Ilya Kirichenko

Elena Dvoretskaya-Yussupova

Sergei Vataev

Advocates Bureau “Legit”

When discussing investment, one’s mind usually unwittingly suggests a picture in which foreign business for its money creates something new in our country with jobs, infrastructure, and future benefits.

Understandably, investments and everything related to them are top priorities for the government and the President.

In almost every speech, the President emphasizes the importance of attracting investment and creating a favorable investment climate.

Officials at all levels enthusiastically take on the task of formulating vital and important indicators for reporting.

From the legislative and institutional point of view, investments in the Republic of Kazakhstan are, in theory, protected.

Various councils and committees, the Entrepreneurial Code and many other legal enactments, investment policy concepts, special economic and industrial zones, and much more have been created.

Let’s try to understand why we still face problems with all these beautiful institutions.

The Entrepreneurial Code defines investors as individuals and legal entities investing in the Republic of Kazakhstan. At the same time, a major investor is defined as an individual or legal entity making investments in the Republic of Kazakhstan at least 2,000,000 multiples of the monthly calculation index.

In other words, the Republic of Kazakhstan’s legislation provides for the national treatment of foreign investors without drawing a line between foreign and domestic investors.

If we take a broader view, in addition to Kazakhstan’s legislation, international treaties protect foreign investors, too. For example, Kazakhstan has signed 52 bilateral treaties on mutual support of investments, of which four have expired and five have not yet entered into force. The protection provided by these treaties complements and strengthens the protection provided by the legislation of Kazakhstan. A question – is this additional layer of armor necessary? Practice shows that it is needed because at the level of national legislation, or more precisely – the national justice system – investors, both foreign and Kazakhstani, sometimes have a hard time.

Various reports on the state of investments in the Republic of Kazakhstan invariably note the judicial system as a weak point.

Alas, the judicial system of the Republic of Kazakhstan has not become a factor of confidence and protection but, on the contrary – a risk factor with a high level of threat to investors, and many examples from the past demonstrate this.

To minimize this risk in the Republic of Kazakhstan, the Astana International Financial Center, with the AIFC Court and the AIFC International Arbitration Center, was established.

With the AIFC, foreign investors received certain guarantees for fair and independent judicial resolution of disputes by foreign judges (although the investor also needs certain conditions to take advantage of this opportunity).

The General Prosecutor’s Office of the Republic of Kazakhstan has been entrusted with special supervision functions in terms of investments.

Foreign investors, as already mentioned, have more effective protection in the form of international treaties, which prevail over national legislation.

As we can see, the work to create a favorable investment climate is in full swing at different levels, and it is certainly good; the inflow of foreign capital, technology, and experience all that helps us to dream of a higher level and quality of life, but what about domestic investors who can be helpful in minor scale work?

Domestic businesses are ready to work with the state, are happy to invest in public-private partnership projects, and take state facilities into trust management, improving and restoring them to their original purpose.

Perhaps we will be objected to and said: “Excuse me, but you have indicated above that the legislation of the Republic of Kazakhstan does not draw borders between foreign and domestic investors?” Yes, this is true, but as it often happens in our reality, there are those for whom the legislation and power institutions work better than others.

Here is an example from our practice.

In one of the megacities of Kazakhstan, the State Assets Department (hereinafter – “SAD”) announced a tender under which it was planned to transfer a property complex into trust management for thirty years without the right to purchase it out. At the time of the announcement of the tender, this property complex, which is included in the list of architectural monuments protected by the state, was in a deplorable condition.

The LLP participated in this tender by presenting a development plan and assuming obligations to make investment investments in the amount of 500,000,000 (five hundred million) tenge during the term of the trust management period, as well as additional obligations to improve the adjacent territory.

The SAD selected this LLP as the tender winner and concluded a contract with it.

In the first year of LLP’s trust management of the LLP, an amount of 160,000,000 (one hundred and sixty million) Tenge was invested in the property complex.

A complete restoration has been carried out, which deserves a separate chapter in our article. The mere mention of the fact that the LLP tracked down the heirs of the architect of the property complex and used original drawings during the restoration, as well as the fact that the mosaic drawings, which were part of the overall ensemble of the complex, were re-made abroad because there are no such specialists in our country, shows that people were full of enthusiasm and desire to work.

18 out of 20 SAD requirements under the trust management (let us remind you – designed for 30 years) were fulfilled by the LLP in the first two years, including the additional load of landscaping and gardening.

LLP, realizing the seriousness of the approach and demanding nature of the state, submitted quarterly reports on trust management, and the object began to function according to its intended purpose. This continued for 7 of the planned and contracted 30 years.

In 2023, the SAD sent a notice of termination of the trust management agreement to the LLP because the 20 requirements were allegedly not fulfilled by the LLP.

Naturally, the LLP could not agree and did not respond. A response was sent to the SAD, in which, referring to documents and other evidence, the LLP explained that the obligations were being fulfilled (as you remember, 18 of the 20 requirements were fulfilled), 2 of the remaining requirements could be fulfilled only after the expiration of the trust management agreement, i.e. in 2036.

Despite the seemingly well-reasoned arguments and the full force and firmness of legal theory, the LLP faced the unbending will of the SAD (read the state) to part with the investor without returning the money it had invested in the restored and functioning facility.

SAD filed a lawsuit in the specialized inter-district economic court requiring the termination of the trust management agreement.

It was surprising to study the grounds of the suit in which the SAD stated that the trust management agreement was subject to immediate termination since the LLP was not fulfilling its obligations under the agreement while referring to those obligations that had been fulfilled and accepted by the SAD without any comments.

The LLP filed several complaints with the Prosecutor’s office, the President’s administration, commissioners, etc., but there was no response.

During the court proceedings, after the LLP presented its objections based on a mass of objective evidence, the SAD changed the basis of its claim, and the term “ineffective trust management” appeared for the first time in this case.

The problem with this term, while it seems obvious, is that there are simply no efficiency criteria that could show ineffective governance if they are not achieved. They are not in the contract; they are not in the regulations. That is, the term is purely manipulative.

The court appointed a field hearing, at which it became obvious that the SAD’s justification for the claim was completely far-fetched; the object was in good condition and was operating solely for its intended purpose.

After the field hearing, the court engaged an architect as a specialist, not an economist or an accountant capable of assessing the effectiveness of trust management, and the architect, who indicated in his report that the asphalt pavement was made with violation of technology, provided that only a visual inspection was conducted and that the number of planted deciduous trees and conifers did not meet the requirement, which was also questionable, based on the specialization of the invited specialist.

These findings were the basis for the court’s decision to terminate the trust management agreement due to the ineffectiveness of such management.

Only the prosecutor’s office reacted to the complaints filed by the LLP. But in a very peculiar way – the prosecutor joined the process and supported the SAD.

Separately, it is worth mentioning that the participation of the prosecutor, in this case, revealed another problem – according to the prosecutor’s office and some courts, the prosecutor has the right to file lawsuits under the Administrative Procedure Code to protect the rights of not only those subjects specified in Article 31 of the APPC, but to protect the interests of the Akimat against the interests of the investor.

That is, with this approach of state authorities (including the prosecutor’s office!) to the law, in principle, investors are excluded from the number of participants of the proceedings – the prosecutor files a claim, SAD recognizes it, and the court will happily formalize the deprivation of investor’s  rights, property, and return on investment, and the possibility to return at least something from the invested…

Challenging this very dubious decision did not bring any results.

Since the trust management agreement has been in force for seven years and in addition to investments in restoration, construction, landscaping, and so on, equipment, furniture, and other items necessary for the functioning of the property complex have been purchased after the decision entered into legal force, the LLP sent a notice to the SAD to hand over the property complex to them under an acceptance certificate, as ordered by the court.

At the appointed time, two employees of the SAD arrived at theobject and, together with the employees authorized by the LLP, an inventory acceptance of the property complex was carried out, and an act of acceptance and transfer in which all the property and investments of the LLP were reflected.

Upon completion of the inventory, the SAD staff sealed the building and took the keys but refused to sign the act of acceptance and transfer, claiming that they were not authorized to do so.

Despite the fact that all this happened in 2023, the act of acceptance and transfer is still not signed. The property complex is sealed and not operational. The SAD refuses to sign the act, which shows how much the actual state of the property complex contradicts the court decision which states that the LLP managed the property complex inefficiently, the obligations were not fulfilled, while the act supports the arguments of the LLP and confirms the amount of its investments, which the state does not want to return.

As a result, one of the megapolises of the Republic of Kazakhstan has on its balance sheet a property complex, which does not function for more than a year, and the investments required after this downtime will be similar and maybe even more significant than what the investor has already invested in it, and the investor will ever work with the state after the loss of money and similar attitude. As a result, not only the state and the domestic investor but also ordinary residents of the city are the losing party, because now they lost the opportunity to use this property complex for an indefinite time.

This is not the only example.

Another is with the participation of a foreign investor. There is a form of interaction between the state and private persons – a public-private partnership, regulated by a separate law.

2020 is one of the regions of the Republic of Kazakhstan.

A foreign investor, wishing to develop and improve medicine not only in the region but also in the country as a whole, decides to bring to our country a rather serious amount of foreign investment, for which purpose he creates an appropriate company, makes plans and projects, signs a memorandum with the regional Akimat, concludes a public-private partnership agreement with the State Institution “Health Department of Region ‘N’”, under the terms of which he receives in trust management of a multidisciplinary clinical hospital.

Under the terms of the agreement, its durationis 30 (thirty) years. The total amount of financing of the Private Partner is 5,548,463,000 (five billion five hundred forty-eight million four hundred sixty-three thousand) tenge.

Immediately upon acceptance of the property complex, the Private Partner learned that the actual figure of accounts payable of the object received by it under the trust management differs from the one declared during the tender for the conclusion of the public-private partnership agreement by 449,128,900 Tenge, i.e. it turned out to be twice as much as the figure declared during the tender!

During this time, the Private Partner has done the following work:

In December 2022, the construction of one of the wards was completed, and the Private Partner notified the Public Partner, requesting to accept all this for balance. At the same time, it started the construction of a 344-bed building.

Despite the results achieved by the Private Partner, it was attacked by the Public Partner.

The actions of the Public Partner went beyond the scope of the contract and the law. The Public Partner started to avoid taking the already built facility on the balance sheet – as it would be difficult to assert that the Private Partner allegedly fails to fulfill its obligations, and therefore there are no grounds for termination of the contract; it tried to inspect the facility transferred to the trust management, although the contract expressly states that only the activities of the Private Partner may be inspected.

At the same time, the Private Partner, not wishing to allow violation of the law, the terms of the contract, and its rights, refused to carry out the inspection, after which the Public Partner suspended payment of remuneration for the management of the PPP object, although neither the law nor the terms of the contract do not provide for the possibility of such suspension.

In this example, the investor’s rights were protected a little better – the contract provided for the right of the Private Partner to apply to the AIFC Court for protection of its violated rights and legitimate interests.

The Public Partner, intending to sabotage the court proceedings in the AIFC Court, filed a lawsuit in local Specialized Interdistrict Economic Court to recognize the contract as invalid, although, at that time in the AIFC Court, it had already filed a counterclaim to recognize the contract as invalid in part. The court, referring to the existence of a dispute in the AIFC Court and the requirements of Article 27 of the Code of Civil Procedure that investment disputes are subject to consideration by the Astana SIEC, left the claim without consideration, after which a similar claim was accepted for consideration by the Astana SIEC, which intended to consider the dispute despite all the objections raised by the Private Partner, including the fact that a similar dispute has already been accepted for consideration by the AIFC Court. The only thing that saved the Private Partner from being heard by the Astana SIEC judge was the interim injunction imposed by the AIFC Court, which obliged the Public Partner to withdraw the lawsuit and prohibited it from filing new ones until the AIFC Court had heard the dispute on the merits.

At the same time, not being able to implement the plan through its efforts, the Public Partner is now trying to challenge not only the contract but also the tender itself, now through the other state bodies, organizing various checks of the legality of its procedure through the appeals of third parties who have received proprietary known only to the parties to the contract.

All this leads to the following conclusion:

We have legislation of sufficiently high quality, and the country’s leadership has the political will. However, without strict compliance with this legislation on the ground in the ranks of executive authorities, without a quality, truly independent judicial system, a prosecutor’s office, which impartially supervises all this – we will inevitably get the result we described above.

We do not want to end on a pessimistic note.

Let’s talk about the prospects – at the time of writing this article, the “Concept of Investment Policy until 2029” is being discussed on the website “Open Acts of Legislation”. We have read the text and, unfortunately, we note that many things in it are specified formally. However, if the disadvantages of the investment climate of the country, which the Concept outlined, were eliminated, and authorities were to begin supporting and protecting not only foreign investors but also the domestic ones, nobody would be worse off and everyone would benefit: the country, and investors, and, most importantly, we, the ordinary citizens, who are the consumers of most of the supplied services.