M&A IN KAZAKHSTAN
RENEWABLE ENERGY
SECTOR:
REGULATORY APPROACH
MARCH, 2021
WHICH TYPE OF LEGAL ENTITY INVESTORS SHOULD CHOOSE
Branch is a structural subdivision of a foreign legal entity that performs all or part of the foreign entity’s functions. In particular, it may engage in commercial activity. It is not a separate legal entity.
In Limited liability partnerships (LLPs) participants hold interests. An LLP may be formed by one or more participants. The participants in an LLP are not liable for the LLP’s debts beyond the value of their contributions. Participants’ interests are proportional to their contributions to the charter capital. LLPs in Kazakhstan are separate legal entities that are distinct from their participants. LLP is subject to state registration and taxation.
Representative office is established to represent a foreign entity’s interests in Kazakhstan. A representative office protects and represents the interests of the foreign legal entity and carries out preparatory and auxiliary activities, such as marketing and advertising. Generally, a representative office may not engage in commercial activity. It is not a separate legal entity.
Joint stock companies (JSCs) is a legal entity that issues shares in order to attract investments to finance its activities. Shareholders are not liable for the JSC’s liabilities. It may have one or more shareholders. The minimum capital required for a JSC is almost US$ 350,000.
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STEP-PLAN ON REGISTRATION OF LEGAL ENTITY
Preparation and submis-sion of the documents for the registration of the partnership (legal
entity)
1-3 WEEKS (INCLUDING APOSTILLE)
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Preparation of an official seal of the partnership
1 BUSINESS DAY
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Obtaining the electronic keys for the online submission of tax
reports
1-2 BUSINESS DAYS
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Opening of a bank account
2-3 WEEKS
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Employment issues
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Obtaining a license (if applicable)
15–30 BUSINESS DAYS
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LAND RIGHTS
Foreigners can obtain lands provided for building
or with already built up industrial and non-industrial
complexes, including residential constructions,
and lands provided for the maintenance of such
buildings.
Foreigners and legal entities with any kind
of foreign participation cannot obtain lands near the border line.
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LICENSING REGULATION
The exhaustive list of licenses and permissions
Range of business and professional activities that require licensing is very broadInvestors need to determine whether they need a license beforehand (engineering and construction, import/export of goods, etc.)
Penalties for not having licenses can be significant (including, profit confiscation)
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EPC contractor can subcontract work either to local or foreign company
Kazakh legislation prohibits provision for subcontract more than 2/3 (two thirds) of the value of the construction contract.
The value is calculated of the following:
construction and installation works including cost of materials for construction;
costs of the equipment, furniture and stock;
other costs.
In this regard, the part of works that may be transferred to subcontractors shall be calculated based on the total amount of abovementioned costs which constitute the value of the construction contract.
SUBCONTRACTORS
SUPPORT MEASURES OF RES IN KAZAKHSTAN
Purchase and sale of electricity – Financial and Settlement Center (KEGOC).
Standard PPA-contract form for 20 years on auction tariff in KZT.
Standard form of grid connection of the RES object.
Annual indexation of tariff – taking into account exchange rate for USD and consumer price index.
Free transportation of RES electricity.
Priority control and dispatching of electricityInvestment preferences in the framework of Entrepreneurial Code.
INFORMATION ON THE INDEXING TO THE CPI AND THE EXCHANGE RATE RISK ADJUSTMENTSAnnual indexation of auction prices, with 70% for currency exchange rate and 30% for theconsumer price index – after start of the production
Formula:Tt+1 = Tt x (1+0,3 x CPIt – 100%/100% +0,7 x USDt+1 –USD/USDt)
Tt+1
Tt
CPIt
Tt+1 is an indexed auction price,calculated by the above formula, rounded downwards to the nearest whole tiyn.
USDt+1
USDt+1 is a current exchange rateof KZT to USD as of October 1 of the year of indexation, determined according to the data of the National Bank of the Republic of Kazakhstan.
Tt is an auction price, taking into account the previous indexation, if there was any.
USDt
USDt is an average exchange rate of KZT to USD for the 12 months preceding October 1 of the year of indexation, determined according to the data of the National Bank of the Republic of Kazakhstan.
CPIt is a consumer price index, accumulated for the 12 months preceding October 1 of the year of indexation, determined according to the data of the authorized national statistics body.
THE INVESTMENT PREFERENCES
Provided to the:Legal entities registered in Kazakhstan that implement investment projects;Leasing companies that import technological equipment for the legal entities under the financial leasing agreement , that develop investmentproject.
The investment project preferences scheme comprises of the:Exemption from customs duties and VAT for import (Duties and VAT free import);State In-Kind Grants.
The investment priority project preferences scheme comprises of (RES):Property Tax (0% for 8 years);Land Tax (0% for 10 years);Reduction of corporate income tax (CIT) by 100% (10 years- new facilities; 3 years- existing facilities)Investment Subsidies up to 30% (Cashback);Import duties exemption;State in-kind grants (land, etc.).
The special investment project scheme is based on exemption from:Import duties;Taxes (VAT) pursuant to taxation laws of the Republic of Kazakhstan.
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AUCTIONS
WPP - 21.69 tenge / kWh;
SES - 16.97 tenge / kWh;
HPP - 15.48 tenge / kWh;
Bio ES - 32.15 tenge / kWh.
1 USD is 420 tenge (approx.)
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According to the Auction Schedule approved by the Ministry of in 2020, the following starting auction prices have been set for the 2020 auctions:
New auction or results of the conducted auctions to be announced on the official web-site of the Ministry of Energy and KOREM https://www.korem.kz/
THE RE AUCTION MECHANISM
THE MINISTRY OF ENERGYOF THE REPUBLIC OFKAZAKHSTAN (MOE)APPROVES:
• Auction Schedule• Reserved Price• Land plots to be allocated• Power generation type• Generation capacity
AUCTION SCHEDULE
• Published on the MoE RK official website (not less than 3 months before the proposed date of auction bidding);
• Envisages separate auctions for small and large RE projects (up to 10 MW and over 10 MW)
THE MAIN CRITERIA
• The lowest price is the main selection criterion;
• At least 2 participants in the auction;
• The total amount of bids shall be more than 130% of the declared capacity;• Auction winners shall use only new generating equipment
HOLDING OF THE AUCTION
• Held in the unilateral online form;
• H e l d b y z o n e s : Northern, Western and Southern;
• Held separately for different types of RE
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ACCESS TO RES AUCTIONS
• Constituent documents (*foreign legal entities provide the same documents in accordance with legislation of their country)
• Copies of technical conditions (if applicable), (issued and agreed in accordance with Grid Code)
• Copies of documents of entitlement for land (if applicable), (in accordance with Land code)
Bid Bond(bank warranty /stand-by letter of credit)
(2 000 KZT/kW - withoutdocumentation;
5 000 KZT/KW - withdocumentation)
Contract withauctions organizer
Registration and access to the Trade system
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RISKS IN PPA
The applicant issues a performance bond ("PB") within 30 calendar days after signing PPA.
The amount of PB is 10,000KZT per 1 kW. PB is irrevocable and valid:
For solar not less than 25 months;
For wind and biogasnot less than 37 months;
For hydronot less than 49 months.
If the contractor fulfils its obligations PB is fully compensated.
However: - 30% of PB is retained if the contractor fails to notify FSC on the commencement of the construction and installation works within the following time limits from the date of signing PPA:
- 70% (if 30% of PB was previously retained) or 100% of PB is retained if thecontractor fails to provide a copy of the facility commissioning certificate within the following time limits from the date of signing PPA:
An auction winner submits an application to sign a PPA to the Financial Settlement Centre ("FSC") after inclusion in the list of energy-producing organisations using RES.
For solar 12 months;
For wind and biogas18 months;
For hydro24 months.
For solar 24 months;
For wind and biogas36 months;
For hydro48 months.
MAJOR APPROVALS FOR RES CONSTRUCTION
Getting a land plot;Construction, Design licenses and permits (I and II categories);Work permits to hire foreign labor;Project documentation development, approval and expertise.
Notice on beginning of construction;Requirements to the construction (HSE, environmental permits, warranties); Architectural & construction control and supervision;Designer’s supervision;Technical supervision;Acceptance on the facility in operation:State acceptance;Acceptance by the owner.Registration of the completed facility.
PRIOR CONSTRUCTION
CONSTRUCTION
MAIN STATE PLAYERS IN RES
Ministry of Energy of the Republic of Kazakhstan is an executive body of the Government of Kazakhstan, which carries out state administration in the field of energy.
JSC Kazakhstan Electric Energy and Power Market Operator (KOREM) introduces mechanisms for the functioning of the market for centralized trading in electric energy, provision of high-quality services and tools to all its participants for the successful conduct of their business.
JSC Kazakhstan Electricity Grid Operating Company (KEGOC) provides the electricity transmission from power producers with power delivery directly to KEGOC to wholesale customers connected to the grid (power distribution organizations, major customers).
Financial Settlement Center for the support of renewable energy sources LLP (FSC) carries out a centralized purchase and sale of electrical energy.
Regional Power Grid companies (RPGC(РЭКи)
Local executive body (akimat) allocates and distributes of land plots.