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Law on Public-Private Partnership of Kazakhstan

29 february 2016, 17:21
0

GRATA Finance & Securities Group has released a legal alert covering important legal developments in the Kazakhstani legislation that occurred in 2015.

Most of the changes were introduced in the legislation pursuant to adoption in May 2015 of a new policy document – the Plan of the Nation: 100 Steps for Implementation of 5 Institutional Reforms – governing the development of Kazakhstan in the short-term perspective.

The legal review covers the following areas:

1. Law on Corruption Countermeasures
2. New Civil Procedure Code
3. Law on Astana International Financial Center
4. Law on Judicial System
5. Law on Supreme Judicial Council
6. Resolution on Application of Bankruptcy and Rehabilitation Legislation by the Courts
7. New Commercial Code
8. PPP Law
9. Law on WTO Accession
10. Law on Special Defensive, Antidumping and Compensational Measures
11. Law on Ownership Right Further Protection
12. Law on Amendments to Electric Power Industry
13. Law on Amendments Related to Non-performing Loans,  Financial Services and Financial Organisations
14. Law on Agricultural Cooperatives
15. Privatisation Decree
16. Rules of Electronic Trades
17. New Procurement Law

Each of them is addressed in a separate release on our website, whereas the today’s release deals with the changes in the Law on Public-Private Partnership.   

 

PUBLIC-PRIVATE PARTNERSHIP LAW

The PPP Law (Law of the Republic of Kazakhstan dated 31 October 2015 No 379-V  “On Public-Private Partnership”) entered into force on 22 November 2015. In addition, on 29 October 2015, the new Commercial Code was signed, which has become effective in most part from 1 January 2016, and where the whole chapter is devoted to the PPP regulation.

Since the legal framework for the implementation of PPP projects in Kazakhstan has been pretty much established (under the framework of legislation on concession and general civil legislation), the next year or two shall show the changes in the ratio of concessional and non-concessional public-private partnership projects in Kazakhstan, the attractiveness and effectiveness of the institution of the public-private partnership contract as compared with a concession agreement both for business and state.

Positive novelties of the PPP Law

Prior to the enactment of the new PPP Law, the legislation of the Republic of Kazakhstan did not provide a legal concept of the contract on public-private partnership. At the same time, before the entry into legal force of the PPP Law, the previous version of the Concession Law (Law of the Republic of Kazakhstan “On Concessions” dated 7 July 2006 No. 167-III) defined the concept of public-private partnership as a form of cooperation between the state and business entities aimed at the financing, creation, reconstruction and(or) operation of social and vital infrastructure facilities.  Moreover, the previous version of the Concession Law clearly outlined that PPP in Kazakhstan was divided into institutional and contractual. It is noteworthy that according to the literal interpretation of the previous version of the Concession Law, contractual public-private partnership could be implemented only within the framework of concession agreements, as well as agreements of tenancy and trust management of state property as provided by the State Property Law (Law of the Republic of Kazakhstan “On State Property” dated 1 March 2011 No. 413-IV).

Among positive novelties of the new PPP Law, it is worth mentioning that:

(i)       The new PPP Law introduced in Kazakhstani legislation the long-awaited concept of a private initiative;

(ii)      Simplified procedure for tendering and entering into a PPP contract with shorter terms as compared to the concession;

(iii)      In addition, the PPP Law gave a broader definition of public-private partnership: “public-private partnership is a form of cooperation between a public partner and a private partner that complies with features defined in this Law”, and also introduced a new legal definition of a public-private partnership contract as “a written agreement defining rights, obligations and liabilities of parties of a public-private partnership contract, and other terms and conditions of public-private partnership contract within the framework of realisation of a public-private partnership project.

(iv)      Article 7 of the PPP Law enlists possible types of public-private partnership contracts, but the list remains open so it would be possible to enter into “other agreements, which comply with the features of public-private partnership”. Thus, the PPP Law solved the problem existed under the previous legislation of a narrow range of possible types of PPP contracts and now allows entering into other contractual forms of PPP, even that are not provided by the PPP Law, but just meet the public-private partnership’s features specified in Article 4 of the PPP Law.

At the same time, we would like to note that the PPP Law, apparently, with aim to extend the possibility of PPP application in all economic sectors, unconsciously created a new problem, since it offers unnecessarily broad understanding of the term “public-private partnership”. Prior to the new PPP Law enactment, a public-private partnership was limited to the forms of cooperation between the state and business aimed at “financing, construction, reconstruction and (or) operation of social and vital infrastructure”.  It is clear, therefore, that the scope of PPP application shall be extended, but with a clear understanding that “public-private partnership is a type of investment activity” (Ref. A.V. Belitskaya.  Legal Regulation of the public-private partnership: Monograph.  – M.: Statut, 2012.  Page 39), and a public-private partnership contract is, in fact, a business (investment) agreement. In the current wording of the PPP Law, however, the public-private partnership forms formally include, for instance, charity, grants, student loans, scholarships, joint activities with the business community on improving educational programs and plans, etc., since it is fairly easy to satisfy the above PPP features for many possible forms of cooperation between the state and business.

The PPP Law enlists the legal rights and obligations of PPP entities in Chapter 2 of the PPP Law. A special attention should be given to the new legal right of a private investor in the case of pre-term cancellation of a PPP contract to demand payments and compensation in cases and in the procedure established by the PPP contract (i.e. termination payment). Additional rights and obligations of the parties may be agreed on a contractual basis in accordance with the freedom of contract principle.

One of the material shortcomings of the PPP Law is ill-considered definitions of the public and private partners.

In particular, Article 14.1 of the PPP Law introduced a new definition – “PPP entities”, which mean “the public partner and private partner, and other persons involved in the implementation of a public-private partnership project and specified by this Law”. The concept of a PPP entity is evidently wider than a concept of party to a PPP contract (i.e., not every entity is a party to a PPP contract, but each party to the PPP contract is a PPP entities). Pursuant to Article 1.5 of the PPP Law, “a public partner is the Republic of Kazakhstan, on which behalf the Government of the Republic of Kazakhstan or local executive body, as well as other government agencies, and entities of quasi-public sector, where fifty or more percent of voting shares (interests in the charter capital) are directly or indirectly owned by the state, entered into a public-private partnership contract”.

As we understand, this definition excludes the possibility of so-called public legal entities (i.e. state-owned enterprises and government agencies) to act as a public partner, since state legal entities are understood as legal entities (companies and institutions), the property of which is not divided into shares or interests, but as a whole belongs to the state under right of ownership (Article 102 of the Civil Code).  Meanwhile, we believe there may be situations where, for instance, the object of a PPP contract is the property owned by the state enterprise under the so-called “right of economic management”, therefore, such an enterprise must have the right to participate on the side of the public partner and exercise certain powers to transfer the PPP object, sign relevant transfer-delivery acts.

Thus, we believe that the concept of a public partner should be extended in the PPP Law by including state legal entities into the list.

The PPP Law also introduced the concept of a “private partner”, which can be an “individual businessman, simple partnership, consortium or legal entity, except for entities acting as public partners under this Law, entered into a contract of public-private partnership” (Article 1.1 of the PPP Law). Since in Kazakhstan commercial organisations can only be established in the form of a joint stock company, business partnership, production cooperative, or state enterprise, it is obvious that the private partner can be the private businessman of any of the above legal forms. Moreover, the definition is so broad that within the current PPP Law the private partner can be non-profit organisations and foreign legal entities.

Meantime, a PPP contract does not have any particular distinctive features that allow it to be classified as an independent contractual obligation and distinguished from all other civil contracts. In addition, a PPP contract is, in fact, a business (investment) agreement.

In the legal literature, (Ref.  S.P. Moroz.   Investment Law: textbook. Almaty: Jurist, 2007.  Page 167) business contract is also defined not as an independent type of a contract, but as a kind of civil contract with a set of the following specific features: 1) parties thereto can only be business structures; 2) they are only used in the business and other economic area.

Therefore, the activities performed by a private partner within the PPP contract can only be a business activity, which raises the question of the need to clarify the PPP Law that non-profit organisations cannot act as the private partner.

Besides, for the purpose of removing the risk of accountability of the private partner to the public partner, by analogy with the PPP Law of the Russian Federation, it makes sense to clarify in the PPP Law that only a Kazakhstani legal entity can be the private partner.

Another considerable weakness of the PPP Law is a potential conflict between provisions of the PPP Law and the same of the Concession Law.

According to the preamble to the PPP Law, the law will determine the “legal conditions of the public-private partnerships, ways of its implementation, and regulate social relations arising in the process of preparing and implementing public-private partnership projects, conclusion, performance and termination of public-private partnership contracts”. Pursuant to Article 7.3 of the PPP Law, one of the types of contractual public-private partnership will be a concession and “in the implementation of certain types of contractual public-private partnerships, to the extent not regulated by this Law, the provisions of the relevant laws of the Republic of Kazakhstan, including the features provided by the Concession Law will apply”.

Our interpretation of the above provisions states that:

1)      Provisions of the PPP Law will have priority over the Concession Law, including in the implementation of concession projects.

2)      With the current wording of the PPP Law, there obviously will be the conflict between the Concession Law and the PPP Law.  For instance, the PPP Law provides that the parties to a PPP contract (i.e. to a concession agreement as well) can be not only a public partner and a private partner, but also financial and other organisations that provide financing, and industry operators (Article 5 of the PPP Law). At the same time, the Concession Law clearly states that the parties to a concession agreement can be only the concessionaire and the concessor (Article 1.18 of the Concession Law). Since the PPP Law regulates relations related to the parties to a PPP contract, then it turns out that the provisions of the Concession Law, in particular on limiting the number of parties to a concession agreement, would no longer be applicable.

We recommend, therefore, to improve the PPP Law in terms of legal technique and to consider the following points:

1)      In the PPP Law it is necessary to clarify the term of a public-private partnership (the current wording of the PPP Law provides an unjustifiably broad interpretation of the term ‘public-private partnership’).

2)      It is necessary to adjust the relationship and priority of the PPP Law and the Concession Law, since the current wording of the PPP Law will inevitably lead to legal conflicts.

 

Comments and recommendations can be sent to schikanayev@gratanet.com. We will make sure we fix any problems and continue to offer you the best service we can.

Shaimerden Chikanayev, Partner

Email: schikanayev@gratanet.com 

Mob: 7701 7878020

Marina Kahiani, Partner

Email: mkahiani@gratanet.com 

Mob: 7701 7251269

This Legal Alert is provided for your convenience and does not constitute legal advice. It is prepared for the general information of our clients and other interested persons. This Legal Alert should not be acted upon in any specific situation without appropriate legal advice and it may include links to websites other than the GRATA website. If you no longer wish to receive legal alerts from the GRATA Finance & Securities Group, please send an email to schikanayev@gratanet.com


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