The Projects and Construction Review: Uzbekistan
Since President Shavkat Mirziyoyev's election to office in 2017, Uzbekistan has introduced a number of reforms to make investors more optimistic about the country's economic revival and investment climate. Being rich in hydrocarbons, gold, copper and uranium, with relatively low-cost human capital, Uzbekistan had been on investors' radar for a long time; however, currency exchange limitations and repatriation obstacles prevented investors from entering the country. Following the liberalisation of currency exchange and the lifting of repatriation hurdles, the situation has changed considerably, with a positive impact on all sectors of the economy, including the construction industry.
In the past four years, one can witness a construction boom in infrastructure projects, industrial facilities, and commercial and residential real estate. To foster the growing construction market, the government has enacted an unprecedented number of legislative acts with the aim of easing the conditions for doing business in Uzbekistan.
President Mirziyoyev has set an ambitious goal to double gross domestic product (GDP) by 2030 and to increase the industrial sector's share of GDP to 40 per cent. Ambitious goals have been set for the energy sector to double energy generating capacities and increase the share of renewable energy by 25 per cent in total portfolio of country's energy generation. To secure financing for these goals, Uzbekistan relies on public debt and public-private partnership (PPP) arrangements, especially in energy and infrastructure. With this in mind, a new public body under the Ministry of Finance – the PPP Development Agency (PPPDA) – has been established to facilitate use of the PPP legal framework. Within a short period from the passing of the new PPP Law in June 2019, a number of PPP projects have been initiated thereunder.
Multilateral development funds and various international financial institutions (IFIs) have also been instrumental in these developments. The role of IFIs is especially significant in the energy, transport and healthcare sectors, where such IFIs as the International Finance Corporation, the European Bank for Reconstruction and Development (EBRD) and the Asian Development Bank (ADB) often act as consultants to the government, providing assistance with structuring and conducting tenders. For the first time in its history, Uzbekistan appeared on a sovereign credit ratings list in December 2018, followed in February 2019 by the issuance of US$1 billion of eurobonds in international debt markets.
Reforms have also encouraged the private sector to take a more proactive role as investors in the construction and operation of economic and social infrastructure projects. This should allow increased access to private investment and enhance the economic efficiency of infrastructure. Even though major infrastructure projects used to be operated by state-owned monopolies, the state declares its readiness to reduce its presence in business by selling its equity shares via initial public offerings or contracting out operations to trust management companies, while reserving control over strategic sectors.
The year in review
The year 2020 has been marked by further developments in the implementation of public-private partnership projects (PPPs). Notably, Uzbekistan continues to use PPP projects to overcome long-standing problems in the energy, transport and healthcare sectors. Despite the effect of the covid-19 pandemic, the government executed several power purchase agreements with leading independent power producers, including Masdar, ACWA Power and Aksa Enerji. Moreover, the government has launched a variety of tenders for both conventional and renewable energy projects, developed a plan for launching tenders for toll road projects and selected Indian NephroPlus as the winning bidder for a landmark healthcare PPP project for the provision of dialysis services.
From the regulatory perspective, a number of long-awaited amendments to the PPP Law have been adopted by the parliament of Uzbekistan.
In respect of the construction industry, recent reforms include the following:
- the adoption of the new edition of the Town Planning Code on 22 February 2021, effective from 23 May 2021;
- measures for large-scale implementation of information communication technologies in construction;
- introduction of an improved procedure of state control over construction works, based on risk categories and the functional purpose of the facilities;
- implementation of an electronic rating of e-construction and design contractors, which is automatically formed on the basis of the tax and statistical reports provided by the contractors and data provided by the Ministry of Construction. The rating should reflect the capacities and experience of construction contractors;
- allowing the use of international or foreign standards for technical regulation of urban planning, subject to the adaptation of the project documents prepared on the basis of such international standards with the engagement of local design companies;
- reduction of state involvement in the construction of affordable housing;
- adoption of the regulations on shared-equity construction, which eliminated a long-existing grey area in Uzbek law; and
- an express reference to the FIDIC form of contract in road construction legislation.
Further to this, Uzbekistan continues to reform its legal framework to accommodate and reflect recent trends and changes in the Uzbekistan market, such as, inter alia, the emergence of holding companies, the diversification of investments and the increase in the number of foreign investors operating in the country. Adoption of the new Tax Code and new Law on Investments and Investment Activities at the end of 2019 also had an indirect impact on the development of the construction industry.
Documents and transactional structures
i Transactional structures
Until recently, the majority of large infrastructure projects were implemented using public investment, with no or limited scope for traditional PPP models. At the same time, the government tends to opt for privately financed PPP projects in certain sectors, such as power generation and healthcare. Moreover, project finance is widely used in such infrastructure PPP projects, especially in those financed by IFIs. The use of project finance models in purely private transactions still remains uncommon, largely owing to the lack of expertise and capacity required for structuring project finance transactions, both on the local lenders' side and on the project sponsors' side.
Usually PPP projects are structured through a special purpose vehicle (SPV) in the form of a limited liability company created to serve as the project company. Until 23 January 2021, the PPP Law provided for the winner of a tender (which usually is a foreign investor) signing the PPP agreement directly, rather than the SPV incorporated thereby. This unusual approach in the PPP Law had been addressed by assigning or novating the rights and obligations of the private party under the PPP agreement to the SPV. However, on 23 January 2021, following approval by the parliament, the President has enacted amendments to the PPP Law allowing, among other developments, the PPP agreement to be signed by the SPV incorporated by the winning bidder.
Notably, due to certain legal uncertainties and contradictions in the PPP Law, the government has preferred to implement PPP projects under a combination of the Public Procurement Law and the Investment Law rather than the PPP Law. Due to the adoption of the amendments to the PPP Law, this trend is expected to change.
Although Uzbek law allows for the majority of PPP models to be used, the government and public partners usually insist that projects are implemented based on the reverted asset models, especially build-own-operate-transfer (BOOT). For instance, two recent projects are structured under this model, namely a 100MW wind power plant project for which the tender is pending under the consultancy of the EBRD, and an up-to-1,000MW wind power plant project implemented by ACWA Power (Saudi Arabia) following direct negotiations with the Uzbek government.
Depending upon the complexity and source of financing, a project finance transaction may generate quite a number of transactional documents. The precise requirements will depend upon the type of project, the ownership structure, the regulatory environment and the level and nature of public sector involvement.
A complex infrastructure project might require the following transactional documents:
- a presidential decree outlining the project details and providing for the legal regime required for implementation of the project, the tax and customs benefits, and any other exemptions necessary for the project's bankability;
- land allotment documents in the form of a land lease agreement. This is important from a bankability perspective, considering that currently land is fully under public ownership;
- tender documents consisting of general, technical and commercial parts;
- financing agreements with lenders, including direct agreements;
- terms of reference or financial and economic reports, or both;
- feasibility studies or cost analyses, or both;
- contract documents (shareholders' agreement, joint venture agreement, joint operation agreement, investment agreement, EPC contract, offtake agreement, supply agreement, concession or licensing agreement, production sharing agreement, power purchase agreement, operation and maintenance agreement, technical service agreement, etc.);
- design documentation adapted to local standards and examined by the local regulator; and
- security documents (bonds and insurances).
Certain documents are executed purely for the lenders' comfort and security purposes. Execution of land lease agreements in major infrastructural projects involving project finance may serve as an example of this approach, as the contents of such agreements may be already covered by the general law.
iii Delivery methods and standard forms
The Uzbek construction industry is experiencing a transformation that includes switching from tailored to standard contract forms. The choice of delivery method and standard form largely depend on the lenders' requirements. If a project draws financing from public sources, it must be delivered on a turnkey basis. Therefore, the EPC and engineering procurement and construction management methods are those most commonly used in public procurement, as they offer maximum risk transfer from public owner to contractor. Given that there are no locally mandatory forms, FIDIC Silver Book or other EPC forms might serve as a good starting point for negotiations. However, in privately financed projects, developers have more freedom to choose the appropriate delivery method and standard form. Thus, in projects funded by IFIs, developers frequently use the FIDIC rainbow suite, including the multilateral development bank harmonised edition, and the Engineering Advancement Association of Japan and the Japan International Cooperation Agency standard forms.
As for PPP agreements, although the PPP Law authorises the PPP Development Agency to approve the standard forms of PPP agreements, no such standard form has been approved to this date.
Risk allocation and management
i Management of risks
Different types of risks may be encountered during the course of a project finance transaction. Typically, parties tend to identify and allocate the risks contractually or pass them to the EPC contractor, subcontractors, suppliers, the offtaker and other counterparties on back-to-back terms, or obtain insurance against the risks insofar as is possible. Generally, insurance is obtained to address the risks that are outside the direct control of the contracting parties.
In large-scale infrastructure projects, the PPP sponsors also attempt to negotiate special regulatory exemptions addressed in the governmental resolution and government support agreement to manage the risks specific to the project. For instance, in process plant projects, it is common to manage the foreign exchange risks by pegging the tariff to the hard currency, which requires the approval of the government and establishment of a special payment regime.
General law contains certain risk management mechanisms applicable to the most significant risks associated with PPP and construction projects, such as performance risks, risk of natural or political force majeure, change in law and regulatory risks. For instance, the Investment Law provides for a stabilisation regime for 10 years after a change in law or regulatory framework has occurred, which may be useful to address the change in law and regulatory risks.
ii Limitation of liability
Project companies and their subcontractors will frequently negotiate their contractual liability limitations. Under the freedom of contract principle, parties are free to set liability caps in a way they find most effective: as a percentage of contract price, fixed sum or formula.
However, should parties fail to set the cap themselves, the statutory limitation will define the limits. Usually, penalties are capped at 50 per cent of the outstanding obligation. As a general principle, the actual loss is payable on the top of penalties if the agreed cap is not sufficient to cover the actual loss, unless the parties have expressly stipulated that a fine or penalty (liquidated damages) is the exhaustive remedy in the event of a contract breach.
Parties are usually relieved from any liability resulting from a force majeure event but not from the actual performance. If a force majeure event occurs, the parties try to negotiate an extension of time and additional costs to deliver the project. Usually parties expressly provide that, if the force majeure event impedes parties from execution of the contract for a specific period – for instance, for more than 180 consecutive days – then each party can terminate the contract.
iii Political risks
Until 2020, land in Uzbekistan belonged to the state, which used its domain powers by expropriating land plots fairly often, especially in recent years. However, enactment of the Law on Privatization of Non-Agricultural Land Plots, adopted on 13 August 2019, and effective on 1 March 2020, as well as reforms in expropriation procedure, might change the landscape.
Generally, the right of requisition is limited to public and social needs, such as defence, deposits exploration, adherence to international agreements and construction of transport infrastructure. Expropriation is possible only after market price compensation is paid for the property located on the expropriated plot.
Similarly, the Investments Law protects investors from the following political risks:
- expropriation, save for emergency cases subject to the relevant decision of the government and payment of adequate compensation of losses;
- restrictions on the transfer of foreign currency outside the country;
- discrimination against particular groups of investors; and
- any intervention by the government and its officials in the lawful operations of investors;
In addition, the Investment Law expressly mentions the investor's right to insure political risks with local insurance companies, international organisations and foreign agencies.
Security and collateral
Creditors may accept a pledge by means of a general security agreement or by concluding a general pledge agreement for movable and immovable assets and property rights. The pledge agreement should specify the objects of security and their value, as well as the nature and terms of the obligation underlying the security. Negotiation of pledge agreements should take into account various perfection requirements for different types of assets. Creditors are free to register pledged rights with the Pledge Registry of the Republic of Uzbekistan. While retaining a voluntary character, creditors who have registered pledged rights can exercise priority to claim and enforce the pledges over those creditors who did not register with the Pledge Registry.
It is typical for lenders in large PPP transactions to obtain security over the project assets, as may be required for ensuring the bankability of the project. Notably, absence of an ownership right for land plots impedes the private partners and lenders from establishing security over the land plots. This situation may change in the near future due to the planned privatisation of non-agricultural land within the framework of the Law on Privatization of Non-Agricultural Land Plots adopted on 13 August 2019, and effective on 1 March 2020. In the meantime, one practical solution used in projects financed by IFIs is to execute a land lease agreement with the municipal government and pledge the right to use the land plot granted thereunder.
Uzbek law also allows for security to be taken over cash deposited in bank accounts and over equity shares in companies incorporated in Uzbekistan. However, a number of commonly used security arrangements (such as a security trustee, for instance) have not yet been introduced in the country, pending the regulatory amendments that will pave the way for these arrangements.
Notably, the PPP Law provides for the lenders' step-in right in PPP agreements (e.g., power purchase agreements) and does not expressly envisage the conclusion of direct agreements. However, in practice the step-in rights are included into the separate direct agreements concluded between the lenders and the public partner.
Use of parent company guarantees is less popular and mainly utilised as a collateral security in addition to a bank guarantee or as a performance guarantee for SPVs in projects with corporate financing.
In process plant PPP projects, the obligations of the offtaker are often secured by a credit support mechanism in the form of a letter of credit issued for certain agreed monthly payments. At the same time, the investors are interested in securing their investments made under the PPP agreements, while the lenders also require certain guarantees for repayment of the loans provided to the local entities. Previously, the government would issue a sovereign guarantee to address these issues. However, in recent years, the government has refrained from providing sovereign guarantees for purely commercial projects, which might be explained by the government's fiscal goals; specifically, it aims to keep sovereign debt within 40 per cent of GDP from 2020 to 2021. As an alternative to a sovereign guarantee, under the government support agreement, the government may undertake to ensure the maintenance of the letter of credit provided by the state-owned offtaker for the agreed amount. Similarly, investors might want to negotiate the government's obligation to pay termination payments if the offtaker fails to do so.
Bonds and insurance
The Civil Code provides a general regulatory framework for guarantees and sureties issued to secure performance of the parties' obligations under the contract. The sureties may be issued by any person on the terms set out in the surety agreement, while the guarantees may be issued only by banks or other credit organisations and are irrevocable and non-transferable by default.
At the same time, owing to the fact that the banking sector is still immature, the usual practice is to freeze the guarantor's money on bank accounts up to an amount equivalent to the guaranteed obligation; for this reason, the use of guarantees is not popular among local companies. By contrast, in large-scale investment projects that involve international contractors and financing by IFIs, various types of guarantees are widely used, including bid bonds, advance payment bonds, interim payment bonds and performance bonds. It should be noted that foreign investors tend to opt for the laws of England and Wales to govern such guarantees.
Under Uzbek legislation, a contractor has an obligation to insure the object of a construction project and the construction works, at its own expense, unless otherwise has been agreed contractually by the parties.
Additional requirements are set out for projects financed from the state budget or by an international financial institution loan against the provision of a sovereign guarantee. In such projects, parties, usually contractors, should take out insurance covering the construction works, materials, equipment, machinery on site, as well as contractor's liability for injuries, health detriment and damage to third parties' property resulting from construction and installation works.
In addition, the following types of insurance are frequently required by employers in construction contracts:
- workers' compensation;
- cargo insurance (covering loss or damage occurring while equipment and materials are in transit from the point of shipment to their arrival at the construction site); and
- mandatory insurance for vehicles and for employer's liability.
Enforcement of security and bankruptcy proceedings
Failure of a project company to perform contractual obligations entitles the lenders to recourse to collateral based on a pledge or mortgage agreement. Recourse to collateral is subject to court proceedings unless the parties have agreed otherwise. As a general principle, mortgage and collateral agreements are subject to notary certification.
Once the court renders a decision in a lender's favour, the collateral is to be sold through a public auction. If collateral is not sold after two auctions, the lender is offered to take the collateral in kind and set off the claims secured by the collateral against its purchase price. Should the lender not exercise this right, the pledge or mortgage agreement will be deemed to have been discharged.
If a project company becomes insolvent, enforcement against the collateral is subject to the bankruptcy procedure in accordance with the Bankruptcy Law, which considers that the lender will not be able to enforce its rights individually. Instead, once an application for bankruptcy has been accepted by the economic court, all the creditors are represented by the board of creditors.
Importantly, collateral consists of the entire property of a project company, and if the proceeds from its sale are not sufficient to cover all of the debts, then the proceeds are distributed to the creditors after the following debts and expenses have been paid in full:
- court expenses;
- fees to the receiver or liquidator;
- utility payments and operation costs;
- the debtor's property insurance costs;
- any debtor's liability that arose after the insolvency procedure had been launched; and
- claims from citizens arising from damage caused to their health or property.
i Licensing and permits
There are several instruments that regulate the social and environmental aspects of project finance transactions and construction contracts. These instruments may be divided into three layers, namely laws, delegated legislation, and environmental and sanitary norms. Laws provide general principles and methods of environmental protection and thus serve as a framework for the other two layers. Delegated legislation, as adopted by the Cabinet of Ministers, sets out the procedures for ensuring compliance with the principles expressed in the laws. Finally, environmental norms establish detailed requirements to be complied with during the design, construction and operation stages. State environmental examination is the main instrument for ensuring compliance with environmental requirements. Both existing and new projects are subject to state environmental examination by the State Committee for Ecology and Environmental Protection, which is the principal body for the supervision of environmental issues.
As part of the state environmental examination process, the State Committee reviews and approves environmental norms that are mandatory for all entities. Additionally, with respect to new projects, state environmental examination is carried out in the form of an environmental impact assessment consisting of three stages:
- a draft environmental impact statement, which should be prepared before the commencement of financing of the project;
- an environmental impact statement, to be prepared before approval of the project feasibility study; and
- an environmental consequences statement, which is a prerequisite for acceptance of a project after construction.
Moreover, production processes affecting the environment are subject to mandatory compensatory payments. These processes are divided into four categories depending on the hazardousness of the waste they emit. The amount of compensatory payments depends on the type of pollutants and the amount of emissions, dumped waste and pollutants released.
ii Equator Principles
Project finance transactions and construction contracts are not subject to the Equator Principles, as they are not part of the Uzbek legal system. However, the Principles are widely used in large infrastructure projects financed by IFIs and foreign banks, including the Surgil Gas and Petrochemical Complex and the latest energy projects implemented in the country.
iii Responsibility of financial institutions
Uzbek law does not provide for the criminal or administrative liability of legal entities; instead, criminal or administrative liability is imposed on the executive officers or other people in charge of relevant functions who deliberately, or through negligence, commit such an offence. Depending on the severity of a violation, an officer who commits such a violation can be tried in an administrative or criminal court, and liability may range from a fine to imprisonment. However, employees and officers of multilateral development banks and IFIs (e.g., the World Bank, the EBRD, ADB), by virtue of their establishing treaties or relevant agreements with the government of Uzbekistan, have immunity against the legal process.
Ppp and other public procurement methods
Although the PPP Law was adopted only in May 2019, PPP agreements have already become an important part of Uzbekistan's legal landscape in relation to infrastructural projects, especially in the energy and healthcare sectors.
In addition, the President has passed several resolutions providing for the implementation of PPP projects in the social sector, namely in pre-school education and culture. However, foreign investors have expressed little interest in these projects, which might be explained by the relatively small size of the projects. PPP projects in the energy sector, by contrast, are more attractive for foreign investors, especially after the adoption of the PPP Law, which set the legal framework for PPPs in Uzbekistan.
The PPP Law introduces a comprehensive framework of principles, the private partner selection process and basic delivery methods. Under the Law, either a public body or a private party may initiate PPP projects. To do so, the initiator shall prepare the proposal (concept) of the project, comprising the overview, costs and specifications of the potential PPP project. In the event of receiving an unsolicited proposal, the potential public partner should provisionally approve the proposed PPP project. In addition, depending on the total value of the project, the concept is subject to approval by:
- the relevant government authority (usually the public partner itself), if the value of the project is less than US$1 million inclusive;
- the relevant government authority in conjunction with the PPPDA, if the value of the project is between US$1 million and US$10 million inclusive; or
- the Cabinet of Ministers, if the project value exceeds US$10 million;
Following approval of a proposed PPP project, the public partner commences the procedure for selection of a private partner. The PPP Law provides for tendering as the principal method for such selection. The selection process can be a one-stage tender if the value of the project is less than US$1 million, or a two-stage tender if the value of the project exceeds US$1 million. Alternatively, the Law allows the PPP agreement to be executed on the basis of direct negotiations when:
- the project is related to a national defence capability or security;
- the private partner owns rights to the property and this is indispensable for the PPP project;
- the project is implemented in accordance with a resolution of the President or a resolution of the Cabinet of Ministers; and
- there are no parties interested in implementing an unsolicited proposal other than the initiator of that proposal.
While structuring tender procedures, the government and public partners tend to prefer a two-stage process consisting of an initial expression of interest, a request for qualifications and a request for proposals. Direct PPP agreements without any competitive bidding are still used to implement large-scale energy projects requiring intensive capital investments, or if a tender is not available due to technical reasons or a lack of competition. For instance, recently a power purchase agreement has been concluded with Phanes Group (UAE) for the implementation of the IPP 200 MW PV solar plant project.
After the private partner has been selected, the parties execute the PPP agreement, which may be effective for between three and 49 years. A typical term of PPP agreements executed to date is between 20 and 25 years. The Law also mandates for the minimum requirements for the contents of the PPP agreement. Importantly, the Law does not prohibit the transfer of the PPP object to the public partner; nor does it specify the stage at which such a transfer may take place. Thus, the Law allows parties to exercise their freedom to negotiate the terms of transfer as they find most fit. Freedom of contract in PPP agreements allows the application of well-established PPP models such as BOOT or build–operate–transfer, among others. The Law also envisages that lenders and public partners may have step-in rights that may be exercised in accordance with the terms of the PPP agreement.
Finally, the Law does not restrict the rights of the parties to choose the substantive governing law applicable to the PPP agreement and dispute resolution mechanism.
ii Public procurement
The new Law on Public Procurement was passed in April 2018. It incorporates international public procurement principles, such as the professionalism of the procurer, reasonableness, rationality and cost-efficiency, transparency, competitiveness and objectiveness, proportionality, consistency and the impermissibility of corruption. The Law provides for five types of public procurement procedures, namely e-procurement, reverse auction (in electronic form), competitive bidding, tender and procurement from a single supplier.
Complaints relating to public procurement are reviewed by the Board of Complaints established by the Cabinet of Ministers. Any participant in public procurement may file a complaint in relation to any irregularities in public procurement procedures. Complaints may be filed both before and after the conclusion of the contract. Depending on the flagrancy of the irregularity and the stage of procurement, the Board can suspend the procurement procedures, annul the award of the contract, suspend the execution of the contract or put the bidder or contractor on a blacklist. Any decision made by the Board is subject appeal in the courts.
Notably, during the implementation of investment projects financed by foreign loans and grants and executed by foreign contractors, bidding documentation must include a local content requirement in an amount of at least 50 per cent of the work, unless otherwise provided by loan agreements with the international or foreign financial institution.
At the same time, the Public Procurement Law does not apply to projects procured by foreign IFIs through their procurement guidelines and procedures.
A special procurement regime for companies included in the list of strategic purchasers proved to be inefficient. Therefore, the special procurement regime has been abolished, and a general procurement regime now extends to strategic purchasers. Moreover, the parliament adopted the Law on Public Procurement in a new version, which must be signed by the President before becoming effective.
No single law governs this regime. Instead, a number of by-laws regulate the regime, which is very prone to regular revision, adding uncertainty and complexities to the procurement process.
Foreign investment and cross-border issues
As a general rule, foreign companies are subject to the same licensing and permit requirements as local companies. Therefore, IFIs, design and construction companies or any other investors can operate in Uzbekistan without special licence. Similarly, foreign lenders are not required to obtain permits or licences to finance projects; nor do foreign contractors need a special construction licence. Design companies may, however, be required to obtain a licence, because some of the design works are subject to licensing.
Uzbek law does not require licences for general construction works. However, construction works in certain areas or sectors are subject to licensing. The following works need a special licence to be executed:
- design, construction, operation and maintenance of gas or oil pipelines;
- design, construction, operation and maintenance of bridges and tunnels;
- design, construction, operation and maintenance of objects for which production is high-risk and potentially dangerous;
- design of architecture and construction documents;
- repair, construction and installation works at heights using industrial mountaineering; and
- examination of design documents.
Apart from that, Uzbekistan recognises design and construction licences issued in Organisation for Economic Co-operation and Development countries.
EPC projects may be implemented using a fast-track procedure, provided that the EPC contractor and design company form a consortium and accept joint liability for breach of contract. A fast-track procedure implies that the contractor may finalise part of the design and then submit it for state examination. Once such a design is examined and approved by the Ministry of Construction, the contractor may commence execution of such approved works while the design company proceeds with the next stage of the design. In other words, the contractor may be entitled to prepare the design step-by-step and have it examined in parallel with the construction works. Ultimately, this enables the contractor to reduce the time for completion. The implementation of fast-track construction shall be approved by the Ministry of Construction, subject to the contractor providing evidence of previous EPC experience, and that it is financially sound and capable of carrying out the project.
The general law provides for a number of tax and customs exemptions and benefits available for foreign and domestic investors operating in certain priority sectors (e.g., renewable energy projects). In addition, in recent years it has been customary to provide individual tax and customs exemptions based on the governmental resolution approving the project. That being said, it should be noted that the new edition of the Tax Code expressly prohibits the provision of individual tax exemptions by governmental resolution, which may still authorise an industry-specific reduction of the general tax rate (save from value-added tax, excise tax and subsoil tax) for a term not exceeding three years.
i Repatriation of profits and investment
Foreign investors can change operating funds or profits from one currency to another without any restriction: there is no control or law restricting repatriation of profits from Uzbekistan. The recently adopted Investments Law expressly guarantees foreign investors' rights to repatriate profits without any restriction. Even though the repatriation of profits or cross-border currency transactions are not subject to any restriction, currency payments are subject to currency control to adhere to Uzbekistan's international obligations to combat money laundering, financing of terrorism and the proliferation of weapons of mass destructions.
i Arbitration and ADR
Alternative dispute resolution (ADR) mechanisms are not very popular in Uzbekistan because of the relatively low cost of litigation and parties' intention to settle a dispute amicably before resorting to court proceedings. However, in cross-border transactions, including project agreements and large-scale government projects, parties prefer international arbitration over national court proceedings. The long-awaited enactment of the UNCITRAL Model Law-based International Commercial Arbitration Law in early 2021 (effective from 16 August 2021) should further boost the utility of international arbitration as a primary means of resolving disputes, as well as making Uzbekistan an arbitration-friendly jurisdiction. That said, due to the inadequate local arbitration infrastructure, parties usually still refer their disputes to internationally recognised arbitral institutions such as the London Court of International Arbitration, the International Chamber of Commerce, the Stockholm Chamber of Commerce or the Singapore International Arbitration Centre seated in London, Paris, Stockholm or Geneva. Regional arbitration centres, such as the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry and the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation, are traditionally popular as well. The Tashkent International Arbitration Centre has also become increasingly popular among local and foreign businesses, especially for small and less complex cases.
Uzbekistan does not have a special technology or construction court similar to the one in the UK. Unless agreed otherwise, these types of disputes come under the jurisdiction of local economic courts. Nevertheless, nothing in Uzbek's legislation precludes parties from opting for international arbitration if a transaction involves a foreign element.
Uzbekistan is a party to both the ICSID Convention and the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). Historically, enforcement of foreign arbitral awards was not always an easy task in Uzbekistan. It is not unusual that the courts in Uzbekistan deny recognition, referring to domestic procedural legislation, which is not fully in line with the New York Convention. Recent case law also demonstrates that the courts can refuse recognition by intervening in the substance of disputes, which raise arbitration users' and practitioners' concerns. Faced with discrepancies between domestic law and the New York Convention, the courts tend to adhere to the domestic law rather than taking a pro-enforcement attitude. Enforcement difficulties are mainly attributable to a lack of capacity and experience, rather than a general pattern of non-enforcement. However, the enactment of the International Commercial Arbitration Law will definitely require effective legislation dealing with enforcement proceedings, and the parliament is expected to synchronise procedural legislation with the provisions of the said law and the New York Convention.
Importantly, adoption of the arbitration law creates the legal basis for courts to assist tribunals in support of arbitration, thus increasing the efficiency of arbitral proceedings. For instance, the courts can enforce interim relief orders issued by the arbitral tribunal or order interim relief at the request of the party to arbitration.
The adjudication of construction disputes is not common practice in Uzbekistan for several reasons. First, the concept and commercial advantages of dispute adjudication are not familiar for the majority of construction practitioners. Second, Uzbek legislation is silent about the legal effect of decisions made by dispute adjudication boards (DABs), and therefore it is not clear how to enforce such decisions. Thus, the prevailing party has no legal instruments to obtain a writ of execution to enforce a final and binding DAB decision. Moreover, voluntary compliance is somewhat uncertain, too, especially in public procurement construction. It is doubtful that under Uzbek law a DAB decision can serve as a solid legal basis for money transfers for state-owned companies. Finally, contracting parties very often disregard dispute adjudication provisions and do not constitute the DAB, or delete any references to dispute adjudication throughout the contract.
iii Investment disputes
A new Investments Law, which became effective in January 2020, introduces a multi-tiered dispute resolution mechanism. In the first tier, parties should seek to settle the dispute by means of negotiations. Should parties fail to resolve the dispute by negotiations, the dispute should be submitted to a mandatory mediation procedure, which is the second tier. If the dispute is not resolved by means of mediation, it shall be referred to the third and final tier: the national courts of Uzbekistan. Investment arbitration under the new law is available only under international treaties (bilateral investment treaties and multilateral investment treaties) and investment agreements. The Law also expressly provides that the state's consent to investment arbitration shall be in a written form enshrined in an international treaty or investment agreement, thus withholding automatic consent from the law itself as it has been interpreted by ICSID tribunals.
The Investments Law raises multiple questions. Arguably, the newly established dispute resolution mechanism deserves healthy criticism for being lengthy, burdensome and unpredictable for foreign investors.
It is also not clear why the legislator made mediation mandatory despite it being a purely consensual mechanism, both by its nature and, more importantly, under the Mediation Law. Moreover, the Law does not provide whether foreign arbitral institutions will be allowed to administer mediation and, if so, which mediation rules shall be applicable. Bearing in mind that Uzbekistan is not part of the Singapore Convention on Mediation, including mediation as a mandatory tier, this looks to be premature and likely to raise investors' concerns as regards the security of their investments.
Finally, and most importantly, submitting an investor–state dispute to national courts may not be a viable option for an investor for multiple reasons ranging from independence and impartiality to the apparent lack of capacity and experience of judges to decide such complex cases.
Outlook and conclusions
Uzbekistan has been undergoing transformative changes in almost all sectors of the economy. These changes are accompanied by a comprehensive revision of the regulatory framework to meet the needs and expectations of businesses. Uzbekistan has set an ambitious goal to double GDP by 2030, and has emphasised the importance of project finance and PPP to accelerate the country's economic growth. Legislative changes have already spurred the growth of the construction industry, making that sector one of the drivers of the Uzbek economy. Similarly, the number of project finance and PPP projects is expected to increase steadily. Despite the current political risks, Uzbekistan is striving to become a safer and more predictable harbour for foreign capital and to secure landmark PPP projects.
In the short term, we have yet to see the launch of a land privatisation programme, which would be a signal that the importance of private property is taking root in Uzbekistan. In parallel, the number of privatisations is also expected to accelerate in the coming years, reflecting the government's intention to discontinue its involvement in non-strategic sectors of the economy.
1 Eldor Mannopov is a managing partner, Yakub Sharipov and Madina Hamidova are associates and Fayoziddin Kamalov is a junior associate at Dentons Tashkent.