Stateowned enterprises in Uzbekistan taking stock and options

State-owned enterprises in Uzbekistan: taking stock and options for the future September 2019

Outline 1. SOE in Uzbekistan 2. SOE governance arrangements: key elements 3. Potential areas for reform • Data and monitoring • Governance arrangements 21 September 2021 2

SOEs in Uzbekistan – general information • Represent large share of the economy • 1400 enterprises monitored by the Center for Management of State Assets (CMSA) across all sectors (2016 monitoring report) • Majority state-owned enterprises accounted for 47% of industrial output in 2017 (Statistics Committee) • Employ 37% of the employed population and account for over 50% of wage employment (World Bank, 2013 survey estimate) • Over 80% of the share capital of existing joint-stock companies is state-owned (GKK Research Center, 2017) • More comprehensive data is necessary to estimate the full economic impact, footprint and performance of SOEs • “State sector” classification used by the Statistics Committee includes only state unitary enterprises (SUE) and leaves out JSCs, LLCs 21 September 2021 3

SOEs in Uzbekistan – general information • Many SOEs are dominant producers of goods and services in their markets (not considering natural monopolies) • More than 90% of enterprises in the registry of enterprises with dominant position (maintained by the GKK) are SOEs or state has some degree of control (e. g. , JVs) • Sectors and markets include auto manufacturing, a number of construction materials, seeds, chemicals and fertilizers, fodder, coal, access to international data networks and others • Major SOEs also carry out supervisory, regulatory or similar functions • Memberships in various licensing commissions, carrying out quality and standard compliance checks of private sector companies, issuance of permissions in few cases 21 September 2021 4

Governance arrangements: key elements • With few exceptions major SOEs have been incorporated as JSCs • JSCs operate under JSC-specific legislation and have fairly welldefined governance structure (dual board system) • Subsidiaries are incorporated as either JSCs, SUEs or LLCs • Majority of SOEs in the CMSA portfolio are SUEs (78% in 2016) and, thus, not subject fully to the legal framework applied to state-owned JSCs • State ownership rights in JSCs are exercised by delegating the management of state’s share in an enterprise to an individual or legal entity • Candidates are proposed by the CMSA, appointed by a dedicated commission and also approved by the Cabinet of Ministers • State trustees are mandated to coordinate and align their voting policy with the CMSA 21 September 2021 5

Governance arrangements: key elements • JSCs law does not introduce, define or mandate the introduction of independent board directors • The concept is included in the corporate governance code approved in late 2015 • Compliance with recommendations of the code is voluntary • Appointment of the head of management board (i. e. , CEO) and its members • Members of the management board are appointment by the supervisory board • CEO is appointed by the Shareholder’s Meeting (this power may be delegated to the supervisory board) • In case of major SOEs, additional approvals by the Cabinet of Ministers and the President’s Office are necessary 21 September 2021 6

Governance arrangements: monitoring • SOE monitoring and performance measurement system has significantly evolved in 2015 • Over 20 efficiency focused KPI were introduced (related to earnings, costs, rate of return, liquidity, indebtedness and others) • CMSA collects these KPIs for SOEs in its portfolio since 2016 • Only the final performance index is publicly available (composite of KPIs) • KPI values are indicated to influence management remuneration • Multiple other criteria that explicitly or implicitly measure SOE performance exist • Production, localization, export and other quantitative targets set through sector development programs, state investment programs, material balances and similar documents 21 September 2021 7

Governance arrangements: monitoring • Existence of multiple performance criteria and quantitative targets signals existence of multiple accountability lines of SOE management • Role of newly introduced KPIs in focusing SOEs on efficiency improvements may be weakened • This is further reflected by other related governance arrangements • These include, for instance, the institution of financial inspectors deployed in some SOEs or existence of overly prescriptive revenue control mechanisms for several SOEs 21 September 2021 8

Reform area: monitoring • Collection and dissemination of baseline data on the SOE sector need further improvement • Introduction of efficiency-focused KPIs is commendable, though degree of disclosure with relation to KPIs needs to improve • Currently available data does not allow to adequately assess the footprint and performance of SOEs in the economy • Streamlining the SOE performance monitoring system to prioritize SOE efficiency • Existence of both efficiency focused KPIs and multiple quantitative targets do not clarify well objectives of the state towards its portfolio of enterprises • This is tied to a larger issue of necessity of clearly articulated policy on objectives and criteria for state ownership • Well-articulated state ownership policy would help identify better a monitoring system that can help achieve government’s objectives 21 September 2021 9

Reform area: governance arrangements • Completion of the work on corporatization of major SOEs • This should bring key enterprises under a single legal framework and increase the consistency of monitoring and governance applied to various enterprises • Development and introduction of a state ownership policy • The policy should clearly define the objectives of state ownership, the state’s role in governance of SOEs and the mechanisms of implementation of the ownership policy • Pursuing reforms aimed at clearly separating ownership and policy functions • Primary aim is to avoid conflict of interest and potentially create a level-playing field for all companies in a sector • Requires critical assessment of regulatory framework across a number of sectors 21 September 2021 10

Reform area: governance arrangements • Pursuing reforms aimed at empowering and increasing the efficiency of supervisory boards • Consider the introduction of independent board directors and increase the transparency of the selection process • Further clarification of roles and responsibilities of the board, capacity building, increasing board’s and SOE flexibility and ability to react to market signals and others • Introduce regular evaluation of board performance • Roles and responsibilities of various government bodies to be clearly specified to better clarify the accountability lines of SOE management • OECD recommendation is to exercise ownership rights through a single dedicated entity within the government (centralized ownership model) 21 September 2021 11

Contacts Umidjon Abdullaev Principal Economist Economics, Policy and Governance Tel: + 44 20 7338 8667 Email: abdullau@ebrd. com EBRD, One Exchange Square London, EC 2 A 2 JN United Kingdom www. ebrd. com 21 September 2021 21