Legal Framework Of Kazakhstan’s Telecommunications Sector
Thomas C. O’Brien, Coudert Brother LLP, Almaty, Kazakhstan
Victoria P. Simonova, Coudert Brother LLP, Almaty, Kazakhstan
Telecommunications services in Kazakhstan form an essential part of the economic and potential investment infrastructure in the region and are a subject of interest for foreign investors. The Telecommunications Law1 is a key component of the telecommunications environment. This article surveys the legal framework for investments into the telecommunications sector in Kazakhstan, focusing on the issues of joint ventures and licensing.*
1 Parliamentary Law No. 382 On Communication, adopted on May 18, 1999 (the “Telecommunications Law”).
*This article is a general review of the law and not intended as the basis for any investment decision. This article was prepared at the beginning of 2002, and due to the constantly evolving laws and regulations in Kazakhstan, readers are advised to undertake appropriate due diligence to determine any changes to the law prior to considering any specific transaction.
Telecommunications Opportunities for Foreign Investors
In Kazakhstan today, most telecommunications services, other than the operation of the public switch telecommunications network (“PSTN”) by Kazaktelecom, the national network provider, are provided by foreign-local joint ventures. Many of these joint ventures include a Kazakhstan co-venturer holding a telecommunications license issued by the Ministry of Transport and Communications or a predecessor (in this article, collectively, the “MinTransCom”). In the period immediately following Kazakhstan’s independence, MinTransCom issued telecommunications licenses more liberally than at present. In the main, these foreign-local joint ventures provide overlay network services, remote earth stations, private digital satellite communications, microwave links, cellular telecommunications and other services.
Cellular telecommunications in Kazakhstan is developing with one analog and two GSM 900 service providers. A tender for third generation GSM is under consideration. Other companies are providing alternate services utilizing satellite and relay technologies. In addition there are many telecommunications equipment and service companies supporting the telecommunication license holders.
Telecommunications Law
The Telecommunications Law governs the major aspects of telecommunications activity in Kazakhstan: tariffing (Section 13); consumer protection (Section 24.1); principle of non-interference with the transmission, delivery and receipt of messages (a civil right) (Sections 4.2 and 24.2); principle of non-discrimination in the telecommunications sector (such as investments) (Sections 4.3, 11.1 and 12.3); fair competition (Section 4.4); and others.
The Telecommunications Law cross-references more than thirty other regulations of the Government and state agencies pursuant to which the Telecommunications Law is to be implemented.
Licensing
Section 11.2 of the Telecommunications Law provides that “the types and terms of licenses, conditions of their issuance, suspension or termination, and other licensing issues shall be governed by the legislation of the Republic of Kazakhstan.”
Licenses granted by the Government of Kazakhstan and its authorized SGAs are generally subject to the unified licensing rules set forth in the Licensing Law2. Telecommunications services fall within the scope of the Licensing Law.
2 Parliamentary Law No. 2200 On Licensing adopted on April 17, 1995 (the “Licensing Law”).
Section 9.1.5 of the Licensing Law governs all licenses issued for the “use of frequency ranges.” Licenses granted by the MinTransCom appear to be governed by the Licensing Law, although it is unclear to what extent licenses granted prior to the adoption of the Licensing Law are affected. MinTransCom was empowered with many of the general rules stated in the Licensing Law with the adoption of the MinTransCom Regulations3.
3 Government Resolution ? 1443 On Approval Of Regulation On Licensing Procedure Of Entrepreneurial Activity In Sphere Of Post And Telecommunications And Usage Of Radio Frequency Spectrum In The Republic Of Kazakhstan adopted on November 25, 1996 (the “MinTransCom Regulations”).
Regulatory Agencies
Under the Telecommunications Law, jurisdiction over the allocation of radio frequencies, the provision of telecommunications services, and other matters is somewhat fractured. The law references no fewer than 8 state governmental authorities (“SGAs”) with telecommunications jurisdiction.
Designating Appointing Authority
The law is not always clear as to which executive branch body will appoint or create that agency (or agencies) which will fulfill the mandate of each functionally defined SGA. Although the point is not settled, the Government appears to exercise broad discretion in delegating executive authority.
For example, the Constitution4 gives the Government broad powers: developing the main directions of the social and economic policy of the state (Section 66.1); introduce drafts of laws to the Majilis (Section 66.3); organize the management of state property (Section 66.4); manage the activities of ministries (Section 66.6); and other powers. The Government has the power, pursuant to Article 1 of the Law On Government5, structure executive bodies and direct their activities.
4 Constitution Of The Republic Of Kazakhstan adopted on August 30, 1995, as amended (the “Constitution”).
5 Constitutional Law No. 2688 On The Government Of The Republic Of Kazakhstan adopted on December 18, 1995 (the “Law On Government”).
Despite such a broad range of powers, the Government might lack the explicit authority to act as the designating body under the Telecommunications Law. Other important legislation, such as the Petroleum Law, explicitly designates the Government as either the specific licensing body or the designating authority.
The ambiguity surrounding the various SGAs mentioned in the Telecommunications Law is compounded by Government Resolution No. 17566, which stipulates that the MinTransCom is the State body authorized to control the communications sector. Government Resolution No. 1756 may be interpreted to mean that the Government has either appointed the MinTransCom as the sole SGA to fulfill all functions, or delegated to the MinTransCom the right to act as the designating authority.
6 Government Resolution No. 1756 On The Regulation Of The Ministry Of Transport And Communications adopted on November 20, 1999 (the “Government Resolution No. 1756”).
Foreign Licensees
The MinTransCom Regulations do not explicitly restrict or prohibit the granting of licenses to foreign legal entities.
Investors should, however, be alert to the fact that foreign legal entities are specifically authorized to participate in competitive tenders in the MinTransCom Regulations, suggesting that foreign legal entities might not be permitted to obtain a license through direct negotiations (that is, outside of the tender process). Foreign investors seeking a license via direct negotiations might consider establishing a 100% owned Kazakhstan subsidiary, as most Kazakhstan legislation generally excludes such subsidiaries from the definition of “foreign investors”.
License Transfer
Article 11 of the MinTransCom Regulations, as well as Section 12.6(3) of the Telecommunications Law, prohibits the transfer of telecommunications licenses.
License Tenders
Article 28 of the MinTransCom Regulations stipulates that licenses may be issued via competitive tenders in the following cases:
(i) where the number of applicants seeking a license for the same type of activity in the same region exceeds the technically feasible maximum; and
(ii) where new communications services are allocated to the radio frequency band most efficient for the provision of such services.
The tender procedures outlined in the MinTransCom Regulations are similar to those for non-telecommunications competitive tenders.
Section 1.3 of the MinTransCom Regulations authorizes MinTransCom to establish a “tender commission”, empowered with significant discretionary authority. The decision to hold a telecommunications tender, and the fee for information, will be announced in the mass media. At such stage, applicants receive a statement of the tender rules and the documentation which must be submitted to participate in the tender.
License Due Diligence
Prior to investing in a joint venture or other investment in Kazakhstan’s telecommunications sector, due diligence should be undertaken to properly structure the deal. The potential telecommunications license itself is a primary asset and should be carefully reviewed.
The following issues should be considered by a foreign investor with respect to a potential investment into the telecommunications sector in Kazakhstan. These main issues are examined below, including both the legislative parameters for the license as well as some of the contractual provisions one might expect in a typical telecommunications license.
Issuance of License
Article 8 of the Licensing Law stipulates a principle of national treatment, that is, both foreign and local companies have the right to obtain a license on equal terms unless special legislation states otherwise. The Telecommunications Law does not appear to limit the principle of national treatment put forward in the Licensing Law. A typical license is issued for an initial five-year term.
License Renewal
A telecommunications license usually contains a renewal right. The licensee is usually required to apply for renewal not later than three months prior to license expiration. Unfortunately, the exact duration of the renewal term is not clear, and investors have little choice but to accept the risk that the renewal period might be unacceptably brief. The Telecommunications Law does not appear to specifically address the issue of license renewal.
Use of License
A telecommunications license customarily includes various use restrictions, including restrictions on (i) the identity of the “operator” of services provided under the license, and (ii) the geographic boundaries of the licensed activity.
A telecommunications license may prohibit a foreign entity from utilizing the license. Although ambiguous, this type of provision appears to prohibit the licensee from delegating the right to provide services envisaged by the license to a foreign-owned “operator.” Thus, a contract-based joint venture (as contrasted with an equity joint venture) where the foreign co-venturer provides equipment and operational support might possibly be a violation of the license.
A typical license might also stipulate the various oblasts, or other regions, within the territory of Kazakhstan where the telecommunications service may be provided by a license holder.
Re-registration of License
There are both statutory requirements set forth in the Licensing Law, as well as provisions in most licenses, that mandate the licensee to re-register the license in certain cases. The Telecommunications Law does not appear to specifically address the issue of license re-registration. Re-registration normally does not affect the term of the license, nor its basic provisions, but it does require the approval of the MinTransCom.
As a statutory matter, Section 21.1 of the Licensing Law requires that the license be re-issued in the event of a change in the legal status of a licensee. It seems to mean that if the licensee needs to re-register its foundation documents with the Ministry of Justice (such as the amendments that foreign partners usually require when they buy an ownership stake in the licensee), then MinTransCom must be notified. In practice, this should not be a problem; however, due to the current freeze on the issuance of new licenses and the political sensitivity surrounding licenses for telecommunications generally, there is some legal risk that MinTransCom may deny the application to re-register.
Telecommunications licenses granted by MinTransCom generally include a proviso that upon the adoption of a new telecommunications law, such licenses must be re-registered in accordance with the new law. These types of license provisos create some uncertainty as to whether current licensees will be “grandfathered” under the telecommunications regime now in effect so as to escape any potentially adverse aspects of new legislation, including the recently adopted Telecommunications Law. If a foreign investor has an ownership stake in the licensee, then it might be possible to argue that the “stabilization clause” in Kazakhstan’s Foreign Investment Law7 mandates that the licensee’s existing rights be “grandfathered” to the extent that any new telecommunications law constitutes an adverse change in legislation.
7 Parliamentary Law No. N 266-XIII On Foreign Investment adopted on December 27, 1994 (“Foreign Investment Law”)
License Suspension and Revocation
Investors should be aware of the grounds for license suspension and revocation in order to assess the risks associated with its selection of a partner and the development of the proposed business plan.
Section 12.6 of the Telecommunications Law provides that the licensor has the right to suspend the license (i) where radio frequencies are used without the relevant permissions; (ii) where there is a delay of more than one month in the payment for the use of the radio frequency spectrum established by law; (iii) where there is a transfer by a licensee of the radio frequencies assigned to it to others for temporary or permanent use; and (iv) where a violation by a licensee of the rules for operation of radio electronic equipment resulted in interference which violates the established norms for the operation of electromagnetic systems.
According to Article 22 of the Licensing Law, the licensee may be ordered to stop (suspend) providing services under the license in the case of (i) persistent non-fulfillment of the license’s requirements, (ii) a court decision prohibiting the licensee from engaging in the licensed activity, (iii) the failure of the licensee to remedy a violation noted in a suspension order issued by the licensing body, or (iv) the cessation of activity by the licensee (a failure to actively utilize the license).
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