## 1uzbea2025002-print-pdf - 1. EBRD Core Transition Indicators 1989-2014

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---

### Overview and key context
- Uzbekistan has made significant progress in its transition to a market economy since 2017.
- Key reforms implemented:
  - Unification of the official and parallel market exchange rates and elimination of foreign exchange restrictions.
  - Deregulation of prices for most goods and services.
  - Liberalization of trade, including significant progress towards World Trade Organization (WTO) accession.
  - Commencement of energy sector reform with tariff increases combined with protection of the vulnerable.
  - Tax policy and tax administration reform to reduce the tax burden on the private sector.
  - Expansion of the coverage of the social safety net.
  - Introduction of comprehensive public financial management reforms to strengthen fiscal transparency and discipline.
  - Strengthening of monetary policy transmission and central bank governance.
- Remaining challenges:
  - Reform and privatization of large state-owned enterprises (SOEs).
  - Establishment of a competitive environment with easy market entry and exit.
  - Reduction and transformation of the role of the state in the economy.

### Academic literature: core transition model and mechanisms
- Two key changes required for transition (Kornai (1994)):
  - Forcing a move from a sellers' market to a buyers' market (via price liberalization).
  - Enforcing a hard budget constraint on SOEs and SOCBs (eliminating subsidies, directed low-cost loans, tax exemptions) while implementing institutional reforms such as large-scale privatization.
- Core processes (Blanchard (1997)):
  - Reallocation of resources from old to new activities (closures, bankruptcies, establishment of new enterprises).
  - Restructuring within surviving firms (labor rationalization, product line change, new investment).
- Reform classification (Fisher and Gelb (1991)):
  - Economic reforms: macroeconomic stabilization; price liberalization; trade and foreign exchange liberalization; small-scale privatization.
  - Institutional reforms: large-scale privatization; governance and enterprise restructuring; establishing competitive environment with easy market exit and entry; reducing and transforming the role of the state.
- Definitions and objectives emphasized:
  - Macroeconomic stabilization: bring inflation under control via fiscal consolidation, discipline over growth of money and credit, and progress toward a sustainable balance of payments.
  - Price and market liberalization: eliminate price controls so supply and demand determine prices.
  - Trade and exchange rate liberalization: reduce tariffs, quotas, non-tariff barriers; allow exchange rate to be determined by supply and demand.
  - Restructuring and privatization: reform SOEs and SOCBs to create commercially oriented sectors.
  - Competitive environment: reform product, labor, and network industries to promote competition and easy entry and exit, with appropriate regulation for natural monopolies.
  - Transforming the role of the state: shift from central planner to enabler of private sector growth (macroeconomic stability, enforceable property rights, rule of law, competition policy).

### Transition dynamics and timing effects
- Transitional recession mechanism:
  - Price liberalization and hard budget constraints reduce SOE output as state-supported sales fall and waste is eliminated before private expansion compensates.
  - New private firm growth lags until incentives and institutions are credible (Blanchard and Kremer (1997) "disorganization" effect).
  - Early growth typically from efficiency gains; later growth from factor accumulation requiring investment.
- Depth of transitional recession depends on initial conditions (e.g., degree of specialization, availability of exportable commodities).

### Debate on speed and sequencing: Shock Therapy vs Gradualism
- Shock Therapy (Big Bang):
  - Rapid comprehensive reforms can enhance credibility and speed recovery (Sachs (1996)); higher near-term social risks and potential backlash.
  - Nsouli, Rached, Funke (2005): gradualism risks entrenching vested interests; shock therapy can prevent their formation.
- Gradualism:
  - Step-by-step implementation allowing adjustments and learning.
  - Roland (2000) and North (1990): institutional preconditions and institutions mitigate risks of rapid change.
  - Blanchard and Kremer (1997): gradual reforms can reduce reversal risk.
- Literature consensus on sequencing:
  - Macroeconomic stabilization should ideally be implemented first.
  - Real sector liberalization (price, trade, restructuring/privatization) should precede financial sector liberalization.
  - Financial sector liberalization should precede capital account liberalization.

### Stylized sequence of reforms (Agenor and Montiel (2015) synthesis)
- Macroeconomic Stabilization: necessary early condition; buffers shocks; enables banking cleanup and severance funding.
- Trade Liberalization: ideally accompanied by real exchange rate depreciation; precedes capital account opening and financial sector reform.
- Financial Liberalization: free domestic interest rates, rely on indirect monetary instruments; strengthen regulation and supervision early.
- Capital Account Liberalization: open after preceding reforms to avoid amplifying distortions and boom-bust cycles.

### Uzbekistan-specific implications and policy directions
- Suggested reform focus:
  - Entrench macroeconomic stability.
  - Complete price and trade liberalization.
  - Harden budget constraints for SOEs and SOCBs.
  - Strengthen SOE and SOCB corporate governance.
  - Accelerate SOE and SOCB privatization (including large-scale privatization).
  - Recast the state’s role as an enabler of private sector development (macroeconomic stability, legal framework, enforceable property rights, competition policy).
- Comparative approach:
  - As a late reformer, Uzbekistan can draw on sequencing and pacing lessons from other transition economies.

### EBRD transition indicators: measurement and stylized facts
- Indicator scale: range from 1 to 4.3, with 1 representing little or no change from a centrally planned economy and 4.3 representing the standards of an industrialized market economy.
- Stylized facts:
  - Economic reforms completed first across transition countries; sustained shock therapy and advanced start countries largely reached scores of about 4 by 1995.
  - Institutional reforms took longer: about 10 years for large-scale privatization; about 20 years or more for governance and enterprise reform, competition policy, banking sector reform, and infrastructure reform.
  - Non-bank financial sector reforms were slowest; advanced economy standards not achieved by end-2016.
  - Cross-country divergence emerged by the mid-1990s and persisted.

### Outcomes and risks associated with reform speed
- GDP per capita outcomes:
  - Successful early shock therapy countries tended to have shallower recessions and earlier recoveries, achieving higher GDP per capita increases.
- Non-GDP outcomes:
  - Overperformance reflected in UN human development index and social indicators (income inequality, poverty ratios).
- Risks from incomplete reform packages:
  - Privatization without elimination of soft budget constraints and weak rule of law; subsidy reform without appropriate protections; these can derail stabilization and invite vested-interest capture.

### Uzbekistan’s transition progress (since 2017) — economic reforms
- Macroeconomic stabilization:
  - Growth described as rapid and resilient; inflation gradually brought down thanks to tight monetary policy and fiscal consolidation with headwinds from ongoing price liberalization.
  - Current account deficit: declined to 5 percent of GDP in 2024 and is expected to remain around these levels over the medium term.
  - Recent current account widening reflected robust capital flows funding investment and distortions from temporary reductions in custom duties and financial sector programs incentivizing car and machinery imports; mitigated by macroprudential measures.
- Trade and exchange rate liberalization:
  - In 2017, official and parallel market exchange rates unified; foreign currency surrender requirements abolished; exchange rate restrictions eliminated; trade barriers reduced.
  - Average tariff was reduced by 50 percent; mixed and compound tariffs replaced by ad valorem ones.
  - WTO accession process advancing rapidly.
- Price liberalization:
  - Prices of most goods and services liberalized except energy, public transport, and utility prices (including water and heating tariffs).
  - Electricity and gas tariffs have been raised but remain administratively determined and below cost recovery.
- Small-scale privatization:
  - EBRD small scale privatization indicator was at 3.3 in 2014 (compared to 4).
  - Data since 2017 indicate significant increase in privatization proceeds (Privatization Proceeds chart: percent of GDP series 2017–2024 shown).
  - Privatization proceeds source: Ministry of Economy and Finance.

### Institutional reform challenges in Uzbekistan
- SOE dominance:
  - SOEs dominant in strategic sectors: oil and gas refining, power generation and transmission, transportation (airlines, railways, public transportation), metallurgy, mining, telecommunications, and the automobile industry.
  - SOEs also operate in sectors that are primarily private in market economies, such as agriculture, chemicals, metal production, and machine building.
  - Major SOEs still exercise monopoly power and limit private entry despite some restructuring and loss of exclusive rights in parts of the economy.
- Large-scale privatization:
  - Large-scale privatizations remain limited despite legislation implying privatization of major enterprises.
  - Notable privatizations: Coca-Cola Bottlers Uzbekistan; Ipoteka Bank; "Ferganaazot"; Qizilqumsement; Ferghana Oil Refinery Plant.
  - Privatization strategy 2021-2025 aimed to reduce the number of SOEs by 75%.
  - Overall number of SOEs remained largely unchanged, prompting new measures to accelerate the process in February 2025.
  - Large-scale privatization has barely begun 7 years after the acceleration of transition began.
- State-owned commercial banks (SOCBs):
  - SOCBs operate as agents of government programs and disproportionately lend to SOEs in strategic sectors, crowding out credit to other sectors.
  - SOCBs often check only program eligibility criteria rather than repayment capacity for preferential loans.
  - SOCBs rely on frequent capital replenishment by the state when liquidity or capital shortfalls emerge.
  - Ownership and market share: 9 of 36 banks are SOCBs, accounting for about 65 percent of commercial banks’ assets.
  - Ipoteka and 2 small SOCBs were privatized in 2023-24, but financial sector remains SOCB-dominated.
- Corporate governance:
  - Supervisory boards commonly include high-level government officials; boards lack operational autonomy in appointing management and CEOs, who require approval from high government levels (e.g., Cabinet of Ministers).
  - Independent board director concept introduced with target of achieving 30 percent of independent board members by end 2025; operational impact unclear.
  - Multiple governance mechanisms beyond formal structures influence SOE and SOCB operations, restricting flexibility.
- Competition, private sector development, and informality:
  - Degree of competition perceived as weak relative to peers.
  - Entry of new firms below Europe and Central Asia averages and lower than predicted by income per capita.
  - Post-entry firm performance sluggish; formal private firms remain small as they age.
  - SOEs enjoy advantages: preferential access to land, cheap domestic and foreign finance, exclusive market rights.
  - Private sector statistics unreliable because official figures classify SOEs as private companies; private sector largely small firms partly due to tax incentives favoring SMEs.
  - Foreign ownership increased by 26 percent over the last five years; combined number of foreign enterprises (10,906) and joint ventures (3,965) equals 3.5 percent of the total number of operating enterprises at end 2024.
  - Large informal sector signals insufficient incentives to formalize; informality correlated with overregulation, weak legal systems, and corruption.

### Policy implementation priorities to complete transition reforms
- Entrenching macroeconomic stability:
  - Fully implement and sustain the planned fiscal consolidation.
  - Complement fiscal consolidation with restrictive monetary policy to lower inflation to the CBU’s 5 percent target.
  - Address inflation pressures from continued liberalization of administered prices that remain below cost recovery levels.
  - Accompany macro policies with fiscal structural reforms and institutional reforms to drive SOEs and SOCBs to operate commercially whether privatized or remaining in the state portfolio.
  - Accelerate privatization of large SOEs to reduce fiscal risks.
- Completing price and trade liberalization:
  - Increase remaining administered prices to cost recovery levels and then adjust based on proper regulation.
  - Complete the WTO accession process.
  - Provide compensation as needed to those temporarily adversely impacted by reforms.
- Hardening budget constraints for SOEs and SOCBs:
  - Make all diverse forms of support transparent and gradually phase them out.
  - Prohibit SOEs from receiving soft loans.
  - Provide recapitalization of SOCBs only conditional on restructuring plans that ensure viability.
  - Quantify the cost of public service obligations carried out by SOEs and SOCBs, compensate from the budget, and transfer obligations to the budget over time; phase out unaffordable obligations appropriately.
- Strengthening corporate governance and eliminating state intervention:
  - Strengthen supervisory board autonomy and appointment processes to ensure qualified and independent professionals with mandates to run entities on a commercial basis.
  - Vest management with operational control and well-defined commercial objectives; abolish instruments of direct state control.
  - Strengthen financial reporting and performance management in largest SOEs.
- Accelerating privatization of large SOEs and SOCBs:
  - Sell enterprises in an open, transparent manner with valuation procedures meeting international standards.
  - Involve internationally recognized financial advisers.
  - Fully disclose relevant information to bidders with no nationality restrictions.
  - After sale, impose no restrictions on buyers (e.g., labor and social obligations) and allow full restructuring authority.
- Stimulating private sector growth and reducing informality:
  - Address barriers to entry: bureaucratic hurdles, complex laws and regulations, lack of access to bank credit.
  - Deepen administrative reform and improve coordination across state agencies.
  - Implement effective bankruptcy procedures.
  - Eliminate artificial tax disincentives to firm growth.
  - Recognize that a vibrant private sector facilitates SOE restructuring by enabling reemployment.
- Reducing and transforming the role of government:
  - Move from discretionary direct intervention to being an effective regulator and provider of market-supporting institutions.
  - Strengthen courts and public institutions to implement laws and attract foreign direct investment.
- Strategies to increase odds of successful structural reforms (IMF (2023)):
  - Implement complementary reforms together.
  - Front-load gains where possible to build social and political buy-in.
  - Address distributional impacts with targeted support.
  - Strengthen communication by engaging stakeholders early.
  - Build administrative capacity to implement reforms.

### Public-Private Partnerships (PPPs): Uzbekistan experience, scale, and risks
- General evolution and scale:
  - First PPP projects began in 2018, before the Law on PPPs was enacted.
  - By end-2021: more than 200 PPP projects with a total value of USD 6.2 billion (about 8 percent of GDP); concentrated almost entirely in the energy sector.
  - In 2024, government signed agreements with total value of USD 11 billion (10 percent of GDP).
  - At end-2024, value of Uzbekistan’s PPPs stood at USD 31 billion (27 percent of GDP).
  - Government estimated direct and contingent liabilities of PPPs at 15 percent of GDP at end-2024.
- Sector composition (December 2024):
  - Total PPP value: 31,118 USD Mln (100%).
  - Energy: 28,878 USD Mln — 93% of total.
  - Utilities: 1,500 USD Mln — 5% of total.
  - Education: 144 USD Mln — 0.8% of total.
  - Ecology: 116 USD Mln — 0.4% of total.
  - Social: 103 USD Mln — 0.4% of total.
  - Other: 276 USD Mln — 0.9% of total.
- Historical and planned trajectory (2019–2030):
  - Presidential Decree 308 presented a list of PPP projects to be completed during 2025-2030 amounting to USD 30.2 billion.
  - If fully executed, stock of PPPs would rise to 34 percent of GDP at end-2026, before falling to 27.5 percent of GDP in 2030.
  - During 2019-2024 more than 90 percent of project value was in the energy sector; planned 2025-2030 projects expected to be divided more equally across energy, utilities, education, and transportation, with transportation taking the largest share among planned projects.
- Institutional changes and scope expansion:
  - Cabinet resolution 720 broadened PPP scope to include production of goods and delivery of services traditionally provided by state enterprises and PPPs that bring management expertise without private investment.
- Monitoring and fiscal risk context:
  - Rapid PPP growth and significant direct and contingent liabilities (15 percent of GDP estimate at end-2024) highlight need for robust fiscal risk identification and management frameworks, including caps on new PPP project flows and/or caps on the stock of PPP projects, and systems to monitor PPPs.

### PPP risks, international best practices, and policy recommendations
- Typical PPP benefits:
  - Private expertise in design and operation; risk sharing; lower near-term financing requirements when private partners provide upfront financing.
- Main drawbacks and fiscal risks:
  - Complexity, legal uncertainty, undermining budget controls, fiscal illusion, lack of competition, and long-term contingent liabilities that often materialize later.
- Common explicit fiscal costs and implicit risks:
  - Explicit: Start up financing; land/resettlement/infrastructure costs; payments under Purchase Power Agreements; operational subsidies; explicit guarantees; early termination clauses; asset condition at termination; legal disputes.
  - Implicit: Expectation of government support for unprofitable projects without explicit guarantees.
- Project selection and appraisal recommendations:
  - Integrate PPP projects into the public investment management system.
  - Conduct scenario analysis and stress tests of demand, exchange rate depreciation, input prices, and private partner insolvency.
  - Ensure projects have clear income streams or demonstrable fiscal affordability; be cautious with social infrastructure lacking income streams.
  - Empower MoEF as gatekeeper with authority to stop PPP projects at multiple preparation stages; restrict unsolicited proposals.
- Contracting, competition, and renegotiation:
  - Promote transparent procurement, international advisers, full disclosure to bidders, and international valuation standards.
  - Minimize renegotiation via strong contracts, dispute resolution mechanisms (examples: Chile Technical Expert Panel, mandatory arbitration), and limits on renegotiation windows (examples: Colombia and Peru).
  - MoEF should assess significant contract changes as it would new PPP projects.
- Monitoring and performance management:
  - Integrate PPPs into public investment systems; tailor monitoring frequency to project size and stage; specify KPIs and baselines.
  - Require annual financial statements from PPPs; use user feedback for service quality assessment.
  - Prepare intervention plans if monitoring shows materializing risks.
- Fiscal exposure management:
  - Consider annual caps on new PPP projects and/or caps on the stock of PPP projects.
  - Monitor contingent liabilities and include potential realizations in budget formulation.
  - If risks are large, consider reduction or temporary moratorium on new PPP projects.

### Institutional framework for PPPs in Uzbekistan and operational thresholds
- Institutional actors:
  - Fiscal Risk Assessment Department (FRAD) of the Ministry of Economy and Finance: collects and monitors PPP fiscal and contingent liabilities; calculates total fiscal liabilities annually; proposes budget limits on PPP guarantees to the Cabinet.
  - PPP Department of the Ministry of Economy and Finance: maintains records of payments and guarantees; assists in fiscal analysis and monitoring; ensures projects above USD 10 million are submitted to the Cabinet.
  - Center for PPP Projects: engages experts, organizes training, develops model agreements and performance standards, and designs anti-corruption measures.
- Approval thresholds by project value:
  - PPPs < USD 1 million: government partner assesses fiscal risks and approves; MoEF can set guidelines for limits on fiscal liability.
  - PPPs USD 1-10 million: government partner submits concept and project evaluation to MoEF for review and approval/revision; government partner prepares tender documents and draft PPP agreement for MoEF approval; MoEF reviews fiscal commitments and finalizes approval.
  - PPPs > USD 10 million: government partner submits concept and analysis of fiscal obligation to the Cabinet of Ministers for approval.

### Optimism bias, fiscal illusion, renegotiation, and caps — evidence and recommended practices
- Optimism bias:
  - Risks: overestimating benefits or underestimating costs (demand, input costs, financing costs, fiscal support needs).
  - Remedies: stress test demand forecasts; conservative assumptions for user-supported projects; require stress testing at two gateways (after feasibility study and after negotiations but before signing).
- Fiscal illusion and off-budget PPPs:
  - PPPs can lower near-term expenditures while creating larger future expenditures and bypass budget controls.
  - Solutions: evaluate costs and risks during selection; require MoEF approval before project progression; consider contingent liabilities during budget formulation.
- Renegotiation risks:
  - Global renegotiation rate estimated at 33 percent; evidence shows high renegotiation incidence in transportation and water sectors.
  - Mitigations: dispute resolution panels, arbitration, exclusion of existing partners from renegotiated tenders, limits on renegotiation windows, and Cabinet approval requirements.
- Caps and limits to contain fiscal exposure:
  - International examples of caps: Armenia (contingent liabilities limited to GDP); Brazil (current spending on PPPs limited to 5 percent of current revenues); China (local government PPP fiscal liabilities limited to 10 percent of their expenditure); Peru (present value of PPPs limited to 12 percent of GDP).
  - Uzbekistan measures:
    - 2025 Budget includes an annual ceiling on new PPP projects of USD 6.5 billion (about 6 percent of GDP).
    - Government analyzing an upper limit on government commitments for PPP projects to complement the 60 percent of GDP cap on public and publicly guaranteed debt.
    - IMF staff providing technical assistance to identify an appropriate cap on the stock of PPPs.

### Monitoring, KPIs, and recent legal/institutional developments (preserved exactly)
- Monitoring and performance recommendations:
  - Frequency of monitoring depends on project size and stage; large projects may need quarterly or monthly monitoring.
  - Monitoring requires a clear baseline and KPIs; baseline can often be obtained from the fiscal sustainability report (FSR).
  - KPIs should focus on measurable outputs, service quality, and financial performance; users can be a source of service quality information.
  - PPP contracts should require annual financial statements to support oversight.
  - Contracts can include KPIs on maintenance; example KPI set count: 15 KPIs; sample KPI examples: at least one vehicle every two minutes; minimum of 400 vehicles an hour.
- Recent legal and institutional developments (preserved exactly):
  - 2018: Law on Public Private Partnerships (LRU-537).
  - December 2018: Cabinet Decree No. 1009 established a PPP Development Agency in the Ministry of Finance with staff of 30.
  - December 2019: Law on Investments and Investment Activity.
  - 2020: Cabinet Resolution 259 provided procedures for execution of PPP projects and for maintaining a register of PPP projects.
  - January 2021: PPP Law amended to require MoEF approval for projects that incur direct budget costs, create contingent liabilities, or create direct or indirect costs borne by the budget.
  - August 2021: Regulation 509 specified the procedure for approving PPPs.
  - April 2023: Public Debt Law introduced; did not define PPP-incurred debt as part of public and publicly guaranteed debt but allowed government to introduce a limit on guarantees to PPPs.
  - October 2023: Cabinet Resolution 558 implemented a procedure for the government to review and approve fiscal liabilities from PPPs; established the Fiscal Risk Assessment Department (FRAD) in the Ministry of Economy and Finance.
    - Fiscal liabilities must be evaluated when the project concept and project evaluation documents are approved and immediately before signing the PPP agreement.
    - Projects valued at USD 10 million or more and payment of contingent liabilities that exceed previous projections require approval by the Cabinet of Ministers.
    - Each year the Ministry of Economy and Finance, together with the Cabinet of Ministers, must propose to the Parliament budget limits on guarantees and fiscal obligations of PPPs.
  - August 2024: Presidential Decree 308 on “Measures on the Development of Public-Private Partnerships for 2024-2030”:
    - Requires amendment of the Public Debt Law to include an upper limit on take-or-pay agreements and letters of comfort for PPP projects.
    - Replaced the PPP Development Agency with a new Center for Public-Private Partnership Projects.
    - Requires the text of all PPP agreements be sent to the MoEF, establishment of a PPP registry, and an annual presentation to Parliament on the status of PPPs.
    - Approved a program of PPP projects from 2025 to 2030 totaling USD 30 billion.
  - October 2024: Cabinet Resolution 720 on the “Procedures for Implementation and Financing of PPP Projects” replaced Resolution 259 and clarified approval and implementation procedures, amended requirements for private partner technical expertise and third-party qualification criteria, and required measurable Key Performance Indicators (KPIs).

### Key statistics and limits (preserved exactly)
- Current account deficit: 5 percent of GDP in 2024.
- EBRD small scale privatization indicator: 3.3 in 2014 (compared to 4).
- Ownership and market share: 9 of 36 banks are SOCBs, accounting for about 65 percent of commercial banks’ assets.
- Combined number of foreign enterprises and joint ventures: foreign enterprises (10,906) and joint ventures (3,965) — 3.5 percent of total number of operating enterprises at end 2024.
- PPP totals and thresholds:
  - By end-2021: more than 200 PPP projects valued at USD 6.2 billion (about 8 percent of GDP).
  - 2024 signed agreements total value: USD 11 billion (10 percent of GDP).
  - At end-2024: value of PPPs stood at USD 31 billion (27 percent of GDP); government estimated direct and contingent liabilities at 15 percent of GDP.
  - Total PPP value (December 2024): 31,118 USD Mln (100%).
  - Energy PPP value: 28,878 USD Mln — 93% of total.
  - Presidential Decree 308 PPP list for 2025-2030: USD 30.2 billion.
  - If fully executed, PPP stock would rise to 34 percent of GDP at end-2026 and fall to 27.5 percent of GDP in 2030.
  - Annual ceiling on new PPP projects in the 2025 Budget: USD 6.5 billion (about 6 percent of GDP).
  - Public and publicly guaranteed debt cap referenced: 60 percent of GDP.
  - Project valuation threshold requiring Cabinet approval: USD 10 million or more.
  - PPP program approved in Presidential Decree 308 for 2025 to 2030: USD 30 billion.
  - Example KPI maintenance set count: 15 KPIs.
  - Specific monitoring KPI examples: at least one vehicle every two minutes; minimum of 400 vehicles an hour.

*International Monetary Fund — Republic of Uzbekistan (excerpts).*

### 1. EBRD Core Transition Indicators 1989-2014 _________________________________________ 17

### 1uzbea2025002-print-pdf - 1. EBRD Core Transition Indicators 1989-2014

### Overview and key context
- Uzbekistan has made significant progress in its transition to a market economy since 2017.
- Key areas of progress cited: unification of the official and parallel market exchange rates and elimination of foreign exchange restrictions; deregulation of prices for most goods and services; liberalization of trade, including significant progress towards World Trade Organization (WTO) accession; commencement of energy sector reform with tariff increases combined with protection of the vulnerable; tax policy and tax administration reform to reduce the tax burden on the private sector; an expansion of the coverage of the social safety net; introduction of comprehensive public financial management reforms to strengthen fiscal transparency and discipline; strengthening of monetary policy transmission and central bank governance.
- Remaining challenges identified: reform and privatization of large state-owned enterprises (SOEs), establishment of a competitive environment with easy market entry and exit, reduction and transformation of the role of the state in the economy.

### Academic literature: core transition model and mechanisms
- Two key changes required for transition (Kornai (1994)):
  - Forcing a move from a sellers' market to a buyers' market (via price liberalization).
  - Enforcing a hard budget constraint on SOEs and SOCBs (eliminating subsidies, directed low-cost loans, tax exemptions) while implementing institutional reforms such as large-scale privatization.
- Core processes through which transition occurs (Blanchard (1997)):
  - Reallocation of resources from old to new activities (closures, bankruptcies, establishment of new enterprises).
  - Restructuring within surviving firms (labor rationalization, product line change, new investment).
- Fisher and Gelb (1991) classification of reforms:
  - Economic reforms: macroeconomic stabilization; price liberalization; trade and foreign exchange liberalization; small-scale privatization.
  - Institutional reforms: large-scale privatization; governance and enterprise restructuring; establishing competitive environment with easy market exit and entry; reducing and transforming the role of the state.
- Definitions and objectives emphasized:
  - Macroeconomic stabilization: bringing inflation under control via fiscal consolidation, discipline over growth of money and credit, and progress toward a sustainable balance of payments.
  - Price and market liberalization: eliminate price controls so supply and demand determine prices.
  - Trade and exchange rate liberalization: reduce tariffs, quotas, non-tariff barriers; allow exchange rate to be determined by supply and demand.
  - Restructuring and privatization: reform SOEs and SOCBs to create commercially oriented sectors; privatization to increase private sector role.
  - Competitive environment: reform product, labor, and network industries to promote competition and easy entry and exit, with appropriate regulation for natural monopolies.
  - Transforming the role of the state: from central planner to enabler of private sector growth (macroeconomic stability, enforceable property rights, rule of law, competition policy).

### Transition dynamics and timing effects
- Transitional recession mechanism:
  - Price liberalization and hard budget constraints cause SOE output declines as state-supported sales fall.
  - Output decline is compounded by elimination of waste before private sector expansion.
  - New private firm growth lags until incentives and institutions are credible — the Blanchard and Kremer (1997) "disorganization" effect.
  - Early growth typically comes from efficiency gains (reallocation and recovery of unutilized capacity); later growth from factor accumulation requiring investment.
- Depth of transitional recession depends on initial conditions (e.g., degree of specialization, availability of exportable commodities).

### Debate on speed and sequencing: Shock Therapy vs Gradualism
- Shock Therapy (Big Bang):
  - Rapid implementation of a comprehensive package of economic and basic institutional reforms to enhance credibility and leverage momentum.
  - Credibility enhanced by complementary measures that can offset negative effects (e.g., tight fiscal/monetary policy offsetting price liberalization inflation).
  - Sachs (1996): immediate liberalization can lead to faster recovery and growth but has higher risks of social backlash and reform reversal.
  - Nsouli, Rached, Funke (2005): gradualism risks building vested interests that impede reforms; shock therapy can prevent such vested interest formation.
- Gradualist approach:
  - Step-by-step implementation allowing adjustments and learning.
  - Roland (2000): stresses importance of institutional reforms as preconditions for market reforms.
  - North (1990): institutions mitigate risks of rapid change.
  - Blanchard and Kremer (1997): gradual reforms can yield more stable transitions by reducing reversal risk.

### Stylized sequence of reforms suggested in broader literature (Agenor and Montiel (2015) synthesis)
- Macroeconomic Stabilization:
  - Treated as a necessary condition to credibly implement and sustain other reforms; typically implemented first.
  - Rationale: fiscal strength buffers shocks; needed for banking cleanup and funding severance; high inflation undermines price signals and reform credibility.
- Trade Liberalization:
  - Ideally accompanied by real exchange rate depreciation to stimulate exports and dampen imports.
  - Should normally precede capital account opening and financial sector reform to avoid undermining export competitiveness and to limit credit misallocation.
- Financial Liberalization:
  - Freeing domestic interest rates, greater reliance on indirect monetary instruments, strengthening regulation and supervision.
  - Strengthening regulation/supervision should start early because it takes time and reduces risks when rates become market-determined.
  - Should be preceded by real sector reforms (restructuring/privatization) and price liberalization to reduce credit risk and limit misallocation.
- Capital Account Liberalization:
  - Opening to portfolio flows and short-term capital should generally occur after other reforms.
  - Reasons cited:
    - Financial distortions amplified by capital flows (over-intermediation, moral hazard).
    - Risk of real exchange appreciation undermining trade liberalization and provoking reform reversals.
    - Insufficient financial development complicates management of inflows/outflows and raises boom-and-bust risk.

### Uzbekistan-specific implications and policy directions
- Suggested reform focus going forward:
  - Entrench macroeconomic stability.
  - Complete price and trade liberalization.
  - Harden budget constraints for SOEs and SOCBs.
  - Strengthen SOE and SOCB corporate governance.
  - Accelerate SOE and SOCB privatization (including large-scale privatization).
  - Refocus the state’s role as an enabler of an environment conducive to private sector development (macroeconomic stability, legal framework, enforceable property rights, competition policy).
- Comparative approach:
  - As a late reformer, Uzbekistan can draw on sequencing and pacing lessons from other transition economies to reduce risks of unintended consequences and reform reversals, and to ensure institutional reforms are in place to support transformation.

*Source: 1uzbea2025002-print-pdf - 1. EBRD Core Transition Indicators 1989-2014; https://www.imf.org/-/media/files/publications/cr/2025/english/1uzbea2025002-print-pdf.pdf*

### 9.      To summarize the above discussion, the academic literature tends to highlight trade-

### C. Speed and Sequence of Transition Reform Experiences

### Trade-offs in reform speed and sequencing
- Shock therapy proponents: argue for faster and more comprehensive reform implementation to achieve faster growth; too slow a reform pace may facilitate capture of the reform process by vested interests risking not only reform reversals but even reform failure; usually acknowledge the risk of social backlash in the near term.
- Gradualists: emphasize building up institutions which would lead to a more gradual growth pickup but one that is more likely to be durable and less subject to reform reversals.
- Literature consensus on sequencing: macroeconomic stabilization should ideally be implemented first; reforms that liberalize the real sector (i.e., price liberalization, trade liberalization, restructuring and privatization of state enterprises) should be implemented before reforms that liberalize the financial sector; financial sector liberalization should precede capital account liberalization.

### Use of EBRD transition indicators and what they measure
- EBRD transition indicators used to measure speed and sequence of implementation of transition reforms; available continuously from the start of transition in 1989 and in many cases until 2014 or 2016 depending on the indicators.
- Indicator scale: range from 1 to 4.3, with 1 representing little or no change from a centrally planned economy and 4.3 representing the standards of an industrialized market economy.
- Indicators cover:
  - Economic reforms: price liberalization; trade and foreign exchange liberalization; small-scale privatization.
  - Institutional reforms: large scale privatization; governance and enterprise restructuring; competition policy; banking reform; reform of securities markets and non-bank financial institutions; infrastructure reforms.

### Stylized facts from transition indicators (Figures 1-3)
- Economic reforms:
  - With the exception of limited reforms countries, transition countries completed economic reforms first irrespective of reform approach although with significant differences in speed.
  - Sustained shock therapy and advanced start countries had largely completed these reforms (i.e., achieving a score of about 4) by 1995; aborted shock therapy countries completed them by the end of the 1990s.
  - It took gradualist countries one more decade than the sustained shock therapy transition countries to complete these reforms.
- Institutional reforms:
  - Institutional reforms were significantly more difficult to complete than economic reforms.
  - For the most successful sustained shock therapy countries: about 10 years to complete large scale privatization; about 20 years or more to get close to completing governance and enterprise reform, competition policy reforms, banking sector reform, and infrastructure reform.
  - Progress in reforming the non-bank financial sector was the slowest, with advanced economy standards still not achieved by the end of 2016.
- Cross-country performance:
  - Countries most successful in economic reforms also tended to be most successful in institutional reforms.
  - Sustained shock therapy countries, advanced start countries, and aborted shock therapy countries tended to outperform gradualist reform countries in institutional reform progress.
  - Gradualist reform countries never caught up with shock therapy countries in institutional reforms within the period covered.
- Divergence over time:
  - By the mid-1990s differences among countries were already large and did not shrink over time; leaders continued to move resolutely forward while slower reformers could not catch up.

### Outcomes and risks associated with reform speed
- GDP per capita outcomes:
  - Successful early shock therapy countries tended to have shallower recessions and were the first to experience an economic recovery, minimizing social costs of transition over time.
  - Rapid reform pace reduced central planning-related inefficiencies fastest and helped achieve the highest GDP per capita increases.
- Non-GDP outcomes:
  - Overperformance mirrored in UN human development index and other social outcome indicators, such as income inequality and poverty ratios.
- Risks from incomplete reform packages (aborted big bang cases):
  - Examples include privatization without elimination of soft budget constraints and inadequate rule of law, and subsidy reform with inappropriate support for the vulnerable.
  - Incomplete packages can derail macroeconomic stabilization, facilitate capture by vested interests, and/or generate resistance by groups that can derail reform.

### Uzbekistan’s transition progress (since 2017)
- General pattern: strengths in economic reforms; institutional reforms proceeding slower than in other successful transition economies.
- Macroeconomic stabilization:
  - Growth described as rapid and resilient; inflation gradually brought down thanks to tight monetary policy and fiscal consolidation with headwinds from still ongoing necessary price liberalization.
  - Current account deficit: declined to 5 percent of GDP in 2024 and is expected to remain around these levels over the medium term.
  - Recent current account widening reflected robust capital flows funding investment and distortions from temporary reductions in custom duties and financial sector programs incentivizing car and machinery imports; mitigated by macroprudential measures.
- Trade and exchange rate liberalization:
  - In 2017, official and parallel market exchange rates were unified; foreign currency surrender requirements abolished; existing exchange rate restrictions eliminated; trade barriers reduced.
  - Average tariff was reduced by 50 percent; mixed and compound tariffs were replaced by ad valorem ones.
  - Some discriminatory excises on imports and export permit requirements for most goods were eliminated; customs procedures were rationalized to reduce clearance times.
  - WTO accession process has gained momentum and is currently advancing rapidly.
- Price liberalization:
  - Prices of most goods and services liberalized except energy, public transport, and utility prices (including water and heating tariffs).
  - Electricity and gas tariffs have been raised in recent years but remain administratively determined and below cost recovery.
- Small-scale privatization:
  - EBRD small scale privatization indicator was at 3.3 in 2014 as compared to 4, which signifies a largely completed process.
  - Data since 2017 indicate significant increase in privatization proceeds (Privatization Proceeds chart: percent of GDP series 2017–2024 shown).
  - Privatization proceeds source: Ministry of Economy and Finance.

### Institutional reform challenges in Uzbekistan
- SOE dominance:
  - SOEs dominant in strategic sectors: oil and gas refining, power generation and transmission, transportation (airlines, railways, public transportation), metallurgy, mining, telecommunications, and the automobile industry.
  - SOEs also operate in sectors that are primarily private in market economies, such as agriculture, chemicals, metal production, and machine building.
  - Some SOEs underwent institutional restructuring to separate regulatory and operational activities and lost exclusive rights to certain markets, but major SOEs still exercise monopoly power and limit private entry.
- Large-scale privatization:
  - Large-scale privatizations remain limited despite legislation implying privatization of major enterprises in several sectors.
  - Notable privatizations: Coca-Cola Bottlers Uzbekistan; Ipoteka Bank; "Ferganaazot"; Qizilqumsement; Ferghana Oil Refinery Plant.
  - Privatization strategy 2021-2025 aimed to reduce the number of SOEs by 75%.
  - Overall number of SOEs (i.e., Joint Stock Companies, Limited Liability Companies) remained largely unchanged, leading to adoption of new measures to accelerate the process in February 2025.
  - Privatization has been slower than in other successful transition economies; large-scale privatization has barely begun 7 years after the acceleration of transition began.
- State-owned commercial banks (SOCBs):
  - SOCBs operate as agents of government programs and disproportionately lend to SOEs in strategic sectors, crowding out credit access to other sectors.
  - SOCBs conduct only limited assessment of borrowers’ repayment capacity when originating preferential loans, mostly checking compliance with program eligibility criteria.
  - SOCBs rely on frequent capital replenishment by the state when liquidity or capital shortfalls emerge.
  - Ownership and market share: 9 of 36 banks are SOCBs, accounting for about 65 percent of commercial banks’ assets.
  - Even though Ipoteka and 2 small SOCBs were privatized in 2023-24, the financial sector remains dominated by SOCBs.
- Corporate governance:
  - Corporate governance remains problematic in both SOEs and SOCBs, enabling significant government intervention in decisions and operations.
  - Supervisory boards commonly include high-level government officials and ministry representatives; boards do not appear to have operational autonomy in appointing management board members and company CEOs, who ultimately need approval from the highest levels of government (e.g., Cabinet of Ministers).
  - The concept of an independent board director was introduced with a target of achieving 30 percent of independent board members by end 2025; the operational impact remains unclear.
  - Multiple governance mechanisms and policies beyond formal structures continue to significantly influence performance and daily operations of SOEs and SOCBs, likely restricting flexibility and market responsiveness.
- Competition, private sector development, and informality:
  - Degree of competition in product markets perceived as weak compared with key peers.
  - Entry of new firms remains well below averages for Europe and Central Asia and lower than predicted by income per capita.
  - Post-entry firm performance sluggish, with formal private firms staying small as they age.
  - SOEs enjoy advantages over private firms: preferential access to land (e.g., mining exploration land retained by mining SOEs), cheap domestic and foreign finance (directed lending by SOCBs and government guarantees), and exclusive market rights that impede a level playing field.
  - Private sector statistics unreliable because official figures classify SOEs as private companies; private sector largely composed of small firms in part due to tax incentives favoring SMEs.
  - Foreign ownership of private businesses increased by 26 percent over the last five years; combined number of foreign enterprises (10,906) and joint ventures (3,965) remains low at 3.5 percent of total number of operating enterprises at end 2024.
  - Firms struggling to grow suggests productivity and performance are not being rewarded, reflecting a distortive business environment linked to large state role and insufficient SOE restructuring and privatization.
  - A large informal sector signals insufficient incentives for firms to become formal; high informality typically correlated with overregulation, weak legal systems, and corruption.

*Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1uzbea2025002-print-pdf.pdf*

### 18.      After significantly advancing economic transition reforms since 2017, Uzbekistan

### After significantly advancing economic transition reforms since 2017, Uzbekistan

### Policy implementation priorities to complete transition reforms
- Entrenching macroeconomic stability
  - Fully implement and sustain the planned fiscal consolidation.
  - Complement fiscal consolidation with restrictive monetary policy to lower inflation to the CBU’s 5 percent target.
  - Address inflation pressures from continued liberalization of administered prices that remain below cost recovery levels.
  - Accompany macro policies with key fiscal structural reforms and institutional reforms to drive SOEs and SOCBs to operate commercially whether privatized or remaining in the state portfolio.
  - Accelerate privatization of large state-owned enterprises to reduce fiscal risks that threatened consolidation plans in other transition economies.
- Completing price liberalization and trade liberalization
  - Increase remaining administered prices to cost recovery levels and then adjust based on proper regulation.
  - Complete the WTO accession process to facilitate reduction of trade barriers and increase external competitive pressure.
  - Provide compensation as needed to those temporarily adversely impacted by reforms (especially the vulnerable), as illustrated by recent electricity and gas price adjustments.
- Hardening budget constraints for SOEs and SOCBs
  - Make all diverse forms of support to SOEs and SOCBs transparent and gradually phase them out to incentivize restructuring and efficiency improvements.
  - Prohibit SOEs from receiving soft loans.
  - Provide recapitalization of SOCBs only conditional on implementing restructuring plans that ensure viability and avoid further recapitalization needs.
  - Fully quantify the cost of public service obligations carried out by SOEs and SOCBs, compensate them appropriately from the budget, and transfer these obligations to the budget over time. If support is unaffordable after quantification, phase out these obligations appropriately.
- Strengthening corporate governance and eliminating state intervention
  - Strengthen supervisory board autonomy and reform appointment processes to ensure qualified and independent professionals are appointed with mandates to run entities on a commercial basis.
  - Vest management with operational control focused on well-defined commercial objectives in corporate plans, without direct state intervention.
  - Continue to strengthen proper financial reporting and performance management mechanisms in the largest SOEs.
  - Abolish any instrument of direct state control.
- Accelerating privatization of large SOEs and SOCBs following international good practices
  - Sell enterprises in an open, transparent manner with valuation procedures that correspond to international standards.
  - Involve internationally recognized financial advisers.
  - Fully disclose all relevant information to all bidders with no restriction on the number or nationality.
  - After the sale, pose no restrictions on buyers such as taking over labor and social obligations; new owners should have full control to restructure appropriately.
- Stimulating private sector growth and reducing informality
  - Address barriers to entry for domestic and foreign private firms: bureaucratic hurdles, complex laws and regulations, and lack of access to bank credit.
  - Deepen administrative reform and improve coordination across state agencies to reduce regulatory multiplicity and contradictions.
  - Implement effective bankruptcy procedures to facilitate exit and reallocation of unprofitable firm resources.
  - Eliminate artificial tax disincentives to firm growth.
  - A vibrant private sector is essential to facilitate SOE restructuring by enabling reemployment of displaced workers.
- Reducing and transforming the role of government
  - Move from discretionary direct intervention and controls to being an effective regulator and provider of market-supporting institutions.
  - Create sound laws and regulations and ensure sufficient institutional capacity in courts and public institutions to implement them effectively, reducing perceived risk and helping to attract foreign direct investment.
- Strategies to increase odds of successful structural reforms (IMF (2023))
  - Implement complementary reforms together.
  - Front-load gains where possible to generate social and political buy-in for deeper reforms.
  - Address distributional impacts by providing targeted support to adversely affected groups.
  - Strengthen communication by engaging stakeholders early and explaining benefits clearly.
  - Build capacity to enhance administrative capabilities to implement reforms.

### Public-Private Partnerships (PPPs): benefits, drawbacks, and fiscal risks
- Nature and typical features of PPPs
  - PPPs involve public and private sectors cooperating to finance and provide services, often via a firm or special purpose vehicle.
  - PPPs generally involve long-term contracts (e.g., 25 years); the private partner may or may not have an obligation to transfer ownership to the government at a future date.
  - PPPs have been used for hospitals, schools, prisons, transportation infrastructure, and energy projects.
- Benefits of PPPs
  - Bring private sector expertise at design and operation stages, potentially raising operating efficiency.
  - Share project risks between public and private sectors; risk allocation should favor the party better able to manage a given risk (examples: design, input costs, maintenance, operation).
  - May involve lower near-term financing requirements as private partners bring financing and bear certain upfront costs (e.g., land, resettlement, infrastructure to project site, initial payments or subsidies).
- Drawbacks and risks of PPPs
  - PPPs are more complex than traditional public investment, involving many stakeholders and complex arrangements.
  - Poor legal framework, project selection, or management can produce legal uncertainties and inefficient management.
  - PPPs can undermine budget processes by bypassing budget controls and creating fiscal illusion—lower near-term payments may mask higher future costs.
  - Lack of competition can allow private partners to charge above-market prices, especially in natural or regulatory monopolies.
  - PPPs are not well suited for social infrastructure that lack clear income streams.
  - Risks from PPPs tend to materialize later, during operation, compared with traditional projects where risks materialize earlier during construction.
- Common fiscal costs and fiscal risks from PPPs (Table 1)
  - Explicit fiscal costs: Start up financing; costs of land, resettlement, and infrastructure before PPP begins; payments under Purchase Power Agreements; operational subsidies; explicit guarantees (financing, revenues, power purchase prices, exchange rate); early contract termination clauses; asset condition at contract termination; legal disputes.
  - Implicit fiscal risks: Implicit guarantees—government may need to step in to support unprofitable or insolvent projects even without explicit guarantees.

### Uzbekistan’s PPP experience, size, sector composition, and pipeline
- General evolution and scale
  - The first PPP projects began in 2018, before the Law on PPPs was enacted.
  - By end-2021, Uzbekistan had more than 200 PPP projects with a total value of USD 6.2 billion (about 8 percent of GDP). These projects were concentrated almost entirely in the energy sector. The pipeline included nine projects worth USD 1.7 billion close to signing and 15 projects worth USD 2.2 billion at the tender stage.
  - In 2024, the government signed agreements with a total value of USD 11 billion (10 percent of GDP).
  - At end-2024, the value of Uzbekistan’s PPPs stood at USD 31 billion (27 percent of GDP). The government estimated that direct and contingent liabilities of PPPs stood at 15 percent of GDP.
- Sector composition (December 2024)
  - Total PPP value: 31,118 USD Mln (100%).
  - Energy: 28,878 USD Mln — 93% of total.
  - Utilities: 1,500 USD Mln — 5% of total.
  - Education: 144 USD Mln — 0.8% of total.
  - Ecology: 116 USD Mln — 0.4% of total.
  - Social: 103 USD Mln — 0.4% of total.
  - Other: 276 USD Mln — 0.9% of total.
- Historical and planned trajectory (2019–2030)
  - Presidential Decree 308 presented a list of PPP projects to be completed during 2025-2030 amounting to USD 30.2 billion.
  - If fully executed, the stock of PPPs would rise to 34 percent of GDP at end-2026, before falling to 27.5 percent of GDP in 2030.
  - Figures show planned flows and sectoral shifts: during 2019-2024 more than 90 percent of project value was in the energy sector; planned 2025-2030 projects are expected to be divided more equally across energy, utilities, education, and transportation, with transportation taking the largest share among planned projects (key planned projects include Tashkent-Samarkand and Tashkent-Andijan toll roads).
- Institutional changes and scope expansion
  - Cabinet resolution 720 broadened the scope of PPP activities: permits PPPs that produce goods and deliver services traditionally provided by state enterprises and allows PPPs that bring management expertise without private investment.
- Monitoring and fiscal risk context
  - Rapid growth in PPPs and significant direct and contingent liabilities (15 percent of GDP estimate at end-2024) highlight the need for robust fiscal risk identification and management frameworks, including caps on new PPP project flows and/or caps on the stock of PPP projects, and systems to monitor PPPs to guard against realization of contingent liabilities.

### Management of PPP risks and international best practices (implications for Uzbekistan)
- Project-level practices to manage risks
  - Integrate PPP projects into the public investment management system.
  - Conduct scenario analysis to stress key assumptions.
  - Evaluate costs and risks of PPP projects during selection.
  - Create frameworks that minimize renegotiation of PPP contracts.
- Macroeconomic-level practices to mitigate risks
  - Consider an annual cap on new PPP projects and/or a cap on the stock of PPP projects to avoid accumulation of explicit and implicit guarantees.
  - Maintain a robust monitoring system to track PPP contingent liabilities and fiscal exposures.
- Selection and appraisal
  - Ensure projects selected for PPP have clear income streams or fiscal affordability; be cautious about social infrastructure projects that may not be attractive to private partners or may create future fiscal liabilities.
- Contracting and competition
  - Promote competition to avoid monopoly pricing by private partners.
  - Use transparent procurement, international advisers, full disclosure to bidders, and international valuation and sale standards where privatization or private participation is involved.

*Italic: International Monetary Fund — Republic of Uzbekistan chapter excerpt*

### 6.      Uzbekistan’s scale of PPP development is significantly larger than in other countries.

### 6.      Uzbekistan’s scale of PPP development is significantly larger than in other countries.

### Institutional Framework
- In 2023, Uzbekistan signed six PPP projects worth USD 1.6 billion, comprising almost 40 percent of total commitments to low- and middle-income countries in Europe and Central Asia that year.
- Aside from line ministries, three entities have institutional responsibilities for PPPs:
  - The Fiscal Risk Assessment Department (FRAD) of the Ministry of Economy and Finance:
    - collects and monitors data on government fiscal and contingent liabilities from PPPs;
    - calculates total fiscal liabilities from PPPs on an annual basis; and
    - proposes budget limits on PPP guarantees to the Cabinet of Ministers.
  - The PPP Department of the Ministry of Economy and Finance:
    - maintains records of payments and guarantees for PPP agreements;
    - assists in calculating fiscal obligations and assesses risks, quality, demand, and fiscal commitments of proposed PPPs;
    - prepares recommendations and fiscal analysis for the FRAD;
    - ensures projects above USD 10 million are submitted to the Cabinet for approval; and
    - monitors the fiscal obligations in PPP agreements.
  - The Center for PPP Projects:
    - engages with local and international experts, organizes training, and develops PPP initiatives, model agreements, models, and performance standards;
    - designs measures to prevent corruption and conflicts of interest in PPP projects.

### Risks from PPPs — Explicit and Implicit
- Explicit risks:
  - include government guarantees, obligations to purchase the output of PPP projects, or supply inputs at fixed prices.
  - examples: minimum revenue or usage guarantees; subsidies to producers if tariffs fall below an agreed level; transfers to cover operational losses, unexpected exchange rate changes, or higher input costs.
  - guarantees can facilitate access to cheaper credit but expose the government to uncertain future cash flows if the PPP borrower defaults.
- Implicit risks:
  - are expectations that the government will provide financial support if a project experiences difficulties or faces bankruptcy.
  - historical example: from 1990 to 2018, the budgetary impact from the materialization of PPP contingent liabilities averaged about half of one percent of GDP in Middle East and North African Countries.

### Project Selection Risks — Findings and Solutions
Findings
- Lack of a rigorous, centralized selection process can lead to less productive PPPs being chosen; PPPs are not necessarily more efficient than other forms of investment.
- Acceptance of unsolicited PPP project proposals can allocate resources to projects that do not align with government sector priorities and can yield worse contract terms than competitive tenders.
- International examples:
  - Mongolia: PPPs used to obtain financing faced less scrutiny and many failed to deliver promised services.
  - South Africa: Treasury approval required at four stages: (i) following feasibility study, (ii) after preparing bid documents, (iii) while evaluating bids, and (iv) before contract approval.

Solutions
- Integrate PPP projects into a unified public investment management system that screens and selects public investments.
- Base selection on clear objectives and criteria including fiscal sustainability, ability to deliver services, capacity of providers, and availability of private sector financing.
- Empower the Ministry of Economy and Finance (MoEF) to act as a gatekeeper with the power to stop PPP projects at multiple preparation stages (feasibility study, tender documents, final contract).
- Consider forbidding or restricting direct negotiation of unsolicited PPP proposals.

Uzbekistan-specific arrangements
- Some PPPs used the Law on Investments and Investment Activities because the original PPP law (2019) did not provide a sufficient framework for private sector borrowing and Investment Law approval bypassed MoEF oversight.
- A 2021 amendment to the PPP Law required MoEF approval for projects that incur direct budget costs, create contingent liabilities, or create any direct or indirect costs borne by the budget.
- A 2022 Presidential Decree required future PPPs to be approved under the PPP Law and suspended direct negotiation of unsolicited proposals by line ministries.
- Current approval thresholds by project value:
  - PPPs < USD 1 million: government partner assesses fiscal risks and approves; MoEF can set guidelines for limits on fiscal liability.
  - PPPs USD 1-10 million: government partner submits concept and project evaluation to MoEF, which reviews and approves/rejects/requests revisions; government partner prepares tender documents and draft PPP agreement for MoEF approval; MoEF reviews fiscal commitments and finalizes approval.
  - PPPs > USD 10 million: government partner submits concept and analysis of fiscal obligation to the Cabinet of Ministers for approval.

### Optimism Bias — Risks, Examples, and Remedies
Risks
- Optimism bias involves overestimating benefits or underestimating costs, including demand, input costs, financing costs, and fiscal support needs.

Examples
- Colombia (1990s): guaranteed toll revenues and utility payments under long-term PPAs; lower than expected demand resulted in the government paying $2 billion to private partners.
- Korea: government guaranteed 90 percent of revenues for 20 years on a toll road to the airport; traffic was 50 percent of projected demand and the government paid several million US dollars per year.
- Mexico (early 1990s): contracted to build and operate 5,500 km of roads; lower traffic and higher interest rates led the government to assume $7.7 billion in debt.
- Empirical studies: actual costs for 258 transportation projects were on average 28 percent higher than planned; rail projects had actual demand on average half as high as projected demand.

Solutions
- Stress test demand forecasts via scenario analysis.
- For government-customer PPPs, ensure projects can produce expected output; for user-supported projects, employ conservative assumptions.
- Typical stress scenarios should estimate impacts of:
  - (a) demand below projections,
  - (b) a sizeable depreciation of the exchange rate,
  - (c) higher input prices,
  - (d) the fiscal cost if the private partner goes bankrupt after several years of operation.
- Require these stress tests by PPP contract and ensure MoEF enforces completion at minimum during two gateway checkpoints: (i) after the feasibility study is finalized, and (ii) after negotiations are concluded but before contract signing.

Uzbekistan
- Most PPPs are at an early stage, so evidence of optimism bias in selection is not yet apparent; MoEF is conducting scenario analysis regarding contingent liabilities.

### Fiscal Illusion and Off-Budget PPPs — Risks and Management
Risks
- PPPs can reduce near-term expenditures while creating larger future expenditures, enabling bypass of budget and public borrowing limits.
- Fiscal risks often materialize later in a project lifecycle.

Examples
- Jordan: share of public investment in total general government expenditures decreased from about 20 percent in 2009 to about 10 percent in 2013–2015; PPP debt guarantees almost doubled between 2010 and 2017.
- Mongolia: PPPs used to finance projects when budget funding was lacking, implemented without attention to long-term implications, leading to higher future costs.

Solutions
- Evaluate costs and risks of PPP projects during selection; projects should not proceed until MoEF approval is obtained.
- Consider potential realization of contingent liabilities during budget formulation.

Uzbekistan
- MoEF has been developing expertise to assess potential contingent liabilities.
- PPPs and their liabilities are not included in the budget nor in public and publicly guaranteed debt.
- MoEF often struggles to obtain early-stage information from other ministries to assess fiscal risk.

### Renegotiation — Causes, Evidence, and Mitigations
Risks
- Risk-sharing features of PPPs can lead to renegotiation of responsibilities; private partners may seek renegotiation knowing government switching costs are high.
- Events triggering renegotiation include higher-than-expected construction costs, government policy changes, changes in regulated prices, and higher-than-expected operating costs.

Evidence
- Study of 1,000 projects in Latin America: 10 percent of electricity, 55 percent of transportation, and 75 percent of water projects were renegotiated.
- Global renegotiation rate estimated at 33 percent, ranging from 12 percent in East Asia to 58 percent in Latin America.
- Chile (1991–2007): accumulated PPP value of $11 billion (about 5 percent of GDP) in 2007; one quarter of PPP investments required renegotiation partly due to unclear institutional arrangements; renegotiations did not require competitive bidding, resulting in higher government costs.

Solutions
- Mechanisms to minimize renegotiation:
  - Chile revised its PPP law in 2010 to establish a Technical Expert Panel to review disputes; Panel recommendations followed in 40 percent of cases and mandatory arbitration is required when private partners disagree; revisions excluded existing partners from tenders for additional renegotiated work. After revision, renegotiated investment fraction fell from over a quarter to less than one percent.
  - Colombia and Peru forbid renegotiation during the first three years of a PPP project.
  - Australia requires Cabinet approval for PPP renegotiations.
- MoEF should assess contract changes as it would new PPP projects.

Uzbekistan
- PPPs are relatively new and significant renegotiations have not yet occurred, but pressure to renegotiate is likely in the future.

### Managing Risks — Limiting Exposure with Annual Ceilings and Stock Caps
Risk
- Rapid accumulation of PPP projects can create macroeconomic risk even when individual projects have acceptable fiscal risks.

Examples of international limits and caps
- Armenia: limits the value of PPP contingent liabilities to GDP.
- Brazil: limits current spending on PPPs to five percent of current revenues.
- China: limits PPP fiscal liabilities from local government budgets to 10 percent of their expenditure.
- Georgia: limits PPP aggregate liabilities as a share of GDP.
- Kazakhstan: limits the ratio of direct PPP liabilities to revenues.
- Peru: limits the present value of PPPs to 12 percent of GDP.

*Source: 1uzbea2025002-print-pdf - 6.      Uzbekistan’s scale of PPP development is significantly larger than in other countries.*

### 25.      A ceiling on the overall stock of PPP investment is appropriate to limit the risk from

### 25.      A ceiling on the overall stock of PPP investment is appropriate to limit the risk from

### Rationale for a ceiling
- A cap on PPP liabilities limits contingent liabilities to fiscal sustainability.
- Ideally the cap would focus on PPP liabilities, but without sufficient information, a cap on the value of the stock of PPPs could be easier to implement.
- Caps should have broad coverage and be easy to measure.
- Operational targets (for example, an annual limit on the signing of new PPP projects) may be needed even if a cap on the stock is implemented.
- If potential fiscal risks are large and an annual ceiling or cap on the stock of PPPs is not sufficient, the government could consider a reduction or a temporary moratorium on new PPP projects.

### Uzbekistan’s measures and caps
- The 2025 Budget includes an annual ceiling on the value of new PPP projects of USD 6.5 billion (about 6 percent of GDP).
- The 2025 ceiling is characterized as relatively high and future ceilings should be lower to mitigate risks.
- The government is analyzing an upper limit on government commitments for PPP projects to complement the 60 percent of GDP cap on public and publicly guaranteed debt, which does not cover PPP liabilities.
- IMF staff are providing technical assistance to identify an appropriate cap on the stock of PPPs.

### Monitoring, performance risks, and examples
- Key risks after selection and financing: lack of adequate monitoring, insufficient planning for unforeseen problems, lack of a designated monitor, and inadequate maintenance of PPP infrastructure.
- Examples of monitoring and performance practices:
  - Brazil and Hungary use several performance measures including efficiency, service quality, and activity.
  - Korea has used surveys to evaluate user satisfaction with PPP projects.
  - South Africa found delaying road maintenance for three years results in repairs that cost six times more than the cost of preventative maintenance.
  - Philippines: monthly traffic monitoring on the Daang Hari-SLEX road PPP; KPIs included ensuring tolls handled at least one vehicle every two minutes and that the toll could process a minimum of 400 vehicles an hour. To ensure proper maintenance, 15 KPIs were set on road maintenance, including indicators on road smoothness and maximum times for repairs.

### Solutions and recommended practices
- Monitoring systems should be adequate and tailored to project size and stage:
  - Frequency of monitoring should depend on the size of the project and stage of implementation; large projects may need quarterly or monthly monitoring.
  - Monitoring requires a clear baseline and key performance indicators (KPIs); the baseline can often be obtained from the fiscal sustainability report (FSR).
  - KPIs should focus on measurable indicators of outputs, service quality, and financial performance.
  - Users of PPP services can be a useful source of information on service quality.
  - Where the government is the customer, payments can be reduced if the PPP does not meet KPIs.
  - PPP contracts should require PPPs to send annual financial statements to the government to support ongoing reporting and oversight.
  - If monitoring shows materializing risks, the government should have an intervention plan to address risks and put the PPP back on track.
  - PPP contracts can include KPIs on maintenance issues to promote proper upkeep.

### Recent legal and institutional developments in Uzbekistan
- 2018: Law on Public Private Partnerships (LRU-537) specified principles, scope, rights and obligations, and procedures for PPPs.
- December 2018: Cabinet Decree No. 1009 established a PPP Development Agency in the Ministry of Finance with staff of 30 to help line ministries identify potential PPP projects.
- December 2019: Law on Investments and Investment Activity established protections and regimes for investment and allowed free transfer of funds in and out of Uzbekistan.
- 2020: Cabinet Resolution 259 provided procedures for execution of PPP projects and for maintaining a register of PPP projects.
- January 2021: PPP Law amended to require the Ministry of Economy and Finance to approve projects that incur direct costs to the budget, create contingent liabilities, or create other direct or indirect costs borne by the budget.
- August 2021: Regulation 509 specified the procedure for approving PPPs.
- April 2023: Public Debt Law introduced; did not define PPP-incurred debt as part of public and publicly guaranteed debt but allowed the government to introduce a limit on guarantees to PPPs.
- October 2023: Cabinet Resolution 558 implemented a procedure for the government to review and approve fiscal liabilities from PPPs; established the Fiscal Risk Assessment Department (FRAD) in the Ministry of Economy and Finance and procedures to review and approve fiscal liabilities and ensure budget coverage for direct and indirect state liabilities.
  - Fiscal liabilities must be evaluated when the project concept and project evaluation documents are approved and immediately before signing the PPP agreement.
  - Projects valued at USD 10 million or more and payment of contingent liabilities that exceed previous projections require approval by the Cabinet of Ministers.
  - Each year the Ministry of Economy and Finance, together with the Cabinet of Ministers, must propose to the Parliament budget limits on guarantees and fiscal obligations of PPPs.
- August 2024: Presidential Decree 308 on “Measures on the Development of Public-Private Partnerships for 2024-2030”:
  - Requires the government to amend the Public Debt Law to include an upper limit on take-or-pay agreements and letters of comfort for PPP projects.
  - Replaced the PPP Development Agency with a new Center for Public-Private Partnership Projects to coordinate implementation.
  - Requires the text of all PPP agreements be sent to the MoEF, establishment of a PPP registry, and an annual presentation to Parliament on the status of PPPs.
  - Approved a program of PPP projects from 2025 to 2030 totaling USD 30 billion.
- October 2024: Cabinet Resolution 720 on the “Procedures for Implementation and Financing of PPP Projects” replaced Resolution 259 and clarified approval and implementation procedures, addressed property rights issues, amended requirements for private partner technical expertise and third-party qualification criteria, and required measurable Key Performance Indicators (KPIs).

### Key statistics and limits (preserved exactly)
- Annual ceiling on new PPP projects in the 2025 Budget: USD 6.5 billion (about 6 percent of GDP).
- Public and publicly guaranteed debt cap referenced: 60 percent of GDP.
- Project valuation threshold requiring Cabinet approval: USD 10 million or more.
- PPP program approved in Presidential Decree 308 for 2025 to 2030: USD 30 billion.
- Example KPI maintenance set count: 15 KPIs.
- Specific monitoring KPI examples: at least one vehicle every two minutes; minimum of 400 vehicles an hour.

_International Monetary Fund — Republic of Uzbekistan (excerpts)._

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1uzbea2025002-print-pdf.pdf_