Kazakhstan - Public–Private Partnership In Roads: Passing Through Challenges.

Legal News & Analysis - Asia Pacific - Kazakhstan - Energy & Project Finance

Kazakhstan - Public–Private Partnership In Roads: Passing Through Challenges.

 

5 August 2020

 

Asia Pacific Legal Updates
 

Traditionally, governments have been the principal authorities responsible for implementing infrastructure projects (both in terms of financing and construction). However, over the last few decades, the situation has begun to change.

 

With the aim of reducing debt obligations while improving and expanding existing infrastructure, governments have started to involve the private sector in long-term agreements under which the private partner takes over responsibility for financing, building, and/or managing a public sector infrastructure project within PPP framework. For Kazakhstan, which has a favorable geographical location between Europe and Asia, the implementation of the PPP model in transport infrastructure projects becomes very important.
 

In 2007-2014, during the initial period of development of PPP in the Kazakhstan highway sector, the government has taken a number of significant efforts to prepare and hold PPP tenders, most of which unfortunately was unsuccessful due to various reasons. In many tenders, for instance, there were no bids from potential concessionaires willing to participate in the tender.  The main reason for it was a low transport load, high capital intensity of Kazakhstani road projects due to the long length of the roads, and the cost of their maintenance taking into account the climatic conditions of Kazakhstan, legal barriers and other.
 

The situation was aggravated by the global financial crisis in 2007, which limited investors' access to long-term financing. Expensive loans and instability of the national currency forced potential concessionaires to inflate the required level of government support.
 

Therefore, most of the projects originally proposed for the concession were implemented using internal resources as well as external government borrowings, for instance, the following projects: Construction (reconstruction) and exploitation of "Almaty - Kapshagai" road section of "Almaty - Ust-Kamenogorsk" highway, reconstruction and exploitation of "Astana - Karaganda" section of "Russian Federation border (to Yekaterinburg) - Almaty" highway, through the cities of Kostanay, Astana, Karaganda", reconstruction and operation of "Almaty - Khorgos" road section of "Border of the Republic of Uzbekistan – (to Tashkent) Shymkent – Taraz – Almaty – Khorgos through Koktal Blagoveshenka, doorways to the border of the Kyrgyz Republic" highway.
 

Thus, the initial experience of implementation of concession projects in the road sector of Kazakhstan showed that the PPP and concession mechanisms of that time were not effective in practice. However, the government's desire to further develop cooperation with the private sector through PPP mechanisms and political will of the country's leaders resulted in the undertaking of the work on correction of the mistakes that eventually shifted the PPP implementation in the road sector.
 

Nowadays, Kazakhstan already has sufficiently developed legislation that clearly stipulates the concept, principles, participants, and stages of the PPP project implementation. The undoubted achievements of our legislation in the PPP sphere is a high level of guarantees that are available to investors and private partners today:
 

  • budgetary payments (compensation for investment costs, compensation for operating costs, management fees, availability fees, etc.);
     

  • a ban on sequestering financial obligations undertaken by the state under a PPP contract;
     

  • currency risks reimbursement (for the projects of special importance);
     

  • compensation of losses in case of early termination of the PPP contract upon the state initiative and others.
     

One of the driving forces behind the development of the transport industry in Kazakhstan is the “Nurly Zhol” state infrastructure development program, approved in April 2015. The “Nurly Zhol” program provides for the expansion of public-private partnerships in road construction.  [1]
 

As part of the “Nurly Zhol” program, the first PPP contract of national importance "The construction of Nur Zholy vehicle checkpoint and the operation of the transport-logistics centre" on the Kazakh-Chinese border was concluded in 2017. Construction and operation of the facility were completed in 2018. As a result of the project implementation, vehicle passage time on the territory of the Centre between registration and exit from the checkpoint has been reduced from 180 to 40 minutes.
 

A two-stage tender to determine the concessionaire for construction and operation of the "Big Almaty Ring Road (BAKAD)" with the length of 66 km was held in 2015 within the framework of the “Nurly Zhol” program. As a result of the tender procedures, the winner was determined and in 2018 the first concession agreement of the republican significance was concluded between the Government of the Republic of Kazakhstan and the winner of the tender - the Turkish-Korean consortium formed by Alsim Alarko, Makyol Insaat, SK E&C, and Korea Expressway Construction. Agreements on financing the project were reached in 2019. Earlier this year, a direct agreement was signed between the Government of the Republic of Kazakhstan, the concessionaire, and the project creditors. Starting from this year it is planned to inflow at least 150 billion tenges of foreign direct investments into the project, which will ensure construction with expected completion in 2022. According to the conducted analyses, the planned income from the traffic fare in the period of 15.5 years will amount to 231 billion tenges, for 25.5 years - 570 billion tenge, thereby the self-repayment of the project is expected.
 

Thus, the “Nurly Zhol” state infrastructure development program has positively influenced the expansion and development of the PPP mechanism with gaining experience in achieving the effect of self-repayment in the implementation of large investment infrastructure projects without the burden on the national budget.  [2]
 

It should be noted that the PPP sector in Kazakhstan went a long way over the past decade since the first concession projects until now. The legislative framework regulating the PPP sector has been improved significantly, some of the improvements are results of trial and errors in certain projects.
 

Hence, the BAKAD project has only been launched at the second attempt, after the first bid in 2009 failed due to the fact that no applications were submitted. The main stumbling block was the "land" issue, as the tender documentation implied that the obligation to buy out land plots was to be imposed on the concessionaire.

 

During the second tender procedure in 2015, previous mistakes were taken into account. As a result, the state took an obligation to provide land for road construction and covered traffic risks. Furthermore, the legislation on concession and PPP was amended by:
 

  • introduction of the concept of "a project of special importance";
     

  • introduction of availability payments (compensation for investment costs + compensation for operating costs + management fees);
     

  • introduction of direct agreements and compensation for early termination;
     

  • arrangement of currency risks settlement through management fees;
     

  • possibility to apply to international arbitration, etc.
     

These modifications boosted not only the BAKAD project but also other major infrastructure projects under the PPP and concession framework in Kazakhstan.
 

However, we shall admit that today, despite the best efforts of the state to create favorable conditions for the implementation of infrastructure PPP projects, including road construction, the interest of private businesses in the PPP in the development of road transport services and construction of highways is still relatively weak. PPP is fairly well covered in terms of Kazakhstani legislative regulation. Along with that, the high cost of construction and operation of road transport infrastructure facilities in the absence of a guaranteed stable sufficient level of profitability and, as a result, high financial risks have become the main reason for the low interest of private businesses in participating in infrastructure projects.
 

In addition to abovementioned, there are other pitfalls in the implementation of the infrastructure PPP projects which are:
 

  • Distortion of the positive effect and exaggeration of the importance of PPP project implementation;
     

  • Shortcomings in land allocation procedure;
     

  • Determination of incorrect institutional schemes, including those that do not meet project conditions or unrealistic mechanism of interaction between the parties;
     

  • Incorrect distribution of the project risks and management methods;
     

  • Inaccurate calculations, exceeding the allowable volume and invalidity of the selected state support measures, as well as sources of cost recovery and income generation;
     

  • The inability of financial closure, including due to risks not considered at the PPP project planning stage;
     

  • The requirement for all tender participants to develop an expensive and complex feasibility study within concession projects of special importance;
     

  • Insufficient elaboration of the terms of amendment and termination of the PPP agreement, distribution of responsibility of the parties, and other specific aspects depending on the project.
     

Nevertheless, the new “Nurly Zhol” state infrastructure development program for 2020-2025 was approved by the Resolution of the Government of the Republic of Kazakhstan on December 31, 2019. The new program focuses on developing transport infrastructure that should be both comfortable and accessible to citizens and would increase mobility, productivity, and quality of life. As part of the program, 112 infrastructure projects are to be implemented by 2025 at a total cost of 5.5 trillion tenges.
 

The program's funding sources include PPP as well as private investments with a total indicative amount of 719,962 million tenges, which represents 12.9% of the planned investments in the transport sector under the program.  [3]
 

Considering the government's interest in mutually beneficial cooperation between the state and the private sector in the construction of roads in Kazakhstan, which is confirmed by the new “Nurly Zhol” program for 2020-2025, we believe that good planning of the PPP projects, elimination of legislative obstacles mentioned above and others, provision of additional tax and budgetary incentives for the active involvement of private business in the industry ultimately will have a positive effect on the further development of the PPP and will help to increase the number of successful PPP projects in the road construction sector in Kazakhstan.
 

 

For further information, please contact:

 

Saniya Perzadayeva, Managing Partner, Unicase Law Firm

saniya.p@unicaselaw.com

 

 [1] The state program of infrastructure development "Nurly Zhol" for 2015-2019, approved by the decree of the President of the Republic of Kazakhstan dated April 6, 2015 No. 1030

 [2] https://primeminister.kz/ru/news/reviews/itogi-programmy-nurly-zhol-za-pyat-let-poyavlenie-platnyh-dorog-novye-rabochie-mesta-rost-gruzoperevozok-2133112

 [3] The state program of infrastructure development "Nurly Zhol" for 2020-2025, approved by the Decree of the Government of the Republic of Kazakhstan dated December 31, 2019 No. 1055