Project Finance And PPP in Kazakhstan

  1. INTRODUCTION AND LEGAL FRAMEWORK

    1.1 Please describe the importance of the project finance industry in your jurisdiction.

    Project finance in the strict sense of the term (ie, where the financing structure is based on the performance of the project itself) has not yet developed and is not tested so far in Kazakhstan. 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 (EBRD) or the International Finance Corporation (IFC)) that have somehow benefited from government guarantees, security packages, direct budgetary investments or net private investments.

    It is expected, however, that proper project finance deals will finally take off in Kazakhstan in the near future, firstly because specific legislation on project finance has just been put in place (the Project Finance Law as defined below) and, secondly, after decades of neglect, the Government of Kazakhstan has finally decided to invest at least part of the wealth from commodity exports in long-postponed infrastructure projects.

    Since 1991 Kazakhstan has had to rely on the deteriorating infrastructure it inherited from the Soviet Union. As a result, nearly every piece of public infrastructure (eg, roads, power plants, kindergartens, sewerages) in Kazakhstan requires a different degree of upgrading and/or expansion. Kazakhstan authorities have come to recognise that they cannot finance the necessary investments in public infrastructure from current budgets and that a major part of future financing must flow from the private sector. The need for the inflow of capital is becoming even more pressing in the current downturn in the global financial markets. The importance of project financing as a new tool for raising private capital for the implementation of infrastructure projects in Kazakhstan, therefore, cannot be overemphasised.

    1.2 An overview of the legal framework:

    1.2.1 What general system of law applies in your jurisdiction?

    The Kazakh legal system is based on civil, not common law. Kazakhstan's laws are contained in the Constitution, various codes, laws, edicts, decrees (having the force of law), regulations, instructions, orders and other normative acts of the Republic. Terms, formulations and approaches which are well recognised and frequently used in common law courts have no distinctive meaning under Kazakh laws (for example, concepts of 'representation', 'warranty', 'covenant', or 'indemnity' (the latter is not seen as different from a claim in damages for breach of a contract)). It is uncertain how Kazakh courts would interpret and enforce such provisions.

    The current legal framework governing PPPs and project finance consists of the following key legal acts:

    the Constitution of the Republic of Kazakhstan; the Civil Code; the Law of Kazakhstan 'On Concessions'; the Law of Kazakhstan 'On Investments'; the Law of Kazakhstan 'On State Property'; the Tax Code of Kazakhstan; the Land Code of Kazakhstan; the Budget Code of Kazakhstan; the Law of Kazakhstan 'On Securities Market'; the Law of Kazakhstan 'On Project Finance and Securitisation'; the Law of Kazakhstan 'On Special Economic Zones'; the Law of Kazakhstan 'On Natural Monopolies'; and the Law of Kazakhstan 'On State Support of Industrial Innovative Activity'. In addition, there are various special bylaws and regulations with regard to concessions, including, among others:

    Edict No.294 (of 5 March 2007 of the President of the Republic of Kazakhstan) 'Concerning the List of Facilities Not Subject to Concession'; Decree No.1343 (of 10 December 2010 of the Government of the Republic of Kazakhstan) 'Concerning the Approval of the Rules for Submission, Examination and Selection of Concession Projects, Holding Tender for Concessionaire Selection, Monitoring and Appraisal of Implementation of Concession Projects that are Co-Financed from Budget, and Selection of Concession Projects for Granting and Increase of Limits of State Surety'; Decree No.693 (of 17 July 2008 of the Government of the Republic of Kazakhstan) 'Concerning the Formation of a Specialised Organisation for Issues of Concessions'; Decree No.1326 (of 29 December 2006 of the Government of the Republic of Kazakhstan) 'Concerning the Approval of the Standard Concession Agreements in Various Sectors of the Economy'; Decree No.783 (of 18 August 2006 of the Government of the Republic of Kazakhstan) 'Concerning the Approval of the Criteria for the Concession Projects'; Decree No.1254 (of 23 December 2006 of the Government of the Republic of Kazakhstan), 'Concerning the Approval of the Rules of Maintaining the Register of Signed Concession Agreements and Provided Government Guarantees and Sureties'; Decree No.955 (of 16 October 2008 of the Government of the Republic of Kazakhstan) 'Concerning the Approval of the Rules for the Formation of the List of Concession Projects Which Require Co-Financing'; Decree No.864 of 18 September 2008 of the Government of the Republic of Kazakhstan) 'Concerning the Approval of the Rules for the Formation of Tariffs (Prices, Rates of Levies) or their Maximum Levels for Regulated Services (Goods, Work) of Natural Monopolies Carrying Out Their Activity in Accordance with Concession Agreements'; Order No.95 (of 28 July 2010 of the Minister of Economic Development and Trade of the Republic of Kazakhstan) 'Concerning the Approval of the Requirements to Expert Examination of Concession Proposals, Tender Documentation, and Concession Applications Submitted by Tender Participants in Conducting Tender on Concessionaire Selection, and Draft Concession Agreements'. 1.2.2 Are there any government agencies which assist or regulate the project finance industry? If so, what authority do they have?

    There is no single central government or quasi government agency to regulate the project finance industry or Public Private Partnerships (PPPs) in Kazakhstan.

    The Law 'On concessions' defines the responsibilities of several government bodies but with regards to concession projects (and not other contractual forms of PPPs) only:

    (i) Government of Kazakhstan (among other authorities)

    approves the list of concession projects recommended for implementation in a mid-term perspective; and approves the rules of tender for selection of the concessionaire. (ii) Ministry of Economy Development and Trade (among other authorities)

    engages a specialised organisation (ie, PPP Center as defined below) for concessions. It is also responsible for analysis and review of concession proposals, economic appraisal, feasibility studies, and analysis/review of concession projects submitted by bidders during tender; creates a list of concession projects taking into consideration results of economic feasibility studies and submits it to the Government of Kazakhstan; and approves bid documents and concession agreements and any amendments to them. (iii) Ministry of Finance (among other authorities)

    approves bid documents and draft concession agreement and any amendments thereto, if the object of the concession is state property that belongs to the Republic of Kazakhstan directly (ie, not municipal state property); registers the concession obligations; executes state guarantee agreements and state surety agreements related to concession agreements on behalf of the State; monitors implementation of the concession agreements related to objects of concession that belong directly to the Republic of Kazakhstan as state property; accepts property established (constructed) under concession agreements into state ownership for the Republic of Kazakhstan. (iv) Sector Ministries (among other authorities)

    prepare concession proposal related to the Republican state property taking into account proposals made by individuals and legal entities as a matter of private initiative; act as organisers of a tender with regard to objects of concession related to the Republican state property; sign the concession agreement related to objects of concession that is Republican state property; arrange for transfer of property established (constructed) under concession agreements into state ownership; and monitor implementation of the concession agreements related to objects of concession that belong directly to the Republic of Kazakhstan state property. (v) Local Governments (ie, Akimats) of Regions or Astana or Important Cities (among other authorities):

    prepare proposals for inclusion of objects of municipal property of a corresponding region or city into the list of concession objects, taking into account proposals made by individuals and legal entities as a matter of private initiative; act as organiser of a tender with regards to objects of concession related to the municipal state property as stipulated in the list of concession projects; sign the concession agreement related to objects of concession that is municipal state property; and monitor implementation of the concession agreements related to objects of concession that is municipal state property. Beside the government agencies mentioned above that are playing an active role in concession projects in Kazakhstan, in August 2008 Kazakhstan established its specialised PPP unit called Kazakhstan Public-Private Partnership Centre (the PPP Centre) to facilitate and promote PPP projects. The only shareholder of the Kazakhstan PPP Centre is the Government of the Republic Kazakhstan represented by the Ministry of Economic Development and Trade of the Republic of Kazakhstan. The main activities of the Kazakhstan PPP Centre include economic evaluation of concession and budget projects at each stage of their preparation including evaluation of: investment proposals; feasibility study; bidding documentation; bids of potential concessionaires; and concession agreement. The PPP Centre, in general, plays the role of an external independent advisor of the...

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