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PROCUREMENT OF GOODS, WORKS AND SERVICES (GWS): RULES FOR SUBSOIL USERS

ERBOLAT ERKEBULANOV, ADVISER OF THE LEGAL FIRM GRATA SHARES INFORMATION ON THE SPECIFICS AND PROSPECTS OF DEVELOPMENT OF THE SYSTEM OF GOVERNMENT REGULATION OF SUBSOIL USERS’ GWS PPROCUREMENTS.

Could you briefly tell us about your professional experience in the sphere of subsoil use?

I started to work in the sphere of subsoil use in February 2006, when I accepted a proposal to work at the company that had two contracts for exploration of RHD (raw hydrocarbon deposits) and a branch in the city of Aktobe. My duties as the sole lawyer included legal support of all corporate matters (including conclusion of civil law contracts, keeping minutes of general meetings of shareholders, labour, tax issues, and etc.). I have been working as an advisor at the law firm GRATA since November 2010 to the present time. There is a focused specialization in GRATA. My area of responsibility here is subsoil use, regulated procurement and contract law.

What difficulties did you encounter and how did you cope with them?

Starting to work at GRATA, I encountered the work standards of international law firms. These were the main difficulties. Jurisprudence abroad has been developed for many years. After the fall of the Soviet Union the legislation in Kazakhstan was created from scratch. Here is an example. Once we had a multi-jurisdictional project for the purchase and sale of the corporation, which had branches and subsidiaries in several countries. We represented Kazakhstan. About a dozen of different companies participated in general correspondence. Just as a matter of interest, I looked thorough information about all the participants on the Internet. Thus, the age of three companies was from 182 to 100 years, the age of about half of them was from 99 to 50 years. The youngest law firms (that worked a little more than 20 years) were our firm and another one from China.

Just imagine what standards can be achieved for several decades in case of constant improvement of quality?

Moreover, the same standards require you to: 1) “squeeze” text as much as possible (“to make no room for words and to give space for thoughts”) 2) state conclusions in plain language (“it is easy to complicate and it is difficult to simplify”); 3) work quickly (“you have the whole night/weekend ahead”); 4) looked at the situation as a whole, seeing even remote risks (trait that is intractable without direct supervision during the first years from the side of more experienced colleagues); 5) and many others. In spite of the fact that prior to start working at GRATA, I already had 9 years of experience as a corporate lawyer, the first year was the most difficult one. But I find it easier as I went along. Generally, I would recommend to all law graduates to try to work in a law firm with international standards. It will be difficult, but I think that it will give a very good experience in a legal sense.

Do you have currently any projects in the sphere of subsoil use?

Yes, we have a lot of projects from subsoil users. We regularly receive orders for due diligence, requests to clarify controversial issues and disputable issues not clearly defined by law or contracts for subsoil use. Because of confidentiality provisions, I cannot give a more detailed answer to your question.

Do we need, in your opinion, to have in Kazakhstan rules of procurement of goods, works and services for subsoil users?

Of course, we need. After all, Kazakhstani companies started to earn more as a result of the fact that the procurement rules have become mandatory for subsoil users. How was it before? Previously, subsoil users made procurements on the principle – “I make procurements where I want”. The principle would seem to be normal, but there is a creephole for the actions, when some of the investors on the one hand make considerable contributions in terms of financial contractual obligations into the subsoil use operations, but on the other hand almost all goods, works and services (hereinafter referred to as the “GWS”) are purchased from “their” companies (from “their” country).

Note that in this case the state has little to say as technically it is shown that they spent as much money as it was specified in the work program. As for the fact that GWS purchased abroad can cost 5–10 times more than GWS in Kazakhstan – it is the right of a subsoil user as the owner of the money. In net balance, in such cases most of funds do not remain in Kazakhstan, even if there are not less competitive local companies offering GWS that are not worse than foreign ones. That is why the introduction of the obligation to comply with the procurement rules and preliminary notify about the upcoming purchase on a single Internet site (reestr.nadloc.kz or tender. sk.kz for the companies of Group of Joint Stock Company Sovereign Wealth Fund ”Samruk-Kazyna”) fundamentally reversed the situation. This also gave the Kazakhstani enterprises the opportunity to learn about the planned procurement, to participate and therefore to receive orders, to pay wages to their employees – citizens of Kazakhstan. Let’s look at it on the other side. In relation to the procurements, there are three groups of subsoil users. First of them, consisting of Tengizchevroil LLP, Karachaganak Petroleum Operating B.V. and North Caspian Operating Company B.V. have non-transparent procurement procedures. According to public reports and in accordance with the results of 2013, the above stated companies purchased GWS for the amount of about $8.6 billion. For comparison: quasi-state RHD subsoil users (about 20 companies of Group of Joint Stock Company Sovereign Wealth Fund “Samruk-Kazyna”) for this period spent $4.2 billion for GWS, and the rest of RHD subsoil users – $5.3 billion. If the government managed to move forward in this matter, discussions on which were started in 2010, the broad layers of the domestic business could be directly involved in the procurement of “three pillars” that would increase by leaps and bounds the cash flows remaining in Kazakhstan. However, these companies are referred to the provisions on the stability of contractual conditions, enabling them to make procurements as per non-transparent schemes. It would be possible to offer these companies to perform transparent procurements at least in respect of certain, limited range of GWS. As far as I know, the state continues to conduct systematic work with this subsoil users, and perhaps in the future the situation will change for the better.

Did you make any proposals as for amendment to or cancellation of GWS rules?

Yes, there were initiatives to make amendments of a technical nature. Among the latter, I can mention a proposal for compulsory notification in the registry about the up-coming purchase of a particular product in a particular commodity exchange, for example, 1 week prior to it. This proposal was made this year in March at the Minex Central Asia forum in Astana. At that time the representatives of NaDLoC JSC (National Agency on Development of Local Content JSC) reported on the situation in the sphere of GWS based on the results of 2014. It turned out that subsoil users purchase 27% of goods through commodity exchanges, but the question on exclusion of this type of procurement from the rules is being considered now by the state authorities. The reason for it is that there are too many commodity exchanges and a wide range of suppliers are deprived of a real access to such procurements.

Are the rules advisory in nature and does the state strictly monitor compliance with them?

In fact, few people know that the procurement rules for subsoil users (the first version) were firstly approved in summer 2002. However, in fact, subsoil users started to use these provisions only after introduction of a sanction in the law on Subsoil and Subsoil Use (Clause 6, Article 77), according to which the cost of GWS purchased in violation of the procurement rules shall be excluded from the expenses taken into account in the competent authority as execution of contract obligations by a subsoil user.

What does this mean in practice?

For example, I have financial obligations under the contract equal to $ 10 million. Let us deduct other financial liabilities for $1 million – training (1%), liquidation fund (1%), insurance, social and economic development of the region, expenses for R&D (Research and Development), taxes, indirect costs, and so on. GWS costs of $9 million remain, including, for example, $7 million spent in compliance with the procurement rules and $2 million spent in violation of these rules. The competent authority shall deduct $2 million, and instead of 100% fulfilment of contractual obligations, only 80% will be counted. This means that I will have to invest another $2 million to meet the conditions of the work program. In addition, there is a risk of fine sanctions (up to 30% of the outstanding liabilities), if such a liability is specified in the contract. Of course, I would be more profitable for me to make procurements in compliance with the rules.

Where do the industry participants have to apply to, if the subsoil user does not comply with the rules of GWS procurement?

If a potential supplier believes that the subsoil user violated the rules, he may appeal to the competent authority (Ministry for Investment and Development and the Ministry of Energy), with a copy to the organizations, which were entrusted by the Ministry to consider issues related to the procurement rules, in the person of, respectively, the Contract Agency (www. contractagency.kz) or NaDLoC JSC (www. nadloc.kz). In addition, in extreme cases, there is always the possibility to take legal action. What are the prospects, in your opinion, of the state regulation of subsoil use sphere by the rules? I think that in the next few years procurement rules will remain relevant for the subsoil users. In the coming months it is expected that new rules in the version approved by the competent authority will be adopted. (Previously, the Government of the Republic of Kazakhstan had the powers for their approval).