The New PPP Law: Opportunities and Flaws

PPP: A New Turn

PPP stands for public-private partnership.

The idea is to bring in private investors for projects that do not offer a normal rate of return but carry social obligations and guaranteed revenues, or where the state lacks the knowledge and experience to proceed on its own.

A new PPP law has recently been adopted. It is meant to resolve the main legal conflicts of the previous approach to PPPs. There had been no dedicated PPP law, only scattered references and hints in the Law on Project Financing and Securitization and in the Law on Concessions.

A quick read of the law shows that much has been changed, added and clarified. It divides PPPs into tiers, lays out the procedures for creating them, and sets out what the state may and may not do.

As a rule, PPPs are used for infrastructure projects: roads, pipelines, the infrastructure of special economic zones, various public facilities, parking lots and so on.

The state's main goals are to transfer part of a project's risks to a private investor and to attract sources of financing for such projects.

The state, as a rule, cannot build, supervise and maximize revenue from such facilities in an optimal way. In a crisis, it also needs to attract financing for these projects, which is a very difficult task today.

For an investor to provide financing, several things matter:

1. Repayment of the financing: a guarantee that the funds invested will be returned.

2. Acceptable return on the financing: confidence that the PPP facility will generate an appropriate return.

3. Acceptable manageability of the facility once it is commissioned: confidence that it will be properly managed.

4. Efficient construction at minimal cost.

That is why, when creating a PPP, the state provides the project and guarantees.

Depending on the type of facility, guarantees usually mean a guaranteed cash flow, state guarantees and co-financing of the facility. But that is where the state's role ends. From there, the private investor does everything: finds a project operator, raises financing and carries out the project. The state only oversees and does not interfere.

It will be interesting to see which state body is the first to use this mechanism.

In my view, the new law can be applied most readily and quickly in large cities such as Almaty, Astana and Shymkent.

In Almaty and the Almaty region, for example, the obvious candidate is BAKAD, the Big Almaty Ring Road.

Following the same principle, one could go on to build the Almaty metro, create paid parking, organize public transport services, and build water supply and sewage systems and gas networks. In short, anything that offers a steady, guaranteed income but has long payback periods.

But the new law also contains provisions that, in my opinion, will keep it from working to its full potential.

1. It is unclear who is responsible for PPPs, because there are too many actors. There is the central authorized body for state planning (the Ministry of National Economy), and the central authorized body for budget execution (the Ministry of Finance). There is the authorized body for state property (the State Property and Privatization Committee of the Ministry of Finance), and the sectoral authorized body (the relevant line ministry). There is the antimonopoly authority, as well as maslikhats (local representative bodies) and local executive bodies. The law also gives a role to the NCE (National Chamber of Entrepreneurs, "Atameken"), and why the NCE is involved at all is not entirely clear either.

On top of that, a PPP center will be created, a kind of umbrella body that will conduct expert reviews, provide training and issue recommendations.

As a result, it is not at all clear who will be the locomotive and the engine of the whole PPP effort.

2. For some reason, the law makes it harder for a private investor to sell debt. Debt can be sold only with the state's permission. Yet the ability to structure and sell debt is a way to bring in a larger number of participants.

Pledging PPP rights as collateral also requires the state's consent. In other words, if a private partner wants to take out a loan for this purpose, it will need the state's consent to pledge the facility, or more precisely, not the facility itself but the rights under the PPP.

It is similar to the subsoil use law, which completely killed lending to subsoil users.

3. There is nothing at all about debt securities, although it would be logical to issue bonds for such projects, backed by the guaranteed cash flow from the operation of the facility. That would broaden the range of financing options for such facilities.

4. The NCE. It turns out that to get onto the list of potential participants in a PPP under the simplified procedure, one has to be included in a list kept by the NCE. In other words, the NCE will decide whether I can take part in a project or not. This makes businesspeople dependent on the NCE, although the NCE is supposed to depend on them. The very nature of its work changes: it turns from a helper of businesspeople into an active force with real power, exercised not against the state but against business.

Those, briefly, are the main shortcomings of the new law.

Oh, and one more thing: the new law does not repeal the old ones, which will again cause confusion.