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  KAZAKHSTAN International Business Magazine №3, 2005
 State Procurements for Conducting Petroleum Operations: What the Investor Should Know
State Procurements for Conducting Petroleum Operations: What the Investor Should Know
Rinat Begaliyev, Lawyer, DentonWildeSapte
With the strengthening of the role of the National Company KazMunaiGaz, the importance of the institute of state procurements for conducting petroleum operations has also grown to a great extent. In accordance with the most recent changes in Kazakhstan petroleum legislation, KazMunaiGaz has been authorised to have the rights of contractors under oil contracts in the event of their termination and the exercise of the pre-emptive right of the State to acquire interests in such contracts. Furthermore, KazMunaiGaz must be granted at least a 50% participatory interest or 50% of shares in operators of oil projects. Its share in all offshore oil projects, including those implemented on the basis of production sharing agreements, must also be at least 50%.
At the same time, it is provided in Kazakhstan legislation that KazMunaiGaz and its subsidiaries must procure necessary goods, work and services pursuant to the procedures established by state procurement legislation. As a result, their broader participation in oil projects will bring about the increased volumes of goods, work and services acquired using the state procurement mechanism.
The State Regulation System
The main regulatory acts governing state procurements are Law #321 On State Procurements, dated 16 May 2002, and the Rules for Organising and Holding State Procurements of Goods, Work and Services, approved by RoK Government Resolution #1158, dated 31 October 2002.
The Financial Control and State Procurement Committee of the Ministry of Finance of the Republic of Kazakhstan (the "Committee") is the state body regulating and controlling state procurements. In order to perform its duties, the Committee has very broad authorities, including: (i) maintaining the State Register of Persons/Objects of State Procurements; (ii) issuing regulatory acts, orders and other decisions binding on all persons in organising and performing state procurements; (iii) coordinating procurement methods with customers; (iv) reviewing and settling the participants' complaints and announcements; (v) recognising tenders as invalid; (vi) terminating state procurements; (vii) considering administrative violations and imposing administrative penalties for violations of state procurement laws; (viii) filing suits with courts, seeking the invalidation of transactions entered into in violation of the state procurement legislation of the Republic of Kazakhstan; and (ix) submitting materials of conducted reviews to law enforcement bodies where elements of crime are revealed.
Circle of Entities
In regard to the petroleum industry, the entities obligated to acquire goods/work/services through state procurement procedures can be conventionally divided into two groups: principal entities and their affiliates. The former include (i) KazMunaiGaz, (ii) other national companies1, (iii) state enterprises; (iv) joint stock companies in which at least 50% or a controlling interest is owned by the State, and (v) limited liability partnerships in which at least 50% of the charter capitals is owned by the State.
1. The appearance of new national oil companies is predicted due to the introduction of a new, broader definition of the term a "national company" into Kazakhstan legislation. This new definition was effected by the amendments to legislation made on 1 December 2005. In accordance with the new definition, a national company may be organised not only in the form of a joint stock company but also in other organisational-and-legal forms. 
As far as affiliates are concerned, they may be affiliated either directly or indirectly. Direct affiliates include: (i) joint stock companies in which over 20% of shares is owned by KazMunaiGaz, another national company or a state enterprise2; and (ii) limited liability partnerships in which at least 50% of the charter capitals is owned by KazMunaiGaz, another national company or a state enterprise. Indirect affiliates, in their turn, include those entities in which KazMunaiGaz, another national company or a state enterprise has the right to make decisions on the basis of contracts or based on their ownership of interests/shares in the principal organisation.
2. In accordance with Article 95 of the Civil Code of the Republic of Kazakhstan, a joint stock company in which another person holds over 20% is deemend, and the possibility of such a person to influence any decisions made by that joint stock company is deemed to exist. In this connection, a controlled joint stock company is an affiliate pursuant to the state procurement law of the Republic of Kazakhstan.
State Procurement Methods
In accordance with Kazakhstan legislation, state procurements for conducting petroleum operations may be made using four methods: (i) open tenders, (ii) closed tenders, (iii) selecting a supplier by price bidding, and (iv) procurements from one source.
All interested parties may participate in open tenders, provided that they comply with the established qualification requirements. Such a tender has the following stages: placing an announcement on the tender, submitting and disclosing envelopes with bids, evaluating bids, identifying the winner of the tender, compiling a protocol, its approval by the Committee, and concluding a state procurement contract. Closed tenders are conducted if certain goods, work or services can, due to their complex and/or specialised nature, be provided by a limited number of suppliers, which are familiar to the tender organisers. Each closed tender must be coordinated with the Committee on a mandatory basis.
The remaining two methods may only be used in a limited number of cases as defined in Kazakhstan legislation. Suppliers are selected through price bidding where the price is more important for the customers than goods/services specifications. In such event, the annual amount of procurements may not exceed the approximate sum of US$29,000 as established by legislation. One-source procurements are made in the event that only certain specific suppliers are able to supply necessary goods/ work/services.
As open tenders are the main and most widely used state procurement method, this article only addresses the issues relating to the conduct of open tenders.
Qualification Requirements for Tender Participants
The list of the qualification requirements for tender participants is complete and may not be extended. As some of the qualification requirements are not described clearly in the Law On State Procurements, their meaning was explained by the General Prosecutor's Office of the Republic of Kazakhstan.3
3. Letter #7-33-8677-03 of the General Prosecutor's Office of the Republic of Kazakhstan "The Explanation of the Law of the Republic of Kazakhstan On State Procurements", dated May 22, 2005. Letter #7-24-194-2002 of the General Prosecutor's Office of the Republic of Kazakhstan "The Explanations Provided by the General Prosecutor's Office of the Republic of Kazakhstan Regarding the Participation of Consortia (Associations of Legal Entities without Forming a Legal Entity) in Procurement Tenders for Goods, Work and Services", dated 6 September 2002.
Only legal entities, including foreign ones, may be tender participants. Consortia or ordinary partnerships are not allowed to participate in tenders. Legal entities participating in a tender must have been active in the regional market for a period of, at least, one year. Legal entity affiliates are not admitted to tenders either.
In our view, one of the shortcomings of the existing state procurement system which restricts competition is admission to tenders of persons affiliated to the customers. We believe that in this case, the common economic interests of the customer and its affiliate can serve as the basis for giving unlawful advantages to such an affiliate. We note that the Kazakhstan legislation regulating this issue is not stated clearly enough, and its content was also explained by the General Prosecutor's Office of the Republic of Kazakhstan.4
4. Letter #7-33-8677-03 of the General Prosecutor's Office of the Republic of Kazakhstan "The Explanation of the Law of the Republic of Kazakhstan On State Procurements", dated 22 May, 2005.
Selecting a Company for a Tender
In our opinion, it is appropriate that Kazakhstan legal entities having extensive previous experience of operations in the domestic market and employing a large number of local employees should be selected to participate in tenders. In tenders for the supply of goods such entities may be granted the status of "local commodity producers", provided that their local personnel accounts for, at least, 85% of the total number of the employees. In such cases, the conventional price of the bid shall be reduced by 20%, which significantly increases its competitiveness. Although legislation does not provide for this quantitative parameter for tenders for services, still, the number of local employees is to be taken into consideration when determining a conventional price of the bid in accordance with the tender conditions prescribed by the customer. Furthermore, the conventional price of the bid must be lowered by 1%, but, in any event, by up to 10%, for each two years of operations in the local market.
Criteria for Selecting Tender Winners
Tender winners are to be identified by selecting a bid with the lowest aggregate conventional price on the basis of certain established criteria.
The criteria for selecting winners of tenders could be conventionally divided into two groups: criteria whose meanings are established statutorily and those whose meanings are to be set by the customers.
The first group includes servicing costs. In order to have a quantitative assessment of bids compared to one another, the tender commission determines the lowest servicing costs indicated in a bid, calculates the servicing costs difference between the lowest value and the value indicated in the bid in question, expresses the calculated difference in percentages to the lowest value and increases the number reflecting the servicing costs by such calculated percent.
In addition to the above criterion for local content utilisation, legislation also established certain additional criteria for identifying tender winners, which may not change the conventional prices of bids by more than 15%.
The criteria whose values must be reflected in bids also include supply schedules, qualitative parameters, payment dates and warranty periods, as well as a demonstrated preference for local suppliers.
Challenging Steps Taken by Tender Organisers and/or Commissions, as Well as Tender Results
In the course of a tender, each participant may challenge any steps taken by the tender organiser and/or tender commission, with the exception of challenging the method for conducting the state procurement. The participant may file its appeal with the State Procurements Committee, which has the authority to revise or cancel a challenged decision. Moreover, in the event that a violation of law is revealed, the Committee may impose a penalty of up to an equivalent to US$1,500.
In the event of disagreement with tender results, a participant may challenge such results within five calendar days after their official announcement. If violations are revealed in connection with a tender, the Committee may recognise the tender as invalid, provided that such violations affected the results of the tender. If, as of the moment of such a decision, a state procurement contract has already been concluded, the Committee may seek its invalidation in a judicial proceeding. Furthermore, the Committee may conduct its investigation following a request from a participant and suspend the conclusion of such a contract for a period of up to 30 calendar days.
Any participant disagreeing with tender results may also file its claim with a court, seeking to invalidate the tender results, within three months of the day when it became aware of the violation in question. In such event, the court will have to consider such claim within one month after its submission.
Although the current state procurement system has existed for approximately three years in Kazakhstan, it is coherent and rather unambiguous for all of its participants. Certain individual provisions that once were not clear were explained by the General Prosecutor's Office of the Republic of Kazakhstan, which facilitated their application.
Though the existing system certainly has some drawbacks (in particular, the admission of entities to tenders which are affiliated to customers), it continues to evolve in order to fully comply with the demands of oil and servicing companies operating in Kazakhstan.
* The English text of the article was provided by the author.

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