4. Further improving of ppp benefits in kazakhstan

Main factors for the development of the successful public-private partnership program are presented in the table below. These factors are key to identify the priorities of the central and local government authorities, who act as Contracting Authorities, with the aim of the developing the PPP program.

Main factors for the development of ppp

Types factors	Definitions
Political	-Stable national and local government - Clear strategy, regional and sector development objectives; - A clear definition of competence of different levels of government authorities and clear correlation between them; - Development of planning (programming) of individual activities; - Transparency of all procedures related to initiation, development and implementation of PPP projects;

Economical

- Economic stability and transparent economic, financial and investment policy; - Development of financial institutes, including investment and venture funds, etc. - Development and adoption of development programs for specific types of activities involving business structures; - Economic encouragement of business structures to participate in implementing the regional development strategies and objectives; - Competitive selection mechanism of business structures, the private partners of the PPP;

Legal

- Legal amendments and modernization of laws regulating PPP in accordance with international best practices; - Development of institutions for protection of interests and rights of the partners;

Some of the key lessons from international experience may be useful for Kazakhstan:

1) Expansions of concession models by introducing broader PPP principles ;

2) Transfer of state-owned infrastructure facilities for rent, management, administration and maintenance;

3) Compensation of not only the investment cost, but also the operation & maintenance expenses of the concessionaire in social sector projects;

4) Use of the public sector comparator, which would allow the state to minimize and properly allocate budget funds for social projects.

The construction costs of facilities implemented through PPP are likely to be higher than when procured via a conventional procurement. However, additional benefits will be realized through the PPP approach, as the private sector will have incentives to build the facility in a timely manner and in accordance with high standards of quality in order to recover all costs via availability payments and to ensure uninterrupted cash flow from the project.

As an additional benefit to the government, the Contracting Authority is able to spread the costs of the infrastructure facility over the course of the concession contract and reduce the operation and maintenance costs of the facility due to higher construction quality.

5) A two-stage tender process for the selection of a PPP project sponsor;

6) Use of project finance principles.

Project finance is non-recourse or limited recourse borrowing for large infrastructure projects, based on future cash flows from the project. The debt of the project company (SPV) is not reflected on the balance sheet of the shareholders and only the project’s cash flows are considered in the decision to lend.

International practice shows that implementation of large projects requires the use of long and cheap money through access to international capital markets. Some of the main principles and characteristics of project finance are:

a) Principle of purpose implies a new legal entity which is set up to implement a specific project (special purpose vehicle - SPV);

b) Step-in rights on future cash flows in order to ensure repayment to creditors;

c) Limited recourse financing - i.e. lenders have no rights of claim on any other assets of the shareholders/ investors outside of the specific project;

d) The principle of ring-fencing the assets of the project company is the process of segregating certain assets (project assets in this case) into a separate entity (SPV) to ensure that the project’s assets remain intact in the event of the project sponsor’s bankruptcy. At the moment this principle is provisioned through introduction of a new legislation on securitization;

e) High leverage; the debt to equity ratio may be as high as 80/20 for certain project finance transactions.

Another important element of project finance is risk allocation between the parties on the basis of contracts. The use of international experience adapted to Kazakhstan's economy may have a positive effect on investment projects and the provision of public services with the use of PPP.

Analysis of the regulatory framework of the Republic of Kazakhstan shows that the current law constrains the active implementation of PPP projects in social sector. Addressing the following systemic issues would allow the state to attract private capital for the implementation of larger infrastructure projects via PPP:

1) Review the list of infrastructure facilities that may not be transferred to concession;

2) Review measures of government support to allow reimbursement of not only capital investment costs but also operating costs to the concessionaire;

3) Improvement of asset management contracts and lease contracts under the civil law, taking into account the basic principles of PPP, such as long-term and stable contracts. In this case it could be useful to adapt the contract for «management and maintenance», which is widely used in international practice.

Existing education and healthcare facilities, and public utilities assets may be transferred into concession. Concession contracts may provision HR management, financial management and strategic planning, as well as provision of certain services related to the facility which may be outsorced (catering, equipment maintenance, laundry services, x-ray services, dance and music classes, sports clubs, etc.).

Additionally, based on international experience, the possibility of using various funding mechanisms during the opration period will be anaylised as well. For example, the development and introduction of new financing mechanisms in the education system in the form of per capita funding, in the form of vouchers, and others.

Despite the experience gained through implementation of concession projects in Kazakhstan, such important issues as implementation of PPP projects, risk allocation, easing the burden on the budget and steering the state budget policy towards implemetation of projects of social importance (such as healthcare, education, etc.), establishment of effective public facility management methods by involving private capital are not properly developed at strategic level.

The use of PPPs can be a major component of the modernization process of strategically and socially important sectors of the economy.

Successful development of PPP in Kazakhstan depends on a systematic approach to a well-coordinated and well-thought implementation of PPPs.

Line ministries and sector agencies are encouraged to consider the possible implementation of sector-specific PPPs into their sector development programs both regional and national.