Kazakhstan: General Legal Aspects Of Public Private Partnership In Kazakhstan

Last Updated: 8 August 2016
Article by Colibri Kazakhstan LLP

Types of PPP in Kazakhstan

There are two types of PPP in Kazakhstan.

Institutional PPP – joint participation of public and private partners in the equity of new project company.

Contractual PPP can be implemented through the following forms:

  1. Trust management
  2. Public property leasing/rent
  3. Leasing
  4. Concessions
  5. Contracts on technology development, production of prototype models, trial and job-lot production contracts.
  6. Life cycle contract
  7. Service contract

Industry-specific laws and codes may determine other types of PPP not included in the Law «On public private partnership».

The PPP can be performed at the republican and local level.

PPP projects differ according to organization methods, by the result of which PPP Agreements are concluded. There are two methods:

  • tender on selection of private partner
  • direct negotiations (the so-called private initiative)

Level of guarantees and rights provided to investors by the public partner vary depending on the level of the project (republican or local) and specifics of project (social importance; special significance).

Rights of the private partner in relation to PPP object

Scope of rights that private partner will have in relation to PPP object depends on 2 factors: (1) limitations on object dispose under the law; (2) payments received by private partner from the state.

Limitations on object disposal: First, we shall define objects that generally cannot be transferred under concession. Decree of the President as of March 5, 2007 № 294 establishes a list of objects that cannot be transferred for concession1. In the development of recently adopted Law «On Public Private Partnership», the same list of objects will be adopted. However, such list will include objects that are not subject to the PPP projects in general, and not only for the concession.

Pledge under the concession project: object of concession cannot be pledged or be subject of alienation. Rights of the concessionaire under the concession agreement can be a subject of pledge, but only with the consent of the grantor.

Pledge under the asset management project: pledge is allowed only with the prior written consent of the asset management trustor.

Pledge under other types of PPP projects: the Law «On public private partnership» does not stipulate on pledge restriction, thus, leaving it to the discretion of the parties in PPP agreement. However, if private partner receives CIC (payments from state budget for compensation of investment costs), pledge of the object is possible only with the consent of public partner.

Moreover, some objects' disposal is limited by the Civil Code of the Republic of Kazakhstan due to the "strategic" significance of the objects. Article 193-1 of the Civil Code gives a definition of "strategic object" as the property, which has a social-economic significance for the sustainable development of the Kazakh society, whose ownership and (or) use and (or) control shall influence the state of the national security of the Republic of Kazakhstan2. Encumbrance on strategic objects or their alienation is possible on the basis of the decision of the Government of the Republic of Kazakhstan on permit issuance.

Industry-specific laws also establish limitations on PPP object disposal.

Thus, Law «On railway transport» stipulates that construction (reconstruction) and further operation of railway lines, not included in main railway network can be performed under the concession agreement. In addition, only the right to poses and use such railways can be transferred to concessionaire. Thus, the concessionaire can only conclude BTO schemed agreement in relation to this object.

Law «On inland water transport» determines that lands of coastline are state property.
Law «On motor roads» also determines that lands of public roadways are state property.

Limitation due to payments from the State budget: if under the concession agreement concessionaire receives such state payments as RIC - partial compensation of investment costs on construction of object, co-financing [of object construction], state guarantee for loans, state suretyship for infrastructure bonds,- then the object can be transferred to concessionaire only under the Build-Transfer-Operate scheme. This means that concessionaire cannot own the object and after the completion of construction it must be transferred to State property.

Payments from state budget and state support measures

PPP project presumes investment of the following:

  1. private partner's own funds;
  2. loan capital;
  3. Government subsidies in cases as specified in the laws of the Republic of Kazakhstan;
  4. reimbursement of part of investment costs (RIC);
  5. reimbursement of operational costs (ROC) for the maintenance of social infrastructure objects and life support in the relevant sector of economy;
  6. remuneration for management of state property object;
  7. rent fee for use of object owned by concessionaire;
  8. availability payment;
  9. co-financing

The State may invest from the budget by the way of (1) co-financing, (2) reimbursement of investment costs, (3) reimbursement of operation costs, (4) remuneration for management of state property object; (4) rent fee for use of object owned by concessionaire; (5) availability payment.

Co-financing – the only way of receiving money from the State during construction/ reconstruction of object. All other payments are paid based on schedule specified in agreement only upon completion of construction.

Reimbursement of investment costs (RIC) – reimbursement of certain volume of concessionaire's investment costs, that is costs for construction (reconstruction) of object. RIC is paid upon entering into operation of object and based on schedule specified in agreement.

The amount of RIC depends on the evaluation criteria of obligation performance by concessionaire. Thus, if concessionaire infringes its obligations (which covers not only quality of rendered services, goods and labor, but also other obligations arising from agreement), grantor has the right to decrease the RIC payment by percentage established in agreement.

Concessionaire receives full amount of RIC established by the agreement if no claims arise in relation to concessionaire's technical work, operational characteristics of object, quality of services rendered and other obligations.

Reimbursement of operational costs (ROC) – reimbursement of certain operational costs for the maintenance of social infrastructure objects under concession agreement.

Same as RIC, ROC payments are

  • made after entering into operation according to the schedule specified in concession agreement
  • limited by concession obligations and by the amount as established in the budget law annually
  • bound to the performance criteria of the concessionaire as specified in the agreement

Annual payments of ROC shall not exceed the annual payments from the state budget for the operation (including subsidies) of similar objects, including the natural norms approved jointly by the Ministry of National Economy and Finance.

Remuneration for management of state property object – payments made on regular basis and in parts during object operation. Such payments are made upon meeting of technical and operational characteristics during maintenance of concession object by concessionaire. Through remuneration payments concessionaire is able to compensate losses that have occurred due to currency exchange risks and such possibility serves as the peculiarity of the payment. Moreover, if the established limit for concession obligations established by the law is not enough to cover currency exchange risks then, according to the budget law, it shall be reconsidered/adjusted.

However, this kind of remuneration is applicable only for projects of special importance. Projects of special importance are determined according to criteria3 established by the Ministry of National Economy and included in the list established by the Government.

Currency exchange risk deemed to be a significant change of tenge rate determined by the National Bank of the Republic of Kazakhstan.

Simultaneous obtainment of all three payments (RIC+ROC+ remuneration for maintenance) means an availability payment. Such payment is not accessible for all. All three payments are accessible only for projects of social significance.4.

Rent fee for use of object owned by concessionaire – payments made on regular basis from state budget, paid within one calendar year during operation of object according to schedule determined in the concession agreement. Such payments are made upon meeting of technical and operational characteristics during maintenance of concession object by concessionaire. Same as with other payments, rent fees are made within the total limits of concession obligations and within the amount as determined in the law on state budget or in the decision of maslikhats on local budget.

The obligations of the State to pay the above payments are considered as state concession obligations – which means all rights and obligations of the grantor to the amount received on a certain date and not performed by grantor of its financial obligations under the concession agreements.

Undoubtedly, a positive aspect of it is that, according to the Budget Code, expenditures made in order to fulfill government concession obligations shall not be subject to sequestration in the process of budget implementation.

In addition, the law provides the following measures of state support:

  1. state suretyship for infrastructure bonds in relation to concession agreements;
  2. state guarantee for loans attracted for financing of concession projects;
  3. transfer of state's exclusive rights for intellectual property;
  4. provision of land grants in accordance with legislation of the Republic of Kazakhstan (for instance, gratuitous provision of plot for use);
  5. co-financing of concession projects;
  6. guarantee on state consumption of certain amount of goods (work, services) produced by concessionaire in case when the major consumer is the State itself.

Limitation of some state support measures and sources of financing established by the law: total amount of fees (ROC+ co-financing + exclusive rights for concession object + land grant + state guarantee on loans + state suretyship on infrastructure bonds) payment of which is determined by tender rules and agreement shall not exceed the cost of concession object itself.

As it seen from all the above mentioned fees and payments, ROC is part of the availability payment, payment of which is usually assumed for PPP projects in health care.

In addition, many projects are provided with land grants.

Thus, if land is provided as land grant and, in addition to that, there is a payment of ROC, then the total cost of ROC + land grant shall not exceed the cost of concession project.

Payment of ROC and of other fees, besides those mentioned above, is not limited by the cost of the object.

Despite the existence of provision in the law that amount of state support and financing sources are determined by the agreement, nevertheless type and quantity of state financing are determined on the stage of feasibility study exercise (or tender documentation preparation) and its examination, after which the state determines them as an essential term of tender documentation and sticks to such terms during the tender.

Footnotes

1. 1. Land, water (excluding transfer of land use right for implementation of concession agreement), flora and fauna.
2. Specially protected natural territories.
3. Standard equipment and subjects of military-technical supplies necessary for the national security of the Republic of Kazakhstan.
4. Backbone railway network, navigable waterway, lighthouses, navigation devices and signs regulating and ensuring safe navigation.
5.Water structures (dams, hydroelectric and other hydraulic structures), that are of particular strategic importance, with the exception of water management facilities (water intake facilities, pumping stations, water purification plants) that ensure water supply of the following cities: 1) Astana; 2) Almaty; 3) Aktau; 4) Aktobe; 5)Atyrau; 6) Karaganda; 7) Kokshetau; 8) Kostanay; 9) Kyzylorda; 10) Pavlodar; 11) Petropavlovsk; 12) Taldykorgan; 13) Taraz; 14) Uralsk; 15) Ust-Kamenogors; 16) Shymkent; 17) Semey; 18) Turkestan; 19) Temirtau; 20) Ekibastuz; 21) Rudnyi; 22) Zheskazgan; 23) Kentau; 24) Balkhash; 25) Zhanaozen; 26) Satpayev; 27) Aksu; 28) Ridder; 29) Arys; 30) Stepnogorsk; 31) Shahtinsk; 32) Saran; 33) Kapchagay; 34) Arkalyk; 35) Lisakovsk; 36) Priozersk.
6. Health care organizations of blood service, HIV / AIDS and disaster medicine.
7. Objects of historical and cultural heritage which are under state protection

2. Strategic objects are: backbone railway network; main pipelines; national electric line; trunk circuit; broadcasting facilities (production and technological complex of terrestrial and satellite systems of TV and radio broadcasting); petroleum refinery operations; energy-producing facilities with not less than 50MWe; national postal network; international airports; marine ports of international importance; air navigation facilities of air traffic control system; navigation devices and signs regulating and ensuring safe navigation; nuclear facilities; space industry objects; water structures; public roadways; and share capital of legal entities owning strategic objects, share capital of physical and legal entities that can directly or indirectly influence the decision making of the legal entities, which owns such strategic objects.

3.1) technical complexity of the concession object (first level responsibility;
2) project of social importance;
3) project implementation of state property objects (existing or proposed construction) and/or beneficiaries of project are subjects of two or more regions, of cities of republic significance and of capital;
4) cost of the object construction (reconstruction) is more than 4 000 000 monthly calculation index. 

4. Concession project is considered as project of social importance due to followings:
1) concession project implemented in the following sectors: social security service; health care; general secondary education, preschool education; municipal infrastructure; transport.
2) implementation of concession project increases quantity of: social security service facilities; health care facilities; general secondary education and preschool education facilities; facilities of municipal infrastructure; transport facilities. 

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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