The International Business Council, mining enterprises and associations of the mining industry of Kyrgyzstan appealed to President Sooronbai Jeenbekov with a request to assist in solving problems in the subsoil use sector.

The appeal is related to the recent decision of the Security Council on measures in the subsoil use.

The decision aims to increase investors’ confidence and provides for measures to simplify business procedures and stimulate investment in the key industry for the country.

At the same time, according to the business community, in the case of the implementation of some initiatives, there is a risk that many exploration and mining enterprises that are currently actively operating in the country can stop production due to economic inexpediency.

The subsoil users conducted a detailed analysis on each issue voiced at the Security Council meeting and the possible consequences in the case of their implementation.

The main problems negatively affecting the attraction of direct investments are related to poor implementation of laws, conflicts with local communities, undeveloped infrastructure, interference of law enforcement, fiscal and supervisory government bodies in the companies’ activities in the form of unreasonable inspections and additional charges.

Tax burden

First of all, business is concerned about a possible increase in the tax burden. The Security Council proposed raising almost all types of taxes including the income tax, royalties, fees for withholding licenses, and bonuses.

The business is also concerned about proposed measures of verification of all licenses issued earlier. Without this, the companies face numerous inspections of law enforcement, supervisory and regulatory authorities because subsoil users have not been included in the moratorium on business inspections, IBC Executive Director Askar Sydykov said.

According to the Ernst & Young research conducted at the initiative of the IBC and the State Committee for Industry, Energy and Subsoil Use of Kyrgyzstan, the tax burden on mining companies is 17.9% of revenues in Kyrgyzstan while it is 14% in Kazakhstan and 15% in Mongolia. The tax burden in the subsoil use sector is one of the highest among other sectors of the Kyrgyz economy.

The profit of many companies does not exceed 5%, while the payback period of projects ranges from 10 to 20 years. Most of the companies engaged in exploration of non-ferrous metals and operating in the general tax regime, has not yet received a profit. It is unknown when they will start mining. Therefore, the increase in the tax burden will have a negative impact on the sector, the IBC head concluded.

Corruption

The Security Council stressed that corruption has deeply penetrated into certain authorized state bodies in the subsoil use and the mining sector, especially in the licensing system.

However, according to the business community, corruption is not in the issuance of a large number of licenses, but in extortion of money for obtaining them and in carrying out appropriate examinations.

As practice shows, it is necessary to encourage companies that invest in geological prospecting and exploration, and not to impede the transfer of licenses to larger companies specializing in higher exploration stages, and then development of deposits. Punitive and restrictive measures would scare off investors.

Vagueness, ambiguity of understanding of laws and regulatory legal acts create corruption. The business community proposes to conduct an audit of laws and regulatory legal acts related to subsoil use, with the involvement of highly professional experts.

Licenses

At the Security Council meeting, Attorney General Otkurbek Jamshitov said that a former employee of the Ministry of Internal Affairs who had no relation to the mining industry owns 41 licenses for deposits in Kyrgyzstan. The law allows him to sell these licenses at his own discretion, the Attorney General added.

Such information in the media negatively affected the investment image of the country.

In fact, these licenses (they are 39 but not 41) for deposits in Kyrgyzstan are owned not by a former law enforcement officer, but by a group of companies. The person the Attorney General was talking about is the companies’ director responsible for the relationship with the local community, and investors are satisfied with his work. The fact that he is a former employee of the Internal Affairs Ministry is just a coincidence. The final investor is Alexander Becker, a well-known businessman in the country, the executive director of Canadian companies. Earlier a Kyrgyzstan citizen, he has been living and working in Canada for about 30 years. Investors Becker attracted invested about $300 million in geological research at several promising deposits in Kyrgyzstan.

The group of companies has large license areas to investigate them and determine which of them should be used to continue developing and which should be returned to the State. In 2019, it is planned to return 20% of the licenses recognized as unpromising and the same number of licenses will be returned in 2020.

This example is very significant, Svetlana Meng, General Director of YurAsia in Kyrgyzstan LLC believes. Of 39 licenses, only a small part will be put into development. To start mining, it takes from five to ten years. Kumtor gold field was studied very carefully for twenty years before they began mining.

The reserve of gold deposits that could be put on development is now small in Kyrgyzstan. The era of Kumtor is coming to an end and the deposits explored during the Soviet times (Jerooy, Kuru-Tegerek, Taldy-Bulak and others) will be developed. For nearly 30 years, the State has not conducted geological research, and private companies are reluctant to invest in exploration.

If large-scale geological exploration is not carried out, the progress of the mining industry will stop in 15-20 years. In Soviet times, the development of many fields was carried out with great government support while currently all responsibility lies on the investors.

Therefore, investors who invest in gold mining primarily look at the prospects for their licenses. The mining sector demands very large investments with the results unknown, so the fears of subsoil users who say that the additional tax burden will have an extremely adverse effect on their activities are understandable.

Attracting investors

When making a decision on investing in high-risk subsoil use projects, a major investor always looks at how the state protects investors in this country.

Over the years of independence, as a result of the inconsistent government policy, Kyrgyzstan has already lost major investors with a worldwide reputation, and investors who remained in the country have revised their production plans, including geological exploration, to the downside, the subsoil users said.

Over the past years, new large investors have not come to Kyrgyzstan. All current investors, with the exception of the Jerooy project, entered Kyrgyzstan earlier, with a tax regime less burdensome for subsoil users, and enjoyed the stabilization tax regime for ten years and good trend of rising gold prices. These are development projects for the Taldy-Bulak Levoberezhny, Kuru-Tegerek, Bozymchak, Ishtamberdy, Unkurtash, and Chaarat fields.

Investors of Altynken and KAZ Minerals Bozymchak spent over $300 million for the construction of mining enterprises. After the construction of the facilities started, the State began to increase taxation for investors including one-time bonuses, contributions to the infrastructure of local communities — 2% of the cost of product sales; increased payments for waste disposal and new payments for disposal of rock dumps waste.

The companies faced problems with VAT refunds, export of commodities, the threat of imposing completely unaffordable and unreasonable customs duties, raising the rates of bonuses, royalties, and license retention fee. Problems with the local community continue, and the investment climate is undermined by the “eternal” problem around Kumtor.

As a result, current investors think about stopping their business or not continuing to invest in its development.

Ready to cooperate

The business community is ready to provide expert support on the issues identified, taking into account international experience, and to ensure an objective approach to the information voiced at the Security Council.

The subsoil users support the initiative to draft a Mining Industry Development Concept, providing for the creation of an effective mechanism for attracting domestic and foreign investment. The bona fide subsoil users, who comply with the legislation, are set to work jointly with government agencies to develop the mining industry and Kyrgyzstan’s economy as a whole.