress of Kazakhstan. As a result, a strong argument could be made that improvement of living

conditions and healthcare of mothers and children should be one of the top priorities.

One way to provide targeted assistance to children is by providing one or two balanced, free meals

per day at school to ensure that they received proper nourishment. The result would be healthier

children who are more attentive and capable of learning.

Another way to provide targeted assistance is to provide a child allowance up to a certain age, for

example, age 10. The qualifying age and amount of the benefit can be adjusted based on what can

be allocated to the budget. The benefit would be the same for all qualified children and would be

paid from the budget.

VIII. NEXT STEPS FOR DEVELOPING AND IMPLEMENTING A SOCIAL PROTECTION POLICY The development and implementation of a social protection system is a process that takes time.

Western social protection systems required several decades to acquire their current shape and are

still evolving. The near term focus should be to define the general parameters of a new social

protection system within which a more comprehensive system can develop as constraints make that

possible. The immediate tasks to be accomplished immediately include:

1) Agreement on the fundamental structure of a reformed social protection system;

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2) Prioritization and further development of detailed policies, including financial modeling to

create sustainable components of the social policy;

3) Preparation of legislation; and

4) Implementation of a transparent administrative system based on a national database and

personal identification system.

A. Development of detailed policies and financial modeling

After the conceptual outline for a new social policy is approved, work can begin on designing the

specific components of a comprehensive, integrated social protection system. This will require

another round of financial projections and policy choices. Building on the general concept, specific

policy proposals will be prepared, discussed with decision-makers and stakeholders, and adjusted

based on comments received.

Quantifying the costs associated with different policy options will require extensive modeling. One

aspect of modeling is the design of survivorship, unemployment and disability benefit structures,

especially the cost of Pillar II benefits. Another dimension is the phase out of some existing state

benefits over time. These models must be done within the context of macro-economic parameters

and how they interact with the components of the social protection system.

B. Drafting legislation

The second main task will be drafting new legislation to serve as the legal foundation for a new

social protection policy. This activity will have to begin once decisions are made regarding the

main conceptual structure of the new system. The first step is to draft a �Law on Social Protection

Policy� that establishes a new foundation to which all existing legislation will have to conform.

Subsequently, work can begin on reviewing and preparing amendments to all legislation related to

social policy to insure that it conforms to the organic legislation.

C. Setting up a system of individual identification

The last main task is the implementation of a personal identification number for all citizens and the

development of a national database. This work is the basis for many of the reforms that will be

implemented and will take time. First, a political decision must be made regarding how the system

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should be developed, and only then can work begin on the technical design work. The full

development and implementation of the system will take many months and should begin

immediately.

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APPENDIX �A�

THE CURRENT SYSTEM OF SOCIAL PROTECTION BENEFITS IN KAZAKHSTAN

I. GENERAL

This Appendix contains a description of the existing system of social protection benefits in

Kazakhstan. The current system includes the following categories of benefits:

• old age pensions,

• general state benefits,

• special state benefits,

• early retirement benefits for special groups, and

• burial benefits.

Each category of benefit is described in more detail below.

II. OLD AGE PENSIONS

The pension system has two components, the accumulation and pay-as-you-go, solidarity systems.

These systems collectively are designed to provide old age security to Kazakhstani citizens.

The accumulation pension system

As of 1 January 1998, 10% of the gross wages of each formal sector worker is deducted and paid8

into a defined contribution, accumulation pension system. The contributions are tax exempt and

workers can choose to contribute more on a tax exempt basis, to a total of 15 times the Calculation

Index (CI)9 per year. Upon retirement, the accumulated accounts are used to pay pensions (e.g., by

purchasing an annuity, etc.). Pension payments are taxable when received. The pension age is 58

for women and 63 for men. In the case of premature death, the accumulated funds pass to the heirs

of the deceased.

8 Initially, this amount was payable by the employer; however, in 1999, this burden was transferred to the employee, and wages were to rise simultaneously to compensate. In many enterprises, however, this compensating wage rise has reportedly not taken place or has been implemented only partially. 9 The CI is an amount established by the Government to serve as the basis for calculating many State benefits. It is adjusted and published quarterly. Currently, the CI is 725 tenge.

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The State Center for Benefit Payments (SCBP) is responsible for receiving and processing all

contributions from employers, acting as a clearinghouse for all contributions, and serving as a

backup for all system record-keeping. In addition, the SCBP is responsible for issuing Social

Individual Codes (SICs) to all participants in the accumulation pension system. No pension

contributions can be processed without a SIC.

Private pension funds manage the contributors� accounts, asset management companies invest

accumulations, and custodian banks hold the assets. The accumulation pension system is

supervised by a regulatory structure that includes the National Bank of Kazakhstan, the National

Securities Commission and the Committee to Regulate the Activities of Accumulation Pension

Funds. Because the accumulation pension system is young and many of the concepts it embodies

are new to Kazakhstan, it is still evolving.

The solidarity system

Persons who worked in the formal sector prior to 1 January 1998 are entitled to receive a pension

from the solidarity system. Men may retire at age 63, and women may retire at age 58 (up from 60

and 55, respectively, prior to pension reform). Separate pension arrangements exist for military

employees and other specially-designated organizations, who have earlier retirement ages and

higher guaranteed replacement rates. These special groups account for a relatively small percentage

of pension costs.

Under the solidarity system, men receive 2.4% of their average salary�based on the three highest-

paid years of service�for each year of service prior to 1 January 1998. Because inflation effects

are not taken into account, the highest-paid years are often the last three years. The maximum

contribution period is 25 years.

Women, on the other hand, receive 3.0% for each year of service, with a maximum contribution

period of 20 years. Thus, for full years of service under the solidarity system, both men and women

receive a pension equal to 60% of the average of their three highest-paid years of service. In

addition, for each year of pre-1 January 1998 service in excess of the maximum contribution period,

pensioners are entitled to an additional 1% of the average of their three highest-paid years of

service.

�Years of service� is interpreted liberally, and includes years spent studying, serving in the army,

and a portion of the years spent raising children. Years in which an individual was entitled to

disability benefits do not qualify as �years of service�.

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�Salary� is gross salary on which income tax has been paid, and includes bonuses, seniority

premiums, etc. No deduction is made with respect to contributions to the accumulation pension

system. Irrespective of actual salary, the maximum salary used to calculate a solidarity pension

cannot exceed 15 times the CI.

Prior to pension system reform in 1998, several special categories of early retirement were provided

(e.g., heavy industries, entertainers, etc.). These were eliminated on 1 January 1998; however,

benefits in payment at that time continue. As of January 2000, 44,000 pensioners continue to

receive these early retirement benefits. The average pension for these categories is approximately

4,100 tenge per month.

The solidarity system is financed from the state budget, on a pay-as-you-go basis. Initially, a fixed

percentage of the social tax was designated specifically for pensions; however, all social taxes

collected are now treated as general budget revenue. The cost of the solidarity system will decrease

over time, due to attrition in the number of workers whose principal years of service occurred prior

to 1998.

Minimum pension guarantees

Irrespective of salary levels, men with 25 or more years of service, and women with 20 or more

years of service (which, for this purpose, includes years of service after 1 January 1998) are entitled

to a minimum pension. The amount of this pension is determined annually and currently stands at

3,500 tenge. Retirees with fewer than the required years of service receive no minimum pension

guarantee.

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III. GENERAL STATE BENEFITS

General State benefits consist of:

• Disability benefits;

• Survivorship benefits; and

• minimum guaranteed benefits.

Benefits are expressed as multiples of the CI.

Disability benefits

Disability benefits are divided into three categories. Each category provides for different benefits

based on the degree of disability as indicated in the following table:

Category Rate of Disability Benefit

Group I ≥80% - 100% 6 times the CI

Group II ≥50% - <80% 4 times the CI

Group III 30% - <50% 3 times the CI

Disability is assessed on a yearly basis; however, in severe cases, the assessment may be less

frequent, or may be waived entirely.

Each category is further subdivided into the following classes:

• persons with general diseases (e.g., TB, cancer etc.);

• persons with work-related injuries; and

• persons who suffer from professional diseases.

While these classes have no consequences with respect to the size of the state benefit, those who

have work-related injuries and those who suffer from professional disease are eligible to extra

benefits from their employer or former employer. Mandatory employer benefits include:

• a lump-sum payment between one and five times annual salary (and up to 10 times in the event

of a lethal accident);

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• continued payment of a percentage of salary (�salary replacement�), with the percentage

dependent upon the category of disability; and

• payment of the actual cost of health care, prostheses etc., to a maximum of 30% of �salary

replacement�.

Disabled children are entitled to a benefit of three times the CI to age 16, to cover extra costs, and to

reflect the fact that their parents are less able to work. After age 16, they are entitled to benefits in

accordance with the general disability category into which they are classified.

Military conscripts injured in action, and workers disabled as a result of nuclear radiation, are

entitled to total benefits of eight, six and five times the CI, with respect to Groups I, II and III,

respectively. Other soldiers and state security employees injured in action are entitled to disability

benefits equal to 15, 10 and eight times the CI, for Groups I, II and III, respectively.

Disability benefits are not subject to means-testing, and can be received concurrently with other

benefits. All benefits are funded on a pay-as-you-go basis from the state budget.

Survivorship benefits

Survivorship benefits are paid to families with children under the age of 18, upon the death of an

�income-generating� parent. �Income generating� includes a parent who was receiving a state

benefit at the time of his or her death. If a child is a student, the period of eligibility age can be

extended to age 23.

The amount of the benefit is based on the total number of persons (children or otherwise) who were

dependent and continue to be dependent (i.e. not working) upon the deceased parent according to

the categories established in the following table:

Number of Dependants Benefit

1 4 times the CI

2 7 times the CI

3 9 times the CI

4 or more 10 times the CI

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Survivorship benefits are not subject to means-testing, and can be received concurrently with other

benefits. They are funded on a pay-as-you-go basis from the state budget.

Minimum guaranteed benefits (“general social assistance”)

If the total pension income (accumulation system and solidarity system) or disability pension (if

any) is lower than three times the CI, a person is entitled to a social benefit equal to three times the

CI.

IV) SPECIAL STATE BENEFITS

Special State benefits were developed in April 1999, to replace a complicated �in kind� system of

benefits (e.g., electric, gas, and water utility subsidies, etc.) enjoyed by designated groups. The

special state benefits are paid to qualified persons in the amounts that follow:

Group Benefit

Disabled from WW II 7.1 times CI

Participants in WW II 5.8 times CI

Equivalents to disabled from WW II 5.7 times CI

Equivalents to participants in WW II 2.4 times CI

Widows of soldiers who died during WW II 2.7 times CI

Families of deceased soldiers and Ministry of Internal Affairs employees 2.8 times CI

Spouses of deceased disabled from WW II 0.9 times CI

Recipients of medals for work or fighting during WW II 0.5 times CI

Disabled (Groups I and II) 1.4 times CI

Disabled (Group III) 0.6 times CI

Disabled children to age 16 0.9 times CI

Rehabilitated citizens 1.0 times CI

Recipients of pensions for special services 1.0 times CI

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Mothers of many children (≥ 4) 1.9 times CI

Special State benefits are not subject to means-testing, and can be received concurrently with other

benefits. There is currently a proposal to transfer the responsibility to pay for 9 out of the 14

categories to local governments beginning in the Year 2001.

Early retirement benefit for special groups

Early retirement benefits are provided to several categories of workers in professions where heavy

labor is required. The benefit is 8 times the CI, and is paid until the person reaches the normal

retirement age.

Burial benefit

A burial benefit is a one-time payment to the person responsible for the burial of a deceased

recipient of any special State benefit. The benefit is 15 times the CI for deceased invalids of WW

II, and 35 times the CI for participants in WW II.

This benefit is not subject to means-testing, and can be received concurrently with other benefits.

Benefits from local budgets

Benefits paid by local budgets are called �social provision� and include costs for the operation of

boarding schools for disabled children, employment programs and targeted social assistance (which

consists of lump-sum and recurring payments). Lump-sum benefits paid by local governments

include:

• a maternity benefit paid at childbirth10; and

• burial benefit for workers and the unemployed (other than those burial costs of recipients of

State benefits and old age pensions that are covered by the Republican budget).

In addition, local governments pay recurring benefits including:

• housing subsidies,4

• benefits for families with children,4

10 These benefits are means-tested�only families with a total income of less than 2 times the CI are eligible.

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• unemployment benefits,4

• benefits for mothers with four or more children under the age of 7; and

• benefits for disabled children who live and receive their education at home.

The size of all benefits is dependent on local (rayon level) budget restrictions and priorities.

Currently draft legislation is under consideration that would eliminate all but the last two benefits

listed above, and possibly housing subsidies. Under the current proposal, lump-sum benefits would

cease to exist. Recurring benefits would be replaced by a minimum income guarantee for all

families (calculated on a per capita basis), based on the �poverty line�. The �poverty line� would be

equal to 38% of the �subsistence minimum� (defined as a basket of food products, grossed up by

30% to reflect the cost of non-consumer goods).

As of the second quarter of the Year 2000, those amounts were:

Item Level

Basket of food products 2,790 tenge11.

Existence minimum 3,985 tenge

Poverty line 1,515 tenge

The following amounts are included for the purpose of comparison:

Item Level

2 times the CI 1,450 tenge

Minimum guaranteed benefits 3,500 tenge

Minimum wage 2,680 tenge

The cost of this basket of food products is calculated by oblast. As a result, the �subsistence

minimum� and the �poverty line� will vary by oblast. For example, the current poverty line varies

11 All amounts herein are on a monthly basis, unless stated otherwise.

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from 1,208 tenge in South Kazakhstan oblast to 1,916 tenge in Mangistau Oblast. Those numbers

represent a 47% difference in benefit levels.

Under the draft law, families with a total income lower than the �poverty line� would receive a

targeted social assistance benefit to increase their income up to the �poverty line�. In the current

system, an applicant is required to present several official documents to prove his or her need in

order to receive targeted social assistance. Under the draft law, an income declaration by the

applicant would be sufficient. Also, under the draft law, the decision to grant targeted social

assistance would be made at the rayon/city level. While it is acknowledged that such a declaration

might be open to abuse, it is assumed that�due to their proximity to applicants�local authorities

are in the best position to assess legitimacy of the needs.

The approximate cost of funding this new system is approximately 10 billion tenge annually, in

addition to the 7 billion tenge currently spent on targeted social assistance.

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APPENDIX �B� SOCIAL PROTECTION POLICY IN HEALTH CARE

I. THE GOAL OF SOCIAL PROTECTION POLICY IN HEALTH CARE

The Kazakhstan Health of the Nation Program approved by the President of Kazakhstan Nursultan Nazarbayev in 1998 formulated the goal of this program as: �improve the health status of the population of Kazakhstan and develop and implement short-term, mid-term, and long-term action plans contributing to qualitatively raising the level of health care delivery.�

II. JUSTIFICATION FOR SOCIAL PROTECTION POLICY IN HEALTH CARE

Not only is the health status of the population an important aspect of the overall level of human welfare in a country, but a healthy population is also a key input into broad-based economic development. Health status is an important determinant of both labor supply and labor productivity, and health status is also linked to other aspects of human resource potential, such as the rate of population growth. A social policy in health care is therefore essential as part of a broader macroeconomic development strategy. Basic health status indicators for Kazakhstan are presented in Table 1, with countries from Eastern Europe and the former Soviet Union also presented for comparison. The indicators suggest a high burden of mortality, particularly among infants and adult men, given Kazakhstan�s per capita gross national product (GNP). This suggests that the current level and allocation of investments in health are not being optimised, and there may be significant consequences in terms of both human welfare and economic growth. Table 1. International Comparison of Basic Health Indicators12

Life Expectancy Country GNP Per Capita

Government Health

Expenditure as % of GDP

Male Female Infant

Mortality Rate

Maternal Mortality

Rate

(1994-97) (1995) (1994-97) Hungary 4,347 6.8 65.3 74.7 10.7 15 Czech Republic

3,870 7.4 70.5 77.6 6.1 6

Russia 2,240 4.1 59.8 72.5 17.5 49 Bulgaria 1,330 5.5 67.2 74.8 16.3 13 Kazakhstan 1,330 2.2 58.9 70.3 25.9 53 Uzbekistan 970 3.5 65.0 70.7 26.6 19 Turkmenistan 920 1.2 61.5 66.6 42.9 43 Armenia 730 3.1 70.1 76.2 15.5 21 Kyrgyzstan 700 3.5 64.3 71.0 27.7 31 Tajikistan13 340 5.8 65.0 70.5 -- 70

III. THE PURPOSE OF SOCIAL PROTECTION POLICY IN HEALTH CARE

As in other areas of social protection, the purpose of social policy in health care should be to define the roles and responsibilities of the government and other stakeholders in health care -- individuals and organizations. What is not defined by law as a responsibility of the state, individual, or organization will be left to the free choice of individuals or organizations to decide whether to take on additional responsibility for health care.

12 Source: World Health Organization Web Site: Basic Health Indicators (Country-Reported Data) 13 Government health expenditure as a percentage of GDP is from 1995, the remaining indicators are reported for 1991-93.

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IV. BROAD SOCIAL PROTECTION POLICY FRAMEWORK IN HEALTH CARE

The framework for rational social protection policy in health care should be based on two overarching policy principles whose achievement or realization will mark a successful transition from the current inequitable and inefficient health care system to a reasonably equitable and efficient one. Such a reformed health care system will then be capable of efficiently and effectively accommodating new macro-level health policy decisions, for example, adding another source of public funding to the budget funded health care system. The two health policy protection principles are:

1. Matching state health budget funds with the free universal package of health care benefits (free benefits);

2. Reducing the inefficiencies in the health care system to effectively increase the level of free benefits before introducing another public source of funding.

These two principles should be realized through a gradual but radical health reform process. The following three pyramids describe the current, the transitional, and end phase of health care system reform. The two principles will be achieved and embodied in the reformed health care system at the end of Phase I. The first pyramid entitled �Current Situation� exhibits the imbalance between the current level of state health budget funding and free benefits (Exhibit 1). At present, the population receives free benefits that are substantially less than those guaranteed by the state (the first level of the pyramid). The population is subsidizing the difference (funding gap) by paying informal out-of-pocket expenditures at the point of health service delivery (the difference between the first and the combined second and third levels of the pyramid). Attachment 1 provides more detailed information on health expenditures.

Current Situation

Funding gap covered by informal out-of-pocket expenditures of the

population

Actual level of free benefits with health budgetat 2% of GDP

Level of free benefitsguaranteed but not delivered by the

state

Health benefitscovered from

voluntaryinsurance andself-insurance

Uni

vers

e of

Hea

lth B

enef

its

Most Essential

Least Essential

State responsibility for thehealth status of citizens

Responsibility of individuals fortheir own health

Loss of free benefits dueto health system inefficiencies

EXHIBIT 1

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The health delivery system is currently inefficient which means that it uses more resources to achieve results or health outcomes that could be achieved with fewer resources. If the health care system was efficient, it could have achieved higher results by providing more free benefits for the same amount of state health budget funding (the second level of the pyramid). Voluntary insurance and self-insurance pay for health benefits that are not guaranteed by the state (the top or fourth level of the pyramid). The second pyramid entitled �Phase I� (Exhibit 2) exhibits the results of the health reform process related to the two principles outlined above (matching state budget funds with free benefits and reducing inefficiencies in the health system): 1. Level two shows the added value of health care reforms which effectively increases the

level of free benefits, at the same level of state health budget funding (2% of GDP) as that in �Current Situation.� The added value benefit is in fact the use of the savings realized from reducing inefficiencies in the health care system and using these savings to pay for more free benefits. The use of these savings increases the actual free benefits and bridges part of the funding gap at no extra cost to the state budget.

2. In Phase I the state health care budget should increase from its current level of approximately 2.0% of GDP in 2000 to 3% of GDP. This health policy decision will provide resources to further increase the level of actual free benefits and bridge even more of the funding gap (level three).

3. Even additional state budget resources will not be able to bridge entirely the funding gap. Therefore, the new level of actual free benefits will be lower than the guaranteed level of benefits in �Current Situation.� The actual free benefits in Phase I, however, should deserve to be called guaranteed by being indeed free of charge to all patients. Self-insurance or voluntary insurance should pay for all other health benefits above the actual level of free benefits (fourth and fifth levels of the pyramid). These payments should bridge the last remaining part of the funding gap (fourth level of the pyramid).

In summary, reducing the inefficiencies in the health system, increasing budget funding for health care from 2-3% of GDP, and increasing the responsibility of individuals to pay for health care directly or through insurance will bridge the funding gap and ensure that the budget actually covers free benefits. The third pyramid entitled �Phase II� (Exhibit 3) exhibits a reformed health care system which can accommodate the funds coming from additional sources of funding such as mandatory health insurance. At this phase it will be up to social protection policy makers to decide whether to add mandatory health insurance as another source of public funding to the state budget or not. Evaluation mechanisms should be established to determine when the health system is ready to move from Phase I to Phase II and what the new level of free benefits will be in Phase II.

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New actual level of freebenefits

Phase I

Uni

vers

e of

Hea

lth B

enef

its

Bridging the funding gap

Actual

Actual level of free benefits with health budgetat 2% of GDP

Additional free benefits due tosavings from improved health system efficiency

Free benefits with healthbudget = 3% of GDP

Healthbenefits

covered fromvoluntary

insurance andself-insurance

Reduction offree benefits

Most Essential

Least Essential



EXHIBIT 2

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100

Phase II

Uni

vers

e of

Hea

lth B

enef

its

Least Essential

Most Essential



Benefits tobe covered

by either oneor a combinationof the following:

-voluntary insurance;-self insurance;-mandatory insurance.

Actual level of free benefitswith health budget at 3% of GDP

and improved efficiency

EXHIBIT 3

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V. CHANGING HEALTH CARE SYSTEM STRUCTURE, ELEMENTS AND FUNCTIONS -- FROM �CURRENT SITUATION� TO END OF "PHASE I"

Introduction One of the most profound inefficiencies in the current health system is the imbalance between the hospital and primary care sectors. Hospitals consume more than 70 percent of the health care budget. The hospital sector including the extensive vertical health programs for tuberculosis, sexually transmitted diseases, oncology and psychiatry is overdeveloped and the primary health care sector which should serve as the broad base of a cost-efficient and clinically effective health care system is underdeveloped, under-financed, and under-utilized. Primary health care is inadequately provided through catchment area physicians with incentives to refer quickly to specialists. Training of primary care physicians, in modern clinical standards, is inadequate, and thus conditions that should be effectively and inexpensively treated in the primary care sector are treated at high costs in the hospital or by specialists at polyclinics. Solving this fundamental problem requires realizing both principles of broad social protection policy in health care. State budget health expenditures need to be prioritized and health system inefficiencies reduced through a gradual but decisive health reform process. To make the health system more efficient by the end of Phase I, new structure, elements and functions should be incorporated into the health system. These are graphically depicted in Exhibit 4 and summarized as follows:

• The population takes more responsibility for their health status by both exercising their rights and reducing health risk factors associated with their lifestyle.

• The primary health care sector is completely restructured and strengthened through the creation of new primary care practices (providers), upgrading of clinical skills of primary care physicians, and integration of vertical programs, including infectious diseases and maternal and child health into primary care.

• The hospital sector is restructured and excess capacity reduced by rationalizing hospitals and creating new general profile hospitals to replace specialty hospitals.

• New health provider payment systems are introduced to encourage competition and adequately respond to the uncertainty of health purchasing and delivery by guaranteeing the autonomy of providers to use resources according to operational and competition driven needs.

• A single public health purchaser (single-payer) is established in the health sector to ensure that financial incentives for providers are consistent, functions are not duplicated, and administrative costs are reduced.

• Fragmented health budget funds from lower administrative levels are pooled at the level of the oblast health budget to make competition among providers possible and improve equity.

• Using the state budget as a sole public source of funding until the health system is reformed and ready to use efficiently another public source of funding in Phase II - mandatory insurance (Exhibit 5).

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EXHIBIT 4

Health Delivery and Finance Systems with General Taxation and Earmarked Payroll Tax Sources of Funds

State Responsibility for the Health Status of Citizens Responsibility of Individuals for Their Own Health

Revenue SidePolitical Decisions

Personal/EmployerDecision

REVENUE SOURCES

RayonBudget EMPLOYEES EMPLOYERS CO-PAYMENT

FROM PATIENTS

HOSPITALSPOLICLINICSPrimary Care Practices

ALL HEALTH BENEFITS OUTSIDETHE BENEFITS GUARANTEED

BY THE STATE

REVENUESOURCES

EMPLOYERSEmployers choose/decide

to contribute or notINDIVIDUALS

HEALTH INSURANCECOMPANIESSINGLE HEALTH PURCHASER

national level entity with branches in the oblasts has the authorityto pay providers based on the rules of the provider payment systems

including rules to distribute funds across geography and type of providers

Clini

cal

Stati

stica

lGr

oups

Outpa

tient

Fee

Sche

dule

Per

Capit

aRa

te

tengetenge

Pooling of FundsFunction

Health PurchasingEntity

Provider PaymentSystems

Autonomous Providers

PopulationInvolvement - Rightto Choose Primary

Care Provider

Revenue Sources

ExpenditureSide

REVENUETOTAL

% OF GDP=

ELIGIBLE POPULATION COVEREDAND PACKAGE OF GUARANTEEDBY THE STATE HEALTH BENEFITS

tenge

tenge

CO-PAYMENTFROM PATIENTS

tenge

tenge

tenge

CityBudget

OblastBudget

RepublicanBudget

OblastBudget

All fu

nds p

ooled

at ob

last le

vel a

ndtra

nsfer

red t

o the

oblas

t sing

le he

alth

purch

aser

Purchaser-ProviderSplit

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103

Health Delivery and Finance Systems with General Taxation Sources of Funds

State Responsibility for the Health Status of Citizens Responsibility of Individuals for Their Own Health

Revenue SidePolitical Decisions

Personal/EmployerDecision

REVENUE SOURCES


HOSPITALSPOLICLINICSPrimary Care Practices

ALL HEALTH BENEFITS OUTSIDETHE BENEFITS GUARANTEED

BY THE STATE

REVENUESOURCES

EMPLOYERSEmployers choose/decide

to contribute or notINDIVIDUALS

HEALTH INSURANCECOMPANIESSINGLE HEALTH PURCHASER

national level entity with branches in the oblasts has the authorityto pay providers based on the rules of the provider payment systems

including rules to distribute funds across geography and type of providers

Clini

cal

Stati

stica

lGr

oups

Outpa

tient

Fee

Sche

dule

Per

Capit

aRa

te

tengetenge

Pooling of FundsFunction

Health PurchasingEntity

Provider PaymentSystems

Autonomous Providers

PopulationInvolvement - Rightto Choose Primary

Care Provider

Revenue Sources

ExpenditureSide

REVENUETOTAL

% OF GDP=

ELIGIBLE POPULATION COVEREDAND PACKAGE OF GUARANTEEDBY THE STATE HEALTH BENEFITS

tenge

tenge


tenge

tenge

tenge

All fu

nds p

ooled

at ob

last le

vel a

ndtra

nsfer

red t

o the

oblas

tsin

gle he

alth p

urch

aser

RayonBudget

CityBudget

RepublicanBudget

OblastBudget

Purchaser-ProviderSplit

EXHIBIT 5

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Matching State Budget Funding and Free Benefits At present, the free benefits cover a universe of health services which is not nearly matched by state budget funds. Official data shows the need for 97 billion tenge to cover the free benefit package in 2000, while the health budget is at only 44 billion tenge.14 Bridging the funding gap requires a policy decision on what health benefits to fund first. The policy decision concerning what health benefits are a priority for state budget funding should be based on a delineation of the most essential services, generally defined as the following list: primary health care, maternal and child health care, immune-prophylactics, infectious diseases, and emergency care. Reducing the Inefficiencies in the Health Care System to Increase the Level of Free Benefits Before Introducing a New Public Source of Funding The following sections discuss the charts contained in Exhibit 4 and Exhibit 5. The Chart in Exhibit 4 matches Phase I described above and the Chart in Exhibit 5 matches Phase II described above. Each level shown at the right of the charts will be described, starting from the bottom. Involving the Population in Primary Health Care The first and probably most important level in the health system chart in Exhibit 4 is the population. At present, the population is relatively poorly informed of the health risk factors associated with their lifestyles. Therefore, they have little control over or responsibility for their own health. The lack of population involvement in health care is one of the major factors contributing to increased morbidity and mortality as well as lack of incentives to improve the efficiency of the health system. To improve the current situation the population should take an active role in their own health status and health care. This role is built on a partnership between the population and their primary care practices, and on patient (customer) influence over primary care practices. A successful partnership requires that respective responsibilities for the health status of the patient be clearly understood and recognized by the partners. Among the key responsibilities of the medical professional in this partnership are keeping patients well informed of their clinical conditions and risk factors associated with their lifestyle. Key responsibilities of patients in the partnership become decreasing the major risk factors associated with their lifestyle, monitoring their health conditions, and fulfilling appropriately the prescribed prevention or treatment. At the heart of the population�s changing role should be the empowerment of people to choose a primary care practice in a democratic process of free open enrollment. This choice should be the engine driving competition, increased operational efficiency, and continuous improvement of quality in a reformed, modern health system. Patient satisfaction will ultimately be the main determining factor in people�s choice of a primary care practice and thus will drive competition by penalizing poor practices and rewarding good ones. Primary care practices should compete to attract patients whose enrollment with a practice determines the amount of state funding going to the practice. This funding is determined as a flat per-capita fee per enrolled person. Certain preconditions should be met to ensure that the role of the population changes. These are the establishment of a sufficient number of primary care entities from which people can choose, and a provider payment system that pays the provider based on the number of people enrolled. Providers have the liberty to operate in a way that would attract new patients and keep current one satisfied, while patients have the right to change the provider and thus exercise a powerful control on quality. Intensive social marketing should be conducted in advance of enrollment to explain the new structure of the health delivery system and the step-by-step process that will culminate in a choice of primary care provider.

14 See Letter of the Chairman of the National Bank of Kazakstan Mr. Marchenko to the President of Kazakstan Mr. Nazarbayev of 3 October 2000.

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The Structure of the Health Delivery System The second level in the health system chart in Exhibit 4 is the health delivery system. It is at this level where most of the health reforms resulting in efficiency gains need to occur. The changes needed in the health delivery system are described in the following sections. Primary Care Sector At present, the primary care system is largely fragmented into specialized facilities � adult, women�s and children�s polyclinics not capable of providing the complete range of primary health care services needed by a family. Polyclinics provide care for a specific geographic area known as a catchment area. Patients living in that area are assigned to a polyclinic and have no choice of primary care provider. The polyclinic includes a group of primary care physicians who are assigned a geographic catchment area and function largely as dispatchers, treating few patients and referring most on to specialists. The polyclinic includes a wide range of outpatient specialists not connected to hospitals, usually between ten to twenty, in areas such as cardiology, pulmonology, gastroenterology, neurology, otolaryngology, ophthalmology, etc. Primary care by definition is the most cost efficient and effective type of health service and therefore should be funded and developed as a priority service in relationship to outpatient specialty and diagnostic services as well as hospital services. As part of the restructuring occurring in Phase I, primary care should be delivered by new juridical entities in both rural and urban areas, independent from polyclinics and consisting of three types of physicians - therapist, pediatrician, and obstetrician-gynecologists. Over time as new family practitioners graduate, they may continue to function in groups or may become solo practitioners. The elements of new primary care practices/providers are shown in Table A. TABLE A

The three types of physicians together form a group to prevent, diagnose, and treat an entire family�s main causes of morbidity and mortality. Primary care specialists should receive training in modern clinical protocols and be able to expand their scope of services to deliver other types of essential health care such as infectious diseases and maternal and child health. Medical education should be reformed to produce more family practitioners able to provide primary care to the population and less specialists. Introduction of family practice will result in the gradual integration of the health benefits currently delivered in vertically integrated dispensaries, polyclinics, and hospitals into a more cost-effective primary care sector (Exhibit 6). As discussed above, an integral part of the primary care model is the involvement of the population in creating competition and improving quality. Specialty and Diagnostic Outpatient Care Sector Outpatient specialty and diagnostic outpatient care is the second, higher, and more expensive level of health care. It currently consists of polyclinics (which also deliver primary care), diagnostic centers, and hospital outpatient departments. Hospital outpatient departments are the exception rather than the rule in the health delivery structure. Outpatient specialty and diagnostic care is characterized by duplication and inefficiency. In Phase I specialty and diagnostic outpatient care would be provided by polyclinics (which will not longer provide primary care), diagnostic centers, and more hospital outpatient departments. New provider payment systems will create competition based on cost-efficient operations which is likely to encourage mergers of some polyclinics into hospitals to create new hospital outpatient departments where hospital specialists also see patients in outpatient settings (Exhibit 6).

Independent from Polyclinics Juridical Entity Having Six Elements and Functions Financing

Per-capita of enrolled

population

Management Freedom to allocate and

manage resources

Assets Equipment and Facility

Physicians Therapists,

Pediatricians Gynecologists

Patients Freely

Enrolled Population

Service Scope of Essential

Free Benefits

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Clients of outpatient specialty and diagnostic providers should be primary care practices who have the freedom to choose to which provider of outpatient specialty and diagnostic care to refer their patients. Therefore, the choice of primary care practice will play a key role in inducing competition and improvements in quality among this second level of providers. The choice of specialist made by the primary care practice will affect patient satisfaction and impact future decisions related to choice of primary care practice. Hospital Care Sector Inpatient care provided by hospitals is the highest, most expensive, and least cost-effective level of care in the health delivery system. At present, there are numerous different types of specialty hospitals including adult, pediatric, maternity, cardiology, endocrinology, emergency, oncology, STI�s, TB, and psychiatric. The hospital sector suffers from severe inefficiency due to very high fixed costs and very low capacity utilization. The way to reduce the current inefficiency in Phase I is to encourage gradual merger of specialized hospitals and some or all dispensaries into general hospitals with specialized departments (Exhibit 6). Purchaser/Provider Split and Provider Payment Systems The third level in the health system chart in Exhibit 4 is the purchaser/provider split and new provider payment systems. Well functioning provider payment systems are the next level or essential element of an efficient health care system. Until recently, the provider payment systems was the old system inherited from Soviet times paying providers fixed budgets linked to capacity such as number of beds and staff, without a relationship to health outcomes. These provider payment systems consisting of fixed budgets contain powerful financial incentives for health system inefficiency. For example, as hospitals are paid based on the number of beds, they have a strong incentives to have more beds than are needed to provide hospital services to the population.

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Pediatrics InternalMedicine OB/GYN

HOSPITALS

InternalMedicinePediatrics OB/GYN

CATCHMENT AREA

POLYCLINICSPECIALTIES

TUBERCULOSIS

Hospital

Outpatient

STIs

Hospital

Outpatient

ONCOLOGY

Hospital

Outpatient

PSYCHIATRY

Hospital

Outpatient

PRIMARY HEALTHPediatrics Internal

Medicine OB/GYN

TUBERCULOSIS

Hospital

Outpatient

STIs

Hospital

Outpatient

ONCOLOGY

Hospital

Outpatient

PSYCHIATRY

Hospital

Outpatient


HOSPITALS

CENTER FORCONSULTATIVEDIAGNOSTICS


TB

STIsPediatrics Internal

Medicine OB/GYN

HOSPITALS ONCOLOGY

PSYCHIATRYOUTPATIENT DEPARTMENT

Tuberculosis

STIs

Oncology

PsychiatryPediatrics Internal Medicine OB/GYN

PRIMARY HEALTH CARE

CENTER FOR CONSULTATIVE DIAGNOSTICSPediatrics Internal Medicine OB/GYN

THE HEALTH CARE DELIVERY STRUCTURE - FROM CURRENT SITUATION TO PHASE II

PHASE I: VERTICAL INTEGRATION OF PHC, HORIZONTAL INTEGRATION OF

CURRENT SITUATION PHASE II: INTEGRATED HEALTH CARE DELIVERY SYSTEM

EXHIBIT 6

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Although there have been some modifications to the old provider payment systems, in effect they are essentially still the same. The budgets are broken down by chapters such as salaries and utilities, with funds extremely difficult to move from one chapter into another even if operational needs necessitate it. New provider payment systems were enacted into different laws and regulations in 1999 and 2000 and are in the initial stages of implementation. They are designed to create competition across providers and provide incentives to reduce inefficient operations, improve quality, improve equity, and support the choice of provider by:

• allowing health funds to �follow� the patient to the provider of choice;

• providing a mechanism to balance the inequality in economic status and burden of disease among different administrative units in an oblast;

• rewarding providers for the end results of their work - number of enrolled patients in primary care, number of patients in specialty and diagnostic care, and treated patients in hospital care;

• giving the opportunity to providers to earn more money if they reduce inefficiency and start achieving the same or better results for the same level of financing;

• assuring qualify with the help of new health management information systems;

• introducing a monitoring and evaluation function through collection and analysis of clinical and management information.

Purchaser-Provider Split The roles and responsibilities in the health delivery system can be defined by how resource allocation decisions are distributed between the purchaser and providers of health care. To establish a prudent purchaser of health care benefits, the authority to mobilize, allocate, and use health resources should be split between the purchaser and providers as follows:

Health Care Resource Allocation

The purchaser-provider split divides the authority with respect to allocation and use of health funds, but preserves the unity of the process of allocation and use of health funds through the provider payment systems. In the first purchaser function, the Government of Kazakhstan, Ministry of Finance, and Ministry of Health together determine the level of state health budget funding. In the second purchaser function, the Ministry of Health, or an entity subordinated to it, becomes the prudent health purchaser with authority to develop health financing priorities, allocate resources across geography and types of benefits or providers, and purchase health benefits using the new provider payment systems. The authority to allocate funds across types of benefits or providers is very important and should result in a policy decision to shift resources to primary health care, the most cost-effective type of care. The separation between purchaser and provider functions is called the purchaser/ provider split and is operationalized through the new provider payment systems. The first function of the providers is to compete with other providers for the resources of the purchaser that are distributed by the rules of the provider payment systems. Competing means to improve the cost-efficiency of operations and the quality of delivered benefits in relation to other

Purchaser Functions 1. How much state (national and local) funding will be allocated to health care? 2. How this funding is allocated among levels of the health care delivery system or types of benefits?

Purchaser/Provider Split -- Provider Payment Systems Provider Functions 3. How are funds distributed among providers within each level of the health care system? 4. How do health providers allocate funds across inputs to produce health services?

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providers. Improving the cost-efficiency of operations relates to the second function of providers which is to allocate resources according to their operations needs. In order for providers to perform this function, they need flexibility in resource allocation and can no longer be held to rigid chapter budgets through the Treasury System. The purchaser-provider split cannot be separated from the provider payment systems, the autonomy of providers to use their funds according to operational needs, and the population choice of primary care provider. They are interconnected and health system performance is conditioned upon the appropriate functioning of all elements. Primary Care Practices, Outpatient Specialty and Diagnostic, and Hospital Payment Systems New provider payment systems consist of per capita in primary care, fee schedule in outpatient specialty and diagnostic care, and clinical statistical groups in hospital care. They connect the function of the purchaser of free benefits, deciding how to allocate funds across types of providers, with the function of the provider, deciding how to use these funds to respond best to the requirements of the client (the purchaser). The rules of the provider payment systems establish a mechanism to shape the operations of the provider in a way that assures the best quality for a defined level of free benefits. The provider payment system for primary care financing should be a per-capita payment for the enrolled population of a primary care practice and the scope of benefits delivered should be free of charge to the patient. With improved structure, quality of care, and new financial incentives, primary care should be able to treat more and more cases and refer an ever decreasing number of patients to the higher, more expensive levels of care. This in effect will make the primary care practices gatekeepers to the higher levels of the health system. To ensure efficiency and effectiveness of operations management, primary care practices will have the autonomy to decide how to spend resources in response to the forces of competition and the needs of their patients. Rationalization of providers at this and other levels of care should be the sole result of competition, not of administrative decisions. The interaction between primary care and the higher levels of care will be through patient referral and integrated payment and management information systems. The rules of referral should be changed to establish strong economic disincentives for patients to circumvent primary care using ambulances or self-referring to higher levels of care. Specialty and diagnostic care should be funded through an outpatient fee schedule based on quantity and quality of services delivered. Providers should have the autonomy to spend their resources in a way that ensures they are able to respond to the financial incentives embedded in the outpatient fee schedule. Competition rather than administrative decisions should determine the rationalization and closure of providers. Inpatient care in hospitals should be paid through a cased-based hospital payment system. This case-based hospital payment system pays hospitals for each treated, discharged case. Each case is classified into a clinical statistical group which adjusts the payment according to the type and severity of illness. This new hospital payment system should be one of the drivers of improved efficiencies through consolidation and mergers in the hospital sector, as it contains incentives for competition based on quality and efficiency of business operations. To ensure the normal functioning of the incentives imbedded in the provider payment systems hospitals should be given the right to spend their funds as they need. The downsizing of the hospital sector should be preceded by intensive effort to build a strong primary care capable of absorbing an increased flow of patients currently serviced by hospitals and specialty and diagnostic care. The Need to Reconcile the GosZakaz System for State Procurement of Services With the New Provider Payment Systems New provider payment systems and GosZakaz are very similar in their fundamental goals but very different in the methods they employ to achieve them. Provider payment systems and GosZakaz both aim to ensure competition, lower costs, and improve quality. To achieve these

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goals GosZakaz applies uniform rules across all economic and social sectors including health care assuming that the type of benefit or service, the quantity of service, and the type of provider can be determined in advance of the purchase. Indeed, this assumption is probably valid in most sectors, however, it is not in health care, where the types of benefit, quantity of service, and the type of provider delivering services are usually unknown until they are actually delivered (the transaction has taken place). GosZakaz is not designed to deal with such uncertainty and its use in health care is recognized as inappropriate by the Agency on State Procurement. In a fair, technically and economically sound, and practical fashion the new provider payment systems fully accommodate the natural unpredictability of health care service delivery and achieve the goals of GosZakaz. They accomplish this by seamlessly linking the rules of provider payment with benefits and providers. Linking Providers, Benefits, and Financial Risk through the Provider Payment Systems To assure good management of financial risk and to provide incentives for efficient use of resources in a complex, but balanced health care system, providers, benefits, and financial risk should be reconciled through the rules of the new provider payment systems. Primary Care P r i m a r y c a r e p r a c t i c e s a r e f u n d e d a f l a t f e e f o r a s c o p e o f f r e e b e n e f i t s t h a t s h o u l d b e d e l i v e r e d i n t h e v o l u m e t h a t e n r o l l e e s r e q u i r e . T h e r u l e s o f t h e p a ym e n t s ys t e m p l a c e t h e b u r d e n o f f i n a n c i a l u n c e r t a i n t y a s s o c i a t e d w i t h t h e d e l i v e r y o f a n u n k n o w n n u m b e r o f b e n e f i t s o n t h e p r i m a r y c a r e p r a c t i c e . T h e p r i m a r y c a r e p r a c t i c e i s b e s t p o s i t i o n e d t o m i n i m i z e t h i s u n c e r t a i n t y b y e n ga g i n g i n p r e v e n t i v e a c t i v i t i e s a n d c l o s e l y m a n a g i n g t h e h e a l t h r i s k o f e n r o l l e e s t h r o u gh t h e d e l i v e r y o f t h e m o s t c l i n i c a l l y- e f f e c t i v e c a r e . In a d d i t i o n , t h e p r i m a r y c a r e p r a c t i c e m i n i m i z e s i t s r i s k o f f i n a n c i a l l o s s b y o p e r a t i n g i n t h e m o s t c o s t - e f f i c i e n t w a y. T h u s , a p r i m a r y c a r e p r a c t i c e h a s a d i r e c t e c o n o m i c i n t e r e s t i n m i n i m i z i n g t h e h e a l t h r i s k s o f p a t i e n t s a n d i m p r o v i n g t h e e f f i c i e n c y o f o p e r a t i o n s . T o a l l o w e f f e c t i v e a n d e f f i c i e n t r i s k m a n a ge m e n t a n d t o i n d u c e c o m p e t i t i o n a m o n g p r i m a r y c a r e p r a c t i c e s r e q u i r e s e l e m e n t s e x h i b i t e d o n T a b l e A . T h e t yp e o f r i s k a n d t h e s p e c i f i c s o f i t s m a n a ge m e n t m a k e t h e r u l e s o f G o s Za k a z a n d p e r - c a p i t a p a ym e n t c o m p a t i b l e . The structure and functions of risk management in primary care minimizes the financial risk to the entire system by minimizing the number of patients flowing to expensive specialty and diagnostic care as well as hospital care. The per-capita fee in primary care, therefore, should be seen not only as a payment for a scope of benefits, but also as a premium for the delivery of a critical insurance service to the rest of the health system.

Outpatient Specialty and Diagnostic Care and Inpatient Care Unlike primary care where the risk of excessive demand for benefits can be minimized by preventive measures, monitoring the health risks of the population, and delivering the most clinically effective care, at the outpatient specialty and diagnostic, and inpatient or hospital levels of care the risk has different dimensions and dynamics that cannot be managed easily by the provider. The number of patients� visits and the frequency of delivery of each individual benefit by a specialty and diagnostic provider or hospital greatly depends on the quality of services at the primary care level. High quality primary care should mean decreased referrals to specialty and diagnostic providers and hospitals, whereas lower quality primary care should mean referrals stay at the same level or increase. Specialty and diagnostic providers and hospitals have no control over the quality of work of primary care practices and therefore face uncertainty in terms of the level of services they need to deliver.

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Providers have no means to manage this uncertainty which means that the payment principle used in primary care cannot accommodate the uncertainty at this level of service delivery and a different type of payment system is needed. A different principle, payment per benefit provided, splits the burden of financial uncertainty in unequal shares between the purchaser of benefits (majority risk), and the provider of benefits (minority risk). The financial risk associated with uncertain demand for the benefits delivered by the specialty and diagnostic provider or hospital lies with the purchaser. In addition, the health purchaser also faces risk from the tendency of specialists to create demand and provide an excessive level of benefits. This risk is managed by integrating the provider payment systems across all provider levels, for example, by introducing fundholding. Placing risk on the provider can be accomplished by encouraging competition, informed choice of primary care practice by the population and disincentives to providers to deliver more benefits to referred patients than they actually need. In addition, co-payments (see 2.6.2) from patients produce a cost containment mechanism on the demand side of free benefits. The provider manages its risk through the delivery of benefits that patients actually need and allocating funds in the most efficient way. GosZakaz rules cannot accommodate the type of uncertainty of health delivery at this level of care and therefore should be replaced by the new provider payment systems � initially outpatient fee schedule and case-based system for hospitals, and over time a more integrated system such as fundholding. Improving the On-going Implementation of New Provider Payment Systems The implementation of new provider payment systems in Kazakhstan started before certain critical conditions were set in place to enable them to function as designed. As a result, the provider payment systems will not have the intended impact until the following conditions are met:

1. Primary care practices are established as independent juridical entities with an enrolled population who has the right to periodically choose to enroll with another primary care practice;

2. Changing Treasury system rules to allow providers freedom and flexibility to use state budget funds according to operational needs;

3. Pooling health budgets from various administrative levels within an oblast to the level of the oblast health budget;

4. Replacing GosZakaz rules in health care with the rules of the provider payment systems.

Single Health Purchaser The fourth level in the health system chart in Exhibit 4 is the single health purchaser. When Mandatory Health Insurance (MHI) was introduced in Kazakhstan, two state institutions administratively independent from each other were responsible to pay providers, the Ministry of Health and the MHI Fund. The lack of coordination between them and their contrasting health policies lead to the implementation of two different provider payment systems with contradictory incentives for providers. The MOH/MOF budget system was funding providers based on fixed budgets related to physical structure and capacity rather than provision of health services. Providers did not have financial incentives to improve the efficiency of their operations. At the same time the MHI Fund was paying providers based on the actual provision of health services to the population and the results of their work, giving providers an incentive to reduce inefficiencies. The contradictory incentives of the two provider payment systems of the two purchasers sent mixed signals to providers and did not promote efficiency or quality improvements. The implementation of a national social protection policy in health care and the successful functioning of the new provider payment systems requires concentrating the functions of purchaser of free benefits in a single government entity. This entity should have branches in each oblasts and should use a common oblast level pool of local budget health funds (see next

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section) and the new provider payment systems to pay both state owned and private providers/purchase benefits. Pooling of Health Budget Funds The fifth level in the health system chart in Exhibit 4 is pooling of health budget funds. At present, health care budgets are formed and executed at different levels of administration - national, oblast, city, rayon, and rural. Each administrative level funds their own network of health facilities to ensure that health care assets are available to deliver free benefits. How many providers to own and how much funding to provide to them is mostly within the discretion of local administrations. The result is costly, underfunded, and inefficient mini-health systems, the access to which is largely limited to the people living on the administrative territory serviced by the mini-health system. These mini-health systems which exist due to fragmented budgets not only make it impossible to improve equity, but also impede competition which is essential to reduce the inefficiency of the health system and improve quality of care. Competition should be driven by population choice of their primary care practice, and the choice of specialist by the primary care practice acting on behalf of their patient (customer). Competition presupposes the existence of two essential health system elements -- alternative providers, and a provider payment system that allows funds to �follow� the patient to the provider of choice so that the provider is reimbursed for delivering services to the customer. However, alternative providers by definition are usually not available in mini-health systems while budget fragmentation does not allow funds to �follow� the patient to alternative providers belonging to different mini-health systems. To solve this problem, all mini-health systems on the territory of an oblast should be combined into one oblast-wide system by pooling all health budget funds within the oblast in the oblast health budget and using the rules of new provider payment systems to reimburse all providers from that pool. One of the features of the new provider payment systems is a mechanism allowing funds to �follow� the patient to any provider in the oblast. Consolidation of the oblast health budget or pooling of funds should be horizontal across all parts of the health care system (primary, specialty and diagnostic, and hospital care) and vertical across levels of local administration. Revenue Sources The sixth level in the health system chart in Exhibit 4 is revenue sources and other high level policy decisions. Revenue source elements and decisions are discussed in the following sections. Public Sources of Funds Between 1998 and the first ten months of 2000 Kazakstan spent between 2.0% and 2.4% of its GDP on free benefits (see Attachment 2). This is low by the standards of transition economies enjoying high economic growth (average 5.7%), as well as those experiencing low growth (average 3.7%). An increase in state budget funding from 2% to 3% of GDP together with an effective increase in free benefits gained through health system efficiencies, and an increase in responsibility of individuals to fund health benefits will remove the funding gap currently covered by informal out-of-pocket expenditures of the population. Additional increases in state budget funding should follow rather than precede significant health care restructuring efforts aimed at improving the efficiency of the system. Once the system has completed Phase I and entered Phase II, the option of introducing another public source of funding, mandatory health insurance (Exhibit 5), could be considered. When considering mandatory health insurance, however, it is important to note the experience of both Kazakhstan and other economies in transition -- mandatory health insurance did not increase the inflow of resources to the health systems. Mandatory health insurance could be effectively limited to the formal sector (which could include pensioners, who being former employees may not have to pay a premium). The appropriate payroll contribution rate will in part depend on overall health care expenditures relative to GDP that might be broadly desirable. Since Kazakhstan is somewhat poorer than

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high growth transition economies, it seems likely that desirable total health care expenditure as a share of GDP will be lower than for these countries. An appropriate national target for Kazakhstan might be 5% to 5.5% of overall expenditures. If a decision is made to re-introduce mandatory health insurance, careful consideration should be given to the proportion of funding from the state budget and mandatory health insurance. If one accepts a national health expenditure share of 5.0% and a public expenditure share of 3.0%, then the target private health expenditure share would be 2.0%. Informal sector workers and their dependants might account for 0.5% to 1%, leaving the remaining 1% to 1.5% to be funded by payroll contributions by formal sector workers. Since the formal sector wage bill is about one-fifth of GDP, the contribution rate that would cover these costs would be 5% to 7.5% of the wage bill. Since even insured individuals are likely to have some uninsured health care expenditures, a payroll contribution rate toward the lower end might be appropriate. T o a v o i d m a r k e t f a i l u r e s o f p r i v a t e h e a l t h i n s u r a n c e m a r k e t s m a n d a t o r y i n s u r a n c e s h o u l d b e m a n a ge d b y a s t a t e i n s u r e r , n o t b y p r i v a t e i n s u r e r s . T h e m a i n s o u r c e o f m a r k e t f a i l u r e s i n p r i v a t e h e a l t h i n s u r a n c e i s t h e s o - c a l l e d � a d v e r s e s e l e c t i o n . � I t a r i s e s f r o m t h e f a c t t h a t p e o p l e w i t h h i gh e r t h a n a v e r a ge h e a l t h r i s k a r e m o r e l i k e l y t o b u y h e a l t h i n s u r a n c e a t t h e i n s u r a n c e c o m p a n y� s f a i r a c t u a r i a l p r e m i u m t h a n l o w - r i s k i n d i v i d u a l s . A s a r e s u l t , t h e c o s t s t o t h e i n s u r a n c e c o m p a n y b e c o m e h i gh e r t h a n o r i g i n a l l y c a l c u l a t e d . I f i n r e s p o n s e t o t h i s t r e n d t h e c o m p a n y r a i s e s i t s p r e m i u m s , m o r e o f t h e l o w e r r i s k i n d i v i d u a l s w i l l b a i l o u t a n d e v e n a h i gh e r r i s k g r o u p w i l l b e l e f t . T o o v e r c o m e t h i s p r o b l e m p r i v a t e i n s u r a n c e c o m p a n i e s t r y t o e x c l u d e f r o m c o v e r a ge h i gh - r i s k i n d i v i d u a l s , o f t e n t h o s e w h o n e e d i n s u r a n c e m o s t , a n d a t t r a c t l o w r i s k o n e s t h r o u gh d e s i gn o f s p e c i a l b e n e f i t p a c k a ge s a n d m a r k e t i n g . In d o i n g t h i s p r i v a t e i n s u r e r s i n c u r g r e a t a d m i n i s t r a t i v e c o s t s . Compared to private insurance, public or state managed insurance is more equitable as it does not deny coverage and for that reason avoids the above mentioned administrative costs. �Moral hazard� is another failure of all insurance systems - public and private, mandatory and voluntary. It is the tendency for individuals to use more health services than they would if they were paying all of the costs directly out-of-pocket. Moral hazard is usually overcome by making individuals responsible for at least some portion of the expenditures they incur, through deductibles, expenditure limits, and co-payments. Co-payment for free benefits When health benefits are free patients have the tendency to use more of them than they actually need, which raises the cost of health care without improving health outcomes. To contain the increase of health care costs due to such behavior, co-payments from patients for all or some free benefits should be introduced. Co-payments should be high enough to discourage patients from overusing the free benefits, but not so high that they effectively change the free nature of these benefits by prohibiting patients in need of a benefit from accessing it. To prevent a negative impact on the strengthening of equity and access to health care in Phase I, co-payments should be collected only on free benefits that exceed the five categories recommended in Section 1 �Matching State Health Budget Funding and Free Benefits.� In Phase II this restriction may be abolished as other elements and functions of the reformed health system will be in place to ensure adequate equity and access. Voluntary Health Insurance Lowering the responsibility of the state with respect to free benefits in Phase I will place more responsibilities on individuals for their own health. In response to the reduction in free benefits, private insurance companies could offer voluntary insurance packages, however, they should not be allowed to sell benefits that are covered from public sources of funds (state

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budget and mandatory insurance). A legal framework for the operation of private insurance companies in the health area should be established in the beginning of Phase I.

VI. CONCLUSION

A successful social protection policy in health care should lead to increased welfare through better health outcomes, greater equity, higher quality, more consumer satisfaction, and more cost-effective delivery of health services. The Kazakhstan health delivery system will be able to deliver such results when two fundamental principles are realized:

1. Matching state health budget funding and free benefits. 2. Reducing the inefficiency of the system in order to effectively increase the level of

free benefits. Improving the efficiency of the system requires gradual but extensive health reforms to change the functions and elements of health service delivery and finance. The core of the health reforms is strengthening primary health care through the creation of new primary care practices and medical education producing better family practitioners, the involvement of the population in health care through their choice of primary care practice, and the introduction of a new capitated rate payment system for primary care practices. The successful accomplishment of health reforms in Phase I will result in a health system ready for the introduction of an additional public source of health funding - mandatory health insurance.

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Definitions: Access to health care - the degree to which people have economic and physical access to a minimum set of health services. Actual free benefits � the difference between the currently guaranteed (promised) by the state free universal health care benefits and the free universal health care benefits for which the population is paying informally out-of-pocket. Efficiency - the improvement in population health status given the amount of money spent on health. Equity - the extent to which basic necessary health care is distributed according to health care need rather than ability to pay. Public source of funding � republican and local budgets and earmarked payroll tax/insurance premium for health care. Private sources of funding � sources of funding which are not included in the definition of public sources of funding. Self-insurance � formal fees collected from patients at the point of health service delivery that may or may not reflect the full cost of the service.

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ATTACHMENT 1 Health Care Expenditures in Kazakhstan

in millions of tenge Percentage of Total

1998 1999 2000 1998 1999 2000 PRIVATE EXPENDITURES Purchased by the Population/Employers Health Services not Included in the Guaranteed by the State Benefit Package: *

1. at Health Facilities on Republican (National) Level NA 244 443 0,0% 0,3% 0,6% 2. at Health Facilities on Local Level 1521 1977 2527 2,3% 2,8% 3,5% Informal out-of-pocket health expenses of the population ** 21867 23581 24105 33,3% 33,3% 33,3%

Total Private Expenditures 23388 25802 27075 35,7% 36,5% 37,4% PUBLIC EXPENDITURES Republican Budget *** 7728 8689 6051 11,8% 12,3% 8,4% Local Budget *** 18296 36252 39189 27,9% 51,2% 54,2% Mandatory Health Insurance Fund **** 16191 24,7%

Total Public Expenditures 42214 44941 45240 64,35% 63,53% 62,56% Total Health Care Expenditures 65602 70743 72315 100,0% 100,0% 100,0% * Source: Agency of Health Finance Department ** The informal out-of-pocket health expenditures of the population are estimated at 50% of the financing of the guaranteed and free benefits financed from the republican and local health budgets. This estimate is based on data from patient surveys conducted in Bulgaria, Poland, and Turkey mentioned in a paper entitled "Informal Payments in the Health Care System." The paper summarizes the results of a survey conducted in 1999-2000 by the Almaty Health Department and York University on out-of-pocket health expenditures of surgery patients in Almaty. The table above shows that 33% of the total health care expenditures in 1998, 1999, and 2000 came from informal out-of-pocket payments. This result is in line with the findings on out-of-pocket expenses in health care in Kazakstan in 1996 by Sari, Langenbrunner, and Lewis, 1999. The World Bank Social Expenditure Review Report for Kazakstan of June 2000 suggests that the data on health expenditures of the population in the annual household survey of the National Statistical Agency are too low at 23-25% of total health care expenditures. *** Source: Ministry of Finance �Annual Report on Actual Budget Expenditures� for 1998, 1999, and by October 1, 2000 (Russian: "Godovoi Otchot ob Ispolnenie Biudzheta"). Republican budget includes loans and grants in health care. **** Source: State Enterprise �Densaulik� (former Mandatory Health Insurance Fund/Center for Health Purchasing) NOTES: 1. Numbers for 2000 are estimates based on actual data for the first six to ten months of the year. 2. Only a small percentage of the recorded purchases of health services outside the guaranteed package comes from employers. Lack of data on employers' expenditures on health services for their employees makes it impossible to make a reliable estimate. 3. Some state owned and private organizations such as the National Railway and Kazahoil pay for the healthcare of their employees under different arrangements: fixed amount contracts with health providers, through insurance companies, or by financing their own health facilities. Anecdotal evidence suggests that most such health expenditures go to health providers directly or through insurance companies. The funds are reflected in the table as health services purchased by the population/employers.

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ATTACHMENT 2 Health Care Expenditures as a Percentage of GDP

in millions of tenge

1998 1999 2000* Nominal GDP 1733300 1893000 2266000 Purchased by the Population/Employers Health Services not Included in the Guaranteed by the State Benefit Package:

1. at Health Facilities on Republican Level 0,01% 0,01% 0,02% 2. at Health Facilities on Local Level 0,1% 0,1% 0,1% Informal out-of-pocket health expenses of the population

1,3% 1,2% 1,1%

Total Private Expenditures 1,4% 1,4% 1,2% Republican budget 0,4% 0,5% 0,3% Local Budget 1,1% 1,9% 1,7% Mandatory Health Insurance Fund 0,9%

Total Public Expenditures 2,4% 2,4% 2,0% Total Health Care Expenditures 3,8% 3,7% 3,2%

* GDP estimate