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Zh.S.Yelyubayev Ж.С.Елюбаев
Role of Investment Law in Regulating Relations in the Sphere of Subsoil Use[1]
The issues of legal regulation of investments in the sphere of subsoil use and environmental protection have always been a high priority topic. Their relevance is determined by the necessity to ensure legal support and protection for investments at the stage of drastic alterations in the sphere of state regulation of investment activity, especially in the current crisis conditions. The needs of national economy, where ownership rights should be secured, set up tasks for improvement of law-enforcement and protection functions of both investors and the state and its government. In Kazakhstan the general status of legal protection of investment activity is evaluated as positive and sufficient to satisfy the needs of the market economy, specifically in the sphere of subsoil use. At the same time the level of investment into the sphere of environmental protection can be called poor as direct investment into this costly branch are usually not made. Meanwhile, the investments made in the sphere of subsoil use are used by business entities partially for environmental protection. It is known that absence of the efficient legal mechanism for regulating investment activity and a model of interaction of investment process participants in the provision of their security using administrative and financial reliefs. Recently due to amendments and additions to a number of national legislative acts the investment climate in Kazakhstan became less attractive. Time will show how it might impact the economy of the country. Nevertheless before considering current concerns in the sphere of investment activity, I would like to brief you on the history of the investment legislation of the Republic of Kazakhstan that laid a sound legal basis for subsoil use operations and environmental protection using advanced technologies. Let us refer to the time before the breakdown of the Soviet Union (1991). Gorbachev Thaw, «restructuring» and «new thinking» in the 80’s of the last century proved that the existing socialist planning system was not able to resolve new objectives set before the society. The country was in a terrible economic and political crisis, and the only way out of that situation was a transfer to cost-accounting and market relations, but it required to denationalize (privatize) state ownership, to attract foreign investments into budget-forming branches of industry. Such branch at that time was oil and gas industry regardless the fact that prices for hydrocarbon raw materials were significantly lower that in the late 70’s - early 80’s. In such complicated situation, on December 7, 1990 there was adopted the Law «On Foreign Investments in the Kazakh SSR», which can be referred without exaggeration to the category of progressive legal acts of that time. This Law recognized that the «objects of foreign investment in the territory of the Kazakh SSR can be enterprises, interests in the property of Soviet legal entities, shares and other securities, other property as well as acquired ownership rights to use natural resources in the Kazakh SSR for conducting business and other activities in the territory of the Kazakh SSR». This legislative provision envisaged an opportunity for foreign business entities, most of them being private companies, to participate in possession, use and disposal of the country’s assets. Thus, «green light» was given to foreign investments, market relations and privatization of state property. It played a great role in the development of the subsoil use sphere based on foreign investments. In the early 90’s major transnational corporations came into Kazakhstan, having executed first investment agreements and subsoil use contracts. Such major oil and gas projects as Tengiz and Karachaganak got a second wind caused by implementing advanced technologies, expanding production, increasing the scope of export-oriented products, and thus ensuring the inflow of hard currency rehabilitating other branches of industry and social programs. The appearance of foreign investors in oil and gas sector and their successful activity created an attractive investment climate in Kazakhstan, and caused investments in other key branches of the economy: coal, metallurgy, uranium, gold mining, and even in house holding. It was a good start for foreign investment. This positive example was one of the grounds to adopt on June 10, 1991 another important Law «On Investment Activity in the Kazakh SSR» whereby «investments» were defined as «all types of contribution of financial and material and technical resources as well as property rights and intellectual values invested in the objects of entrepreneurial and other activities in order to gain profit, social, economic, environmental and scientific and technical effect». For the first time both foreign and Kazakhstani participants were recognized as investors. This Law gave a new impulse to establish market relations. Further, provisions of the tax legislation applicable at that time facilitated investments by foreign and national entities into the economy of Kazakhstan, especially into the budget-forming branches, and in particular into the sphere of subsoil use. Thus, e.g. Article 10 of the Law of the Kazakh SSR «On Taxes on Enterprises, Associations and Organizations» of February 14, 1991 provided for a possibility to grant significant tax benefits and preferences to the investors. So, a solid national legal basis was established for investments. It should be noted that at time none of the Republic incorporated in the USSR had such progressive legal acts. After declaration of sovereignty and independence, Kazakhstan within a short period of time formed new government institutes and foundations of market economy, conducted property privatization and monitory reform, adopted a number of laws aimed at development and strengthening of the financial system. Even during the parliamentary crisis of 1995, the President of the Republic of Kazakhstan having been granted exclusive authority adopted key Decrees having the force of laws that laid the foundations for the country’s entering international economic relations. On February 28, 1997 there was adopted another legal act - the Law «On State Support to Direct Investments» for the purpose of establishing a favorable investment climate to promote accelerated development of production of goods, works and services in prioritized economic sectors. All of the above yielded positive results and Kazakhstan was successfully developing until the current crisis. However, the national economic and financial system established during the last decade allows managing difficulties in the economy and social sphere in the current crisis situation. Industrial enterprises established on the basis of attracted investments, especially in the sphere of subsoil use, are successfully operating in spite of significant decrease of world prices for mineral raw materials. On January 8, 2003 the new Law «On Investments» was adopted whereby the above mentioned legislative acts were repealed. It was a new step of the state aimed at regulating investment relations in the conditions of certain stability of political and economic situation in the country. This Law is an effective legal act and therefore it is worth to mention the important provision stipulated in Clause 3 of Article 4 stating that «the Republic of Kazakhstan guarantees stability of contracts entered into and between investors and state agencies of the Republic of Kazakhstan, expect for the cases where amendments to contracts are made by agreement of the parties». However, this general rule does not apply to: 1. amendments to the legislation of the Republic of Kazakhstan and/or effect and/or amendments to international agreements of the Republic of Kazakhstan that change the procedure for and terms of export, production and sale of excised goods; 2. amendments to the legislative acts of the Republic of Kazakhstan for the purpose of ensuring national and economic security, health and ethics. After the adoption of this legislative act the situation in the sphere of investment activity changed dramatically. The authorized state agencies started applying the adopted legal acts to the activity of investing subsoil users that entered into investment agreements and subsoil use contracts with the Republic of Kazakhstan. The erroneous judicial and other law-enforcement practice began to form causing violation of the balance of interests of the participants of the investment activity. I will give you a couple of examples to substantiate my statement. So, the most disputable current legislative provisions that the competent government authority is entitled to unilaterally terminate a contract if a subsoil user fails to comply (prejudices) a requirement in respect to preemptive right of the state to the alienated subsoil use right or alienated interest (shareholding) in a legal entity holding the right to use subsoil (sub-clause 2 of Article 45-2 and Article 71 of the Law of the Republic of Kazakhstan «On Subsoil and Subsoil Use»). This legislative novel was enacted by the Law of the Republic of Kazakhstan No. 2 of October 24, 2007 on the initiative of the RoK Government. First, the question is whether this requirement applies to contracts entered into before this legislative provision came into force because practically all subsoil use contracts concluded contain contract stability provisions. Secondly, this legislative novel relates to the provisions of other legal acts. Is there violation of the balance of interests? I.e. Are the rights of investors and subsoil user infringed? Let us consider the situation. Thus, e.g. most major subsoil contracts concluded with the international energy companies that have in Kazakhstan an additional status of foreign investors, contain provisions that each project participant has a priority right to acquire the alienated right to use subsoil and/or alienated interest (shareholding) in a legal entity. They do not specify exclusive and prevailing priority right to acquire alienated interests (shareholdings). It is known that any contract concluded between a subsoil user and the competent state authority is a civil agreement between two and several entities, and its subject is subsoil development (production, exploration, combined exploration and production, construction or operation of underground facilities). Each party to the contract (agreement) has specific rights and obligations. Hence, let us refer to Article 383 of the Civil Code of the Republic of Kazakhstan that contains a provision stating that «a contract should comply with binding rules established by the legislation (imperative rules) applicable at the moment of conclusion thereof. If after conclusion of a contract the legislation stipulates binding rules other than those in effect at the time when the contract was executed, the terms of the contract concluded survives except for cases where the legislation establishes that it extends to the relations subject to previously executed contracts». An explicit provision of the Code that is superior to the law in the hierarchy of regulatory legal acts[2] stipulates that the terms of concluded contracts retain their effect unless otherwise expressly stated in the new legal act. Subject to the provisions of Article 71 of the Law «On Subsoil and Subsoil Use» «a subsoil user is warranted protection of its rights under the legislation. Amendments and additions to the legislation deteriorating the position of a subsoil user shall not apply to contracts executed prior to making amendments and additions». These warranties «shall not apply to amendments to the legislation of the Republic of Kazakhstan in the spheres of defense, national security, environmental and health safety». A similar provision is stipulated by Article 57 of the Law of the Republic of Kazakhstan «On Oil» No. 2350 of June 28, 1995. The issues of contract stability were also regulated by the Law of the Republic of Kazakhstan No. 68 «On production sharing agreements (contracts) during offshore operations» of July 8, 2005. Thus, the applicable legislation of the Republic of Kazakhstan stipulates a general provision for stability of previously executed investments agreements and subsoil use, and the state warrants their stability. Existing exceptions to the general rule are not subject to wide interpretation, first of all due to the issues of national security, environmental safety and health and ethics as wells as issues of turnover of excised goods. The amending of the Law of the Republic of Kazakhstan «On Subsoil and Subsoil Use» by Article 45-3 stipulating the provision that «on the initiative of the Government the competent state authority is entitled to unilaterally waiver the contract if subsoil operations conducted by a subsoil user in respect to strategic subsoil blocks (deposits) result in significant changes to the economic interests of the Republic of Kazakhstan, that create a threat to national security» is not quite justified. A similar provision is contained in Clause 1 of Article 45-2 of the said Law. In particular the provision stipulates that «in the event subsoil operations in respect to strategic subsoil blocks (deposits) result in significant changes to the economic interests of the Republic of Kazakhstan, that create a threat to national security, the competent authority is entitled to require amendments and/or additions to be made to the terms of a contract». A simple legal analysis of these legislative provisions requires an answer to the following questions: «Who will determine that subsoil operations caused «significant change to the economic interests of the country?». Further, if somebody establishes this fact, in order to require that amendments and additions be made to the contract it is necessary obligatorily establish that circumstances causing «significant change to the economic interests of the Republic of Kazakhstan» created «a threat to national security», i.e. resulted in adverse impact. The latter term is an estimating notion, and therefore a subjective approach contrary to the ensuring of the balance of the interests of a subsoil user and the state should not be discarded. Liberal interpretation of these terms by the government officials in the absence of legislative construction may result in pursuing subsoil users who receive unsympathetic treatment from officials that make decisions on many issues related to concurrence and approval of documents required to exercise the right to use subsoil. Also it should be noted that this law has been given retroactive effect to resolve current private conflicts with individual subsoil users or to establish legal basis for influencing first investors in Kazakhstan. In this connection I would like to attract your attention to one critical provision of the Law of the Republic of Kazakhstan No. 233 of June 26, 1998 «On National Security of the Republic of Kazakhstan» (part 2 of Article 18) stating that whenever the state «for the purpose of protecting the national interests of the Republic of Kazakhstan, including maintaining and strengthening industrial potential» exercises «control over the condition and utilization of the economic facilities of Kazakhstan, which are operated or owned by foreign organizations and organization with foreign participation», it should do it strictly «complying with guarantees granted to foreign investors». In addition, subject to the same law (Clause 1 of Part 5 of Article 18) state agencies are prohibited when «ensuring economic security» «to adopt decisions and actions that prevent investment flow into the economy of Kazakhstan». Decisions and actions contrary to the above provision of the law results cause «responsibility» of these agencies and their officials. Finally, it should be noted that a possibility of «unilateral waiver of a contract» for subsoil use by the competent state authority, as well as validation of retroactive force are not the best practice in law making and enforcement. This practice should be acknowledged as the worst one, given the state intends to be included in the list of highly developed countries with a stable political system and progressive market economy, and really existing democratic institutes. This law put the Republic of Kazakhstan 15 years back to the period when the country chose to develop market economy creating attractive investment environment. Through the fault of law-making innovators the country might lose more than it is going to gain. The second example is connected with the introduction of export customs duty on crude oil. Customs rates on crude oil exported from the customs territory of the Republic of Kazakhstan were established by the Resolution of the Republic of Kazakhstan of April 8, 2008 No. №328, which amended the existing government act of October 15, 2005. Now this act subject to amendments made is titled: Resolution of the Government of the Republic of Kazakhstan of October 15, 2005 No. 1036 «On Collection of Customs Duties at the Time when Crude Oil and Goods Produced from Oil are Exported from the Territory of the Republic of Kazakhstan» (in the version of April 8, 2008). Further, Clause 3-1 of the said government act states that rates of customs duties on crude oil exported from the territory of the Republic of Kazakhstan «shall not apply in respect to the export by subsoil users of crude oil produced under subsoil use contracts stipulating exemption of crude oil from export customs duties». It should be noted that export customs duties on crude oil and goods produced from oil were introduced «for the purpose of stabilization of domestic market of crude oil and oil products». What is the legal status of customs duties? Pursuant to Article 516 of the former Code of the Republic of Kazakhstan «On Taxes and Other Obligatory Payments to the Budget» of June 12, 2001 No. 209-II (hereinafter the RoK Tax Code), customs duty was one of customs payments and was referred to «other obligatory payments to the budget», stipulated by Section 16 of the RoK Tax Code. The official interpretation of the notion customs duty is contained in sub-clause 32 of clause 1 of Article 7 of the RoK Customs Code of April 5 2003 No. 401; it is defined as «type of customs payment levied by the customs authorities of the Republic of Kazakhstan at the time when the goods are imported to the customs territory of the Republic of Kazakhstan or when the goods are exported from the said territory, and which is an integral term of such importation or exportation». The provisions of the above legislative acts allow concluding that «export customs duty» on crude oil introduced by the governmental act is one type of customs payments and was referred to the category of «other obligatory payments», stipulated in Section 16 of the RoK Tax Code. For this reason, so introduced «export customs duty» is to be treated as a new type of obligation stipulated both by tax and customs laws. Given that each investment agreement to which the Republic of Kazakhstan is a party provides for stability of obligations to pay applicable taxes and other obligatory payments, the new type of obligatory payment in the form of «export customs duty» on crude oil cannot be applied to investing subsoil users who executed agreements before the introduction of this legal novel. Such conclusion does not contradict the provision contained in Clause 3-1 of the Resolution of the Government of the Republic of Kazakhstan of October 15, 2005 No. 1036 «On Collection of Customs Duties at the Time when Crude Oil and Goods Produced from Oil are Exported from the Territory of the Republic of Kazakhstan» whereby the rates of customs duties on crude oil exported from the customs territory of the Republic of Kazakhstan «shall not apply in respect to the export by subsoil users of crude oil produced under subsoil use contracts stipulating exemption of crude oil from export customs duties». Due to unfounded application of this type of obligatory payment to subsoil users who are guaranteed contracts stability, over one billion US dollars were paid to the state budget. This dispute might be the subject of arbitration and it will have a negative impact on the state’s business reputation and image before the world community. In this connection a reference should be made to the international commitments of the Republic of Kazakhstan in respect to the issues of the protection of investments. First, our country signed a number of Agreements with foreign states on reciprocal protection and support of foreign investments under which it committed to provide all possible support to investors and avoid undertaking measures aimed at termination or complicating investment activity. According to the general rule, international treaties signed and ratified by the Republic of Kazakhstan shall have priority (prevails) over the national legislation (Article 4 of the Constitution of the Republic of Kazakhstan). Secondly, with regard to subsoil use, the Republic of Kazakhstan ratified the Agreement to the Energy Charter[3] (Decree No. 2537 of the President of the Republic of Kazakhstan of October 18, 1995) whereby it committed «to encourage and create stable, equal, favorable and transparent conditions for investors», which are entities of the parties to the Energy Charter. Please not that the key provisions of this international legal act that are binding upon all of its signatories: 1. Provision to all foreign investors the regime of investment activity not less favorable than that provided to national investors or investors from other countries. 2. maximum restrictions to exceptions to the established regime of investment and other useful activities. 3. gradual removal of existing restrictions for investors. 4. monitor that the national legislation provide efficient remedies for protecting claims and ensuring compliance with the rights in respect to investments and investment agreements. 5. preventing nationalization and expropriation or other measures with similar consequences regarding investors. Be it allowed for the purpose of protection of state interests and compliance with legal procedures, there should be «paid prompt, sufficient and efficient compensation». Thus, subject to the existing international legal obligations, the Republic of Kazakhstan may and shall not perform actions or adopt legal acts prejudicing rights and interests of investors. Unfortunately, it should be noted that in the recent two-three years protection of investments and fulfillment of international legal obligations in Kazakhstan leaves much to be desired. There a lot of examples: of adoption of acts contradicting national laws and international legal acts; of performing unlawful actions aimed at exaction of property and profit of investors and subsoil users on the basis of doubtful acts adopted by courts and other authorized state agencies; violation of obligations to ensure stability of «contractual provisions» and «tax regimes» set up in the agreements. These and other invalid actions of the state and its agencies do not provide for improvement of the investment climate in the country, formation of positive image and rating of the country at the international level. On the other hand, investors, especially foreign investors, should not seek to get from the state more benefits and privileges than the national investors in the sphere of small and medium business. Pursuit of excess profit, negligence of the country and its people, existing laws and legal system cause defense reaction of the state. There should be a balance of interests, respect for law and agreements made, only then the desired positive result and a harmony of relations between all participants in the investment process can be attained.
[1] © All exclusive copyrights to this work belong to Zh.S. Yelyubayev. [2] See Article 4 of the Law of the Republic of Kazakhstan No. 213 «On Regulatory Legal Acts» of March 24, 1998. [3] The Energy Charter adopted on December 17, 1994 in Lisbon, Portugal.
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