Legal Reform in the Kyrgyz Republic

Fundamental changes have taken place in the Kyrgyz Republic following the change of regime in 2010. In many legal areas (including pledge law, insolvency and corporate governance), the EBRD assessments reveal that the laws on the books have reached at least medium compliance with international standards of best practice, which by regional standards is a significant achievement. However, as is often the case in early transition countries, implementation of laws remains highly problematic and investor confidence in the judiciary to enforce laws on the books remains weak.

 

Access to Finance

The primary legislation governing secured transactions includes the Law on Pledge adopted by Government Decree No. 49 on 12 March 2005. This law has repealed and replaced the 1997 Pledge Law and the 1999 Mortgage Law. A number changes have been made to the law since 2005. One of the most significant amendments provided for extrajudicial enforcement of creditor rights. The civil code provisions on pledge were amended in February 2007 to reflect the new law. More recent reforms took place in 2008-09 when the Kyrgyz Republic amended its civil code and pledge law to make secured lending more flexible by allowing general descriptions of encumbered assets and of debts and obligations. Technical amendments have been made multiple times since 2007, most recently in July 2011.
 
Mortgage
 
The Pledge Law appears to provide the necessary framework for the development and enhancement of primary and secondary mortgage markets. Apart from the agricultural land (reserved only for Kyrgyz citizens and financing reserved for local financial institutions) there are no limitations on who can grant and take mortgage and it can be establish over all types of immovable property (except over publicly or municipally owned residential houses and apartments and the living quarters provided by an employer).
 
Pledge
 
Since both mortgage and pledge are regulated in the same act, the same general rules applying to mortgage apply to pledge as well. There are no limitations on who can grant and take mortgage and it can be establish over all types of movable property. It seems that the property can be generally described as both the Civil Code and the Pledge Law stipulate that the pledge can be described in general terms as long this description allows its identification.
 
Credit Bureaus
 
The credit reporting system is a private credit bureau called CIB Ishenim. There is not a public credit registry in operation in the Kyrgyz Republic. Ishenim was established in 2003 with the financial support of EuropeAid. In 2004 it issued its first credit reports. It is a non-profit organisation and all its current members are founders. In March 2010 the credit bureau reached the milestone of including 500,000 credit histories, which reflected a coverage rate of 15.6 per cent of the population. The code of conduct developed by the IFC support became effective on January 1, 2012.
 
Financial leasing and factoring
 
Financial leasing is regulated by the Financial leasing law. The law provides relatively modern legislative framework for undertaking leasing transactions, including sale and lease back. Leased assets may include any non-consumable good including enterprises and other property complexes, buildings, facilities, equipment, transport vehicles and other movable and immovable property, used for commercial activity.  
 
There is no special legislation of factoring apart from general “assignment of claim by contract” provisions of the Civil Code which provide basis for assigning account receivables. As a result there is no definition of factoring services or types of factoring transactions which can help increase legal certainty of the factoring transactions and hence reduce involved costs and risks of re-characterisation of transactions. Reported factoring activity is currently insignificant and the development of factoring market might facilitate access to finance, especially for SMEs.
 
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 the Kyrgyz Republic.
 
 
 

Capital Markets

Since 2007, capital markets activity in the Kyrgyz Republic has primarily been regulated by the State Service for Regulation and Supervision of the Financial Market of the Kyrgyz Republic (FSA). There is one stock exchange, the Kyrgyz Stock Exchange (KSE), founded in 1994 as a non-profit organization and transformed into a joint-stock company in May 2000, with Borsa Istanbul as one of its shareholders. A single depository provides clearing and settlement services, the Central Depository of the Kyrgyz Republic (Depository).
 
The Kyrgyz Republic has made considerable effort to reform its commercial and financial laws, including capital markets law, in the past decade. The most recent reform included the 2009 amendment of the Securities Market Law, the primary law governing capital markets. The law covers, among other areas: (i) the regulated market; (ii) the public offering and issuance of securities; (iii) the secondary market of securities; (iv) the clearing and settlement system; (v) the disclosure, reporting, and other obligations of issuers and public companies; (vi) the protection of ownership and transfer of ownership of securities; (vii) the requirements for and obligations of securities market intermediaries; and (viii) the responsibilities of self-regulatory organizations.
Although efforts to introduce more financial products and the above mentioned reforms of capital market laws have been beneficial, the key to fostering the development of an active and liquid local capital market lies in establishing a functioning, reliable, and transparent institutional framework. The establishment and enforcement of corporate governance standards is needed in particular to support local corporate bond issuance, such as the EBRD assisted September 2013 inaugural som corporate bond issue by the Kyrgyz Investment and Credit Bank (KICB) for an equivalent of USD 2 million.
 


Contract Enforcement and Judicial Capacity

The Kyrgyz Republic’s judiciary comprises three-tiered courts of general jurisdiction vested with authority to hear criminal and civil matters. The Judicial Training Centre, formed under the authority of the Supreme Court, is responsible for professional development, including training and qualification of judges, as well as the general improvement of the judicial system. Judges are be appointed by the Parliament and nominated by the President upon recommendation by the Council of Judges, a self-regulatory authority consisting of 15 judges.
The EBRD Judicial Decisions Assessment found court judgments in commercial law matters in Kyrgyz Republic to be above the regional CIS average in terms of quality and predictability, a finding consistent with the EBRD’s support for commercial law judicial training in the country from 2006 to 2011. Enforcement of court judgments is another major issue for the entire region. In the Kyrgyz Republic, one of the most problematic areas is non-compliance with time limitations for the relevant procedures, mainly due to lack of effective instruments to counter the improper behaviour of debtors making spurious claims that hinder the enforcement process. Insufficient staffing of the enforcement agency and lack of professional training on enforcement procedures are other factors contributing to the low rates of enforcement.
The impartiality of courts in Kyrgyz Republic is perceived to be questionable. This is consistent with data from the EBRD / World Bank Business Environment and Enterprise Performance Survey, where only 24% of local respondents considered that courts were fair, impartial and uncorrupted.
 
 
EBRD Legal reform projects
 
Judicial capacity building - Phase I
 
The EBRD assisted local authorities with the preparation of an Action Plan for increasing judicial capacity in the commercial law sector. An inception visit to Bishkek for the assessment phase of the project took place in January 2005. A polling survey of stakeholders took place in the spring of 2005 and an Action Plan has been finalised in consultation with the local authorities. This phase of the project was completed in 2005.
 
Judicial capacity building - Phase 2
 
The objective of this follow-on project (completed in 2009) was to implement the Action Plan developed under Phase I of the project, with a view to improving the general level of commercial law knowledge and building capacity in the local judiciary and the local Judicial Training Centre as one of the requirements for ensuring the effectiveness of the commercial law framework.
 
Judicial Capacity Building – Phases 3 and 4
 
The project’s objectives were to improve the general level of commercial law knowledge and building capacity in the local judiciary and the local Judicial Training Centre as one of the requirements for ensuring the effectiveness of the commercial law framework.
 
 

Corporate Governance

There are several principal acts pertaining to corporate goverance. In addition a National Corporate Governance Code was enacted on 18 December 2012 and approved by the Order of the Executive Council of the State Service for Regulation and Supervision of the Financial Market in the Kyrgyz Republic. In the Introduction it is declared that the Code is based on the OECD Principles of Corporate Governance. The Code is voluntary and not endorsed by the Kyrgyz Stock Exchange. It is recommended for the companies to develop their own corporate governance code based on international best practices and take into consideration specifics of their own business.
The most recent EBRD assessment on corporate governance (2007) showed Kyrgyz Republic being weak in most of the areas under consideration, and especially in the “structure and functioning of the board, “transparency and disclosure” and “internal control” sections. Also, the institutional framework supporting corporate governance practices in the country was found weak.
 
 
 

Debt restructuring and bankruptcy

The Law No. 8901, dated 23 May 2002 on Bankruptcy (as amended, the LB) is the main legislation governing the insolvency proceedings of businesses (including both legal entities and entrepreneurs).
 
The main legislative provisions relating to insolvency office holders (IOHs) are found in the LB and are supplemented by other laws, including the Order of the Minister of Justice, No. 24, dated 14 January 2014 on the Detailed Rules for the Supervision and Inspection Procedures of Insolvency Administrators; Decision of the Council of Ministers No. 197, dated 13 April 2007 on the Criteria and Conditions for the Establishment of the Insolvency Administrator’s Compensation and Reimbursement of Expenses; Government Decision No. 125, dated 6 February 2013 on the Approval of the Code of Ethics for the Insolvency Administrators; and the Decision of the Council of Ministers No. 124, dated 6 February 2013 on National Standards of Administration of the Bankruptcy Estate.
Based on the results of the assessment, a detailed legal framework exists for the IOH profession in Albania, which prima facie, displays a number of key strengths. Nevertheless, the framework is new and under development. It would benefit from further improvements to address certain key areas of weaknesses and thus further improve IOH capacity and performance.
 
 
 

Electronic Communications

The 1998 Law on Telecommunications and Posts is the primary law governing the electronic communications sector in the Kyrgyz Republic. The 1998 Law has some features of best practice but, given the advances in the sector since its passage, it is overdue fundamental overhaul or replacement.  Although the 1998 Law provides for separation of the policy function carried out by the Ministry for Transport and Communications (MTC) and regulatory function conducted by the State Communications Agency (SCA), a number of deficiencies impede SCA’s ability to regulate the sector.  There is no clearly established sector policy and, although the Law provides nominal independence and substantial authority for SCA, other government agencies are seen to interfere with its decision making.  Most recent attempts to update the 1998 Law to take into account advances in technology and regulation have not been successful.
Despite some progress in market liberalisation, investor confidence will remain low until a more open, transparent regulatory regime is put in place, with simpler procedures for market entry and to introduce the normally expected competitive safeguards.
 
 
EBRD Legal reform projects
Interconnect and Costing
This project, completed in 2012 aimed at providing advice and assistance to the National Telecommunications Agency and the Government of the Kyrgyzstan in the revision of interconnection and costing/tariffing practices to better reflect international best practice.
 
Communications Law Revision Project
This project, completed in 2012 aimed at assisting the Ministry for Transport and Communication and the regulator to revise the 1998 Telecom Law.
 
Kyrgyz Universal Access
 
This Project provided advice and assistance to the Government of Kyrgyzstan in developing a strategy for universal access and ICT development; The Project also provided advice and assistance with respect to a demand study, advice and assistance with respect to the calculation of cost and design of financing mechanism and with respect to the design and administration of a pilot project (including public tender/auction) to trial the implementation of the chosen level of universal access. Approval by the Government of Phase I output was achieved in July 2006. Implementation of phase II is ongoing.
 
 

Energy and resource efficiency

Renewable Energy
 
The economy of the Kyrgyz Republic remains highly energy-intensive and relies to a large extent on energy imports. Energy security is a state priority priorities and rapid expansion of the use of renewable energy sources (RES) is at the centre of the government’s policy efforts. The Energy Saving Programme (till 2015) and the longer-term Strategy for the Fuel and Energy Complex Development (till 2025) set the policy framework for the sector. The government has also approved a high-level action plan to implement the Energy Saving Programme, including reduction in the energy losses, introducing development of small-scale energy projects and modernisation of energy infrastructure.
 
The lack of a modern regulatory framework until recently has been a major barrier to sector development. In 2008, the first Renewable Energy Sources Law (RES Law) was enacted. The RES Law introduced basic principles of regulation of RES production and distribution, including licensing of RES facilities (other than those used for own consumption), cost-based tariffs for RES-produced electricity with separate coefficients for each RES type, import duty exemption for RES equipment and mandatory purchase of the RES-produced electricity. One of the amendments introduced to the RES Law in 2012 provides for the RES producers’ right to claim lost profit from energy companies for breach of their obligations under the RES Law.
 
Energy Efficiency
 
With high levels of energy intensity and over-dependence on energy imports, the promotion and implementation of energy efficiency (EE) measures in all sectors of the economy is essential. Residential buildings sector is the largest energy end-user in the Kyrgyz Republic (it takes up almost 42% of the final national energy consumption). At the same time, the residential building sector offers one of the largest energy saving potential with over 20,100 TJ up to 2025 and another over half of that amount up to 2050. Investment opportunities needed to realise the energy saving potential are estimated at approximately €12 billion. These investments are associated with improvement of existing housing stock up to the level required by the new building regulations. Energy prices are heavily subsidised both in terms of allowances to residents and by direct subsidies in form of tariffs set below cost recovery levels.
 
The Kyrgyz Republic ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change in May 2003.
 
 

Energy legal and regulatory reform

The energy sector is managed and regulated by the Ministry of Energy (prior to
2009, known as the Ministry of Industry, Energy and Fuel Resources (MIEFR)),
which is responsible for strategic planning and forecasting in the energy sector,
development of the energy strategy, as well as for drafting new legislation or
amendments and introducing these drafts to the government for adoption. The State
Department for Regulation of the Fuel and Energy Complex (hereinafter referred to
as the State Department), which has tariff setting and licensing authority, is a department within MIEFR.
 
Pursuant to the Law on energy, the State Department is responsible for: setting of
prices and tariffs in fuel and energy organisations; issuance of licences for operations in fuel and energy organisations; approve decisions on the imposition of economic sanctions in case of breach of legislation or non-compliance with established license terms and conditions, including issuance of binding injunctions to natural and legal persons, regardless of their ownership form, as to termination of breaches on matters included in the State Department’s competence.
 
The EBRD 2010 energy sector assessment found that The Kyrgyz Republic performs slightly below average when compared with other countries in the region for electricity. The absence of an independent regulatory authority, separate from Ministry or government, contributes largely to reduce the overall score given to the country. One priority is to establish – and maintain over the long term – an independent regulator that is capable of effectively intervening in the ongoing restructuring of the sector.
 
 
 

PPP/Concessions

The new Law of the Kyrgyz Republic on Public-Private Partnership (the “PPP Law”) was adopted in 2012. The PPP law has been completely redrafted compared to the previous 2009 law in order to address the deficiencies evidenced in the 2011 EBRD Assessment. The PPP Law was drafted with the assistance of international PPP experts and international institutions. An Asian Development Bank assessment "Enabling Identification of Public-Private Partnership (PPP) Projects and Capacity Building in Kyrgyz Republic" published in August 2012 was “… made with reference to the EBRD ‘Core Principles’ (of Modern Concession laws) which themselves include and reference other sources and especially those from UNCITRAL". It states that the PPP Law fully meets best international practice related to many Principles, such as providing a legislative sound basis and detailing PPP project support. Other Principles, such as clarity of rules are largely met but with the need for comprehensive detailing of provisions through implementing regulations and guidelines.
 
The PPP Law is assessed by the EBRD as being in high compliance with the international best practices. The law covers all major elements and procedures normally attributed to PPP laws. Regulating key provisions in the law it leaves a number of arrangements to project documentation and agreements, e.g. properly requiring risk allocation between the public and private parties, as well as compensations for possible changes in the contract, to be specified in the PPP contract. The more plausible features of PPP Law include its acknowledgement of financing and the necessity to provide for government support and guarantee.
 
 

Public Procurement

In the Kyrgyz Republic, public procurement is regulated by a 2004 law (the PPL), as amended. The PPL is based on the 1994 UNCITRAL standards and to a large extent is now outdated. The PPL provides specific procurement rules for government procurement and public institutions, including state – owned companies. There is no specific separate regulation for public procurement in the utilities sector.
 
According to recent assessments conducted by the Bank, the PPL shows a medium level of compliance with current international standards. Substantial reforms are needed to upgrade the legislation to the standards of the 2011 UNCITRAL Model Law on Public Procurement (a model particularly relevant to CIS countries, given their previous reliance on the old UNCITRAL model law).
Currently, new legislation is being developed and discussed by parliament. Since 2012, the EBRD UNCITRAL Initiative, a joint technical cooperation programme of the EBRD and the United Nations Commission on International Trade Law (UNCITRAL) has been assisting the Kyrgyz government in revisions to the public procurement primary and secondary legislation.  The project will continue in particular with a view to promoting eProcurement mechanisms.