Latest Amendments to Kazakhstan's Public-Private Partnership Legislation

The president of the Republic of Kazakhstan signed Law No. 399-VI, On Amendments into Certain Labour-Related Legislative Acts of the Republic of Kazakhstan (the Amendment Law), on January 2, 2021. The Amendment Law entered into force on January 16 and amended a number of legislative acts of the Republic of Kazakhstan, including the Civil Code, the Budget Code, and the Entrepreneurial Code as well as the Law of the Republic of Kazakhstan on Public-Private Partnership (PPP), No. 379-V, dated October 31, 2015 (the PPP Law). This LawFlash summarizes the most important new elements introduced into the PPP Law through the Amendment Law.

Qualification Criteria

The list of qualification criteria that must be satisfied by bidders in order to qualify as a private partner was updated to include the following new or updated criteria:

• The founders and managers of the potential private partner must not be included on the list of persons associated with the financing of terrorism and extremism, which list is published on the Kazakhstan Financial Monitoring Agency's website.
• The potential private partner must not be included in the register of bad-faith participants of public procurement, which is published on the public procurement portal of Kazakhstan.
• The potential private partner must have its own funds to be injected into PPP project implementation and amounting to at least 20% of the value of the PPP facility.
• The potential private partner must not have tax arrears in excess of six times the monthly calculation index (MCI)[1] set for the corresponding financial year.[2]

PPP Agreement

The PPP Law, as amended, includes the following restrictions on amendments or termination of the PPP agreement:

• The amendment or termination should be agreed with all "interested state bodies"; however, the PPP Law does not provide any definition of "interested state bodies."
• Amendments to the PPP agreement providing for a change in the scope of government obligations require a consent of the republican or local budget commission.[3]

Any terms of the PPP agreement that have been specified by the PPP Law (i.e., the scope and types of work and services, requirements as to the quality of goods, works, and services) are considered material and can only be changed by agreement of the parties, if

• the amendments result in a positive budgetary efficiency (i.e., if the amendments do not result in an increase in budget expenditure or an increase of state revenue);
• the amendments do not reduce the minimum requirements as to quality, volume, and/or availability of goods, works, and services provided for by the PPP agreement; and
• the economic and social efficiency of the PPP project is maintained or improved.

The PPP Law, as amended, sets out a nonexhaustive list of grounds for early termination of the PPP agreement, which includes liquidation of the private partner, along with any other grounds provided for under Kazakhstan law.

Arbitration

The PPP Law, as amended, extends the circumstances in which the parties to the PPP agreement may agree on Kazakhstan or international arbitration for dispute resolution purposes. In addition to the case where the private partner is a nonresident, the PPP Law now allows for arbitration to be selected if at least one of the private partner's shareholders holding 25% or more of voting shares is nonresident in Kazakhstan. However, this provision applies only to PPP projects costing more than four million times MCI (currently, approx. US $28 million).

PPP Project's Infrastructure

The PPP Law, as amended, provides that under the PPP agreement, the private partner will be able to receive compensation for costs incurred in connection with developing engineering and transport infrastructure as part of the development of a production (industrial) facility. We understand that this provision was introduced in order to address investors' concerns regarding lack of compensation for the private partner's cost of building the infrastructure required for the underlying industrial PPP project.

Project Company

The PPP Law, as amended, provides that with respect to the implementation of PPP projects of particular importance,[4] the state partner may, on the basis of the decision of the tender commission, enter into the PPP agreement with a project special purpose company that is incorporated by the tender winner, subject to the tender winner providing bank guarantees to secure proper performance by the project company of its obligations under the PPP agreement. In such cases, and in contrast to the institutional PPP structure, the project company will act as the private partner and there is no participation of the state partner in the project company.

Other Key Amendments

Other significant amendments made to the PPP Law by the Amendment Law include the following:

• The minimum PPP project implementation period[5] has been increased from three years to five years.
• The PPP Law now sets the minimum period for operation of the PPP facility at five years.
• The principle of "value for the population" (or People First PPP) has been introduced by the Amendment Law. This principle means that the PPP project must ensure the development of social infrastructure and utility systems for the population; increase the level of availability and quality of goods, works, and services; and create new jobs.
• In addition to the issuance of tenders and direct negotiations with potential partners, selection of a private partner may now also be carried out via an auction process. An auction is considered valid only if at least three auction bids have been submitted.
• The private partner is only entitled to receive full reimbursement of its costs if the operation of the relevant social infrastructure and utility facilities do not secure the private partner's return of investment.
• The private partner is entitled to receive compensation for its investments, paid annually and in equal installments, starting at least five years after the relevant PPP facility has been commissioned; such payment of compensation for investment costs cannot commence earlier.
• In the case of a PPP project being offered via a tender or auction process, the conditions of the tender or auction that cannot be amended during the negotiations stage should be clearly listed in the tender or auction documentation.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Astana
Asem Bakenova

[1] KZT 17 502 (approx. US $42).

[2] Previously, the PPP Law did not allow for the existence of any tax arrears.

^[3] A budget commission is responsible for allocation of funds required for implementation of PPP projects. Therefore, any amendments to the PPP agreement entailing a change of state’s commitments under the PPP project must be approved by the relevant budget commission.

[4] The list of such PPP projects is approved by the Kazakhstan government.

[5] The implementation period covers the term of development, construction, modernization or reconstruction (as applicable), as well as the period of operation, trust management, maintenance or lease of the PPP facility (as applicable).