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 KAZAKHSTAN International Business Magazine №2, 2006
 New Realities, New Role …Regarding the Mining Policy in Kazakhstan
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New Realities, New Role …
Regarding the Mining Policy in Kazakhstan
 
By Gulzhan Nurakhmet, LLM in Mineral Law and Policy (the UK), Lawyer, GRATA Law Firm
 
Approximately 27% of the Kazakhstan's GDP comes from the mining industry which provides 30% of its export earnings. Kazakhstan could be named as the most successful among the Central Asian Republics in terms of attracting foreign direct investments. In Mines and Money Conference 2005 Kazakhstan was one of the nominees for the country award which shows the most improvement, in terms of attractiveness to mineral investors, during 2004-2005. It was acknowledged that foreign direct investment jumped by over 80% in 2004, with natural resources being the most attractive sector. In many respects this is due to vast natural resources, and not its legislative framework, which requires further legislative clarity. The Law On Subsoil and Subsoil Use contains some contradictory provisions that could create unattractive investment environment and deter the participation of the most qualified international mining companies. The aim of this article is to highlight the salient points of the provisions of the current legislation and to evaluate the role of the State as a regulator for attracting foreign investments to Kazakhstan. The author would like to identify the current role of the State in the mining industry and determine the international trends that could characterize the role of the State as 'operator' and (or) 'regulator' of private sector in order to attract and stabilize foreign investments in the mining industry. This article intends to diagnose the role of the State and to reveal problems and bottlenecks of the new mining sector investments. The question whether the State in Kazakhstan is a regulator of private mining industry or an investor – operator would also be presented. Finally, the conclusion and the main findings, recommendations, which are addressed, to overcome revealed obstacles will be presented.
 
The State Mining Policy
 
In the Middle Ages effective Mining Policy (MP) could be identified as following: "Now a miner, before he begins to mine the veins, must consider seven things, namely: the situation, the conditions, the water, the roads, the climate, the right of ownership, and the neighbors." (Georgus Agricola in De Re Metallica, 1556)
 
According to the United States of America Bureau of Mines, mining is the science, technique and business of mineral discovery and extraction.
 
In order to determine the competitiveness of non-petroleum mineral resource base of Kazakhstan with other investment opportunities available in other countries author like to consider the country's MP from both the national and international perspectives.
 
In order to define the role of the State in MP it is necessary to determine the State's interests and objectives that underline the country's MP. In the mining industry the State plays a key role and stipulates the policy that could promote the quick achievement of its objectives. These objectives could be said to be:
· Promotion of exploration of the resources;
· Development of local mining industry and community;
· Increase revenues-royalties and taxes;
· Achieve economic growth and social tranquility;
· Environment protection.
 
Kazakhstan being an emerging nation with huge mineral resources, and lack of technology, funds and willingness to risk by its own, requires foreign investments to get things going in mining industry. For this reason the State must make sure that the laws and regulations are attractive enough to a foreign investor to justify its investments. 
International best practice and Kazakhstan
MP should be well defined, consistent, apply to everyone, and determine the State's approach to foreign investment. Major mining countries such as Canada and Australia are such because of promotion of training and education simultaneously with promotion of investment policies which undoubtedly leads its mining industry to grow. From the international perspective, changing policies or (and) lack of basic policies and inconsistency in mining legislation are not attractive for the foreign investments. Review of Legal and Fiscal Frameworks for Exploration and Mining1 indicates that the successful countries regulate mineral operations with simple and clear mining laws that provide private investors with greater access to mineral resources, through clear and transparent processes, security of tenure, the freedom to transfer their rights and freedom to operate and market their output on commercial terms. Therefore the MP should be clear and predictable in order to ensure the long term investment and cooperation between developing country and foreign investor. States should act as a guarantor of fairness, equity, transparency, security of property and individual rights and should incorporate these principles in its MP. Information on geological data, maps and technical information should be available to foreign investors as they assist in the first stage of assessment of the country's attractiveness for developing mineral reserves. Charging high premium for geological information leads to disincentive of investments and places country in an uncompetitive position with other countries.
1. Naito, K., Remy, F., and Williams J.P., Review of Legal and Fiscal Frameworks for Exploration and Mining, iii, (Great Britain: Mining Journal Books Ltd, 2001)
 
Comparative analysis of the current Kazakh MP provisions with International best practice is presented in Table 1.
 
               
 
The main constraint in the MP is the muddle of mining sector with oil and gas industry. And this strong confusion of both industries is reflected in legislation. Therefore investments and presence of the big Trans National Corporations (TNC) in Kazakh petroleum sector are incomparable with its mining industry, when the latter could eventually not only compete with its resources in situ but also overtake in terms of exploration and production of the resources. The nature of these sectors is absolutely different and what is applicable to one sector does not necessarily apply to another.
 
In this part the writer shall proceed with some definitions:
Mineral – a naturally occurring inorganic element or compound having an orderly internal structure and characteristic, chemical composition, crystal form, and physical properties.
Petroleum – a naturally occurring complex liquid hydrocarbon, which after distillation and removal of impurities yields a range of combustible fuels, petrochemicals, and lubricants, whether gaseous, liquid or solid.
 
However this rule seems to have been ignored by Kazakh lawmakers. Nowadays it is hard to expect that mining could compete with oil and gas, when both industries share the same legal frameworks governing subsoil operations, which are however primarily, have been designed for oil and gas industry. The main features of the MP in Kazakhstan such as tendering in mining title allotments, preferential treatment of National Companies (NC) as well as taxation provisions are based on petroleum sector model. There are two main statutes that regulate mining industry:
 
Law On Subsoil and Subsoil Use2
2. Law On Subsoil and Subsoil Use, No 2828, dated January 27, 1996
 
The Tendering System
The tendering system for blocks of geologically potential ground is introduced in this statute. Referring to the International best practice and example of Indonesia (which is rich both for oil and gas and mining reserves) tendering system that is extensively used in petroleum industry is very unusual for mining and could be treated differently in a form of licensing. The single license for exploration and exploitation pioneered by Peru and subsequently adopted in Bolivia and Venezuela typifies the simplicity and efficiency thought in modern mineral licensing regimes. Countries where tendering system has been used for acquiring mining title are unsuccessful. Obtaining mining title in Kazakhstan is more complicated and time consuming process than in Argentina, Peru, Mexico, Indonesia and Tanzania, countries that have attractive for foreign investors MP due to the fact that none of them applies cumbersome tendering system as well as long term contract negotiations for allocating mining title.
 
The Concept of 'National Company'
This concept of a NC was introduced after revision of this law in 1999. The concept necessitates for competitive bidders to place in their bid with the intent to co-operate with national companies for obtaining subsoil use rights and further exercise their rights as subsoil users by encouraging private companies to create Joint Stock Ventures (JSV) with the NC. Unlike private companies, the NCs are to receive mining title in the first instance through direct negotiations. This provision apparently applies to oil and gas sector rather than to mining and does not reflect the current situation which has not changed since that time – Kazakhstan has only one NC in mining sector – National Atomic Company Kazatopmrom. The role of the State is contradictory in its nature from one side it promotes private investment and free-market economy but on the other hand it acts as operator by restricting the most important doctrine that it should apply 'the same rules for all investors', by giving inherent preferences to obtain mining rights to the 100% state-owned NCs. This leads to the possibility for direct State interference to the private sector development. In addition these provisions give impression that the State aggressively pursues the policy of privatization of mining sector that had been already completed 8 years ago. By being an operator rather than a regulator, the country reduces its chances of getting rid of the policy of centrally planned economy and attracting new investments to mining sector as investors, who are motivated by profit and stability, naturally choose to invest in countries that offer not only an attractive geology, but a transparent and predictable MP as well. 
 
 
Tax Code3
3. Code On Taxes and Other Mandatory Payments to the Budget (Tax Code), No 209-II, dated June 12, 2001
 
Provisions in MP contain several taxes which confuses mining sector with oil and gas. Especially, 'discovery' and 'signature' bonuses, 'reimbursement of historical cost' are distinctively untypical in the international mining industry because it increases the cost and risks to investors. Royalties in Kazakh MP are not stipulated in the Law they are negotiated case-by-case. However, there is a tendency to eliminate minerals royalties or if any they should not exceed 2% of net smelter return. Minimal royalty obligations – can enable countries in other regions to encourage investment to the development of the natural resources as they have in Latin America
Deficiency of legislation
The State being owner rather than regulator by pursuing oppressive and aggressive role puts the brakes on the country's economy and limiting the business possibilities of the investors.
 
I) State pre-emption right to purchase raw materials
The State has priority right to buy minerals from the share of foreign investor or non-state subsoil user at prices that are not higher than world market prices. Such provisions as maximum amount of acquired minerals, the method of price determination and type of payment are considered in subsoil use contracts concluded between the State and Investor.
 
II) State pre-emption right to purchase shares in mining projects
Recent Law4 has introduced new amendments to the article 71 of the Presidential Edict and now 'for preservation and strengthening resource-energy base of the country's economy in previously concluded and in future contracts, the State has the right of pre-emption before other parties to the contract or members of the legal entity that holds mining title to acquire shares in mining projects at conditions that are not worse than proposed by other purchasers'.
4. Law On Introducing Modifications and Amendments in Some Legislative Acts of the Republic of Kazakhstan Concerning Subsoil Use and Carrying out Petroleum Operations in the Republic of Kazakhstan, No 79-III, dated October 10, 2005
 
From this perspective the State is entitled entirely or partially to acquire mining title in a form of rights and obligations in mining project or to buy shares in legal entity that concluded a contract on subsoil use. Privatization of the mining industry that had been started in 1994 and completed by 1998 nowadays has new form, where, rights to operate in the mining industry, given to investors in the past, can be taken back by government. This invasion contradicts not only to the policy of promotion of private investment that has been proposed, but also to the some statutory acts that have been accepted several years ago. For instance, in accordance with para 2 of the article 80 of Civil Code5 and Law On Limited Liability Partnerships, members of the Limited Liability Partnership (LLP) have pre-emptory right to buy part or shares of this LLP.
5. Civil Code of the Republic of Kazakhstan, dated December 27, 1994
 
 It also violates Article 111 of the Civil Code, which states that State participation in civil-legal relations must be on the same conditions as others. Similarly, if the contract on subsoil use operations was concluded with Consortium (Association of the legal entities), members of the Consortium are entitled to have pre-emptory right to purchase the part of the Consortium, over the State. The Civil Code states 'contract on subsoil use operations is a generally shared property of all members of the Consortium' (para 2 of the article 230 of the Civil Code), 'each member of the Consortium has right on its own consideration to sell, to make a present, put as a collateral its own part (share) in subsoil use contract (para 2 of the article 212 of the Civil Code). As the Law On Normative-Legislative Acts6 where para 1 of the article 6 states, that in a case of any contradictions between legislative acts of different levels, the norms of acts which are higher in hierarchy would prevail.
6. Law On Normative Legislative Acts, No 213-1, dated March 24, 1998
 
Provisions of the Civil Code, being superior to the other laws would prevail, where any law is in contradiction with it. Thus, if a company, being a party of LLP or Consortium subsoil user intends to sell its shares or part in the mining project, other members of LLP or Consortium will possess the pre-emptory right to purchase, not the State. In cases of acquiring mining title, shares in the mining projects or part of the subsoil-use of a LLP or Consortium the State could not legally exercise pre-emptory rights due to the implication of the Civil Code provisions, which are higher on a law hierarchy than newly adopted law. Before eliminating these clash points this loophole could be a bottleneck that leads to the disagreement between newly enacted law and the Civil Code. Therefore legally the State can not exercise pre-emptory rights until it eliminates these contradictions and makes corresponding amendments to the Civil Code. However this applies to LLP and Consortium only, and the situation is different with Joint Stock Ventures (JSV). Article 16 of the Law On Joint Stock Ventures7 also stipulates pre-emptory rights for shareholders for purchase of securities of JSV.
7. Law On Joint Stock Ventures, No 415-II, dated May 13, 2003
 
The Civil Code, however, does not contain any provisions for pre-emptory rights of members of the JSV. If we look again to the Law On Normative-Legislative Acts, para 3 of the article 6 of the Law provides that in case of contradictions between regulations of the same level, the norms of the act that was enacted later will prevail. The amendments to subsoil use law that conferred pre-emptory rights on the state, being more recent than the law on JSVs, State can exercise its pre-emptory right where the subsoil user is a JSV. The other obstacle is undetermined process and procedure of realisation the States pre-emptory right on redemption of shares (part) in mining projects. But this is a different theme that is outside the scope of this paper.
Conclusion
Kazakhstan is ill-prepared in terms of legal and institutional arrangements of MP, which are constraints rather that motivators of the development of mining industry. Due to the confusion with oil and gas sector the country is not attracting sufficient investments in mineral recourses industry. The State still has not adopted an appropriate role for operating in mining industry. On the one hand it promotes private sector development where it has to be promoter or referee, but instead it holds role of assertive owner of the resources which leads to the failure in attracting required amount of the private investments for the intensive development of the mining sector. Probably for this reason Kazakhstan is considered by the International Mining Investment Community as not preferable country. If the State does not re-evaluate and re-define its role from being 'owner' and take comprehensive measures to be a 'regulator' in it's MP, Kazakhstan will not be able to compete with these countries in attracting private investments and creating favorable MP. Kazakhstan continues to be world class mineral reserve base in-situ, with volumes that could not be extracted to benefit its people for the following reasons:
· Changeable and inconsistent mining policy that is characterized by frequent amendments and modifications could not work for improving current investment climate. On the other hand one change related to the role of the State as 'regulator' but not 'owner or operator' could cardinally change the situation for the better condition.
· Gaps in legal arrangements and existing contradictions could do less in a way of attracting multi national mining companies with the best mining practice, technology and resources.
· There is discrepancy with International practice in mining industry: tendering system and reserve classification system are not irreconcilable with international practice and standards.
Recommendations
Kazakhstan should improve legal framework governing mining activities for shaping Mining Policy, conductive to mineral development, drawing from the best experience of other countries. The most successful countries in attracting investments in their mining sectors are characterized by enabling investors to obtain exploration rights through a well defined policy, supported by a conductive legal and regulatory framework and transparent process: easily, quickly and at low cost. In this case the following fundamental changes which are the normal practice of the international experience would create forecasted favorable economic climate in Kazakhstan and promote further investments:
· Encouraging investment possibilities by making geological data mainly available for the moderate price;
· Creating mining cadastre which geographical areas which should be available and open to public consultation;
· Lessening the time and cost for obtaining mineral title.
 
To attract foreign companies for investing in exploration and development of mines in country, State should set up a regime that is favorable to mining exploration investment. Elimination of contradiction in current legislation will appeal to potential foreign investment.
 
1. The Role of the State
It would be a good transition for State from being 'owner' to be 'regulator' in a case of ensuring security of tenure by providing automatic right from exploration to exploitation and eliminating case-by-case negotiations.
 
MP is clearly stated by the State as promotion of private sector development. However the existing role of the State in a form of having superfluous governmental shares and control over geology and tendering could be considered as an obstacle for achieving this objective as does not coincide with stated above policy. In order to eliminate this contradiction, the State should re-define its role towards private sector development from being owner and operator in the mining sector, which contradicts to the main concept of the internationally accepted standards of regulating mining industry to supervisory role and be regulator/referee of the mines. The main responsibilities preferably should be limited to:
1) Provision of information to potential domestic and foreign investors;
2) Administration of mining title system;
3) Collection of taxes and other payments.
 
2. NCs
Unclear provisions on preferential treatment of the NCs in the Subsoil law should be eliminated or revised by clearly indicating and specifying the role of NCs. 
 
3. Improving Mining Legislation
Government exercises overlapping administration of oil and gas with mining sector. The State should amend and modify subsurface legislation in order to provide a separate regime for granting rights to solid minerals and petroleum operations. They may both be resources in the extractive industries but have different character profiles. Fundamental problem with orientation of the mining legislation could be overcome if the subsoil law is modified and as a result will contain separate sub-sectors for mining, special and strategic minerals. Improving of the legal framework will encourage investments to the mining sector.
 
4. Tendering System
Negotiating contracts and tendering mineral title could not encourage new investments. Following World Bank recommendations that were presented four years ago Kazakhstan should abandon the tender regime and adopt an administrative mineral title licensing system.
 
5. The State Pre-emption Right
Kazakhstan is promoting private sector development in the mining industry, but it is doing on a discretionary basis which is not coinciding with fundamental principles of the market-oriented mining industry. Kazakh MP contemplates the role of the State as 'operator' with pre-emptory and preferential rights which discourages private investments. The State should abandon any rights to pre-emption which suggests threat of the governmental taking and provide equal conditions without state interference.
 
6. Mining Associations
State should encourage domestic participants in mining industry in a form of supporting the formation of exploration and mining associations.
 
7. Educational Programs
Kazakhstan could achieve the better results in its mining policy by providing venue of mining education programs. So that professionals are able to translate government MP into effective and positive actions.
 
 


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