National PPP landscape

The legislation, in general, and the Budget Code, in particular, allow for three types of state support to PPP projects: (i) funding support, in the form of cofinancing; (ii) revenue support, mainly availability-type payments post completion and during operation; and (iii) credit enhancement instruments in the form of sureties and guarantees. However, the level of support, guarantees, and rights provided to concessionaires and private partners varies depending on the level of the project (republican versus regional) and its specifics (e.g., social importance, special significance).

The amounts of state support committed by the state for PPP/concession projects are bound by the limits of acceptance of PPP/concession obligations which are set each year for 3 years within the standard budget process. The limits (accrued and new) are calculated in accordance with formula adopted by the Ministry of National Economy (MNE) in its Order No.731 (last amended in December 2020).1 The PPP/concession limits depend on the annual revenues of each subnational budget, and the level of its obligations and liabilities to creditors, including banks and bonds. In most cases, they are prohibitively low to accommodate for large-scale, long-term regional projects.

In April 2021, the MNE amended its Order No. 129 of 5 December 2014 to add a new compulsory prerequisite (criterion) for the implementation of PPP projects (including concession projects). The amendment provides that the state obligations under the PPP projects, including state concession obligations (if necessary), should not exceed the amount of money spent or involved by the private partner (concessionaire) in the PPP (concession) project, including the private partner’s own funds. At the same time, the private partner shall involve its own funds into the project in the amount not less than 10% (for concession) and 20% (for PPP) of the value of the object. The effectiveness of this change was suspended until 1 April 2022; this suspension has now expired.2 This revision can potentially disrupt all future PPP projects as the state will not be able to provide availability payments and structure availability payment-based PPPs.

Funding Support

Cofinancing from state budget is currently the only method of providing viability gap funding for PPP projects that can be committed directly from the republican and/or regional budgets at the implementation stage, as reflected in Article 27, point 5 of the PPP Law and Concessions Law (Article 14, para. 1, sub-para 5). A more detailed mechanism for assuming and implementing the commitments on cofinancing is prescribed in Article 11 of the Budget Rules.3 It is unclear if they also apply to the projects structured in accordance with the Concessions Law. The implementing entities (i.e., line ministries or akimats) can cofinance the capital expenditures of the PPP projects within the budget limits of their respective budgets and programs, as calculated in accordance with the PPP Limits Methodology (footnote 1).

Equity contributions have become available with the adoption of the PPP Law and its concept of “institutional PPPs” (Chapter 6 of the PPP Law). It envisages the participation of the state-owned enterprises and quasi-state companies as an alternative to the cumbersome budget process of receiving state support as part of the contractual PPP. Approved according to the participating companies’ internal procedures, such involvement enhances the creditworthiness of the special purpose vehicle and may positively impact the financing cost.

Provision of land grants is administered in accordance with the relevant clauses of the Land Code (for instance, gratuitous provision of plot for use).4 The law allows for the risk allocation on the land plot-related risks, such as access roads, communications, and resettlement, to be borne by the public party. Land expropriation and resettlement risks should be carefully assessed and managed as the provisions of the Land Code may be insufficient to ensure compliance with ESG and Equator principles. In terms of expropriation and resettlement, a decree needs to be published by the government or the relevant akimat on the planned alienation of land, indicating the purpose, location, owner, and date of the property.

Revenue Support

The bulk of the PPP-specific state support measures relate to the project’s post-construction operations stage. The government provides revenue support through the following:

Investment cost compensation (ICC) is payable at the commencement of the project’s operation stage in accordance with the agreed payment schedule.5 It is limited to the following justifiable costs:6

• preparation of design documentation, cost estimates, surveys, assessments, evaluation of project feasibility, and obtaining licenses and receiving permits prior to project implementation required by Kazakhtan’s legislation;
• raw materials and materials, works, and services used in the creation (construction) of the object;
• project implementation and management expenses during the construction and implementation period, including technical and administrative expenses;
• accrued interest on short- and long-term debt (at market interest rates) and other debt service related expenses;
• all types of insurance costs required during the creation and/or reconstruction of the PPP object;
• depreciation accrued on the fixed and intangible assets used directly in the creation (construction) of the object; and
• other project-implementation-related expenses.

Operational cost compensation (OCC) is paid out of the state budget (republican or regional) aimed at reimbursing the expenses of the private partner related to the operation of the PPP object in accordance with a PPP agreement.7 OCC can be used to compensate the following operational costs:8

• costs related to the operation and maintenance of engineering and technological equipment;
• maintenance costs of buildings (structures) and territories;
• administrative costs (e.g., remuneration of administrative and managerial personnel, insurance costs, banking fees, communication and security services);
• tax expenses;
• insurance costs;
• debt service;
• other operating costs, which may include routine repairs, average repairs, and material costs (e.g., raw materials necessary for the operation of the PPP object, fuel, spare parts); and
• costs of keeping stocks, inventory, and reserves necessary for the operation of the PPP object (e.g., work clothes, food).

Management fee has been specifically introduced to reimburse for cases where the private partner is mandated with the responsibility of operating a state-owned asset (for concession projects, management fee description also includes the rent payable from the state budget to the concessionaire). Management fee effectively includes return on equity, foreign-exchange-related payments, debt service not covered by ICC, and other project-related costs.

• 1Order of the Minister of National Economy of the Republic of Kazakhstan dated 26 November 2015 No. 731 “On the Methodology of Determining the Limits of State Obligations on Concession/PPP Projects of the Government of the Republic of Kazakhstan and Local Executive Authorities” (the PPP Limits Methodology).
• 2Unicase Law Firm. 2021. Kazakhstan – PPP Criteria “1 To 1” Postponed for a Year. Almaty. https://www.conventuslaw.com/report/kazakhstan-pppcriteria- 1-to-1-postponed-for-a/.
• 3Order of the Minister of Finance of the Republic of Kazakhstan dated 4 December 2014 No. 540 “On approval of the rules of budget execution and its cash service” (the Budget Rules).
• 4Article 27 of the PPP Law; Article 6 of the Concessions Law.
• 5Order of the Minister of Finance of the Republic of Kazakhstan dated 4 December 2014 No. 540 “On approval of the rules of budget execution and its cash service” (the Budget Rules), para. 546.
• 6Rules No. 725, Appendix No. 7, para. 8.
• 7The Budget Rules, para. 564-1.
• 8Rules No. 725, Appendix No. 7, para. 23.

BAKAD Payment Structure

The Big Almaty Ring Road PPP, commonly referred to as “BAKAD” for its Russian abbreviation, had its payment mechanism structured in accordance with the provisions of the Concessions Law and Order 157. It consists of the following:

Fixed part (A)

• ICC, based on the investment costs of the local feasibility study (commonly referred to as “TEO”), not on the estimates of the winning bidder
• OCC, also based on the estimates of the TEO (also based on local feasibility study)
• Management fee, consisting of
  • cost of equity,
  • compensation for expenses during service period,
  • additional expenses for construction (construction costs of the winning bid minus the construction costs according to the TEO), and
  • additional expenses for operation (operating costs of the winning bid minus the operating costs according to the TEO).

Variable, or contingent, part (B)

• The foreign exchange compensation (legally part of the management fee).
• Adjustments for deductions.

The foreign exchange compensation part should be calculated in accordance with the following formula:

FXo - initial exchange rate
FXn - exchange rate at the moment of payment of availability payment in period n

B - fixed component of availability payment in period n

The toll payments are collected by the government and are not part of the concessionaire’s revenue structure.

The BAKAD experience has demonstrated to the investor community the willingness of the public entity to accommodate the requirement for a robust payment that includes essential contingent obligations, such as the foreign exchange adjustment component.

The project is expected to generate tax revenue for the Government of Kazakhstan, and contribute to the national budget. Tax revenues will be generated through income taxes and corporate taxes on expenditures, operational and corporate revenues, and incomes of employees.

While the maximum amounts of management fee are set by the PPP/concession agreement, the actual amounts can be reduced if the private partner is in violation of the agreement terms related to service quality.9

Availability payments can be included in the PPP/concession agreement as payable out of the state budget, where availability is to be specified as operational and qualitative characteristics as well as individual, technical, and economic parameters of the PPP/concession object.10 According to the Concessions Law, they can be the sum of ICC, OCC, and the management fee; while in the PPP Law, they are a sum of OCC and the management fee (ICC is a separate component). Availability payments can be combined with other means of state support payable from the state budget.11 However, unlike the Concessions Law, the PPP Law does not provide a requirement for the PPP project to be “socially important” to qualify for the availability payment.

Credit Enhancement Measures

The PPP Law contemplates various measures of state support aimed at enhancing the ability of the private partner to raise affordable long-term debt and encourage the participation of institutional investors. Among such measures are the following:

• state sureties for infrastructure bonds (not necessarily placed on the Kazakhstan stock exchange);
• state guarantees for loans, aimed at financing PPP projects;
• demand-related guarantees (e.g., offtakes by the state entities, shadow tolls); and
• rent fee for use of the object owned by the private partner.

The guarantees are applicable for the projects initiated by the government entity as well as those initiated by the private player under the direct negotiation model defined in the PPP Law, subject to the receipt of various approvals listed in the Budget Rules on the provision of government guarantees.12

Typically, a fee of 2% of the guarantee amount is charged from the private player seeking guarantees.

According to the PPP Law, the budget execution central authorized body shall

• enter into contracts of state guarantees and sureties under contracts of PPP,
• keep a register of state guarantees and sureties provided by the state under PPP agreements, and
• record the acceptance and fulfillment of the state’s financial obligations under a PPP agreement.

The Concessions Law also mentions the following credit enhancement instruments:

• state guarantees for infrastructure bonds under concession agreements,
• state guarantees for loans attracted to finance concession projects, and
• guaranteed offtake of a certain volume of goods (works, services) by the state.

• 9The Budget Rules, para. 574.
• 10The PPP Law, Article 1 (4).
• 11Rules No. 725, Appendix 7, para. 23.
• 12The Budget Rules No. 674 on the provision of sovereign guarantees dated 2 June 2019.