New Local Content Approach

[General overview of Kazakhstan in World Mineral Industry.

Kazakhstan ranks second only to Russia among the countries of the CIS in its quantity of mineral production. It is endowed with large reserves of a wide range of metallic ores, industrial minerals, and fuels, and its metallurgical sector is a major producer of a large number of metals from domestic and imported raw materials. The economy of Kazakhstan has been growing owing to the state policy of attracting foreign investment into its extraction industries. Kazakhstan was the first CIS country assigned with investment sovereign rating, and the World Bank has listed Kazakhstan among the 20 most attractive countries for investment.1 More than US $140,7 billion was invested in Kazakh economy since 1994 to 2009.]

  1. Introduction

    What a potential investor deciding whether to buy a profitable oil and gas or solid minerals assets in Kazakhstan should know? Before the middle of 2010, the rules of entry into the Kazakh subsoil market were rather simple. Except for political concerns in rare cases, potential investors should estimate planned expenses and income, decide the question where necessary operational funds will be taken from, make relevant technical and legal due diligence, buy the asset, resolve the staff issues and commence working.

    But since mid 2010 investors faced the new important state factor which should be taken very seriously.

    In June 2010 Kazakhstan adopted a new Law on Subsoil and Subsoil Use (the "Subsoil Law"), which replaced the Subsoil Law 1995.

    Since adoption of this Law a new trend appeared in relationships between subsoil users and regulatory authorities. Subsoil users found out that... they cannot spend income derived from their investments on operational activity in the way they would like. After the new law has been introduced, if a subsoil user wants to buy certain equipment, or hire a subcontractor for drilling, processing or other subsoil-related activities, he is obliged to follow the Procurement Rules2, approved by the state. It may be therefore possible that the investor may have to choose a different contractor from the one he originally intended to hire; it will be the one who offers the lowest bid from all other contractors.

    What is this new trend connected to? Why did it appear? What are the roots of such regulation of subsoil users' procurement process by the state?

    The answer is simple. Kazakhstan decided to follow other countries' experience in order to develop the local content.

    This articles will shortly describe the main points relating to this issue.

  2. General overview

    During the recent one and a half year one could notice a sharp increase in the interest of subsoil users and their contractors related to the issue of Kazakh content in the procurement of goods, works and services. In the first instance it was connected with changes to subsoil and subsoil use legislation, as well as with toughening of the Kazakh government's policy with regard to development of Kazakh content.

    It is worth noting that at the international level the term which has a similar meaning to "Kazakh content" has already been known among subsoil users for several decades as the "local content". In general, this term refers to use and development of local production and labour force, as well as technology transfer. Such development is ensured through creation of legal mechanisms obliging subsoil users to use local goods, works and services in their operations, as well as to increase proportion of local employees among their staff and their contractors' staff. Let us see how specifically the "local content" provisions are applied in the Republic of Kazakhstan.

  3. History

    Strictly speaking, the term "Kazakh content" was first introduced to the subsoil legislation on 1 December 2004 together with the terms "Kazakh manufacturer" and "Kazakh origin" (goods, works and services of Kazakh origin). However, until the adoption of the Law on Amendments to Some Legislative Acts on Kazakh Content, dated 29 December 2009 (unofficially called "Kazakh Content Law"), this term did not raise much attention, since the Kazakh content provisions were essentially declaratory by nature.

    In particular, despite the fact that the rules for purchasing goods, works and services ("GWS") by subsoil users were first approved by the Kazakh Government Decree in the summer of 2002, the majority of subsoil users did not actually apply these Rules and kept purchasing GWS at their discretion.

    However, since the enactment of the Kazakh Content Law the rules of the game between the Government and subsoil users changed dramatically. Such a change is, for instance, reflected in the fact that since the second half of 2010 until now, almost all subsoil users have been and procuring GWS...

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