The term Project finance services in Uzbekistan refers to the method of implementation of capital-intensive business projects with limited recourse to the borrower.

Project finance is the financing of project in which the source of servicing debt obligations is the cash flows generated by the project. An important feature of this type of financing is that the assessment of costs and income is carried out taking into account the distribution of risk between project participants.

Project finance is essentially a method of attracting long-term debt financing for large projects through financial engineering instruments, based on borrowing against the cash flows generated only by the project itself. In the modern realities of doing business in Central Asia, PF is a complex organizational and financial event for financing and monitoring the implementation of a project by all its participants, requiring significant experience and perfect methodology.

The most attractive sectors for project finance in Uzbekistan:

• Mining and natural resources: Uzbekistan has rich resources, including gold, copper, and uranium, which may attract investment in mining projects.

• Transportation: Infrastructure development, including roads, railways, and local airports, has been a priority to improve connectivity within the country and the broader Central Asian region.

• Energy sector: Uzbekistan has a significant focus on large energy projects, including renewable energy sources such as solar and wind power, as well as oil and gas exploration and production.

• Agriculture: Local agriculture is another sector with potential for investment, as the country has a long history of cotton and grain production.

International financial organizations played a prominent role in enduring the application of project finance service in Uzbekistan.

In 1993, Uzbekistan became a member of the World Bank. In subsequent years, the IBRD and other international financial institutions successfully financed a dozen large projects worth more than $700 million, and this cooperation continues.

The partnership strategy between the Republic of Uzbekistan and the World Bank is focused on modernizing infrastructure, projects in the water supply sector, modernizing the education and health care systems, and improving the efficiency of the energy sector.

The International Development Association (IDA) actively supports local projects to introduce innovative technologies in viticulture, vegetable growing and other agricultural sectors.

All this fits into the general vision of the structural economic transformation of the country for the next decade.

However, the use of project finance in Uzbekistan is not limited to cooperation between the public sector and international organizations. Private capital actively uses this tool to develop highly profitable investment projects in the field of mining, downstream projects in oil and gas sector, energy, metallurgy, and other industries.

Challenges and considerations for large business in Uzbekistan:

• Access to finance: While Uzbekistan is taking steps to improve access to financing, it’s essential to consider how project financing will be secured and whether there are local or international sources of funding.

• Local partnerships: In some investment projects, forming partnerships with local entities or the government may be required or beneficial.

• Cultural and language differences: Understanding the local culture and working effectively with local partners is crucial for successful investment project implementation.

• Political and regulatory risks: As with any emerging Asian market, investors should be aware of potential political and regulatory risks.

• Bureaucracy: Despite the reforms, dealing with bureaucratic processes can sometimes be challenging. Investors should be prepared for administrative procedures and paperwork.

There are potential opportunities for business development based on Project finance services in Uzbekistan in all sectors of her economy.

Main development scenarios for project finance services in Uzbekistan

Based on the key internal factors determining the development of Uzbekistan, several possible options for the further economic development can be identified.

All scenarios considered are based on the long-term results of political and economic reforms launched by the local government back in 2016. They rely, among other things, on the modernization of the legal and financial systems, in particular on the development of advanced instruments for attracting capital, such as project finance.

The first scenario assumes the continuation of current development trends and financing priorities, which will lead to further unlocking the potential of existing growth factors. This includes new investment programs aimed at modernizing the real economy, increasing employment in traditional small businesses and services, and increasing revenues from mineral exports.

Experts believe that if this scenario is followed, it will be difficult for Uzbekistan to achieve the status of an above-average developing country by the end of the decade.

One of the significant obstacles for this scenario is the limited water resources. The increase in water scarcity is due to rapid economic growth (average annual growth rate approx. 7%) and population growth (Uzbekistan’s population could increase to almost 40 million people by 2030). Under such conditions, water shortages will increase to 45% by the end of the decade. This, in turn, will lead to a slowdown in the development of not only agriculture, but also other industries.

Experts call the second scenario oriented towards energy resources.

This option provides for additional investment in the energy sector, which includes the rapid development of project finance services in this area.

If this concept is successfully implemented, GDP growth rates should increase from 5% to 6% per year or more.

However, such growth will not provide a comprehensive boost to the economy. In particular, challenges associated with job creation in innovative and labor-intensive sectors will remain unresolved. In addition, the share of energy resources and primary products in the country’s exports may continue to increase. The sustainability of such a model is also a concern as the risk of environmental problems increases.

The third scenario for Uzbekistan is the so-called innovative model that assumes a less resource-intensive approach to economic development. Key priorities should be strengthening the capacity of government institutions to combat corruption, as well as implementing strict environmental regulations and standards for more efficient resource management.

This model provides for a limitation of administrative regulation. Instead, it is supposed to create incentives for preserving resources, effective antimonopoly policy, tax reform and foreign investment attraction. The desired result of this scenario is to achieve a higher quality of economic growth and increase its sustainability.

Economy and foreign investment in Uzbekistan

Uzbekistan, located in Central Asia, has been undergoing significant economic reforms in recent decades.

Local government has been working to liberalize the economy and attract foreign investment on a large scale.

The economy of Uzbekistan looks more balanced compared to neighboring republics. Thus, the share of the mining industry in the structure of Uzbekistan’s GDP in 2021 is less than 4%, while the most developed sectors of the economy are agriculture (25%) and industrial manufacturing (20%). Leading industries in Uzbekistan traditionally include cotton ginning, mechanical engineering, textiles, gas, non-ferrous metallurgy, electrical engineering, electronics, instrument making, oil refining, automobile manufacturing, and agricultural processing.

Thanks to a well-balanced government policy, over the past decades, Uzbekistan has been able to form production clusters in many high-tech industries, attracting foreign investment and technology. In the domestic market of Uzbekistan, the share of sales of locally produced TVs is about 70%, air conditioners – almost 60%, refrigerators – about half of sales.

This applies to many other types of household appliances and equipment, which in most countries of the former USSR are largely imported from China and other countries.

In addition, large investments in agriculture provide Uzbekistan with most of the main types of agricultural products. In addition, local agricultural producers have established successful exports of a number of products far beyond Central Asia.

Economy development in 2022-2024:

According to recent IMF estimates, the economy is expected to grow at 3% this year and next, representing an improvement of 0.2% from previously forecasted in April.

Real GDP growth is expected to be around 5% in 2023, and then could accelerate to 6% in 2024. Along with GDP growth, experts expect exports to grow by up to 17%, and in the next two years – up to 12%. Today, the economy of Uzbekistan is one of the most dynamic and attractive in the region, which contributes to the development and improvement of various instruments for raising capital, including project finance.

Even before the onset of geopolitical upheaval in Eurasia in 2022, Uzbekistan’s economy was attracting tens of billions of dollars in investment loans from major countries, including China and Germany. The conflict in Ukraine, contrary to some expectations, did not negatively affect the rate of economic growth of Uzbekistan.

Factors for local economic success in the new normal include the following:

• Growth of local exports (the growth in exports of goods and services to Russia amounted to 52.6% compared to 2021, and reached 17% in total exports).

• Significant increase in money transfers to Uzbekistan from abroad. In 2022, this figure doubled as a percentage of GDP, reaching an impressive 18.9%

• Large foreign investments and loans from Russian Federation, China, Saudi Arabia and Turkey. Other important investor countries include Switzerland, Cyprus, Germany, South Korea, Italy, the UK and the USA.

• Rapid growth in consumer demand, fueled by increased prosperity and decreased unemployment in key sectors of the local economy.

Thanks to favorable external conditions and reforms, Uzbekistan’s gold and foreign exchange reserves reached $35.8 billion by the end of 2022. Today the country has the largest reserves of monetary gold in Central Asia. These resources are sufficient to cover the costs of imported goods and services for about 14 months.

According to the Statistics Agency of the Republic of Uzbekistan, the volume of capital investments in the first half of 2023 amounted to 139 trillion soums (more than 11 billion US dollars).

Of these, Project finance services in Uzbekistan alongside the total amount of foreign investments and loans allocated to fixed capital amounted to 59 trillion soums.

Multilateral institutions like the Asian Development Bank and the World Bank have been involved in Project finance services in Uzbekistan and supporting infrastructure development projects. These institutions often play a role in large project finance schemes.

The national development program of Uzbekistan for the next five years includes attraction of foreign investment, digitalization, and trade liberalization. The country has been actively seeking foreign investment in different sectors, including infrastructure, energy, and agriculture.

Project finance services in Uzbekistan plays a crucial role in financing large-scale investment projects across the country.

Between 2022 and 2024, Uzbekistan intends to implement investment projects totaling more than $52 billion. For 2022 alone, the country’s government has planned investment projects worth more than $16 billion, including about $6 billion in FDI. Many of these projects require large capital investments amounting to hundreds of millions of dollars.

For their practical implementation, the assistance of international financial institutions, investment loans from large commercial banks, project finance instruments, leasing agreements and other mechanisms are widely used.

If you are considering project finance services in Uzbekistan, consult with our experts, legal and financial advisors with extensive experience in business development in Central Asia.

They can provide guidance on the latest developments and regulatory changes.

While there is a huge business potential, investors must also consider the risks associated with political stability and regional situations. Before investing, it is very important to conduct a detailed analysis and consult with experienced professionals who are familiar with the market and have local business contacts.

CP Finance UK provides comprehensive project finance services (PF) for investment projects in Uzbekistan and other Central Asian countries, including large projects aimed at the construction, expansion and technical modernization of factories, mines, power plants, farms, as well as strategic infrastructure.

We also provide investment loans in Central Asia to support promising business ventures and projects in the region. These loans can be utilized for a wide range of purposes, including capital investment and working capital needs.

It’s essential for investors to conduct thorough due diligence, seek legal and financial advice, and stay informed about the evolving business and regulatory environment.

If you are looking for a reliable partner for long-term financing of capital-intensive projects in Central Asia, contact our team at any time.

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Combined project finance, investment loans,  (PF) schemes, bond issues – financing  for large-scale energy projects are extremely diverse.

Most energy companies require some form of financial support, especially renewable energy projects.

Banks are showing strong interest in investing in the renewable energy sector amid a clear decline in interest in coal projects around the world.

However, each business has unique requirements, which is why our team is open to any project.

CP Finance UK offers a full range of financial and engineering services for energy companies, including financing of energy projects, construction of power plants, substations and power lines under an EPC contract.

At CP Finance UK, we provide funding for the following projects:

• Construction and modernization of thermal power plants.
• Construction of solar power plants of all types (PV and CSP).
• Construction and modernization of hydroelectric power plants.
• Construction of geothermal power plants.
• Construction of electrical substations.
• Laying of transmission lines, etc.

Contact our consultants at any time for details. 

Traditional sources of financing for large-scale energy projects

Over the past decades, the energy sector, due to its strategic nature, has attracted significant private investment and bank loans. Most large companies in the sector raise funds primarily through project finance instruments or investment loans.

Traditional corporate financing is used when the amount of investment is adequate to the current scale and activities of the company.

In this case, the net debt / EBITDA ratio usually does not exceed 3 throughout the entire financing period.

Corporate finance is considered the most cost effective financing option. It also gives more flexibility and reliable access to funds, since the bank guarantees the repayment of the debt based on the results of the analysis of the financial performance of the borrower.

The 2008 crisis has increased the caution of commercial banks in providing loans, including investment loans to finance large energy projects. Caution is still expressed in increased requirements for borrowers, higher interest rates and shorter loan terms.

Currently, due to a slowdown in the economy and uncertainty due to the pandemic, financial institutions are still wary of large-scale projects with a long funding period.

However, in cases where the financing period exceeds 7-8 years, certain elements of project finance are usually integrated into the corporate finance structure, and in some cases, financing is carried out according to the PF formula.

The high risk of investors associated with the preparation of project finance models contributes to the attractiveness of traditional methods of business financing.

There are currently few energy projects in the world that exceed the recommended net debt / EBITDA ratio.

Therefore, both energy companies and banks prefer a corporate finance model that avoids complex PF procedures and reduces costs.

To a large extent, the choice depends on the specific company. For example, young companies with large ambitious projects cannot obtain sufficient loans under the traditional scheme, therefore they are forced to use PF.

The possibility of traditional financing largely depends on the borrowing company.

The more assets a company has, the higher its ability to generate EBITDA.

Thus, large energy groups have much more opportunities to obtain loans. European experience shows that very large funds can be obtained in this way. Large companies in Poland, Spain, Germany and other countries are announcing multi-million dollar bond programs.

Corporate finance instruments are now relatively cheap and simple whiles financing a large-scale energy projects

This is evidenced by the fact that the current supply of banks in financing the energy sector based on the borrower’s balance sheet exceeds the needs.

However, banks to protect their interests use separate contractual provisions, to some extent limiting the activities of the borrower. Restrictions usually apply to lending, guarantees, collateral, ownership structure, etc. These restrictions usually apply to the entire energy group.

The situation is completely different with project finance. Although the structure of the PF contractual relationship is much more complex, the restrictions mainly apply to special purpose vehicles (SPVs) and to a lesser extent affect the activities of the initiating company.

Sometimes a loan is considered as bridge financing for a specific investment period.

Ultimately, the part of the enterprise that has already been put into operation can be classified as an SPV and refinanced with a long-term loan provided by the bank directly for the SPV.

From the point of view of financial institutions, this practice minimizes the risks associated with the investment process. This ensures the safety of lenders and allows investors to save time and costs associated with bank supervision of the investment process and risk assessment of contractors. In addition, since the loan refinances a finished project, which does not entail additional risks associated with the investment process, it can be provided on much more favorable terms compared to standard contracts.

As mentioned earlier, the ability to obtain financing based on traditional models is limited by the ratio of net debt to EBITDA.

In the short to medium term, energy companies should have no problem with such financing.

However, as the need for financing large-scale energy projects is increasing, this model will soon fail to provide the required investments in the energy sector to maintain sustainable power generation and modernize distribution networks.

As a result, even the most powerful companies have to look for alternative long-term financing instruments.

Energy project finance

Projects that are more costly than the company’s current assets require project finance.

This financing formula is also chosen to limit the risk borne by the project sponsor and in case of attracting a large number of investors.

The PF is based on the assumption that the debts will be fully repaid from the funds received from the project. In the European energy market, this approach has been widely used to finance wind farms.

Preparations for financing large-scale energy projects can take up to several years, especially if the initiator invites a wide range of participants.

Financing energy projects includes the following stages:

• Development of a project concept and, in the case of attracting a large number of investors, establishing clear rules for their future cooperation.

• Carrying out a feasibility study taking into account all aspects of the project.

• Obtaining appropriate licenses and permits, negotiating concessions, etc.

• Analysis of the environmental impact of the future facility and obtaining environmental permits, as well as negotiations with the local community.

• Development and approval of technical and commercial documentation, preparation of a tender and signing an agreement with the general contractor (EPC contract).

• Obtaining funding for the project.

In the case of large projects requiring funding from several or even a dozen financial institutions, the initiator usually hires a financial consulting team to make decisions.

Such projects require a lot of research and negotiations with the participants.

CP Finance UK is ready to provide clients with various financing options for an energy project, helping to organize and coordinate financing. Both the initiator of the project and banks and investors cooperate with specialized companies responsible for due diligence.

When it comes to the energy sector, potential investors should additionally conduct technical analysis in accordance with accepted standards.

Investment loans for energy projects

The needs for long-term investment in the energy sector in Europe, East Asia and Latin America are enormous.

The question is how to find the most convenient funding sources for numerous projects.

Technological and regulatory uncertainty, which determines the hardly predictable efficiency of investment projects in the energy sector, remains a very serious problem for the market. The tightening of restrictions in the banking system is also becoming an important obstacle.

Although the best projects will find their place even in adverse conditions, the success of the vast majority of investments will depend on the stability of the regulatory framework and the right choice of financial solutions.

Sources of long-term financing of energy projects, in addition to the issue of securities (shares, corporate bonds) and leasing, is an investment loan. Companies use it as their primary source of funds for capital intensive projects.

An investment loan is a type of bank loan provided to finance investments aimed at increasing the value of a company’s fixed assets.

Typically, this loan is issued for a period of several years to two decades or more.

Funds received under an investment loan can be used in different ways. They are most often used to buy new fixed assets such as cars, machinery, devices or equipment. They can also be used to buy, build, expand, add or upgrade commercial properties, or lease equipment.

Loan funds do not have to be used only for investments in tangible assets.