Investing in Kazakhstan: opportunities and legal challenges

1. Investing in Kazakhstan: opportunities and legal challenges Shaimerden Chikanayev

2. A Silk Road for Oil & Gas “Today, as I stand here and look back at that episode of history, I could almost hear the camel bells echoing in the mountains and see the wisp of smoke rising from the desert” Speech by H.E. Xi Jinping, President of the People's Republic of China At Nazarbayev University. Astana, 7 September 2013

3. Why Kazakhstan is so important for energy security of China? • Kazakhstan oil, gas, coal and uranium reserves are among the ten biggest in the world. • Kazakhstan has a strategic geographical location to control oil and gas flows from Central Asia to East (China) and West (Russia, global market). • Its geographical proximity, the safety of the transportation routes, and the absence of any hostile rivals in the region are the main advantages of Kazakh energy for China.

4. Kazakhstan - an ideal junction between China and the West

5. Kazakhstan - China Oil Pipeline • TheChina’s first direct oil import pipelineallowing oil import from Central Asia. • The pipeline is owned by the CNPC and KazMunayGas. • Unprecedented international treaty was signed on 8 December 2012, that created specific legal framework for this particular project, that prevails over any conflicting Kazakhstan legislation.

6. Central Asia – China Gas Pipeline • The 3,666kmgas pipeline predated the new SilkRoad,but forms the backbone ofinfrastructure connectionsbetween Turkmenistan and China. • Unprecedented international treaty between Kazakhstan and PRC was signed on 18 August 2007, that created specific legal framework for this particular project, that prevails over any conflicting Kazakhstan legislation.

7. Moinak Hydro Power Plant • It is funded by ChinaDevelopment Bank with an investment of USD 360 million. • The firstsignificant infrastructure cooperation project between China and Kazakhstan other than the development of resources. • EPC contractor – China International Water& Electric Corp. • The plant is equipped with two 150MW Pelton turbines for an annual power output of 1,027GWh.

8. Roadblocks and Pitfalls for Chinese FDIs: Lessons Learned • Unsettled legal and regulatory environment including uncertainty regarding the continuity of existing laws and enforceability of contracts. • Bureaucracy and corruption. • Real Power Transition Still To Come – New President • The rise of Sinophilia and Sinophobia. • Major Chinese energy FDIs made in Kazakhstan so far, therefore, can be distinguished by specific approaches which the Chinese investors take in terms of obtaining additional legal protections in one form or another.

9. Kazakhstan’s Multi-Vector Energy Policy : implications • China already controls up to 30% of oil industry of Kazakhstan. • Since 2000 year Kazakhstan has moved from being fully dependent on Russia for oil & gas export toward more diversification, but now there are concerns, that Kazakhstan became dangerously dependent from China. • Kazakhstan has legal tools handy to prevent further expansion of Chinese control in energy sector, if needed, that may be an obstacle for some of the energy projects initiated by China under the Belt and Road initiative: • State’s priority right to purchase/permission to transfer so-called “strategic assets”. • State’s priority right to purchase/permission to transfer in the sphere of subsoil use. • State’s priority right to an interest of no less than 51% in any new trunk pipeline projects.

10. CONVENTIONAL POWER • Introduction of the capacity market in Kazakhstan from 1 January 2019 • The Ministry of Energy will determine annually an anticipated deficit of electric power and, if any, will hold tenders for the construction of newly-commissioned generating plants • Payments under the PPAs would cover the operating expenses of power plants, whereas payments under the CPAs shall cover the capital expenses of investments in new projects and in the modernization of existing power facilities • Indirect state guarantee for the single quasi-state offtaker obligations under the CPA

11. RENEWABLE ENERGY • Kazakh Government provides guaranteed offtake of the energy produced by RES power station by a single off-taker. • Kazakhstan has switched from the fixed feed-in tariff support system to the mechanism of auctions to develop renewable sources of energy from the 1st January 2018. • The auction system made the process of granting renewable energy projects open and transparent and gave impetus to the implementation of the most cost-effective projects.

12. Agribusiness in Kazakhstan • Kazakhstan has approximately 24 million hectares of arable land and 188 million hectares of pasture. More than 74% of the country’s territory is suitable for agricultural production. • Kazakhstan is one of the top 10 grain exporters in the world and its meat production is a particularly promising area that can generate up to US$2.6 billion in annual export revenue. • The biggest potential markets for Kazakh agricultural products are China, Iran, Saudi Arabia and Russia. • Currently, only local legal entities with a foreign ownership of 50% or less can lease farmland for up to 49 years, whereas foreign legal entities, foreign citizens and local legal entities with foreign ownership of 50% or more can neither own nor lease farmland.

13. Why invest in infrastructure in Kazakhstan? • There is lack of budget financing and high demand for investments in public infrastructure • Strategic geographical location (e.g. China’s Belt and Road initiative, a door to the Eurasian Economic Union, a single market of 183 million people) • Generally good legal framework (special PPP Law and Concession Law) • Strong political will of the President and Government to support PPPs • Kazakhstan’s climbed the World Bank’s Ease of Doing Business index and is now ranked 28th • Strong support of Kazakhstan by MDBs (EBRD, ADB, IFC, IDB, EABR, AIIB) attracting private and international financial investment

14. WHAT IS LEGAL FRAMEWORK FOR PPPs? • Please refer to general overview of the legal framework of PPPs in Kazakhstan: http://www.gratanet.com/up_files/PPP_Kazakhstan.pdf • Please refer to unofficial translations of the PPP Law and Concessions Law: http://www.gratanet.com/up_files/[GRATA]%20PPP%20Law%20English%20Translation%20(As%20of%204%20July%202018).pdf http://bit.ly/GI_Concessions_law

15. Concession Law v PPP Law

16. What are remaining hindering obstacles for PPPs? • Continuous and piecemeal changes to the PPP legislation. • Poor PPP project selection and preparation by state authorities (mainly because of lack of competence in the regions and/or lack of relevant state officials that are ready to take over the responsibility for making necessary decisions). • Uncontrolled growth of “fake” PPPs and concessions in the provinces (i.e. there is quantity, but there is no quality of PPP projects). • Lack of long-term and cheap Tenge financing (local capital market is dead, Kazakh commercial banks are not ready to finance PPPs).

17. 2018 Year in Review for PPPs • A number of subordinate acts and changes in the PPP Law and Concession Law were introduced in 2018. • More than 192 PPP agreements have been signed in just one year (mainly small and “service” type PPPs in education (kindergartens) and healthcare) – i.e. high risk that most of them are “fake” PPPs. • BAKAD finally reached commercial close, but it seems now it has problems with financial closing? • Some uncertainty in the PPP market, which was driven by the increasing attention that state authorities (mainly because of negative perception of how PPP develops), in the Ministry of Finance and some of the MPs) were paying to the PPP projects.

18. Outlook for PPPs • Amalgamation of the Concession Law and PPP Law. • There will be fewer projects with availability payment (i.e. with compensation from the budget of all investor costs incurred in the project). • There will be more real “infrastructure” PPPs, instead of “fake” service type PPPs. Less kindergartens, more utilities, transport and healthcare PPPs. • Decrease of KPIs for regions from 5 to 3 projects per year as a minimum. • Smaller size of projects and use of fully packaged products (i.e. templates etc.). • Revival of infrastructure bonds as a source of debt financing for PPPs. • Defaults, litigations and invalidation of many badly structured and “fake” PPP/concession agreements and tenders.

19. What to expect in 2019? • Light Rail transit in Almaty - $ 250 mln • Almaty railway bypass - $ 537mln • Asfendiyarov Medical university project in Almaty - $ 75 mln • Shymkent bypass toll road - $ 500 mln • Karaganda Medical University project - $ 151 mln • Almaty 1,265-bed Medical University project - $ 354 mln

20. Shaimerden Chikanayev Partner, GRATA Law Firm Almaty, Kazakhstan E-mail: schikanayev@gratanet.com Mobile: +77017878020

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