New Investment Drive, Same Old Challenges in Uzbekistan

Despite government campaign to attract funds, the business environment remains less than attractive.

New Investment Drive, Same Old Challenges in Uzbekistan

Despite government campaign to attract funds, the business environment remains less than attractive.

Thursday, 23 April, 2009
Lack of interest has forced the Uzbek government to extend the deadline for bids to acquire state-owned assets.

Analysts interviewed by IWPR say it is unsurprising that few potential buyers have come forward. Uzbekistan’s economy is subject to a high degree of state control, businesses are vulnerable to interference from government, and the current privatisation process is far from transparent.

In March, a round of tenders for 26 state-owned enterprises – originally planned for last year – was delayed again. The assets on offer include the Kokand alcohol plant, a large fertiliser factory in Samarkand, the UzbekUgol coal company and the Markazi hotel complex.

These state-owned firms fall within a major privatisation programme which is due to be completed next year.

This includes most of the government-run enterprises involved in extracting and processing Uzbekistan’s rich mineral resources, and in chemicals, food, construction and tourism.

The authorities are also looking for new owners for the Tashkent aircraft plant, the communications agency Uzbektelecom and two luxury hotels in the capital, the Grand Mir and the Dedeman Silk Road.

Analysts believe the privatisation drive has been spurred by the global economic crisis, one of whose consequences is a fall in export prices for commodities like cotton.

In this harsher environment, the Uzbek state is finding it increasingly untenable to underwrite businesses that are, at least in the case of industry, crumbling and obsolete.

An anti-crisis programme for 2009 approved late last year focuses on attracting investment funds to upgrade industrial plants to modern technologies.

What has not changed, however, is the intrusive role of government in the private sector, and analysts say that unless this changes, privatisation efforts will have limited success.

Among the main obstacles they cite is the banking system, where businesses report that their accounts are open to scrutiny by the authorities. In practice the central bank, which is subservient to government, may freeze cashflows or prevent them converting earnings into foreign currencies, despite legislation allowing foreign investors for move funds freely in and out of the country.

“The central bank decides arbitrarily which investors are going to be allowed to convert their currency and which ones aren’t,” said a local economist.

When the wind changes, even investors who have secured high-level political backing and pledges of unhindered currency conversion can suddenly run into difficulties. As a result, a succession of major foreign investors have come and gone over the years.

In some cases, the foreign partner sets up a joint venture, only to be nudged out when the business starts doing well. In 2006, for example, the American gold-mining firm Newmont, for example, had to retreat when the joint venture it was involved in, Zaravshan-Newmont, was taken over by the state-run Navoi concern. In what many saw as an example of judicial compliance with the government’s agenda, courts in Uzbekistan ruled against Newmont.

According to Dosym Satpaev, director of the Risk Assessment Group in Kazakstan, business and politics are closely linked in Uzbekistan.

“The elite has an interest in maintaining total state control over key sectors of the economy,” he said.

Taken together with a flawed banking system and restrictions on access to currency conversion, he said, this suggests that “investors will be afraid to take risks, and the privatisation of key state enterprises will drag on for many years”.

Uzbekistan’s problematic international reputation is also a constraint on foreign-owned businesses. Many of those working in the country closed after sanctions were imposed on Uzbekistan following the events of May 13, 2005, when government troops shot hundreds of demonstrators in Andijan. In response to political pressure to allow an independent investigation into the violence, the authorities hit out at foreign companies, squeezing them out of the country and nationalising their assets.

In an unfavourable global climate, with the business in Uzbekistan particularly unfriendly, the investment outlook does not look good.

According to Tashpulat Yuldashev, a political analyst in exile, some enterprises have been on the market for three years or more without a buyer in sight.

Another deterrent for potential investors is that it is unclear how the state-run concerns on offer have been valued.

Some argue that in purely monetary terms, the firms actually represent a bargain. Analysts say UzbekUgol, for example, which would give access to large coal reserves, is grossly underpriced at just over 30 million dollars.

“Practically all the assets put out to tender are undervalued,” said Tashkent-based economist Komron Aliev.

Another commentator, who asked to remain anonymous, said the sell-offs would have been easier if the price-tags had been assessed by international consultancy firms.

“One of the main problems with the privatisation is that the assets on sale haven’t been priced correctly,” he said. “If an investor was interested [in one of them] they’d need to visit the site and take a look at what state it was in. That would cost time and money.”

(The names of some interviewees have been withheld out of concern for their security.)
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