Uzbekistan: on the right path with the right partners

New Uzbekistan under the leadership of His Excellency President Shavkat Mirziyoyev is transforming in many ways. Economic reforms, including state-owned enterprise reforms and liberalisation, are among the key pillars of current structural transformations in Uzbekistan.

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Foreword by Deputy Prime Minister — Finance Minister Jamshid Kuchkarov


To ensure our economic reforms benefit from the best international practice, the President created the Economic Council this January. It comprises senior Uzbek government officials as well as international scholars and practitioners, including those at Growth Dialogue, a think-tank under George Washington University, chaired by Michael Spence and Danny Leipziger.

In its inaugural meeting on July 18 2019, the Economic Council agreed to implement reforms in nine priority areas, of which the energy sector stands out. With expected GDP growth of over 5% per annum in the medium term, the country simply needs much more energy to fuel its growth. With the current mismatch of energy supply vis-à-vis growing demand, reforms in the energy sector are viewed as a real driver both in terms of energy-growth nexus and exports, especially to Uzbekistan’s southern neighbours.

Therefore, the government has embarked on a wide-ranging reform agenda in the energy sector. Unbundling state monopolies — Uzbekenergo into generation, transmission and distribution and Uzbekneftegaz into exploration, transportation and distribution companies — has created opportunities for the private sector, including foreign investors. While Uzbekistan is a late reformer as unbundling took place long ago in other developing countries, we can learn from these earlier reforms to make the right decisions.

At the same time, we have to work on administered tariffs to make this sector more attractive. Working together with our trusted advisors at the World Bank, ADB and EBRD, the government is decisively pursuing gradual liberalisation of energy prices in the country.

Last August we raised electricity prices by 18% (retail) and 36% (corporate). Natural gas prices rose by 19% (retail) and 25% (corporate) while gasoline and diesel went up by 13%. This followed a circa 10% increase in energy tariffs in November 2018.

With expected tariff increases in the future (eventually leading to free market prices in the medium term), we believe the power sector should be even more attractive to investors. This is very important as we want to nearly triple Uzbekistan’s power generation capacity to over 30,000MW by 2030.

Substantial investments in the power sector are expected through the Public Private Partnership (PPP) mechanism. For example, with the advisory support of the International Finance Corporation (IFC), a pilot project (as part of scaling solar programme) is being implemented to build a 100MW solar photovoltaic (PV) station in the Navoiy region. The international competitive tender recently ended with five bidders, namely Total Eren (France), TBEA Solar (China), Masdar (UAE), Acwa Power (Saudi Arabia) and Jinko Solar (China), reaching the final stage. Masdar won the tender with the offer of 2.679 US cents per kWh. Given the success of this tender, we are soon to launch two more tenders for 900MW solar PV stations.

Moreover, transaction advisory mandates have been signed for a further 1,300MW CCGT greenfield project in the Sirdarya region with the IFC and for a 1,000 MW solar PV project in the Surkhandarya region with the ADB. These projects will pave the way for more PPP-based conventional and renewable energy projects. By 2030, we plan to increase the installed capacity of solar power plants to 5,000MW. Furthermore, through the PPP mechanism, wind (2,000MW) and gas-fired CCGT (3,400MW) power stations are also planned by 2030.

In the oil and gas sector, the investment programme for the next decade is estimated at $34bn, consisting of 40 projects including exploration, development, transportation and storage of natural gas and petrochemical processing.

A substantial proportion of these investments will be covered through FDI. Therefore, the government is keen to open up further new investment blocks for foreign investors. This, together with investments in Uzbekneftegaz, would increase the domestic production of natural gas to 74.8bn cubic metres (+23% vs 2018) and liquid hydrocarbons to 7.1m tonnes (+130% vs 2018) by 2025.

In chemicals, together with Boston Consulting Group, we have developed our Strategy 2030 based on three priority areas: fertilisers, gasochemical and other chemical products. This strategy mostly relies on FDI (through privatisation and greenfield investments) which has already started working with Indorama Corporation firmly on the ground. At the moment, several SOEs producing fertilisers are up for sale.

Corporate governance and institutional development

The government is keen to improve corporate governance in SOEs. Together with international organisations such as the World Bank, ADB, EBRD as well as local and international consulting firms, we have identified key areas of concern. Based on that, there is a firm commitment and political will to address these concerns.

As a result, more transpar-ency, independent directors, IFRS implementation, credit ratings and access to capital markets (including IPOs) are reflected in all the roadmaps to reform the SOEs. To illustrate, Uzbekneftegaz and Uztransgaz will have IFRS reporting in 2020 while Thermal Power Plants, UzHydro and National Electric Systems will move to IFRS by 2021. The World Bank, ADB and EBRD have confirmed their commitment to assist newly formed power companies in corporate governance implementation, including selection of independent directors with international experience.

It is important to mention that a focus on corporate governance is happening within the framework of a broader strategy to strengthen institutions in Uzbekistan. Development Strategy 2017-2021 is based on five pillars, including development of the institutional framework of the state administration and rule of law and legal reforms.

To measure our progress in structural reforms, the government is following 24 global ratings and indices, including Worldwide Governance Indicators (World Bank) and the Corruption Perception Index (Transparency International). Line ministries and agencies have developed roadmaps with clear milestones to improve each indicator. While the progress may take time, we believe we are on the right path with the right partners.

Vision

Our leader, His Excellency President Shavkat Mirziyoyev, has set ambitious objectives for the government. When we succeed, Uzbekistan will be a different country with a modern economy and well-functioning energy market benefitting from strong private sector participation.

This vision requires well-sequenced and irreversible reforms to attract substantial investments. Therefore, under the President’s leadership, the government of Uzbekistan is strongly determined to continue with the reforms, embrace new challenges ahead and build trusted relationships with investors.

Uzbekistan is open for business!