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Uzbekistan is open for business

Nadezda Kokotovic, BREC Director for Agefi Le Journal Financier de Luxembourg


July-August 2019



The Brussels Energy Club (BREC) is the only discussion platform in Brussels that brings in significant knowledge about the energy sectors of other parts of the world and in June we hosted a meeting dedicated to Uzbekistan. In 2016, the entire world witnessed a peaceful change of leadership in Uzbekistan, when Islam Karimov died after 25 years of presidency and Shavkat Mirziyoyev, his long-term prime minister, became the president. It is no longer headline making news that Uzbekistan has significantly opened to the world since that time and embarked upon the road to deep reforms of its economy and society. Our partnership with the Uzbek Mission to the EU is part of this new wave that aims at attracting foreign partners and knowledge to this country. We admit that our partner has achieved their goal – the drive and optimism with which they are trying to recover their country is indeed infectious.


Uzbekistan has over 33 million inhabitants – a number that is expected to grow more than 10% in next 10 years – and is the most populated country of the region . Overall, some 100 million people live in the five Central Asian countries (Kazakhstan, Kyrgyzstan, Turkmenistan, Tajikistan and Uzbekistan) plus Afghanistan. Uzbekistan has the most central position, and as such is the best positioned to become an economic hub for investors in CA. But, if you want to take a quick look on the overall state of the economy in this country by checking the World Bank’s Global competitiveness index or other internationally verified statistics, you will not find Uzbekistan there. Becoming part of various international rankings is just one of the goals in the new state strategy . Uzbekistan desperately needs it– in 2017 GDP per capita was around 1 500 USD, compared to 9 000 of neighboring Kazakhstan. According to Kakhamon Olimov, one of our speakers and president of the Kapital Bank, both international and local private investors started believing in reforms in Uzbekistan and investing in projects offered and run by the government. He is an owner of a financial-industrial holding, consisting of an insurance company, construction company and the leading private bank with 2.5 million clients that wants to invest into Uzbekistan's energy industry and attract experienced foreign partners. Since 2017, Uzbekistan has made progress in achieving administrative reforms. One of the key things was free convergence of foreign currencies. Economic growth in the country is projected to reach 5.3% in 2019 and 6% in 2020-2021. For the first time, the government started allowing private sector to areas monopilised by the state and made reductions in tax rates and reforms to liberalize high-potential growth sectors, such as horticulture, food production, tourism, textile, chemicals and energy. According to DGP Research and Consulting, there are 21 free economic zones, taxation is rather low and progressive, and you need just five days to open an LLC. The ratings agency S&P has assigned 'BB-/B' long-and short-term sovereign credit ratings to Uzbekistan .


A revolutionary law on Public Private Partnerships (PPPs) and privatisation was adopted in May of this year, addressing key principles such as equality before the law, transparency, competitiveness and objectivity, non-discrimination and inadmissibility of corruption. Two types of tenders have been introduced: one-step tenders for deals up to 1 million USD, and pre-qualifications for projects above 1 million USD, but the President keeps the exclusive right to conclude direct contracts. Another way to protect investors is a regulation that says that in case legislation worsens, the law that was in effect at the date of conclusion of PPP will apply to the private partner for the following ten years. An investor has the right, at its discretion, to apply new provisions that are beneficial for him. As the law on PPP shows, the government is ready to share its risks with private partners. This year Uzbekistan has succesfuly sold Eurobonds, with the overall demand almost 9 times higher than the proposed 1 billion, which reflects investors' confidence in reforms.


Fayzullah Shaismatov, Deputy-Chairman of JSC Thermal Power Plants, gave us an overview of the deep reforms of the energy sector, which has previously largely remained as it was during the Soviet era: socially oriented, heavily subsidized, with low tariffs (and hence little incentive for investors). The reforms are now targeting state owned companies by promoting competition and ultimately improving service delivery for the people. This is of key importance as the population is expected to increase and energy consumption is expected to double by 2030 . Currently, there is a shortage of electricity. Total national electricity capacity is 12.6 GW of which 88.5% is provided by thermal power plants and 11.5% by hydropower plants . While much of the population has access to electricity – thanks to the electrification efforts made during the Soviet era – Uzbekistan is likewise one of the most energy intensive countries in the world.


The country’s energy-mix is heavily dependent on rapidly depleting reserves of natural gas. Under-pricing of energy encourages inefficient use of energy in the economy, which leads to less gas for export. The equipment in generation, transmission, and distribution systems is outdated and extremely inefficient - developed during the Soviet times and not modernized since. As a result, approximately 20 % of electricity and 30 % of gas are being lost in the process. One of the government’s solutions to this is to install smart meters all over the country.


Development partners, such as ADB, WB and EBRD are helping Uzbekistan improve its investment climate and attract FDI in energy sector by drafting regulatory framework, consolidated investment plans, improving corporate governance and preparing country for implementation of renewable energy projects. By the end of 2019 most of these will be delivered, providing more defined rules for private investors.


In this respect there have been several key developments in the energy sector. A separate Energy Ministry was established and state owned companies are being reorganised. First, Uzbekhydroenergo became a separate company and then the rest of Uzbekenergo was separated into 3 companies: JSC Thermal Power Plants, JSC National Electric Networks and JSC Regional Electric Grid. In this new structure individual power producers will sell electricity to national electricity networks. The latter will remain in the hands of state, while generation and local grids are open to private sector. The strategic goal is to introduce a single buyer model and to reshape it gradually to the wholesale market.


Another new thing is Law on Renewable energy sources (RES) that defined rights of all players in this sector, including the right to enjoy tax, customs and other benefits, preferences and incentives and create local networks (electric, thermal, gas). In general, potential in RES remain largely unharnessed, apart from hydro. Potential in solar energy is estimated at 51 b.t.o.e. Potential of wind is 2,2 b.t.o.e, with possible 520GW of installed capacity. In these two areas, wind and solar, Uzbekistan has already signed contracts with international companies and financial corporations (such as Total, IFC, Masdar) last year and the projects are in process. The current price of electricity generation is low and the green tariff is not estimated to be the best solution for the country, but the government is offering other types of stimulus and companies are finding this package economically promising. Uzbekistan signed the Paris Climate Agreement, but for the time being the system can digest only limited capacities from RES in the country.


The government is also providing incentives for investors to go into the coal, and it is expected that these would come from China. However, share of coal in total energy mix will not be increased. Hydro potential is yet to be opened to private investors. When it comes to foreign relations in the energy sector, Uzbekistan is pursuing a balanced approach. The role of Russia is significant, as most of the equipment is historically being made in this country, although recently Uzbekistan started diversification in this regard. Still, the agreement on the construction of a new modern nuclear power station has been signed in September 2018 with Russian partners with capacity of 2,4 GW . Lukoil and Gazprom are the biggest foreign gas producers in Uzbekistan. China is interested in installing coal power units and it’s the biggest importer of Uzbekistan’s gas.


The government is aware of the lost opportunities in cross border trade in energy: the Central Asian energy system was initially constructed as one entire effectively working system and it was under-exploited due to political reasons. Now they are trying to overcome it by re-establishing economic, political and business connections: President Mirziyoyev’s first foreign visit was to neighbouring countries. Relations between the EU and Uzbekistan are still formally guided by the Partnership and Cooperation Agreement from 1991. Following the proposal from Uzbekistan, the EU launched negotiations for upgrade of the present Agreement in 2018. At the beginning of June, Donald Tusk visited Uzbekistan and on 7 July, and Federica Mogherini is travelling to Bishkek to present the new EU Strategy on Central Asia to her counterparts.


The Republic of Uzbekistan is now as open as it has never been in the past – to other countries, to new knowledge and new partners. Foreign advisers are now part of state owned companies and ministries, while the World Bank and the EBRD are the main providers of expertise to the government. A visa free regime is now valid for all European countries.


As Kakhamon Olimov said: “If you don’t believe me, come and check it yourself“.



 

Ministry of Economy of Uzbekistan, Kapital Bank.

https://www.mf.uz/en/novosti-ministerstva-finansov/3925.html

**Source: Ministry of Economy of Uzbekistan

https://energypedia.info/wiki/Uzbekistan_Energy_Situation#cite_note-3

http://eurasia.expert/chto-stoit-za-sblizheniem-rossii-i-uzbekistana/


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