Differences between public-private partnership and investment projects in Uzbekistan. Which are more profitable?

Deloitte experts discuss the main points that should be considered when choosing a mechanism for structuring an investment project

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The arrival of a new president in Uzbekistan immediately signalled the implementation of systemic reforms as the market announced it was open for investment. According to the “Invest in Uzbekistan” website, at 1 February 2020, businesses with foreign capital in Uzbekistan numbered 11,000, which is a 37% (3 thousand) increase on the previous year. In January 2020 alone, 255 companies with foreign capital were created.

Uzbekistan law provides potential investors in the country a number of benefits and guarantees, and mechanisms for providing them. For example, the Public-Private Partnership Law from 10 June 2019 provides a project structuring mechanism that has generated interest among investors. A statutory mechanism has also been in place for a long time for entering into investment agreements with the State. So, what is the difference between these mechanisms and which one do investors find more attractive?

In this article, we discuss the main points we believe should be considered when choosing a mechanism for structuring an investment project.

Contract parties and project initiation

A public-private partnership project or “PPP” can be initiated either by the state (or organisation, which we will call the state initiator) or a company (the “private initiator”). Private initiators can initiate a PPP project by developing a concept and offering it for consideration to the state initiator. A PPP project concept should contain innovative solutions and be recognised as commercial for both parties.

Agreement subject

PPP and investment projects cover a wide range of subject matters, such as assets, property complexes and public infrastructure that are designed, constructed, created, supplied, financed, reconstructed, upgraded, operated and maintained as part of PPP project implementation, as well as work (services) and innovations to be introduced during PPP project implementation.

Investment law does not specify the areas eligible for investment, but does mention that they may include the social sphere, entrepreneurial, scientific and other activities not prohibited by law. Foreign investors are entitled to additional statutory guarantees and support measures when investing in priority sectors that ensure sustainable economic growth, progressive technological changes in the national economy and in priority projects that strengthen and expand the country’s export potential and its integration into world economic relations.

Agreement terms

PPP project contracts may be in place for 3-49 years, while the investment contract period is not defined by law, but it cannot be unlimited.

A key factor in determining an investment contract period is the duration of preferences and benefits, and the period for which land has been provided, if investment contracts are land-related.

Transfer of the agreement asset to state ownership

A key issue to be discussed before launching a project is whether title to an asset can be transferred to the investor once the agreement expires. PPP law provides guidance, stating that “public-private partnership agreements establish a procedure whereby title to a PPP project designed, created, financed, reconstructed, operated and maintained under a PPP project may only be transferred to the private partner by presidential resolution.” PPP agreements should also indicate the moment title to the PPP asset transfers, specifically, the moment it is commissioned; the PPP agreement expires or as otherwise specified in the PPP agreement. Therefore, by law title to a PPP agreement asset can be transferred to the investor. However, in practice the authorities prefer not to apply this approach.

Investment law does not require that title to a state-owned investment target be returned to the government, which is why we believe that the agreement asset can be transferred to private ownership in the absence of other legislative restrictions.

Types of financial support for public-private partnerships

Under a PPP agreement, the following types of financial support can be provided to private partners:

  • subsidies, including those to ensure a guaranteed minimum income for private partners from the implementation of a PPP project;
  • contributions in the form of assets and property required to implement a PPP project;
  • budget funds allocated to pay for the consumption or use of a specific amount or part of goods (work or services) produced or supplied to implement a PPP project;
  • budget loans, loans, grants, credit lines and other types of financing;
  • state guarantees;
  • tax and other benefits;
  • other guarantees and/or compensation.

A unique characteristic is that a PPP agreement may stipulate access, use and other types of payments.

A private partner, in turn, can make the following PPP agreement payments to a public partner:

  • a fixed amount payable periodically;
  • a one-time payment;
  • a fixed part of any income due to a private partner from its activities.

A PPP agreement may include a combination of the payments listed above.

State support for an investment agreement can take the form of:

  • benefits and preferences;
  • centralised investments for the co-financing of investment projects;
  • financial, advisory and informational support.

The State may support investment projects by:

  • transferring state-owned targets or title to them to investors for a discounted amount or free of charge;
  • providing tax breaks, including on customs duties;
  • subsidising interest rates on loans received by an investor to implement an investment project.

The Government may provide investment subsidies by creating utilities networks leading to the investment target.

Legal presence and liability

A key business structuring element in Uzbekistan is the potential statutory liability for legal entities. Uzbekistan employs the same types of legal presence as in other CIS countries, namely limited liability partnerships, joint stock companies and representative offices.

Branches are not registered in practice, although the process is provided for by law and the structures that would be operated through branches tend to use the permanent establishment of foreign companies structure. Limited liability partnerships and joint stock companies where the foreign investor contributes at least 15% of shares and the charter capital amount is no less than 400 000 soums (approx. 40 000 USD) are eligible for benefits and can apply for ”enterprise with foreign investment” status and enjoy additional benefits, including legislative stability.

Currency issues

Foreign exchange transactions are a pressing issue for foreign investors when implementing PPP and investment projects, which is why the process has been liberalised significantly. All payments and payments for goods, work or services in Uzbekistan should be made in the local currency, with the exception of a number of operations provided for in currency regulations.

Foreign trade contracts can be denominated in foreign currency. A contract is recognised as a foreign trade contract if it is concluded by a non-resident and Uzbekistan resident and registered in the Integrated Electronic Information System of Foreign Trade Operations.. Foreign trade contracts include export, barter and import contracts. The payment currency should be a foreign currency. It is likely that these contracts contain fixed fees to be registered in the system.

In practice, these requirements make it hard to conclude agreements without determining the final contract value, that is, based on rates or tariffs. One option is to use the highest contract value, and when the contract is completed, revise it. The important issue here is to present contract terms as well as possible.

Legal entities registered in accordance with Uzbekistan law are permitted to open and use overseas bank accounts based on decisions of the President/Government or relevant international treaties.

When opening or changing accounts overseas, legal entities are obliged to notify their local tax authorities and the Central Bank. Notification includes quarterly details on account balances and turnover no later than one month from the end of the reporting quarter, using the procedure prescribed by the Central Bank.

By law, resident legal entities are permitted to transfer foreign currency without restrictions from their local accounts in Uzbekistan banks to overseas bank or to banks outside of Uzbekistan.

Land issues

If the project target is real estate or land, then the investor needs to consider the restrictions in place for foreign companies, including the duration of land use rights. Foreign companies may apply for permanent or temporary land use rights or rent land, but may not own it. However, companies with foreign participation may own land, but the bureaucracy around the process is complex.

Land use is either short-term - up to 3 years or long-term - from 3 to 10 years. Land intended for agricultural purposes can be leased for up to 50 years, but not less than 30 years. The tenant has the pre-emptive right to renew a land lease once it expires, all other things being equal. Land plots are provided to farms on the basis of open tenders for rent for up to 50 years, but not less than 30 years.

By law, foreign nationals and legal entities or Uzbekistan non-residents are not entitled to purchase privatised land plots, unless otherwise provided for in the Land Code or an international treaty.

Thus, if land issues are an important element of a project, the investor needs to consider the possibility of registering an Uzbekistan company.

Employment and immigration issues

Due to the importance of foreign expertise for Uzbekistan, foreign investors, including those founding or participating in enterprises producing goods and providing services in Uzbekistan, are entitled to apply for residence permits according to the simplified procedure.

Foreign investors who are the founders (participants) of enterprises with foreign investment are entitled to an “investment visa”, while their family members (spouse, parents and children) can apply for a guest visa for the duration of the “investment visa”, with the option to extend it without leaving Uzbekistan.

Foreign investors with an Uzbekistan residence permit or “investment visa”, and their family members (spouse, parents and children) are entitled to work in Uzbekistan, and receive the same medical care and educational services as Uzbekistan nationals.

Foreign nationals may transfer their salary overseas without restriction after paying all statutory taxes.

Strategic targets and special solutions

A key point to consider when structuring a transaction is whether the target is strategic and eligible for privatisation. Some cases specified by privatisation law require a presidential resolution to validate the privatisation of specific assets.

Licensing issues

It is important to remember that certain activities, such as construction, require a license in Uzbekistan. Depending on the type of license, they may be obtained by foreign entities or require the establishment of a legal presence in Uzbekistan.

Other important issues

Tax and customs issues should be part of any project financial model and their proper structuring may also affect project cost and profitability.

It is worth pointing out that PPPs and investment agreements can combine various types of agreements, ranging from lease, trust management, concession and other types of agreements.

Conclusion: which form is ultimately more profitable?

Project performance depends on choosing a project structure that best meets the interests of the project participants. With this in mind, when structuring a project, it is worth asking yourself the following questions in advance:

  • Does the company need to be registered in Uzbekistan?
  • Can title to the target be transferred?
  • Is the target eligible for privatisation?
  • Have all land right transfer issues been resolved?
  • Do other participants have a pre-emptive right to repurchase the property?
  • Are there any restrictions in place on conducting currency transactions?
  • Do I need a license to implement the project?
  • What subcontractor requirements are there?
  • Will a third-party be involved in financing the project, and if so, on what terms?
  • What type of financial support, such as benefits and preferences, will be most beneficial during project implementation?
  • Does the employer require a work permit and other employment permits, as well as the corresponding employee visas?
  • What exit mechanisms are in place for the project?
  • How are rights protected during project implementation and withdrawal from the project?
  • And some other questions.

A preliminary analysis of the above questions will go a long way to ensuring a project is implemented successfully for all participants.

Olessya Kirilovskaya, Tax and Legal Department Director, Deloitte

Dariga Tokpayeva, Tax and Legal Department Senior Manager, Deloitte



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