Natural Monopolies Regulation In Kazakhstan

Importance of so-called natural monopolies in Kazakhstan can be seen in the fact that some of Kazakhstan's largest and most powerful corporate empires, such as the Kazakhstan Electricity Grid Operating Company (KEGOC) (national transmission grid operator), KazTransOil (national oil transporter in Kazakhstan accounting to 80% of all oil transported in the country) and National Company Kazakhstan Temir Zholy (the national railway company of Kazakhstan) are officially subject to natural monopoly regulation. The development of natural monopoly regulation in Kazakhstan can, therefore, be seen as an important test case for regulatory reform issues in countries with developing market economies.

Recently Government of Kazakhstan declared its intention to introduce competition into potentially competitive areas of the natural monopoly sectors and its readiness to improve the investment climate and to attract private investments (including through PPPs) into the housing and utilities sector, as well as other industries subject to natural monopoly regulation.

If successful, these initiatives would increase bankability and investment attractiveness of many projects in Kazakhstan.

Below is a brief recap for potential foreign investors and lenders of a current legal framework for natural monopolies in Kazakhstan, in particular description of the current tariff regulation.

Definition of Natural Monopoly in Kazakhstan

The general definition is set forth in article 3(15) of the Law of the Republic of Kazakhstan 'On Natural Monopolies and Regulated Markets' No. 272-I dated 9 July 1998 (the 'NML') which states as follows: "natural monopoly shall mean the condition of services (goods, works) market, where the creation of competitive conditions for satisfying demand for a particular type of services (goods, works) is impossible or economically inexpedient due to the technical peculiarities of production and provision of the given type of services (goods, works)."

As article 1 of the NML states, that this law is aimed at (i) determination of the legal framework for the state control and regulation of activities in the natural monopolistic spheres and (ii) achievement of a balance of interests of the consumers and holders of natural monopolies. In other words, the purpose of this legislation is not only to regulate natural monopolies for the public benefit, but to mediate between the competing interests of all the parties involved, including those of the holders...