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General legal newsletter for March 2021

In March 2021, the Uzbek government revealed its further plans to liberalize the national economy. Hence, it adopted a strategy for reducing state participation in the economy envisaging, among other things, the substantial reduction of the number of state-controlled entities. Resolutions were also passed to introduce the system of antimonopoly compliance and to improve the trade in goods produced by monopolists (so-called “monopolistic products” that are usually produced by state-owned entities).

Some other notable developments of the month include the adoption of the Law on the Environmental Audit, new measures to develop PPP in airports management, a targeted Resolution of the Cabinet of Ministers on commercialization and privatization of one of the country’s largest state-owned banks, JSCB "Uzpromstroybank".

1. STRATEGY FOR REDUCING STATE PARTICIPATION IN THE ECONOMY

The Cabinet of Ministers has adopted a Resolution aiming to reduce state participation in certain sectors of the national economy (civil aviation, energy, mining and metallurgy, the electrotechnical industry, road construction, the production of building materials, agriculture, etc.). It is planned that by 2025, the number of enterprises with state participation will decrease by 75%. A separate strategy (the “Strategy”) has been developed for managing and reforming enterprises with state participation in 2021-2025, which, among others, envisages:

the prohibition on the establishment of state unitary enterprises and commercial entities with more than 50% state shares as well as granting any privileges and incentives to such entities, unless certain criteria are met;
the restriction of state participation in sectors where private businesses operate successfully and competition is strong;
the introduction of the "sell-or-explain" principle, based on which the state shall keep owning enterprises only in cases where that is justifiable in view of the specific criteria set by the Resolution (as provided further below);
ensuring that enterprises with state participation do not have regulatory functions and operate on market terms;
the introduction of modern corporate governance mechanisms in enterprises with state participation, including greater engagement of independent members in their supervisory boards;
preparation of new Laws “On State Assets Management” and “On Privatization”.

The Resolution further provides that:

starting from 1 January 2022, special voting rights of the state (golden shares) in respect of strategic joint-stock companies will be abolished;
the regular practice of providing state guarantees to enterprises with state participation for financing investment and infrastructure projects will be abolished; state guarantees will be provided to enterprises with state participation only in cases where strategically important infrastructure or socially significant projects are being developed.

According to the Strategy, the state will be allowed to maintain a share in an enterprise only when one of the following criteria is satisfied:

an enterprise operates as a natural monopoly;
it provides basic services to the population, which are considered unprofitable by private businesses;
it performs strategic or other highly important functions such as those related to the production, sale, or repair of military equipment; state defence; the extraction, handling, or utilization of radioactive substances; the mining of precious metals; the construction, operation, or maintenance of nuclear power facilities; the implementation of major infrastructure projects in the national interests.

A Roadmap for implementing the Strategy is attached to the Resolution (Annex 2) and provides for specific actions to be taken throughout 2021-2022.

Resolution of the Cabinet of Ministers No. 166 of 29 March 2021

2. RULES FOR SELLING MONOPOLISTIC PRODUCTS

The President has signed a Decree on the implementation of market mechanisms for selling highly liquid and monopolistic products. The below measures are, among others, envisaged.

Starting from 15 June 2021, the requirement to sell certain products only through the Uzbek State Commodity Exchange (UzEx) will extend to the following products:

polyvinyl chloride and formalin sold to all categories of customers; consumer ethyl alcohol sold to producers having relevant licenses and conformity certificates; technical ethyl alcohol sold to all categories customers; and silver sold to jewellery manufacturers;

as produced by (i) monopolists; (ii) legal entities with 50% and more of state-owned shares; or (iii) legal entities 50% or more of the shares of which are owned by the entities of type (ii);

oil and gas condensate produced by field developers (gas processing entities) and sold to producers having relevant licenses and conformity certificates;
until 1 January 2022, the following products produced by private and/or non-monopolist entities (including those, in which less than 50% of the shares are owned by the state):

50% of all produced cement;
100% of produced cotton seeds, cottonseed oil, and processed seed wastes,

regardless of the legal status and shareholding of the producer.

It is further provided that the customs value of the products transported under transactions concluded on foreign commodity exchanges shall be determined exclusively based on the relevant contract value.

The Antimonopoly Committee is authorized:

to set the maximum volume (limits) of products purchased by one buyer at one trading session of exchange trades as well as to change these limits based on levels of supply and demand;
to issue binding orders to all categories of legal entities to sell highly liquid goods (including those being in high demand in a given season) exclusively through UzEx.

The Decree also approves a Roadmap for the implementation of modern information technologies into the activities of UzEx. The Roadmap, among other things, envisages: (i) the creation of the payment system “UzEx Money”, allowing to make payments in a digital currency; (ii) the adoption of a regulation streamlining the participation of foreign entities in trades on UzEx, (iii) the creation of a legal basis for using commodity derivatives, including futures contracts.

Presidential Decree No. 5031 of 17 March 2021

3. ANTIMONOPOLY COMPLIANCE

The Cabinet of Ministers has approved a Regulation on the Implementation of the System of Antimonopoly Compliance. According to the Regulation, antimonopoly compliance is a system of internal organizational measures and procedures aimed at ensuring compliance with the competition legislation, identifying and preventing relevant risks. The requirement to implement the system applies to the following entities:

starting from 1 January 2021, to state agencies, local executive bodies, and 9 state-owned enterprises included into the list set by the Presidential Decree No. UP-6019 of 6 July 2020;
starting from 1 January 2022, to natural monopolies, business entities holding a dominant position in a particular market, and corporate purchasers, whose average annual revenue from the sale of goods over the past three years exceeds UZS 30 bln (approx. USD 2.86 mln)[1].

The above entities will have to appoint a person/body responsible for the implementation and monitoring of the system. An entity’s internal audit service may be assigned with such a responsibility.

Resolution of the Cabinet of Ministers No. 114 of 2 March 2021

4. ENVIRONMENTAL AUDIT

The Law “On the Environmental Audit” has been adopted. It comes into force on 15 March 2022. According to the Law, an environmental audit is a systematic, documented, and independent assessment of company's operations and processes for its compliance with environmental regulations, conducted by a certified environmental audit organization.

Environmental audits will be mandatory for entities with medium and high risks of affecting the environment (the relevant categorization is listed in the Resolution of the Cabinet of Ministers No. 541 of 7 September 2020) and will have to be conducted at least once a year. Environmental audits do not replace the state environmental control (the state environmental expertise, etc.).

Under the Law, if, as a result of an environmental audit, an entity receives a positive opinion of an independent auditor, it will not be subject to inspections of the State Committee for Ecology and Environmental Protection for 1 year after the completion of the audit, except for cases of accidents and emergencies, criminal investigations, or if a special decision is made by the President or the Cabinet of Ministers.

Law No. ZRU-678 of 15 March 2021

5. PAYMENT UNDER PUBLIC PROCUREMENT CONTRACTS

The Cabinet of Ministers has introduced a new public procurement rule, in accordance with which budgetary organizations and recipients of budget funds shall make an advance payment in the amount of 30% under procurement contracts with a total value of up to UZS 1 bln (or approx. USD 95,220). The rule does not apply to goods and services included in the list approved by the Resolution of Cabinet of Ministers No. 241 of 24 August 2011, prepayment for which may exceed 30%.

Resolution of the Cabinet of Ministers No. 139 of 16 March 2021

6. EXPORT SUPPORT MEASURES

As provided in our January’s Newsletter, starting from 1 April 2021, certain local exporters’ costs incurred abroad may be compensated by the Export Promotion Agency under the Ministry of Investments and Foreign Trade. The relevant procedure for getting the compensation was set forth in the Regulation of the Cabinet of Ministers of 31 December 2020.

On 30 March 2021, the Cabinet of Ministers adopted a Resolution clarifying some matters related to paying the compensation and envisaging some changes to the Regulation. According to the Resolution:

the following exporter’s costs related to their trading houses, offices, trading and warehouse premises, and advertising campaigns, as incurred abroad, will be compensated by the Agency: (i) costs of the registration of national goods and brands with foreign authorized bodies; (ii) costs of leasing offices, trading and warehouse premises; (iii) electricity and utilities-related costs, (iv) costs of organizing advertisement campaigns;
if, after receiving the Agency’s financial support, an exporter does not perform export operations within the time frames and in the amounts specified in the Regulation (they vary depending on the purposes for which the support has been requested), such an exporter will no longer be entitled to Agency’s compensations.

Resolution of the Cabinet of Ministers No. 167 of 30 March 2021

7. PPP IN AIRPORTS MANAGEMENT

The President has issued a Decree aimed at enhancing competition and attracting investments in airports management. It, among others, provides for the following:

the Ministry of Transport and state-owned JSC “Uzbekistan Airports” are instructed to take measures on introducing PPP mechanisms for implementing projects for the reconstruction, modernization, exploitation, and management of airports;
It is set that for a period of 3 years from the date of concluding a relevant PPP agreement, the following incentives are provided:

private partners and project design organizations, consultants, contractors and subcontractors engaged for the project implementation are exempt from (i) customs duties on their import of special-purpose vehicles, road-building machinery, equipment, spare parts, components, raw materials, technological and project documentation, software, and inventory; (ii) the recycling fee payable for the import of vehicles (except for cars) and special-purpose machinery;
the rates of the income tax and the dividend tax will be decreased by 50% for private partners and relevant airports;
the rate of the property tax will be decreased by 50% for relevant airports.

the “Open Sky” regime will be introduced in airports where PPP projects are implemented; the regime implies the absence of restrictions on flights and routes for foreign airline companies.

Presidential Decree No. PP-5042 of 29 March 2021

8. COMMERCIALIZATION AND PRIVATIZATION OF JSCB "UZPROMSTROYBANK"

Following the Strategy for Reforming the Banking Sector and the relevant Roadmap for 2020-2025, the Cabinet of Ministers has adopted a Resolution on commercialization and partial privatization of JSCB "Uzpromstroybank" (Sanoat Qurilish Bank or SQB). The state share in the bank will be gradually reduced to 50% by the end of 2023 (currently, more than 80% of the bank’s shares are kept by the Ministry of Finance, the State Fund for Reconstruction and Development, and a number of state-owned enterprises). This will be done with the assistance of the International Finance Corporation (IFC), which will also provide SQB with a USD 75 mln loan, convertible into the bank’s shares. The relevant privatization roadmap will be developed by the Ministry of Finance, related state agencies, and IFC by July 2021.

The following commercialization measures are, among others, envisaged by the Resolution as a part of the preparation for the privatization:

SQB is prohibited from making equity investments into companies operating in the spheres not related to the banking activity;
SQB will sell the assets not related to its banking activities;
a new stricter policy for transactions with related parties (including other state-controlled entities) will be developed;
SQB will become independent in taking decisions on financing state social and development programs;
independent members will be appointed to SQB’s Supervisory Board from among candidates having international banking experience (5 members out of 9);
a KPI system will be improved for the bank’s executive managers;
modern information technologies will be implemented into the banks’ activities to improve its operation.

Resolution of the Cabinet of Ministers No. 161 of 29 March 2021

9. INVESTMENT PROJECTS IN POWER ENERGY

Turkish company “AKSA Enerji Üretim A. Ş.” will design, construct, finance, and operate for 25 years (i) a 230MW natural-gas fueled reciprocating-engine power plant in the Tashkent region and (ii) a 270 MW natural-gas fueled reciprocating-engine power plant in the Bukhara region. Approximately USD 450 of foreign investment will be attracted for implementing the projects. “AKSA Enerji Üretim A. Ş.” has established two local companies, LLC “Aksa Enerji Tashkent” and LLC “Aksa Enerji Bukhara”, for the project implementation purposes. According to approved power purchase agreements, power energy generated by the plants will be purchased by JSC “National Electricity Grids of Uzbekistan”, a single purchaser of power energy in the Uzbek energy market.

Presidential Decree No. PP-5018 of 4 March 2021

[1] As per the Public Procurement Law, corporate purchasers include: (a) unitary enterprises, (b) legal entities, 50% or more of the shares of which are owned by the state; (iii) legal entities 50% or more of the shares of which are owned by the entities of type (ii).

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Kosta Legal Law Firm

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