J.16 Assessment of Regional Agri-Logistics Centers in Uzbekistan.pdf

This publication was produced for review by the United States Agency for International Development. It was prepared by the World Food Logistics Organization in collaboration with Dr. Mulat Abegaz Legesse. The authors’ views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

ASSESSMENT OF THE

ESTABLISHMENT AND DEVELOPMENT

OF REGIONAL AGRI-LOGISTICS

CENTERS IN UZBEKISTAN

NOVEMBER 2019

Photo credit Brian Kiger

CONTENTS

EXECUTIVE SUMMARY 1

INTRODUCTION 6

OVERVIEW OF THE UZBEKISTAN ALC INITIATIVE 7

ASIA DEVELOPMENT BANK (ADB) PARTNERSHIP 8

1. MARKET OVERVIEW 9

1.1 AGRICULTURE-BASED, EXPORT-LED GROWTH 9

1.2 TRADE & EXPORT PERFORMANCE 9

1.3 REGULATORY AND ENABLING ENVIRONMENT ANALYSIS 11

1.4 CHALLENGES AND BARRIERS TO ENTRY 11

2. DEMAND FOR AGRI-LOGISTICS INFRASTRUCTURE AND SERVICES IN

UZBEKISTAN 12

2.1 QUANTITATIVE DEMAND ASSESSMENT: A PROPOSED METHODOLOGY 13

3. SUPPLY OF AGRI-LOGISTICS INFRASTRUCTURE AND SERVICES IN

UZBEKISTAN 13

3.1 PRODUCERS/FARMERS 14

3.2 COLD STORAGES 15

3.3 EXPORTERS, BROKERS, WHOLESALERS, PROCESSERS AND FOOD PACKERS 16

3.4 TRANSPORTATION SYSTEM AND TRANSPORTATION COMPANIES 17

3.4.1 REEFER TRUCKS 17

3.4.2 RAILWAYS 18

3.4.3 AIRWAYS 18

3.5 PARTICIPATION OF THE PRIVATE SECTOR IN INVESTMENTS FOR ALCS 18

3.6 EXISTING PROVIDERS 18

3.7 COMPETITIVE ANALYSIS 19

4. THE QUALITY INFRASTRUCTURE AND REGULATORY BODIES 19

4.1 THE NATIONAL QUALITY INFRASTRUCTURE AND UZSTANDARDS 19

4.2 PLANT QUARANTINE INSPECTION 21

4.3 SANITARY EPIDEMIOLOGICAL INSPECTION 22

4.4 INTERNATIONAL INSPECTION & CERTIFICATION BODIES IN UZBEKISTAN 22

4.5 STRENGTHEN THE NATIONAL FOOD SAFETY CAPACITY AND ENHANCE THE

PARTICIPATION AT REGIONAL LEVEL 23

5. TRADE FACILITATION BY GOVERNMENT OFFICES 25

5.1 UZAGRO-EXPORT 25

5.2 UZAGRO EXPORT BANK 25

5.3 MINISTRY OF TRANSPORT 25

6. COMPARATIVE ANALYSIS 26

6.1 RELEVANT DESIGN PRINCIPLES 26

6.2 APPLICABILITY IN UZBEKISTAN 26

7. RECOMMENDATIONS 27

7.1 PROVIDE AGRICULTURE EXTENSION SERVICES TO IMPROVE PRODUCTION 27

7.2 RECONSIDER ALCS AS A ONE-STOP SHOP FOR PRODUCE HANDLING & DISTRIBUTION

7.3 CONSIDER ALCS AS MARKETING & LOGISTICS CENTERS RATHER THAN PRODUCTION

AND PROCESSING-FOCUSED CENTERS 28

7.4 CONDUCT A QUANTITATIVE DEMAND ASSESSMENT TO DRIVE DECISIONS ON DESIGN

AND LOCATION OF PROPOSED ALCS 30

7.5 DEVELOP THE ALC MASTER PLAN IN PHASES 30

7.6 EXAMINE POTENTIAL BENEFITS OF PRIVATE SECTOR ALC OWNERSHIP 31

7.7 COMMISSION THE GATHERING OF ADDITIONAL DATA 31

7.8 INTEGRATE ALCS WITH EXISTING INFRASTRUCTURE 32

7.9 INCORPORATE EDUCATION AND TRAINING ON WAREHOUSE OPERATIONS AND

FACILITY MAINTENANCE INTO ALC PLANNING 32

7.10 ESTABLISH A PLAN TO ACCESS THE SEA TO REACH HIGH-VALUE EXPORT DESTINATIONS

7.11 ESTABLISH AN INTEGRATED PLANT PROTECTION AND FOOD SAFETY CONTROL SYSTEM

7.12 STRENGTHEN TRADE FACILITATION ORGANIZATIONS 33

7.13 SEEK DONOR ASSISTANCE TO BUILD CAPACITY THROUGHOUT THE SUPPLY CHAIN

WITH A FOCUS ON GLOBALG.A.P. AND FOOD SAFETY CERTIFICATIONS 33

7.14 PROVIDE SUPPORT AND INCENTIVES TO SMALL HOLDER FARMERS TO ADOPT

INTERNATIONAL PRODUCTION STANDARDS 33

7.15 CONSIDER A VISIT TO SHYMKENT, KAZAKHSTAN TO LEARN ABOUT THEIR EXPERIENCE

WITH AN ALC. 34

ANNEX 1: CASE STUDIES 35

ANNEX 1A: INDIA MEGA FOOD PARK SCHEME (MPS) 35

ANNEX 1B: ANNEX 1B: CASE STUDY: TURKEY AGRO LOGISTICS DEVELOPMENT 38

ANNEX 1C: CASE STUDY: FRESHPOINT, SOUTH FLORIDA (USA) 40

ANNEX 2: ASSESSMENT ITINERARY 45

ANNEX 3: FACILITY VISIT SUMMARIES 49

ANNEX 4: FIVE YEARS EXPORT PERFORMANCE OF MAJOR FRUIT AND

VEGETABLES PRODUCTS OF UZBEKISTAN 56

ANNEX 4.1 SUMMARY OF FIVE YEARS EXPORTS IN THOUSAND USD 56

ANNEX 4.2 FIVE YEARS SUMMARY BY MAJOR EXPORT DESTINATIONS IN THOUSAND USD

ANNEX 4.3 EXPORT TRADE PERFORMANCE OF THE FRUITS AND VEGETABLES SECTOR 58

ANNEX 4.4 LIST OF MAJOR IMPORTERS FOR UZBEKISTAN’S FRUITS AND VEGETABLES

PRODUCT 68

ANNEX 5: SUMMARY TABLE ON REQUIREMENTS FOR PHYTOSANITARY, FOOD

SAFETY & QUALITY INFRASTRUCTURE, PROPOSAL ON CAPACITY BUILDING

PROGRAMMES 72

ANNEX 6. PHOTOGRAPHS 75

ANNEX 7: REQUESTED DATA SETS FROM THE MINISTRY OF AGRICULTURE83

INFRASTRUCTURE DATA 87

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EXECUTIVE SUMMARY

The World Food Logistics Organization (WFLO), the education and research arm of the Global Cold

Chain Alliance (GCCA), was retained as part of the USAID-funded Uzbekistan Agricultural Value Chain

(AVC) Activity to support the Uzbek government in assessing investment opportunities in the agri-logistics sector. Specifically, WFLO was tasked with identifying the needs at the local, regional, and national level to support successful investments by both the public and private sector in compliance with the Agri-food

Development Strategy 2019-2030.

The WFLO team, in collaboration with food scientist, Dr. Mulat Abegaz Legesse, assessed proposed Agri-

Logistics Centers (ALCs) in the Tashkent, Fergana, and Andijan regions of Uzbekistan. To complete this report, the team conducted a literature and data review and a rapid in-country assessment, followed by an analysis to formulate recommendations. This analysis compared the current state of the cold chain for horticulture to the best practices for an integrated cold chain, as shown below, to determine how to strengthen the role of the ALCs.

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The key observations taken from this study include:

• Fulfilling and maintaining the market demand for high value products is critical for the success of the ALCs.

Although Uzbekistan is among the five leading exporters in terms of volume for fresh cherries, fresh apricots, fresh persimmons, dried prunes, dried apricots, and fresh grapes, many fruit and vegetable products are exported to lower value/traditional markets for a cheaper price, in most cases 2-3 times lower than the average world price. Uzbekistan must provide consistent high-quality volumes of the products in demand by the market.

• Size and location of proposed ALCs have not been determined using quantitative data.

The WFLO team found it extremely challenging to provide specific recommendations on the location, competition, size and design of the proposed ALCs without specific data to support or guide these types of recommendations. Specifically, production data combined with harvesting periods, combined with the varieties and volumes destined for specific markets should be gathered to ensure that facilities are built to the appropriate size and can be utilized year-round. Amassing this data is an international best practice when investing in temperature-control facilities.

• A successful ALC system must include pre-cooling as a core component of the infrastructure; however, pre-cooling is not mentioned in the current ALC plan and is not currently practiced by most farmers or exporters.

Pre-cooling of fruits and vegetables is the critical first step in the cold chain, the lack of which severely impacts shelf life and quality especially for high value products such as cherries. Products entering the cold chain that are not pre-cooled have a high amount of field heat. Cold storage and refrigerated transport trucks (reefers) are designed the maintain temperature. Loading hot produce into storage or trucks not only misses the opportunity to cool the product as quickly as possible, increasing shelf life and quality by as much as two weeks, but it also taxes the refrigeration equipment.

• In addition to infrastructure, the success of the ALCs will depend upon the development of skills and support providing through a national Agricultural Extension Service, which is currently lacking.

During facility visits, the WFLO team recognized that operators were asking questions or doing things that could easily be addressed by agriculture extension agents if made available to them. For example, lack of good agricultural practices including hygienic practices both at the farm and cold storage facilities, storage handling practices, manufacturing processes, documentation and record maintenance, and calibration of measuring devices were major observed challenges which require immediate attention and technical support.

Based on information to date, the key recommendations are:

1) Reconsider ALCs as a one-stop shop for produce handling and distribution.

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Currently, the ALC concept is being considered as a ‘one-stop shop’ for all logistics and handling for export-oriented horticulture. However, this is not aligned with international best practice, where various integrated cold chain procedures are disaggregated. Therefore, it is recommended that the Government of Uzbekistan (GoU) consider the following:

• Physically separate the individual links (post-harvest, transport, storage, processing) of the integrated cold chain, allowing multiple facilities related to each of these links to work as “clusters” where they will have the greatest impact in the various districts of the growing regions, and expand the infrastructure naturally as economic conditions allow.

• Remove the “dirty” post-harvest activities (e.g., rinsing/cleaning, grading, sorting, packaging, pre-cooling, etc.) activities from the ALC. This is recommended primarily for sanitation considerations. This separation of functions is standard operations in most developed markets.

2) Consider ALCs as Marketing and Logistics Centers rather than Production and Processing-focused Centers.

The emphasis of the ALC should be on trans-shipment and marketing of high-value horticulture to large domestic markets or export markets. Currently, as it reads, the ALC proposal seems to focus more on handling and processing, rather than on product movement to market. The former is typically done in specialized facilities.

3) Conduct a quantitative demand assessment to drive decisions on design and location of proposed ALCs.

There is little doubt that the three regions identified (Andijan, Ferghana and Tashkent) are likely the most appropriate for the location of the assets and focus, though it is best practice to assess production and market data to formalize this decision. The primary questions which only data and expert corporate knowledge can answer in a follow-on assessment are the design criteria and effective focus of each cluster, a comparative review of “like” facilities in other countries, and the further review of additional clusters throughout the country.

4) Develop the ALC masterplan in phases.

Each ALC should be designed to service the local horticulture products in the most economically profitable manner, as informed by market demand and farm production data. For example, it is possible that the Tashkent ALC will support the retail and wholesale needs of the domestic market of Tashkent.

If this example is accurate, this ALC would focus largely on local distribution, often in the mornings or late evenings, and utilize small and large vehicles for distribution. There is a similar entity in Kazakhstan, immediately outside of Shymkent, referenced more in-depth in recommendation fifteen. This facility should be assessed, and its history considered in the advisory process.

5) Examine Potential Benefits of Private Sector ALC Ownership.

As a core partner of the GCCA, an international trade association representing the businesses involved in the cold chain, WFLO experience with international best practices has demonstrated that the greatest

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success and sustainability with cold chain investments occur when they are developed and managed by private sector actors. The idea that ALCs should be owned by a set of private businesses that rely on small business owners to be experts in their various fields/cold chain segments should be examined in the context of Uzbekistan as this model usually promotes the greatest efficiencies, and subsequently profitability. Alternatively, the ALCs can be structured initially as parastatal entities, 50% owned by the government and 50% owned by private businesses via a public private partnership or PPP.

6) Commission the gathering of additional data.

The WFLO team cannot make a firm recommendation on size, location, operations or proposed timelines for developing the ALCs, given the numerous variables that have yet to be determined, such as, but not limited to the availability of personnel to staff these facilities; availability of specialists to train management and staff personnel onsite at the ALCs; the management and the operations staff’s ability to grasp the necessary criteria to assume ever-increasing leadership/ownership roles; and the wide variances in situations arising from the seasonal availability of incoming horticultural volume, and, the physical condition of that volume. WFLO recommends that a follow-up assessment is conducted to gather necessary data to confirm the assumptions. Once the follow-on assessment and recommendations are delivered, the

GoU should endeavor to begin the process of developing the scheme as soon as possible.

7) Integrate ALCs with existing infrastructure.

The existing capacity of cold stores might be sufficient to store current volumes, however the majority of the existing cold chain infrastructure as observed by the team, with a few exceptions, is rudimentary, idle or lacking altogether. For example, critical pre-cooling sites, refrigerated facility sites, field packing operations, receiving, cleaning/rinsing/sorting/sizing/packaging sheds are often missing, preventing an integrated cold chain. However, certain structures and infrastructure may exist in the areas recommended for ALC’s which may be useful to include in the cluster scheme. To integrate the existing cold stores with the planned ALCs, the GoU should conduct a thorough assessment and diagnostic analysis to identify the potential cold stores that could easily be integrated with minor improvements and retrofitting, and those that require complete rehabilitations. The potential for implementation of the proper storage/stacking discipline and handling practices, good hygienic and manufacturing practices should be also assessed.

8) Incorporate education and training on warehouse operations and facility maintenance within the plan for the ALCs.

To prevent the GoU from investing in expensive assets that do not provide a return on investment due to improper management, WFLO highly recommends incorporating training and education costs into the planning. This method could follow the “3-legged stool” method that was effective in the U.S. which involved academic institutions, the government and industry, or a method could be developed uniquely for the ALCs. WFLO has often visited countries where investments were made into the cold chain that lacked an educational component resulting in a facility that was either never used, used poorly and inefficiently, or in some cases wound up being used for a different purpose entirely.

9) Establish a plan to access the sea to reach high-value export destinations.

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Uzbekistan is a doubly landlocked country, with transportation systems based on refrigerated trucks, railways and airways. This could present serious challenges and increase the transport costs for higher-value export destinations, affecting the competitiveness of fruit and vegetable exporters and limiting the export destination to neighboring countries, the traditional markets. Transport via sea could facilitate export into other Asian countries (Japan, Indonesia, South Korea), the European Union, and North

America.

10) Establish an integrated plant protection and food safety control system.

The accreditation, inspection, system and product certificates issued by UZstandard is not recognized internationally, and the accreditation body is not a member of the International Laboratory Accreditation

Cooperation (ILAC) or International Accreditation Forum (IAF). The plant quarantine inspection services also lack representation with the International Plant Protection Convention (IPPC) and has limited capacity, inspection tools and manpower to provide documented information and dependable services.

Finally, the newly established Sanitary Epidemiological Inspection service does not have the necessary manpower, knowledge, documented information and inspection tools to provide hygiene and sanitary inspection in wholesale stores, cold storages, pack-houses, and during transport. An integrated plant protection and food safety control system including maintaining traceability, the required quality and food safety requirements should be established. The conformity assessment services of UZstandard including the laboratory services should be strengthened to provide reliable and credible analytical services on pesticide residues, heavy metals, environmental contaminates, additives, adulterants, mycotoxins and microbiological contaminants; and possibly consider internationally recognized and accredited HACCP, food safety, and possibly GLOBALG.A.P. certifications. The inspection and certification services of the considerable number of international recognized inspection and certification bodies operating in

Uzbekistan could also be utilized to support the ALCs services. The Plant Quarantine Inspection and

Sanitary Epidemiological Inspection services should be strengthened by competent and trained manpower, inspection tools, laboratory equipment, infrastructures and transportation services.

11) Strengthen trade facilitation organizations.

Trade facilitation organizations recently established by the GoU, which are accountable to council of

Ministers including UZAgro-export, UZAgro Bank, and the Ministry of Transport, should be strengthened to spearhead the role of coordination, facilitation, and promotion of the ALCs and exports.

12) Seek donor assistance to build capacity throughout the supply chain with a focus on GLOBALG.A.P. and food safety certifications.

The technical support offered by organizations such as FAO, GIZ and USAID should be incorporated with the initiatives of the ALCs. Assistance offered by these organizations should focus on strengthening the capacity of the quality infrastructures, inspection, and certification bodies and enhancing the technical capacity of those involved in training and consultancy services, as well as the production, transportation, distribution and export of fruit and vegetables to achieve food safety requirements and GLOBALG.A.P.

by accredited certification bodies.

13) Provide support and incentives to small holder farmers to adopt international production standards.

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The GoU should provide aid and repayment support to smallholder farmers for adopting certifications to meet International Trade Standards such GLOBALG.A.P., ISO, Codex, etc. Additionally, there may be other GoU-based incentives that could incentivize the farmers such as tax incentives for a period of time for all export grade production. Farmers might also be incentivized to produce a data and market driven alternative crop base to work in-conjunction with the existing crop array (cherries, grapes, onions, potatoes, carrots, etc.) to expand the availability of many products, and to reduce the common glut of same products in the growing areas.

14) Provide Agriculture Extension Services to Improve Production.

The ALCs will be dependent upon volumes and high-quality produce which results in the need for

Agriculture Extension Services. This is critical to improving all aspects of crop production from seed, germ plasm, plant spacing, husbandry, and harvest, through the cold chain to final retail or export delivery. This will strengthen the ability to improve the quality of crops from pre-planting all the way through final sale and will yield greater volumes through enhanced field-level knowledge and production practices.

The establishment of more greenhouse horticultural crop production would also improve the quality of production. The GoU may consider researching other high value export-focused crops to augment the existing crops such as cherries and grapes. Generally, it is recommended to encourage quality over quantity, and focus on the value proposition as opposed to production volumes.

15) Consider a visit to Shymkent, Kazakhstan to learn about their experience with an ALC.

There are several examples, including those described in the case studies, that could provide a valuable learning experience. However, WFLO experience with study tours has been that they are most effective when the difference in the industry’s level of sophistication is not as stark. For example, regional study tours tend to inspire competition and an understanding of what is not only possible but feasible.

Particularly, the logistics hub built in Shymkent would be an excellent opportunity to learn from the challenges and successes of a neighboring country.

INTRODUCTION

The Government of Uzbekistan’s Agri-food Development Strategy 2019-2030 outlines a vision to support a thriving agri-food industry for Uzbekistan in the 21st century. This strategy identifies a development plan for Uzbekistan’s agriculture, food and rural sector for the period 2019-2030, proving a long-term vision for the development of Uzbek agriculture and rural areas, as well as offering the basis for a stable, predictable, and transparent legal framework aimed at improving the business climate and stimulating investment for the modernization of the sector. This strategy also provides the basis for the institutional and budgetary reforms necessary for successful implementation.

One of the priorities of the strategy is to support the strengthening of the business environment in the agri-food sector. A high priority action linked to achieving this objective is the need to assess, design, establish and develop modern regional agri-logistics infrastructure and services.

Encouraging investment in agri-logistics infrastructure and services will help to address the high levels of post-harvest losses experienced by many Uzbek farmers today, which are caused by various factors

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including: the lack of available sorting, grading, and packaging services and facilities; no pre-cooling present;

limited access to localized farmer and wholesale market facilities; lack of adequate transport, storage and refrigeration services; inadequate and under developed agri-food processing facilities; and the lack of farmer knowledge of good post-harvest practices and quality standards. The solution to reducing post-harvest losses is through the proper management of the product at the farm level as well as the integrated cold chain; concurrently, the product value is maintained to international standards which positions the industry to increase higher value exports, as well as address the need to supply domestic retail with high value products. Investment in agri-logistics infrastructure and services will also help to support the government strategy of agriculture diversification and the promotion of higher value horticulture agri-food exports.

To this end, WFLO and Dr. Mulat Abegaz Legesse were retained as part of the USAID-funded Uzbekistan

Agricultural Value Chain (AVC) Activity to support the Uzbek government in assessing investment opportunities in the agri-logistics sector, by identifying the needs at the local, regional and national level to support successful investments by both the public and private sector in compliance with the Agri-food

Development Strategy.

The nature and type of ALCs to be developed and established depend on several factors including the type and nature of produce, product value, market requirements such as quality and food safety of the potential markets, size of the market, volume of produce, required regulatory and development supports, the nature and type of infrastructures required including access and vicinity to sea, railway, road and air transport systems. The assessment of the needs and requirements for the establishment and development of regional agri-logistics infrastructure & services in Uzbekistan targeted three regions: Tashkent, Fergana and Andijan. Following desktop research, in-country interviews were conducted between October 8th -

19th, 2019.

OVERVIEW OF THE UZBEKISTAN ALC INITIATIVE

During their in-country research, the WFLO team met with a variety of GoU representatives to learn more about their vision for ALCs. During these discussions, the team learned the GoU’s ALC project is part of a larger initiative to restructure the agriculture industry to promote export-led growth and create jobs. Inspired by the high value horticulture distribution systems of Spain and France, the GoU decided it would like to adopt some of what they saw in those countries by creating a network of agri-logistics centers in various cities across Uzbekistan. The vision is to have approximately eight ALCs which will be designed as a “one-stop shops” for horticultural processing, sorting, and distribution across the 14 regions in the country. Not only are the ALC’s envisioned to promote trade at the macroeconomic level, it is also envisioned that the ALCs will help to reduce post-harvest losses, improve returns to small holder farmers and create jobs at the microeconomic level.

The ALC project will start with the establishment of approximately three ALCs in Andijan, Samarkand, and Tashkent. However, one of the main observations made by the team in discussions with the GoU is the decision to establish the ALCs (e.g. how many, and where) do not appear to have been influenced by data on production capacity or demand for proposed ALC services. This is a significant observation and a critical oversight because when decisions are made without aid of relevant, accurate data, it is a lagging indicator that the assumptions made may be incorrect due to a lack of evidence to the contrary, which also indicates that other decisions may also be suspect. A more detailed discussion on demand for ALCs and recommendations for determining demand will be covered in section 4.

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As per the project study, the ALCs are expected to provide the following services:

• Strengthening upstream and downstream value chain linkages and provide modern post-harvest infrastructure;

• Provide all necessary facilities and services in one place: trading, storage, processing, food safety certification, customs clearance, transport, shipping, marketing advisory services, trade finance, and commercial banking;

• Help to address the current high levels of post-harvest losses and expand horticulture produce sales in domestic and export markets;

• Introduce post-harvest processing, storage, and handling following international quality and safety standards and the ALCs expected to be the focal points of horticulture clusters in Andijan and

Samarkand and the neighboring regions; and

• Help to smoothen crop seasonality and enhance price transmission to and price stability for small-scale producers, and small and medium-sized agribusinesses.

ASIA DEVELOPMENT BANK (ADB) PARTNERSHIP

Financed by the ADB, the Horticulture Value Chain Infrastructure Project supports the GoU's plan to establish horticulture clusters where production and post-harvest services can be consolidated to improve efficiency and economies of scale. The proposal from the GoU is for financial support for the establishment of ALCs in two locations, Andijan and Samarkand regions, considering international best practices.

Given its mandate, the Horticulture Value Chain Infrastructure Project published a variety of studies to support its intention to finance the establishment of two ALC’s in Andijan and Samarkand regions to strengthen upstream and downstream value chain linkages and provide modern post-harvest infrastructure. According to the project information document (PID), the ALCs are to provide all necessary facilities and services in one place: trading, storage, processing, food safety certification, customs clearance, transport, shipping, marketing advisory services, trade finance, and commercial banking. The

ALCs will also help address the current high levels of post-harvest losses and expand horticulture produce sales in domestic and export markets. It will introduce post-harvest processing, storage, and handling following international quality and safety standards. Finally, the ALCs will be the focal points of horticulture clusters to be established in Andijan, Samarkand and neighboring regions.

This report is the output of the assessment and is organized as follows:

• Section 1: Market Overview

• Section 2: Demand for Agri-logistics infrastructure in Uzbekistan

• Section 3: Supply of Agri-logistics infrastructure in Uzbekistan

• Section 4: Quality Infrastructure and Regulatory Bodies

• Section 5: Trade Facilitation by Government Offices

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• Section 6: Comparative Analysis

• Section 7: Recommendations

1. MARKET OVERVIEW

1.1 AGRICULTURE-BASED, EXPORT-LED GROWTH

Over the last 3 years, Uzbekistan has experienced a significant increase in export-led growth in the agriculture sector due to robust policy reforms undertaken by the Government of Uzbekistan. These reforms were specifically designed to promote jobs and economic growth through increased exports of high value horticultural products such as, but not limited to apricots, cherries, grapes, persimmons and plums.

In 2018, horticulture exports grew by 35 percent in both volume and value compared to 2017. This can be attributed to several factors, including positive advances in the regulatory and enabling environment discussed in this section below. The horticulture subsector is not only the most successful agricultural export subsector for Uzbekistan, but it also serves as the largest economic subsector in the country.

According to the World Bank, the horticulture subsector in Uzbekistan generated 80 percent of total crop production in Uzbekistan, which in turn accounted for 53 percent of gross agricultural output in

2018. Horticulture also has a greater than average positive impact on employment amongst other agricultural sectors.

1.2 TRADE & EXPORT PERFORMANCE

Uzbekistan is a net exporter of horticulture products. It accounted for 80 percent of the agri-food export, which together with cotton fiber made up 9 percent of total export. Compared to 2015, the export volume of vegetables in 2018 grew by 133 percent and fruits by 183 percent. Uzbekistan exports more than 180 kinds of fresh and processed horticulture products. The export geography has expanded over the last 5 years to trade with more than 80 countries, allowing Uzbekistan to become: the 2nd largest global exporter of dried apricots; the 3rd largest exporter of persimmon; the 4th largest exporter of raisins and apricots; and the 5th /6th largest exporter of dried prune, fresh cherries and plums .The other major export products include fresh peaches, fresh plums, and tomatoes. The export performance of the major fruits has shown relatively steady growth between the year 2015 and 2018, refer Figure 1 below.

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Figure 1 Five years export performance of the major fruit and vegetables of Uzbekistan in million USD

Source: International Trade Center based on UN COMTRADE and ITC statistics

All major products from Uzbekistan are exported to lower value export destination countries, at cheaper cost. As per the export performance of 2017 and 2018, except fresh cherries and fresh apricots, the average cost of exported fruits and vegetables were 2 to 3 times lower than the average world price refer table below. The highest valued exporter countries in large volume of fruit and vegetable of produce include USA, Chile, Turkey, South Africa and most EU countries; for further details of the market performance of different countries refer to Annex 4. The challenges and potentials for improvement of

Uzbekistan to join the high valued exporter countries including the food safety and quality requirements and the regulatory and support organizations have been assessed and evaluated in the following sections, specifically under section 5 and 6.

TABLE 1 TWO YEARS EXPORT VALUE/TON OF THE MAJOR FRUIT AND VEGETABLES OF

UZBEKISTAN

Type of Major Export Products

Average Uzbekistan Price USD/Ton

Average World Price USD/Ton

2017 2018 2017 2018

Fresh cherries 2186 3791 4330 4344

Dried apricot 964 991 2508 2413

Dried prunes 737 694 2299 2378

Dried grapes 905 1091 1813 2042

Fresh grapes 727 788 1764 1758

Fresh peaches 558 646 957 1157

Fresh plums and sloes 469 722 1131 1156

Tomatoes 562 847 1119 1126

Fresh apricots 891 1133 1126 1072

Fresh persimmons 571 602 974 1045

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Source: International Trade Center based on UN COMTRADE and ITC statistics

Based on discussions with the Ministry of Trade and Foreign Investment while in Tashkent, countries that the government would like to target for high value horticultural exports outside of Russia include, but are not limited to: China, the European Union (EU), South Korea, Turkey, and the United Arab Emirates

(UAE). As a landlocked country, the GoU has invested in construction of a railway to better facilitate trade with China. The planned ALCs are also envisioned to support increased trade outside of Russia.

1.3 REGULATORY AND ENABLING ENVIRONMENT ANALYSIS

Over the last three years, the Government of Uzbekistan made significant regulatory changes to promote horticulture exports. In 2017, the GoU:

1) Liberalized the exchange rate;

2) Ended the export monopoly of Uzagroexport;

3) Ended the mandatory sale of 25% hard currency earning and permitted to keep 100% value of earned hard currency in their account; and

4) Reduced the time to receive an export certificate and register the contract at the customs agency for horticulture exporters from 10 days to three days.

In 2018, the GoU:

1) Granted permission to use any transport for exports, not only railroad;

2) Established several “green corridors” at border crossings;

3) Eliminated minimum export prices;

4) Removed full prepayment req. for export contracts outside of Uzagroexport; and

5) Improved access to credit for horticulture agribusinesses.

Overall, these reforms reduced trade distortions affecting Uzbekistan’s agriculture sector. These reforms laid the groundwork for the following resolutions to establish a network of ALCs in Uzbekistan:

• Presidential Decree #4406 of 29 July 2019; and

• Cabinet of Ministers Decree, which is specifically related to ALC project via ADB financing.

1.4 CHALLENGES AND BARRIERS TO ENTRY

While the GoU has undertaken significant industry-friendly reforms to promote export-led growth in the agricultural sector in Uzbekistan, there remain some barriers faced by horticultural farmers as summarized below:

Currently, farmers pay a 15% VAT (initially 20% until October 1, 2019) to sell produce to domestic retailers. As a result, farmers are choosing to sell in the informal markets and bazaars. This may also include clandestine exports via Kazakh traders/transporters.

In addition, there are challenges with access to finance for smallholder farmers. In order to overcome these challenges, the GoU has offered a 5% interest rate for loans to small-holder farmers to

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grow certain horticulture products which can be exported and to incentivize small-holder farmers to grow according to international standards.

Kazakhstan charges Uzbekistan carriers a special tariff to carry products into or through the country, whereas Kazakh carriers are not subjected to these tariffs. As a result, it is more expensive to use Uzbek carriers, which artificially inflates the cost of goods landed in Kazakhstan, Russia, etc.

The GoU measures the amount of exports by region. As a result, some regional government administrators pressure farmers to only sell to traders who enter the region to purchase. For example:

often village farmers will have an excess of a certain product and may wish to sell to an aggregator from another region who has buyers. The pressure is put on them to keep the product in the region. With no buyers to sell them to, the farmers must sell into the local market.

In addition, farmers are recommended to grow only certain crops in certain regions as it is considered more profitable and the region has more favorable climatic conditions for certain crops. In many cases, farmers also lack linkages to potential buyers in export markets. Closer cooperation and linkages between

Uzbek farmers and buyers in the export markets would inevitably serve to improve the quality and quantity of the agricultural products produced, based on demand and buyer tastes.

2. DEMAND FOR AGRI-LOGISTICS INFRASTRUCTURE AND

SERVICES IN UZBEKISTAN

One of the first observations made by the WFLO team after speaking with the Ministry of Agriculture is the ALC project plan and rollout strategy should be driven by objective data to confirm demand and parameters for ALC’s and the locations proposed.

According to the Ministry of Agriculture, the working group for the ALC project was just formed (within hours of the WFLO team’s visit). Consequently, there is a conscious effort underway by the ministry to obtain the relevant data required to confirm demand for the ALCs. However, this data may not be available for additional analysis by the WFLO team for several months, and there are already questions as to the validity of the data promised. Therefore, for the purposes of this report, the WFLO has obtained and used qualitative data from the field visits and conversations therein to assess the demand for the ALCs and to better understand what exactly the ALC’s are supposed to be, and finally, to get a better sense of the situation on the ground at the proposed locations.

Once data is provided by the ALC working group (within the Ministry of Agriculture), the WFLO team recommends that a follow-on data assessment be scheduled with a scope to:

• Provide a complete report including a quantitative evaluation of the data;

• Conduct sight visits to Kazakhstan (Shymkent), and another location (possibly France, Spain, or Turkey) to better understand the genesis of the project, as well as to provide a comparison analysis between those ALC’s and the proposed ALC’s in Uzbekistan;

• Draft approximately 3 specific ALC, as well as ICC cluster design concepts; and

• Make specific suggested locations for the ALCs or confirm those already selected.

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The WFLO team highly recommends ongoing efforts are made to validate the feasibility of the ALC project, though the tender has already been released.

Uzbekistan is currently enjoying a high demand for horticulture products from their neighbors in

Kazakhstan and Russia. Demand for horticultural products from China has been rising, though China is urging its supply partners to increase quality to international standards. This growing Chinese demand is nearly limitless in its possibility, provided Uzbekistan can normalize exports to international standards.

2.1 QUANTITATIVE DEMAND ASSESSMENT: A PROPOSED METHODOLOGY

The following methodology is recommended by the WFLO team for assessing demand for the ALC services in the locations identified:

• Utilizing the OECD’s “Framework For The Unrecorded Economic Activities In Transition Economies” http://www.oecd.org/sdd/na/2463883.pdf, assemble, analyze, and inform on the demand of horticulture products of Uzbekistan, following the general approach as follows:

• Assemble data sets to review the impact of the informal markets on the total VAT collected by the

GoU. Data analysis may take on the following approach:

o Capture the total domestic horticulture production in metric tons (MT).

o Assess the post-harvest loss and “shrink” rate and adjust available quantity accordingly.

o Assemble data on Value Added Tax (VAT) and the MT sold data on all horticulture products, including products destined for domestic consumption and export.

o Compare the quantities on which VAT was collected with the adjusted production level to determine the difference in unrealized VAT resulting from the informal market.

• Assess the market, production, logistics, sales, and distribution data for each ALC region independently, in order to measure volume produced and demanded for each region, so that the design and inventory of infrastructure is effective in meeting the specific needs of the region.

There is a focus on VAT in the proposed methodology because the current taxing scheme incentivizes farmers to sell directly into the informal open-air markets’ economy, which is unregulated. If the tax schemes change and these become regulated, then it allows the formal market to compete on a level playing field.

It is likely and expected that data analysis will show each ALC will have significant, volume, throughput, thresholds, and design differences from the other. For example, the Tashkent facility may be more focused on domestic distribution into Tashkent, whereas Andijan may be more aligned with a “Direct to Export”

(export distribution) model. If this data is made available, WFLO can assist in the analysis.

3. SUPPLY OF AGRI-LOGISTICS INFRASTRUCTURE AND

SERVICES IN UZBEKISTAN

http://www.oecd.org/sdd/na/2463883.pdf

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Supply chains for highly perishable agricultural products like fresh vegetables and fruits comprise growers, cold chains, brokers, wholesalers, importers and exporters, retailers, shops, and input and service suppliers. The main processes include the agricultural practices from farm selection to harvesting, and the post-harvest practice from sorting, grading, packaging, storage, distribution, retailing to consumption.

Several studies have been conducted on perishable fruits that do not ripen after harvest and vegetables regarding the effect of time, temperature and humidity after harvesting. These studies have indicated an increase in temperature usually results in accelerated loss of quality and reduction of shelf life, with 50 to

90% loss of quality and reduction of shelf life reported in some cases due to improper handling of post-harvest practices. Moreover, due to food related diseases and globalization of food production, consumers

(especially in the Western world) have become more aware of the origin and nutritional content of their food. This leads to a growing interest in traceability, freshness and quality of products.

The ALCs are expected to address food safety and quality requirements, including post-harvest losses, and expand horticulture produce sales in domestic and export markets. They are also expected to establish small- and medium-sized cold storage and processing facilities, expand production areas, and adopt modern production technologies in intensive orchards and greenhouses.

This section comments on the observations taken from interviews and visits to Samarkand, Tashkent, Fergana and Andijan between 8 to 19 October 2019 regarding the current supply of cold chain, beginning on-farm and moving into cold storage and to destination markets via refrigerated transport.

3.1 PRODUCERS/FARMERS

Due to the seasonal nature and availability of products in the three regions, the assessment focused primarily on agricultural and post-harvest practices for grape products. The rate of deterioration of grapes increase with time, high temperature and low humidity, which cause water loss from the grapes and stems.

Deterioration could therefore be limited by maintaining temperature control through an integrated cold chain using proper packaging such as expanded polystyrene packaging (EPS). EPS boxes are recommended by major producers and exporter countries, which have many benefits including light weight, less interior packaging to allow airflow, good insulation, and the ability to maintain strength in high-humidity cold storage.

As observed in the Tashkent region, grapes are picked and transferred to sheds, usually early in the morning until noon, followed by sorting, grading and packaging in the afternoon into wooden boxes or crates. All activities are conducted on-farm with transportation typically occurring in the evening between

6 and 9 PM by open trucks on rough roads. This contributes to possible contamination and damages the product further. Per this traditional practice, pre-cooling is not utilized.

In the Fergana and Andijan regions, grapes are transferred to cold storages 3 to 5 hours after harvesting and collection.

Cooling in the regions is conducted in cold storage rooms arranged in pyramid shape, which require 12-

24 hours to reach the required cooling temperature. There is in general lack of pre-cooling facilities and proper pre-cooling practices.

Records and documentations should be kept including the history of land selection to final harvesting, hand picking, handling, farm packaging, storage, and transportation. However, based on the interviews, 15 | ASSESSMENT OF REGIONAL AGRI-LOGISTICS CENTERS IN UZBEKISTAN USAID.GOV there is no such practice that could serve as evidence for traceability, to prove that required quality and food safety standards were maintained. Records are mainly utilized for financial purposes.

A few farms reported they use mobile toilets with hand washing facilities and canteens during the harvesting period. In general, personnel standards and personal hygiene issues are not properly addressed resulting in a lack or completed absence of farm toilets, sheds, hand washing facilities, canteens, dressing areas, etc.

Farm hygiene and sanitations is not properly implemented, presence of animals (dogs) and grazing inside orchards and vineyards are common, farms are not properly protected from dust/dirt, there are no wind breaks;

Chemicals, fertilizers, and inputs are purchased from reputable suppliers in most cases, but the use of informal markets or unknown suppliers was also reported. Documentation and records on pest scouting, use of pesticides, preharvest intervals, and calibration of spraying equipment are not properly practiced.

Generally, there is lack of knowledge and awareness in the management of farms, as well as a lack of cooperatives and commercial farms to undertake and implement proper management and implement good agricultural and hygienic practices as indicated in the guidelines of UN-FAO, the Codex General Principle of Food hygiene and GOBALG.A.P. requirements. These are considered as the minimum requirements by the developed markets, such as EU, North America and Asian countries with relatively strict food safety and quality market requirements. The practices observed are primarily traditional agricultural practices with exports focused on traditional markets (the previous Soviet Union countries) with lower food safety requirements and cheaper prices. Please visit the annexes for additional information.

For the ALCs to effectively boost and enhance the export of high-value fruit and vegetables and located markets in higher value destinations, a major shift from traditional agricultural practices must occur. Good agricultural practices, including hygiene and farm management supported by cooperatives, contracts and commercial farms should be supported and coordinated closely to match the planned capacity of ALCs.

There are some nascent cooperatives, forming based on support given by development partners working to implement good agricultural practices and GLOBALG.A.P. However, to date only two or three farms are GLOBALG.A.P. certified. Such efforts should be strengthened and extensively implemented in line with the ambitious plan and investment into the ALCs.

3.2 COLD STORAGES

At the time of the field visit, most of the cold storages were filled with grapes with the following observations noted:

• Some storage facilities were above capacity while others were below capacity;

• Due to the lack of pre-cooling facilities, pre-cooling was conducted in cold stores utilizing a pyramid shape, which requires 12 to 24 hours to reach the required temperature 10C.

• Calibration is not conducted by the Metrology Institute/Calibration bodies; rather, they believe their own equipment and do some comparisons with thermometers. Calibrated temperature and humidity

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measurement devices, balance, and fire extinguishers were not available. There is limited knowledge on the importance of calibration.

• Some cold stores reported that they recorded humidity and temperature on a daily basis, but no evidence was found during the visit.

• Cold stores, loading and unloading sites were not properly cleaned. Drinking, eating and smoking occurred in and around the corridors of the cold stores, and most of the light lamps were uncovered or not properly protected. Dogs and cats walked around the facilities.

• Some of the cold rooms were built in a manner that is difficult to clean. Floors, walls and ceiling were covered with wooden materials or rough surfaces. Some were rusty.

• In general, the cold storage facilities visited require proper monitoring and storage/stacking disciplines, handling practices, and good hygienic practices, but some need complete rehabilitation (refer annex 3 for photograph presentations).

• Document handling and record keeping practices should be implemented and monitored.

It was reported that there are 200 to 300 cold stores in each region with different capacities from 100 tons to few hundred tons capacity, with 5 to 10 percent growth per year. Few cold stores have capacity between 1000 to 3000 tons, and one has 7000 tons capacity.