Problems of Application of Procurement Rules of GWS in the Subsurface Use Sphere
Problems of application of Procurement rules of GWS in the subsurface use sphere
Since exploration and production of raw materials is the sector which is still considered to be for foreign and national investors the most attractive and developing sector of economy of Kazakhstan, the existing legal system of relationship regulation between the state and subsurface users is an object of careful attention of all interested parties.
It is obvious that from the moment when the Republic of Kazakhstan gained its state independence, the law of subsurface use has gone through its big way from primary definition of basic concepts and general principals of subsoil usage, including determinative exclusive authorities of state on granting right of subsurface use and its control till creation of developed system of law rules, which regulates the most significant aspects of subsurface use in all its stages.
For the last years one of the main trends of development of Kazakh law on subsurface use has become the significant reinforcement of control from the state’s side for implementation of contracts on subsurface use, as well as changing the balance of interests of parties on contracts towards requirements strengthening, imposed by the state to subsurface users.
Especially, a serious step from the state’s side was adoption of Resolution of the Government of the Republic of Kazakhstan No.1139 dated 28 November 2007. In accordance with the Resolution there were approved new Rules of procurement of goods, works and services during operations on subsurface use (hereafter – Rules).
With adoption of indicated Resolution, a previous acting resolution of Government of the Republic of Kazakhstan No.612 dated 7 July 2002 “On approval of Rules of procurement goods, works and services during oil operations” was cancelled (except other regulations), which legally can be considered as first attempt of the state to make exact and uniform rules for procurement of goods, works and services by subsurface users in oil and gas industry.
In contrast to previous Rules, which were applied to oil and gas sector, the adopted Rules in year 2007 are being applied to all subsurface users – customers, as well as their contractors, except enumerated Rules in clause 2:
1) Execution of procurement of goods, works and services during operations on widespread natural resources;
2) Executionofprocurementofgoods,worksandservicesinaccordancewiththelaw of the Republic of Kazakhstan which regulates state procurements;Legal entity, which possesses subsurface use right, fifty and more interests of voting shares (interest of participation), which directly or indirectly belongs to national managing holding company.
Whereas there were established numerus clausus of methods of procurement of goods, works and services during operations on subsurface use, which includes:
1) Open tender;
2) Request for quotations;
3) From single source;
4) Through the system of e-procurement; 5) Through goods exchanges.
Basis for development and adoption of Rules were legislative acts, valid on that moment: Laws of RoK «On subsurface and subsurface use» (article 63-1) and Law of RoK «On oil » (article 5), and аs starting model in many ways were used provisions of Law of RoK «On state procurements».
Amendments, made in Rules by Resolution of Government No.267 dated 1 April 2010, as well as followed after it, the adoption of the Law dated 24 June 2010 “On subsoil and subsurface use” in new version (hereafter – “Law “On subsoil””), in which provisions of Rules are fully duplicated and responsibility of subsurface users for violation of order of procurement of goods, works and services is established (hereafter – GWS), and have made many companies review and significantly change their practice of procurements.
It was contributed mostly through the introduction of provisions which were enacted by new Law “On subsoil”. According to the provisions expenses on procurement of goods, works and services, used during operations on subsurface use, by the results of tender, taken place outside the Republic of Kazakhstan, or gained in violation of established order of procurement of such goods, works and services by Government of the Republic of Kazakhstan, are excluded from expenses, they were taken into account by relevant competent body as performance of contractual obligations by subsurface users (article 77 of the Law).
Besides, article 129 of the new Law “On subsoil” stipulates, that under prior concluded contracts on subsurface use with state authorities of the Republic of Kazakhstan, the parties are obliged to rely on established requirements by indicated Law in a part of unification of terminology, providing information about Kazakhstan content in human resources, about Kazakhstan content in goods, works and services, calculated in accordance with unified calculation methodology by organizations of Kazakhstan content during procurements of goods, works and services, about planning and actually produced procurements of goods, works and services, in order and by forms, approvedby thecompetentbody.
Thus, in spite of provisions of article 30 of the Law “On subsoil”, guarantying defense of rights of subsurface users against changes of law, except changes in the sphere of national safety, defensive capacity, environmental safety, health care, taxing and customs regulation, in article 129 of the same Law was established retroactive force in regard to obligation of subsurface users to rely on new requirements in the sphere of Kazakhstan content (including the order of procurement of GWS).
For execution of above mentioned provisions of the Law “On subsoil” the relevant Competent body (with respect to oil and gas contracts – Ministry of oil and gas of RoK, with respect to mining contracts – Ministry of industry and new technologies of RoK), beginning from the latter half of the year 2010, actively worked on conclusion of additional agreements to prior signed contracts on subsurface use. The main content of concluded additional agreements was an introduction of terms in conceptual structure of all contracts, relating to Kazakhstan content, as well as including in contract additional obligations of subsurface users on increasing of percentage of Kazakhstan content separately for goods, works, services and personal, also responsibility of subsurface users for their disregard.
From our point of view, application of retroactive force of the Law to certain obligations of subsurface users, among which is indicated an application of new order of procurement of GWS, actually additional administrative mechanisms are created for control of performance of contractual obligations by subsurface users in a part of performance of work program under contracts. Consistent work of the competent body in this direction shows it.
In this situation the state was governed by necessity of achievement of such important aims as limitation of unreasonable increase of expenses by subsurface users, later applied on deductions and, accordingly, increase of tax receipts, as well as increase of Kazakhstan content during procurement of GWS and arrangement of conditions, excluding corruption, comprising in the industry.
However, in spite of all good purposes and applied efforts by state authorities, the practice of application of Rules shows that they have serious incomplete works, which make many difficulties for subsurface users in their daily operating activity.
In this article the most significant lacks of acting Rules were reviewed. These are the lacks with which subsurface users usually experience difficulties.
1. Application of unified procedure of procurement without deficiencies in types of operations on subsurface use.
In accordance with the article 76 of the Law “On subsoil” the subsurface user is obliged to submit an annual program of procurement of goods, works and services for the upcoming year to the competent body by approved forms and order of the Government of the Republic of Kazakhstan, on yearly basis not later than 1 February of the planned procurement year or not later sixty calendar days from the date of registration of contract on subsurface use.
In spite of failure to provide the annual procurement program of GWS for the upcoming year (as well as the failure to provide the quarterly report on procured GWS) is not subject to any special responsibility, the risk of qualification of such violation as non- performance of conditions of the contract for subsurface use exists, it can imply its termination by the relevant competent body in accordance with the article 70 of the Law “On subsoil”.
By clause 1 of the Rules, it is stipulated, that they “define the order of purchasing of goods, works and services by subsurface users and their authorized persons during operations on subsurface use, prescribed in annual program of procurement of goods, works and services, as well as by subcontractors, carrying out the activity within implementation of agreements, concluded with subsurface users and authorized persons of subsurface users”.
Thus, the main document, defining the list and volume of procurement of GWS on reporting year is an annual program of procurement, which the subsurface user develops independently and in established order submits to the competent body by placement in the Register. In indicated program the subsurface user plans for the one calendar year the nomenclature and volumes of GWS, methods and period of their purchasing.
Since the basis for preparing of the annual procurement program is working program of the contract, which in its turn is based on project decisions, the subsurface user is forced to rely on those initial information (they are often outdated), which were used as a basis when such project decisions were developed.
It should be taken into consideration, that acting current contracts on subsurface use were concluded at different times, they are significantly differ from each other by many parameters, beginning from definition of concept “exploration”, “production” and “operations on subsurface use” and finishing by structure and content of working programs. In particular, in some working programs in total expenses under the contract are included administrative, indirect, overhead and other expenses, and under the other contracts such expenses within implementation of working program are not taken into account.
On repeated appeals by subsurface users to relevant authority for relevant explanations were received the answers, that the subsurface user must rely on provided in Law concepts of operations on subsurface use (especially, exploration and production) and that subsurface users must define by themselves what kinds of GWS need to be included in the annual program of procurement.
In a result of such indefiniteness, some of subsurface users included practically all their expenses of operating activity in the annual program of procurement, and the others tried at their own risk to define initial criteria for reference any expenses to expenses under the contract on subsurface use. One more variant for decision of this problem – making changes in Annual program of procurement, however not all companies are ready to use this mechanism, fearing negative reaction from the Relevant authority’s side and possible problems during making report of implementation of annual program of procurement.
As the Rules do not contain any exceptions officially depending on types of GWS or amounts of procurement, upon not increasing, the established procedure is not applied and subsurface users are forced to increase the quantity of employees in many times in procurement department, to waste time and money on preparation of tender documentation and holding of tenders for buying absolutely all – even till office suppliers and lamps for light.
In this relation, it would be significant relief for subsurface users making changes in the Rules in a part of minimum amount of annual procurement and list of GWS and on which the Rules will not be applied, by analogy with applied law on state procurements, containing analogical norms.
2. Lack of clear criteria of attribution of procured GWS to operations on subsurface use.The clause 8 establishes that during procurements by method of open tender the qualification criteria to potential supplier are limited (1) by availability of legal capacity (for legal persons), civil capacity (for individual persons); (2) capacity to pay; unavailability of procedure of bankruptcy or liquidation at the moment of tender submission. (3).
Further in the clause 8 of Rules it is contained a mandatory requirement: “It is not accepted an establishment of qualifying requirements, which are not provided in the present clause”.
At first sight, such situation maximally extends potential suppliers’ circle and it should ease formalities of qualification confirmation of participants of the tender. However, it makes impossible for the customer in the stage of submitting documents for participationinthetendertoprotecthimself/herselffromunconscientious suppliers.
In distinction from the clause 8 of Rules, there is a clause 3 of the article 8 in the Law “On state procurements”, which states that “Potential suppliers of goods, works and services, except common qualifying requirements, established in the clause 2 of this article, must meet the special qualifying requirement in a part of having material, financial and labor resources, enough for performance of obligations under the agreement on state procurements”.
Unavailability of analogical clause in Rules actually means that the subsurface user has no right to make sure that potential supplier really will be able to perform his/her obligations and practically all subsurface users have such negative practice.
Ultimately the subsurface user is forced to execute the whole procedure of tender once again on the same volume of GWS, which besides direct expenses on its execution, in certain cases incurs also direct losses as forced suspension of production and violation of technological circle with all ensuing consequences.
Theclause36oftheRulesdoesnotsolvethisproblemaswell.Thisclause indicates that tender response of potential contractor must include “technical specification with description of technical and qualitative characteristics, supplied goods and (or) performed works and (or) provided services, as well as the list of documents, confirming the compliance of goods, works and services with these requirements (if there is relevant requirement in tender documentation)”.
First of all, it is obvious, that the list of documents, confirming such compliance is not warranty for the customer and in no way protects his/her interest from unfair suppliers.
Secondly, preparation of relevant technical specification gets additional time and makes necessity of engaging of specialists in the relevant sphere by subsurface users, possessing required level of qualification, and marketing experts of the market of relevant GWS. Generally it is negatively influenced on the period of holding of tenders and opportunity to promptly satisfy domestic demand of the company on separate types of GWS.
It is important to note that by the Rules, it is not stipulated such effective additional reaction mechanisms for the unconscientious potential participants of the tenders. However such mechanisms are stipulated in the Law “On state procurements», it is considered as a register of unconscientious participants of the state procurement and refusal of dumping quotations.
3. Limitations on qualitative requirements, made to potential supplier.
The next significant lack of Rules, from the point of view of the subsurface users and potential participants of tenders too big and not enough planned list of documents, which the participants of tender must apply to their proposal.
Since in current version of Rules there is no clear delimitation, what documents are submitted by residents, and what kind of documents – by non-residents for foreign participants such documents are formally impossible to submit, as for example, certificate of state registration with indication of BIN or certificate, confirming the absence of liabilities in accordance with Model plan of calculation, approved by resolution of the Management board of National Bank of the Republic of Kazakhstan dated 30 July 2002.
In relation to practical significance of certain demanded documents the certain questions are also being raised. For example, how the debts in amount of 500 tenge of tax influences on payment capacity of potential contractor or supplier? How the requirement of submission of notarized copies of licenses and/or patents or any other documents, confirming the right of potential supplier on production, fabricating work, delivery and realization of procured goods, performance of works and provision of services is sorted with prohibition on establishment of additional qualified requirements?
A certain question – legal status of potential participant of the tender. In accordance with definition of potential supplier, set out in the clause 3 of Rules, it can be only individual person, legal person, time-division of legal entities (consortium), taking part in the process of procurement of goods, works and services, used during operations on subsurface use.
It appears that registered branches or representatives of foreign companies in RoK, which in accordance with clause 43 of Civil Code of RoK are not legal entities; do not have a right to participate in tenders, held in accordance with Rules. On practice it leads to that, the foreign producers (especially big and globally known companies), having their branches in Kazakhstan, will not participate in declared tenders in Kazakhstan, as, their branches by themselves execute the realization of produced GWS on the territory of Kazakhstan. In connection to it, the holding company does not undertake formalities concerning with submitting of tenders in RoK as potential supplier.
Another «lack» between rights of Kazakhstani and foreign contractors (already in favor of latter) – as described in the clause 122 of Rules the permission on usage of agreement form of tender participants – non-residents, which directly infringes the rights of Kazakhstani contractors and suppliers, who must conclude the agreement only in forms, offered by the customer, who had led the tender.
Above mentioned lacks of Rules in this part lead to that, many potential national and foreign contractors and suppliers at first are laid in unequal conditions, or are denied from the opportunity to participate in the tender by absolutely formal grounds, and subsurface users cannot purchase goods, works and services of high quality, that they really need.
4. Unreasonable big list of documents, which are provided during tender Execution.
The next significant lack of Rules, from the point of view of the subsurface users and potential participants of tenders too big and not enough planned list of documents, which the participants of tender must apply to their proposal.
Since in current version of Rules there is no clear delimitation, what documents are submitted by residents, and what kind of documents – by non-residents for foreign participants such documents are formally impossible to submit, as for example, certificate of state registration with indication of BIN or certificate, confirming the absence of liabilities in accordance with Model plan of calculation, approved by resolution of the Management board of National Bank of the Republic of Kazakhstan dated 30 July 2002.
In relation to practical significance of certain demanded documents the certain questions are also being raised. For example, how the debts in amount of 500 tenge of tax influences on payment capacity of potential contractor or supplier? How the requirement of submission of notarized copies of licenses and/or patents or any other documents, confirming the right of potential supplier on production, fabricating work, delivery and realization of procured goods, performance of works and provision of services is sorted with prohibition on establishment of additional qualified requirements?
A certain question – legal status of potential participant of the tender. In accordance with definition of potential supplier, set out in the clause 3 of Rules, it can be only individual person, legal person, time-division of legal entities (consortium), taking part in the process of procurement of goods, works and services, used during operations on subsurface use.
It appears that registered branches or representatives of foreign companies in RoK, which in accordance with clause 43 of Civil Code of RoK are not legal entities; do not have a right to participate in tenders, held in accordance with Rules. On practice it leads to that, the foreign producers (especially big and globally known companies), having their branches in Kazakhstan, will not participate in declared tenders in Kazakhstan, as, their branches by themselves execute the realization of produced GWS on the territory of Kazakhstan. In connection to it, the holding company does not undertake formalities concerning with submitting of tenders in RoK as potential supplier.
Another «lack» between rights of Kazakhstani and foreign contractors (already in favor of latter) – as described in the clause 122 of Rules the permission on usage of agreement form of tender participants – non-residents, which directly infringes the rights of Kazakhstani contractors and suppliers, who must conclude the agreement only in forms, offered by the customer, who had led the tender.
Above mentioned lacks of Rules in this part lead to that, many potential national and foreign contractors and suppliers at first are laid in unequal conditions, or are denied from the opportunity to participate in the tender by absolutely formal grounds, and subsurface users cannot purchase goods, works and services of high quality, that they really need.
5. Tender results summary by definition of the lowest price approach.Established by Rules, the procedure of tender results summarization is based on definition of winner only by the lowest price approach (clause 62 of Rules).
It was expected, that it would significantly ease the problem of choice of potential supplier for the subsurface user, as it is not needed to review any other criteria (except enough formal requirements of timeliness of submitting proposal and completeness of submitted documents by potential supplier).
However, on practice it turns out that this requirement is one of the main lacks of the whole system of procurement, since it gives unreasonable competitive priority to businessmen, who save on the quality. As consequence the impossibility to check quality and experience of participants of the tender and the absence of mechanisms of blocking off unconscentious participants leads to that, the customer is forced to refuse from purchasing of more qualitative goods, and more professional services, as they will be cost more expensive than cheap low-quality analogs.
6. The limitation of validity period of procurement agreement of GWS.
In accordance with the clause 129 of Rules, the procurement agreement is concluded “on the period not more than one financial year, except the following cases:
1) Purchasing works with the period of their completion in next (following) financial year (years), provided in design estimate documentation;
2) Purchasing of assets and other goods, the duration of technical period of production, which stipulates their delivery in next (following) financial year (years);
3) Purchasing of goods, works and services, terms of performance (providing, supply) which in connection with duration of execution is stipulated in next (following) financial year (years), established in working program”.
This limitation raises many questions on practice.
For example, how must act the subsurface user in cases of agreement conclusion of obligatory employees’ insurance from misfortunes? In accordance with Law “On obligatory insurance of employees from misfortunes during their performance of labor (official) obligations” such agreement is to be concluded on the period of 12 (calendar) months. If such agreement is concluded not at the beginning of financial year, but suppose, in the second or third quarter, then the subsurface user must violate either the Rule or the requirement of relevant law.
Another situation – at first the procurement agreement of GWS is concluded for one year, but in the process of its implementation the objective circumstances are occurred, when the period of performance of obligations is required to prolong or the completion of mutual exchanges becomes possible after expiry of this agreement. In this case for compliance of law requirements on accounting and tax legislation, the subsurface user is obliged to conclude additional agreements on prolongation of terms of the agreement, simultaneously violating the Rules.
One more often occurring question of the subsurface users – how to be with so-called “frame” contracts, containing only total approximate amounts and the list of GWS, without definition of the terms, cost and assortment of concrete party of GWS? If such contract was concluded before entry into legal force of the Rules and Law “On subsoil”, and no any parties is interested in their termination or significant sanctions are provided by the contract for its early termination by initiative of the customer, then could they realize procurement of GWS by it without application of procedure established in the Rules?
From legal point of view, the answer is single-valued: as after entry into force of the Rules all actually deliveries, carrying out on the basis of additional agreements to frame agreement, are independent dealings, they fall under the action of the Rules (a relevant procedure of procurement is to be applied). In this case the problems arise again from subsurface user, as with termination of early having of contractual relationship so with holding of urgent tenders on procurement of required GWS.
Summary
Above mentioned represents anything but full list of all problems of subsurface users, resulting from incomplete works and lacks of the Rules and their current version.
As these and many other questions continually were brought up and discussed in many different levels, the projects of resolution of the Government of RoK “On approval of the Rules of procurement of goods, works and services during operations on subsurface use” and “On approval of the Rules of procurement of goods, works and services during operations of subsurface use through state information system “the Register of goods, works and services, used during operations on subsurface use and their producers”” were developed by Ministry of industry and new technologies of RoK.
At this time these projects are under consideration in the Government of the Republic of Kazakhstan, and we will hope, that with adoption of relevant resolutions the most part of problems will be resolved, and subsurface users will be able to implement all established rules of procurement of GWS in a good faith, without damage to their industrial, financial and operational activities in a whole.
