In the spirit of openness and transparency, the Uzbek government, represented by State Asset Management Agency (SAMA), has called on a large meeting of stakeholders such as development financial institutions (DFIs), news agencies including popular bloggers and Big Four consulting and audit firms and other interested parties to discuss the large privatization efforts it is undertaking, that were briefly announced in the press few weeks ago.
These are the results of reviews of eight government groups, who delved into analysis of the economy and they recommend these reductions to the President (three versions of potential presidential decrees were presented at the meeting).
From 2,965 companies currently on the list of state owned assets, it plans to keep only 554, reducing its stock of assets by 81%. The number of government unitary companies will go down even more drastically, by a whopping 96% from 1,718 to 70.
During the next two years they would like to conduct 20 major IPOs, including some household names and the version of the Presidential Decree that will be signed will be chosen based on the feedback they receive from the expert community, including International Financial Institutions (IFIs), investors and media.
Currently, the state-owned entities account for 55% of Uzbek GDP, bring in 47% of tax revenues, but only 33% pay dividends and they provide meagre 6% of the employment in the country. These companies provided a return on assets of 1.6% and return on equity of 6.4%. Given the cost of capital in Uzbekistan they are all practically de facto loss-making. Hence, the government wants to dump them, retaining only a handful for strategic reasons.
The Uzbek government is using the Singaporean “yellow pages’ approach on deciding which companies to keep and which to cut; during the meeting examples of road construction were given, where the state-owned Avtoyol has 200 road construction companies, whereas there are 70 private companies that are successfully competing in the sector.
The playing field is not level, with the state-owned enterprises (SOEs) enjoying significant advantages over the private sector. Some 30% or 900 state owned companies have tax and customs duties privileges costing the state budget money, whereas the private companies are competing without any state support. Analysis has showed that in certain areas that require licensing, some SOEs were able to operate without a license. In government tendering process, some SOEs received government orders without onerous tender process, whilst the private companies had to compete to win contracts.
SAMA will be reporting to the Oliy Majlis (the lower house of Parliament) on the progress and justify why certain assets must be kept by the state. If cannot justify, they will sell the asset.
The World Bank, EBRD and Asian Development Bank have provided extensive technical assistance to assist with this review and their technical assistance brought in expertise from international experts SAMA is assisted by ex-senior government officials who have been involved in very successful privatization efforts in Poland, and international experts on corporate governance from Ukraine and the UK.
The World Bank representative pointed out that Uzbek companies are not in dire situation and this transformation is more aimed at improving efficiencies. Uzbekistan Airways, for example, could improve on its the customer experience, but it is capable of maintaining United States FAA certificate and satisfying aviation regulators globally in terms of safety and technical maintenance standards. Navoi Mining and Metallurgical Combine (NGMK) has third of the borrowing capacity of its international peers, however it still produced reportedly 90 tons of gold the last year. However, the number of privatizations within the given timeframe might be too ambitious.
The PwC representative pointed out at the experience of countries such as UAE, where the fully state owned companies such as Emirates Airlines are successful, as they found a good mix of state support and autonomy, well rewarded management team, who can run the businesses without too much corporate interference from the shareholders. So, privatization for the sake of privatization may not bring the desired economic abundance. It is important not to just conduct a fire sales of assets, as for certain companies just changing the management and bring it u p to international standards could achieve desired efficiencies, without selling the company off.
Indeed, Uzbekistan’s privatization efforts is not in the same state of desperation and collapsing industries of 90s in Soviet Union. However, for the economy to grow and adopting international technological innovations, it must modernize and attract private capital and talent.
The Uzbek government is facing the typical conundrum of a country undergoing a privatization: not to sell out too cheap, because the assets belong to the people of Uzbekistan, and at the same time, to make the investment attractive so there will interest from the market. The solution seems to make it a transparent process and involve public discussion.
However, most of these discussions have just started and are on paper. For example, the ADB studied 6 companies and made recommendations on corporate governance and they have not yet been followed. Experience shows that the actual implementation is very important in Uzbekistan and this is not just about giving recommendations. Also, the goals that SAMA set itself maybe too ambitious and to achieve these goals a more hands-on approach from DFIs may help with the process. To see actual progress DFIs may want to participate in the implementation via investments in the actual privatization as investors and provide feedback on the shortfalls of the system to the government. If there is a lack of capacity, then this can be outsourced to private asset managers.
Fiezullah Saidov is the CEO of Uzbekistan Equity Fund and a banking sector consultant for the IFC. He can be contacted here.