Independent Power Project (IPP) as an optimal structure for the creation of generating object based on the project financing principles (PPP) Shaimerden Chikanayev Partner GRATA Law Firm

2 Why does Kazakhstan need IPP projects? Lack of budget funds. PPP on concession basis does not work. Private business is more effective than the State. The principal task of IPP projects is raising foreign private investment and technologies in electric power industry and distribution of risks between the government (Akimat) and foreign private business. Successful global practice in the US, UK, Turkey, etc. For over 20 years. There is already such a practice in Kazakhstan: Balkhash TPP (in progress), similar IPP project with Akimat of one of the regions (in progress). GRATA has been engaged as a Kazakhstan legal counsel in both projects.

3 Structure of IPP project adapted to the conditions of Kazakhstan Project Company Power Purchaser (Sale-and-Purchase Agreement) Foreign Sponsors (shareholders) Akimat (Project Support Agreement ) Fuel Supplier (controlled by Akimat) Operator (O&M Contract) Contractor (EPC/T Contract) International Banks (loan agreements) SBC (controlled by Akimat) ( guarantee under the Sale-and-Purchase Agreement )

4 What does Akimat have to do for IPP project? Guarantee (though the Akimat-owned company - Purchaser) the purchase of generated power at a predetermined price (formula) in the Project Company (power plant) for years. Facilitate the conclusion of the fuel supply contract (gas or coal) at a predetermined price for years. Guarantee that in case of violations by the Purchaser of its obligations, the Project Company will receive compensation from the Guarantor appointed by Akimat (utility company owned by Akimat or, for example, SBC). Guarantee that in the event of material breach by Akimat of its obligations under the Implementation Agreement, the Project Company is entitled to demand from the Guarantor to purchase power at a specified price (“ticket home”) and exit the Project in exchange for a built power plant, which remains with the Guarantor. If the Guarantor does not have sufficient funds, Akimat shall make an additional contribution to the charter capital of the Guarantor.

5 Electric Power Sale-and-Purchase Agreement The principal contract in IPP projects. Long-term (up to 30 years). Guarantee of consumption of a certain amount (e.g. 80%) of power. Signed between the Project Company and the Purchaser (a solvent company represented by Akimat – e.g. KaragandyZhyluSbyt LLP).

6 Guarantee Agreement To successfully attract international financing for IPP projects, a guarantee from a solvent company represented by Akimat (Guarantor) for the obligations of the Purchaser under the Electric Power Sale-and-Purchase Agreement is required. For example, the guarantee from a solvent utility company or SBC. The Guarantor will also have to provide a guarantee to purchase a built power plant from the Project Company in the event of termination of the Implementation Agreement due to Akimat’s fault. For example, if the Project Company does not receive fuel for more than 6 months for the reasons beyond its control, it is entitled to claim the purchase of power (to recover its investments) and withdraw from the Project.

7 Why concession does not work in Kazakhstan? Concession objects cannot be subject to pledge (there is nothing to secure loans by). Concession object is not subject to alienation during the period of the concession (concession in Kazakhstan is only possible on the ‘Build Transfer Operate’ principle). Excessive bureaucracy and lack of transparency (development of the list, tender, etc.). Participation in a tender for the selection of a concessionary is not acceptable for many investors. Since concession has proven its inefficiency in Kazakhstan, a good alternative for raising private investments to construction of power plants in Kazakhstan on PPP principles may be IPP projects.

8 Contact Details: Shaimerden Chikanayev, Partner GRATA Law Firm е-mail: GRATA Law Firm 104, M. Ospanov Street, Almaty, , Kazakhstan Ph.: Fax: