DRAFT. Mid-term and Long-term Perspectives of Transport and Transit in Uzbekistan in the Context of Economic Transformation: Problems and Solutions

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1 Mid-term and Long-term Perspectives of Transport and Transit in Uzbekistan in the Context of Economic Transformation: Problems and Solutions An effective transportation sector is a crucial element in economic development. Uzbekistan s key strategic task for its transport policy has been to structure its transportation system so that prices for transportation services can be reduced, operational efficiency is increased, and transportation services are reliable and accessible for economic agents. The policy has also aimed at diversifying transport routes to allow Uzbekistan to become a hub in transcontinental and regional logistics schemes. Uzbekistan Supporting Modernization, Accelerated Reform and Transformation (SMART) Project

2 Uzbekistan s Transportation Sector during the Transition Period In 1991, Uzbekistan was faced with the need to rapidly transform its logistics networks by establishing new transportation arteries Active policies aimed at developing transport corridors and international transport routes have enabled significant expansion and diversification in the export and import of goods Uzbekistan inherited a system of transport connections/corridors from the Soviet period that have restricted opportunities for accelerated development in the country. The main challenges toward this end were the following: First, transportation was fragmented and there were difficulties in transport communication between certain regions of the country. In particular, railway connections between Uzbekistan s northwestern and southwestern regions required transit through Turkmenistan, while highways and railway links between regions in the Fergana Valley and other parts of the country passed through Tajikistan. This impeded transportation links between various regions within the country. Secondly, most transport corridors were northbound. To diversify foreign economic relations, it was necessary to create corridors that are southbound (toward the Persian Gulf), westbound (the Black Sea Basin) and eastbound (China, Korea, and countries in the Asia Pacific Region). Upon gaining its independence in 1991, the country was faced with the need to rapidly transform its networks of logistics. This involved establishing new major traffic arteries and transportation links to compress the distance between the different regions in the country and, in order to open access to new markets, to lower the dependence of Uzbekistan on northbound transportation corridors. The implementation of railroad construction projects along routes such as Navoi Uchkuduk Sultanuozdag Nukus and Tashguzar Baysun Kumkurgan laid a solid foundation for the longitudinal axis of Uzbekistan s transportation framework, extending from the northwest to the southwest of the country. These transport routes were then linked to the wellestablished east west traffic arteries of the route Andijan Tashkent Samarkand Bukhara. A key step for this was the building of a highway over the Kamchik Pass, which enabled direct motor communication between the Fergana Valley and the rest of the country. Current projects include the refurbishment of the national highways and the construction of an electrified Angren Pap railway line. These represent a logical continuation of policies aimed at tying together the country s transportation system. The implementation of active policies for developing transport corridors and international transport routes during the decades since Uzbekistan s independence has allowed significant expansion and diversification in the export and import of goods. From 2000 to 2013 alone, foreign trade increased more than four times, from 6.2 billion to 29.5 billion US dollars, with imports increasing from 2.9 to 13.9 billion US dollars and exports from 3.3 to 15.6 billion US dollars. 2

3 The growing demand for freight traffic in the economy is primarily satisfied through motor freight transportation Between 2000 and 2012, the length of railway lines in Uzbekistan increased from 3,471.5 km to 4,191.8 km and freight traffic rose from 46.9 to 76.7 billion tons/km. Construction or reconstruction was undertaken on 679 km of roads, of which 489 km were parts of international transport routes and 190 km parts of national highways. This increased the length of roads of the highest category by 557 km and the overall length of bridges and overpasses by 2,743 km. Qualitative structural changes have also taken place within the transportation sector. The growing demand for freight traffic in the economy is primarily satisfied through motor freight transportation; its share in overall freight traffic volume amounts to about 90%. Of this, private freight carriers currently comprise 85% of the sector. Table Indicators for the Development of the Transport Sector in Uzbekistan GDP Growth 7,0 7,5 9,5 9,0 8,1 8,5 8,3 8,2 8,1 Increase in the volume of freigh 9,7 8,5 9,4 9,9 13,4 9,9 8,7 5,4 4,4 trucking transport 10,8 9,2 9,4 11,0 18,2 10,8 8,8 5,2 4,6 railway transport 1,2 9,1 16,1 8,5 4,5 3,9 4,8 4,8 3,5 Investments in the transport sector, billion Uzbek soums In % of GDP 3,29 3,01 3,26 4,51 7,03 5,66 3,67 3,53 3,53 Source: The State Statistics Committee of the Republic of Uzbekistan At an annual GDP growth rate of 8% until 2030, the volume of freight traffic will grow by approximately 9.2% per year Patterns of transportation service usage have changed considerably, as have business entities and service providers. Small businesses and private entrepreneurship are becoming active consumers of transportation services, including international consignment services. In general, during the transition period since its independence, Uzbekistan has been able to create a uniform transportation network connecting all of its regions and has laid the foundation for balanced development throughout the country by having implemented several highway and railway projects. Also Uzbekistan s active participation in a number of international transport corridor construction projects has enabled the foreign trade transport routes to be diversified. Structural changes within the sector have helped establish a market for private motor trucking, which, as mentioned, carries a large proportion of the total freight traffic. 3

4 Long-term Prospects of Economic Transformation and Transport Sector Development Strategies for the country s industrial and innovative development until 2030 involve increasing the proportion of industry in the GDP to 37% and of manufacturing to 22%. This means an average annual industry growth rate of 8.3%. This will ensure the diversification of export profiles, with a reduction in the proportion of raw materials being exported and an increase of high valueadded goods. This growing economy will place new demands on the transport sector, which will necessitate the streamlining of logistics systems and major restructuring of the surface freight transportation system. According to forecasts by experts, at the current high economic growth rate (nearly 8% annually), the volume of freight traffic will continue to grow until 2030 at annual rate of 9.2%. This represents an overall increase of 4.4 times, from 1,387.3 million tons in 2013 to 6,041.3 million tons in Broken down by types of surface transportation: Diagram 1. Forecasted Changes in Uzbekistan s GDP Breakdown by 2030, in per cent Diagram 2. Forecasted Volumes of Freight Transport in Uzbekistan, in millions of tons Diagram 3. Volume of Investments by 2030 (in million USD) Source: Expert estimates, CER, 2014 Diagram 4. Ratio of Investments in Renewal of Infrastructure and Rolling Stock, in per cent Source: Estimates of experts, Center of economic research,

5 motor transport will see an average annual increase of 9.4%, or an overall increase of 4.6 times, from 1,258.6 million tons in 2013 to 5,811.6 million tons in railway transport will see an average annual increase of 5%, or an overall increase of 2.3 times, from 63.7 million tons in 2013 to 146 million tons in It is necessary to increase investments in the transport sector to 4.6% of the GDP. Total investments by 2030 should amount to about USD 46.7 billion According to estimates, increasing investments in the transport sector by 1% will provide for a rise of 0.94% in the volume of freight traffic. Based on forecasts of the real GDP increasing at an average annual rate of 8%, to ensure the required growth rates of freight traffic volume, investments in the economy s transport sector need to increase from 3.55% of the GDP (the mean value for the period ) to 4.6% of the GDP in By 2030 total investments in the transport sector should amount to nearly USD 46.7 billion, 1 with annual investments increasing from USD 2.1 billion in 2015 to USD 5.1 billion in In addition to increasing investments, to achieve the country s economic transformation goals, transport policy in Uzbekistan should aim at the following: improving institutional aspects (sector regulation and enhancement of tariff policies); optimizing transportation and logistics systems further, with consumer-oriented policies combined with quality improvement and a broader range of services; and providing continued expansion of transport routes for export, import and transit of goods. Reduction in Prices for Freight Transportation Transportation expenses are a part of the unit cost of manufactured goods. If these expenses increase, this has a direct impact on the marketability of domestic goods. Thus it is a central objective to reduce the proportion of transportation costs in the unit cost of such goods. The price of freight transportation services within and outside the country (including transit) remains relatively high. Since 2006, increases in the cost of transportation services have been noticeably outpacing the average price increases in the economy, in particular, for food products, non-food goods and industrial goods. It is a priority to bring down the costs of motor freight transportation, since this is the primary means used by the private sector for transporting goods. In Uzbekistan the cost of transporting 20 tons of freight (textile goods) by truck for 500 km amounts to USD 1.75 per km. In contrast, in Kazakhstan the same costs USD 1.19; in Kyrgyzstan, USD 1.35; in Tajikistan, USD 1.11; and in Turkmenistan, USD This situation is due to the following: 1 Excluding pipeline transport. 5

6 Diagram 5. Rise in Prices for Goods and Services in Economic Sectors , as times Diagram 6. Level of Profitability of Economic Sectors Source: Estimates of experts, Center of economic research, 2014 To reduce prices for transportation services, the fleet of rolling stock needs to be renewed and prices optimized 2 In comparison, in the Russian Federation this is 35 37% and in the EU, less than 30%. 3 Source: UNECE Statistic Data / The truck fleets of many motor freight carrier companies are quite old. In Uzbekistan, about 85% of the truck fleets (as of the beginning of 2012) have been in operation for longer than 15 years. 2 Obsolete truck fleets consume more fuel and, consequently, have higher transportation costs. In Uzbekistan, the fuel consumption of trucks averages litres per 100 km, whereas in the EU, it averages litres for the same distance. One of the reasons for this is that fees for importing trucks are quite high. Importing a long haul truck made in Europe to Uzbekistan costs a total of % (customs duty, VAT, excise tax, road fund fees, and other fees) of the customs valuation of the goods. As a result, from 2001 to 2005 the number of trucks in Uzbekistan increased only by 0.6%. During the same period, in the USA the number of trucks increased by 5.7%; in Poland, by 40.1%; in the Russian Federation, by 25.4%; in Slovenia, by 48.7%; and in Slovakia, by 64.7%. 3 High freight carrier costs are also inherent in the railway sector. A comparative analysis of transportation costs per km of one standard railcar (loaded with 60 tons of textile goods) for a distance up to 500 km shows that Uzbek exporters and importers pay USD 5.15 to railway companies. In Kazakhstan, the same indicator amounts to USD 0.93; in Kyrgyzstan, USD 2.65; in Tajikistan, USD 6.83; and in Turkmenistan, USD Id the distance increases from 500 to 1,000 km, shippers in Uzbekistan pay USD 2.51 to transport one standard railcar per km, whereas in Kazakhstan the same costs USD 0.68, and in Turkmenistan, USD From 2008 to 2013, prices for transporting rail freight increased 1.7 times. In the same period the volume of goods transported by railway decreased from 23.4 to 22.9 billion tons/km. The reasons for the relatively high prices for railway freight transportation include the following: 1) the current methodology for setting tariffs for railway transportation services at the Uzbekiston Temir Yullari State Joint Stock Railway Compa- 6

7 ny (SJSRC). This calculation methodology envisages an annual indexation of SJSRC tariffs following the principle costs of previous year + profit. 2) lack of bidding processes at the Uzbekiston Temir Yullari SJSRC. If such processes were introduced, this would enable more domestic as well as foreign freight forwarders to conclude direct freight forwarding contracts with the SJSRC. 3) insufficient development of container freight transportation. As is evident from international experience, transporting one ton of rail freight in highcapacity containers is on average 10 12% less expensive than transporting the same by railway wagon. In 2012, only 8.5% of rail freight in Uzbekistan (export, import and transit) was transported in containers. In the EU, the same indicator is 14%, and in China, 51%. Reliability, Operational Efficiency and Accessibility of Transportation Services The reliability and operational efficiency of freight transportation is directly related to the quality and range of railways and highways, the condition of rolling stock, and the optimal geographic locating of logistics centres The reliability and operational efficiency of freight transportation is directly related to the quality and range of railways and highways, the condition of rolling stock, and the optimal geographic locating of logistics centres. In 2012, the technical condition of approximately 70% of the general-use highways in Uzbekistan was recognized as unsatisfactory. Poor condition of roads results in lower transportation speeds and faster wear and tear of motor vehicle fleets. Overall this leads to longer delivery times, delays and delivery failures. Current international standards of highway design and construction envisage motor vehicle axle loads of up to 13 tons. Presently, 80% of the international highways in Uzbekistan allow for an axle load of less than 10 tons. While the remaining 20% is to be upgraded up to 10 tons, still these highways are not complying with the international standard of 13 tons. With regard to Uzbek railways, the rolling stock shows a high degree of obsolescence and physical deterioration. Of the locomotive stock, 60% has been in operation for years; another 13% has been in operation for more than 30 years. Old locomotive stock is unable to provide nominal pulling capacity, often resulting in railcars uncoupling from trains, failures to meet delivery dates, and reduced volume of rail freight transportation. Heavy wear of the rolling stock slows down train speeds by 40 50% of current normative standards. This rolling stock is gradually being upgraded and in the past few years alone, over 10 electric locomotives were purchased. The SJSRC is planning to acquire another 32 by However, there are limitations on plans for expanding the fleet of electric locomotives (and thereby upgrading the rolling stock as a whole). This is not only due to costs, but also to the extent of railway electrification in Uzbekistan. Logistics systems in Uzbekistan are characterized by fragmented supply chains as well as redundant loading and unloading of goods on the way from 7

8 shipper to consignee. This is due to transportation and logistics companies being less developed as well as insufficient infrastructure. For manufacturers this leads to higher expenses for transportation and logistics services. Most transportation and logistics operations in the country make use of first and second party logistics (1PL, 2PL) modality. There are only a few companies providing a limited range of services in 3PL 4 modality. Very few major operators are able to establish effective interaction between motor, railway and air carriers. Diversification of Transport Routes and Transit Capacity Building Fragmented supply chains as well as the excessive loading and unloading of goods between the shippers and the ultimate consumer are characteristic of current logistics systems 4 The logistics and warehousing market classifies operators according to the PL (party logistics) system, which is based on the number of provided services. It is ranked from 1PL to 5PL. The classification 1PL means that a manufacturer carries out all logistic processes itself. A 2PL is a logistics company that provides services only for the transporting and warehousing of goods. A company classified as 3PL (which is most commonly used) provides warehousing, intermediate storage, freight handling, organization, and the management of freight delivery to the final consumer. A 3PL company provides its clients a single package for all matters of transportation and storage logistics. 5 Doing Business, 2015 A strategic objective for Uzbekistan is for the country to become a key hub in global transport and logistics systems and to increase revenues through its transport and transit services. For this, transport and logistics collaborations with neighbouring countries must be established, a step that will be mutually beneficial. To enable growth in transit and to create conditions for the more effective use of the country s transportation and transit capacities, it is necessary to address several issues of concern. The location of international transport corridors on Uzbek territory is tied to its administrative centres, the largest being the city of Tashkent. One clearly pressing problem is insufficient capacity at certain border crossing points due to poor technical equipment and the lack of information and communications technology (ICT) being used in customs services operations. As a result there are delays in transit freight inspection procedures by authorized agents, long stays for freight carriers at the border, as well as other problems. Due to growing volumes of international freight trucking, in some cases crossing times for large-capacity trucks at border crossing points take up to five days. This lowers the country s attractiveness for freight transit. Secondly, roadside infrastructure on major transportation corridors in Uzbekistan is currently insufficient, although some infrastructure is being built along certain longer routes that are likely to become international traffic arteries. And thirdly, the complex procedures currently used for processing foreign trade transactions has also negatively influenced the effectiveness of freight transportation. The number of processing documents needed in various nearby countries for export and import, respectively, is as follows: China, 8 and 5; Iran, 7 and 11; Kazakhstan, 10 and 12; Kyrgyzstan, 9 and 10; Russia, 9 and 11; and Tajikistan, 11 and 12. In comparison, Uzbekistan requires 11 and Moreover, due to issues related to risk management organization at customs, currently nearly all freight and passenger traffic flows in Uzbekistan are subject to inspection at both entry and exit. All this leads to lengthy customs procedures and delays in the export, import and transit of goods. 8

9 Major Directions in Uzbekistan s Long-term Transport Policies It is essential to create incentives for the private sector to become an active investor in the renewal of truck fleets The transport sector in Uzbekistan needs to undergo substantive changes in order to become a driver of economic development. Major investments are needed for renovating the rolling stock of the railways as well as for developing the infrastructure of motor, railway and air transport. A number of actions are essential for reducing the recent rapid increases in prices for transportation services. These include the following: 1. According to forecasts, freight trucking volumes will increase at an average rate of 9.4% or 4.6 times by 2030 (based on 8% per annum economic growth). It will thus be necessary to enlarge Uzbekistan s truck fleets to at least 120,000 vehicles. Considering that at least 5% of the current fleet will need replacing each year due to age, it will be necessary to purchase 8,000 motor vehicles on an annual basis until Annual investments will thus amount to USD 960 million; by 2030 this will be a total of USD 14.4 billion. Since the private sector is the main source of investments in motor trucks, to enable the needed growth, measures need to be developed and implemented that create conditions and incentives for renewing the truck fleets of freight carrier companies. Such measures include: enhancing systems for long-term soft bank lending to purchase modern trucks; reducing customs fees for truck models that are not produced domestically; enhancing the current legal framework and creating incentives for renewing truck fleets by making standards for efficient fuel consumption and exhaust gas emissions more stringent. In general, renewing truck fleets and increasing the proportion of high capacity vehicles and introducing long haul trucks, which will increase carrying capacity, will allow reductions of 15% to 28% in motor freight carrier costs. 2. Incentives need to be introduced in order for the SJSRC to increase railway freight turnover while reducing prices. These may include: changes in principles concerning the setting and indexation of tariffs, with a gradual transition towards a new tariff system, whereby the number of adjustment factors should be minimized6 and all types of cross-subsidization in railway transportation should be reduced; creating a competitive environment in railway transportation by a stage being set for the development of private freight carriers that own rolling stock for freight transportation. 3. Transportation and logistics systems need to be operationally efficient and reliable. This will require: 9

10 developing highways and roadside infrastructure. According to estimates, a total of USD 19.3 billion should be invested in road construction by 2030; increasing the proportion of electrified railways to 45% by For this, an average of 178 km of railway lines need to be electrified annually, with investments totally USD 5.34 billion. In addition, the renewal of railway rolling stock will require total investments of USD 1.2 billion by The mean speed of traffic on highways should increase to km/h and to km/h on railways Overall, implementing the above investment plans will ensure an increase in the mean speed of vehicle traffic on highways to km/h and to km/h on railways. To reduce transport costs by 10% in the end price of goods suitable for containerized transport will necessitate containerized transport being increased by 25 30%. To this end, the SJSRC s pool of 40 foot containers should be increased by 5,000 units, which will require investments amounting to approximately USD 22.5 million. 4. The network of multimodal transportation and logistics centres (TLCs) needs to be expanded in regions developing transportation and logistics services. This can be done by: harmonizing legal and regulatory frameworks, technical and technological regulations, and standards for freight transportation. Also intermodal and multimodal transportation, logistics centres, and freight forwarding activities should be harmonized with international standards; integrating the databases of customs and tax authorities and other government bodies, as well as of institutions collecting statistics to ensure the effective operation of multimodal transportation; improving the national network of TLCs and raising the minimum level of transportation and logistics services they offer to 3PL. To ensure the diversification of transport routes and more effectively use the country s transit potential, it is also essential to take the following steps: create new transport corridors to allow the closer integration of national transport systems into international transport corridors that currently bypass Uzbekistan. These include the railway lines Termez Mazar-i-Sharif Andho Herat Iran; Herat Andhoi Mazar-i-Sharif; and Uzbekistan Kyrgyzstan China; optimize and reduce the number and types of customs and border procedures during export and import; adopt laws on international road transport and the transit of goods regulating issues concerning international transport and transit of goods, as well as the legal status of transit freight carriers, in order to streamline and ease conditions for the entry, sojourn and exit of motor vehicles from foreign countries. 10

11 Table 6. Key Areas for Integrating Uzbekistan s Transport System into Transport Corridors Bypassing Uzbekistan Routes bypassing Uzbekistan 1 Western Europe - Western China Caspian transport corridor: Uzen Kizilkiya Bereket Etrek Gorgan Railway line from Turkmenistan though Afghanistan: Imamnazar Atamyrat Andhoi Herat Railway line and road from Kashgar through Kyrgyzstan, Tajikistan and Afghanistan to Iran Project for integrating these routes Name Length Value Modernization of the road section Tashkent Chimkent Implementation of the transport corridor project: Uzbekistan Turkmenistan Iran Oman Construction of the railway line Mazar-i-Sharif Andhoi by the Uzbekistan Temir Yullari State Joint Stock Railway Company Construction of the electrified railway line Angren Pap, which will create a basis for implementing the construction of the railway line: Uzbekistan Kyrgyzstan China 150 km USD 300 million 2800 km 120 km To be determined Approx. USD 170 million 150 km USD 2.7 billion Center for Economic Research Shota Rustaveli Str., Tupik 1/5 Tashkent , Uzbekistan Tel: , /57/58/59; Fax: The publication reflects opinions and views of the working group, which may not coincide with the official point of view of the Center for Economic Research or UNDP. Tashkent 2014 UNDP Country Office in Uzbekistan 41/3 Mirabad street, Tashkent , Uzbekistan Tel: , ; Fax: