## 1. Losses by Barki Tojik and other SOEs ## Source details **Canonical URL:** [1. Losses by Barki Tojik and other SOEs](https://www.imf.org/-/media/files/publications/cr/2021/english/1tjkea2021007.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1tjkea2021007.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1tjkea2021007.pdf.json) --- ### Introduction - The SOE sector in Tajikistan: - Employs around 24 percent of the labor force. - Accounts for approximately 17 percent of GDP. - Assets of this sector are estimated around 48 percent of GDP (EU, 2017). - Three largest SOEs by assets — Barki Tojik (BT), Tajik Railways, and the Tajik Aluminum Company (TALCO) — hold over 80 percent of all SOE assets. - As of 2017, 931 SOEs were active; remainder listed in the Tax Committee’s register as under re-registration or liquidation. ### Losses and fiscal risks from the largest SOEs - The SOE sector is inefficient and loss-making; cumulative losses amounted to 3.7 percent of GDP in 2018. - BT accounts for almost all sector losses owing to: - Below cost recovery tariffs. - Revaluation of its FX denominated borrowing from the government and commercial banks. - TALCO is also loss-making; most other SOEs show only modest profitability. - Data coverage and quality: - Results based on data from the SOE Monitoring Department of the Ministry of Finance covering the 24 largest SOEs. - Consistency and reliability of the data may be questionable. ### Barki Tojik (BT): financial position and exposures - Government loans to BT: - At end-2018, the outstanding amount of government loans to BT was 17 percent of GDP. - The government has continued to service the external debt. - Arrears to domestic banks and suppliers: - Cumulative liabilities of BT to banks and suppliers were 6½ percent of GDP at end-2018. - Operational measures and tariff policy: - Authorities have implemented annual electricity tariff increases of about 17 percent since 2016. - A new tariff methodology approved would allow setting tariffs in line with full cost recovery. - Further annual tariff increases planned: 17 percent till 2022, 8 percent between 2023- 2025. - Ongoing reform program: - Program designed with WB and ADB assistance envisages clearance of arrears to suppliers and commercial banks and restructuring of the debt to government. - Expected improvements: inventory management, collections, and rising export revenues to strengthen BT’s financial position over the medium-term. ### Non-guaranteed borrowing by other SOEs and contingent liabilities - Tajiktransgaz signed a loan agreement for $300 million (3½ percent of 2019 GDP) to finance construction of a gas pipeline (Line D of the Central Asia-China Gas Pipeline). - TALCO signed an MOU to borrow $545 million (6½ percent of 2019 GDP) from Chinese companies to finance modernization of its plant; agreement expected to be finalized in 2020. - Given SOEs’ financial situations, such loans may become contingent liabilities for the government. ### SOE reform efforts in Tajikistan (progress and measures) - Institutional improvements and transparency: - SOE Monitoring Department (SOEMD) established at the Ministry of Finance in 2010. - Gradual expansion of monitoring powers from 10 to the 24 largest SOEs; list recently updated and awaiting approval. - Inclusion of the Statement of Fiscal Risks (SFR) in the state budget document for 2016 and 2017; preparation of 2018 and subsequent SFRs facing delays. - Approval of a Strategy to Manage Fiscal Risks from SOEs (September 2016) and adoption of an Action Plan (July 2017); implementation has been slow. - Preparation of a new SOE law to promote profitability, financial sustainability, transparency and accountability; draft passed internal coordination and is awaiting final approval. - Government decree (May 2019) to establish a Fiscal Risks Coordination Council on the management of SOE fiscal risks. - BT-specific reforms: - Decree issued to unbundle operations into generation, transmission and distribution. - Electricity Regulatory Department established under the Antimonopoly Agency. - Progress in improving collection rates. ### What more is needed — recommendations and policy actions - BT-specific actions: - Implement the program designed with WB and ADB assistance. - Restructure BT’s existing loans and arrears to make them concessional in line with initial donor terms. - Repay commercial banks and suppliers to reduce BT’s debt burden. - Continue improvements in collection and further tariff increases to ensure full cost-recovery over the medium-term. - Provide targeted social safety nets to mitigate the impact of tariff increases on vulnerable populations. - Over the longer-term, continue deregulation and improve transparency and management (drawing on Georgia experience). - Strengthening SOE oversight and fiscal risk management: - Full implementation of International Financial Reporting Standards (IFRS) by all large SOEs. - Ensure regular audits; address instances of adverse audit opinions and weak internal controls. - Comprehensive recording and reporting of all public debt, including non-guaranteed SOE debt. - Include SOE borrowing within the government’s overall medium-term debt envelope and strategy. - Large infrastructure and public policy investments should be undertaken by the government and financed through government borrowing; commercial borrowing by SOEs should be supported by strong corporate governance and proven commercial viability. - Improve staffing and capacity of the SOEMD (currently limited to 8 people) or outsource support for comprehensive monitoring and risk assessment. - Prepare and publish accrual-based consolidated financial statements for general government. - Ambitious structural reforms: - Adopt institutional frameworks that grant SOE management more autonomy while strengthening ex-post monitoring and incentive mechanisms. - Approve revised list of SOEs to include all economically significant SOEs. - Continue preparation and inclusion of the SFR in budget documents. ### Key numeric indicators and fiscal magnitudes cited - SOE employment: around 24 percent of the labor force. - SOE share of GDP: approximately 17 percent. - SOE assets: around 48 percent of GDP. - Three largest SOEs hold over 80 percent of all SOE assets. - Active SOEs as of 2017: 931. - Cumulative SOE losses: 3.7 percent of GDP in 2018. - Government loans outstanding to BT at end-2018: 17 percent of GDP. - BT liabilities to banks and suppliers at end-2018: 6½ percent of GDP. - Annual electricity tariff increases implemented since 2016: about 17 percent. - Planned annual tariff increases: 17 percent till 2022; 8 percent between 2023- 2025. - Tajiktransgaz loan: $300 million (3½ percent of 2019 GDP). - TALCO MOU: $545 million (6½ percent of 2019 GDP). - SOEMD staffing: 8 people. ### Annex — international experience (selected lessons) - Reform approaches in comparator countries: - Georgia: phased power sector reforms including unbundling, privatization, tariff reform, and market mechanisms; lessons emphasize independent regulator and transparent competition. - Malaysia: transformation of Government Linked Companies with KPIs, performance-based contracts, board and management changes; results include improved revenues, profitability, and global expansion. - Kazakhstan: establishment of state asset management and sovereign wealth funds, updated corporate governance codes, abolition of price regulation except for “natural monopolies”; results show improved financial reporting and auditing practices but persistent challenges with SOE incentives and cost-recovery. *Prepared by Nailya Menlasheva and Yuri Sobolev; December 26, 2019.* ### 1. Losses by Barki Tojik and other SOEs ____________________________________________________ 4 ### 1. Losses by Barki Tojik and other SOEs ### Introduction - The SOE sector in Tajikistan: - Employs around 24 percent of the labor force. - Accounts for approximately 17 percent of GDP. - Assets of this sector are estimated around 48 percent of GDP (EU, 2017). - Three largest SOEs by assets — Barki Tojik (BT), Tajik Railways, and the Tajik Aluminum Company (TALCO) — hold over 80 percent of all SOE assets. - As of 2017, 931 SOEs were active; remainder listed in the Tax Committee’s register as under re-registration or liquidation. ### Losses and fiscal risks from the largest SOEs - The SOE sector is inefficient and loss-making; cumulative losses amounted to 3.7 percent of GDP in 2018. - BT accounts for almost all sector losses owing to: - Below cost recovery tariffs. - Revaluation of its FX denominated borrowing from the government and commercial banks. - TALCO is also loss-making; most other SOEs show only modest profitability. - Data coverage and quality: - Results based on data from the SOE Monitoring Department of the Ministry of Finance covering the 24 largest SOEs. - Consistency and reliability of the data may be questionable. ### Barki Tojik (BT): financial position and exposures - Government loans to BT: - At end-2018, the outstanding amount of government loans to BT was 17 percent of GDP. - The government has continued to service the external debt. - Arrears to domestic banks and suppliers: - Cumulative liabilities of BT to banks and suppliers were 6½ percent of GDP at end-2018. - Operational measures and tariff policy: - Authorities have implemented annual electricity tariff increases of about 17 percent since 2016. - A new tariff methodology approved would allow setting tariffs in line with full cost recovery. - Further annual tariff increases planned: 17 percent till 2022, 8 percent between 2023- 2025. - Ongoing reform program: - Program designed with WB and ADB assistance envisages clearance of arrears to suppliers and commercial banks and restructuring of the debt to government. - Expected improvements: inventory management, collections, and rising export revenues to strengthen BT’s financial position over the medium-term. ### Non-guaranteed borrowing by other SOEs and contingent liabilities - Tajiktransgaz signed a loan agreement for $300 million (3½ percent of 2019 GDP) to finance construction of a gas pipeline (Line D of the Central Asia-China Gas Pipeline). - TALCO signed an MOU to borrow $545 million (6½ percent of 2019 GDP) from Chinese companies to finance modernization of its plant; agreement expected to be finalized in 2020. - Given SOEs’ financial situations, such loans may become contingent liabilities for the government. ### SOE reform efforts in Tajikistan (progress and measures) - Institutional improvements and transparency: - SOE Monitoring Department (SOEMD) established at the Ministry of Finance in 2010. - Gradual expansion of monitoring powers from 10 to the 24 largest SOEs; list recently updated and awaiting approval. - Inclusion of the Statement of Fiscal Risks (SFR) in the state budget document for 2016 and 2017; preparation of 2018 and subsequent SFRs facing delays. - Approval of a Strategy to Manage Fiscal Risks from SOEs (September 2016) and adoption of an Action Plan (July 2017); implementation has been slow. - Preparation of a new SOE law to promote profitability, financial sustainability, transparency and accountability; draft passed internal coordination and is awaiting final approval. - Government decree (May 2019) to establish a Fiscal Risks Coordination Council on the management of SOE fiscal risks. - BT-specific reforms: - Decree issued to unbundle operations into generation, transmission and distribution. - Electricity Regulatory Department established under the Antimonopoly Agency. - Progress in improving collection rates. ### What more is needed — recommendations and policy actions - BT-specific actions: - Implement the program designed with WB and ADB assistance. - Restructure BT’s existing loans and arrears to make them concessional in line with initial donor terms. - Repay commercial banks and suppliers to reduce BT’s debt burden. - Continue improvements in collection and further tariff increases to ensure full cost-recovery over the medium-term. - Provide targeted social safety nets to mitigate the impact of tariff increases on vulnerable populations. - Over the longer-term, continue deregulation and improve transparency and management (drawing on Georgia experience). - Strengthening SOE oversight and fiscal risk management: - Full implementation of International Financial Reporting Standards (IFRS) by all large SOEs. - Ensure regular audits; address instances of adverse audit opinions and weak internal controls. - Comprehensive recording and reporting of all public debt, including non-guaranteed SOE debt. - Include SOE borrowing within the government’s overall medium-term debt envelope and strategy. - Large infrastructure and public policy investments should be undertaken by the government and financed through government borrowing; commercial borrowing by SOEs should be supported by strong corporate governance and proven commercial viability. - Improve staffing and capacity of the SOEMD (currently limited to 8 people) or outsource support for comprehensive monitoring and risk assessment. - Prepare and publish accrual-based consolidated financial statements for general government. - Ambitious structural reforms: - Adopt institutional frameworks that grant SOE management more autonomy while strengthening ex-post monitoring and incentive mechanisms. - Approve revised list of SOEs to include all economically significant SOEs. - Continue preparation and inclusion of the SFR in budget documents. ### Key numeric indicators and fiscal magnitudes cited - SOE employment: around 24 percent of the labor force. - SOE share of GDP: approximately 17 percent. - SOE assets: around 48 percent of GDP. - Three largest SOEs hold over 80 percent of all SOE assets. - Active SOEs as of 2017: 931. - Cumulative SOE losses: 3.7 percent of GDP in 2018. - Government loans outstanding to BT at end-2018: 17 percent of GDP. - BT liabilities to banks and suppliers at end-2018: 6½ percent of GDP. - Annual electricity tariff increases implemented since 2016: about 17 percent. - Planned annual tariff increases: 17 percent till 2022; 8 percent between 2023- 2025. - Tajiktransgaz loan: $300 million (3½ percent of 2019 GDP). - TALCO MOU: $545 million (6½ percent of 2019 GDP). - SOEMD staffing: 8 people. ### Annex — international experience (selected lessons) - Reform approaches in comparator countries: - Georgia: phased power sector reforms including unbundling, privatization, tariff reform, and market mechanisms; lessons emphasize independent regulator and transparent competition. - Malaysia: transformation of Government Linked Companies with KPIs, performance-based contracts, board and management changes; results include improved revenues, profitability, and global expansion. - Kazakhstan: establishment of state asset management and sovereign wealth funds, updated corporate governance codes, abolition of price regulation except for “natural monopolies”; results show improved financial reporting and auditing practices but persistent challenges with SOE incentives and cost-recovery. *Prepared by Nailya Menlasheva and Yuri Sobolev; December 26, 2019.* ### References ### References ### A. The Main Characteristics of Tajikistan’s Tax Regime and Tax Policy - Tax revenues increased from 13 percent of GDP in 2000 to 22.8 percent in 2014; declined to 21.3 percent in 2018. - Number of taxes reduced from 21 to 10. - Effective tax rate (ETR) on profits reported by businesses in Tajikistan is "almost 7 and 2 times" that in Georgia and Kyrgyz Republic respectively; Tajikistan’s effective CIT rate reported as 17.7 percent (Table 2). - Road user tax (RUT) rate is 1 percent but charged on firms’ turnover, making it roughly equivalent to a 17 percent tax on reported profit (Table 2). - Social tax paid by employers is 28.5 percent (highest in the CCA). - Tajikistan’s VAT has multiple rates: 0, 5, and 18 percent. - CIT has three rates: 13, 15, and 23 percent for goods, services, and nonresidents respectively. - RUT dual rates: 0.25 percent for trade and procurement and 1 percent for other activities. - Taxpayers with turnover below the threshold of TJS 1 mln (approximately USD 100,000) are subject to a simplified tax regime. - The 5 percent VAT rate reflects reduced VAT granted to a few sectors. ### B. Tax Incentives in Tajikistan — Design and Effects - Multiple VAT, CIT, PIT, and customs duty exemptions/incentives exist across sectors. - Generous profit-based incentives include: - A 5-year corporate income tax holiday available to investments over USD 0.5 million. - Sectoral incentives for: construction of hydropower stations; import of raw materials to make final goods; poultry farms and feed producers; tourism; securities market participants; production sharing agreements. - Firms in four free economic zones benefit from reduced taxes and custom fees. - Simplified tax for small businesses and a unified tax for agricultural producers grant exemptions from PIT (for small businesses), CIT, RUT, VAT, and land tax (for agricultural producers). - Cost-based incentives such as accelerated depreciation are allowed but used less widely. - Profit-based incentives predominate over cost-based incentives. - Incentives are often not linked to new investment and are vulnerable to abuse (e.g., disguising existing investment as new; broad import VAT and customs exemptions; leakage from special economic zones). - Tax incentives likely eroded the tax base: tax revenues as a share of GDP in 2018 decreased by 1.5 percent relative to 2014. - In 2018, trade related tax revenues consisted 30 percent of total tax revenues. - Tajikistan heavily relies on import related tax revenues; import-related taxes declined despite imports increasing sharply in 2018. ### C. International Experience with Tax Incentives — Empirical Findings - Cross-country studies show tax incentives in LICs usually create complexities and erode the tax base; associated with abuse and corruption (Kinda 2014, IMF 2015). - Reforms that simplified tax regimes, curtailed exemptions, and improved tax administration contributed to tax revenue growth (example: Mauritania — VAT collection net of refunds increased by 2.5 percentage point of GDP during tax reforms 2009-2013). - Investment surveys indicate tax incentives are not the most important consideration for business investment; stability, predictability, less discretion, and transparent tax systems rank higher (UNIDO survey: tax incentives rank 11th out of 12). - Empirical evidence suggests tax incentives do not have a sizable long-term effect on investment; in some cases FDI displaced domestic investment (Klemm and Van Parys, 2009). - International experience suggests cost-based incentives (e.g., accelerated depreciation) are generally preferable to profit-based incentives for boosting investment. ### D. Advantages and Disadvantages of Common Tax Incentives (Summary) - Lower Corporate Income Tax Rate: simple to administer; may result in profit shifting and windfalls to existing high-return firms. - Tax Holidays: simple; can attract short-term projects and incentivize tax avoidance by disguising existing investments as new. - Investment Allowances and Tax Credits: targetable and transparent; risk of abuse, administrative burden, and distortion toward short-lived assets. - Accelerated Depreciation: preserves benefits of allowances/credits without discriminating against long-lived assets; reduces investment distortion under CIT. - Exemptions from Indirect Taxes (VAT, import tariffs): allow avoidance of contact with tax administrators; prone to abuse and weaken VAT administration. - Export Processing Zones: can distort locational decisions and typically result in leakage of untaxed goods into the domestic market. ### E. Tax Incentives Reform Recommendations - Transition to a new economic model emphasizing private investment and job creation; reduce reliance on public investment and remittances. - Broaden the tax base and gradually rationalize high tax rates while maintaining fiscal sustainability. - Phase out inefficient profit-based incentives over time; move toward cost-based, transparent, and non-discretionary incentives (including accelerated depreciation). - New incentives should: - Adhere to international best practices. - Be rule-based rather than discretionary. - Be consolidated into the Tax Code and under the Ministry of Finance. - Include estimated fiscal cost in the tax expenditure report. - Be reported through a proper system for firms benefiting from incentives. - Implement near-term reforms beginning with a detailed cost–benefit analysis of existing incentives, including special economic zones. - Pre-announce reforms credibly and allow phased implementation to enable businesses to adjust. - Additional administrative reforms recommended: drop nuisance taxes, eliminate multiple rates where relevant, and simplify tax payment and compliance procedures to reduce compliance costs, encourage firm growth, expand the tax base, and improve compliance. *Italic: Source — Selected sections and policy recommendations extracted from the IMF content unit.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1tjkea2021007.pdf_