1. Обдуманные ходы Эффективные решения PPP as a mechanism for infrastructure formation in Kazakhstan: legal aspects 16.03.20161

2. Обдуманные ходы Эффективные решения 16.03.20162 PPP LEGAL FRAMEWORK HISTORY The first Law of Kazakhstan ‘On Concessions’ was adopted in 1991 and lapsed in 1993 (the Law governed legal terms of object provision into concession to foreign investors). Concession under the ‘old’ Law means “leasing to a foreign individual or legal entity – concessionary – of property, land, natural resources”. After the ‘old’ Law was lapsed and prior to the adoption of the current Law ‘On Concessions’ the legal framework for PPP projects in Kazakhstan was the general rule of the Civil Code of Kazakhstan, JSC Law, Privatization Law, etc. Formation History of PPP Legal Framework in Kazakhstan

3. Обдуманные ходы Эффективные решения 16.03.20163 PPP LEGAL FRAMEWORK HISTORY “New” Law ‘On Concessions’ was adopted in 2006 and allowed assignment of rights to create state property objects for both foreign entities and resident legal entities. In 2008 and 2010 there was a range of amendments introduced to the concession legislation in terms of procedures for the transfer of objects into concession, expanding of state support, etc.

4. Обдуманные ходы Эффективные решения 16.03.20164 PPP LEGAL FRAMEWORK HISTORY Concession under the ‘new’ Law means “the transfer under the concession contract of state property objects into temporary possession and use for improvement and effective operation, as well as the rights to create (construction) of new objects for account of the concessionary or in co-financing with the concessor with further transfer of such objects to the state and provision of the concessionary with the right to own, use for further operation as well as with or without state support”.

5. Обдуманные ходы Эффективные решения 16.03.20165 PPP PRACTICAL EXPERIENCE OF KAZAKHSTAN Share Purchase Agreements Construction and operation of the rail way ‘Shar-Ust Kamenogors Station’ Construction and operation of the passenger terminal of the international airport of Aktau Construction and operation of the inter-regional power line ‘North Kazakhstan – Aktobe Region’ Construction and operation of the gas turbine plant in Kandyagash city, Aktobe region Construction and operation of the rail way ‘Yevraliyevo-Kuryk’ The following is currently performing:

6. Обдуманные ходы Эффективные решения 16.03.20166 NORMATIVE LEGAL REGULATION  The Law of Kazakhstan ‘On Concessions’;  The Law of Kazakhstan ‘On Investments’;  The Civil Code of Kazakhstan;  The Law of Kazakhstan ‘On State Social Procurement’;  The Law of Kazakhstan ‘On State Property’;  The Tax Code of Kazakhstan;  The Land Code of Kazakhstan;  The Budget Code of Kazakhstan;  The Law of Kazakhstan ‘On Motor Roads’;  The Law of Kazakhstan ‘On Rail Way Vehicles’;  The Law of Kazakhstan ‘On Security Market’;  Various special bylaws in concessions.

7. Обдуманные ходы Эффективные решения 16.03.20167 BASIC PPP CONTRACT FORMS ConcessionLeasing Management Contract Service Agreement

8. Обдуманные ходы Эффективные решения 16.03.20168 CONCESSION AS A PPP FORM Transfer under a concession agreement of current state property objects into temporary ownership and use (for improvement and effective operation); or is performed for account of the concessionary or in co-financing with the State; need to transfer such an object to the State (BTO); concessionary is entitled to own and use for further operation; with or without state support. Transfer under a concession agreement of the rights to create (construct) new objects:

9. Обдуманные ходы Эффективные решения 16.03.20169 CONCESSION OBJECT Concession objects resulting from the execution of contract terms are transferred into the state ownership since the creation thereof for further operation of these objects by the concessionary A concession object cannot be the subject matter of a pledge Concession objects cannot be alienated during the term of the concession contract

10. Обдуманные ходы Эффективные решения 16.03.201610 CONCESSION BENEFITS  State guarantees on infrastructure bonds;  State loan guarantees;  transfer of the exclusive IP rights owned by the State;  provision of in-kind grants;  co-financing of concession projects;  Guarantees of consumption by the State of a certain amount of goods (works, services) when the State is a principal consumer;  compensation for a certain volume of investment expenses.

11. Обдуманные ходы Эффективные решения 16.03.201611 STATE SUPPORT The State provides for one or several types of state support When the State support is provided in the form of co- financing, the concessionary shall be obliged to issue infrastructure bonds The total value of the State support shall not exceed the value of an object created (under construction) at the expense of the concessionary under the concession agreement

12. Обдуманные ходы Эффективные решения 16.03.201612 CONCESSION APPLICATION FIELDS Transport (airports, rail ways and motor roads);Electric Power Industry;City Infrastructure (hospitals, kindergartens, stadiums);Waste Disposal; Water Resources (water desalination plants, water treatment facilities).

13. Обдуманные ходы Эффективные решения 16.03.201613 WHY DOES NOT CONCESSION WORK IN KAZAKHSTAN? The concept ‘availability fee’ is not provided for in the laws of Kazakhstan (Methods for determination of the concession object value, concession project value and total value of the State support to the concessionary’s activities, 2009, complicates the applicability thereof on contractual basis). Excessive bureaucracy and lack of transparency (formation of the list, tender, etc.). Participation in a tender for the selection of a concessionary is not acceptable for many investors. In some cases, compensation is needed not only for investment expenses but for operating costs as well.

14. Обдуманные ходы Эффективные решения 16.03.201614 GAPS IN LAWS Capacity Charge for IPP projects and Availability Payment for PPP projects - can be provided on a contractual basis, but must be take into account the restrictions of the Methods for determination of the concession object value, concession project value and total value of the State support to the concessionary’s activities, and tariff regulation. Assignment of rights is not a pledge under the laws of Kazakhstan. The concept “direct agreement” is not recognised by the laws of Kazakhstan. The concept “step in right” does not work – through pledging interests in SPV as an alternative. Many concepts applicable in the international practice do not work:

15. Обдуманные ходы Эффективные решения 16.03.201615 GAPS IN LAWS The concept of “take or pay” - can be envisaged as a ‘penalty’ in the contract, but the amount of the ‘penalty’ may be revised unilaterally by the court if it deems it excessive. The concept of “termination payment” can be envisaged as a ‘penalty’ in the contract, but the amount of the ‘penalty’ may be revised unilaterally by the court if it deems it excessive. Long-term contracts of purchase / consumption for 30 or more years is no longer possible (for example, electricity tariffs are set at a maximum of seven years)? The concept of “Single Offtaker” - there may be problems with the Law “On Competition”. Obligatory sale of the pledge subject through an auction is not practical for the purposes of project financing. The concept of subordinated debt shall be recognised, including in case of the bankruptcy of a company. To amend the law to clarify the authority of local executive bodies (may Akimat provide a guarantee, is there the need to hold a tender or there will be problems with the anti-corruption laws?). Many concepts applicable in the international practice do not work:

16. Обдуманные ходы Эффективные решения 16.03.201616 104, M.Ospanov Street Almaty, Kazakhstan, 050020, Ph.: +7 (727) 2445-777, Fax: +7 (727) 2445-776 info@gratanet.com Contact Details Shaimerden Chikanayev Almaty, Kazakhstan Partner Mob.: 8701 7878020 schikanayev@gratanet.com