by Jamshid Turdibekov
August 18, 2021
Image source: www.trialogueknowledgehub.co.za

Introduction

Uzbekistan has been paying significant attention to investment policy for the last years to accumulate economic growth. According to the results of the investment activity of Uzbekistan for January-September 2020 by the Ministry of Investments and Foreign Trade of Uzbekistan, during that period, the total assimilated foreign investments in Uzbekistan amounted to USD 7.2 billion, including USD 4.9 billion – foreign direct investment, and USD 2.3 billion – funds of international financial institutions and foreign government financial organizations. The direct investment has increased by 29,5 % than in 2019. In this regard, competition law is an essential part of investment policy. This blogpost discusses how the current investment policy of the government distorting the competition environment in Uzbekistan. In my opinion, there are some controversial errors in the investment policy and competition law of Uzbekistan, which will be discussed in this post.

Investment agreement(contract) between government and investor

Initially, let us look at the legal basis and nature of investment agreements. According to international investment law, investment agreements are the written documents between an investor and an investment accepting state, where a state should ensure legal protection for investors so they can achieve their goals set out in the contract.

According to the investment law of Uzbekistan, investment agreements are the written contract reflecting particular obligations, rights of investors that are signed by both sides (Article 3 of the Law “On Investment and Investment Policy.”) To be more precise, it is a risk-based activity which the government and investor plan to gain economic, social, or other kinds of benefits reflecting on the contract. Furthermore, as those agreements are mandatory for both sides, it plays a regulative role between the state and investors.

However, the development of the investment climate might create another challenge, such as a breach of competition law. In other words, Article 11 of the Law on “On Investment and Investment Policy” says that any investor has to follow anti-corruption, labor, urban planning, and particularly the Competition law of Uzbekistan. This rule is mandatory for local market participants and any foreign investor and investment projects.

Another problem is when the government is violating principles of fair competition stipulated in Article 12 of the Competition law of Uzbekistan by granting privileges and preferences to foreign investors (Article 12 of Law “On competition” prohibits decisions and actions of state administration bodies restricting competition).

Case and Facts

Let us look at the investment agreement between the Uzbekistan government and Russian company “MegaFon” and USM Telecom concerning establishing a “Digital Holding” joint venture specialized in informational technology and communication. With respect to this joint venture company, the President of Uzbekistan issued a resolution on this investment agreement on February 10, 2021, which granted the “Digital Holding” the following privileges:

  1. The “Digital Holding” receives land for the construction of the telecommunication facilities without auction.
  2. The value-added tax rate on mobile communications will be set at 10 percent from January 1, 2022, and it will be suspended entirely from the same time in the next year. 
  3. Moreover, several state authorities, namely: the Ministry of Investments and Foreign Trade, Ministry of Information Technologies and Communications, State assets management agency are determined to support “Digital Holding”  in terms of giving advice and relevant information, for instance: “Tax law” or “Business law” of Uzbekistan which is crucial on conducting a business. It will help to increase efficiency and achieve high profitability and capitalization growth.

Analysis

How should we evaluate such investment contracts with foreign/ domestic investors from the viewpoint of competition law?

Firstly, Article 12 of the Law “On competition” of Uzbekistan prohibits the restriction of competition by public administration bodies, local state authorities, and associations of legal entities. In particular, it is forbidden for state authorities to grant to individual firms some preferences in contracts, instruct the business entity on the choice of funding sources and the priority of their use, except for some circumstances indicated by the legislation. So, Article 12 says that there might be some exceptions from the rule, but the problem is that it does not clarify what they are precise”. This sort of formulation allows state authorities to interpret Article 12 differently and favor their interests.

The state favors promoting investments since they think that investments are vital for the economic and social development of the country. However, the government should clarify the legal exceptions between investment and competition law and be strict on this activity before giving preferences to any investors.

Therefore, exceptions indicated in these laws should be minimized and clarified by the government. It may help to keep a balance between ensuring fair competition and investment.

In the above “Digital Holding” case, these exceptions from the law create the opportunity for the state authorities to give foreign investors significant preferences and unfair competitive advantage before local businesses, which may suffer from unequal playfields in the domestic market. In particular, this causes a natural barrier for companies such as “Beeline,” “Perfectum,” “Mobiuz”.

If to look at the international experience in investment law, the French investment law is somehow can be helpful in Uzbekistan. Because, according to French legislation, a foreign investor should first obtain “permission” from the French Ministry of Economy, Finance, and Budget. One of the main criteria for giving permission is that foreign investment should not harm domestic competition.

Conclusion

In conclusion, I would like to say that the Uzbek legislation should reconsider legal exceptions stipulated in Competition law and public procurement-related laws. It helps to prevent restriction competition in a market, creating unfair market conditions and monopolizations.  The automobile company “UzAvto Motors” is a real how these legal exceptions may harm competition and consumer rights.

Thus, Uzbekistan needs investment, but we should not forget about building a fair competition, which is a base of economic growth and development of entrepreneurship activity.

Cite as: Jamshid Turdibekov, “Negative impact of Foreign Direct Investment (FDI) on fair competition in Uzbek domestic markets”, Uzbekistan Law Blog, 18.08.2021.