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DE RUEHTA #1265/01 2080419
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O 270419Z JUL 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5885
INFO RUCNCIS/CIS COLLECTIVE 1796
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
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RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1731

UNCLAS SECTION 01 OF 04 ASTANA 001265 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB, OES/PCI (PHUDAK, NFITE) 
MOSCOW FOR ESTH (DKLEPP) 
 
E.O. 12958: N/A 
TAGS: PGOV ECON SENV KZ
SUBJECT:  KAZAKHSTAN:  NEW UNIFIED PROCUREMENT SYSTEM FOR 
PHARMACEUTICALS 
 
ASTANA 00001265  001.2 OF 004 
 
 
¶1. (U) Sensitive but unclassified.  Not for Public Internet. 
 
¶2. (SBU) SUMMARY: According to the Ministry of Health's 
Pharmaceutical Control Committee, Kazakhstan's plan to consolidate 
most state procurement of pharmaceuticals under one provider will 
stimulate the economy and increase domestic pharmaceutical 
production.  The World Bank expressed reservations about the new 
system, saying the government is reforming institutions too rapidly 
and not waiting for the World Bank's own health reform program to be 
approved.  American Company UniPharm predicted that it will be 
difficult to establish an efficient distribution system, which will 
require setting up a huge storage capacity and sending drugs even to 
small villages in remote regions.  UniPharm did not think the new 
plan will attract many foreign investors, especially those that 
would make "high-tech" insulin and antibiotics.  END SUMMARY. 
 
NEW PROCUREMENT LAW ALSO DESIGNED TO ATTRACT INVESTMENT 
 
¶3. (SBU) Kazakhstan recently implemented a new unitary system to 
consolidate most state procurement of pharmaceuticals under a single 
distributor/provider.  In addition, President Nazarbayev tasked the 
government in May to increase the market share of local 
pharmaceutical producers to 50 percent by 2014. 
 
¶4. (SBU) According to Syzdyk Baimukhanov, Chairman of the Ministry 
of Health's Pharmaceutical Control Committee, the government hopes 
to save up to 40 percent of current budget expenditures on 
pharmaceuticals as well as stimulate domestic production.  He said 
the government will give a purchase guarantee -- a five-year 
contract at a fixed price -- plus tax waivers to domestic producers. 
 Baimukhanov said foreign companies (like Pfizer and Merck, for 
example) that choose to invest in Kazakhstan and produce locally 
will be fully regarded as domestic producers and will receive the 
same purchase guarantee and tax waivers.  He said the main goal of 
the new plan is to attract investment to Kazakhstan and to produce 
inside Kazakhstan rather than continue to import expensive 
pharmaceuticals from abroad. 
 
NATIONWIDE PILOT PROJECT UNDERWAY 
 
¶5. (SBU) Baimukhanov said a nationwide pilot project for the 
purchase and delivery of pharmaceuticals began in May.  Distribution 
costs will not be a major factor in the overall cost of 
pharmaceuticals, he said, and early results show a savings of up to 
45 percent in budget expenses.  Public hospitals will place their 
orders with the central agency, which then purchases pharmaceuticals 
for public hospitals, taking advantage of bulk purchasing to lower 
costs.  Hospitals can continue to order specialized medicines as 
needed throughout the year.  There will still be a private sector 
for pharmaceuticals because the unitary procurement system is 
expected to handle only about 70 percent of total purchases for 
public hospitals. 
 
SHOULD ALSO REDUCE OBLAST-LEVEL CORRUPTION 
 
¶6. (SBU) Baimukhanov repeatedly cited Malaysia and Britain as models 
of efficiency.  He said centralized procurement will mean less 
illegal redirection of pharmaceuticals and less local corruption 
from the previous system, where each oblast wanted to preserve its 
own non-transparent system of procurement, showing favoritism to 
certain local "distributors" who were able to purchase 
pharmaceuticals with government budget money and then sell them on 
the market, making a considerable profit. 
 
¶7. (SBU) COMMENT: Baimukhanov is a former president of KhimPharm, 
the largest local producer of pharmaceuticals.  KhimPharm won the 
pilot tender for production.  StoPharm, a private distributor, won 
the pilot tender to deliver medicines, underbidding other bidders by 
40 percent.  StoPharm has been accused in the past of not fulfilling 
contractual obligations and winning tenders unfairly.  The Ministry 
of Health even sent a letter to the Committee of Financial Control 
 
ASTANA 00001265  002.2 OF 004 
 
 
and State Procurement asking that this company be put on a list of 
unreliable service providers.  END COMMENT. 
 
WORLD BANK HAS CONCERNS 
 
¶8. (SBU) World Bank Social Project Coordinator Bibigul Alimbekova 
and Health Sector Technology Transfer and Institutional Reform 
Project Administrative Coordinator Ninel Kadyrova told Regional 
Environmental Officer that they want to "step back" and wait before 
commenting further.  Alimbekova said the government's intention is 
to protect the local population and provide the best medical product 
at the best prices possible.  However, the government did not wait 
for the government's final agreement on the World Bank's own overall 
health reform program, part of which was to reform the 
pharmaceutical market before launching their unitary procurement 
system. 
 
¶9. (SBU) Alimbekova said the World Bank believes that institutional 
reform cannot be done so quickly.  She said the government wants to 
do this now and not wait, and it needs a fast turn-around, because 
it has an urgent agenda.  She said Kazakhstan wants to be among the 
top competitive nations in the world, but she believes it cannot 
complete the entire pharmaceutical reform agenda in such a short 
time.  She said "instant reform" cannot be done quickly, even if the 
order comes from the top.  There is still a "Soviet mentality" that 
impels people to carry out these orders "or die (in the process)," 
she added. 
 
¶10. (SBU) According to Kadyrova, the World Health Organization 
recommends that centralized procurement of pharmaceuticals comprise 
at least 50-60 percent of a country's procurement for inpatient care 
in order to take advantage of bulk purchases and, therefore, lower 
prices.  Hospitals can make their bulk purchases through centralized 
procurement and smaller purchases can be done locally. 
 
SYSTEM'S AUTHOR CONVINCED STATE WILL BENEFIT 
 
¶11. (SBU) Serik Sultanov, President of the "PharmMed Industry of 
Kazakhstan" Association, member of President Nazarbayev's 
Entrepreneur's Council, and an advisory member of SK-Pharmacia (the 
designated unitary distributer), told Regional Environmental Officer 
that he single-handedly authored the new unitary distributor 
initiative.  He said he visited Malaysia in 2007 to learn about 
their single-operator system and was struck by how much more 
efficiently and cheaply Malaysia procured medicines than Kazakhstan. 
 It spent about the same amount of money for a population almost 
twice as large and procured 70 percent more medicines than 
Kazakhstan. 
 
¶12. (SBU) Sultanov said Kazakhstan's pharmaceutical market is about 
one billion dollars, 50 percent of which is state procurement of 
medicines.  Under the current system, local distributers now 
purchase directly from producers, using state budget allocations, 
and then make a 100 percent profit selling the medicine at retail. 
This leads to excessive corruption, he said, whereby state 
procurement has become a "feeding trough" for government officials. 
For example, a hospital's head doctor can set up his own 
distributing company and then give it his hospital's contract to 
provide medicine.  By contrast, under the new system, the single 
distributor will purchase medicines directly from producers, thereby 
allowing them to avoid excessive retail margins. 
 
SK-PHARMACIA EXPLAINS ITS ROLE 
 
¶13. (SBU) SK-Pharmacia Deputy Director General Aibar Burkitbayev 
told Regional Environmental Officer that the Ministry of Health 
previously had national and regional programs to procure medicines 
for public hospitals.  A Ministry of Health survey showed 
significant regional variances in the prices of medicines, he said, 
resulting in huge budget losses because of the regional disparity in 
prices for the same medicines.  Burkitbayev said the Kazakhstani 
 
ASTANA 00001265  003.2 OF 004 
 
 
system of pharmaceutical state procurement is not transparent, 
because the regional departments of health do not report to the 
Ministry of Health on how the regional money is spent. 
SK-Pharmacia's goal is to save the government money, support local 
producers, and attract investors to set up domestic production 
facilities. 
 
TENDER PROCESS FAVORS LOCAL COMPANIES 
 
¶14. (SBU) Burkitbayev explained the elaborate tender rules designed 
to give local tender participants unprecedented preferences and 
admitted that foreign producers are in a disadvantageous position 
compared with local producers.  However, this measure is designed to 
encourage foreign companies to set up production facilities in 
Kazakhstan.  He cited one foreign company that successfully won a 
tender:  Nobel Almaty Pharmaceutical Factory won the tender for two 
lots, and it is 100 percent Turkish. 
 
GOVERNMENT SPEEDS UP IMPLEMENTATION 
 
¶15. (SBU) Burkitbayev said the original concept of the 
single-distributor system stipulated a gradual transition from the 
current procurement system.  However, the Government decided to 
speed up the process, though he did not explain why.  This year, 27 
out of 600 medicines will be purchased for public hospitals through 
the single distributor system, and SK-Pharmacia selected one private 
distributor to deliver the medicine to hospitals across the country. 
 In 2010, SK-Pharmacia will procure all 600 medicines and will 
contract with several private distributors to deliver purchased 
medicines across the country, since no one private distributor is 
capable of handling all the deliveries nationwide. 
 
AMERICAN COMPANY SAYS DISTRIBUTION IS THE PLAN'S WEAK LINK 
 
¶16. (SBU) Vadim Efimenko, Kazakhstan representative for the American 
pharmaceutical company UniPharm, which sells nutritional supplements 
and over-the-counter medicines, told Regional Environmental Officer 
that the key to the government's new procurement system is 
distribution.  He predicted that it will be difficult to set up an 
efficient distribution system, which will require a huge storage 
capacity and must send drugs even to small villages in remote 
regions.  It takes UniPharm up to three weeks to deliver products to 
remote villages.  Efimenko said distribution costs typically add 25 
percent to the final cost of medicines.  He believed the government 
could further reduce pharmaceutical costs by reducing customs duties 
and VAT, currently set at 10 percent and 13 percent. 
 
¶17. (SBU) Efimenko was critical of the government's five-year 
guaranteed, fixed-price contract.  The recent devaluation of the 
tenge caused costs to jump 25 percent, and some of UniPharm's 
American suppliers are demanding that UniPharm reimburse them for 
the losses due to devaluation.  He believes that such long-term 
contracts pose a serious risk to potential investors unless there is 
a mechanism in the contracts that can provide compensation due to 
devaluation. 
 
PLAN AS ENVISIONED WILL NOT ATTRACT INVESTMENT 
 
¶18. (SBU) Efimenko also questioned the nature of the investment that 
the new program would attract.  Producers of low-tech medicines 
(vitamins, energy supplements, etc.) can easily set up shop. 
However, high-tech pharmaceuticals (certain antibiotics, insulin, 
tuberculosis medicines, etc.) will require substantial investment. 
The Central Asian market is still relatively small, and potential 
investors will have trouble justifying an investment in Kazakhstan. 
He noted that approximately 10,000 pharmaceutical products are 
registered in Kazakhstan, but only 3,000, or less than one third, 
are sold on a regular basis. 
 
¶19. (SBU) Efimenko agrees that the Kazakhstani market for 
pharmaceuticals is stable and he foresees regular growth in the next 
 
ASTANA 00001265  004.2 OF 004 
 
 
few years.  However, UniPharm is not planning to invest because the 
population base is too small and labor costs relative to Asia are 
too high. 
 
FAGIN