Kazakhstan content issues in state - subsoil user relationships

Kazakhstan content issues in state - subsoil user relationships

Local content issues have always had and will always have a special importance for investors as well as for the state. This fact is due to the intention of the government to develop its industry and increase the competitiveness of its economy. This process in early stages may be carried out to the prejudice of an investor.

The recently adopted new Law of the Republic of Kazakhstan On Subsoil and Subsoil Use No. 291-IV dated 24 June 2010 (‘Law on Subsoil’ hereafter) provides for a number of rules and conditions intended to regulate investors’ activities. This Law focuses on Kazakhstan local content issues. Nevertheless, the Law of the Republic of Kazakhstan “On amendments and additions to some legislative acts of the Republic of Kazakhstan concerning the Kazakhstan content” is still effective with regards to amending Kazakhstan laws excluding the old Law On Subsoil and Subsoil Use.

In the present article we would like to cover certain provisions of the Law on Subsoil concerning Kazakhstan content

1.    Notion of Kazakhstan content in goods, works and services

As similar to the previous Law, the Law on Subsoil provides for notions of Kazakhstan content on goods, works and services.

Kazakhstan content on goods means a share (in per cent) of the cost of Kazakhstan origin materials and producer’s expenses for goods processed in the Republic of Kazakhstan

In practice, Kazakhstan content on  goods shall be determined by a subsoil user on the basis of an ST-KZ certificate issued in relation to the goods. In the absence of such a certificate Kazakhstan content shall be considered as null.

According to the Law on subsoil, Kazakhstan content on work (services) means an aggregate cumulative share of Kazakhstan content on the cost of goods used for the performance of works, on the agreement value and/or payments to Kazakhstan employees, on the salary fund of the entity performing works or rendering services under an agreement after deduction of the costs of goods used for the performance of works and subcontract agreement values;

2.    Method of calculation of Kazakhstan content during procurements process

For the purpose of monitoring and control on the fulfilment of obligations on procurements in relation to Kazakhstan content, the Law on Subsoil provides the use of an appropriate method. At the present time, this act has not been adopted. Nevertheless, the previous Law On Subsoil and Subsoil Use provides for the adoption of an analogous method which was adopted by Decree of the Government of the Republic of Kazakhstan No. 367 dated 20 March 2009 on the approval of a unified method for the calculation of Kazakhstan content by organisations during the procurement of goods, works and services (‘calculation method’ hereafter). At the present time this method shall be followed.

The calculation method is intended for calculating Kazakhstan content whilst carrying out procurements by:

1)    state authorities, establishments and enterprises, legal entities, which are owned by the state or its affiliates for 50 percent or more, procuring goods, works and services under the Law of the Republic of Kazakhstan on state procurements;

2)    National managing holdings, national holdings, national companies and their subsidiaries and affiliates, and other part owned state entities;

3)    subsoil users and/or persons authorised by subsoil users to perform the procurement of goods, works and services under the Law On Subsoil and Subsoil use; and

4)    Organisations where the procurements of goods, works and services shall be monitored according to the list approved by the Government of the Republic of Kazakhstan.

This calculation method contains formulas for the calculation of Kazakhstan content.

It should be noted that in practice these formulas are not always applied properly because of an absence of explanations. This fact may result in the wrong calculation of Kazakhstan content and consequently result in a breach by a subsoil user’s obligations on Kazakhstan content.

In this regard, we would hope that the Decree of the Government of the Republic of Kazakhstan on the method of calculation of Kazakhstan content, which is currently being developed, shall provide a more clearer and digestible description of the calculation process.

3.    Monitoring and control over the fulfilment of obligations in respect to Kazakhstan content.

Coming to the theme of procurement, it should be noted that the Law on Subsoil has envisaged the notion of the Register of goods, works and services used in subsoil operations and their producers (hereinafter the “Register”). In accordance with the Law, the Register of goods, work and services used in subsoil operations and their producers” means a state information system established for the control and monitoring of purchase of goods, works and services used in subsoil operations and their producers, as well as for electronic purchasing and establishment of the list of goods, works and services used in subsoil operations;

As of 1 October 2010, paragraph 3 of Article 77 of the Law on Subsoil comes into force. Accordingly, purchasing of goods, works and services by subsoil users (excluding purchasing via goods exchange) shall be implemented with the usage of the Register. In accordance with paragraph 6 mentioned above, expenses on the purchasing of goods, works and services used in subsoil operations purchased in breach of the procedure confirmed by the Government of the Republic of Kazakhstan shall be excluded from the expenses accepted as fulfilment by  subsoil users under their contract obligations.

In accordance with paragraph 1 clause 129 of the Law on Subsoil, the Law shall apply to the relations appeared after its enactment. In our opinion, procurement made by subsoil users is classed as independent relations between subsoil users and suppliers. We assume that the noted provisions on Register and their effectiveness once coming into force, shall not only be applicable to procurement under newly concluded contracts, but also to procurement under old contracts, unless as otherwise stipulated in the stability provisions.

We should note that at present, the rules on purchasing goods, works and services used for subsoil operations using Register are still not confirmed. In such a case, it is difficult to make any conclusions on the consequences of running the Register in the process of procurement and the procedure of action. Additionally, there is an opinion that the term envisaged by the Law before the start of purchasing by using the Register can be significantly prolonged.

4.    The responsibility of the subsoil user for the violation of Kazakhstan content obligation

In accordance with the Law, the subsoil contract shall include obligations of the investor on Kazakhstan content. This means that breach of such obligations shall be treated as breach of part of the contract and shall thus effectively be deemed as breach of the contract.

In accordance with the legislation, non fulfilment of contract obligations in part of Kazakhstan content can result in the subsoil user as being be liable in three different ways:

              I.        Administrative liability. Pursuant to clause 275 of the Administrative Code of the Republic of Kazakhstan dated 30 January 2001, violation of the terms of the subsoil contract shall lead to a fine for small and medium-sized businesses – from 80 to 100 monthly indices, for big enterprises – from 120 up to 150 monthly indices.

      At the same time, the Administrative code envisages provisions to relief an entity from administrative liability in case of a minority breach. According to the Administrative Code, a minority violation is treated as a case where among other circumstances the amount of the sanction exceeds the amount of damage caused by the violation.   

      The issue regarding the relief of the subsoil user from liability shall be resolved by the state body which shall consider the administrative case (the authorised body in the sphere of studying and usage of subsoil) and sanctions accordingly depending on the concrete breach.

            II.        Recovery of  forfeiture (penalty or fine) in accordance with the terms of the contract. The Law on subsoil envisages the necessity to indicate in the subsoil contract, the level of forfeit (penalty or fine) for non fulfilment and/or improper fulfilment by the subsoil user of its obligations including Kazakhstan content.

      As the legislation does not consider the basis from which obligation on Kazakhstan content shall be deemed as violated, the competent body has the right to demand the recovery of a forfeit for any breach of Kazakhstan content obligation.

           III.        Termination of the subsoil contract. Pursuant to clause 61 of the Law on subsoil, in the case where the subsoil user violates the terms of the contract, the competent body shall notify on the necessity to eliminate such breach in defined terms. In cases where more than two breaches of contract obligations are not eliminated, the competent body has the right to terminate the contract unilaterally.

      In practice, minor fluctuations do not lead to any notifications and issues raised and are resolved operatively.

As mentioned above, there are no special provisions in the legislation referring to the definition of fluctuations of indexes of Kazakhstan content stipulated in the Contract. In such a case, any fluctuations from obligations regarding Kazakhstan content can be a subject for the liability of a subsoil user.

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To summarise the latest changes in the legislation in respect to Kazakhstan content, it should be noted that there should be a more detailed regulation of the subject. At the same time, the legislation in the sphere of Kazakhstan content has some backlogs, such as the calculation method of Kazakhstan content and usage of the Register .

Unfortunately, the volume of this article does not allow us to highlight all issues regarding Kazakhstan content. GRATA Law Firm does however specialise in this sphere of work and is thus able to  a more provide detailed review and analysis upon instruction.

Best Regards,

Natural Resources Department

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