Kazakhstan's Health PPP Programme

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GLOBAL INFRASTRUCTURE KAZAKH HEALTH PPPS

KAZAKHSTAN’S HEALTH PPP PROGRAMME IN THIS ARTICLE WE GIVE AN OVERVIEW OF KAZAKHSTAN’S PUBLIC-PRIVATE PARTNERSHIP (PPP) LAW AND ITS APPLICATION TO THE HEALTHCARE SECTOR IN KAZAKHSTAN. BY AYESHA K WAHEED, PARTNER, ASEM BAKENOVA, INTERNATIONAL PARTNER, NUR-SULTAN, AND DANIYAR ZHUMAKHANOV, ASSOCIATE, ALMATY, MORGAN LEWIS.

It is no surprise that developing countries around in Kazakhstan generally reflects accepted the world are focusing on improving the quality international standards. Under the PPP Law, a and efficiency of their healthcare sectors. The public-private partnership has the following impact of the current Covid-19 crisis has served to exclusive features: highlight the stark disparity between the delivery • A relationship is established between the public of healthcare in developing economies compared and private partners by their entering into a PPP with developed economies. agreement; The public-private partnership concept was • The PPP project is for a medium-term or long- first introduced in Kazakhstan through the Law term period, from three to 30 years, depending on Concession adopted in 2006. In an attempt on the specifics of the project; to improve its legislative and institutional • There is joint participation by the public and framework, Kazakhstan adopted the PPP Law1 in the private partner in the implementation of the 2015, which created the basis for implementing PPP project; public-private partnerships in almost all sectors • Resources of the public and private partners with limited exceptions, extended the list of are combined for the implementation of the PPP PPP participants and the forms and types of project; and PPP contracts, and introduced a private finance • Risks are shared between the parties based on initiative. which party is in the best position to manage the As a result, there has been a significant risk at a lower cost. increase in the number of PPP projects implemented over the last five years: while only PPP project implementation is a fairly standard 21 PPP agreements, for an aggregate amount of process, which includes: approximately US$150,000, were entered into • Development of an investment proposal by the in the period 2003 to 2016, 588 PPP agreements, public partner or a business plan for a PPP project for an aggregate amount of approximately by the private partner; US$3.75m, were signed during the period January • Selection of the private partner; and 2017 through to February 2019. As of 5 March • Execution and implementation of the PPP 2020, 1,475 PPP projects have been, or are in the agreement. process of being, implemented in Kazakhstan, of PPP projects can be implemented in any which approximately 20% are in the healthcare sector of the economy, except for those facilities sector.2 that have been selected by the Kazakhstan Further development of the relevant legal Government as not being appropriate for PPPs, framework has led to a number of recent such as major water supply facilities, facilities amendments to the PPP Law leading to: of historical and cultural heritage, healthcare • Simplification of PPP planning via a reduction organisations engaged in blood services and HIV/ of PPP project planning stages; AIDS prevention other than the acquisition of • Provision of a long-term offtake/consumption medical equipment and their maintenance. guarantee by the state partner; • Development of standard documentation aimed There are two main types of PPPs: at saving time for all parties involved; and • An institutional PPP, which envisages • The launch of a unified database of PPP incorporation of a joint venture by state- projects. controlled entity(ies) and private partner(s); and • A contractual PPP, which can be implemented The PPP Law via a concession agreement, state property The planning and execution of PPP projects is lease and trust management agreement, leasing carried out in partnership with international agreement, life cycle contract3, service contract, investors and private partners selected on the etc. Certain of the contractual PPPs are governed basis of transparent international competitive by specific legal acts – for example, the Law of procedures. Importantly, PPP regulation the Republic of Kazakhstan On Concessions.

Reproduced from Project Finance International Global Infrastructure Report June 2020 © Refinitiv KAZAKH HEALTH PPPS GLOBAL INFRASTRUCTURE

Generally, the private partner is selected The state organiser of the tender process or through a tender, which can be either a regular, or direct negotiations is not entitled to add any simplified, tender, or a two staged tender. In certain qualification requirements in addition to those limited circumstances, the private partner may be required under Kazakhstan law, and potential selected by the relevant Ministry, for national PPP private partners have the right to not provide projects, or by local executive authority Akimat, information that is beyond the qualification for local PPP projects, by way of direct negotiations requirements set out under Kazakhstan law. with the potential private partner. There are no specific qualification The selection of the private partner through a requirements or exemptions for foreign private tender process is made on the basis of the best bid, partners compared with resident private partners. taking into consideration the following criteria: Non-resident private partners are required to • The amount of funds to be provided by the submit the same documents or documents bidder for the purposes of implementation of the containing similar information. PPP project; If a potential private partner is found to • The timelines provided by the bidder for the have provided false information confirming construction, reconstruction, modernisation and/ compliance with qualification requirements, or operation of the PPP facility; it may be subject to a three-year ban from • The bidder’s technical and economic indicators participation in future PPP projects. for the PPP facility; • The bidder’s track record in successful State support measures completion of PPP projects; and While the specific support provided to a project • The availability of qualified specialists. will be tailored for each individual project, the PPP Law sets out the range of state support Direct negotiations may apply where: measures generally available to PPPs. Such • The PPP project is initiated by a potential measures include: land or other in-kind grants; private partner in relation to an asset that it owns engineering infrastructure for the project; state or for which it has a long-term lease; or guarantees; co-financing; and consumption • The PPP project is inseparably linked to guarantees. proprietary rights to intellectual property However, the aggregate amount of state belonging to the potential private partner. support measures available to a PPP project may In case of direct negotiations there are not exceed the cost of development of the PPP procedures that must be followed before the PPP facility. agreement is entered into, such as examination of the PPP project business plan and negotiations Financing between the parties to the PPP agreement. Based on the PPP Law, the following sources of financing can be used for implementation of a Standard tender documents PPP project: the private partner’s own funds; Kazakhstan law provides for standard tender financing from third-party lenders; state budget documentation and a standard PPP agreement, funds; funds of quasi-public sector entities; and in particular in respect to healthcare PPP projects any other funds not prohibited by the laws of for ambulatory and polyclinic infrastructure Kazakhstan. and services. Due to the standardisation of tender documentation and the PPP agreement, Revenue sources familiarisation by potential private-sector partners PPPs are able to generate revenue from a number with such documentation can be useful for a of sources, including: income from the sale of general understanding of the expectations of the goods – works, services – produced by the PPP state partner. facility or management fees and rental charges for use of the PPP facility; receipt of availability Qualification criteria payments or state subsidies; and receipt of The PPP Law sets out the qualification criteria compensation for investment and/or operation applicable to a potential private partner costs from the state partner. participating in tenders or direct negotiations. he specific terms and conditions of a PPP These include minimum criteria for the private project’s financing are set out in the PPP partner’s legal capacity and solvency and availability agreement but the amount of financing obtained, of financial, material and labour resources. when aggregated with any state compensation Depending on the specifics of the PPP for investment costs, is not permitted to exceed project, additional qualification criteria may the cost of the development and construction of apply. For example, potential private partners the PPP facility. willing to implement healthcare PPP projects may be required to confirm the availability PPP agreement of maintenance centres in the Republic of The PPP agreement is a so-called combined Kazakhstan, the existence of an insurance contract, which embodies a number of different contract for the PPP facility, and monitoring types of contracts such as contracts for the supply capabilities for integration into information of equipment, execution of works and delivery of databases of medical institution(s). services, and operation and management.

Reproduced from Project Finance International Global Infrastructure Report June 2020 © Refinitiv GLOBAL INFRASTRUCTURE KAZAKH HEALTH PPPS

The PPP agreement must contain certain among the state partner, the private partner provisions that are expressly stipulated by and the project’s lenders, thus enhancing the Kazakhstan Law, including information regarding bankability of such projects.4 the proprietary rights to the PPP facility, the The PPP Law provides that direct agreements scope and types of services to be provided should include: under the agreement, the amount and terms • The acknowledgement of the pledge or and conditions of financing and investment, transfer/assignment of the private partner’s rights compensation of costs and state support or under the PPP agreement to its lenders; measures, timeline of implementation of the PPP • The state partner’s obligation to notify the project, conditions and scope of development of private partners’ lenders of any material breach the PPP facility, the rights and obligations of the of the PPP agreement by the private partner; parties, environmental obligations, currency risk • The right of the project’s lenders to demand mitigation measures if applicable, liability of the replacement of the private partner in case of parties, and conditions concerning amendments a material breach by the private partner of its to and termination of the agreement. obligations under the financing agreements The maximum term of the PPP agreement, or under the PPP agreement and to propose a including any extensions, is 30 years. In certain substitute private partner; and circumstances, the term of a PPP agreement may • The terms and conditions of the private be extended by a court decision, for example, partner’s replacement. in the case of a delay or suspension of the PPP project as a result of circumstances beyond the These provisions suggest that lenders will control of the parties to the PPP agreement, have the right to step in and take over the including due to force majeure. management of the PPP project – ie be granted Notably, an assignment or transfer of the step-in rights – in case the private partner private partner’s rights or obligations, as well as defaults. However, the PPP Law does not address any pledge of its rights under the PPP agreement, this matter in much detail and, given that direct is only permitted with the prior written consent agreement provisions are relatively new in of the state partner. Kazakhstan, the use and practice around such If the private partner is a non-resident of agreements is yet to be developed. Kazakhstan, the parties are permitted to agree to the selection of a foreign law as the governing Current pipeline law of the PPP agreement. The State Program on Healthcare Development 2020–2025, Healthcare Program, was approved by Direct agreement, step-in rights the Kazakhstan Government at the end of 2019.5 A direct agreement with the project’s lenders is The stated objectives of the Healthcare Program only available for PPP projects that are considered are the improvement of the quality of medical to be of particular national importance: in such care services being offered and sustainable cases, a direct agreement may be entered into development of the healthcare system, with

Reproduced from Project Finance International Global Infrastructure Report June 2020 © Refinitiv KAZAKH HEALTH PPPS GLOBAL INFRASTRUCTURE

construction of medical institutions, including by the Kazakhstan Government and was selected through a PPP structure with compensation of as the model on which to base the Healthcare investment costs, being identified as one of the Program, thereby further strengthening priority areas. cooperation between the two countries. The preliminary total cost of implementation To facilitate dialogue and exchange experience, of the Healthcare Program is reported to be the Kazakh-Turkish Business Forum was held in US$8bn. This cost is expected to be financed Istanbul in November 2019, the main purpose from the state budget, both national and local, of which was to discuss potential cooperation assets of the social health insurance fund, between Kazakhstan and Turkey in the fields of investment by private partners, and other sources business, trade and investment. permitted under the law, for example loans from As a result of this forum, the governments and multilateral institutions. a number of conglomerates of the two countries According to the Healthcare Program, at executed a total of 18 memoranda or agreements least 14 healthcare projects are expected to be relating to cooperation in various fields, implemented over the next six years in the cities including healthcare, involving a total amount of of Aktobe, Kokshetau, Ust-Kamenogorsk, Atyrau, US$1.5bn.7 Taraz, Karaganda, Kostanay, Kyzylorda, Aktau, Pavlodar, Petropavlovsk, Almaty, Turkistan, Nur- Conclusion Sultan, including four university hospitals. These Private investment in Kazakhstan’s healthcare sector include the following projects: is growing steadily. For the period from 2016 to 2019, • Construction of six large clinics; investments in the healthcare sector more than • Construction of a medical image repository of a doubled with an average annual increase of 31%. national scale; Kazakhstan government bodies continue to • Implementation of eight investment projects work on improving the PPP methodology for for the construction of large multi-disciplinary the creation and maintenance of a balance of hospitals; interests between the state and commercial • The introduction of the International enterprises in order to further increase the Classification of Functioning, Disability and number of private investors, including foreign Health to improve rehabilitation services; investors, in the PPP programme. • Construction of large medical facilities with One example of the investor friendly steps taken is compensation of investment costs, including via a the creation of a One Window section on the official PPP structure; and website of the Kazakhstan PPP Center, which allows • Creation of seven centres of percutaneous potential investors to receive information about any coronary intervention. PPP project, both planned and ongoing. n

In an effort to facilitate development of Footnotes PPP projects, the Kazakhstan Government 1 – Law of the Republic of Kazakhstan on Public- and the European Bank for Reconstruction Private Partnership, No. 379-V dated 31 October and Development (EBRD) entered into 2015 (PPP Law). a memorandum of understanding on 2 – Please see https://kzppp.kz/projects. the implementation of a comprehensive 3 – Life-cycle contract is a public-private programme for the modernisation of healthcare partnership agreement providing for a full cycle infrastructure in Kazakhstan in December 2019. of work on the design, construction, creation, The EBRD has also agreed to help the Ministry reconstruction, modernisation and operation of Healthcare prepare six hospital projects in the (including repair and maintenance) of a PPP following cities: Kyzylorda, Kokshetau, Kostanay, facility, the sale of goods, works and services Taraz, Pavlodar and Atyrau, all of which, other produced, as well as obligations to ensure than Kyzylorda, are expected to be structured as compliance of the public-private partnership PPPs, Kyzylorda is expected to be structured as a facility with the required technical and design-build-operate-maintain project.6 operational indicators throughout the term of the public-private partnership agreement. Kazakhstan and Turkey 4 – The lists of such PPP projects is approved Relations and economic ties between Kazakhstan by the Kazakhstan Government. To-date, PPP and Turkey have been improving dynamically projects of particular importance have included over the last 20 years. This cooperation has led to five projects, two of which are in healthcare. extensive implementation of joint and coordinated 5 – Resolution of the Government of the Republic projects in a number of different sectors, including of Kazakhstan No. 982 dated 26 December 2019. construction and healthcare. The total volume of 6 – For more information please see the EBRD’s investment in Kazakhstan by Turkish companies website at https://www.ebrd.com/work-with-us/ during this period has been over US$4bn. procurement/pn-82870.html Given the successful implementation of the 7 – For more details please check the official PPP healthcare programme in Turkey, which website of Kazakhstan Project Preparation Fund involves the design, construction and subsequent Limited Liability Partnership, which acts as the operation of healthcare facilities of different primary adviser for the Kazakhstan Government sizes, the Turkish precedent was carefully studied on all PPP projects.