Investment climate in Kazakhstan

Again about import substitution

At a meeting dedicated to the import substitution, which took place in Aktau in June, it was announced that Kazakhstani government by the decree No. 612 approved the rules of bids for the oil companies' commodities and services. These rules must support Kazakhstani service companies, whose presence in the oil industry of the republic is not so big. The rules were developed by the government in accordance with the last changes in the orders of the president that have powers of the laws on oil and mineral resources utilisation, being also another government measure in the realisation of the import substitution program. According to V.Shkolnik, minister of energy and mineral resources: "Whenever a bid (for commodities or services) takes place, Kazakhstani enterprises participation must be a priority".

The rules must regulate not only the activities of the oil operations contractors, but those of the third parties as well in the case when a contractor transfers his right on purchase of commodities or services to a third party. It is important to notice that both Kazakhstani and foreign enterprises are supposed to be involved in the bids. According to the head of the MEMR: "The government will observe most strictly that there is a normal competitive environment and no lobbying of affiliated companies on the part of the purchasing companies".

As per the rules, those enterprises that will offer the certified commodities, produced on the territory of Kazakhstan or the high technologies, and will employ Kazakhstani workforce, including specialists and enterprises, will have a priority.

It is quite obvoius that the representatives of the foreign companies will not have doubts in the capacities of Kazakhstani companies in the offshore oil production. In relation with this, the minister states that the government activities are aimed at the formation of a favourable competitive environment, which does not suggest that the foreign companies will be forced to use Kazakhstani commodity producers or services. "You should not be afraid - it's an international practice…we've been working for a long time with you and we will resolve this matter reasonably",- Shkolnik informed the foreigners, adding that during the next half year such rules will be imposed on all mineral resources producers in the country.

There is no doubt that after the introduction of the rules, the role of the ministry of energy and mineral resources as a tender authority will grow: representatives of the ministry will be included "on compulsory basis" in the tender commission, while the ministry will be responsible for the results. In other words, it will be responsible for all the issues of commodities, works and services regulation during the oil operations. The bid organiser - oil enterprise - must present full information about the tender conditions in Russian.

The law of priorities

The rules anticipate the establishment of a new legal space in Kazakhstan, which is supposed to regulate the investment relations, presently reflected in the laws "On foreign investments" and "On the state support of investments".

At the meeting of the lower house of Kazakhstani parliament (Mazhilis) last Friday (21.06.02.) the draft law "On investments" was discussed. As per an instruction from N.Nazarbaev, which had been read earlier, the document will have to be discussed and approved by the Parliament as a priority. In the state secretary K.Tokaev's view "the main essence" of the draft law is in "not dividing foreign and national investors" and equalling their rights for various guarantees and preferences. Moreover, the state secretary observed the inadmissibility of revising the current contracts with the foreign investors: "It is worse than death - to revise the existing contracts with the foreign investors".

At the same plenary session, after extensive debates, the draft law was forwarded to the conciliatory commission. Disagreements between the government and the deputies appeared because of the amendments to the draft proposed by the deputies, according to which the rights on the conclusion of the contracts with the investors, as well as their preferences definition, would be represented not by the authority, in the preson of the investment committee of foreign ministry of RK, but by its territorial representatives in the local executive authorities - akimats. The amendments brought forth a negative reaction of the government representatives, who are in favour of the centralised regulation of investment activities. As it could be predicted, the conciliatory commission proposed to the chamber to approve the draft law without the mentioned amendments, which was done by the deputies soon.

An important novelty, marking the new draft law, is the absence of the norm, providing a guarantee of the tax regime stability for the foreign investors. It is known that such guarantees are provided by the current law "On foreign investments" (art. 6). In the givernement's explanatory note to the draft law it was emphasised that the issue of tax regime for foreign investors presently is "the sticking point in the relations between the state and the investor". This norm', in government's view, helped to form a more privileged position of foreign companies in comparison with the Kazakhstani ones. The discussions in the society on this subject "negatively influence the investment climate in Kazakhstan, causing losses in the national and local budgets". Moreover, the governement is sure that if this regime is extended to the national investors, it would bring "the budget losses. In relation with this, it was decided to abstain from the guarantees of "non-worsening" the tax regime for the foreign investors.

However, it has to be noted that the transition items of the draft law are supposed to maintain guarantees for those foreign companies, which came to Kazakhstan before the new law was passed, for the general term of 10 years since the beginning of investments. Besides, the tax regime conditions in the long term contracts of foreign investors, providing their definite term of more than 10 years, will remain unchanged, if it is not provided otherwise.

On the other hand, a number of guarantees, provided by the current legislation only for the foreign companies, as per the new draft law, is valid also for Kazakhstani investors. These guarantees are provided for the case of nationalisation and requisition, illegal actions of state authorities and officials, guarantees of compensations and reimbursements of costs to the investors, possibilities of free usage of the received income, the publicity of the state authorities in their relations with the state authorities, guarantees from unfounded audits etc.

Of course, the issue of guarantees in the investments area must be important anyway. Therefore, already on 24 June, K.Tokaev, in relation with adoption of the law "On investments", observed: "There is no possibility that the contracts with foreign investors will be revised unilaterally whatsoever ". One of "the main advantages" of the new draft law, the minister believes, is the presence of the items on the contracts stability and possibility of resolving the production disputes in the international arbitration. The important moment in the realisation of this item by the heads of foreign ministry in their consultations and negotiations with the foreign companies concerning the cases of claims from Kazakhstani side, which, in the first turn, dealt with the failures of the foreign companies to execute their obligations or causing ecological damage.

Novelties in mineral resources utilisation and oil operations

At the mazhilis plenary session of 21 June, V.Shkolnik also spoke. The report was dedicated to the improvement of the legislation on mineral resources and oil operations.

As it is possibly known, today the main legal norms, regulating the relations in this area are two decrees of the president of RK, having legal powers. It is the decree as of 28.06.95, No.2350 "On oil" and decree as of 27.01.96, No.2828 "On mineral resources and their utilisation".

The first one affirmed the rights and the obligations of the participants in the relations between the state authorities and companies, the powers of the state authorities, defined the types of the contracts and the rules of the offshore operations, conditions for the trunk pipelines utilisation. The latter regulates the issues of mineral resources utilisation in order to provide their rational usage and protection, to create conditions of equal development in all forms of production, to strengthen legality in this area. The decree defined the order of providing rights for the mineral resources utilisation, the government's competence, the functions of the Competent and of the local executive authorities, the types of the contracts, the conditions for termination and interruption of the contract, the resources protection demands, ecology, safety, and so on.

On 27 May, 1996, by the decree No.646 of the government of RK, the "Clause on competent authority of the government of RK on contracts conclusion by the mineral resources users" passed. First, the competence authority functions were executed by five ministries, but later, by the decree of the government as of 12.09.97, these functions were borne by the state committee for investments. The decision was taken in relation with the necessity of increasing efficiency of "the mineral resources utilisation, investment activities regulation improvement in the mineral resources area" etc.

When some time passed (11.05.99. and 11.08.99.), amendments were made in the decrees, which provided the transition from license-contract form of mineral resources utilisation to the contract form, which enabled to simplify the procedure significantly.

Besides, in the period from 1995 to 2000 the government of Kazakhstan approved a number of clauses, regulating the relations in the mineral resources utilisation and oil operations. First of all, the rules of granting a right to utilise mineral resources, containing sections on "organisation of bids of investment programs for the right to utilise mineral resources" and "the order of the contracts conclusion" (the decree of the government of RK as of 21.01.2000, No.108), as well as the Model contract (the decree of the government of RK as of 31.07.2001, No.1015). The issues of control over geologic survey and mineral resources protection are regulated by the decree of the president of RK as of 27.01.96., No.2828, Clause on state control over mineral resources protection in RK, approved by the order of the government of RK as of 18.10.96., No.1284 with changes and amendments as of 19.06.99., No.810, where the item 2 (General provisions) defines that the state control over the mineral resources protection is carried out by the state control authorities of the committee for geology and mineral resources protection.

Despite the lawmaking activities, the current legal basis is far from corresponding with the modern requirements. Due to this fact, as well as due to the extending presence of the foreign investors in the country, a decision on the establishment of an operating group for development of chanfes and amendments in the legislative acts on the issues of mineral resources utilisation and oil operations in RK. According to V.Shkolnik: "These issues must be resolved with the balance between the interests of the state and of the operating companies in view. Therefore the target of the currently developed draft law of RK "On introducing changes and amendments into the legislative acts of RK on the issues of mineral resources utilisation and oil operations in RK" is the improvement of the legislation in the mineral resources area considering the legal practice of the preceding period by means of liquidation of a number of errors uncertainties..., as well as introduction of new amendments that had not been reflected in the legislative acts earlier".

Briefly, the essence of the draft law might be said to consist in defining the norms on improvement of the state regulating system for these relations and liquidates a number of contradictions in mineral resources utilisation and oil operations in Kazakhstan.

First of all, the draft provides that the abovementioned decrees receive the status of the laws of RK. Also an extention of the competent authority powers is suggested. Thus, the article 74-1 has been included into the draft, according to which the functions of the licensing authority concerning the previously issued licenses, are transferred to the competent authority. This item allows to resolve the problem of changes in those licenses (today the procedure is registered by a government decree and takes 3 to 6 months and more).

In the draft the body of notions is extended and made more precise, plus certain definitions are excluded, which are not the subject of the regulating decrees. It has to be noted that the norm obliging to realise the production volume defined by the geologic capacities of a field for mineral resources users (as contradicting to the principles of market economy).

An important moment is also the cancellation of the restriction on financing the state geologic survey only from the national budget funds. The norms, establishing advantages for separate subjects have been cancelled as contradicting the principle of equal development of all forms of management.

The draft also provides the items on regulation of the contracts conclusion order and authorisation for mineral resources utilisation, correcting and classification of the types of contracts, detailing the process of investment programs bids, terms of bid applications, and so on. Besides, the draft law takes a new approach to the conclusion, execution and termination of contracts, provides cases and order of mineral resources utilisation, possibility of production contracts term extension.

Finally, it is necessary to underline that the draft law has an item on the necessity of the approval for the rules of establishment and usage of the Liquidation fund, which would have to resolve the problems of jobs conservation and rehabilitation of contract activities.