Kazakhstan: Brief Summary Of The Major Novelties Of The Draft PPP Law In Kazakhstan

Last Updated: 1 August 2014
Article by Shaimerden Chikanayev

A draft Law of Kazakhstan 'On Public-Private Partnership' (the 'Draft PPP Law') has been prepared as per initiative of the Ministry of Economy and Budget Planning of Kazakhstan and, to the best of our knowledge, is now under the consideration of the relevant state authorities and the Parliament of Kazakhstan.

These are the key developments associated with the Draft PPP Law:

  • In general, the Draft PPP Law is rather generic so it is not clear why it is needed as a separate legal act in the first place, if there is already existing Concession Law that provides for concept of "PPPs' and legal framework for implementation of PPPs and many provisions of the Draft PPP Law duplicate provisions of the Concession Law, Investment Law and other laws of Kazakhstan. Ostensible purpose of adoption of this Draft PPP Law is to secure the basic concepts, principles, types of public - private partnerships, as well as creating the necessary legal basis for the further development of public - private partnership in the Republic of Kazakhstan.
  • The Draft PPP Law provides a concept of the "public-private partnership" that is different from current definition in the Concession Law where it is currently defined as a "form of cooperation between the state and subjects of private business that is directed toward financing, construction, reconstruction and/or exploitation of social infrastructure and vital objects".
  • The Draft PPP Law as a 'public-private partnership' understands 'a form of cooperation between the state and private business entities, based on the pooling of resources (cash and (or) other property, other knowledge, experience, skills) and the allocation of risks (including risks of financing, construction ensuring availability of or demand for objects of public-private partnerships or appropriate public services and associated risks), carried out in accordance with the contract through competitive procedures agreement on public-private partnership aimed to finance capital investments and (or) scientific research and (or) development activities, as well as creation, reconstruction and (or) the operation of objects of public-private partnerships to address the public and other socially significant problems'. Definition of PPP in the Draft PPP Law is, evidently, broader and, unlike current definition of PPP in the Concession Law, makes it clear that not any relations between State and private business, but only relations based on (i) pooling of resources and (ii) sharing the risks between the State and private business can be recognised as a PPP.
  • The PPP Law established new definitions of the "state partner" (i.e. the Republic of Kazakhstan represented by (i) the Government of Kazakhstan or (ii) relevant Akimat (local executive body) or (iii) authorized by the Government of Kazakhstan or Akimat state agency or so-called 'state controlled company' as defined below) and a 'private partner' (i.e. a company or a private entrepreneur or a consortium) as counterparties to the so-called 'PPP agreement'1
  • Importantly, the Draft PPP Law allows a group of legal entities and/or private entrepreneurs as a 'consortium' to act as the 'private partner' to the PPP agreement (as of today it is prohibited for concessions) but every member of such consortium can be participant of only one consortium while bidding for the same project.
  • Certain legal entities, in particular, (i) state agencies, (ii) state enterprises, (iii) non-profit organizations, (iv) so-called 'state controlled companies'2 and (v) so-called 'companies with non-dominant state participation'3 (unless such company with non-dominant state participation' pitches as a part of consortium), cannot act as a private partner of the PPP Agreement.
  • Companies with non-dominant state participation can act as a third party of the PPP Agreement, including as a lender, guarantor or consultant.
  • Draft PPP Law also provides following distinctive characteristics of the PPP (apparently if at least of these characteristics would be not applicable to a potential project, it would NOT be recognised as PPP project for the purposes of the Draft PPP Law):
    • It shall be a long-term relation (from 5 years to 30 years);
    • It shall be documented in the written PPP Agreement;
    • It shall be based on sharing by the state partner of certain risks with the private partner;
    • It shall presuppose investments by a private partner from its legal sources of funding.
  • Draft PPP Law suggests theoretical possibility of unilateral assignment of rights and obligations of the company that is a private partner under the PPP Agreement to another company as a result of reorganization (i.e. merger, acquisition, division, appropriation, transformation as stipulated in article 45 of the Civil Code) provided that such assignee meets initial qualification requirements as provided by the law and the tender documentation. Above statutory restriction is not applicable after placing into operation of the relevant object under the respective PPP Agreement.
  • Assignment of obligations of the private partner under the PPP Agreement also can be perfected upon prior consent of the state partner and provided such assignee meets qualification requirements.
  • Draft PPP Law guarantees stability of the contractual terms of the PPP Agreement and provides possibility for the private partner to ask for relevant changes in the PPP Agreement to address subsequent legislative changes4 that adversely affected its position. If private and state partners cannot agree on such changes into the PPP Agreement, private partner can refer to the respective Kazakh state court to make final decision what changes shall be made in the PPP Agreement or if the PPP Agreement shall be cancelled5 by the court whatsoever.
  • Draft PPP Law also suggests possibility for the private partner to ask for changes in the PPP Agreement to protect its interests in case if:
    • State partner does not fulfill properly its obligations under the PPP Agreement;
    • Any state agency takes any measures or actions that preclude a private partner to fulfill its contractual obligations under the PPP Agreement properly;
    • establishing inconsistencies evidence the data specified in the tender documentation, as well as the discovery in it of any errors or inaccuracies that impede the fulfillment of obligations by the private partner under the PPP Agreement;
    • detection in relation to the private partner in connection with the implementation of public-private partnership of land or other real or personal property of burden, which was not and could not know the private partner at the conclusion of the PPP Agreement.
  • Draft PPP Law provides that the PPP Agreement shall provided exhaustive list of cases when the State would have unilateral right to amend or even cancel the PPP Agreement at any time if such actions are justified by 'interests of public and state' for the purposes of national and ecological security, health and morality. In theory the State would compensate any additional expenses of the private partner caused by such unilateral amendment of the PPP Agreement by the State or pay losses of the private partner if the PPP Agreement is cancelled.
  • Interestingly, Draft PPP Law refers to 'shareholders agreements' that is not recognised concept under Kazakhstan law and, therefore, it is unclear how it is supposed to be enforced in executed under the PPP framework.
  • Also Draft PPP Law says that parties of the PPP Agreement can choose local tribunals and international arbitration courts as proper forum, whereas current legislation prohibits referring to local arbitration tribunals if one of the parties is a so-called natural monopoly entity (e.g. water and heating utilities) or the dispute somehow involves the interests of State or state enterprises (i.e. practically all PPP projects involves interests of the State) and referring to international arbitration courts (e.g. LCIA) if both parties are residents of Kazakhstan (i.e. if private investor is a Kazakh company it would not be able to refer to international arbitration court). Again, it is unclear whether Draft PPP Law suggests that above and many others discrepancies would be corrected upon adoption of the Draft PPP Law.

Footnotes

1 This is also a new concept introduced by the Draft PPP Law that means a written agreement to be executed between state partner and private partner as a result of tendering procedures and that shall stipulate mutual rights and obligations of the counterparties as well as other conditions of the implementation of the PPP project.

2 This is also new concept introduced by the Draft PPP Law and means joint-stock companies or limited-liability partnerships incorporated in Kazakhstan with more than 50%'s state shareholding.

3 This is also new concept introduced by the Draft PPP Law and means joint-stock companies or limited-liability partnerships incorporated in Kazakhstan that do not meet characteristics of the 'state-controlled companies' (i.e. evidently, companies with 50% or less state shareholding).

4 Unless such legislative changes have been caused by public policy, national and ecological security etc. 5 In this case Kazakh court would need to decide what would be consequences for each of state and private partner and how any expenses or profits shall be allocated.

5 In this case Kazakh court would need to decide what would be consequences for each of state and private partner and how any expenses or profits shall be allocated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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