Tajikistan - Privatisation Resumes With War's End

©2000 Pangaea Partners, Ltd.

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Due north of Afghanistan, Tajikistan is emerging from almost a decade of civil strife and putting its house in order.Ý With national reconciliation and multi-party elections achieved in March 2000, the country is now fully able to focus on economic regeneration, including a major push on privatisation.Ý

Background

Mostly landlocked and mountainous, Tajikistan has a population of 6.1 million people, most of whom live in rural areas or in the capital Dushanbe.Ý As one of the poorest countries in the region even before the dissolution of the Soviet Union, the break-up and the civil war caused a major decline in output in Tajikistan.Ý In 1999 the country had an estimated GDP per capita income of only US$178.50 (less than $15 per month). Tajik President Imomali Rakhmonov said in a speech in April 2000 in Prague that Tajikistan's five-year civil war -- from 1992 to 1997 -- had exacted an enormous cost, creating some 1 million refugees and leaving 100,000 people dead (1.67% of the entire population).Ý He estimated the total financial cost at some $7 billion.

In working on recovery, Tajikistan is blessed with one commodity: water resources, enabling irrigation of about 80% of all arable land (which is only 7% of the total land in the country).Ý Benefiting from up to 300 days of sunshine a year, the country is then able to utilise its scarce but fertile arable land, the sunshine and water to be a major cotton producer (about half of total agricultural production).

 The water resources also permit extensive hydropower facilities.Ý These in turn permit extensive aluminium production, constituting the bulk of Tajik industrial output.

In working to turn the economy around, the Government has worked hard to reduce inflation, bringing it down from more than 160% in 1997.Ý As a result of peace and Government's efforts, real GDP finally began to increase in late 1997.Ý GDP grew by 1.7% in 1997, 5.3% in 1998, 3.7% in 1999 and 3.8% during the first quarter of 2000 according to World Bank figures.Ý Growth might have been even better were it not for the effects of external shocks from the Russian Ruble crisis in 1998 and the drought in 2000.

Initial Privatisation Efforts

Economic reforms in Tajikistan began shortly after independence in 1991.Ý Scores of laws were passed on a variety of subjects including Enterprises; Property, De-nationalisation and Privatisation; Joint Stock Companies; Foreign Investments; Bankruptcy and so forth.Ý The Privatisation law called for 40% of the shares of larger state enterprises to be reserved for sale to labour collectives (with 3/4 for current employees and 1/4 for retired employees).Ý Some of the remaining 60% of the shares in each enterprise could be retained by the state but the majority was to be sold via open auction.Ý

Small enterprises including shops and uncompleted construction projects were to be sold via auction, usually to one or more employees.Ý These later came to be defined as having less than 30 "work spaces" [1] .Ý Companies with more than 30 "work spaces" were first incorporated and then were sold via share auctions.ÝÝ

Some sales were completed after the law was passed but the process was marred by many cases of enterprise directors using enterprise resources to purchase the companies.Ý The civil war also greatly reduced the pace of privatisation.Ý All told about 1,850 small and 39 medium to large enterprises were privatised from 1991 to 1996. Over time the system evolved into a corrupt, closed sales process marred by the presence of paramilitary groups and armed criminals.

New Law in 1997 Improves Pace of Privatisation

In 1997, a new privatisation law, On Privatisation of State Property, was passed in an attempt to improve and accelerate privatisation, partially due to World Bank and IMF pressure.Ý As regards small enterprises, it achieved its goal: more than 3,500 such businesses were sold in 1997-1999.Ý The new law also made incorporation mandatory for enterprises with more than 200 "work spaces" thereby moving privatisation of larger enterprises along.ÝÝÝ

The law provided for the State Property Committee to sell enterprises via auction/tender or, in the case of large, unique enterprises via case-by-case methodology.Ý The latter method includes:

•  Analysis of the activity and competitiveness of the enterprise;

• Valuation;

• Decision on the percentage of the shares to be sold;

• Decision on the technological and organisational changes that buyers be propose;

• Decision on the form of privatisation; and

• Execution of case by case privatisation by the body approved by the Government of the Republic of Tajikistan.

The renewed commitment to privatisation yielded significant improvements as the following table shows:

Table 1: Overall Status of Tajik Privatisation Programme

Total "Objects" in Inventory											10029
Total "Objects" to be Privatised											7099
Total Privatised	39	656	124	331	304	434	696	1262	1534	467	5856	82.5%
Small Enterprises
Total Enterprises and Organisations											8352
Organisations Not Suitable for Privatisation (e.g., schools)											2168
Total Small Enterprises to be Privatised											6184
Privatised to Date	36	627	124	326	303	433	679	1185	1459	414	5586	90.3%
Remaining to be Privatised in 2001 and on											598
Medium-Large Enterprises
Total Medium-Large Enterprises and Organisations											1677
Organisations Not Suitable for Privatisation											762
Total to be Privatised											915
Privatised Medium & Large Enterprises to Date	3	29	0	5	1	1	17	77	84	53	270	29.5%
Remaining to be Privatised in 2001 and on											645

Though the sales pace for larger "objects" improved considerably since 1997, the State Property Committee continued to find that buyers were relatively scarce and the sales rate continued to lag behind that of small businesses.Ý In some cases, locals simply did not have much money available for purchasing companies and/or foreigners were still reluctant to invest in Tajikistan in the absence of final reconciliation in 1998-9.

There were also problems of unrealistic terms and conditions.Ý All too often the Government of Tajikistan said it was willing to sell its more substantial enterprises provided they are to be "used well" and the price was right.Ý Unfortunately, the phrase "used well" has meant retaining all employees despite typical Soviet over-staffing.Ý In addition, valuations were over-inflated.Ý As a result, either negotiations have dragged on or no bidders surfaced until the price was dropped in one or more subsequent auctions ---- leaving the enterprises to slowly die in the interim.

Sectoral Distribution

The majority of privatised enterprises have been from the trade, catering, and service sectors, primarily because of the preponderance of small-scale privatisations.Ý The table below provides the details.Ý Going forward however, the sectoral distribution will likely shift in favour of industrial, farming, construction and transport enterprises.Ý

Table 2: Breakdown of Privatised "Objects" by Industry: [2]  

No.	Industry	Total in State Sector	Proportion of all Industry	Privatized
				1991	1992	1993	1994	1995	1996	1997	1998	1999	Total	% Privatised
1	Industry	318	3.9%	1	12	1	3	10	16	18	33	26	120	37.7%
2	Construction	422	5.1%	1	10	1	2	2	5	3	18	31	73	17.3%
3	Transport	167	2.0%		7	1		5	2	6	9	16	46	27.5%
4	Trade, Public Catering and Warehouse	2546	31.0%	17	198	21	78	170	298	333	471	632	2218	87.1%
5	Consumer Service	2200	26.8%	10	501	43	200	151	242	177	338	291	1953	88.8%
6	Agriculture	1300	15.8%		1	1	9	5	16	60	137	198	427	32.8%
7	Unfinished Con- struction Projects	350	4.3%						8	23	0	92	123	35.1%
8	Others	902	11.0%		10		20	12	61	100	252	266	721	79.9%
	Total	8205		29	739	68	312	355	648	720	1258	1552	5681	69.2%

2000 - Finishing Small Enterprises and Selling Cotton Ginneries

Small Enterprises

The first auction of 2000 for small "objects" was held by the Republican Real Estate Exchange on January 29^th.Ý The auction sold 28 projects of "Republican" property (i.e., nationally owned property; as opposed to municipal) for 180,820,600 Tajik Rubles (about $115,000).Ý Speaking at the auction on January 29, the Deputy Chairman of State Committee for Government Property, Mr. Ikbolsho Salimov, said that with only a few hundred more "objects" left to sell, the privatisation of small enterprises was practically complete.

However, two other tasks that historically have not been included in the small enterprise privatisation programme (partly because they are handled by another ministry) have yet to be finished:

• Tajikpotrebsoyuz, the nominally private consumer cooperative that former controls roughly 12,000 enterprises all over the countryside, and

• About 2,000 small enterprises on farms that are subject to privatisation as the farms themselves privatise (see below).Ý

Until these are dealt with, the retail sector in the countryside will not develop fully and small-scale privatisation will be incomplete.Ý

Medium and Large Enterprises

In addition to the problems cited above as regards the privatisation of larger sized enterprises, the end of a World Bank financed privatisation project reduced the resources available to the State Property Committee for processing transactions in 1999 and early 2000.Ý As a result, the only substantial effort to proceed was the sale of the cotton ginneries (see below).Ý

Cotton Ginneries

Besides constituting half of all Tajik agricultural production, cotton provides 30% of Tajikistan's export earnings and tax revenues.Ý Accordingly, the Government felt its 23 cotton ginneries were very valuable and would command high prices.Ý This opinion ignored the fact that all were quite run down and in need of investment.Ý As a means of bridging the wide range of opinions concerning the value of the ginneries, the World Bank insisted on the use of a Dutch Auction method for the privatisation.Ý The process started in late 1998.Ý Initial rounds were confusing and problematic; most of the companies were sold at prices that only barely met the reserve prices.Ý The seventh round was conducted in August 2000.Ý By then, most of the companies had been sold:

Table 3: Status of Ginnery Privatisations

 Almost all of the purchasers were domestic though some were financed by overseas clients (e.g., cotton traders such as P. Reinhardt).Ý One ginnery was purchased by an individual.Ý In each case, purchasers acquired one share more than 75% of the outstanding shares.Ý

Farm Privatisation

Currently, the Tajik Constitution does not provide for outright ownership of farmland by individuals.Ý However, the land code does provide life long and inheritable land use rights valid for up to 99 years.Ý Accordingly, the Government and World Bank are undertaking a project to legitimise and register these land use rights.

Up until recently, obtaining land use rights has been an expensive and convoluted bureaucratic process.Ý A new private farm might pay up to $200 for the issuance of a Certificate of Land Use Right, roughly ten times the cost in other former Soviet Republics.Ý To get the Certificate, nine organisations [3] must give their permission permissions; some of these agencies charge additional fees beyond the basic fee.Ý Needless to say, such a morass needs fixing and Government has begun to address it.

Government and the World Bank are also working together to implement a simple and inexpensive land registry system and comprehensive information services to increase people's awareness of all aspects of allocation, distribution and registration of land use rights and farm restructuring processes.

All told, the Government wants to transform several hundred former state and collective farms into small private sector "Dekhan" farms.Ý To date, private land use has taken several different forms:

a)    reorganisation of the former state and collective farms into structures such as Joint Stock Companies, Lease Enterprises, Dekhan Associations or Collective Farms;

b)   retaining the existing 'Brigade' structure of the old Sovkhozl and Kolkhoz farms; and

c)    creation of new private Dekhan farms based on nuclear or extended families, often as a second-stage break-up of "Brigade Farms."

Farm privatisation will have to be managed carefully in order to avoid unfair and opaque processes and inequities in land distribution.Ý Also, people need to be educated to seek more than superficial adjustments such as merely changing the status of collective farms to that of joint stock companies or associations and maintaining centralised management.

Plans for 2001

Moving forward, the State Property Committee will focus more and more on case-by-case privatisation of large enterprises.Ý Tajikistan's crown jewel, the aluminium smelter, was being reviewed as of this writing by a team of international consultants financed by the International Finance Corporation (IFC).Ý Government is unlikely to sell a majority stake in the firm but may agree to the sale of a minority stake and the granting of a management contract.Ý Besides the smelter, other Tajik enterprises such as the national airline (Tajik Air) and telephone company (Tajiktelekom) are also being studied for privatisation.

The Tajiktelekom case also serves as an example of some of the areas the country needs to improve if it is maximise foreign investment in the country and speed economic growth.Ý In 1999, the Ministry of Communications, with EBRD assistance, held an international tender seeking a strategic investor to establish a joint venture with Tajiktelekom and build a digital overlay network.Ý The strategic partner would have owned 51% of the joint-venture and been obliged to invest $65-85 million in the first five years of the project.Ý More than 40 telecommunications companies expressed interest including such reputable firms as Deutsche Telekom, Alcatel, Siemens, Daewoo Telecomm, Ericsson, and China Telecom.ÝÝ In the end, few submitted bids and the deal failed.Ý The main reason was that despite the fact that it would not be the majority shareholder, Tajiktelekom demanded a majority on the Board of Directors and disagreed over management control and financing arrangements.Ý So instead of receiving substantial investment and modernisation, the country's telecomm facilities remain stuck with antiquated equipment, insufficient capacity and poor reliability.Ý If Government wants to modernise its largest enterprises, it is going to have to accept the accompanying loss of control and work to speed investment while there is still interest.Ý

The processing of transactions should improve in 2001: the State Property Committee itself is receiving renewed support from the World Bank from 2000 until 2004.Ý The assistance includes policy and legal advice on the incorporation and privatisation processes, especially with regards to the remaining medium and large state-owned enterprises.Ý The consultants are also to provide organisational, legal and policy advice to the Central Share Registry on incorporation and share auction processes.Ý Lastly, the international consultants will be assisting with the establishment and operations of three Private Sector Advisory Groups that will identify and reduce legal and regulatory barriers to business growth.

Summary

On balance, Tajikistan has made good progress since 1997 on reinvigorating its privatisation efforts, not to mention having achieved a return to civil society and economic stabilisation.Ý However, notwithstanding considerable natural resources, it remains poor and faces challenges from Islamic fundamentalism and drug trafficking from neighbouring Afghanistan to Western countries.Ý Meanwhile, offshore investors find Tajikistan far away, hard to reach and a smaller market than most of its neighbours.Ý The Tajik Government can ill afford to exacerbate challenges outside its control with problems of its own making.Ý Thus, efforts need to continue to reduce bureaucracy and corruption, accelerate privatisation and encourage investment.Ý If progress continues, investors seeking additional investments in Central Asia will find interesting opportunities in Tajikistan.Ý

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