When President Shavkat Mirziyoyev came to power in 2016, Uzbekistan showed promising signs of entering a new era of liberal market and governance reforms. Initially, Mirziyoyev took a proactive approach to reforms: ending isolationist policies, opening the country to investors, and improving regional cooperation with Uzbekistan’s neighbors in Central Asia. During the first three years of Mirziyoyev’s presidency, the country prioritized attracting foreign investment by communicating favorable macroeconomic conditions to investors, such as large foreign exchange reserves, low government debt, and a youthful demographic. However, enthusiasm for sweeping economic reforms in Uzbekistan has since stalled after Uzbekistan encountered a major roadblock to further economic transformation.
In the current economic environment, it is nearly impossible for a competitive independent business sector to develop in Uzbekistan
The transformation of state-owned enterprises (SOEs) into monopolies in Uzbekistan has left market access constrained. The widespread presence of SOEs poses significant barriers to market access for investors who cannot compete in sectors dominated by SOEs. In the current economic environment, it is nearly impossible for a competitive independent business sector to develop in Uzbekistan. Promoting delicate and gradual adjustments to the current market system that allow for free access for all firms – regardless of ownership and state affiliation – is an important way to support the development of a competitive independent business sector in Uzbekistan. These gradual adjustments ought to include the implementation of frameworks to contest the advantages of SOEs and replace predatory policies that favor SOEs and disadvantage independent businesses. Open and inclusive public-private dialogue that brings together private sector and government stakeholders to discuss the privatization of SOEs can foster the development of policies that effectively address the current monopoly of SOEs. Through privatization, rent-seeking practices in Uzbekistan could be greatly reduced and public funds could be diverted away from supporting SOEs to support improving societal inequality.
Initial progress with liberal market reforms in Uzbekistan has been very positive
Among the most significant changes that Uzbekistan has experienced since Mirziyoyev became president include the liberalization of the foreign exchange market, the elimination of parallel exchange rates, market rate adjustments through depreciation, improvements in the quality of economic statistics, the promotion of new policies to improve the business environment, introduction of new legislation on competition, and partial deregulation of the economy – including a simplified business registration process.
In addition, practical steps have been taken to bring about greater openness within private sector participation in energy, transport, tourism, and other economic sectors. Each of these reforms supported the country’s self-promotion efforts and garnered widespread praise in international media and among investors, including international financial institutions.
But dealing with state-owned enterprises (SOEs) and the state capture model of running the economy has proven to be very challenging
From the period ranging from when Uzbekistan gained its independence in 1991 up until Mirziyoyev became president in 2016, the country refused to embrace market reforms out of a concern for potential destabilization. There was a government desire from vested political and private interests to preserve state assets under the government and president’s personal control, which left independent Uzbekistan with a Soviet-style autarkic economy. Paradoxically, SOEs have long been seen as a vital tool for advancing the nation’s industrial policy goals. Uzbekistan has enacted several activist industrial policies during the past 20 years to sustain the nation’s current industrial capacities and foster the growth of new ones.
Under the leadership of President Mirziyoyev since 2016, the country certainly made some undeniable progress. However, SOEs still dominate, accounting for approximately 55% of Uzbekistan’s economy.1 The lack of transparent and accessible data on SOE ownership is one of the main challenges to understanding the SOE landscape in Uzbekistan, making it an arduous task to determine the real number of SOEs and the forms they take on in Uzbekistan.
Around 900 SOEs in Uzbekistan (or 30% of the total) enjoyed tax and duty subsidies, distorting the market for the private sector.
As part of a recent reform package, Mirziyoyev’s government announced its readiness2 to move forward with massive privatization of both SOEs and banks, which ideally would increase competition and minimize the conflicts of interest that plague the current system3. During the reforms, a variety of decrees were adopted, culminating in the adoption of the Strategy of Privatization of SOEs 2021-2025. In the Strategy of Privatization of SOEs 2021-2025, the government announced that 75% of all SOEs will be eliminated, and the state’s share in 115 companies will be sold. The oil and gas, energy, chemical, food, alcohol, newspaper, banking, and market (bazaar) industries will be impacted by the sale of the state’s shares. The government’s maintenance of unjustifiable ownership of SOEs in competitive sectors such as shopping malls, food, textiles, and tourism is a key reason for this transition.
As part of the government’s privatization efforts, the government introduced an “explain or sell” approach to privatization. There are three central tenants of this approach. First, it places restrictions on state participation, which means that creating SOEs in areas where there is developed competition is prohibited. Second, the “explain or sell” approach will systematize the legislation on privatization through the introduction of IPOs and using public-private partnerships in transportation, road construction, energy, and other key sectors. Finally, this approach to privatization requires transitioning SOEs to market mechanisms and introducing performance evaluations to the executive body and the boards to improve corporate governance.4
The fundamental purpose of state regulation is to nurture growth. According to the Agency for Management of State Assets, as of March 2020, Uzbekistan had over 3000 SOEs. State unitary enterprises (SUEs) accounted for 1,800 of the total number of SOEs. SUEs are established by SOEs or government entities and SUEs have the right to be contracted directly or work without a license, giving them an unfair competitive advantage over privately-owned enterprises. Around 900 SOEs in Uzbekistan (or 30% of the total) enjoyed tax and duty subsidies, distorting the market for the private sector. SOE’s Return on Assets (ROA) revealed that only 57%,or 1,703, earned a net profit in 2019.5
Do SOEs generate real economic or social value for the country?
In addition to poor performance, SOEs are only responsible for creating 6% of the formal jobs in Uzbekistan.6The inability to generate profit and create formal employment illustrates the failure of SOEs to foster inclusive and equitable economic growth. Due to the connectedness of political and economic power, the evolution of the current economic system has created an environment where economic inequality is on the rise.
One potential solution to this problem would be to provide incentives to enterprises that introduce corporate governance regulations. Improving corporate governance would empower company owners to take responsibility for their business practices in a way that would boost competitiveness, efficiency, and transparency of SOEs. Instead, command and control orders continue flowing from the government to SOEs. Government command and control orders often include dictating key functions of an enterprise, appointing the CEO, appointing board members, encouraging participation in investment programs, providing grant subsidies, granting access to loans, giving waivers for customs clearances, and providing tax cuts. Inevitably, the majority of SOE board members remain politicized and disengaged, dominated by public officials with limited participation of independent members, rare in-person meetings, and unpublished protocols. Without independent board members and clear protocols to ensure effective regulation, boards of directors have little impact on the performance of SOEs.
Economic reforms in developing economies often result in reductions in public outlays, layoffs of public personnel, and liquidation or consolidation of SOEs. However, the number of jobs created by SOEs is insignificant and cannot be used as an argument for procrastinating on privatization.
It is possible that the pandemic has delayed the privatization agenda, allowing monopolies to persist. However, the slow pace of reforms could also be a litmus test for the lack of incentives to accelerate SOEs’ privatization process. For example, the current competition policies harm public welfare by allowing SOEs to function as natural monopolies. According to the public record, 80 percent of monopolies have shares owned by the state or are controlled by business entities with a state-owned share. The underdeveloped market environment and excessive participation of the state in the economy contributes to the inefficiency of individual business entities’ activities backed by the state. This state support comes in the form of cross-subsidization, providing tax and customs benefits, and preferential loans.
The latest report by OECD (2022) on competition legislation in Uzbekistan concluded that the Antimonopoly Committee of the Republic of Uzbekistan (ACRU) should clarify the goals of its competition policy to prioritize enforcement of legislation and regulation. As current regulatory practices often result in poor outcomes, the competition policies remain weakly enforced. The main takeaway from the OECD report is that ACRU should become free from political meddling and more independent in its decision-making.7
Economic structure matters and determines political conditions. Neither the government nor SOEs can effectively promote inclusive economic growth alone. In the absence of a competitive market, monopolistic market structures where some enterprises enjoy privileged relationships with the authorities can cause exaggerated costs for everyone. This economic form that favors the state actually contains the seeds of its own downfall.
Privatization of SOEs poses a risk of enshrining an oligarchic economic structure through the opaque privatization of state assets. The fear of creating an oligarchic economic structure after dissolving SOEs is a real risk that could have delayed Uzbekistan’s privatization efforts. Another explanation for delayed reforms could be government concern for the downsizing of labor force and layoffs. Economic reforms in developing economies often result in reductions in public outlays, layoffs of public personnel, and liquidation or consolidation of SOEs. However, the number of jobs created by SOEs is insignificant and cannot be used as an argument for procrastinating on privatization in Uzbekistan.
How should SOE dominance in Uzbekistan be addressed going forward?
Mirziyoyev was re-elected in 2021 and has the opportunity now to use the remainder of his term to implement transformative reforms focused on public-sector efficiency and developing a competitive dynamic for the private sector in Uzbekistan. If the government of Uzbekistan were to take on a smaller role in the economy and instead prioritize core government functions, the government could more effectively deliver on its promises and support the good of the public. Most experts agree that privatization could be a win-win for Uzbekistan that enables the government to prioritize efforts that serve the public good. An independent and transparent private sector could generate increased revenue for the government to implement its broader public policy objectives.
Aziza Umarova is an expert on the Political Economy of the Reforms in Central Asia. Visiting research fellow at Harvard University’s Davis Center for Russian and Eurasian Studies (Fall 2022-2023). A thoughtful practitioner who brings regional insight and analysis, Umarova engaged in a variety of roles. A former development practitioner with United Nations Development Programme, her experience includes serving as Advisor on Public Sector Innovation at UNDP’s Global Center for Public Sector Excellence in Singapore and leading UNDP’s governance portfolio in Uzbekistan. Founder of a boutique consulting firm, rendering advisory services to the government on the public sector reform. She also serves as a member of the Boards of two large state-owned enterprises. Umarova is a regular speaker and author of numerous articles on public governance reforms in Central Asia. Graduate of St Andrews University, UK.
- Rapoza, Kenneth. (2022) Uzbekistan: From Privatizing Everything to Leapfrogging 30 Years. Forbes Uzbekistan: From Privatizing Everything To Leapfrogging 30 Years (forbes.com)
- New approaches to reforming and privatizing state-owned enterprises defined (uza.uz)
- Uzbekistan – Systematic country diagnostic (English). Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/304791468184434621/Uzbekistan-Systematic-country-diagnostic
- Lex.uz (2021) Decree of the President “Strategy on the managing and transformation of the SOEs” No. PP-166 of 29/03/2021 166-сон 29.03.2021. 2021-2025 йилларда давлат иштирокидаги корхоналарни бошқариш ва ислоҳ қилиш стратегиясини тасдиқлаштўғрисида (lex.uz)Decree of the President of the Republic of Uzbekistan No. PF-6096 dated October 27, 2020;
Decree of the President of the Republic of Uzbekistan No. PP-3067 dated 16.07.2017;
Decree of the President of the Republic of Uzbekistan No. PF-5552 of October 11, 2018;
Decree of the President of the Republic of Uzbekistan No. PP-4112 of 14.01.2019;
Decree of the President of the Republic of Uzbekistan No. PF-5666 dated February 19, 2019 - Spot.uz (2019), Explain of selling your share, how the government will decrease its share in the economy, available at Объясняйили продай: как государство сокращает свое участие в экономике – Spot
- Data in the official presentation of the Agency for Management of State Assets 2020 March
- OECD (2022), An Introduction to Competition Law and Policy in Uzbekistan, OECD Publishing, Paris, www.oecd.org/daf/competition/an-introduction-to-competition-law-and-policy-inuzbekistan.pdf
Published Date: February 21, 2023