Legal Reform in Kazakhstan

Kazakhstan’s legal environment continues to remain complex and challenging despite significant reforms. Further steps are needed to strengthen the legal framework for investment and well-functioning markets.

Over the last few years there have been significant improvements in crucial areas such as securities legislation, concessions, competition, anti-money laundering, insolvency, and establishing legal entities. Notwithstanding these improvements, Kazakh commercial laws still fall short of internationally accepted standards in some respects.

The concession law could be improved by expanding the security package available to lenders. The corporate governance framework, including disclosure to shareholders, could be strengthened. Further improvement of the legal, institutional and regulatory telecoms framework will be a critical ingredient to ensure effective future development of the market and the delivery of a choice of affordable services of sufficient quality. Limitations on using sophisticated methods of taking security over movable assets and inexistence of a centralised register of pledges restrict the access to credit in Kazakhstan by limiting the legal certainty and business flexibility of transactions. Areas of uncertainty in the bankruptcy law remain and further reforms are underway aimed at strengthening debtor and creditor rights. Even though the basic regulatory framework for renewable energy sources has been created in Kazakhstan, further amendments are needed to encourage development of renewable energy projects. Kazakhstan’s public procurement laws need a comprehensive review and upgrade to meet modern standards.
Kazakhstan continues to move forward in developing legislation that will assist it in
its transition towards a market economy. However, implementation and shortcomings in the judiciary and the enforcement of court judgments remain a serious problem.
 
 

Kazakhstan: Access to Finance

In 2014 the EBRD conducted an assessment on secured transactions which examined the availability of collateralising different types of assets regardless of the underlying legal instruments used to achieve the establishment of secured creditor’s rights. In addition to the classic security interests (pledges and mortgages the assessment also covered usual types of quasi security, such as sale and lease back transactions. The assessment also covered related issues such as enforcement and syndicated lending. The links below take you to the assessment results for Kazakhstan.
 
 

Kazakhstan: Capital Markets

The capital markets in Kazakhstan are relatively well developed. The public equity
market capitalisation in 2011 stood at 25.7 per cent of GDP, compared to 45 in 2010.
The number of listed companies increased by 3, with 63 companies listed on the
Kazakhstan Stock Exchange as of end-2011. Factors such as an overall lack of
transparency in the corporate segment constrain the development of equity capital
markets. Many large Kazakh companies have chosen to list in London or New York.
The primary government bond market is well developed, although the secondary
market lacks liquidity. Money markets are at early stages of development, and
liquidity in this market segment remains modest. Securities legislation in Kazakhstan
remains weak.
 


Kazakhstan: Contract Enforcement and Judicial Capacity

The court system is a three-tier system composed of: regional courts, district courts and the Supreme Court as the highest judicial body. The regional courts are of common jurisdiction and try most cases in the first instance. The judgments of regional courts may be appealed to the district courts, while decisions of district courts may be appealed to the Supreme Court. There are also specialized courts including military courts, administrative courts and more recently created economic courts.
Cases that are within the competence of the specialised courts are judged in the first instance in the relevant specialised court. The President nominates judges for appointment to the Supreme Court and the Senate approves them. The President also appoints oblast judges, who are nominated by the Highest Judicial Council, and local judges from a list compiled by the Ministry of Justice. A Constitutional Council, whose members are also appointed by the President and legislature, review, among other things, constitutional questions.
The legal system has made some significant progress since independence. Nevertheless, weaknesses remain in several areas and further reform is needed. Moreover, reform of the court system and judiciary is especially pressing; while the former is progressing slowly, several rulings suggest that judicial independence is very much open to doubt.
 
 
 

Kazakhstan: Corporate Governance

The principal legislation governing corporate governance in Kazakhstan is the Law on Joint Stock Company of 2003, as amended (the “JSC Law).
The EBRD assessment highlighted the need to enhance the legal framework on
director duties to include duties of care and loyalty. The law should avoid micromanaging the distribution of powers between boards and management and leave boards in charge of strategic issues with a stronger mandate to direct and supervise their companies. Disclosure to shareholders should be strengthened and the regulators should develop more effective monitoring system of such disclosure. There is no need for all JSCs to have independent directors and board committees, but there is much need to have board able to provide direction and oversight to their companies.
The current Kazakh Corporate Governance Code (the “Code”)10 was developed in
February 2005 by a working group led by the Financial Institutions Association in
Kazakhstan, the Kazakhstan Stock Exchange and the Kazakh Supervisory Authority
and was revised in 2007. The Code is voluntary and applies to Kazakhstan listed
companies, which are recommended to incorporate the provisions of the Code in their own codes and bylaws. While the majority of companies formally incorporate the Code in their corporate documents, in practice the implementation of the Code’s
principles remains weak.
The EBRD’s Legal Transition Team has been discussing with the Kazakh authorities (i.e., the Ministry of Economic Development and Trade of the Republic of Kazakhstan and the National Bank) and other key stakeholders, with the collaboration of the IFC, a possible technical cooperation project aimed at improving the corporate governance framework in the country. In particular, the project would aim to revise the JSC Law and the Corporate Governance Code so to align them to best international and international standards, also addressing the shortcomings mentioned above.
 
 
 

Kazakhstan: Debt restructuring and bankruptcy

A complete assessment of all insolvency laws in the EBRD’s countries of operations, including Kazakhstan, was completed in 2009. The assessed compliance score for the general insolvency law assessment was 61%, indicating ‘low compliance’.
In the 2006 assessment Kazakhstan was rated as ‘medium compliant’. This suggests that subsequent changes to the law have not improved it. It is weak in the areas of commencement, assets of the estate, credits rights and reorganisation.
 
 
 

Kazakhstan: Electronic Communications

Until 2007, the telecommunications sector (the “Sector”) in Kazakhstan was regulated by three separate entities: the Agency for Communications and Informatics (AIC) which regulated technical matters and universal service; the Agency for Natural Monopolies (AREM), which regulated interconnection; and, the Committee for the Protection of Competition (CPC), responsible for assessment of dominance and application of retail tariff regulation. (The CPC was replaced by the Agency for Protection of Competition (APK) in 2008). In 2007 all relevant powers to regulate the sector were transferred to AIC. AIC is also now responsible for Sector policy making and Informatisation issues.
Since 2007, AIC has attempted to take independent action but meaningful reforms have yet to be implemented. The Government of Kazakhstan (the “Government”) maintains control of 51% of the dominant incumbent operator, KazakhTelekom (KTC), through its Samruk Holding organisation, which also owns 100% of one of KTC’s main competitor, TransTelekom. The sector regulator AIC has produced progressive regulatory proposals for retail tariff rebalancing, market access and interconnection charging but these have not yet been implemented by KTC. Thus, as the necessary market remedies have yet to be implemented, regulatory independence is still only a theoretical concept in Kazakhstan.
In a 2008 assessment of the communications sector of EBRD Countries of Operation the sector regulatory regime in Kazakhstan was deemed to have “Low Compliance” when measured against international best practice.
 
 
 

Kazakhstan: Energy and resource efficiency

Despite improvements in the area of energy efficiency, Kazakhstan’s output remains highly energy intensive and carbon intensive, while energy tariffs are not fully cost reflective.
A legal and institutional framework for sustainable energy needs to be upgraded, while increases in energy tariffs would provide the necessary incentives for a more efficient energy use by enterprises as well as households. Further support needs to be extended to development of renewable energy sources. The Government’s Green Economy Strategy (covering the period to 2050) is a top national priority and the Bank will assist in implementing key aspects of the strategy, through projects in energy, renewables, agriculture, water, waste management, transport, and other sectors. the Bank made some headway towards bridging the wide gap
between international best practices and Kazakhstan’s renewable energy and energy efficiency legislation. The EBRD championed adoption of feed-in tariffs, which were written into law. With the Bank’s assistance Kazakhstan became eligible for cofinancing (with the EBRD) from the Clean Technology Fund. In the conventional energy sector, the Bank promoted transition by aiming to balance supply and demand for power, through supporting re-tooling of the country’s main transmission company.
 
 

Kazakhstan: Energy legal and regulatory reform

Kazakhstan was one of the first former Soviet states to reform their electricity
market, beginning in 1996. The Law on electricity provides for a supplier of last resort in the retail market.  As a first step, the responsibility of the supplier of last resort is assigned to the distribution companies. There are no limitations on foreign investments into Kazakhstan’s energy sector. Investments in construction of large energy facilities require endorsement of the MEMR and permission from the Government. A state licence is also needed for electricity production.
For electricity and gas alike, ANMR is responsible for developing an annual plan
of the Agency's operation and submitting a yearly report to the Government on the results of its activity. ANMR reports to the Government and Parliament at least once a year.
The decisions of the Agency are published in the mass media and on the Agency's
Website - http://www.regulator.kz .
 
 
 

Kazakhstan: PPP/Concessions

As a result of a PPP promoting policy Kazakhstan has recently undertaken notable efforts in reforming concession enabling legislation, in particular, by making amendments in 2008 to the 2006 Concessions Law No. 167-III (the “Concession Law”). In addition, a National PPP Unit was set up in 2008 under the Ministry of Economy (“MoE”) to improve the PPP institutional framework.
The current Kazakhstan Concession Law enables the implementation of concession in infrastructure including those based on open tendering. The July 2008 amendments to the Concession Law addressed a number of major flaws, relating to definitions, model contract provisions, register of concessions, deadline period to conclude concession contract, and limits to state guarantees.
Overall, the amended Concession Law is now seen as adequate; however, the law still falls short in certain aspects of internationally acceptable standards.
 
 
 

Kazakhstan: Public Procurement

Public procurement law in Kazakhstan is regulated by Law on Public Procurement enacted on December 29th, 2009 (PPL). In the EBRD 2010 assessment PPL scored low to medium compliance in the region. The scores have been calculated on the basis of a legislation questionnaire, based on the EBRD Core Principles for an Efficient Public Procurement Framework.