Jacopo Dettoni in Almaty -
The Uzbek government has launched an ambitious privatisation plan aiming at opening up one of the world’s most rigid economies, but there is little sign that things will turn out any different from the series of unsuccessful sell-off plans announced in recent years.
“The Uzbek government has been unveiling privatisation plans nearly every year in the past decade but the anticipated large inflow of private capital has yet to happen,” Lilit Gevorgyan, Russia and CIS analyst at IHS Global Insight, told bne IntelliNews.
This time authorities plan to auction off about 1,000 state-owned facilities in order to reduce the number of enterprises with state involvement from 534 to 147 over the next two years. The government also plans to reduce state stakes to 51% in 203 existing enterprises by issuing additional shares to the tune of UZS450bn (nearly $185mn at the official exchange rate).
A number of similar plans were announced in recent years, reportedly resulting in the sale of some profitable state assets to quasi-private local firms, but failing to lure international investors.
“The new plans of privatisation are unlikely to break away from the already set trend of failing to attract investors,” Gevorgyan said. “There are longstanding issues, such as the difficult business environment and the absence of a level playing field for all economic actors. These problems have been accentuated by corruption scandals involving large foreign companies as well as the troubles of the Russian telecommunications firm MTS in recent years.”
Uzbekistan’s highly centralised economy has a poor track record in terms of attracting purely private local and international investors. The country ranks 149th out of a total of 185 countries for ease of doing business, according to World Bank figures. At the same time, Uzbekistan features at the bottom of the 2015 economic freedom ranking produced by the Heritage Foundation – 160th out of 178 countries. Uzbekistan’s total FDI was $1,077mn in 2013, well below other neighbouring, resource-right countries such as Kazakhstan ($9.739mn) and Turkmenistan ($3,061mn), another champion of the state-dominated economic model in the region, according to figures from the United Nations Conference on Trade and Development (UNCTAD).
Yet the local economy is showing some economic dynamism. Largely supported by public investments, annual GDP growth was 8.1% in 2014, basically stable from 2013, at least according to official government figures. The country has large potential for hydrocarbons, minerals, cotton and textile. Besides, its young and growing working population presents a “window of opportunity for increased economic growth”, as highlighted by the World Bank in a report published on February 2.
However, “despite sustained rapid growth on the back of high commodity prices and relative stability, the underlying foundations of Uzbekistan’s economy are weak,” according to the Heritage Foundation’s 2015 Economic Freedom report. “The rule of law is weakly enforced, a holdover from the Soviet past. Investment is restricted in many industries, and financial markets are shallow, preventing the capital accumulation necessary for sustained growth. The state-owned banks and industries tend to respond to the government’s political priorities.”
Some international investors familiar with doing business in emerging, risky countries are still trying to tap Uzbekistan’s potential, mostly in high-yielding sectors. Chinese state oil firm China National Petroleum Corporation (CNPC) is investing $800mn alone in the Uzbez stretch of the fourth Central Asia-China gas pipeline. Back in 2011, Chinese authorities pledged to invest some $5bn in the development of local infrastructure and the mining sector.
A group of South Korean companies is investing up to $3.9bn in the development of the Ustyurt gas chemical complex in the western autonomous Karakalpakstan region. Global firms such as Gazprom and Rio Tinto are actively investing in the country to tap its recognized potential for hydrocarbons and minerals.
The telecommunications sector also attracted several foreign investors, but rather than paving the way for other foreign investment to come though, they damaged the country’s image as they became embroiled in big corruption scandals. Nordic telecommunications companies Teliasonera and Telenor have both been accused of receiving local licences after bribes were allegedly paid to members of the family of president Islam Karimov; they deny involvement in any wrongdoing. Another international telecommunications group, MTS, saw its license abruptly revoked in 2012 on charges of tax evasion and illegal use of equipment – the dispute got eventually settled in July 2014 and MTS resumed its local operations the following December.
Besides, foreign investors lack visibility on the country’s long-term future. If the population’s young average age will add an edge to the local job market in the coming years, an ageing elite casts a shadow of uncertainty over the future. Most notably, Karimov, who has run the country since its independence in December 1991, turned 77 on January 30. He is braced to run and win a new term in the presidential elections slated for March, but a succession strategy still appears up in the air. As long as doubts over Karimov’s successor are not cleared, long-term investment thinking will be difficult.
“There are assurance by Uzbekistan’s authorities for great business opportunities for foreign investors, but little light is shed on overall economic policy direction in the next decade […] Also whilst the leadership change is increasingly inevitable, there is little expectation of dramatic economic policy change as the current highly centralised political system with a converged business and political elite at the top is unlikely to change anytime soon,” Gevorgyan said.
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