The number of companies in Kazakhstan with foreign participation has grown 12% this year alone to 21.7 thousand by the start of autumn. Of these, 97.3%, or 21.1 thousand are small businesses; 1.5% (325 companies) are medium-sized business and 1.2% (260 companies) are large businesses, with the majority of them from Russia, Turkey and China. Even though the pandemic has undoubtedly affected project numbers, there does still seem to be investor interest in Kazakhstan, especially in projects offering state concessions and preferences.
With that in mind, renewable energy projects, which are popular across the globe, have recently caught the eye of investors due to the wealth of opportunities offered for sector development in Kazakhstan.
Investment projects and objectives
In Kazakhstan, the following types of investment projects are available:
• investment projects
• priority investment projects (“PIP”);
• special investment projects (“SIP”);
• public-private partnerships (“PPP”).
In this article we discuss the specifics of each type of investment project.
Officially, an investment project represents a series of measures to invest in:
• the creation of new production(2); and/or
• the expansion of current production(3); and/or
• the upgrading of current production(4).
Priority investment projects
PIP are used to:
• create new production, stipulating investment in the construction of new production facilities of at least two million times the monthly calculation index (“MCI”);
• expand and/or upgrade current production, stipulating investment of at least five million times the MCI;
• realise projects involving priority activities as approved by the Kazakhstan Government;
• carry out projects for which investment is not made through PPP contracts or concession contracts.
Special investment projects
SIP criteria include:
• implementation by a Kazakhstan company registered in a special economic zone (“SEZ”) or as a free warehouse owner; or
• a project acquired from an SEZ member, or
• a project of a Kazakhstan company that has entered into a vehicle assembly agreement.
By law, PPP projects cover all areas of the economy except for those in a special government-approved list(5). PPP targets include property and property portfolios planned, built, created, reconstructed, upgraded and operated within the framework of a PPP project, as well as work and innovations to be implemented during a PPP project.(6)
Contract parties and contract initiation
Kazakhstan companies(7) and the Ministry of Investment and Development can initiate investment projects and PIP.
Statutory restrictions exist with respect to public and quasi-public sector participation in PIP and SIP depending on the industry(8), and for that reason, legal entities should:
1) be registered as an SEZ member; or
2) be registered as a free warehouse owner; or
3) have a vehicle assembly agreement in place.
The two PPP parties are the State and private partner. Financial and other project financing organisations and sector operators may also act as PPP contract parties.
State authorities, state institutions, state-owned enterprises and limited liability partnerships, joint stock companies in which the State holds a 50% interest or more in share capital or voting shares may act as the state partner in a PPP on behalf of Kazakhstan.
The key factor in determining investment contract, PIP and SIP validity periods is the duration of preferences and concessions, or the period for which land is provided, if applicable. Working programmes(9) should be completed within nine months of investment contract expiry. In the case of a finance lease, an investment contract should expire nine months after the finance lease contract expires.
PPP projects are either recognised as medium-term or long-term, which translates to 3-30 years, depending on project specifics.
Courts may extend PPP contracts if:
1) the project has been delayed or suspended for reasons out of the parties’ control;
2) the project has been suspended due to public partner and/or state authority actions or inaction;
3) project implementation costs have increased as a result of the public partner making demands not stipulated by the PPP contract.
Transfer of the contract facility to the State
Before deciding on a project, an important issue to work out is whether title to the investment target can be transferred.
Under an investment project and PIP, legal entities receive property belonging to Kazakhstan for temporary use free of charge or land under the same conditions to implement an investment project with its subject transfer to ownership or for use as a state grant in kind.
State grants in kind for investment projects may take the form of land, buildings, structures, machinery and equipment, computers, measuring and control instruments, vehicles (except for passenger vehicles), production and business stock.
When an investment contract expires and the investor has executed all contractual investment obligations, any property or land provided as a grant in kind may be transferred to the investor free of charge.
By law, a PPP project target may be transferred to the private partner exclusive of compensation for investment costs. In this case, once a project ends the PPP target is returned to the State. The legislator has also not allowed PPP targets to be used as a pledge.
An interesting addition in 2018 was a provision governing the legal treatment of an account used to accrue investment cost compensation, and specifically that it is opened if the private partner receives financing secured by recourse to compensation for investment costs. The new provision was made to protect the rights of creditors financing PPP projects.
Project preferences, subsidies and sources of financing
Investment projects offer the following benefits (preferences):
1) customs duty and import VAT exemptions;
2) state grants in kind.
The authorised body may provide investment project state grants in kind in the form of state-owned property with subsequent title transferred.
The maximum state grant in kind is 30% of total investments in the fixed assets of a Kazakhstan company.(10)
The following investment preferences are available under PIP:
1) tax breaks;
2) investment subsidies(11).
An SIP offers investment preferences in the form of:
1) import customs duty exemptions;
2) tax exemptions.
SIP-related customs duty exemptions are provided to:
1) SEZ members for 15 years, but for no longer than the SEZ is operational;
2) free warehouse owners for up to 15 years from the moment an SIP contract is registered;
3) Kazakhstan legal entities that entered into an agreement to assemble vehicles, for a period of up to 15 years from the moment the SIP contract is registered.
PPP12 projects may be financed using:
1) private partner funds;
2) borrowed funds;
3) state budget funds;
4) quasi-public entity funds;
5) other funds not prohibited by Kazakhstan law.
Even though PPP projects do not allow preferences, costs are recoverable13 and income generated through:
1) the sale of goods, work or services while operating PPP facilities;
2) state subsidies;
3) the recovery of PPP project investment costs;
4) the recovery of PPP project operating costs;
5) fees for managing state-owned PPP facilities, and rent for the use of PPP facilities;
6) access fees.
Legislative stability guarantees
A crucial point for investors is legislative stability. By law, Kazakhstan companies implementing PIP, SIP and strategic investment projects under investment contracts concluded before 1 January 2015 enjoy stability if tax law or regulations governing work permits for foreign nationals change.
No such statutory stability is available for PPP projects.
A model contract is available for investment contracts.
The authorised body(14) makes a decision to invest and provide investment preferences(15) within 20 working days and 15 working days for SIP.
Within 10 working days of a positive decision, the authorised body drafts a model investment contract that is registered within 5 working days of being signed by the parties and that enters into force from the moment it is signed. A special investment contract is signed for SIP.
By law, investment contract and special investment contract appendices may be amended with the agreement of the parties twice a year. In addition, while an investment contract is in force, the Kazakhstan company that entered into it may not:
1) change the purpose of a state grant in kind or property purchased according to a working programme;
2) dispose of a state grant in kind or property acquired according to a working programme.
PPP projects are categorised as institutional and contractual.
Companies implement institutional PPP projects in accordance with a PPP contract, while contractual PPP are concluded through a range of contracts, specifically:
1) a concession contract;
2) a trust management contract for state-owned property;
3) a property lease contract for state-owned property;
4) a lease contract;
5) contracts concluded to develop technology, prepare prototypes, pilot industrial testing and low-batch production;
6) a life cycle contract;
7) a service contract;
8) other contracts that show PPP characteristics.
After a PPP tender or direct negotiations, the tender organiser sends the winner a draft model contract for agreement, including for amendments and/or additions, together with copies of minutes identifying the best tender bid. The authorised body agrees the draft contract. The conclusion deadline for the model contract is 90 calendar days from the date the tender ended.
An investment contract may be terminated early with the consent of the parties or unilaterally.
When an investment contract is terminated early, the legal entity should:
- pay taxes and customs duties outstanding due as a consequence of investment contract preferences;
- pay taxes and customs duties outstanding due as a consequence of investment contract preferences;
- return property in kind and provided as a state grant in kind (within 30 calendar days of the authorised body for investment taking the decision to terminate an investment contract early), or its original cost as at the transfer date in accordance with investment contract terms;
- return investment subsidies paid under an investment contract in full.
If a special investment contract is terminated early with the consent of the parties, the Kazakhstan company that concluded it does not pay customs duties outstanding as a consequence of special investment contract preferences.
A PPP contract may be amended and terminated with the consent of the parties.
A court may terminate a PPP contract:
1) following a significant violation of a PPP contract by either the public or private partner;
2) if the private partner is unable to execute a PPP project due to insolvency (bankruptcy);
3) in public and state interests, including when any such actions are taken to ensure national security, public health and morals.
Resolution of disputes
Investment contract disputes are resolved through talks or in accordance with a dispute resolution process agreed by the parties. In specific cases, disputes may be resolved in accordance with international treaties and Kazakhstan law in Kazakhstan courts, as well as in arbitration as specified by an agreement of the parties.
Under the Arbitration Law, to include an arbitration clause, the participating state authorities or companies in which the State owns 50% or more of voting shares (share capital interest) send a preliminary request to the authorised body for consent for the clause with reference to projected arbitration costs. The authorised body should consider the issues over 15 calendar days factoring in economic security and state interests, and send a written response indicating irrevocable consent or a justified refusal to give that consent.
Disputes related to the execution and termination of PPP contracts may be resolved according to the statutory procedure, including in court, arbitration or in international arbitration in specific cases16, and in accordance with the procedure stipulated in a PPP contract.
Special investment courts were created in 2018 to consider investment disputes. At the same time, a number of investment disputes were considered by the Supreme Court as the court of first instance, guaranteeing investors access to a legal process of the highest order.
Conclusion: so which is most lucrative?
Project performance depends on choosing a project structure that best meets project participant interests, and with that in mind when choosing your structure, we recommend you consider the following questions:
• Does the company need to register in Kazakhstan and what is the most beneficial structure for the investor?
• Which legal structure best suits project implementation and meets investor interests?
• Is the contract target a strategic facility that cannot be disposed or used as a PPP target?
• Are land rights transferrable?
• Are there any currency transaction restrictions in place?
• Is a license needed to implement the project?
• Are there any subcontractor requirements?
• Will an independent company finance the project, and if so, under what terms?
• What financial support, concessions and preferences will be most beneficial in implementing the project? Do they cancel out the receipt of requested concessions and preferences?
• Are there any work permit and visa requirements for employees?
• What opportunities are available to withdraw from the project?
• Are rights and interests protected during project implementation and withdrawal?
• And others.
Please remember that this article is not a legal recommendation. Always contact experts when considering entering into any form of investment project. The Deloitte legal team will be pleased to advise and help you in drafting all the required agreements and other documentation.
(2)including production to implement a PPP project (concession project)
(3)including production to implement a PPP project (concession project)
(4)including production to implement a PPP project (concession project)
(5)https://online.zakon.kz/document/?doc_id=38755357 Government Resolution No. 710 dated 6 November 2017 approving a list of objects that cannot be transferred to a public-private partnership, including a concession arrangement
(6)article 72 of the Kazakhstan Entrepreneurial Code
(7)A legal entity may not be an independent training organisation; or an organisation operating in an SEZ.
(8)The state share and/or of a quasi-public sector entity/Kazakhstan legal entity as a founder and/or shareholder of a Kazakhstan legal entity in the engineering industry, including the foundry industry, should not exceed 50% (this issue is covered further in Kazakhstan law). – point 5 of part 5 of article 286 of the Entrepreneurial Code.
The above conditions do not apply if the quasi-public entity in which the state share and/or quasi-public entity as a founder and/or shareholder of a Kazakhstan legal entity is less than 50% is implementing a PIP to produce coalbed methane.
(9)The working programme is an investment contract appendix determining the pre-production investment project implementation schedule.
If the estimated value of the state grant in kind exceeds the maximum amount, the Kazakhstan legal entity will be entitled to the property with payment of the difference between its estimated value and the maximum state grant value.
(10)Investment subsidies are not given on priority investment projects to expand and/or update current production.
(11)PPP projects are financed using project financing in accordance with Kazakhstan project financing and securitisation law in conjunction with the PPP Law
(12)The procedure for refunding costs to PPP parties is determined by Kazakhstan budget law
(13)The rules for the authorised body for investment to provide investment preferences are approved by the Kazakhstan Government
(14)Special statutory rules exist for providing investment subsidies
(15)If a PPP party is a non-resident or at least one of the private partner shareholders (partners) holding 25% or more of voting shares (share capital interest) is a non-resident for projects valued in excess of 400 million times the MCI.