IFSWF Santiago Principles

Santiago Principles Self-Assessment

SK 2019

    Institutional Framework and Governance Structure.
    Principle 6

    6. The governance framework for the SWF should be sound and establish a clear and effective division of roles and responsibilities in order to facilitate accountability and operational independence in the management of the SWF to pursue its objectives.

    The Law on SWF sets up the following governance framework in the Fund:

    Superior Body – Sole Shareholder

    Governing Body – Board of Directors

    Executive Body – Management Board

    Each level of governance has clearly determined competencies and responsibilities reflected in the Law on SWF.

    According to the Law on SWF, one of the key principles of interaction between the Sole Shareholder of the Fund and the Fund is that interference by the public authorities to the operational activities of the Fund or its Portfolio Companies is prohibited except for cases provided by the laws of the Republic of Kazakhstan.

    According to the provisions of the Corporate Governance Code, the Government of RoK participates in the management of the Fund and group of the Fund only through implementation of the power of the Sole Shareholder of the Fund provided for by the Law on SWF and the Fund Charter and representation in the Board of Directors of the Fund.

    https://sk.kz/about-fund/corporate-governance/

    7. The owner should set the objectives of the SWF, appoint the members of its governing body(ies) in accordance with clearly defined procedures, and exercise oversight over the SWF’s operations.

    In compliance with the Law on SWF, the Fund Charter the decisions on approval of the Charter of the Fund, Corporate Governance Code, long-term strategy, annual financial reports as well as appointment of members of the Board of Directors fall within the exclusive competence of the Sole Shareholder of the Fund – the Government of RoK. At the same time, according to the Law on the SWF the Sole Shareholder of the Fund appoints the CEO of the Fund. Decisions on disposal of shares of companies on the list, determined by the Sole Shareholder of the Fund and transfer of these shares in trust management as well as decision on the liquidation, reorganization of companies on the list, determined by the Sole Shareholder of the Fund also fall within the exclusive competence of the Sole Shareholder of the Fund.

    On April 15, 2015, the Government of RoK approved a new Corporate Governance Code aimed to ensure long-term value growth and sustainable development of the Fund. The Corporate Governance Code is disclosed on the Fund website and available at https://sk.kz/about-fund/regulatory-and-legal/

    8. The governing body(ies) should act in the best interests of the SWF, and have a clear mandate and adequate authority and competency to carry out its functions.

    The Board of Directors sets policies aimed at achieving the objectives - investment policy, risk management policy, corporate social responsibility policy, information disclosure policy, debt policy and others. The Board of Directors of the Fund has reasonable and adequate authority to carry out its functions. It is empowered to approve and to monitor medium-term development plans, to approve of the annual budget, to increase in the Fund's liabilities, to acquire shares of other entities. The Board of Directors establishes Committees under the Board of Directors and appoints members of the Management Board of the Fund, except for the CEO of the Fund. A special minimum standard of competency for the members of the Board of Directors, as well as Board of Directors's role, responsibilities, the terms of office are set in the Regulations on the Board of Directors of the Fund.

    The Fund’s Board of Directors consists of members of the Government of RoK, CEO, independent directors and other persons. The Chairman of the Fund's Board of Directors is, ex officio, the Prime Minister of the Republic of Kazakhstan. The size of the Fund's Board of Directors is determined by the Charter of the Fund; the number of Independent Directors should be at least two-fifths of the total number of member of Board of Directors of the Fund. The role and functions of the Chairman of the Fund's Board of Directors and CEO of the Fund are clearly segregated and set out in the Fund's Charter. In compliance with the Law of the Republic of Kazakhstan No.156-VI dated May 24, 2018, since January 1, 2020 the size of the Board of Directors shall be formed of the number of following persons: the First Head of the Central Competent Authority on State Planning – the representatives of the Fund’s Sole Shareholder, Assistant to President of the Republic of Kazakhstan, four independent directors and CEO of the Fund. The Chairman of the Fund’s Board of Directors shall be elected by secret voting of the number of independent directors by a majority of votes of the total number of members of the Board of Directors.

    Members of the Fund's Board of Directors who are state officials shall not receive separate remuneration for their membership in the Board of Directors and its Committees. 

    https://sk.kz/about-fund/corporate-governance/

    9. The operational management of the SWF should implement the SWF’s strategies in an independent manner and in accordance with clearly defined responsibilities.

    In compliance with the Law on SWF, the Government of the RoK – the Sole Shareholder of the Fund who heads the system of executive bodies – does not interfere in the operational activities of the Fund, except as required by laws and acts of the President of the Republic of Kazakhstan. The Government of the RoK administers the Fund solely through the exercise of the powers of the Sole Shareholder provided for by the Law on SWF and the Charter of the Fund, as well as by representing the members of the Government of the RoK on the Board of Directors of the Fund.

    The Fund’s Development strategy for 2018-2028 was preliminarily approved by the Fund’s Management Council (Minutes No.18-01-7.5 dated April 19, 2018) and was finally approved by the Decree of the Government of RoK No.656 dated October 17, 2018. The Fund’s Management Council preliminary approves the Fund’s Development Strategy and reviews the Fund’s annual report on the progress of its implementation, and develops proposals on the priority sectors of the economy in which the Fund operates. The Sole Shareholder of the Fund, the Government of the RoK, finally approves the Fund’s Development Strategy and makes changes and additions to it. The Fund’s Board of Directors performs the control for implementation of Fund’s Development Strategy and executes its monitoring. According to the Corporate Governance Code, the Fund’s Management Board is also in charge of the implementation of the Development Strategy, holds in-person meetings and discusses the issues on its implementation.

    https://sk.kz/about-fund/corporate-governance/

    The Law on SWF and Corporate Governance Code are available at https://sk.kz/about-fund/otchety-i-plany/

    10. The accountability framework for the SWF’s operations should be clearly defined in the relevant legislation, charter, other constitutive documents, or management agreement.

    The accountability framework of the Fund operations is defined by the Law on SWF, Charter of the Fund and Corporate Governance Code.

    The Law on SWF, Charter of the Fund and Corporate Governance Code are available at https://sk.kz/about-fund/otchety-i-plany/

    11. An annual report and accompanying financial statements on the SWF’s operations and performance should be prepared in a timely fashion and in accordance with recognized international or national accounting standards in a consistent manner.

    The Fund issues Annual Report according to the Corporate Governance Code, Kazakhstan Stock Exchange Listing Rules and best international standards. Consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and in timing set by the Law on JSC.

    Annual report and consolidated financial statements are available at https://sk.kz/about-fund/otchety-i-plany/

    12. The SWF’s operations and financial statements should be audited annually in accordance with recognized international or national auditing standards in a consistent manner.

    The Fund's consolidated financial statements are audited annually by the external auditor as well as financial statements of Portfolio Companies included in the consolidation. The audit is conducted in accordance with International Standards on Audit (ISA). The selection of the external auditor is carried out in accordance with the Procedure for Auditor Selection, approved by the Board of Directors of the Fund. The Procedure provides transparency of procedures,  auditor's compliance with the requirements for qualification and competence.

    https://sk.kz/about-fund/otchety-i-plany/

     

    13. Professional and ethical standards should be clearly defined and made known to the members of the SWF’s governing body(ies), management, and staff.

    As it is fixed in the Corporate Governance Code and the Code of Conduct, the Fund should comply with the highest ethical standards and implement appropriate procedures to ensure that all employees and partners of the Fund comply with these standards.

    The Fund established professional and ethical standards and made it known to the governing board, management and employees. In order to strengthen these standards, in 2016 the Fund introduced Compliance and Ethics function, hired compliance officers and introduces broad compliance and ethics program.   

    In the course of operations and transformation of the Fund, in 2017 corporate values in form of five fundamental principles – PRIME (P – Partnership, R – Respect, I – Integrity, M – Meritocracy, E – Excellence) were defined.

    The Code of Conduct is available at https://sk.kz/about-fund/regulatory-and-legal/

    14. Dealing with third parties for the purpose of the SWF’s operational management should be based on economic and financial grounds, and follow clear rules and procedures.

    The Fund is governed by its own Procurement Rules that clearly regulate activities when carrying out procurement procedures. Procurement Rules’ principles, inter alia, are as follows:

    1. openness and transparency of the procurement process;
    2. optimal and efficient money spending used for procurement;
    3. purchase of qualitative goods, works, services.

    Further interaction with procurement winners shall be defined by a relevant contract, including own standard forms of contracts that ensures regular and equal interactions with suppliers of different procurement.

    15. SWF operations and activities in host countries should be conducted in compliance with all applicable regulatory and disclosure requirements of the countries in which they operate.

    The Fund conducts activities in other countries in compliance with all applicable regulatory and disclosure requirements of the countries to be adopted in these countries.

    16. The governance framework and objectives, as well as the manner in which the SWF’s management is operationally independent from the owner, should be publicly disclosed.

    The governance framework and objectives are defined and publicly disclosed in the Law on SWF, Agreement on Interaction and Corporate Governance Code. The Law on SWF states that “no interference allowed by public authorities in the operational activities of the Fund and its Portfolio Companies, except for cases stipulated by laws of the Republic of Kazakhstan”.

    https://sk.kz/about-fund/regulatory-and-legal/

    17. Relevant financial information regarding the SWF should be publicly disclosed to demonstrate its economic and financial orientation, so as to contribute to stability in international financial markets and enhance trust in recipient countries.

    The Fund audited consolidated and separate financial statements supported by required analysis are publicly disclosed and available on the Fund website and Financial Statement Depository of the Ministry of Finance of the Republic of Kazakhstan.

    The Fund audited consolidated financial statements are also available on the Kazakhstan Stock Exchange (KASE).

    https://sk.kz/about-fund/otchety-i-plany/

    Principle 18

    18. The SWF’s investment policy should be clear and consistent with its defined objectives, risk tolerance, and investment strategy, as set by the owner or the governing body(ies), and be based on sound portfolio management principles.

    18.1. The investment policy should guide the SWF’s financial risk exposures and the possible use of leverage.

    18.2. The investment policy should address the extent to which internal and/or external investment managers are used, the range of their activities and authority, and the process by which they are selected and their performance monitored.

    18.3. A description of the investment policy of the SWF should be publicly disclosed.

    The Investment Policy was approved by the Board of Directors of the Fund in 2017. The Investment Policy establishes the uniform requirements for investment operations of the Fund and has a clear objective: the investment operations of the Fund are aimed at increasing the value of the Portfolio Companies in the long term in compliance with the Law on the SWF. The Fund has implemented appropriate risk management regulated by internal documents. The Investment Policy does not give the detailed investment strategy per se but provides the key approaches in the implementation of investment activities that take into account the following activities: strategic planning, corporate governance, the medium-term planning, risk management, investor relations, and process monitoring.

    The Investment Policy describes the process of how the Fund will analyze and monitor the risks of investment projects. In the process of making investment decisions, the Fund and portfolio companies take into account the impact of these investments on the level of the financial stability of companies and the Fund, respectively. The financial sustainability of the Fund and portfolio companies are managed by setting and monitoring target and threshold values of financial sustainability ratios, such as Debt / EBITDA, Debt / Equity, and EBITDA / Interest expense. The Fund adheres to the policy of sound financial management by limiting new borrowing and/or providing financial support in the event of a possible violation of financial covenants.

    Within the framework of the new Development Strategy, the Fund intends to invest beyond the Republic of Kazakhstan. A specifically allocated pool of investments to carry out international investments aimed at diversification of the current portfolio will allow the Fund to increase and preserve the wealth for the future generations. At the first stage of investment, it is planned to attract external fund managers. Therefore, it is planned to adjust the Investment Policy concerning the degree of use of the external managers, their powers as well as the selection process and control over their activities.

    The Investment Policy of the Fund is not a public document. However, the main principles and guidelines of the policy are disclosed in the Fund's Development Strategy, which can be downloaded on the Fund's website: https://www.sk.kz/about-fund/regulatory-and-legal/

    19. The SWF’s investment decisions should aim to maximize risk-adjusted financial returns in a manner consistent with its investment policy, and based on economic and financial grounds.

    19.1. If investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed.

    19.2. The management of an SWF’s assets should be consistent with what is generally accepted as sound asset management principles.

    According to the Investment Policy and Development Strategy, investments of the Fund and Portfolio Companies should be carried out in accordance with the principle that internal rate of return on investments should be higher than their cost of equity (CoE). This indicator is approved by the decision of the Management Board of the Fund on an annual basis. Each portfolio company is provided by its own level of CoE based on the Capital asset pricing model (CAPM).

    In compliance with the new Development Strategy, the Fund and its Portfolio Companies will not implement low-profit projects or projects with a rate of return below the CoE. In case of the Government of RoK initiatives on implementation of such projects, the Fund together with the Government of RoK shall determine the pool of projects and value thereof, which will be subsequently financed by the Fund taking into consideration financial stability of the Fund and portfolio companies, through other distributions to shareholder according to International Financial Reporting Standards.  According to the Corporate Governance Code, low-profit and socially significant projects are the subject of public disclosure in annual reports of the Fund and Portfolio Companies. The Corporate Governance Code is based on the legislation of the Republic of Kazakhstan, Organization for Economic Cooperation and Development (OECD) Guidelines for State-Owned Enterprises, UK Corporate Governance Code and international best practices

    20. The SWF should not seek or take advantage of privileged information or inappropriate influence by the broader government in competing with private entities.

    The Fund does not seek to use confidential information or inappropriate influence in competing with private entities. One of the principles by which the Fund is governed in seeking promising investment projects is observations of the rules of Yellow Pages, according to which the Fund should not compete with private entities. This principle is stated in the internal documents of the Fund regulating investment activities. Firstly, the Fund invests in the projects that may contribute to the development of related industry and private business.

    21. SWFs view shareholder ownership rights as a fundamental element of their equity investments’ value. If an SWF chooses to exercise its ownership rights, it should do so in a manner that is consistent with its investment policy and protects the financial value of its investments. The SWF should publicly disclose its general approach to voting securities of listed entities, including the key factors guiding its exercise of ownership rights.

    The Fund exercises its ownership rights in portfolio companies through the segregation of duties set in the Fund Charter, Law on SWF, Corporate Governance Code and Charters of portfolio companies. 

    https://sk.kz/about-fund/regulatory-and-legal/

    22. The SWF should have a framework that identifies, assesses, and manages the risks of its operations.

    22.1. The risk management framework should include reliable information and timely reporting systems, which should enable the adequate monitoring and management of relevant risks within acceptable parameters and levels, control and incentive mechanisms, codes of conduct, business continuity planning, and an independent audit function.

    22.2. The general approach to the SWF’s risk management framework should be publicly disclosed.

    23. The assets and investment performance (absolute and relative to benchmarks, if any) of the SWF should be measured and reported to the owner according to clearly defined principles or standards.

    As part of the Development Plan, the Fund’s Board of Directors is provided with information regarding the performance of portfolio companies and the Fund’s investments (Net Income, ROACE, ROI, NAV) for the year and in comparison with previous periods.

    24. A process of regular review of the implementation of the GAPP should be engaged in by or on behalf of the SWF.

    This Self-Assessment Report of the Fund on compliance with Santiago Principles is the third self‐assessment made after 2014 and 2016. The Fund plans to review self-assessment on a regular basis every two years.