How To Attract Private Investments To Develop Infrastructure In Kazakhstan: A Lawyer's Perspective

"The life of the country changed every passing century. Clothing changed, weaponry was perfected, and potato riot were subdued. People learned to shave their beards. The first hot air balloon took flight. Those iron twins — the steamship and the steam locomotive — were built. Automobiles began trumpeting their horns. But the road stayed exactly the same as it had been under the Nightingale the Robber. Humpbacked, covered with volcanic dirt or powdered over with dust as poisonous as insecticidal powder, this domestic road extended past villages, towns, factories and kolkhozes like a six hundred mile long trap. The skeletons of carriages and spent, dying automobiles lay in the yellowing burnt grass along its edges". 'The Little Golden Calf' by I. Ilf and E. Petrov

1. INTRODUCTION

   "This is not Rio de Janeiro" The Little Golden Calf

   Incredible but true fact: the people of the Republic of Kazakhstan are a small community (no more than a single US metropolis) which is literally sitting on huge riches (a vast territory of the country, oil, gas, coal, grain and God knows what else) an yet is still forced to ride on rough roads, drink water from the rust-eaten pipes and consume electricity from dilapidated electrical networks built up, as they say, 'when queen Ann was alive'.

   Although Kazakh authorities report on the state programs and infrastructure development projects with incredible frequency (e.g. so-called 'clusters', 'State Program of Accelerated Industrial and Innovative Development' (SPFIID), 'Ak Bulak' state program, 'Business Road Map - 2020') things haven't budged an inch.

   However, it is hoped that the ruling establishment of the Republic, finally, came to an understanding, that if it further allows the bureaucracy to plunder the budgetary funds allocated under another government program, the country may cross the point of no return.

   Moreover, there is, evidently, finally an understanding that infrastructure development using only state funds is impossible and ineffective, and that favourable conditions must be created to attract private capital.

   One of the principal conditions for attracting foreign and domestic private capital for the infrastructure projects development is an adequate legal framework in a host country which allows to structure bankable projects based on the principles of project finance and public-private partnerships.

   Interestingly, from the standpoint of the legal framework, in the past two years Kazakhstan has enacted very good laws the analysis of which is the subject of this article.

2. LEGISLATIVE INNOVATIONS

   "Those are the stern laws of life. Or, to put it more briefly, life dictates its own stern laws to us". The Little Golden Calf

   (i) Project Finance Law

   Project finance in the strict sense of the term (i.e., financing of investment projects when the source of the debt instruments service are the cash flows generated by the project) has not yet been tested so far in Kazakhstan in the absence of the appropriate legal framework. So-called "project finance" transactions that took place in Kazakhstan so far, in fact, were either conventional bank loans mostly by international financial institutions like the European Bank for Reconstruction and Development, Asian Development Bank, or the International Finance Corporation (IFC) that have somehow benefited from government guarantees and/or security packages of the borrower.

   However, the Law of the Republic of Kazakhstan No. 539-IV, dated 12 January 2012, "On Introducing Amendments to Certain Legislative Acts of the Republic of Kazakhstan in relation to the Project Finance Issues" came into force on 6 February 2012. It introduced the concept of "project finance" and other concepts of international practice into the legislation by amending and supplementing the Law "On Securitisation" (now the Law of the Republic of Kazakhstan No. 126-III, dated 20 February 2006 "On Project Finance and...