The Transport Sector: Tariff Reductions as a Means to Economic Growth. Center for Economic Research November 29, 2013

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2 The Transport Sector: Tariff Reductions as a Means to Economic Growth Center for Economic Research November 29, 213

3 Economic Growth and Structural Transformation 1% 8% 6% 4% 2% % 1% 8% 6% 4% 2% % Uzbekistan: GDP structure in 23 42,5 34,4 13,7 14,1 48,9 45,1 28, 19,5 26,4 9,4 9,1 9, Structure of Export (%) 2 4,7 3,4 6,6 8,4 5,5 6,8 11,7 1,3 9,2 2,5 1,7 2,9 5,4 11,5 24,8 5,3 3,8 27,5 5,1 48,4 19,1 9,7 13,7 12,2 11,3 9,1 7,7 21,3 3,2 3,5 27, , 56, 1,5 7, 19,4 15, 17, 22, machinery and equipment ferrous and nonferrous materials energy resources chemical products and goods food cotton services others Services Agriculture Nonmanufacturing Manufacturing To increase the share of industry in GDP from 35,4% in 21 to 37% in 23 requires annual growth of industry at 8.3%. Diversification of the export structure, reducing the share of raw materials and increasing the share of goods with higher added value. An urgent task is to increase the share of manufacturing in the GDP. Increasing the level from 9% in 21 to 22% by 23 requires the achievement of annual growth rates of added cost in processing at 11.3% (while average annual growth in mining at the 5% level). 3,1 Manufactures exports (% of merchandise exports, 21) 14,1 18,7 48,4 AZE KAZ UZB Lower middle income 61,3 Upper middle income 67,2 73,2 89,6 MYS OECD KOR

4 Transportation cost and Export Promotion Transport Infrastructure (199 = 1%) автомобильные Public roads with дороги hard surface общего пользования с твердым покрытием железные Public Railways дороги общего пользования перевозка Transportation пассажиров of passengers перевозка Freight грузов* Trade Facilitation (21) Cost to export (US$ per container) Cost to import (US$ per container) ,7 19,8 1, , AZE EU MIC KOR KAZ UZB MYS Share of transportation costs in the end the price of Uzbekistan s export goods is times higher than the world averages. In order to be competitive in the global markets there are two principal issues to address: Constant reduction in shipping costs for domestic producers (domestic and international); Optimization of transport sector (institutions, approaches, logistics). Trade Facilitation and Manufacturing Export 7% 4% 6% 81% 19% 3% Nonmanufacturing exports (bln US$ at 21 prices), right scale Manufactures exports (bln US$ at 21 prices), right scale Cost to export (US$ at 21 prices per container) Cost to import (US$ at 21 prices per container)

5 Transport One of the Key Sectors of Economy Transport services Transport sector accounts for 9% of Uzbekistan s GDP and 4% of its total employment. Role of automobile transport is growing. Transport services is one of the key sectors, having high multiplier effect for the economy. Transport sector is among the leading recipients of investments. $6,96 bln to be allocated for developing transport infrastructure in The diagram shows values for the demand multiplier and the supply multiplier for sectors of the economy. The farther to the right sectors are in the graph, the more demand they create for the goods of other sectors. The higher sectors are in the graph, the greater the supply they create for other sectors. By influencing demand and supply, the key sectors have a significant impact on production growth in other sectors. Sectors whose position in the graph is higher and farther right are priority sectors drivers of the country s economic development. Key sectors in the diagram (the top-priority sectors) are highlighted in red and are in the right-hand yellow quadrant ,5 Shares of autimobile and railway sectors in transportation, % 54,4 54,2 52, ,1 52,3 45,3 45,6 47,2 48,8 47,5 47,3 43,2 Automobile Railways

6 Container Traffic Routes At present more than 9% of the goods traded between the EU and the Asian Pacific are being shipped by sea. Development of transit routes in Eurasia, incl. CA region, require cheaper tariffs and customer service in compliance with international standards. Transit capacity of Uzbekistan is estimated at $ bln per year. Origin Intra- and inter-regional merchandise trade in 21, bln. dollars Destination Europe CIS Middle East Asia Europe CIS Middle East Asia Source: WTO

7 Investments and Tariffs for Transportation Investments and tariffs The rapid growth of rail tariffs compared with the Industrial Producer Price Index, % 135, 13, 125, 12, 115, 11, 15, 1, 95, Динамика регионального экспорта Investment growth rates (right scale) темпы роста инвестиций в транспорт (правая шкала) Индекс Index железнодорожного of railway tariffs тарифа Индекс автомобильного тарифа Index of automobile tariffs 2, 18, 16, 14, 12, 1, 8, 6, 4, 2,, IPPI Tariff Indexes for rail transport Tariff Indexes for automobile transport Regional export Dynamics The rapid growth of rail tariffs compared with the Industrial Producer Price Index, leading to decrease in competitiveness of local producers, especially small and medium enterprises in The situation is expected to improve in 213 but rise of tariffs remains a key development challenge

8 Railway Transportation: Increasing tariffs and falling freight intensity 2,5 2 1,5 1,5 The intensity of rail freight and the growth of tariffs for rail trucking thousands тыс.ед. of перевозок/км shipments/km Интенсивность Intensity of rail грузоперевозок freight by UTY ГАЖК "Узбекистон темир (thousands йуллари" of shipments) (тыс. ед. перевозок) Индекс Index of железнодорожного railway tariff, % (right тарифа, scale) % (правая шкала) % Over the past 6 years, the annual growth of freight tariffs for Uzbekistan Temir Yollari (UTY) averaged at 55%. Labor productivity of Uzbekistan Railways 4.9 times lower comparing to Russian Railways, 1.7 times than Ukrainian railway. In general, tariff policy is not targeting small and medium-sized shippers, creates low incentives for export cargo transportation Labor productivity of railway companies (thousands of shipments/emp) Average number of personnel per 1 km ,7 3,6 2,3 2 1,66 Kazakhstan Russia Ukraine Belarus EU-27 Turkey Egypt Uzbekistan Uzbekistan Slovakia Bulgaria Romania Poland Spain Sweden

9 Automobile Sector: Poor roads, small companies, rising fuel prices Structure of Truck Freight Transportation Costs Uzbekistan Fuel EU 8, 21, 4, Drivers wages Depreciation Maintanance 2, 1, 6, 16, 2, 3, 12, 16, Taxes 55, Other costs Growth of fuel prices outrun growth of tariffs for automobile transportation, % A-8 fuel prices Automobile tariffs Small size of companies international trucking involves 16 domestic companies with about 1,92 vehicles (12 trucks per 1 company). About 8% of trucking vehicles has been in operation for over 15 years, whereas the maximum allowable period is 1 years. The share of heavy and specialized vehicles does not exceed 1%. Poor condition of roads, especially in rural areas, decrease speed of movement 5 km/h average. Licensing, certification and other formal barriers to get access into the market for private companies.

10 Meeting Demand for Transportation Services Economic Growth and Transport Sector Development Growth of freigts turnover, % All types of transport Railway Automobile Annual growth of investments, % Scenario 1 6% 6,3 4,7 7,9 11,3 Scenario 2 8% 8,3 6,2 1,5 15,1 Scenario 3 1% 1,4 7,8 13,2 18, Average 8% annual growth of freight turnover, % - Freight turnover, bln tons/km 1% - Freight turnover, bln tons/km 8% - Demand for new trucks, thousand units 1% - Demand for new trucks, thousand units During last 5 years freight turnover was growing at 1,2% while GDP growth averaged at 7,6% annually. To meet the demand by 22, the trucking fleet will have to be expanded to 62 vehicles (4 new trucks annually). To upgrade at least 5% of current trucking fleet by 22 additional new trucks need to be purchased by trucking companies annually.

11 Economy of Scale and Better Institutions Promoting growth of national trucking companies Increasing number and modernizing trucks (licensing and certification, custom fees for imported vehicles, etc.) Partnership with UTY (railways) and HY (airways) to go multimodal Development of the transport and logistics services market, creation of a network of multimodal transportation and logistics centers (local, regional and international) Improvement of the transit regime for freight (by ground and air) Increase the stock of containers and the fleet of container carriers, rise the level of containerization of shipments Upgrading of the system of institutions for formulation and implementation of transport policy Creation of a single governing body (a Ministry of Transport) Revision of powers of sectoral agencies and state transport companies

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