General legal newsletter for February 2021

The adoption of a Presidential Decree on measures for accelerating privatization as well as the adoption of the new Law on International Commercial Arbitration are amongst the most notable developments of February 2021. A number of sectoral regulatory acts were also adopted, including a Presidential Resolution on measures to reform the chemical industry and a Presidential Decree on incentives for businesses in the tourism industry. Several large investment projects in energy and telecommunications were also approved by the President.

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 1.  PRIVATIZATION ACCELERATION REFORM

• JSC “UzAssets” and the State Assets Management Agency are allowed to appoint privatization consultants by selecting the best offers; relevant consultancy agreements are not subject to the state expertise;
• In selling state property through public trades, it is allowed to use a value of state property or a diapason of values determined by professional consulting organizations; the mandatory requirement to set the starting price at the level specified in a report of an evaluation organization does not apply.

• dispose of state shares through a public auction/competitive bidding without considering the pre-emption rights of shareholders, where particular requirements set by the Decree are met;
• make decisions on privatization through contributing state assets into the charter capital of enterprises or through decreasing state share by transferring non-core assets of enterprises to the state;
• determine the starting price of state assets put up for a public auction, based on rules provided in the Decree.

Presidential Decree No. 6167 of 11 February 2021

 2.  THE LAW ON INTERNATIONAL ARBITRATION

The Law “On International Commercial Arbitration” has been adopted. It comes into effect on 16 August 2021. Under the Law, any disputes of a commercial nature may be submitted for international commercial arbitration (except for particular cases expressly provided for in other Uzbek laws). Commercial arbitration between parties is considered to be international when some criteria defined by the Law are met. The Law is mainly aimed at regulating international commercial arbitration proceedings, where a seat of arbitration is in Uzbekistan; for commercial arbitration proceedings happening abroad, the following rules are, among others, relevant:

• If, based on a written agreement of parties, a dispute shall be resolved through international arbitration, Uzbek courts shall refer the dispute to the agreed arbitration court, provided that one of the parties requests so not later than submitting its first statement on the substance of the dispute and that the relevant agreement remains valid, has not expired, and may be performed;
• Based on our understanding, while the matter of jurisdiction is considered in an Uzbek court, a dispute may be initiated, continued, or resolved in international arbitration;
• Parties to international arbitration may apply to Uzbek economic court with the request to apply interim measures awarded in the course of the arbitration; application to the Uzbek economic court for applying interim measures and the application of interim measures by a court before or during arbitral proceedings shall not be considered incompatible with an arbitration agreement;
• exhaustive lists of grounds for refusing the application of interim measures and refusing recognition and enforcement of arbitral awards are set for Uzbek courts.

Law No. ZRU-674 of 16 February 2021

 3.  PUBLIC SECTOR CONSTRUCTION PROCUREMENT

Following the Presidential Decree No. UP-5963 of 13 March 2020, the Cabinet of Ministers adopted a Resolution on the introduction of new rules for purchasing construction works by state agencies and enterprises. Public purchasers will now have to conduct some of their procurement procedures for purchasing construction works in electronic form with the use of electronic ratings of engineers and contractors.
Relevant interim regulations envisage the establishment of a specialized electronic bidding system, through which construction contracts will be concluded as a result of public procurement procedures. The system will be integrated with the National System “Transparent Construction”, which facilitates electronic processing of documentation under construction projects.

The following general rules are also set in the regulations:

• the e-procurement procedure is mandatory if construction works for more than 2,500 times the baseline calculation value (“BCV”) (UZS 6125 mln or approx. USD 58.3 thousand) are purchased;
• the state expertise of tender documentation and technical assignments will be conducted only by assessing the volume of purchased goods, works, and services and relevant price indicators;
• those bidders, whose current outstanding financial obligations exceed 1.5 times the cost of major constructions works they performed during any 1-year period over the past 3 years will not be eligible to participate in public procurements procedures;
• if some funds have been saved after the performance of tendered works without prejudice to the quality and volume of the works, such funds may remain at the disposal of a contractor;
• to be eligible to participate in procurement procedures, a construction company has to obtain an electronic rating, indicating the company’s professional capacity and reliability. Obtaining a better rating allows offering the performance of more complex engineering and construction works.

Resolution of the Cabinet of Ministers No. 55 of 5 February 2021

 4.  DEVELOPMENTS IN THE CHEMICAL INDUSTRY 

The President adopted a Resolution on the transformation of enterprises in the chemical industry and the development of the production of chemical products. The following general objectives are, among others, set in the Resolution:

• decrease of government interference into the activities of chemical enterprises, primarily in interactions between chemical enterprises and agricultural producers, and removal of the planned system of the distribution of chemical products;
• decrease of the state share in chemical enterprises through staged privatization;
• technological and digital modernization of chemical enterprises.

The following measures are envisaged by the Resolution:

• based on recommendations of the International Finance Corporation and engaged experts, the Ministry of Finance, the Ministry of Economic Development, and JSC “Uzkimyosanoat” shall develop (i) until 1 June 2021, an action plan for implementing reforms in the chemical industry in line with the above goals; (ii) until 1 November 2021, a program for the strategic development of the chemical industry for the period till 2035;
• the Open Partnership Program for the Creation of Technological Clusters will be implemented with the engagement of private parties; it, among others, envisages the creation of new production facilities on the territories adjacent to such enterprises as JSC "Navoiazot", LLC "Kungrad Soda Plant", the Ustyurt and Shurtan Gas Chemical Complexes, JSC "Ferganaazot", and the Ferghana Oil Refinery;
• JSC “Uzkimyosanoat” and the Ministry for the Development of Information Technologies are instructed to gradually, by 2024, introduce at all enterprises of JSC “Uzkimyosanoat” an automatized monitoring systems for industrial and management processes; for financial, economic, and organizational operations; for the control of the sale, delivery, and use of manufactured products.
• a list of 16 new investment projects to be implemented in 2021-2025 for the purpose of diversifying the production of chemical enterprises with a total cost of USD 1,176 mln (USD 700 mln of which are foreign direct investments) and the Road Map for these implementations of the projects was approved.

Presidential Decree No. PP-4992 of 13 February 2021

 5.  INCENTIVES IN THE TOURISM SECTOR 

To support businesses operating in the tourism sector, the President signed a Decree providing for the following incentives, which will be effective till 31 December 2021:

• extension of the tax incentive for the reduction of the income tax rates by 50% for tour operators, travel agents, and accommodation providers;
• partial subsidization of expenses of tour operators for air and railway tickets for tourists in the amount of 30% of their cost, provided that a relevant tour to Uzbekistan is organized for a foreign tourist group of at least 10 people and they stay in tourist accommodation for at least 5 nights;
• an exemption from paying the land tax and the property tax as well as the reduction of the social tax down to 1% for tour operators, travel agents, and accommodation providers;
• suspension of the application of fines for overdue accounts receivable under foreign trade transactions for tour operators, travel agents, and accommodation providers.

Furthermore, starting from 1 March 2021, citizens of Uzbekistan (as well as stateless persons permanently residing in Uzbekistan) will be charged a tourist (hotel) fee in the amount set by the Cabinet of Ministers for each day of their stay in tourist accommodation.

Presidential Decree No. UP-6165 of 9 February 2021

 6.  INCENTIVES FOR MANUFACTURERS IN THE AGRICULTURAL MACHINERY INDUSTRY

The President signed a Decree on the development of a competitive environment in the sector of agricultural machinery manufacturing. The Decree, among other things, envisages the provision of the following incentives, starting from February 2021:

• till 1 January 2022, local manufactures of agricultural machinery will be exempt from customs payments (except for VAT and customs duties) for importing spare parts and components required for the manufacturing and maintenance of agricultural machinery, which are not produced in Uzbekistan and are included in a special list approved by authorized state bodies;
• local manufactures of agricultural machinery importing components and materials required for the manufacturing and maintenance of agricultural machinery will be allowed to defer payment of VAT on imported items for a period of up to 270 days, starting from the date of placement of the imported items under the customs regime "released for free circulation".

The Decree also provides that until 1 December 2021, the Ministry of Economic Development, the Ministry of Finance, and the Ministry of Agriculture shall develop and submit to the Cabinet of Ministers proposals on improving the attractiveness of investment projects in the agricultural machinery industry.

Presidential Decree No. 4969 of 1 February 2021

 7.  LEASE OF FOREST LANDS 

The Regulation on the Procedure for Leasing Lands of the State Forestry Fund was amended to reflect the changes introduced into the Land Code in September 2020, which related to the use of forest lands in PPP and investment projects. The following changes were, among others, introduced into the Regulation:

• the right to lease forest lands may be granted to individuals and legal entities based on PPP and investment agreements;
• the annual rental rate for 1 hectare of forest land was decreased from 20 times the baseline calculation value (“BRV”) to 10 times the BRV (approx. USD 233) (subject to the application of location-based increasing/decreasing coefficients);
• a template lease agreement was attached to the Regulation; the template is mandatory for use, but additional provisions may be added by parties.

Resolution of the Cabinet of Ministers No. 50 of 3 February 2021

 8.  INVESTMENT PROJECTS IN CONVENTIONAL ENERGY SECTOR

The President approved project documentation of an investment project for the construction of a 240 MW steam and gas power plant in the Tashkent region. The project is sponsored by “CENGIZ ENERJI SAN. VE TIC А.Ş” (Turkey), which established the local project company LLC “Cenergo”. An approved investment agreement provides for Cenergo’s commitment to engineer, finance, construct, and operate the plant for 25 years. According to an approved power purchase agreement, generated energy will be purchased by JSC “National Electricity Grids of Uzbekistan” (“NEGU”), a single purchaser of power energy in the Uzbek energy market. As security for the fulfillment of its obligations, NEGU will provide Cenergo with a confirmed, renewable, irrevocable, and unconditional bank guarantee in a foreign currency.

Presidential Decree No. PP-4971 of 2 February 2021

 9.  INVESTMENT PROJECTS IN RENEWABLES 

The President signed two Decrees on the implementation of projects for the design, financing, construction, and operation for 25 years of two 300MW-500MW wind farms in the Gijduvan and Peshkunskiy districts of the Bukhara region. Both projects are sponsored by the foreign company “International Company for Water and Power Projects” (Saudi Arabia), which is going to invest approx. USD 650 mln in each project. For implementing the projects, the company has established two local project companies: FE LLC “ACWA Power Bash Wind” and FE LLC “ACWA Power Dzhankeldy Wind”. As in the above case of Cenergo’s project, generated energy will be purchased by JSC “National Electricity Grids of Uzbekistan”.

Presidential Decree No. PP-5001 of 23 February 2021
Presidential Decree No. PP-5003 of 23 February 2021

 10.  INVESTMENT PROJECTS IN TELECOMMUNICATION

The President approved the investment agreement between the Cabinet of Ministers of Uzbekistan and the Russian company LLC “Digital Invest” (established by Russian PJSC “Megafon” and LLC “USM Telecom”). The agreement provides for the establishment of the joint venture “Digital Holding” LLC in Uzbekistan, 49% of which will be owned by the State Assets Management Agency (contributing, among other, 100% of shares of LLC “Coscom”) and 51% of which - by LLC “Digital Invest” (contributing, among others, an amount of USD 100 mln). The established joint venture will engage in advising on introducing innovative platforms, developing telecommunications infrastructure throughout Uzbekistan, the creation of a system of the electronic labeling of certain goods, introduction of new technologies in the spheres of information security, data storage, etc. A number of incentives are granted to the joint venture to implement the above, including certain tax incentives and the right to work with state authorities and SOEs directly, without participating in public procurement procedures.

Presidential Decree No. PP-4986 of 10 February 2021

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Kosta Legal Law Firm