State and business need to work in partnership
Zhomart Abiyessov, Chairman of the Board of JSC Kazakhstan Public-Private Partnership
Although the public-private partnership in Kazakhstan has more than 7 years of history, in practice it has evolved quite recently. The main reason for “spinning” of PPP projects was the imperfection of the legislative framework governing relations in this area. However, after the President has signed the amendments to the law of the Republic of Kazakhstan «On introduction of amendments and additions to legislation on PPP” on July 4, 2013, the partnership of the government and business received a new impetus.
Our country has a high potential of development of public-private partnership. As the experts of the Kazakhstan PPP Centre predict, in 2023 the volume of PPP projects may reach 10–15% of the total needs of the Republic in the financing of infrastructure facilities. In this case, according to the estimates of the international financial institutions, Kazakhstan will need about 38 trillion tenge for these purposes by 2040. That is, it can be assumed that 4–6 trillion tenge of this amount or 130 billion tenge will be necessary annually for the PPP.
It is clear that with the policy of full funding for infrastructure from the State budget, a tremendous overload will happen. Therefore, to solve this problem, we propose to attract investors through the implementation of PPP mechanism. It is important to note that given the qualitative selection of PPP projects and their effective structuring, the obligations of the state can make about 50% of the projects, which is about 2–3 trillion tenge. It is less than 5% of the projected GDP of Kazakhstan. This level of obligations undertaken by the state is safe enough for the country's economy and will not lead to a rapid increase in the national debt.
Currently, 24 potential PPP project form a portfolio worth more than 227 billion tenge. In their structure, the transport sector is 25%, health care – 25%, education – 13%, the development of urban infrastructure (construction of public parking) – 33%, the penal system – 4%. According to our estimates, today the most promising industries for the application of PPP at the regional level are health care, housing and utilities (as related to water resources and solid household waste processing), urban infrastructure, the penal system, as well as the transport and the energy.
However, despite the high potential, the transition of PPP into practice remains low. First, there is no general policy of prioritizing sectors and projects at both national and regional levels. In addition, Kazakhstan has not an established practice of planning PPP projects yet, taking into account that they are constrained by concession limits at the local level.
In general, our center identified existing barriers to the development of the PPP mechanism and formulated appropriate solutions to overcome them.
The first thing that really slows the boom of PPP projects is a low level of their generation. According to the legislation of Kazakhstan, exclusively regional Akimats, ministries and agencies can initiate the PPP projects. Therefore, the development of such projects, even at the level of an idea, directly depends on the activity of these public bodies.
Another negative factor is the low interest in PPP at the level of local executive bodies, since such projects bind them with long-term benefit liabilities, on the one hand, and do not bring short-term ‘political dividends’ on the other.
At the same time, in Kazakhstan, today there is no specialized organization, the area of direct responsibility of which will include practical development of PPP and increasing the portfolio of ongoing projects. For example, the Kazakhstan PPP Centre in the framework of its competence, provides only expertise, acting as a kind of the “filter” for PPP projects, but not as the driver” for their promotion.
As a solution to this problem, in May this year at the VI international investment forum “Astana Invest 2013”, we stated the need to create a Single Centre for the preparation and the support of all PPP projects, which should work on the “one contact” principle. Now we are working on the creation of such a structure. Its tasks will include developing PPP projects, cooperation with financial institutions, search of funding, attracting investors, marketing the real needs of Kazakhstan in PPP projects, etc.
Another significant problem was the low quality of those projects, which are still generated by public authorities. In order to provide proofs, I will say that of all the concession proposals that we have received on the examination from 2008 to 2012, 40% was sent back for revision or received an adverse opinion. The reason for this is simple and is in the low-skilled developers specializing in PPP projects. Moreover, given the potential of the sector, the share of skilled workers of the total number of employees of State bodies involved in the implementation of infrastructure projects, should be at least 15%.
Kazakhstan PPP Centre, for its part, is ready to undertake this task, because we understand that our specialists have enough professionalism and experience, and this is the time to share it.
Based on the practice of our work with the regions, we would like to point out some of the most active ones. So, in 2013 in Mangistau and South Kazakhstan regions, regional PPP centers were opened, that were fully staffed, technically trained and have a high potential to assist Akimats in the development of PPP.
In general, the regional PPP centers today operate in seven regions of Kazakhstan. We understand that the institutional establishment of the regional centers is a very important step in the development of the entire system that is why Kazakhstan PPP Centre provides them with a complete consulting support in creation, build up and further development of the enterprise.
In order to realize the potential of PPP in the regions it is also necessary to implement in practice the principle of “one contact”, to which I have already referred. The Kazakhstan PPP Centre and the regional centers will form a network structure that can not only provide expert consulting support on the development of PPP projects, but also become a “think tank” for the analysis of the real needs and possibilities to address infrastructure challenges at the regional and national level.
It is also obvious that it is time to consolidate the direct responsibility of the public authorities for the implementation of PPP projects. Such indicator as “The number of PPP projects” must be an essential KPI for regional leaders. In turn, this will allow to determine the area of responsibility of akims for the performance of the instructions of the head of state concerning the introduction of new mechanisms of financing infrastructure projects.
The raising “long-term” and “easy” money for PPP projects remains as an open question. In general, the problem of limited financial resources market remains acute not only for this area. To address this challenging task we have studied the successful experience of our partners from South Korea and currently developing the concept of credit and guaranteeing system of PPP projects. In case of default of the concessionaire or project, it will serve as a guarantee for investors/lenders, and this greatly increases the probability of a successful financial close.
However, we must understand that the legislative initiatives which are taken will lead to a growth of PPP projects portfolio, and therefore, there will be the need for the harmonization of legislation for infrastructure projects. It will be necessary to develop a common framework law on state support measures and mechanisms for cost recovery. For example, we have a real need for the development of a single mechanism to allocate land and provide the infrastructure for all projects regardless of the applicable legislation. This question is very relevant today: they are asked almost in all the areas where we hold regional meetings. Therefore, it is necessary to think about the standardization of approaches in the implementation of infrastructure projects even as we speak.
An important step in the further development of PPP is the implementation of pilot projects. They will allow to “feel out” the firmness of the soil on which we nurture PPP, will make it possible to evaluate the needs of investors and prevent a sharp rise in concession obligations.
By the way, speaking of investors, we do not forget that when participating in the PPP projects, they primarily do business, and they are not engaged in global charity. Therefore, if we want to attract investments in infrastructural projects in practice and not just in words, we should kept in mind not only the interests of the state, but also of those who are willing to invest their resources in the development of our economy.
Eventually, the state and the business will build the facilities for health care, education and urban infrastructure, energy and transport on the principles of equal partnership. This position is clearly marked in the strategy "Kazakhstan-2050", where one of the approaches of the new economic policy is to create a favorable investment climate to enhance economic potential based on profitability and return on investment.
Working on the creation of a favorable climate for the development of PPP, we held more than 100 meetings with various foreign companies interested in the market of Kazakhstan. As a result of this preparatory work with investors, we have defined the main conditions on which they would be interested in the domestic market of PPP: projects must be cost effective, the legislation is clear, and the investments are protected by the state. Here are the three pillars of successful work with investors.
To build up the equal partnership dialogue with the investors, we have made great efforts in changing the legislation and the institutional strengthening of PPP. As a result, a new legislative environment was created, which will allow introducing more than 20 forms of new contracts.
A great work has been done in the field of tariff regulation. We understand that due to the unpredictability of the tariff policy the investors are bearing of the projects in the sphere of natural monopolies. To reduce this risk, according to the new law, the Agency for regulation of natural monopolies will be involved in the process of harmonization of tariffs already at the stage of consideration and approval of concession proposals, and the procedure of tariff change in the long run will be prescribed directly in the agreement.
The second thing thats is necessary for investors is the security for investments. It is clear that no investor will invest in a country where there are uncontrolled and unpredictable risks for the investment. And PPP projects are contracts with a prospect to implementation within 20–30 years. Therefore, we just have to prove to potential investors that such projects have a real protection. The government is ready to give to the investors a number of additional safeguards. For example, a new tool “the fee for the availability”, which will be applied to the “commercially weak” projects, where the power of consumption is not sufficient to ensure economic attractiveness will find its use. Such projects may include social assets, as well as roads with low traffic flow.
I would like to point out that there are already a number of projects under intense study and should become the flagships of Kazakhstan’s PPP. One of them is the construction and operation of the Main Almaty Ring Road (BAKAD). The aim of this project is to ensure relieving urban roadway from freight traffic by construction of 69.8 km long bypass toll road. The initiator of the BAKAD project is the Ministry of Transport and Communications and the consulting support is provided by the European Bank for Reconstruction and Development and the International Financial Corporation. Currently, the project has passed the first stage of examination in the Kazakhstan PPP Centre, and now its feasibility study is being developed intensively. We view this project as the first swallow in the framework of the new legislation and believe that its competent structuring and successful implementation will lay the groundwork for the attractiveness of PPP for the businesses.
As a whole, the PPP mechanism is an important element of the general state policy on the infrastructure development. International practice has proved its viability: today it is applied in 120 countries around the world. According to the United Nations Economic Commission for Europe, 80% of all PPP projects in the world are successful, making a significant contribution to the development of the economy.
We are sure that today Kazakhstan has created all the necessary conditions for the development of PPP. The President and the government of the Republic consider the partnership of government and business as an excellent alternative to public procurement and direct budget investments. The issues of PPP development were repeatedly raised in the addresses of the President to the People of Kazakhstan, discussed at a specially created Coordinating Council for PPP under the Government, which is headed by the Prime Minister.
Today we can say with confidence that the Republic has created a business climate for the fundamental development of the PPP mechanism and it was time to proceed to the phase of its implementation. This will allow the PPP to become one of the important points of Kazakhstan's economic growth.