Interview on development of public-private partnership in Kazakhstan: Status, trends and prospects

Public-private partnership has established itself as a successful tool for interaction between business and the state. A lot of work is being done in our country for ensuring the quality growth and development of the PPP mechanism. Chair of the Board of Kazakhstan Public-Private Partnership Center JSC Talgat Matayev in an interview with spoke about the status and prospects of this type of partnership in Kazakhstan.

— Talgat Mustafayevich, the partnership between the state and business in the field of preschool education is by far the most successful example of PPP. How many educational facilities have been built over the years of practicing PPP mechanism in Kazakhstan? How has the pre-school enrollment ratio changed in the country?

— Indeed, PPP is most actively developing in the field of education. So, as of June 1, 2020, of the 786 PPP contracts concluded, 56% or 437 were in this sector. Agreements worth about 115 billion tenge were concluded.

In January-May 2020, compared with the same period of previous years, the education sector also remained the leader in terms of the number of PPP projects.

More than half of PPP projects in the field of education are concluded with pre-school organizations. So, to date, 240 PPP agreements have been concluded worth 70 billion tenge. Within the framework of these projects, new construction, reconstruction of buildings for preschool institutions were carried out, work was carried out on their restoration, modernization and operation. PPP was carried out in the form of transfer to trust, leases, etc.

According to the statement of the Minister of Education and Science Askhat Aimagambetov, in 2019 the coverage of children of 3-6 years old at the level of 98.5% is ensured.

However, despite this, in Almaty, Nur-Sultan, Almaty region and in a number of other regions, the need for preschool organizations remains due to high migration and the growth of demographic processes.

Therefore, in the new State Program for the Development of Education and Science of the Republic of Kazakhstan for 2020-2025. further expansion of the network of preschool organizations and schools through the PPP mechanism and per capita financing is indicated. Work will continue on placing a state educational order for pre-school education and training.

By 2025, it is planned to bring the share of children from 1 to 6 years old with pre-school education and training to 85.3%.

Given the existing experience in implementing PPP projects in this area and the need, further growth of PPP projects is expected.

— The Head of State Kassym-Jomart Tokayev pointed out the importance of developing public-private partnerships in education at the third meeting of the National Council of Public Confidence. In particular, the President pointed out the need to work out the issue of increasing the financial attractiveness of investments in educational infrastructure. What work is carried out to implement this order?

— Today, the Ministry of Education and Science of the Republic of Kazakhstan continues to further improve the mechanism of per capita financing of secondary education, planning to reduce the time for reimbursement of investment costs from 8 to 5 years, increase the size of the depreciation component, offering to co-finance part of these expenses from the local budget through the mechanism of public-private partnership.

The combination of two mechanisms, PPP and per capita financing, will increase the attractiveness of the project for potential investors, since PPP provides a long-term contract lasting 5-10 years, consuming a guaranteed amount of services, there is the possibility of allocating a land plot and providing engineering and communication infrastructure. The PPP agreement provides an opportunity to guarantee the quality of educational and other services, the operation of buildings through the use of special indicators.

Also, given the congestion of schools throughout the country, along with cities of republican significance, this experience is important to apply in each region of Kazakhstan.

In addition to building schools, the use of PPP mechanisms in educational institutions has great potential in such facilities as canteens, hostels, sports grounds, organizing the delivery of children, video surveillance, etc. Implementation of the Program PPP will significantly simplify PPP procedures.

— PPP projects are aimed at the future, it is rather difficult to assess their success according to current results. What is the situation with PPP in Kazakhstan? Is the practice successful?

— As of June 1, 2020, 786 PPP agreements were concluded worth 1.8 trillion tenge, of which 10 are agreements at the republican level, 776 agreements at the local level. Investments amounting to 910 billion tenge have been attracted.

The most successful PPP projects can be considered PPP projects of the third category. As of June 1, 2020, 1/3 of the ongoing PPP projects are projects of the third category, that is, they are paid off from current budget expenditures, tariffs and extrabudgetary sources (paid services, etc.).

One example of the implementation of projects of the third category are projects on the modernization of food blocks and canteen schools (standard projects covering all schools in the locality), as well as projects for the construction and operation of hostels, paid for by public procurement and student rents.

Also, in accordance with the Law of the Republic of Kazakhstan “On Public-Private Partnership,” the PPP Development Center annually evaluates the implementation of PPP projects, as a result of which recommendations are presented to budget program administrators (state partners) in order to increase the effectiveness of planned and implemented projects. Based on the results of inspections of PPP contracts carried out by authorized state bodies, a number of mistakes made by government bodies during the implementation of PPP projects were identified. Currently, administrators of budget programs, together with the Ministry of National Economy of the Republic of Kazakhstan and the PPP Development Center, are working to eliminate the above comments, as well as to make additions to the legislation in the field of PPP.

Along with this, in Kazakhstan there are examples of projects (for example, PPP projects of the third category, recouped from extrabudgetary sources), which are replicated in all regions.

— Is the state an effective partner in PPP transactions, is it effectively facilitating their preparation and conclusion?

— According to the Law of the Republic of Kazakhstan “On Public-Private Partnership,” one of the principles of PPP is the principle of balance — a mutually beneficial distribution of responsibilities, guarantees, risks and revenues between a public partner and a private partner in the process of implementing a public-private partnership project. Since the operation phase is mandatory in PPP projects, PPP agreements also necessarily reflect the obligations of the state partner, in case of violation of which sanctions are provided by the private partner. Today, the state is the most reliable partner; under PPP projects, it provides a number of support measures to private partners.

— What steps have been taken to develop legislation on PPPs in Kazakhstan? What amendments were introduced in the legislation in the field of public-private partnership last year?

— As part of the implementation of the Kazakhstan-2050 Strategy and the Nation's Plan “100 Concrete Steps”, the Law on PPP was adopted on Oct. 31, 2015, which created a new legal framework. The Law on PPPs made it possible to implement PPPs in all sectors of the economy (with the exception of certain facilities, the list of which is determined by the Government of the Republic of Kazakhstan), expanded the contractual forms of PPPs, established the possibility of participation in quasipublic sector entities, organizations providing project financing, as well as the possibility of concluding contracts PPPs not only on the basis of a tender, but also through direct negotiations (putting into circulation the property of a private partner).

The United Nations Economic Commission for Europe, combining global experience in public-private partnerships, has developed recommendations for orienting PPPs for the benefit of society — the principles of “people first PPP,” which involve taking into account certain aspects, including zero tolerance for corruption and the right of the people to compensation for damage and that their opinion is to be taken into account.

Based on these recommendations, in 2019, some orders of the Ministry of National Economy of the Republic of Kazakhstan were developed and amended.

In particular, the Rules for the Planning and Implementation of PPP Projects stipulate that a decision on PPP projects should be made taking into account the value for the population and the urgency of the project. So, in the framework of prioritization, the degree of expediency is taken into account, and, first of all, PPP projects are considered for implementation, providing the basic needs of the population, solving urgent problems.

In addition, given that the problems of project implementation are, first of all, in poor-quality project development at the initial stages, amendments to the PPP Rules have been introduced aimed at improving the quality of PPP projects. For example, to ensure a comprehensive, comprehensive approach to project development, minimizing unaccounted risks, and reducing corruption, the mandatory creation of an Interagency Project Group is envisaged.

In addition, industry reports should now contain a specific positive or negative summary, and must be reissued if changes are made to the tender documentation or business plan according to the industry report form.

A number of amendments are aimed at improving the system of collecting and processing information on projects: regarding the formation of a Unified PPP Project Database, clarifying the procedure for evaluating the implementation of PPP projects, providing services to investors on a one-stop basis, compulsory registration of additional agreements to PPP contracts, their storage and archiving.

Permanent changes to the procedures related to the development and implementation of PPP projects are caused not only by the UNECE recommendations and the study of foreign experience, but also due to the results of studying the increasingly expanding PPP practices in Kazakhstan.

The Law on PPPs and, as a whole, the ongoing work to develop legislation in the field of PPPs and to improve the investment climate led to a significant quantitative jump in PPP projects in Kazakhstan, the evaluation of the implementation of which in turn provided the basis for further improvement of the law.

— Talgat Mustafayevich, how many PPP projects are currently being implemented in Kazakhstan? In comparison with last year, what is the dynamics?

— In 2019, 277 PPP contracts were concluded, for 5 months of 2020, 31 PPP contracts were concluded. If we compare with the same period in 2019, then in January-May 2019, 45 PPP agreements were concluded. The slowdown in the conclusion of PPP contracts is due to two factors: the coronavirus pandemic announced by WHO, and in this regard, the government’s announcement of budget spending cuts, as well as the government’s order to implement priority projects of the third category of PPPs, the return on investment in which is carried out from extrabudgetary sources.

— If you evaluate the current PPP projects, which sector of the economy is most attractive for business and why? What sectors remain unclaimed today for PPP projects? What is the reason?

— PPP projects in the field of education account for more than half (55%) of the total number of PPP contracts. In second and third place are the healthcare and utilities sectors, respectively. At the same time, the largest projects have been implemented in the field of transport and infrastructure.

For example, the main reasons for implementing only 24 PPP projects in the field of transport and infrastructure indicate that projects in this area are capital-intensive in nature, which the state itself is not always ready to go to.

Currently, there are no implemented projects in the areas of agriculture and tourism, but this more likely indicates the unavailability of sectoral legislation and the insufficient work of sectoral bodies with potential private partners.

— What work on modernization of PPP is carried out today?

— On an ongoing basis, work is underway to analyze the problematic issues of implementing PPP projects (interactive platforms, meetings with investors, financial organizations, experts, etc.) and necessary legislative adjustments are being made.

Following the recommendations of the authorized bodies, as well as taking into account the recommendations of the UNECE, MFIs, NPPs and the expert community, legislative amendments have been developed aimed at investment incentives and prevention of project implementation risks.

The draft Law “On Amendments and Additions to Certain Legislative Acts of the Republic of Kazakhstan on Public-Private Partnership Issues” is being approved by state bodies and organizations.

— What types of PPPs exist today in Kazakhstan and how are they being implemented? Will new forms of PPP be introduced in Kazakhstan besides the existing ones?

— PPP by the method of implementation is divided into institutional and contractual.

To date, the most actively used type is the contractual PPP. Contract PPP is implemented in the following forms:

1) concessions;

2) trust management of state property;

3) property hiring (leasing) of state property;

4) leasing;

5) contracts concluded for the development of technology, the manufacture of a prototype, pilot testing and small-scale production;

6) life cycle contract;

7) service contract;

8) other agreements corresponding to the characteristics of PPP.

Institutional PPP is implemented by a company in accordance with a PPP contract. Currently, institutional PPP is still at the implementation stage, developers are exploring the possibility of its application.

In 2017, the Program PPP was introduced, which is used in the field of education and health. The state at the planning stage of state and government programs determines in them the basic parameters of the PPP project, measures of state support and payments from the budget, as well as the procedure for determining a private partner and concluding a PPP contract. Such a mechanism allows saving representatives of the business community and government bodies from developing bulky documentation packages for standard PPP projects and passing numerous examinations and approvals, and also offers equal opportunities to all potential investors.

Potential spheres of application of the mechanism are education, medicine (feldsher-midwife points), physical education and sport (fitness centers), services, housing and communal services and others.

To the branch state bodies, on the example of the Ministry of Education and Science of the Republic of Kazakhstan on providing students with places in dormitories as part of the state program for the development of education, we believe it is necessary to accelerate the use of Program Public-Private Partnerships and move on to practical implementation of this area.

In the framework of the new draft law “On Amendments and Additions to Some Legislative Acts of the Republic of Kazakhstan on PPP Issues” (at the stage of coordination with state bodies, the deadline for submission to the Parliament of the Republic of Kazakhstan is the 4th quarter of this year), a new form of PPP, the so-called ‘’Return PPP,’’ is considered.

Today, often the main object of private investment needs an engineering and communications infrastructure. However, there is no mechanism for reimbursing expenses to a private investor at the expense of the state budget for the creation of such an infrastructure. To this end, it is proposed to introduce the possibility of returning investor investment costs aimed at creating infrastructure necessary for the development of the production (industrial) infrastructure of business entities. Further exploitation of the infrastructure can be carried out both by the state and business.

The reimbursement of investment costs of a private partner is planned within 5 years after reaching the conditions specified in the PPP contract for the main facility.

In addition, at the UNECE International Forum in 2016, it was agreed that the PPP model could be used as a development tool. Next-generation PPPs are projects that aim to provide “People Value PPP.”

For all types of PPP it is extremely important when drawing up project tasks to focus on the results “at the exit”, and not on the necessary costs “at the entrance,” as is done with the traditional organization of procurement.

The implementation of the principle of “values ​​for people” is considered by the new draft law “On Amendments and Additions to Some Legislative Acts of the Republic of Kazakhstan on PPP Issues”.

— In what areas are public-private partnership mechanisms used in Kazakhstan?

— PPP is implemented in all sectors of the economy. Moreover, the facilities whose list is determined by the Government of the Republic of Kazakhstan cannot be transferred for the implementation of PPPs. The list of objects not subject to transfer for the implementation of public-private partnerships, including concessions, was approved by the Government of the Republic of Kazakhstan dated Nov. 6, 2017, No. 710.

— How is the interest of the private sector in the PPP mechanism changing?

The PPP mechanism has all kinds of forms and types of contracts. According to Clause 1, Article 31 of the Law on PPPs, the choice of a private partner is determined through a tender or direct negotiations. The private sector has the right to initiate the project and, in the absence of alternative proposals, conclude a PPP agreement without a tender on the basis of direct negotiations.

It should be noted that the private sector is in no way limited. Projects of any social orientation can take place. For example, in the field of energy, education, healthcare, sports, tourism, culture, housing and communal services, etc.

An effective measure to increase the attractiveness of social projects are sources of reimbursement of costs of public-private partnership entities and revenue generation by public-private partnership entities.

In addition, in PPP projects, the private sector has the ability to place commercial premises to generate additional income.

According to statistics posted on the website, we offer to see how actively private investors are involved in the development of PPPs in the country. In the 5 years since the adoption of the Law on PPPs, 785 PPP projects have been concluded, of which 347 PPP projects have been initiated under the private financial initiative scheme, which is 44%.

As practice shows, private investors are more willing to initiate projects in the health and education sectors.

The PPP tool today is transparent, flexible and at the same time very important in solving such important tasks for the population as well-being and life preservation. PPP mechanisms provide a number of advantages for both the state and business development. The interest of both parties is quite explainable. New investment opportunities and, accordingly, new sources of income are opening up for the private sector. The state can optimize the budget with the help of private capital invested in socially significant objects, thereby relieving itself of the financial burden.

— What does the country's PPP field expect in the coming years?

— It should be noted that in 2019 the PPP Center developed recommendations aimed at reducing the state support measures and budget payments provided for by the PPP Law and the Law on Concessions.

However, the proposals were not supported by Atameken National Chamber of Entrepreneurs, as well as by individual experts in the field of PPPs representing business interests. In their opinion, the reduction of state support measures and budget payments will impede new projects and will not stimulate business to implement PPP projects.

At the same time, with the ongoing trend of reimbursing all the costs of a private partner from the budget, taking into account the current crisis of the global and domestic economies, and therefore, the limited ability of the government to accept PPP obligations, there is a big risk regarding the further possibility of applying the PPP payment mechanism.

Projects implemented under PPP schemes are especially vulnerable during the crisis, due to the complex nature of the PPP institution, high risks (in particular, currency risk).

In order to institutionalize the improvement of the PPP sphere, taking into account the prevailing statistics, project implementation practices, the opinions of stakeholders (stakeholders), the PPP Center proposes the following.

Orientation of the concession exclusively to infrastructure projects related to the obligations of the private party to create and operate the concession facility with the transfer of demand risk. Compensation, if necessary, by the state should be made at the rates per unit of service (world practice). If the tariff is lower or higher than the required level, apply a mechanism for subsidizing or setting a special tariff for concession projects.

PPP projects are proposed to be extended to projects for the procurement of services by the state from a private partner with reimbursement at the expense of the tariff (state order, paid services, etc.). Thus, the state does not redeem private sector assets, introduces SMEs into circulation.

In order to comply with the legislation of the Republic of Kazakhstan on competition, in case of support, the proposed approach will be further developed.

— Thank you for the interview!

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