By Umida Hashimova (04/01/2015 issue of the CACI Analyst)

Privatization is a sore subject in Uzbekistan. Cases of expropriation of foreign and local companies in the past have painted a discouraging picture for private business in the country. Uzbekistan is also criticized for a government-controlled slow privatization process that has been continuing at a snail’s pace since the early days of independence. Uzbekistan’s import-substitution and export-oriented industrialization policy is also not popular among backers of a liberal economy.

Yet, privatization gained renewed attention when, on January 16, 2015, Uzbekistan’s President Islam Karimov requested the Cabinet of Ministries to develop a program on restructuring, modernization and diversification of production for 2015-2019 with a focus on privatization. This was the first presidential-level request for privatization and thus very important for elevating the topic’s importance. In a government like Uzbekistan, what the head of the country says today becomes law tomorrow with ensured follow-through.

The Program on Privatization is under development and is envisioned to encompass full-scale and pivotal analysis of the government’s presence in the economy, aiming to decrease the state presence and increase the share of the private sector. The program prescribes a three-fold reduction of state-owned enterprises: 534 companies that have state shares in nominal capital will be reduced to 147, and 660 non-working enterprises will later be sold to private individuals. The World Bank and the International Finance Corporation were for the first time actively included in the program development process to solicit their expert opinion on the privatization process, with the first round of meetings organized in March 2015.

In the most recent World Bank and State Department reports, however, privatization and foreign investment did not receive high marks. In the Uzbekistan Country Program Snapshot for 2014, the World Bank mentions that the net inflow of foreign direct investments (FDI) has been decreasing in recent years. Cumulative per capita FDI inflows are low due to the government’s reluctance to fully open the economy and improve the foreign investment climate in some areas. The State Department’s Investment Climate report for 2014 pointed out that “access to currency conversion, debilitating red tape, an onerous system of taxation, overregulated banking, and punitive customs laws and procedures” are the most important issues mentioned by foreign and domestic investors, followed by expropriation cases and politically-motivated inspections of companies. The same report says that Uzbekistan’s investment legislation provides a range of guarantees for foreign investors, but the legislation is ambiguous and self-contradicting.

When this author raised these issues from the State Department report with Uzbek officials familiar with developments in the privatization area, they said (on condition of anonymity) that in most expropriation cases, companies seek to abuse domestic laws that allow tax-free import of machinery to Uzbekistan. They then fail to produce a final product through localized production as stipulated in the agreement signed by investors. The officials added that in some expropriation cases, the final product fails to materialize by the deadline of an agreement. Overall, they claimed Uzbekistan currently has around 31,000 private companies and the majority of them are working successfully.

When the author asked the same officials why the Privatization Program is being developed now, 24 years after the privatization process started in the early 1991s, they responded that the government is now more confident to give up state assets because it is certain that privatization can be implemented without disruptions. Unsuccessful early privatization processes in Russia and other former Soviet countries made Uzbekistan hesitant to rush into the privatization process. Furthermore, they added, the government focused on developing a legislative basis for privatization that among others things would protect socially vulnerable groups who could have been disadvantaged by privatization. In preparation for the privatization process, the government was also busy establishing colleges with foreign partners that would provide the younger generation with business-oriented education.

The State Department’s Investment Climate report recognized improvements, such as  amendments to the Law on Foreign Investments (effective January 20, 2014), which introduced a single-window process for the registration of businesses, requiring no more than seven days to finish registration from the submission of an application.

The recent developments in privatization at the presidential level might indicate that Uzbekistan’s government has depleted its measures to control the economy and is ready for the next step. However, the question remains if the economy’s modernization and market-oriented reforms will continue while the government is implementing strong import-substitution strategies. The development of the privatization program at the president’s request in partnership with international organizations is a signal that Uzbekistan’s government is increasingly interested in seriously improving the country’s investment and business climate as state assets are being prepared for divesture.