Kazakhstan enacts law On Public-Private Partnerships

PPP Law Almaty 2106646-v2A\ALMDMS In This Issue: Kazakhstan Enacts Law On Public-Private Partnerships Legal Alert November 2015 Kazakhstan Enacts Law On Public-Private Partnerships On 31 October 2015, the Republic of Kazakhstan enacted a new law, On Public-Private Partnerships (the "PPP Law"), which was officially published on 12 November 2015 and which enters into force on 22 November 2015 (ten days after its official publication). Purpose of the PPP Law The PPP Law was adopted in order to create a common legal framework to regulate public-private partnership projects, which could enhance the investment prospects of this vehicle for private businesses. Public-private partnerships can also be used to implement projects in any sector of the economy. The state may be represented in such projects by either government or quasi-government entities. Although long-term cooperation with the state was possible in one form or another before the adoption of the PPP Law, it was quite complicated to formalize such cooperation and could require compliance with various laws on public procurement, state-owned property, strategic assets and facilities. The PPP Law has standardized and simplified this procedure, which should help to attract investment in Kazakhstan. Moreover, the procedure has been substantially streamlined for PPP projects involving the modernization of existing assets of private companies or the use of intellectual property. Some of the legal innovations, which may be of interest to private capital, are summarized below. Types of PPP Agreements The PPP Law has substantially expanded the list of various PPP arrangements. There are now two ways a PPP arrangement may be formalized: either on an institutional basis (with the creation of a joint venture) or a contractual one (without the creation of a joint venture). We note that the list of contractual PPPs has been expanded significantly to include the following types: • concession; • trust management of state-owned property; • rental / lease of state-owned property; • finance lease; • contracts for the development of technologies and pre-production prototypes, for conducting pilot tests, and for short-run production; 2 Kazakhstan Enacts Law On Public-Private Partnerships November 2015 2106646-v2A\ALMDMS • life cycle contracts; and • after-sales service contracts. Moreover, the PPP Law also provides for formalizing PPP arrangements using other types of contracts that contain PPP elements. However, the practical application of this provision largely depends on how broadly the government authorities will interpret the PPP elements. In a technical sense, such a broad interpretation would allow investors to seek the implementation as a PPP of any project involving PPP assets, which, for the purposes of the PPP Law, include not only property, but also work/services performed and innovations introduced under such project. Awarding PPP Contracts As a general rule, a private sector partner must be selected through either open or closed competitive bidding. A two-step bidding process may also be used. Local PPP projects that involve amounts not exceeding the statutory limit may be implemented through a simplified competitive procedure. Potential private partners shall be selected from the Register of Potential Private Sector Partners maintained by the National Chamber of Entrepreneurs. In addition to the competitive bidding process, the PPP Law also stipulates certain cases, in which a private sector partner may be awarded a contract directly, without a tender. For example, a private sector partner may be selected through direct negotiations if (i) such private sector partner initiates a PPP project involving assets that it owns or has leased on a long-term basis, or (ii) the proposed PPP project is inextricably linked with the exercise of such private sector partner's exclusive rights to results of intellectual creative activity. This method may be of interest to projects currently being carried out by private investors in Kazakhstan (such as the modernization of power plants, housing and community amenities, roads, etc.), and also to projects based on unique technologies owned by private investors. Compensation The PPP Law introduces a fairly wide range of methods to compensate potential investors. The new methods that will now be available for all types of PPP arrangements include the compensation of investment expenditures, operating costs and accessibility charges, all of which shall be payable out of the state budget. However, in practice, forms and procedures for such compensation will need to be clarified additionally in subordinate legislation as well as in the texts of PPP contracts. Governing Law and Dispute Resolution According to the PPP Law, if a private sector partner under a PPP contract is a non-resident, the parties shall have discretion to choose the applicable law in their contract. Generally, disputes arising out of a PPP contract shall be resolved in accordance with the legislation of the Republic of Kazakhstan. The parties shall also have the right to submit their dispute to international arbitration in 3 Kazakhstan Enacts Law On Public-Private Partnerships November 2015 2106646-v2A\ALMDMS accordance with the Law of the Republic of Kazakhstan On International Arbitration. Despite its somewhat vague wording, the above provision on dispute resolution should be literally interpreted as stating that, as a general rule, the only arbitration available to parties to a PPP contract shall be in Kazakhstan. In practice, this means that a Kazakhstani court may overturn such arbitration award in accordance with the procedure prescribed by the Law of the Republic of Kazakhstan On International Arbitration. Only disputes arising out of PPP projects of special importance may be referred to international arbitration. Amendments to Certain Other Laws Along with the PPP Law, the Parliament also adopted the Law of the Republic of Kazakhstan On Amendments to Certain Laws of the Republic of Kazakhstan Applicable to Public-Private Partnerships, whereby amendments were made to the Civil Code of the Republic of Kazakhstan, the Land Code of the Republic of Kazakhstan, and the Budget Code of the Republic of Kazakhstan, as well as to the following laws of the Republic of Kazakhstan: On Limited Liability and Additional Liability Partnerships, On Natural Monopolies and Regulated Markets, On Motorways, On the Railway Sector, On Investment, On Joint-Stock Companies, On the Securities Market, On the Electric Power Sector, On Project Finance and Securitization, On Concessions, On Competition, On State-Owned Property and On Free Economic Zones in the Republic of Kazakhstan. The main purpose of these amendments is to adapt the prevailing legislation so that the provisions of the PPP Law can be effectively applied. ***** This Legal Alert is issued to inform our clients and other parties concerned of time sensitive legal developments which may affect them or otherwise be of particular interest. The comments above do not constitute any legal opinion or advice, and should not be regarded as a substitute for detailed legal advice in individual cases. www.bakermckenzie.com For further information please contact Azamat Kuatbekov, Partner + 7 727 330 0500 azamat.kuatbekov@bakermckenzie.com Alexander Korobeinikov, Associate +7 727 330 05 00 alexander.korobeinikov@bakermckenzie.com Nurgul Abdreyeva, Associate +7 727 330 05 00 nurgul.abdreyeva@bakermckenzie.com Baker & McKenzie - CIS, Limited 8th floor, Samal Towers, 97 Zholdasbekov St., Samal-2, Almaty 050051, Republic of Kazakhstan Tel: + 7 727 330 05 00 Fax: + 7 727 258 40 00 almaty@bakermckenzie.com