Can you give us an insight regarding the development of foreign participation in the Uzbek economy ?
In 1991, with the achievement of Independence of our Republic, our country started the market economic reform, taking in consideration the four main reasons leading to social oriented reforms instead of radical changes of the economy. These reasons are: (1) no previous private sector in the economy of Uzbekistan, (2) not a huge demand for products in internal market, (2) larger import of goods than export; (4) and no market infra-structure. This is why when Uzbekistan started its transition to market economy, certain directions were identified - macroeconomics stabilization, foundation and development of market infrastructure and mainly - the structural reform and reorganization of the industry. These tasks were not easy to achieve, but they were important and crucial for a transition into market and further economic development of Uzbekistan. We need big investments and certainly foreign investments and modern technologies, to make a sound industrial sector in the republic. You may know, that before the year 1991 Uzbekistan was mainly an agricultural country part of the former Soviet Union, since more than 60% of our GDP was coming from agricultural sector. The main export items were the row cotton and gold. However, after independence, we prioritized the implementation of big investment projects and founded our own processing facilities for raw mineral resources, such as gold, cotton, oil, and gas produced in Uzbekistan. We realized new projects in oil and gas field, like Kokdumalak Gas Compressor station, Bukhara and Fergana Refinery Plants which were built in cooperation with foreign partners and banks. We attracted many of big investments from respectable companies and financial institutions from USA, Germany and France to realize our big projects in oil and gas field. Referring to the official data, in 1991 the internal demand for oil was higher than the offer of local production; therefore we were importing oil. The production of oil was near 3 million tons, which was covered partly on demand , whereas now with the realization of the above-mentioned project we produce more than 8 million tons of oil, which fully covers our local demand and allows avoiding import of oil. We are also the largest gas producers in the Central Asian region with annual production more than 55 bln/m3, but we do not export as much as some other Central Asia countries compared with 24 million population of Uzbekistan and bigger industrial sector.
This contributed to the further diversification of the economy, and localization of production and deep profound processing of raw materials, including oil and gas. For instance, this year will be completed the construction of one of the biggest plants in Shurtan - a gas and chemical complex - which will produce polypropylene, and other chemical products, for the further processing and producing of goods and also increasing the export potential. As you see, our position in attracting foreign investors is generated through the following principles - first, to produce high quality and compatible goods and materials, the second, to introduce new technologies and know-how, and the third, very important, principle to create new jobs for local manpower, which are the main principles in implementing the structural reform of the economy. Furthermore, one of the tasks of attracting foreign capital is to make the projects as self-sufficient as possible. Government gives the guaranties, incentives and other favorable business conditions to all of those self-sufficient projects, which are oriented first of all, to supply local demand, and also nonetheless important, to export to foreign markets.
Starting from 1995 we made significant steps in the modernization of not only our industrial sectors, but also in the development of the agricultural sector, with the financial support of large international financial institutions, such as the World Bank, which has many other projects in reforming our economic structure, privatization, and other key areas that have certain impact on the overall economic stabilization and development of the country.
During the Soviet times, there was system, which required tight integration of all republics of the union, according to which Uzbekistan was considered mainly as supplier of cotton and gold and other raw materials to Russia. In those times where many jobs were created for processing the cotton and producing ready consumer goods from it, and we had to buy those products back from Russia on our own.
We put again priorities in attracting cotton growing and textile industry investors to produce not only the high quality cotton, which is in one of the projects of World Bank, but also in establishing joint ventures and foreign enterprises in cotton processing. We have a special textile agreement with the European Union to export our processed products to European markets. Moreover, there were established large Korean, Japanese, Turkish and other enterprises that are working very effectively. Next step was the introduction in to the world market of our fruits and vegetables which have very specific, naturally delicious taste, without any chemicals, additives or sweeteners. This is a smaller project which prospects the high quality processing of locally produced fruits and vegetables, which will give a possibility to increase our export potential.
Already there is a very interesting program of cooperation with JICA for the implementation of quality of textile and fruit-processing production for possible export for international markets. What we try now to achieve the highest quality of production and thereby increase the exportability of locally produced goods in other markets.
Can you elaborate more on the privatization process?
The privatization process has several stages; the first mostly was completed in 1995, when were privatized the living houses, small mostly trade enterprises, agriculture farms. The share of non-state sector increase from 55% to 68% of GDP in 1998.
In the 1998 it was started the privatization of
industrial enterprises. Along with others, we have
high potential of developing our tourism and hospitality
industry, because of our cultural heritage, the
cities such as Samarkand, Bukhara and Khiva and
others are famous around the world and many people
wish to come and visit these historical places.
In this sphere, we are also taking steps in changing
the previous systems. The tourism and hospitality
industry needs infrastructure, so we attract world
recognized hotels, and we have built several new
and reconstructed hotels to the highest world standards.
The hotels like "Inter-Continental", "Sheraton",
Shodlic-Palace, Le Meridian which are managed by
foreigners are now doing business actively in Uzbekistan.
Now, we are implementing the policy of privatization
in this area, not only for management but also for
ownership, so that opening the market for private
sector is essential. Step-by-step, we are on the
way to create new relations, new understandings
as the market economy, to change the mentality of
people, so they start understand how to live in
the new conditions. In 1995, another step was made
in implementing the policy of privatization of state
owned industrial enterprises and business entities.
With assistance of the World Bank we have big projects
on privatization and post-privatization assistance
of industrial, agriculture and financial sectors.
Here we carefully consider each case of privatization,
where the main objective is not just selling but
pay more attention for further investment program
for entity and to develop the sector with the best
return prospective to the economy of Uzbekistan.
There are possibilities for establishment of Joint
ventures, with full foreign capital involved, depending
on the decision of each investor. In some strategic
areas, such as mining field, and in some others,
on case-by-case study, sometimes the Government
has the majority of shares in order to keep the
sector under control. Because, we see examples of
privatization in other CIS countries, sometimes
the new owner is either not professional or has
to close down the enterprise due to the difficulty
of its development. . In other non-strategic areas
the Government's participation is around 25% or
even less, since more and more private investors
are participating in business, wishing to invest
and develop the sector. We want to see the investors
not only as the buyers, but to see them as real
long term business partners, use our advantages
to increase the export potential of the economy,
because as you know, the country is very rich in
mineral resources and the high qualify labor cost
in Uzbekistan is cheaper. We would like, that investors
are coming not only with immediate profit projects,
but mainly we would like to consider mutually beneficial
large projects for many years so that we can give
them privileges and favorable conditions. |
How would you describe the investment climate in Uzbekistan and can you name some examples of significant foreign investors in the country?
For investors we give several exemptions privileges and conditions. For instance, if an entity with foreign investment is included in the State investment program it will be granted a seven-year of tax holiday. If not, they anyway will enjoy 5 years of tax holiday, if more than 50% of their production includes the children's goods production. Along with that, we have some privileges for the companies, which have their charter fund organized with 50% or more of foreign ownership. Later, if the business goes well, they will pay only 25% of income tax, while an ordinary enterprise pays 33%. Also, enterprises can be granted 20 % profit tax if their foreign capital invested is more than US $500,000. If the capital invested is US $150,000, after this level they enjoy benefits and privileges of the foreign investors, there are many other exemptions, such as for land tax, exemption for profit tax and etc.
Big investors are:
· Daewoo Corporation - assembling of automobiles, telecommunication;
· British-American Tobacco (UK)- in tobacco industry;
· Coca-Cola Bottlers Ltd. (USA) - bottling industry;
· Newmont Mining (USA) -specialized in mining and processing of gold;
· Kabool Textiles (Korean) - textile industry;
· Koc Holding - production of buses and small trucks;
· Tekmen (Turkey) - wool processing;
· Case New Holland (former CASE corporation) - assembling agricultural machinery, and other smaller over 1,532 enterprises with foreign capital involved.
An interesting fact is that, in 1996 with IMF program on currency exchange policy, there was a big number of licenses for trading companies, as at that time there was a big demand for commodities in internal market, and many of companies doing only trading business were established. Since we were importing too many goods, most of them being of low quality some currency exchange limitation decrees were issued by Government to stop outflow of the hard currency. Moreover, the development of our National Currency and develop local manufacturers has been taken as a direct measure. This was described by foreigners as a negative trend, that Uzbekistan closing its markets, but if we compare how the situation developed with foreign companies in trading sector 56% in 1996, , the number of trading companies went down to 27% and number of foreign manufacturers grew up to 54% in 1998. We support this policy, when we produce the goods, support local manufacturing, in the meanwhile we do not ignore the trading sector.
Do you have a particular strategy in attracting those foreign investors?
Our strategy in attracting foreign investors, and receiving the loans is not covering just our short-term requirement. We could involve a lot of short-term loans to provide free convertibility of National currency, which it will be successful possibly for a few years. And what will happen after that, if we do not use our internal possibilities, labor, intellectual, and export potentials to earn that currency by ourselves. We understand that we need to attract the long- term loans, under the guaranties of the Government. We will finally come to the free convertibility of our national currency, but step-by step, without taking the short-term loans, using and developing our own export potential. The program is underway with assistance of IMF on liberalization of the exchange market. There is a program with World Bank on Banking reform of Uzbekistan, and from May 1st we liberated our currency market. There were several rates: Central Bank rate - the official rate, Inter-banking rate, and so called Black Market rate; It will be the unification of these rates, so that they become much closer, and we will give more free conditions to the enterprises to buy currencies, but here there are some rules: if the enterprise do not use the currency bought for development of the enterprise, they can send it abroad as dividends. The next step will be allowing enterprises to buy and sell hard currencies not on Central Bank rate, but on Inter-banking Rate freely. This is our task number one to achieve free convertibility of local currency, and we are now in close discussion with IMF, since the President signed the decree that this year will be put main issues for signing program with IMF on liberalization of our currency, though we realize that it will be very difficult for the first time and some figures may shortly go down. We fully understand the necessity of liberalization of currency exchange market, but we also realize that it should be done in a smooth, step-by step manner so that economy as whole will benefit from this measures. We should always keep in our minds that our country has a population of 24 million people, and only about 8.6 million people are people in workable age, so only one out of three can earn livelihood while other 2 needs to be socially protected. Our Government is deeply concerned about the social protection of those layers of our society, while attracting foreign investors. Moreover we should also create positive prerequisites for the development of self-employment in the rural and most populated areas, and the big danger is the economical position of the most population, and if the socially vulnerable layers will not be socially protected, it will result in destabilization, which is not desired.
What are the plans for the future and how do you intend to achieve those goals and objectives?
About the future plans and perspective as I mentioned, development of agriculture, and the development of the regions, and of small and medium enterprises, processing industries. Moreover, the development of tourism industry is essential in order to become an open country and attracting those investors from all over the world.
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Ministry of Foreign Economic Relations