Kazakhstan to open up PPP market

By bne IntelliNews May 3, 2013

Clare Nuttall in Astana -

Kazakhstan is close to adopting legislation that will open up a wide range of sectors from road construction to healthcare to public private partnerships (PPP). Several international companies including France's Bouygues and Spain's Isolux are among those now lining up to look at infrastructure projects once the new law comes into force.

By opening up new sectors to PPP and allowing a wider range of contact types to be used, the government hopes to encourage private investment into the infrastructure and social sectors. So far, progress has been low; in the seven years since Kazakhstan's law on concessions was adopted, there have been just six PPP projects.

The new law, which was approved by Kazakhstan's lower house of parliament, the Majilis, in February 2013, amends the concessions law, and other legislation relating to PPP. A key change will be to allow the use of several forms of PPP including build-own-operate (BOO), build-operate-transfer (BOT) and design-build-finance-operate (DBFO). "Previously only BTO [build-transfer-operate] contracts were possible in Kazakhstan, but if the law is adopted in its current form, concessionaires will no longer be limited to the one type of contract," says Galymbek Mamrayev, deputy chairman of the executive board at the Kazakhstan Public-Private Partnership Centre, a government initiative to promote PPP.

Allowing different contract types is important, as Astana is interested in using PPP in transport infrastructure, municipal infrastructure and social facilities such as hospitals and kindergartens. "Customarily each sector has its preferred forms. For example structures with availability payments are mostly used for toll roads, capacity payments for power generation, revenue sharing for airports, and so on," says Jannat Salimova-Tekay, head of project finance and infrastructure, Central Asia and Caucasus, at Ernst & Young.

The need for availability payments, periodic payments to concession holders, became evident since the adoption of Kazakhstan's 2006 concessions law. While availability payments are routinely used for social facilities such as hospitals, Kazakhstan's large size and distances between cities means that they are also needed for infrastructure projects, since road charging schemes used in densely populated European countries are not feasible.

"The government has realised that many PPP projects are impossible without state funding and certain forms of state guarantees, and the draft law introduces changes including lifting some restrictions on when and how compensation can be paid, and introducing a mechanism for availability payments," says Aigoul Kenjebayeva, managing partner of law firm Dentons' Almaty office. Other changes include introducing long-term off-take contracts to increase the financial viability and bankability of projects.

PPP projects launched in Kazakhstan so far include the renovation of Aktau international airport, construction of a power transmission line, and the Shar to Ust-Kamenogorsk railway. However several did less well than expected because of the crisis that hit the country just a year after the concessions law was adopted. The railway, for example, has seen lower than expected freight volumes, and several of the enterprises expected to use the power line were out of action or operating below full capacity.

Now, however, Kazakhstani officials are enthusiastically preparing lists of projects to be financed using PPP when the new law is adopted, most likely by mid 2013, to meet the country's many infrastructure needs. "With the law due to come into effect soon, ministries and public sector officials are already drawing up lists of projects. We expect a stable flow of projects in areas such as healthcare, transportation and utilities," says Mamrayev.

In the transport sector, there are plans for a comprehensive modernisation of freight and passenger rail transport, and a pressing need to reconstruct roads in many parts of the country. Many regional airports need their runways and terminals rebuilt in line with international standards. The ministry of transport and communications plans to start the revamp of five airports in 2013, with others to be targeted in the next two years. Currently, this project is state funded, but the ministry says it hopes to use PPP in future.

At a city level, water supply networks and other municipal infrastructure is equally in need of attention. The mayors of both Astana and Almaty have announced plans to build light railways, and are planning to use PPP.

According to Mamrayev, several international companies are already interested. "There has been strong international interest, with companies including France's Bouygues, Vinci and Veolia, and Spain's Isolux and Aqualia looking at Kazakhstan. This is not a full list as there are a lot of consultants, engineers and investors from around the world all looking for pilot projects," he says.

Kazakhstan is expected to start relatively small, with pilot projects in new sectors, and expand them to other cities and regions if they are successful. However, there is still a note of caution to be sounded, with Dentons' Kenjebayeva warning that the draft law fails to tackle all the necessary issues. "Overall, the new law is an important breakthrough that resolves many issues seen as obstacles to implementing PPP projects," she says. "However, problems remain, including that it is almost impossible to use international arbitration to resolve disputes."

Mamrayev also points to the dangers in over-using PPP to finance infrastructure projects, citing the example of Portugal, one of the world's largest users of PPP, during the 2010-13 financial crisis. Because of this, Kazakhstan is not expected to use PPP for more than 10-15% of infrastructure projects.

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