Kazakhstan will lift administrative barriers in financing cotton industry

Kazakhstan will lift administrative barriers in financing cotton industry

Kazakhstan has developed a draft law "On the invalidation of the Law of the Republic of Kazakhstan "On the development of the cotton industry" and amendments to some legislative acts of the Republic of Kazakhstan". The document is available on the website of the Ministry of Agriculture.

The draft law is designed to ease administrative barriers in the cotton industry and create conditions for attracting investments, including bank loans. An analysis of law enforcement practice shows that the current law has over-regulated the cotton industry. As a consequence, the inflow of foreign investment in cotton production has decreased and the crediting of the industry has practically collapsed.

"If by the time the law was passed (2007) domestic banks were crediting the cotton industry for more than $200 million a year, in 2009 Kazakhstan banks practically stopped crediting cotton companies. The banks recognized the cotton industry as "risky" due to its excessive regulation and restrictions on pledges of fixed assets.  This situation persists to this day", the document states.

The sharp drop in financing, in turn, has led to a two-fold reduction in cultivated areas and in the gross harvest of raw cotton. At the same time, the quality of raw cotton and, consequently, the quality of all its processed products, has dropped dramatically.

The main idea behind the current law "On Cotton Industry Development" was the functioning of cotton receipt as a security with the function of endorsement (transfer inscription). It was assumed that producers who received cotton receipts could either sell their cotton on the free market by rewriting the cotton receipt to the buyer or receive bank loans by issuing receipts as collateral. In this regard, the law contains numerous provisions aimed solely at securing cotton receipts: licensing of cotton processing organizations (CPOs), their participation in a liability guarantee fund, a special procedure for purchasing and selling CPOs property, bans on pledge of CPOs property, introduction of an external (temporary) CPO department for complaints from cotton receipts holders, as well as a special procedure for meeting creditor claims and bankruptcy of CPOs, and others.

Meanwhile, for 12 years of functioning of the Law "On Cotton Industry Development" no endorsements (transfer inscription) have been made on cotton receipts, and banks have never taken cotton receipts as collateral.

Another gross mistake of the law's drafters was the introduction of licensing for warehousing activities that are not typical for cotton processing plants. Under the storage agreement, the custodian is obliged to return the same or similar goods that he or she received without violating their physical and chemical properties and preserving their quantitative and qualitative characteristics.  Cotton processing plants are engaged in very different activities. They receive raw cotton from agricultural producers, process it and return raw material products (cotton fibre, hook, lint, seeds).  In other words, the contract between agriculture producers and the cotton processing plant is a contractual agreement rather than a storage agreement.  Accordingly, the government has been licensing non-existent activities for many years now.

At the initiative of members of the majilis, a new draft law "On Amendments to the Law of the Republic of Kazakhstan "On Development of the Cotton Industry" has been developed. After recognition of the current law as invalid, the cotton industry will be regulated by the norms of legislation in the field of state regulation of the development of agro-industrial complex and rural areas, as well as other norms of the current legislation.

"The abolishment of excessive administrative barriers will make it possible to improve the investment climate of the industry and create conditions for attracting credit resources to the industry, increase cotton crops, improve the quality of cotton and export earnings of Kazakhstan companies. In the future, this will open up opportunities for the development of Kazakhstan textiles, construction and other enterprises for deep processing of cotton," the Kazakhstan Ministry of Agriculture reported.

The draft law is also expected to increase employment in rural areas.


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