"The life of the country changed every passing century. Clothing
changed, weaponry was perfected, and potato riot were subdued.
People learned to shave their beards. The first hot air balloon took
flight. Those iron twins — the steamship and the steam locomotive
— were built. Automobiles began trumpeting their horns. But the
road stayed exactly the same as it had been under the Nightingale
the Robber. Humpbacked, covered with volcanic dirt or powdered
over with dust as poisonous as insecticidal powder, this domestic
road extended past villages, towns, factories and kolkhozes like a
six hundred mile long trap. The skeletons of carriages and spent,
dying automobiles lay in the yellowing burnt grass along its edges".
'The Little Golden Calf' by I. Ilf and E. Petrov


"This is not Rio de Janeiro" The Little Golden Calf

Incredible but true fact: the people of the Republic of Kazakhstan are a small community (no more than a single US metropolis) which is literally sitting on huge riches (a vast territory of the country, oil, gas, coal, grain and God knows what else) an yet is still forced to ride on rough roads, drink water from the rust-eaten pipes and consume electricity from dilapidated electrical networks built up, as they say, 'when queen Ann was alive'.

Although Kazakh authorities report on the state programs and infrastructure development projects with incredible frequency (e.g. so-called 'clusters', 'State Program of Accelerated Industrial and Innovative Development' (SPFIID), 'Ak Bulak' state program, 'Business Road Map – 2020') things haven't budged an inch.

However, it is hoped that the ruling establishment of the Republic, finally, came to an understanding, that if it further allows the bureaucracy to plunder the budgetary funds allocated under another government program, the country may cross the point of no return.

Moreover, there is, evidently, finally an understanding that infrastructure development using only state funds is impossible and ineffective, and that favourable conditions must be created to attract private capital.

One of the principal conditions for attracting foreign and domestic private capital for the infrastructure projects development is an adequate legal framework in a host country which allows to structure bankable projects based on the principles of project finance and public-private partnerships.

Interestingly, from the standpoint of the legal framework, in the past two years Kazakhstan has enacted very good laws the analysis of which is the subject of this article.


"Those are the stern laws of life. Or, to put it more briefly, life dictates its own stern laws to us". The Little Golden Calf

(i) Project Finance Law

Project finance in the strict sense of the term (i.e., financing of investment projects when the source of the debt instruments service are the cash flows generated by the project) has not yet been tested so far in Kazakhstan in the absence of the appropriate legal framework. 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, Asian Development Bank, or the International Finance Corporation (IFC) that have somehow benefited from government guarantees and/or security packages of the borrower.

However, the Law of the Republic of Kazakhstan No. 539-IV, dated 12 January 2012, "On Introducing Amendments to Certain Legislative Acts of the Republic of Kazakhstan in relation to the Project Finance Issues" came into force on 6 February 2012. It introduced the concept of "project finance" and other concepts of international practice into the legislation by amending and supplementing the Law "On Securitisation" (now the Law of the Republic of Kazakhstan No. 126-III, dated 20 February 2006 "On Project Finance and Securitisation").

Below there are the main developments made by the Project Finance Law:

  1. The Project Finance Law introduced a concept of the "project finance" that is defined as a "method of arranging the financing of a long-term project under assignment of receivables that is secured by expected periodical payments 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 assets".
  2. Project finance transactions, under the Kazakhstani laws, involves a "client"1 that enters into a so-called "base agreement"2 with an "executor"3 and, apart from certain exceptions discussed below, with the optional involvement of a so-called "special finance company"4.
  3. 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.
  4. The Project Finance Law requires that the appropriate Executor for the projects involving the State shall be selected on a tender basis in accordance with the Law "On Concessions".
  5. The Project Finance Law allows the Client to change the Executor at any time during the project if the Executor fails to meet or to properly meet its obligations under the base agreement.
  6. The list of investment projects involving the State 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.
  7. SFC is in essence a special purpose vehicle (SPV), 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 ("bankruptcy remoteness" concept).
  8. 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, shall be used only for the purposes of protecting the interests of the creditors and the levy of execution upon segregated assets during bankruptcy proceedings of the SFC is prohibited.
  9. 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/participatory interest of the charter capital of the SFC.
  10. 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 the SFC shall be used. The project finance transactions shall also be implemented with the involvement of the SFC, if at least one of the creditors requires it to be.

So we can say that, generally speaking, the Project Finance Law eventually created a solid basis for the structuring of transactions on the principles of the project finance in Kazakhstan.

Nevertheless, although gaps will only really become apparent in practice, we can already note the following significant weakness of the new law: Article 6-7 suggests that the "title to the property created under the base agreement by the state order belongs to the state". This rule of law in fact limits the ability to structure projects involving the State only as BTO ("Build — Transfer — Operate") projects.

(ii) PPP Law

In addition to the Project Finance Law, we should note the Law of the Republic of Kazakhstan No. 131-V, dated 4 July 2013 "On Introducing Amendments to Certain Legislative Acts of the Republic of Kazakhstan due to the Introduction of New Forms of Public Private Partnership and Extending the Application Area" which came into force on 22 July 2013 (save for certain provisions) (hereinafter - the "PPP Law").

The main purpose of the law is to introduce new PPP forms, including build-own-operate (BOO), build-operate-transfer (BOT) and design-build-finance-operate (DBFO) in the Republic of Kazakhstan (before under the Concession Law only BTO (build-transfer-operate) contracts were available) and introduction of a concept "availability payment" in Kazakhstan.

Below are the main developments made by the PPP Law in respective legal acts:

Water Code

  • The PPP Law drops the statutory restriction for transfer of the so-called "strategic importance water facilities" from state property into lease or trust management of a private person. In particular, water intake structures, pumping stations, water treatment facilities that provide water supply for cities and are owned by the state can now be transferred into lease and trust management.
  • Importantly, the PPP Law has not eliminated statutory restriction for the transfer of title of such strategic importance water facilities (i.e., they still cannot be sold).

Budget Code

  • The PPP Law makes clear that a concession agreement is a private contract and both parties including relevant state authority have rights and obligations. New definition of the "state concession obligations", therefore, is to be introduced into the Budget Code to distinguish responsibilities of a private party and public party;
  • The PPP Law provides statutory protection for concession obligations against sequestering.

Law "On Natural Monopolies and Regulated Markets"

  • By virtue of the PPP Law, concessionaires that are so-called "natural monopolies" subjects shall have special tariffs (that can be determined on the basis of special calculation formulas as to be stipulated in the concession agreements) and they shall be exempted from general tariff regulation. This means that when the general tariffs applicable to most of the natural monopoly subjects are decreased by the Agency on Regulation of Natural Monopolies (the 'AREM'), the concessionaire would be protected against the risk of not being able to comply with its debt service obligations because of the lack of revenues generated by the project.
  • It does not mean, however, that concessionaires that are natural monopolies subjects would not be regulated somehow; the AREM would have a right to, among others, participate in approval of feasibility study, tender documentation and draft concession agreement including any amendments thereto related to any change of tariffs and monitor the implementation of the concession agreement in terms of compliance with the tariff stipulated in the concession agreement.

Law "On Concessions"

  • The PPP Law established a new definition of the "concessionaire" in order to allow private entrepreneurs to act as the concessionaire (formerly only a legal entity could act as the concessionaire). Importantly, the law still prohibits a group of legal entities as a consortium to act as the concessionaire.
  • Definition of the "concession" is amended to allow other forms of PPP (eg, BOT, BOO, DBFO etc.) under the concession agreement.
  • The PPP Law introduced a concept of the "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 and/or exploitation of social infrastructure and vital objects".
  • The PPP Law states that upon completion of the construction or reconstruction phase, the title on 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 the current legislation a project may be qualified 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 PPP Law clarified that concession facilities cannot be pledged or sold while the relevant concession agreement is valid and until any mutual obligations thereunder are outstanding.
  • The PPP Law also introduced a 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 Law "On Concessions". The "concession facility availability payment" includes 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 paid 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 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 Law "On Concessions" but rather as one of source of income and reimbursement of expenses of the concessionaire stipulated in Article 7 of the Law "On Concessions".
  • The PPP Law introduces additional statutory restriction that if the concession facility to be created is not envisaged to be transferred to state property (i.e., 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 Law "On Concessions" are still applicable).
  • The 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 the 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 the relevant concession agreement.
  • Under the law, tenders of the 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 specified by the legislation before.
  • The PPP Law simplifies the qualification requirements for the concessionaires, so that instead of the previous 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 is now 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 its rights under the concession agreement but only with prior approval of the concessor.

So it is fair to say that the adoption of the PPP Law has, in general, greatly improved the legal framework for the implementation of infrastructure projects in Kazakhstan and attraction of private capital.

A preliminary analysis of the PPP Law, however, has showed that not all the problem points on PPP regulation in Kazakhstan were addressed, in particular:

  1. the PPP Law still provides the possibility to obtain "availability payment" under the concession projects only which are classified as "socially important", such as kindergartens, but not power stations.
  2. the PPP Law has not introduced the concept of the "direct agreement" and the "step in right" which are often important to attract international creditors.
  3. Special tariffs in the form of formulas that can be formalised in the concession agreements as described above are only applicable to the so-called 'regulated services' of the natural monopolies subjects. In practice this means that, for example, the concession will not be able to solve the problem with a long-term and predictable tariff for the construction of a power plant because generation of electricity is not a natural monopoly.


"Given that banknotes are wandering around the country, there must be people who have a lot of them". The Little Golden Calf

According to the recent statement made by the new head of the National Bank of Kazakhstan, Mr. Kairat Kelimbetov, funds of the Unified National Pension Fund of Kazakhstan will be directed primarily for financing infrastructure projects in the country and not for investment in foreign securities. This statement of Mr. Kelimbetov and adequate legal framework described above, give grounds for cautious optimism, that Kazakhstan will wisely use accumulated pension savings, which, in turn, will help to develop the local securities market and attract local and foreign private capital to upgrade the much needed infrastructure of Kazakhstan.


1. That can be an individual or a legal entity or the state represented by the Government of the Republic of Kazakhstan or by local executive authority (i.e., Akimat) and also by authorised state agencies).

2. Base agreement is defined as a written agreement whereby one party undertakes to create and transfer to another party an asset or render services and (or) manufacture products and (or) execute some work while using created asset).

3. 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.

4. That is a legal entity created only for the purposes of the project finance and securitisation transactions which is a beneficiary of an assigned receivable (hereinafter - the "SFC")).

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.