Liberalisation of Subsoil Market

A couple of weeks ago, the mass media were flooded with news on a new approach to the procedure for obtaining the right to subsoil use. Many changes and amendments are to be introduced into the current legislation.  Mr. Sauranbayev, the Vice-Minister of Industry and New Technologies, said that it is expected that the market would be open for those who come first.

To some extent, this approach may enhance investment opportunities in Kazakhstan. Ranked as 6th worldwide for natural resources worth more than $ 10 trillion, Kazakhstan invested in the subsoil area slightly more than $ 7.5 billion in 2012. This constitutes only 1 per cent compare to nearly $ 750 billion worldwide investment bulk of the subsoil market. Kazakhstan is planning to increase subsoil investments by 10 per cent in the nearest future.

Since 2010, there have been two ways of obtaining the right to subsoil use, i.e. either through public sector procurement or direct negotiations. Public sector procurement is usually carried out in the form of a tender or competitive bidding. The procedure might take long with average period of 4 months. It is often difficult to select the winner due to the difference associated with the amount of one-off payment (a signing bonus) and a local social development contribution. In practical terms, the buyer has to choose between bids with the highest one-off payment but a low social development contribution, and a low one-off payment but higher social contributions.

For this reason, the Government of the Republic of Kazakhstan and the working group including the Ministry of Industry and New Technologies, the Ministry of Geology, the Ministry of Finance and Samruk-Kazyna, suggested that the procedure of granting the right to exploration should be simplified. This in turn may drop the level of ‘speculation and ineffective use of subsoil’.

Along with the exemption from obligations to keep local content, to train the locals and to contribute to socio-economic development of the region, the prospective bidders may rely on new forms of granting the right to the subsoil use, i.e. through an open bid auction and on the first come, first served basis.

The first come, first served principle provides for a free access to geological information at a minimum charge. It was labelled in some mass media outlets as a tough riposte to insider dealing with geological information. The principle seems to be fair, although it needs to be backed by another barely announced principle stating that the more you use it, the more you pay for it. Briefly, these two principles mean that a subsoil user, who comes first and is granted with the right to exploration, shall effect one-off payment with annually increased rent for the territory.

This principle relates to the right to subsoil use itself, therefore if there are two and more potential bidders, then the most appropriate option will be an auction.

Auction type of granting the right to subsoil use is another example of liberalisation of the subsoil market, since ‘the auction works best when a market is as free as possible’ (Harvey et Meisel, 1995: 13). The only criterion in auction is the amount of one-off payment, i.e. a participant, who offered the highest bid, wins the auction. However, a slight risk of collusive bidding still exists, e.g. an artificial increase in price or a bidding ring agreement. For this reason, competitive bidding must be transparent, publically available and independent.

There are many positive ways of enhancing investments in this area; lots of improvements in relation to liberalisation of the subsoil market have been introduced in Kazakhstan since recently. In this regard, the new competitive forms of obtaining the right to subsoil use look very promising. The only step forward left is to enact all those improvements into law.

Ibragim Kouky

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