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 Government of Kazakhstan. It should ensure the balance of interests of the state, business and end-users. Moreover, after the concession agreement is signed, the PPP Centre continues to keep track of the project and monitors the course of its realisation and the dynamics of the inherent risks. The Kazakhstan PPP Centre also has important functions of developing methodologies for project preparation and appraisal, preparing recommendations for institutional development, and capacity building of state and other bodies in the sphere of PPP. Interestingly, Akimats of Karaganda and Oskemen cities established their own local PPP centres responsible for development of PPPs in their respective regions.
Also, in accordance with the Map of Industrial Development (as defined below), the Ministry of Industry and New Technologies is the main government agency responsible for monitoring the implementation of all projects as stipulated in the Map. Akimats of the regions and Astana and Almaty are supposed to develop local equivalents of such Maps of Industrial Development for their respective regions or cities and supervise and control the implementation of the projects in accordance with timelines stipulated in these regional Maps.
1.2.3 Describe the material laws that regulate project finance transactions.
The Law of the Republic of Kazakhstan dated 12 January 2012 No.539-IV 'On Introducing Amendments to certain Legislative Acts of the Republic of Kazakhstan in relation to Project Finance Issues' (the Project Finance Law), came into force on 6 February 2012. It introduced the concept of project finance into Kazakhstani legislation by amending the Securitisation Law (now the Law of the Republic of Kazakhstan dated 20 February 2006 No.126-III 'On Project Finance and Securitisation').
These are the main developments introduced by the Project Finance Law:
(i) The Project Finance Law introduced a concept of project finance that is defined as a 'method of arranging the financing of a long-term project that is secured by way of assignment of receivables related to the creation and transfer of assets and also rendering service and/or manufacturing products and/or execution of work while using the created asset'.
(ii) A project finance transaction under Kazakh law involves a 'client' (that can be a natural person or legal entity or the state represented by the Government or by local executive body (ie, Akimat) and also by authorised state agencies) that enters into a so-called 'base agreement' (base agreement is defined as a written agreement whereby one party undertakes to create and transfer to another party an asset or render service and/or manufacture products and/or execute some work while using created asset) with an 'executor' (executor is defined as a legal entity that in accordance with the 'base agreement' creates and transfers an asset and also renders services and/or manufactures some products and/or executes some work while using the created asset) and, apart from certain exceptions discussed below, with the optional involvement of a so-called 'special finance company' (that is a legal entity created only for the purposes of the project finance transactions or securitisation which is a beneficiary of an assigned receivable (the SFC)).
(iii) The Executor on the basis of the signed Base Agreement raises debt finance for the project (by way of concluding loan agreements with creditors and/or issuing bonds or attracting finance from the SFC) and assigns receivables under the Base Agreement to the creditors or SFC as a security or provides other collateral.
(iv) The Project Finance Law requires that the appropriate Executor for the project be selected on a tender basis in accordance with the Concession Law.
(v) The Project Finance Law allows the Client to change the Executor at any time during the project if the Executor fails to properly meet its obligations under the Base Agreement.
(vi) The list of investment projects that Kazakhstan intends to implement on the basis of the project finance mechanism shall be determined by the Government of Kazakhstan on an ongoing basis.
(vii) SFC is in essence a special purpose vehicle whose activities are strictly limited to project finance transactions and the Law explicitly states that any activities of the SFC outside the scope of the project finance transactions are void.
(viii) Interestingly, legal entities incorporated or that have affiliates incorporated in certain offshore/black-listed countries cannot directly or indirectly own and/or use and/or dispose of voting shares of the SFC.
(ix) So-called 'segregated assets' (segregated assets consist, mainly, of assigned right (receivables) and also money on bank custodian account received from assigned receivables payments. of the SFC, are used only for the purposes of protecting the interests of the creditors and the levy of execution upon segregated assets during bankruptcy proceedings is prohibited.
(x) Importantly, if one of the parties to the project finance transaction is the Republic of Kazakhstan, it is a mandatory requirement of the Law that an SFC shall be used. The project finance transaction shall also be implemented with the involvement of the SFC if at least one of the creditors requires it to be.
Generally speaking, the Project Finance Law is well drafted and constitutes a solid basis for the development of project finance in the country. It is only very recent, so the way it will be applied in practice remains to be seen.
1.3 Public-Private Partnership legislation:
1.3.1 At what level of government has PPP-enabling legislation been enacted (if at all)? Is the legislation industry-specific?
Currently there is no specific law in Kazakhstan that deals with all types of PPP structures. In Kazakhstan, however, a relevant state authority may grant a concession to a project company by awarding a concession agreement in accordance with the Law of the Republic of Kazakhstan 'On Concessions' enacted in 2006 (the Concession Law).
The Concession Law is not industry-specific and, generally, state assets from any sector of the economy can be transferred under concession, save for an exhaustive list of exceptions like strategic dams (see Article 4 of the Concession Law). Importantly, the Concession Law is not applicable to subsoil use matters that are regulated by the Law 'On Subsoil and Subsoil Use' (see Article 2.1 of the Concession Law).
Granting the concession by way of a license or special enabling legislation is not permitted under Kazakh law. A concession involves mutual obligations of the parties to the concession agreement, rather than an exclusive right or authorisation issued by the authority to the project company to develop a project (as may be the case in some countries). Kazakh law classifies the concession agreement as a private law contract which combines several types of civil law agreement envisaged by the Civil Code (see Article 1(7) of the Concession Law).
All concessions in Kazakhstan are one-off concessions, while routine concessions from the State or municipal authorities are not permitted.
The Concession Law contemplates the following measures of so-called 'state support' for the concessionaire to encourage private investments into the concession projects (see Article 14 of the Concession Law):
- state sureties for infrastructure bonds issued in accordance with the concession agreement;
- state guarantees for loans, the proceeds of which are to be used for concession agreement purposes;
- transfer of the exclusive IP rights owned by the State to the concessionaire;
- provision of so-called 'in-kind grants' (eg, land, machinery);
- co-financing of concession projects by the State;
- guaranteed offtake by the State of a certain amount of goods (works, services) when the State is a principal consumer;
- compensation of certain amount of investment expenses of the concessionaire; and
- compensation of operational expenses of the concessionaire within the limits of rendered services but only if the concession project has some social significance (eg, kindergartens).
A concessionaire may be granted one or several of the above measures of state support.
Upon completion of the construction phase, ownership of the relevant concession facilities must be transferred to relevant state authority (see Article 5.2 of the Concession Law). Under the Concession Law the concessionaire cannot own the concession facilities. Nor does the Concession Law provide for structures where there is no transfer of the concession facilities to the relevant state authority at the end of the concession period, such a structure being, in effect, a full privatisation. Hence Kazakh concessions as of today may only be structured as either Build, Transfer, Operate (BTO) or Design, Build, Transfer, Operate (DBTO) projects.
The concession agreement entered into between the relevant state authority and a private sector partner company (current law prohibits participation of consortiums) will generally require the concessionaire to design and construct (or reconstruct) the relevant asset(s) or piece(s) of infrastructure by a certain date, operate them for a certain period of time and transfer them to the relevant state authority at the end of that period (see Article 1(4) of the Concession Law).
Draft PPP Law
In addition to concessions regulated by the Concession Law, one may argue that other forms of PPPs (such as BOOT) are permitted and feasible under the current legal framework in Kazakhstan based on the general concept of order to allow a (i) group of legal entities as consortium and (ii) private entrepreneurs to act as the concessionaire (under current Concession Law only a legal entity can act as a concessionaire);
- Definition of 'concession' is amended to allow other forms of PPP (eg, BOT, BOO, DBFO etc.) under the concession agreement;
- The Draft PPP Law introduced a concept of 'public-private partnership' that is defined as a 'form of cooperation between the State and subjects of private business that is directed toward financing, construction, reconstruction, modernisation and/or exploitation of social infrastructure, and also rendering services';
- The Draft PPP Law states that upon completion of the construction or reconstruction phase, ownership of the relevant concession facilities may be transferred into state ownership or such concession facilities may stay in private property of the concessionaire, depending on the terms of the concession agreement (under current legislation a project may qualify as a concession only if it relates to property owned (or, if to be constructed, to be owned) by a public authority). The possibility of having concession facilities in private property enables to structure other forms of PPP (eg, BOT, BOO, DBFO etc.) under the concession agreement. Importantly, if the concession project received any co-financing from the concessor and/or compensation of certain amount of investment expenses, then such concession facilities must be transferred into state property;
- The Draft PPP Law clarified that concession facilities cannot be pledged or sold only while relevant concession agreement is valid and until any mutual obligations thereunder are outstanding;
- The Draft PPP Law includes the possibility to recover the operational expenses by any concessionaire within the limits of rendered services (as of today only concession projects that have some 'social significance' (eg, kindergartens) are eligible for the compensation of such operational expenses);
- The Draft PPP Law also introduced so-called 'concession facility availability payment' and 'state subsidies' as additional sources of income and reimbursement of expenses of the concessionaire as listed in Article 7 of the Concession Law. The 'concession facility availability payment' includes any payments from relevant state budget as (i) compensation of certain amount of investment expenses of the concessionaire and (ii) compensations of certain operational expenses of the concessionaire and, if applicable, (iii) any service fees for trust management of the state property (ie, concession facility) or lease payment by state for usage of concession facility owned by the concessionaire, and envisaged to be paid on regular basis during the concession project life depending on performance of the concessionaire. For each particular concession project sources of income and reimbursement of expenses of the concessionaire are expected to be determined on the basis of concessionaire-selection tender results;
- The Draft PPP Law clarified that compensation of investment expenses shall not be considered as one of the measures of 'state support' under Article 14 of the Concession Law but rather as one of source of income and reimbursement of expenses of the concessionaire stipulated in Article 7 of the Concession Law;
- The Draft PPP Law would introduce additional statutory restriction that if the concession facility to be created is not envisaged to be transferred to state property (ie, would remain in private property after construction), the concessionaire cannot expect (i) state sureties for infrastructure bonds and (ii) state guarantees for loans and (iii) co-financing by the State to be provided as measures of state support (ie, other measures of state support under Article 14 of the Concession Law still available);
- The Draft PPP Law provides that total amount of obligations of the concessor related to (i) undertaking to compensate investment expenses of the concessionaire, (ii) state surety for infrastructure bonds, (iii) state guarantees for loans, (iv) transfer to concessionaire of exclusive rights for intellectual property that belongs to state, (v) provision of 'in-kind' grants and (vi) co-financing of the concession project, shall not exceed total amount of expenditures of the concessionaire for construction and/or reconstruction of the concession facility to be incurred under relevant concession agreement;
- Tenders of potential concession projects that either (i) require collection and analysis of innovative, creative, architecture-planning or organisational-technological solutions or innovations or (ii) require running experiments or researches, would be required to be conducted in two stages and not one as under current legislation framework;
- The Draft PPP Law would simplify the qualification requirements for the concessionaires, so that instead of the current statutory requirement for the concessionaire to have their own capital of at least 20 per cent of the value of the concession facilities, the concessionaire would be obliged (i) to have own capital of not less than 10 per cent of the value of the concession facilities or (ii) procure a banking guarantee which value is at least 10 per cent of value of the concession facilities;
- The concessionaire is envisaged to be able to transfer or pledge his rights under the concession agreement but only with prior approval of the grantor.
The current Concession Law is not often applied in practice because of the serious drawbacks discussed below. Adoption of the Draft PPP Law, therefore, hopefully will provide a decent legal framework for infrastructure projects in Kazakhstan.
1.3.2 To what extent are there limitations (both practical and legal) on PPP transactions?
A number of important legal issues need to be taken into account when contemplating a Kazakh PPP transaction, whether structured as a concession agreement or otherwise. We have highlighted some of them below.
Current Concession Law Does Not Work
The lack of popularity of concessions as the only available form of PPPs in Kazakhstan so far is caused primarily by the fact that concession is less attractive from the perspective of project financing (i) because the concession object, which continues to be owned by the State or municipality, is generally excluded from the security package, and (ii) due to excessive regulation of concession relationships by the relevant legislation, which diminishes the parties' flexibility in determining project terms and, (iii) because the process for granting concessions in Kazakhstan is very bureaucratic and time consuming (in practice it takes two years) and does not preclude the possibility of influence or corruption.
The existing procedure for setting tariffs is based on the broad discretion of the tariff regulator in determining the components of a particular tariff. In addition, tariffs are introduced for a limited period of time that makes PPP projects in Kazakhstan non-bankable. Lawmakers shall provide for specific tariff regulation for all PPP projects in Kazakhstan and guard investors against the above risks.
Central and Local Government Authorities
Current Kazakh law is rather unclear on government authorities (ie, central Government and Akimats) in cases where the concession form of PPPs is not used. Lenders and investors need to be assured that a host government/project support/implementation agreement has been properly entered into by the relevant government parties and that the relevant government authority that will enter into the project support agreement or implementation will not be subject to challenge. PPP projects for instance often presuppose the state undertaking civil-law obligations along with administrative commitments (eg, introducing preferential tariffs etc.). Such undertakings are often beyond the scope of the authority of Akimats or even the Government of Kazakhstan. It also should be noted that Kazakh law does not contain sufficient guaranties regarding the enforcement of financial commitments of a Kazakh public partner (eg, Government of Kazakhstan or Akimat). Only expenditure provided for in the budget of the relevant public authority can be enforced. The maximum term of public budgets in Kazakhstan is equal to three years while the average term of an infrastructure project is about 25-30 years, which means in practice, for instance, any project support agreement signed by an Akimat and a private investor would need to be re-approved by local parliament ('Maslihkat') every three years to remain valid.
To attract foreign investors for infrastructure projects in Kazakhstan, relevant legislation shall make sure that process by which a particular concession or right to develop the project on the basis of non-concession form of PPP is transparent and efficient. As of today Kazakh law is rather unclear as to whether a tender is a mandatory requirement for non-concession forms of PPPs and whether state procurement rules are applicable in all cases. Discretionary choice of the applicable procedure is associated with the risks that the tender results may be contested and is also susceptible to abuse and corruption.
Stabilisation of Legislation
Usually, foreign investors will wish to stabilise the applicable legislative framework and contractual terms in place at the time of the investment commitment in order to have confidence regarding their possible future obligations, liabilities and risks. Under current Kazakhstan law the investor/concessionaire is, generally, not protected from subsequent legislative changes adversely affecting its position.
Current legislation prohibits (i) referring to local arbitration tribunals (that are, unlike Kazakh state courts, presumably not biased or corrupt) if one of the parties is a so-called natural monopoly entity or the dispute somehow involves the interests of State or state enterprises and (ii) referring to international arbitration courts (eg, the London Court of International Arbitration, (LCIA)) if both parties are residents of Kazakhstan (eg, offtake agreement between project company and offtaker). This needs to be addressed as investors and lenders would not be comfortable relying on the state courts of Kazakhstan and this may discourage them from participation in PPPs in Kazakhstan.
Direct Agreement and Step-In Rights
Direct agreement between the grantor and the lender should be possible under Kazakh law to attract foreign investors. In a typical project finance deal creditors require that the right to directly transfer the pledged shares and other assets (property) of a project company be granted to them or be at their direction in case of default on obligations under credit facility. Such a right becomes exercisable upon the enforcement of the pledge which is very important for creditors. The entire credit extending process will depend on the nature of security they receive and the freedom of action they have in enforcing it. Finally, Kazakh law does not recognise concept of 'step-in rights'.
Security and Assignment
Under current Kazakhstan law the concessionaire may not pledge the project assets or rights under the concession agreement and this may impede the arrangement debt financing. It should also be noted that Kazakh law does not recognise trusts and there is uncertainty over the application of the security agent concept in Kazakhstan that results in the need to apply complicated legal structures (eg, parallel debt) in order to provide security for a debtor's obligations in favour of multiple lenders in project finance transactions. The enforceability of such structures in Kazakh courts is yet to be tested.
The current legislation of Kazakhstan effectively makes it impossible to get operation costs compensation under a concession project (save for projects that have social significance). To make the PPPs bankable it is necessary to have ability to compensate not only investment costs but operating costs as well. It seems that relevant provisions of the Budget Code and Concession Law have to be amended to introduce an 'availability payment' concept in Kazakhstan.
Pension Fund's Regulation
There is a need (i) to ease regulation of pension funds in Kazakhstan and (ii) provide state guarantees (ie, joint and several liability of the state) instead of state sureties (ie, subsidiary liability of the state) to encourage them to invest in infrastructure bonds and so provide a necessary source of financing for the development of infrastructure on the basis of PPP principles using accumulated pensions funds.
Negotiations Period Limitation
The Concession Law still limits the negotiation time for entering into concession agreements to no more than 90 days which may hamper the financing on the part of international financial institutions.
1.3.3 Please provide details of material PPP transactions completed recently in your jurisdiction.
Although Kazakhstan developed some experience of PPP-based projects during the 1990s, it became obvious that the successful implementation of such projects would not be effective without a more comprehensive statutory legislative package on concessions and PPP procurement.
The First Law 'On concessions in the Republic of Kazakhstan' was adopted on 23 December 1991 and aimed to regulate administrative, economic and legal environment concession agreements in Kazakhstan only for foreign investors. The frameworks have been proofed and applied in at least four infrastructure projects with the Development Bank of Kazakhstan and three concession projects supported by the Government of the Republic of Kazakhstan. The first law was already deemed invalid by April 1993.
Despite the absence of any specific law on concessions in the period of 1993-2006, several concession projects occurred during that time relying on general provisions of the Civil Code:
(i) 6 July 2005 – execution of the concession project on construction and operation of the rail way 'Shar-Ust Kamenogors Station'.
(ii) 28 December 2005 – execution of the concession agreement on construction and operation of the inter-regional power line 'North Kazakhstan – Aktobe Region'.
As of the end of May 2012, therefore, there are six concessional projects that are currently being implemented in Kazakhstan. Three concession facilities are already functioning:
- 'North Kazakhstan – Aktobe region' power line;
- Shar – Ust-Kamenogorsk railway; and
- passenger terminal of the airport in Aktau.
- The preparation of the other three facilities is underway:
- a complex of kindergartens in Karaganda;
- Yeraliyevo – Kuryk railway; and
- gas turbine electric power station in the town of Kandyagash of Aktobe region.
Seven additional public-private partnership projects are under consideration.
2. REGULATORY CONSIDERATIONS
2.1 What is the a history of state ownership or state repatriation of assets in your jurisdiction? Do any specific laws exist and are certain forms of foreign investment prohibited?
Both private and state ownership is recognised under Kazakh law.
Under the current investment legislation, seizure of an investor's property is effected either though nationalisation or requisitioning, both possible only in 'exceptional cases' and subject to 'state needs'. Should the investment be nationalised, the investor is entitled to full indemnification for damages caused by nationalisation, while, in the case of requisitioning, only payment of the market value of the requisitioned property is provided.
The Law on Investments, that applies to both local and foreign investments, creates a system of benefits and preferences supporting direct investments in priority types of activity, the full list of which is approved by the Government (examples include certain types of production of equipment, agriculture and construction). Local companies engaged in a designated priority activity may be eligible for benefits and preferential treatment and may receive, depending on the circumstances:
- an exemption from customs duties on imported equipment required for investment projects (the exemption can be granted for up to five years); and/or
- state grants in-kind (land plots, buildings, equipment, machinery, etc.)
Existing legislation provides for certain forms of restrictions and the volume of foreign investments in specific sectors of the economy (eg, mass media, telecommunications, insurance etc.).
2.3 What environmental, health or safety laws/ regulations apply to projects? Are these regulatory bodies in place to administer those laws?
Construction and operation of an infrastructure project in Kazakhstan is subject to various environmental regulations. The Environmental Code regulates environment use and protection issues. Environmental regulation is carried out at two levels, ie, the national/republican level and the local level. The Ministry for Environment Protection regulates matters at the national level while its local territorial departments throughout the country regulate matters at the local level. Any company which produces air, sewage and/or solid waste discharges must first obtain an environmental use permit. Such a permit outlines the permissible levels of air, sewage and/or solid waste discharges. An environmental use permit is granted only after there has been a positive conclusion of a State environmental expert examination of the proposed air, sewage and waste reports of the applicant.
The State environmental inspectors of the Ministry for Environment Protection or its local territorial departments are entitled to carry out regular, annual environmental inspections of companies that are required to have environmental permits. If a company commits no environmental violations during three consecutive years, state environmental inspections may be conducted once every three years. However, in cases of environmental accidents, health, safety and other emergency situations, State environmental inspectors are empowered to carry out extraordinary inspections.
2.4 Are there any filing or registration requirements required in respect of any of the project documents with a governmental body?
There are different government bodies approvals and fees that may be applicable to an infrastructure project in Kazakhstan depending, inter alia, on the economy sector.
Kazakh law does not impose any material restrictions on a project company borrowing funds from foreign lenders and in foreign currency. Residents of Kazakhstan may use any currency in their transactions with non-residents. However, in borrowing from foreign lenders, the project company will be required to comply with certain registration requirements. In particular, the Currency Control Law requires that any loan from a non-resident lender to a Kazakh borrower which is both (i) in excess of $500,000, and (ii) for a term exceeding 180 days, be registered with the National Bank of Kazakhstan.
2.5 Are governmental approvals required for project transactions? If so, are fees typically payable for such approval?
There is, generally, no need for Government of Kazakhstan approval for any infrastructure project transaction and, accordingly, no fees are payable. Certain licences, permits etc, however, may be required from different state authorities for implementation of the infrastructure project depending of sector of economy of the project.
3. STRUCTURING THE DEAL, INVESTMENT AND EXIT CONSIDERATIONS
3.1 What form do project companies typically take and what are the principal considerations behind the choice of such form?
A foreign company (ie, investor or developer) may establish a wholly owned subsidiary or a joint venture jointly with other companies or individuals, whether foreign or local. Project companies typically take the form of either a limited liability partnership (LLP) or a joint stock company (JSC). The minimum charter capital of the LLP is the equivalent of approximately $1,000, whereas the minimum charter capital of the JSC is the equivalent of approximately $520,000. In addition, JSC has to meet quite burdensome corporate governance requirements (eg, independent directors etc.) and, therefore, LLP form is preferable legal form for the typical project company.
3.2 Are there any restrictions placed on ownership of a project company?
Apart from certain foreign ownership restrictions discussed above there are no specific restrictions relating to the permitted ownership of a project company.
It is worth mentioning, however, that voting shares/participatory interests in companies which own or manage so-called 'objects of strategic significance' for the Republic of Kazakhstan may not be pledged or alienated without the approval of the government of Kazakhstan. In addition, the government enjoys a pre-emptive right over other participants or shareholders of such companies to purchase the voting shares/participatory interests. Objects of strategic significance are major railways, major pipelines, major gas pipelines, national electricity networks, major communication lines, national post, international airports, international seaports, air navigation facilities, sea navigation facilities, objects using nuclear energy, space objects, water constructions, and roads of common use, among others.
In addition, the Government of Kazakhstan enjoys a pre-emptive right over other participants and third parties to purchase the shares/participatory interests of Kazakh subsoil user companies.
3.3 What sources of finance are typically available?
There are basically two main classes of investors in project finance transactions that can provide either debt or equity finance.
National Welfare Fund 'Samruk-Kazyna' JSC
Wholly owned by the Government of Kazakhstan, nowadays Samruk-Kazyna consolidates companies from all the key sectors of economy of Kazakhstan. The largest among them are KazMunayGaz JSC, Kazakhstan Temir Zholy JSC (railway), Kazakhtelecom JSC, Kazpochta JSC, Air Astana JSC (national air carrier), KEGOC JSC (national operator for managing electrical network), Kazatomprom JSC, etc. The Fund includes several development institutions: Development Bank of Kazakhstan JSC (long-term lending industrial and infrastructure projects), Damu Entrepreneurship Development Fund JSC (to facilitate the development of Kazakh SMBs and microfinance institutions), Investment Fund of Kazakhstan JSC (finances investment projects through the entry into the capital), Kazyna Capital Management JSC (involved in the creation of mutual funds, which in turn invests in infrastructure projects) and Kazakhstan Export Credit Insurance Corporation JSC. Currently, the State transfers for Samruk-Kazyna of budgeting funds to finance some investment projects.
Development Bank of Kazakhstan JSC
The largest share among the projects implemented with the participation of the Bank's financing belongs to projects in transportation and communication industries. They contribute to the expansion of the transit potential of the Republic of Kazakhstan and exports of Kazakhstani producers.
Kazyna Capital Management JSC
The company owns stakes of Funds which invest in transport infrastructure – Macquarie Renaissance Infrastructure Fund and CITIC-Kazyna Investment Fund.
Finally, the chairman of the National Bank of Kazakhstan Mr. Grigory Marchenko confirmed recently that borrowing from the so-called National Fund of Kazakhstan (with accumulated funds as of 2012 more than $45 billion) for the implementation of infrastructure projects would be optimal in the framework of public-private partnerships.
So far International Finance Institutions (IFIs) have been the principle source of international financing of infrastructure projects in Kazakhstan. EBRD, IFC, World Bank, Asian Development Bank (ADB), Islamic Development Bank (IDB) and Eurasian Development Bank are especially active in Kazakhstan.
There is a trend, however, that certain national financial institutions like China Development Bank, Bank of China, Korean Development Bank, Japan Bank for International Co-operation and Japan International Co-operation Agency are becoming more and more active lately in the region.
3.4 Is there a typical governing law for any of the project contracts or financing agreements? Is it enforceable for a party to submit to the laws of a foreign jurisdiction? Is a waiver of immunity enforceable?
Kazakh law, generally, allows parties to a contract to have foreign law as the governing law if at least one party to that contract is foreign. There are limited exceptions to this rule, eg, contracts relating to shares in Kazakh entities or to real estate located in Kazakhstan must be governed by Kazakh law. But such exceptions do not apply to a typical loan agreement, which may be governed by a foreign (eg, English) law. In most cases, loan agreements between foreign lenders and Kazakh borrowers are governed by English law, or, in some cases, by New York law or law of the People's Republic of China or Japan. The same general rule applies to project agreements: contracts between local parties must be governed by Kazakh law, unless there is another foreign element involved. Finally it is strongly recommended that security agreements are governed by Kazakh law to be enforceable in Kazakhstan.
The concept of waiver of rights is, generally, not recognised by Kazakh law, however, if the State enters, for instance, into an agreement governed by English law that provides for a waiver immunity and international arbitration, such a contractual arrangement shall be legal and enforceable from the Kazakh law perspective.
3.5 Minerals and other natural resources:
3.5.1 Who has title to assets such as minerals or other natural resources? Can foreign companies acquire such rights or are there other means by which a foreign company can protect its rights?
In accordance with the Constitution and Article 10.1 of the Law of Kazakhstan 'On Subsoil and Subsoil Use' subsoil and mineral recourses in it belong to the State. Extracted mineral raw materials belong to the subsoil user unless otherwise provided by the law or the relevant subsoil use contract.
Yes, foreign companies, generally, may acquire any ownership right subject to the same rules and limitations applied to Kazakh individuals and companies. It should be noted, however, that non-Kazakh individuals and legal entities may own only land developed for construction or areas built-up with industrial and non-industrial buildings.
Private property rights are protected by the Constitution of Kazakhstan. Any foreign company shall seek legal recourse through relevant Kazakh state court or international arbitration if applicable.
3.5.2 What royalties and/or taxes are payable on the extraction of minerals or other natural resources? How is the charge calculated?
Severance tax is payable in respect of extraction of minerals or other mineral resources in Kazakhstan. The basis for this charge is the volume of extracted mineral resources. The rule for determining of the basis calculation of the severance tax for each type of the mineral resources is specifically stipulated separately (see Chapter 45 of the Tax Code).
As for general tax regulation, in accordance with the Tax Code these are principal taxes applicable to Kazakh legal entities:
- The corporate tax rate is 20 per cent.
- The current rate for VAT is 12 per cent on taxable turnover and taxable import.
- The current rate for individual income tax is 10 per cent, withheld by employers from payments to employees.
- The current rate of social tax is 11 per cent, withheld by employers from payments to employees.
- The general rate of property tax is 1.5 per cent on the average book value of the property classified, immovable property, or investments in immovable property.
- Land tax rates depend on the land category. Tax rates for vehicles depend on the type of the vehicle and its engine volume.
3.5.3 What are the applicable restrictions, fees or taxes on the export of minerals or natural resources?
Export of coal and crude oil is subject to rent tax. Depending on type of mineral resources, export is also subject to different customs duties. VAT for export is '0' per cent.
4. FOREIGN INSURANCE, WORKER, EQUIPMENT, INVESTMENT AND TAX CONSIDERATIONS
4.1 Are there any insurance considerations in respect of insurance policies provided by foreign companies? What costs exist in respect of such policies? Can the proceeds be payable to others, such as foreign creditors?
Under Kazakh Insurance Law any property interests located on the territory of Kazakhstan and belonging to a legal entity or a natural person resident of Kazakhstan may be insured by a Kazakh insurer only.
The Civil Code of Kazakhstan stipulates that a policy holder or a beneficiary under an insurance policy must have an insurable interest in the insured property. Accordingly, where the lender has insurable interest in the insured property, the lender may be named as the beneficiary in the relevant insurance policy. However, where the lender does not have such an interest, he may not be named as the beneficiary.
Kazakh legislation provides a pledgee with a priority right to receive insurance proceeds under an insurance contract relating to the pledged property. The pledgor will be entitled to the insurance proceeds only if the pledgee waives his priority rights to such proceeds. Thus, where the insured property is pledged in favour of the lenders, the lenders will have the priority right to the insurance proceeds in respect of such property.
4.2 Are foreign workers permitted to work on a project and do any restrictions apply?
When hiring foreign citizens or stateless persons, a Kazakh employer (ie, project company) has to obtain a work permit for each foreign specialist, including the top management of Kazakhstan incorporated companies.
There are a number of exemptions from the general requirement to obtain a work permit for some categories of foreign specialists arriving in Kazakhstan. Foreigners holding a residence permit do not need a work permit. The work permit requirement does not apply to foreign citizens and stateless persons holding the position of head of a branch or a representative office of a foreign company or those travelling to Kazakhstan for business purposes for an aggregate period not exceeding 60 calendar days per year.
4.3 Are there restrictions on the importation of equipment from abroad for use on a project?
The project company may need to obtain a number of licences depending on the kinds of activity the project company will be involved in, including for import of certain goods according to the list approved by the Government of Kazakhstan.
It also shall be noted that in order to protect domestic producers of goods and national economy in whole, the Government of Kazakhstan may enact export or import bans, import or export quotas and safeguard measures against imports. Import quotas are enforced by means of licensing.
4.4 Are there any restrictions on the foreign investment in a project company, in the payment of dividends, or repayment of shareholder loans from such project company to its foreign parent?
No restrictions are applicable and no authorisation is generally required for repatriation of funds from the Republic of Kazakhstan. Profit repatriation is normally effected through dividend mechanics. A resident distributing dividends has to withhold tax at source on payment of dividends, at a rate of 15 per cent, unless the rate is reduced by an applicable double-taxation treaty.
4.5 Are there any specific tax incentives available to foreign investors in respect of any particular projects? Are any fees, taxes or other charges payable in respect of such investment in a project company?
Law 'On State Support of Industrial Innovative Activity'
In accordance with the Law 'On State Support of Industrial Innovative Activity', investment projects which are included in the list of investment strategic projects approved by the Government of the Republic of Kazakhstan, will receive the following benefits:
- 0 per cent rate of land tax for seven years;
- 0 per cent rate of property tax for seven years;
- industrial incentives for strategic projects in areas with low socio-economic development (reimbursement or payment of expenses for gas, electricity, land purchase, acquisition or construction of buildings, structures); and
- guaranteed offtake by the State.
- For inclusion in the list of strategic investment projects, an investment project should be directed to the production of products with high added value, consistent with the priority activities as determined by the Government, and meet one of the following criteria:
- investment project should be directed to the production of products included in the list of activities for the production of high-tech products, approved by the Government of the Republic of Kazakhstan; or
- investments under the investment project must be at least five million times the size of the so-called 'MRP' (one MRP is 1618 tenge as of 2012).
Special Economic Zones
Finally, it is worth mentioning companies that are participants of the so-called special economic zones can benefit from the following privileges:
- corporate income tax exemption;
- taxation rate of less than 0 per cent when calculating land tax;
- Application of the 0 per cent rate to the mid-year cost of taxable objects when calculating property tax;
- VAT exemption upon sale of goods on the territory of the Special Economic Zone, if such goods would be fully consumed in accordance with the purposes of the Special Economic Zone and if such goods are in the list of goods promulgated by the Government of Kazakhstan;
- 0 per cent for lease of land plot up to 10 years.
4.6 Is there a requirement project companies to repatriate foreign earnings and if so, do they need to be converted to local currency? Are there any further restrictions in place over their use?
Yes, generally the revenue received by a Kazakh company from the export of goods or services must be deposited in its Kazakh bank account within the relevant period of time of repatriation.
Kazakh law does not restrict the ability of a resident borrower (eg, the project company) to remit money abroad in order to repay loans received from foreign lenders.
4.7 Are project companies permitted to establish and maintain foreign currency accounts, both locally and in other jurisdictions?
Residents and non-residents may freely open bank accounts in foreign and/or national currencies with Kazakh banks. Resident companies that open an account with foreign banks have to notify the National Bank of Kazakhstan. Non-residents may freely transfer money from their bank accounts abroad to their Kazakh bank accounts and vice versa.
4.8 Are there any fees and taxes payable in respect of the foreign investment in a project company?
Generally there are no specific fees or taxes payable in respect of the foreign investment in a project company.
4.9 Are there any particular foreign treaties that assist a foreign entity investing in a local project company?
Kazakhstan has concluded bilateral treaties on the encouragement and mutual protection of investments with 42 countries. Kazakhstan is also a party to a number of multilateral treaties concerning foreign investments (for example, the Energy Charter). Investment treaties provide for a number of guarantees to nationals of member countries, including most-favoured-nation treatment, protection against discrimination, requisition and nationalisation and the right to resolution of investment disputes by international arbitration in the absence of an arbitration agreement.
5. SECURITY AND ENFORCEMENT CONSIDERATIONS
5.1 What types of collateral are available?
Possible forms of security for the financing of an infrastructure project in Kazakhstan include the following: (i) mortgage over real property of the project company; (ii) security agreements over plant, equipment and physical assets; (iii) assignment of rights under insurances, project contracts and project bonds; (iv) pledges of bank accounts and cash; (v) pledge of shares in the project company; and (vi) limited guarantees by the sponsors.
Such security arrangements are mostly permitted and generally enforceable under Kazakh law. There may, however, be issues with enforceability of assignments of rights under project contracts. This is because Kazakh law does not specifically recognise security assignments as a means of creating security and thus it is uncertain how such security assignments are to be enforced in Kazakhstan.
5.2 Can a lender ensure the absence of other competing security interests?
It is possible under Kazakh law to take and register a security interest by way of pledge in respect of land, plant and equipment, shares in the project company and rights under a contract. A pledge, once registered, will give the lenders a priority security interest in the collateral.
5.3 How are security interests perfected and can priority of payments be established? Are any fees or other charges payable? Can charges be minimised in any way?
A pledge may be created by contract, either by a separate pledge agreement or through a clause in the agreement which creates the secured debt. The pledge agreement must be in writing and must contain certain information prescribed by law.
Registration of a pledge over most types of movable assets is not required for the pledge to be effective. In contrast, security over immovable assets and certain registered movable assets (eg, vehicles, aircraft and registered securities) must be registered in order to be effective.
While it is not obligatory to register pledges in relation to most movable assets, such registration grants the creditor priority right over the collateral. If two or more creditors obtain security interests in the same collateral (whether movable or immovable), the law gives priority to security interests in the order in which they are registered. Thus, in the typical case, the creditor who filed earlier will prevail.
The cost related to perfection of security interest is rather minimal already and cannot be minimised further.
5.4 May an agent or a trustee hold security on behalf of a group of lenders?
Kazakhstan does not recognise trusts and accordingly, security must be granted to the actual creditor, ie, the lender which advances the loan. Accordingly, as a matter of Kazakh law, a security trustee (who is not the actual creditor of the borrower) cannot hold security and act as a pledgee on behalf of the lenders. Parallel debt structure seems to address the above issue and shall be enforceable in Kazakhstan. It shall be noted, however, that it has not been tested in the Kazakh courts and there is a theoretical risk that parallel debt structure may be challenged as a sham transaction for the purposes of Kazakh law. Accordingly, it is uncertain whether any security arrangement (eg, parallel debt) whereby a security trustee/agent is acting as holder of security on behalf of the lenders would be enforceable in Kazakhstan. Enforcement may take up to six months from the moment of default to the sale of the pledged property.
5.5 What steps are required in order for a lender to enforce its security? How long will such proceedings take? Is an order of the court required in order to enforce?
The creditor must seek to sell the collateral through a public auction and recover the debt from the sale proceeds. The sale proceeds will be used first to cover expenses incurred in connection with the enforcement and sale (including any fines imposed on the debtor by a court marshal during the enforcement). After that the proceeds will be used to repay the debts. The remainder, if any, will be returned to the debtor. A pledge agreement may be enforced either through a court-supervised judicial procedure or through an out-of-court procedure. The relevant pledge agreement must specify the mode of enforcement (ie, through the courts or without court involvement). The order of the court is required, accordingly, only in case of a court-supervised enforcement of the pledge.
5.6 Can a lender foreclose or appropriate against an asset and what restrictions apply?
A secured creditor cannot simply take possession of the collateral (except for cash and receivables).
5.7 How would the commencement of any insolvency proceedings affect the ability of the lenders to enforce their security against the project company's assets? Please include details of any preferential creditors.
Final liquidation of a Kazakh legal entity (ie, bankruptcy) involves a disposal of the debtor's assets, the distribution of the proceeds to creditors in the payment order established in Article 75 of the Bankruptcy Law (eg, secured creditors are creditors of the 'third priority' and unsecured creditors are creditors of the 'fifth (last) priority' and their claims are satisfied only after settlement of all other creditor claims in a lengthy and not transparent liquidation process) and the dissolution of the debtor.
5.8 Are there laws governing contracts which the local courts will notrecognise? Are international arbitration provisions recognised by the courts?Are there any disputes where the courts will not recognise arbitration?
Under general concept of Kazakh laws, a contract can be governed by foreign laws if there is a foreign element (eg, one of parties is foreign, a contract is fulfilled abroad or relates to property located abroad). There are limited exceptions to this rule, eg, contracts relating to shares in Kazakh entities or to real estate located in Kazakhstan must be governed by Kazakh law.
Kazakh courts will not generally enforce judgments of foreign courts unless Kazakhstan has a treaty with the relevant foreign country on mutual recognition and enforcement of judgments. Kazakhstan has such treaties only with few countries, namely, the CIS countries, Turkey and China. However, there is no such treaty between Kazakhstan and UK, the US, Ireland or any other Western country. Accordingly, judgments of courts in Western countries generally will not be enforceable in Kazakhstan. Thus, it generally is not recommended to submit disputes to English courts, unless the Kazakhstani borrower has material assets outside Kazakhstan against which an English court judgment may be enforced.
Foreign arbitral awards, however, are generally enforceable in Kazakhstan as a matter of law. Kazakhstan is a member of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and, if a foreign arbitral award is obtained in another member country, such award should generally be enforced by Kazakhstani courts without a review of the merits, subject to compliance with qualifications set out in the Convention and certain procedural rules of Kazakhstani law. Please note, however, that in practice the enforcement of foreign arbitral awards in Kazakhstan can be difficult.
The least attractive option is to refer disputes to Kazakh courts. While certainly Kazakh court judgments are enforceable in Kazakhstan, local courts are sometimes perceived as unsophisticated, susceptible to influence and biased in favour of local parties.
6. CURRENT TOPICS
6.1 Please describe any hot topics in the project finance sector in your jurisdiction.
The so-called State Program for Accelerated Industrial-Innovative Development of Kazakhstan in 2010–2014 (the Industrialisation Program) was introduced. It envisages the implementation of at least 15 PPP projects per year totaling over 900 billion tenge (equivalent of $6 billion) by 2015. In furtherance of the Industrialisation Program the Government of Kazakhstan approved on 29 June 2011 the so-called Program for Development of Public-Private Partnership in the Republic of Kazakhstan for 2011–2015 (the PPP Program), whereby the Ministry of Economy Development and Trade as responsible government body is supposed to push for the creation of appropriate legislative and regulatory framework for realisation of infrastructure projects in Kazakhstan using PPP mechanisms.
For the purposes of implementation of the Industrialisation Program a so-called 'Map of Industrial Development' (the Map of Industrial Development) has been developed by the Government of Kazakhstan. The Map of Industrial Development provides for a list of over 100 industrial projects that are supposed to be completed by 2015 all around Kazakhstan and, among others things, specifies relevant government or quasi-government agencies responsible for each particular project (eg, Akimat (ie, mayor) of Akmola region is responsible for construction of the Cement Factory in Akmola region by end of 2012 with participation of private investor 'BI-Cement' LLP).
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