September 4, 2020
EPC and EPCM contracts in Uzbekistan
1. Civil Code of The Republic Of Uzbekistan;
2. Law of the Republic of Uzbekistan No. 57 of 28.09.06 “On Industrial Safety of Hazardous Production Facilities”;
3. Resolution of the Cabinet of Ministers of the Republic of Uzbekistan dated 12.09.03 No. 395 “On Measures to Improve the Mechanism of Economic Relations in Capital Construction”;
4. Administrative regulations approved by the Resolution of the Cabinet of Ministers of the Republic of Uzbekistan No. 961 dated 28.11.19;
5. Administrative regulations approved by the Resolution of the Cabinet of Ministers of the Republic of Uzbekistan No. 370 dated 18.05.18;
6. Decree of the President of the Republic of Uzbekistan dated 13.03.20 No. 5963 “On Additional Measures to Expand Reforms in the Construction Industry of The Republic of Uzbekistan”;
7. Resolution of the Cabinet of Ministers of the Republic of Uzbekistan dated 14.05.20 No. 283 “On Measures to Further Improve Monitoring of Foreign Trade Operations in the Republic of Uzbekistan”;
8. Decree of the President of the Republic of Uzbekistan No. 6044 dated 24.08.20 “On Measures to Radically Improve Licensing and Permitting Procedures”;
9. Decree of the President of the Republic of Uzbekistan No. 5445 dated 22.05.18 “On Additional Measures to Optimize the Procedure for Carrying Out Design and Construction Works in Capital Construction”;
10. Resolution of the President of the Republic of Uzbekistan dated 26.08.19 No. 4427 “On Measures to Further Improve the Procedures for Granting Free Land Plots for Non-Agricultural Purposes and for Carrying Out Architectural and Construction Works”;
11. Resolution of the Cabinet of Ministers of the Republic of Uzbekistan No. 532 dated 20.12.99 “On Mandatory Insurance of Construction Risks during the Construction of Facilities at the Expense of State Funds and Loans under A Government Guarantee”.
EPC and EPCM are types of contracts used in the construction industry, which are based on the concentration of elements such as engineering, procurement of equipment and construction, as well as management in the EPCM contract. The idea of such Contracting is that a customer appoints a General contractor, who assumes financial and legal responsibility for parts of the listed stages, while not actually participating in the control and management of the project. However, in an EPCM type contract, the customer, in addition to the General contractor, enters into contracts with contractors and participates in project management in a coordinated way with the General contractor and other contractors. An EPC contract is also sometimes referred to as a “turnkey contract”.
Projects under EPC/EPCM contracts: conducted and planned
The project “Production of synthetic liquid fuel based on purified methane of the Shurtan gas processing plant” is being implemented, the total cost of which is 3,733 million US dollars. The General contractors are Hyundai Engineering (Republic of Korea), Hyundai Engineering and Construction and Enter Engineering (Singapore). The legislation allowed the application of international standards for procurement, design, engineering, construction, operation, maintenance, health, safety and environmental protection.
Active work is underway on the construction of a complex of production facilities for polyvinyl chloride (PVC), caustic soda and methanol, production of ammonia and urea, as well as production of nitric acid. The project cost is 500.129 million US dollars.
The project “Construction of ammonia and urea production” is also being implemented, the cost of which is 985.74 million US dollars.
Moreover, a project is being implemented to “Organize the production of nitric acid”, the cost of which is 216.5826 million US dollars.
The project “Improving the energy efficiency of industrial enterprises” was implemented, and the facility was put into operation in 2019. The customer was UE “Andijan HPP-2” JSC “Uzbekhydroenergo”. The General contractor for this project is a consortium of JV Energoresurs LLC and Hunan Allonward Hydro Generating Equipment Co., LTD (China). The project cost was 5.46 million US dollars.
It is planned to build a nuclear power plant in 2022. The project will be financed by the Republic of Uzbekistan itself, as well as by the state loan of Russia. It is planned to conclude an EPC contract with Rosatom, the General contractor.
It is planned to build a third PSU with a capacity of 650 MW at the Navoi TPP. The project amount will be 1187.4 million US dollars. At the moment, the tender documentation for the selection of the General contractor on a turnkey basis is being developed and approved.
Type of the contract in Uzbekistan
The EPC contract is not a separate type of contract in the legislation of Uzbekistan. This type of contract is a mixed contract, which may include the terms of such types of agreements as:
- Contract of Construction Independent-Work;
- Contract of Independent-Work for Fulfillment of Design and Survey Work;
- Contract of Compensated Rendering of Services;
- Contract of Delivery.
Thus, when drawing up an EPC agreement, the parties must take into account the substantial terms for each of the above agreements and mandatory rules in regard to them.
Moreover, the Regulation to the Resolution of the Cabinet of Ministers (CM) dated 12.09.03 No. 395 prescribes certain conditions for the construction of the “turnkey” facility. Namely, it is the responsibility of the contractor to provide the materials, structures and products necessary for construction. The contractor is liable for property during the warranty period established by the contract. When building turnkey projects, financing is carried out at the expense of the customer’s advance (up to 30%), current financing (up to 50% including the advance), the contractor’s own funds and Bank loans. Settlement with the contractor is carried out after the construction is completed, as well as after its commissioning. Also, this Resolution approved a standard contract for the construction of turnkey facilities.
Provision of land for construction
According to article 647 of Civil Code, the customer must provide a land plot for construction in a timely manner. At the same time, the size and condition of this land plot must correspond to those specified in the contract. If there is no such indication, then the area and condition of the land plot must ensure timely start of work, normal maintenance, and completion on time.
In turn, in the case of granting land that is in municipal or state ownership, from July 1, 2018, land plots are provided for permanent use for business and urban development activities through the unified electronic trading platform “E-IJRO AUKSION”. Also, through this trading platform, the right of permanent ownership of land plots for investment activities is implemented, namely the construction of real estate objects (hotels, entertainment shopping complexes, etc.).
Permitting procedures for construction work
A prerequisite for entering into an EPC contract is to obtain the necessary administrative permitting procedures for the construction of facilities.
Thus, for example, starting from March 1, 2019, a permit is no longer required for construction and installation works, but it is required to notify of their start (Administrative regulations approved by the Resolution of the CM dated 28.11.19 No. 961).
Also, when repurposing (changing the purpose of use) and reconstructing objects, as well as when approving changes in the appearance of buildings and structures along main streets of city and district significance (within localities), highways of international and national significance, a permit must be obtained (Administrative regulations approved by the Resolution of the CM dated 18.05.18 No. 370).
If permitting procedures are not followed, the object will be recognized as an unauthorized construction. In this case, the person or legal entity that carried out an unauthorized construction does not acquire ownership rights to it and is not entitled to make transactions in respect of such construction.
Construction norms and rules
Construction norms and rules must also be observed during the construction of facilities. A new procedure has been established, according to which some foreign regulatory documents may be applied in the sphere of regulating urban development activities until December 31, 2028 (Presidential Decree No. 5963 dated 13.02.20). At the same time, such application is stipulated by the facts that such documentation must be adapted and the cost of paying for services to foreign specialists, if necessary, must be covered by the customer. The list of acceptable documents in the field of technical regulation includes:
- The Eurocodes (European Codes, EU);
- British standards (British Standards, AS);
- Chinese national construction standards (GB, CJ, JC, JG, etc.);
- Korean building codes);
- Building codes and regulations (SNiP);
- International building codes of the USA (international building code, IBC);
- National standards of Japan (Japanese Industrial Standards, JIS).
Risk allocation in EPC
If the construction object is destroyed or damaged before it is accepted by the customer, the risk is borne by the contractor. However, if the customer pre-accepts certain stages of work, it bears the risk of their death or damage not due to the fault of the contractor.
With regard to the risk of accidental loss or damage to materials before the delivery of the object by the contractor, the party that provided them is responsible. However, if the deadline for delivery of the object has come and the contractor is overdue, it bears the risk of accidental death and damage to the materials, even if these materials were provided by the customer. Conversely, if the customer has delayed acceptance of the object, it bears the risk of accidental death and damage to the materials provided by the contractor.
Minimum requirements for foreign trade contracts
If an EPC/EPCM contract is concluded between a resident and a non-resident of the Republic of Uzbekistan, such a contract will be a foreign trade one. In this case, the EPC/EPCM contract must contain the following main sections and information (Appendix No. 1 to the Resolution of the CM dated 30.09.03 No. 416):
- Subject of the contract;
- Basic terms of delivery;
- Term of delivery of goods, performance of works and rendering of services;
- Price and total amount of the contract;
- Terms of payment;
- Origin of goods, place of performance of works and rendering of services;
- Responsibility of the parties;
- Details of the parties.
If the text is written in a foreign language, it must be translated into the State or Russian language and certified in accordance with the established procedure.
Article 1158 of the civil code of the Republic of Uzbekistan gives the parties the freedom to choose the applicable law in the contract, if it does not contradict the legislation, international documents and Civil Code itself. However, parties should bear in mind that in the EPC/EPCM contracts the relationship relating to design and survey, and construction, according to Civil Code of the Republic of Uzbekistan, will be governed by Civil Code of the Republic of Uzbekistan and Uzbek legislation, regardless of the applicable law specified in the contract.
Licensing of activities
Certain types of construction activities are subject to licensing. Therefore, a contractor providing services for one of the activities listed below must have a license for this type of activity.
- Design, construction, operation and repair of main gas pipelines, oil pipelines and oil product pipelines (simplified procedure for licensing on the principle of “one window”) (Appendix No. 2 to the Resolution of the CM dated 12.06.18 No. 444);
- Design, construction and operation of high-risk and potentially hazardous production facilities (Appendix No. 6 to the Resolution of the CM dated 24.09.03 No. 410);
- Development of architectural and urban planning documentation (Appendix No. 1 to the Resolution of the CM dated 07.05.19 No. 381);
- Production of repair, construction and installation works at heights by methods of industrial mountaineering (Appendix No. 3 to Resolution of the CM dated 24.09.03 No. 410);
- Design and construction of telecommunications networks (simplified procedure for licensing on the principle of “one window”) (Appendix No. 2 to the PCM of 22.11.2000 No. 458).
It is important to note that from January 1, 2021, a number of licensed activities will be canceled (Presidential Decree No. 6044 dated 24.08.20). In the construction sector these will be:
- Design, construction, operation and repair of bridges and tunnels;
- Design, construction, operation and repair of defense facilities;
- Design, installation, lining, repair and maintenance of fire automation, security, fire and fire alarm systems (design-cancellation of the license; installation, lining, repair and maintenance-cancellation of the license and implementation of the notification procedure).
Also, from January 1, 2021, by Presidential Decree No. 6044, the licensing procedure will be carried out through the “License” information system.
It is noteworthy that the Ministry of construction can allow contractors to implement turnkey projects using the “fast-track” method ( simultaneous design, procurement and construction work) without a corresponding permit, provided that the contractor is fully responsible (Presidential Decree No. 5445 dated 22.05.18).
Moreover, starting from October 1, 2019, the implementation of architectural and construction works does not require mandatory examination of urban planning documentation of construction projects, with the exception of those financed from centralized sources (Presidential Decree No. 4427 dated 26.08.19).
Safety of construction work
During the construction of object, a contractor must comply with the legislation on environmental protection, and he is also liable for the safety of the work carried out (article 678 of Civil Code).
Unless otherwise specified in the contract, a contractor is obliged to insure the object or complex of works at its own expense. The party that provides insurance is obliged to provide evidence of the insurance contract with information about the insurer, the amount of the insured amount and the insured risks (article 669 of Civil Code).
Also, when hiring a contractor to work at a dangerous production facility, there must be made mandatory insurance for damage caused in the event of an accident at such an object (Law of the Republic of Uzbekistan of 28.09.06 No. 57).
Moreover, it is mandatory to insure the construction of construction projects financed by public funds and loans under a government guarantee. Namely, financing will be made only in the presence of contracts and insurance policies (Resolution of the CM dated 20.12.99 No. 532).
Liquidated damages (penalty) and damages related to construction works
For this information please see the following page http://azizovpartners.uz/en/2020/09/10/liquidated-damages-penalties-in-uzbekistan/
What is the business interest of a potential investor?
According to article 36 of The Law “On investments and investment activities ” No. 598, The government of the Republic of Uzbekistan can provide an investment subsidy in the form of necessary engineering and communication conditions. In other words, the government can build an external engineering and communication network that leads to the object of investment activity.
Also, article 19 of this Law guarantees the application of the legislation in force at the time of investment for 10 years if the investment conditions deteriorate. The investor has the right to apply only those provisions of the legislation that improve the conditions of his investment.
Uzbekistan has a number of benefits. It is worth noting that the benefits applied to enterprises with foreign investments. Namely, the taxable profit of legal entities is reduced by the amount of:
- funds allocated for expansion of the main production in the form of new construction, reconstruction of buildings and structures used for production needs, as well as for repayment of loans received for these purposes;
- funds allocated for modernization, technical and technological re-equipment of production, purchase of new technological equipment, repayment of loans issued for these purposes, reimbursement of the cost of the leasing object.
Moreover, the government has introduced income tax benefits, VAT benefits for manufactured and sold goods, land tax benefits, tax benefits for the use of water resources, for the use of mineral resources, property tax benefits, benefits for turnover tax payers, and customs payments.