Renewables Projects in Kazakhstan: Any Guarantees Against Adverse Changes in Legislation?
Countries with stable, clear, and predictable legislative frameworks have been always on the investors’ top list. Best international practices demonstrate that such countries are usually granted a high investment climate rating as there is no notion of the “retroactive effect of the law” in these countries. Their governments secure any significant changes to the law to be first discussed in detail with interested parties and the business community prior to their adoption.
The presence of guarantees of stability and the absence of the so-called “grandfather’s clauses” in the newly adopted regulatory legal acts give the right signal to the investor. We have all witnessed the positive effect of the legislation stability guarantees in the Kazakhstan subsoil use sector. These guarantees helped to attract a significant amount of investment in the country's raw materials industry.
This publication analyses the issue of adverse changes in legislation regulating the renewable energy sector in Kazakhstan. This particular sector has been developing dynamically, and the likelihood of amendments to key regulatory legal acts in this area is quite high, without mentioning changes in the tax or foreign currency regimes in the country. The fact is that the participant in the RES auction offers a certain auction price, based on the corresponding financial model and a project business plan developed on the basis of legal requirements actual for that moment.
We will aim to consider the said issue from different angles - the retroactive effect of civil legislation, the stability of legislation, and the correlation of the contract provisions and legislation.
Retroactive Law
The Civil Code provides for the general rule of no retroactive effect in acts of civil legislation.[1] It is noteworthy that such rule covers several scenarios at once:
1) In the case of the adoption of a new legal act regulating relations that have not been previously regulated;
2) In the case of the adoption of a legal act that cancels the regulation of certain relations or eliminates previously existing legislative requirements;
3) In the case of the adoption of a normative legal act that changes pre-existing relationships.
At the same time, the Code provides for the legal act’s regulation of the relations that arose before its entry into force in cases where such legal act expressly states so. A similar approach has been taken by article 43 of the Law on Legal Acts[2]. Accordingly, existing renewable energy producers would be affected by new or changed legislative requirements only when this is expressly provided for by the regulatory act itself.
Granting a new law with retroactive effect may affect regulatory documents of different areas of action, and these changes are not always predictable and unambiguous. The stability of the investment business environment in Kazakhstan can be significantly shaken when Kazakhstan adopts regulatory legal acts with new, amended requirements to be implemented both at the construction stage and during the operation of renewable energy facilities.
There is a vast number of examples of granting new regulatory legal acts by retroactive effect in Kazakhstan.[3]Such situations raise questions in practice and very often lead to court or arbitration proceedings.
Stability – Only Partial and Selective?
As of today, legal entities implementing priority investment projects as well as strategic investment projects[4]under investment contracts concluded before 1 January 2015, are guaranteed stability in case of any changes in the tax legislation of the Republic of Kazakhstan.[5]Accordingly, the renewable energy projects that fall under the definition of priority investment project concluded before 1 January 2015, can rely on tax stability. It is noteworthy though that not all renewable energy projects meet the criteria of priority investment projects. Moreover, stability is also subject to certain time criteria. Hence, the said tax stability is of limited and partial nature.
The Correlation Between the Contract and the Law. Purchase Agreement with the Financial and Settlement Center
The Civil Code establishes a general rule whereby a new legal act applies only to rights and obligations that arose after its entry into force. The relations of the parties under the agreement concluded before the civil legal act enters into force are regulated in accordance with the Civil Code. The latter stipulates that the agreement must comply with the rules binding on the parties and established as a virtue of law at the time of the conclusion of such agreement. If there are any revised or new binding rules for the parties coming into force after the conclusion of their contract, the legislation recognizes the contract as valid unless a new law extends its effect to relations arising from previously concluded contracts.
The implementation by the investor of the RES project in Kazakhstan is governed mainly by the electric energy purchase agreement with the Financial and Settlement Center (hereinafter referred to as the “Agreement with the FSC”). The Agreement with the FSC establishes, among other things, the auction price under the Agreement, and is concluded for a period of 15 years. Clause 35 of Article 9 of the Agreement establishes that "all the terms of the Agreement are stable and do not depend on changes in the legislation of the Republic of Kazakhstan and can be changed only by agreement with the Buyer." Due to the lack of practice on this issue, and taking into account the fact that new legislation can in principle establish that its effect extends to relations arising from previously concluded agreements, this wording of the article from the standard form of the Agreement cannot serve as a guarantee of complete stability.
Conclusion
Problems related to the relationship between law and contract have always been relevant in the energy sector of Kazakhstan due to their practical importance. Developing market practice has shown that considerable importance should be given to the correlation between civil relations and legislative regulation, taking into account details that are not noticeable or have not been noticed before.
As we note in the article above, the current legislation of Kazakhstan cannot provide a full guarantee against adverse changes in legislation to developers of renewable energy projects:
1) The law is retroactive
In case the retroactive effect of a normative legal act or its part is provided by it or by the act on its entry into force.
2) Stability at the legislative level is selective
The Entrepreneurial Code provides only a partial and selective tax guarantee. To award such stability to the project, the project must meet two criteria simultaneously:
a) fall within the definition of an investment priority project; and
b) concluded before January 1, 2015.
3) Stability provisions under the Agreement with the FSC - not a guarantee
The wording of the standard form of the Agreement with the FSC that “all the terms of the Agreement are stable, do not depend on changes in the legislation of the Republic of Kazakhstan and can be changed only by agreement with the Buyer” will not ensure the stability of the provisions of the Agreement with the FSC due to the following:
a) new regulatory legal acts may establish that their effect extends to relations arising from previously concluded agreements, and in this case, the stability provided under the Agreement with the FSC will not work;
b) it should be generally noted that all standard forms of agreements in the field of RES projects, including the Agreement with the FSC, have been approved based on relevant orders of the Minister of Energy. Such orders constitute secondary legislation, and can be easily overturned by higher normative legal acts.
[1] Article 4 of the Civil Code of the Republic of Kazakhstan dated 27 December 1994.
[2] The Law of the Republic of Kazakhstan dated 6 April 2016.
[3] The Subsoil Code adopted on 27 December 2017 establishes the cases where it directly affects the subsoil use contracts signed with the Competent Body before the Code came into force.
[4] According to Article 284 of the Entrepreneurial Code dated 29 October 2015, the priority investment projects include:
- Projects creating new industries, providing for a legal entity to invest in the construction of new production facilities (factory, workshop), in the amount of not less than two million times the monthly calculation indicator established by the law on the republican budget and valid on the date of applying for the provision of investment preferences;
- Projects expanding and (or) updating of existing facilities, providing for a legal entity to make investments in the amount of at least five million times the monthly calculation indicator established by the law on the republican budget and effective on the date of filing an application for the provision of investment preferences for replacing fixed assets, including updating (renovation, reconstruction, modernization) of existing production facilities that produce products.
[5] Article 289 of the Entrepreneurial Code dated 29 October 2015.
