Attachment_J._11_REC_Report_Stakeholder_Mapping.pdf

January 2013 This publication was produced for review by the United States Agency for International Development. It was prepared by Chemonics International Inc by Short Term Technical Advisor, Umida Khaknazar. The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

USAID REGIONAL

ECONOMIC

COOPERATION (REC)

PROJECT

REPORT ON STAKEHOLDER MAPPING OF TRANSPORTATION

AND TRADE FACILITATION: UZBEKISTAN AND KAZAKHSTAN

CONTRACT NO. AID-176-TO-11-00001

ii STAKEHOLDER MAPPING OF TRANSPORTATION AND TRADE FACILITATION

CONTENTS

Acronyms .......................................................................................................................... iii

Section I: Introduction to Transportation and Trade Facilitation in Central Asia

Trade Facilitation and World Trade Organization

Section II: Transportation and Trade Facilitation in Uzbekistan

Main Transportation and Trade Facilitation Challenges in Uzbekistan

Trade Policy and Finance Issues

Customs Administration and Border Control Issues

Transport and Logistics Issues

Key Stakeholders on Transportation and Trade Facilitation in Uzbekistan

International Donors

Asian Development Bank (ADB)

United Nations Development Program (UNDP) Uzbekistan

United States Agency for International Development (USAID)

Government of Uzbekistan

Government of Uzbekistan Approved Local Partner Institutions

Overview of Uzbekistan Trade Policy Development

Conclusions and Recommendations

Section III: Transportation and Trade Facilitation in Kazakhstan

Main Transportation and Trade Facilitation Challenges in Kazakhstan

Freight Insurance and Fianance Issues

Customs Administration and Border Control Issues

Transport and Logistics Issues

Government of Kazakhstan Action Plan in Transportation and Trade Facilitation

Key Stakeholders on Transportation and Trade Facilitation in Kazakhstan

International Donors

Asian Development Bank (ADB)

World Bank

United States Agency for International Development (USAID)

Government of Kazakhstan

Conclusions and Recommendations

Annexes Annex A: Transport Legislation in Central Asia

Annex B: UNDP Newsletter on Trade Facilitation Activities

Annex C: WTO Accession Strategy for Uzbekistan

Annex D: Relevant Technical Assistance Projects for Foreign Donors, 2013-14

Annex E: Relevant Projects from Kazakhstan’s Action Plan for Implementation of the

Kazakhstan – New Silk Road

Annex F: List of Transport and Logistics Companies in Uzbekistan and Kazakhstan

Annex G: Minutes of the Meetings Held in Uzbekistan and Kazakhstan

References

STAKEHOLDER MAPPING OF TRANSPORTATION AND TRADE FACILITATION iii

ACRONYMS

ABDL Association of Business Development Logistics

BIT Kazakhstan’s Bilateral Investment Treaties

BCP Border Crossing Point

BOT Build-operate-transfer

CAR Central Asian Republics

CAREC ADB Central Asian Regional Economic Cooperation

CIS Commonwealth of Independent States

CPMM CAREC Corridor Performance Measurement & Monitoring

ECMT European Conference of Ministers of Transport

FDI Foreign Direct Investment

GATS General Agreement on Trade in Services

GATT General Agreement on Tariff and Trade

GDP Gross Domestic Product

GoU Government of Uzbekistan

IMF International Monetary Fund

IPR Intellectual Property Rights

ISO International Organization for Standardization

ITA Information Technology Agreement

KFTC Korea Fair Trade Commission

MLA Multilateral Agreement

MFERIT Uzbekistan Ministry of Foreign Economic Relations, Investment and Trade

OECD Organization of Economic Cooperation and Development

R&D Research and Development

REC USAID Regional Economic Cooperation

SES Single Economic Space

SME Small and Medium Enterprises

TIFA Trade and Investment Framework Agreement

TIR Transports Internationaux Routiers

TTF Transportation and Trade Facilitation

TRACECA Transport Corridor Europe-Caucasus-Asia

TRIPS Trade-Related Aspects of Intellectual Property Rights

UKTI Trade and Investment

UNCTAD UN Conference on Trade and Development

UNESCO United Nations Educational, Scientific and Cultural Organization

WIPO World Intellectual Property Organization

WTO World Trade Organization

STAKEHOLDER MAPPING IN THE AREAS OF TRANSPORTATION AND TRADE FACILITATION

SECTION I: INTRODUCTION TO TRANSPORTATION AND TRADE

FACILITATION IN CENTRAL ASIA

This paper mainly covers Uzbekistan and to a limited extent Kazakhstan. The scope of this paper includes the following:

Identifying the current role/involvement of acting stakeholders in specific areas of

Transportation and Trade Facilitation (hereafter referred as TTF);

Summarizing the current status of trade policy, dynamic and government initiatives on TTF, and possibilities for the USAID Regional Economic

Cooperation Project (hereafter referred REC) in TTF given the existing limitations.

Uzbekistan is a doubly land-locked country and both Uzbekistan and Kazakhstan share recent past of socialist system and difficult present transition to a market economy. The pace of each country toward economic development has varied. Uzbekistan is among the poorest countries in the Commonwealth of Independent States (CIS), with excessive government intervention and protectionist trade policy. Uzbekistan exports cotton, gas and metals, which constitute a solid share of the GDP. The migrating workforce from

Uzbekistan to Russia and other CIS countries has been growing over the past decade due to a high unemployment in Uzbekistan. Uzbekistan falls very low on international business and investment indexes, such as the Logistics Performance Index (LPI).

Uzbekistan ranks 129 th out of 150 countries surveyed by the World Bank on the LPI.

Recent transport studies highlighted imbalances in trade, where imports outnumbered exports significantly. Most exports being transported over land are textiles and perishables, such as fruits, vegetables and dried fruits and very few manufacturing goods.

Uzbekistan’s WTO accession process has also been stalled since 2006, when the last

Working Party (WP) took place.

Kazakhstan is rich with oil and gas and has been following resolutely toward WTO accession which results in some significant economic and trade policy reforms and more attractive business and investment environment. Kazakhstan is ranked 88 th under LPI, which is more advanced than all other Central Asian Republics (CAR). Despite the relative advantages, Kazakhstan also suffers from many unnecessary barriers to trade.

Overall, in both countries, the high costs of transport and border crossing make their imports often prohibitively expensive, as well as transaction costs for transit in a global value chain.

Trade Facilitation as a term has no exhaustive definition in international trade terminology. Global value chains involve a large spectrum of production infrastructure, Main source: Poverty Reduction, Growth and Debt Sustainability in Low-Income CIS Countries, Joint

IMF and World Bank reports 2009 World Bank report: Connecting to Compete: Trade Logistics in the Global Economy. The LPI measures a country’s trade logistics performance using a number of parameters. Countries with high LPI scores have lower trade costs and are better connected to the global value chain.

STAKEHOLDER MAPPING OF TRANSPORTATION AND TRADE FACILITATION 5

transport, customs, logistics services, financial systems and legal frameworks.

Simplification of TTF processes is not simply mechanical, in which improvements can be made by merely optimizing certain customs procedures, border measures and regulations.

Trade Facilitation should be instead addressed with a holistic approach if effective results are sought. In order to move forward in Trade Facilitation, there must be strong political will. Large investments into global infrastructure projects in Central Asia, such as building roads, equipping Border Crossing Points (BCP) with X-ray scanners, or attempts to provide Customs automation system (Single Window, etc.) do not succeed without trade policy liberalization, elimination of excessive government regulations and genuine regional cooperation in the form of Regional and National Trade and Transport

Facilitation Reform Strategy with realistic action plan for the next five to ten years. Such plans should be discussed among Central Asian neighbors, the countries along the key transport corridors, as well as with the business community, as they represent the main interest groups.

There have been numerous reports, assessment studies and research conducted over the past decade by industry practitioners and consultants commissioned by reputable institutions such as the World Bank, Asian Development Bank (ADB), United Nations

Conference on Trade and Development (UNCTAD), the Transport Corridor Europe-

Caucasus-Asia (TRACECA) and others on the need for such integrative approaches. One of the recent studies, Central Asia Regional Economic Cooperation Corridor Performance

Measurement and Monitoring (CAREC CPMM), discussed in this paper, aimed at calculating the dynamic of excessive transit costs, their nature and provides recommendations for their reduction or elimination.

A. Trade Facilitation and World Trade Organization

As of March 2013, there is no WTO agreement on Trade Facilitation. The ongoing Doha

Round is a forum in which such a prospect is being formulated, despite strong opposition on part of a number of developing countries, who are concerned that unification of certain trade facilitation procedures will lead to excessive costs for developing countries.

Nevertheless, a number of General Agreement on Tariff and Trade (GATT) articles directly relate to TTF. Such articles, among others, include Article V (Freedom of Transit with no arbitrary delays and fees with clear transit routes and fixed fees), Article VIII

(Customs and Border fees should not be excessive and only cover costs related to services rendered), Article X (Obligations on transparency, all laws and regulations should be properly published and economic operators informed in advance of possible changes). In addition, Article VII requires proper Customs Valuation methods. WTO member countries should eliminate all quantitative restrictions for imports, minimize costs, and streamline procedures for permissions on part of licensing, sanitary or veterinary bodies. The latter involves obligations under WTO agreements on technical barriers to trade (TBT), sanitary and phytosanitary (SPS) measures, import licensing, and pre-shipment inspection.

World Bank Transport and Trade Facilitation Issues in the CIS 7, Kazakhstan and Turkmenistan, 2003

CAREC CPMM – Corridor Performance Measurement & Monitoring annual Report 2011

SECTION II: TRANSPORTATION AND TRADE FACILITATION IN

UZBEKISTAN

A. Main Transportation and Trade Facilitation Challenges in Uzbekistan

Many of the challenges that TTF faces in Uzbekistan directly result from controversial trade policy regulations and practices as well as restrictive microeconomic policies. Such restrictions impede significantly on the movement of goods and put Uzbekistan into an unfavorable position as a transit country, leading to transiting countries exploring alternative routes. Cumbersome procedures increase the costs of transport through

Uzbekistan making it prohibitively expensive and significantly slowing down the process. Some of the primary challenges impeding Uzbekistan’s realization of the full potential of its trade logistics sector are, inter alia, described hereunder.

A.1. Trade Policy and Finance Issues

Foreign exchange restrictions. Foreign exchange control is one of the major impediments to trade in Uzbekistan. Although it is a signatory to the 2003 IMF Article

VIII,

the Uzbek currency is still not convertible, so Letters of Credit issued by Uzbek banks are generally not accepted in foreign countries. As a result of over-appreciation of local currency, there are multiple exchange rates. Access to hard currency at the official rate is limited. To import, an Uzbek company must apply for foreign exchange through its bank. The process is long, cumbersome and nontransparent. Even if foreign investors are given permission by the government for remittance, amount tendered to banks for exchange into hard currencies are subjected to a 5% government charge and a 1% bank fee, for a total of 6% in “transaction taxes” just to repatriate profits. The government requires 100% pre-payment for export operations, but half of the hard currencies remitted into Uzbekistan must be promptly exchanged into local currency Uzbek Sum at the official rate, limiting the amount of hard currency that is available for importing goods, and for paying vendors and employees who prefer payments in hard currencies, or if paid in Sum, at the market rate.

Excessive government intervention to import-export operations. Import and export contracts must still be submitted for approval to the Ministry of Foreign Economic

Relations, Investment and Trade (MFERIT), exacerbating inefficiencies and increasing processing times.

Limited access to capital. Government control of the financial system results in an underdeveloped banking system. The government regulates the banking system to the

Information gathered from the existing legislation, interviews with representatives of business community, research think tanks, Customs Service, government agencies, industry association, as well as reports and research papers by the ADB and World Bank Consultants. ( Trade Facilitation and Logistics

Development Strategy Report by Andy Sze and Transport and Trade Facilitation Issues in the CIS7, KZ and Turkmenistan by Eva Molnar and Lauri Ojala).

There was a relative liberalization and multiple exchange rates were eliminated during the period of 2003-

2006, however, soon after the regime went back to the foreign exchange restrictions which again resulted in multiple exchange rates (artificial over-appreciation of local currency Uzbek sum).

STAKEHOLDER MAPPING OF TRANSPORTATION AND TRADE FACILITATION 7

extent of discouraging foreign investments. Recent attempts by Kazakh banks to acquire

Uzbek banks were all rejected by the government. As a result, access to capital remains limited, which negatively impacts the availability to financing, a vital mechanism for engendering trade.

Prohibitive import tariffs and discriminatory excise taxes. Uzbekistan subjects most imports from countries with Most Favored Nation (MFN) status to customs duties of up to 30%, and 20% VAT which is generally applied. Uzbekistan also arbitrarily increases excise taxes, which are much higher than excise taxes applied to domestic goods. These import tariffs and discriminatory excise taxes pose some of the most major issues for

Uzbekistan at WTO negotiations. Discriminatory excise taxes violate GATT Article III, the non-discriminatory national regime principle. For instance, automobiles are subject to a 90% customs duty, leading to a total of 160% tax for imported automobiles. Prohibitive duties and discriminatory taxes discourage both regional and international trade for the country, yet increase volumes of clandestine imports.

A.2. Customs Administration and Border Control Issues

The existing border/customs procedures are not compatible with all the principles of the

Revised Kyoto Convention, nor do they meet the obligations contained in many of the multilateral or bilateral agreements to which Uzbekistan is a signatory, including the

TRACECA Multilateral Agreement (MLA). Although most of these agreements present commitments to simplify and harmonize border procedures, these procedures have not significantly changed over the last decade.

Implementation of international conventions, as well as WTO provisions on simplification and harmonization of Customs and Transit procedures, requires advanced technological modernization of Customs, including, among other things:

Customs automation, adoption and application of Risk Assessment and Management systems, application of “one window” (Single Window), preliminary declaration, the release of goods under bond, and other simplified procedures aimed at expedited customs clearance process.

As traffic increases, border delays will become more severe, if real reforms and practical steps are not undertaken. Currently, the following issues obstruct efficient Customs

Administration:

Absence of Risk Assessment and Management. Excessive documentation requirements make Customs clearance a costly and time-consuming process. In the absence of both a system of pre-arrival clearance and systemic risk analysis, Customs clearance is only possible after physical inspection of the consignment. Some Customs posts have adopted a policy of regularly breaking seals because they doubt the integrity of the previous

Customs organization. This is often in breach of international conventions and makes effective control of transit traffic more difficult.

Excessive Fees. In addition to charging ad valorem 0.2% fee for processing of entries, Customs also charges a 5-per-hour fee on weekdays and a 20-per-hour fee on weekends or after business hours for cargo examination. A minimum 1-hour fee is levied for the

Customs officer to examine the cargo. This causes undue delays, and increases costs in importing goods into Uzbekistan. Customs fees should be brought in compliance with

GATT Article VIII on Border Fees and Formalities.

Flawed Customs Valuation. GATT Article VII stipulates six methods of Customs

Valuation where the first method “based on good value” is a preference. However, Uzbek

Customs often do not apply the first method, as speculation is commonplace that the importer underestimates price. Although Uzbekistan adopted a Harmonized System of

Goods Classification based on 6 digit (HS 2002), HS Codes for many goods are still classified under 2 -4 digits. There is lack of implementation capacity to conduct proper

Customs Valuation.

Sporadic border closures without advance notice. This presents a problem for importers and exporters, as well as forwarders and carriers. One of the recent examples of border closures without notice took place in December 5, 2012, when Customs clearance for impost was suddenly suspended.

There are cases of arbitrarily interrupting the transit of goods. Cases of Tajik transit shipments being interrupted has become a contentious and ongoing political issue.

Unsynchronized Border Crossing Point (BCP) operating hours. This exacerbates inefficiencies by further shortening the actual hours of operation when people and cargo are able to cross.

Lack of transparency and uniformity in the interpretation of Customs laws and regulations. Some customs posts issue their own internal decrees, which are quite different from the law. Besides being interpreted in many different ways, there is evidence that the procedures themselves are not fully understood by customs officials.

Border crossing delays related to immigration services. Passengers and drivers have to disembark their vehicles to have their passports checked. This slows the border crossing process. Furthermore, most checks at BCP are done manually due to a lack of equipment.

Few border crossing points have the capacity to issue full or transit visas, despite requirements becoming more stringent. Visa arrangements for professional drivers are cumbersome and time consuming. It may take so long that by the time a visa is issued, the cargo has already been taken by a foreign hauler. Traders are pressured to accept the

Customs post’s demands just to execute the shipment of goods and then potentially face litigation.

A.3. Transport and Logistics Issues

According to official reports to IMF Uzbek imports do not exceed exports, so there is no budget deficit.

The latter is being “achieved” by merely suspending customs clearance the moment statistics shows even figures. In 2012, the border clearance for imported goods was suspended on December 5, so that there are no disruptions of statistics. As a result, many companies lost their chance for major New Year sales, or, as an alternative, many merely smuggled goods, since corruption offers opportunities.

STAKEHOLDER MAPPING OF TRANSPORTATION AND TRADE FACILITATION 9

Rail transit issues. A lot of activities take place on the border such as the change of the locomotives, crews and track gauge. This is due to the monopoly of the national railway, Uzbek Railway, the facilities of which are in need of major modernizations, and to technological incompatibilities. To cross over to a different track gauge in Uzbekistan, cargo will have to be re-loaded to the wagons of the other railways. Container transport is vastly under-developed. In addition to technological differences, rail freight crossing borders undergo Customs, veterinary and Sanitary and Phytosanitary (SPS) inspections.

Road transit issues. Technical provisions with regard to gross weight and axle load of vehicles, or different insurance schemes often lead to cumbersome inspections by the

Traffic Inspectorate. This may also impose additional taxes and rent, as well as further delays at the borders. As a member of the UN Convention on Frontier Control of Goods, there is a need for further harmonization of weight and load standards, as well as for the mutually recognized weight certificates.

The main deficiency of the Central Asian national road transit systems is that they cover only one country and do not provide a “chain guarantee.” Hence, a transport operator undertaking Customs transit under the national transit systems has to submit separate transit documents and provide separate guarantees in the country of origin. This can be time-consuming and costly.

In addition, there are difficulties in providing a guarantee in any form. In the absence of a guarantee, Customs transit under the national transit systems usually requires convoying which also can increase transport costs and transit tie substantially. That is why the variable costs of the national road transit systems in the Central Asian Republics (CAR) are quite high. Even cargoes traveling under Transports Internationaux Routiers (TIR) guarantee system and subjected to convoying

. All CAR have acceded to the TIR

Convention, but the fixed costs of the TIR system are too high for most transport operators from these nations. Moreover, the benefits of the TIR system are not always realized in the CAR due to border infrastructure problems, noncompliance by Customs, The number of possible inspections/checks related to international road freight transport is huge. They are usually grouped like the ones with regard to the transported cargo; the vehicle and the driver. The procedures related to vehicles can be: fuel taxation of vehicles and checking the amount of fuel, that is allowed free into the country (i.e. fuel in the tank of the vehicle as built by the manufacturer); vehicle tax, road charge, transit fee; Green Card for vehicle insurance or national insurance; transport authorization

(bilateral, transit, third country, multilateral – ECMT); payments for special permits; weights and dimensions; vehicle certificate; its compliance with ADR and ATP provisions; customs security of transport vehicles; statistical data etc. Procedures related to the driver: provisions concerning the driving and rest period; driving license; passport and visa.

TIR Carnet is a guarantee facility that the cargo on board the truck is actually identical to the one included in the documents (since only bona fide transport operators are allowed to participate in the TIR system) and that the customs duties and taxes will be paid. Therefore there is no need for physical inspection in transit countries, unless fraud or crime is suspected. The TIR system has been managed by IRU since 1952 and based on the UN ECE TIR Convention (TIR – Transport Internationaux Routiers)

If destined for a point more than 300 km from the BCP, transit cargo subjected to convoys. Air cargo forwarders reported long waits for Uzbek customs to assemble a convoy, then a long road trip as the cargo zigzags from customs post to customs post (rather than taking the shortest and most logical route) before reaching the destination and corruption. Even if the benefits of the TIR system are fully realized, it will not be suitable for short-distance customs transit, due to its high fixed costs. There is a strong need for the CAR to develop an effective and relatively inexpensive regional transit system that could be used for intraregional customs transit by road and would be less costly than the TIR and the national road transit systems. To this end, the CAR have signed numerous transit agreements with each other as well as with other countries.

These agreements have had a very limited effect on customs transit in the region however. Since negotiating multiparty agreements is relatively difficult, several bilateral transit systems could initially be set up instead, as an intermediate step towards the regional transit system. However, these bilateral transit systems would have to be compatible and similar to the TIR system in order for them to serve as “building blocks,” rather than merely become “stumbling blocks” for the proposed regional transit system.

High logistics costs. Uzbekistan’s logistics costs are generally quite high due to the lack of sea access, inadequate infrastructure, non-physical barriers, inefficient supply chain practices, and very high cost of capital. Freight forwarding, warehousing and other logistics-related services are heavily controlled by the government. Freight forwarding entities often do not take responsibility if cargo is lost or damaged. Furthermore, insurance is underdeveloped. As a result, only a few forwarders are able to provide full and global service to their clients. As a result, shippers have to enter into a contract with forwarders in each country along the transport corridor. This causes unclear responsibilities and liabilities. Advance payment is also often required. Due to lack of competition among freight forwarders, their fees are often higher for domestic freight forwarders and carrier services than in a Western European country.

Multimodal transport, or combined transport, in which goods under a single contract are transported using multiple means of transport, is still in a rudimentary stage in

Uzbekistan. There is no specific legislative framework for multi-modal transport and the position of the Multi-modal Transport Operator is not recognized. Multi-modal transport under one contract is not possible, instead requiring separate contracts with each specific mode of transport. Similarly, the use of a combined Bill of Landing is not possible.

Table 1. Uzbekistan: Waiting on Logistics for Economic Development

Outside Tashkent, the capital, a large cannery is receiving tomatoes on a hot August day from the current harvest, but receiving them slowly. The air smells like tomato soup, but too rich and too thick. A line of vehicles stretches five miles from the cannery, and includes pickup trucks, long trucks, 18 wheelers, donkey carts and everything in between.

The vehicle drivers, regardless of their mode of transportation, wait. The cannery produces canned tomatoes in one size, the institutional 3 liter can, a package unsuited to most European markets. When the cannery opened, Uzbekistan was still part of the

Soviet Union. Local leaders proclaimed it to be the largest in CA. So it was and still is, but despite its monstrous size it still needs space – logistics space. The receiving dock is too narrow. It has too few unloading docks and too few shipping docks. So the drivers wait in the heat and the sun while their loads spoil. This is a common problem in

Uzbekistan.

STAKEHOLDER MAPPING OF TRANSPORTATION AND TRADE FACILITATION 11

The country produces high crops of vegetables, fruits, grains, and nuts but more than

50% of the value is lost before the goods reach the market. The reason is simple: the country lacks a sound logistics infrastructure. A few modern, divided highways course through the deserts and semi-deserts, tying Tashkent, a city of two million, to the second largest city, Samarkand, and to cities in neighboring Kazakhstan, following the ancient spice routes from the Middle East into China. Uzbekistan also has sound rail services with strong links to Northern and Eastern Europe, but with only limited coverage inside the country. Domestic air service will haul people and small shipments, including the livestock that often travel with their owners in the passenger cabin. Uzbekistan’s productive agricultural land, mud of it planted in cotton, is limited in area by the need for irrigation. Consequently, Uzbek farmers must make good use of the irrigated land, but find their productivity frustrated by the lack of transportation, storage, and temperature controlled storage facilities. This means Uzbek farmers can reach only limited markets, receive less for their goods, and profit less from their work. It also means, on the other side, that they have access to fewer goods. The weak infrastructure not only limits their income, it restricts the number of companies either willing or able to consider Uzbekistan a viable potential market.

One Uzbek economist said, “Everyone knows what the problems are and what we lack, but no one wants to make the investment because that kind of investment won’t make them rich right away. We need more roads, more warehouses, more distribution centers and better security for the freight. We could reach markets all over Europe by rail, but first we have to put the goods in better packages, store them so they don’t spoil, and then keep them from being stolen.”

The lack of infrastructure also affects the availability of consumer goods. While the

Uzbek national website brags of having modern department stores, these stores hold fewer goods that the typical branch of a drugstore in a small U.S. town. Again, the source of the problem is storage and distribution facilities. Companies have difficulty reaching market in Uzbekistan, just as Uzbek producers have trouble reaching other markets. As the Uzbek economist summarized their situation: “Until we get modern logistics facilities, it will be hard to become a modern economy.”

Source: From the Council of Logistics Management Toolbox, 2002 at www.clml.org/

Need for trained logistics professionals. Establishment of multi-modal logistics center requires reliable and versatile logistics services, which are not yet available in

Uzbekistan. Such a center would benefit from the existence of free economic zones in their vicinity or on their territory. Such free economic zones or customs zones would enable the interim storage of semi-finished goods for manufacturing or merchandise for domestic or regional markets. As long as governance in customs administrations is low, the benefits of free trade zones remain limited and even off-set by becoming the widespread prevalence of illegal trade.

Infrastructure issues. Transport infrastructure constitutes one of the first barrier to trade.

During the Soviet times, internal borders among the CAR were of no importance. The road network was designed with a strategic focus on connecting the capitals with one another, but primarily to Moscow. As a result, there are often no straightforward connections between locations in the same country. In Central Asia, road and rail links often cross existing borders, aggravated by newly introduced cumbersome immigration procedures. As a result a number of political enclaves exist in Central Asia. Lack of funding for maintenance is another major problem. An important source of revenues both for the general budget and also for the road sector is the fuel tax. But, the different levels of fuel prices, as well as the tax amount therein, make fuel a target of smuggling. While fighting corruption will help reduce smuggling, regional harmonization of fuel prices and taxes could have a more immediate impact on the revenues, the maintenance budget for road infrastructure, and the magnitude of smuggling and also on more transparent and unified costs to international road haulage. There is a strong correlation between road financing reforms and access to and cost of road transit.

Local transport companies services higher than foreign. High import tariffs (up to

150%) apply to an imported EU standard truck. As a result, domestic companies use obsolete soviet trucks (Kamaz) which meet no modern standards and not allowed to enter

European Union (EU) countries. Industry proposals to the government to eliminate prohibitive import tariffs for imported trucks still remain unattended. The services of freight forwarding companies should be pre-paid in hard currency which poses serious constraints, given problems with the foreign exchange. No access to financing, to buy a new truck and pay for associated insurance, is available as local banks do not provide such credits. Such factors make services of domestic transport companies higher than foreign. As a result, mostly Iranian and Turkish companies dominate the market. As for large transportation orders such as those transporting cotton, grain, or government-procured exports or imports, a monopoly is granted to State Trading Enterprises. One such State Trading Enterprise is “Uzvneshtrans,” Agency of the MFERIT, which has a monopoly for the transportation of major export commodities, making prices for their services significantly higher than in the international market. Tax legislation discriminates against domestic freight forwarders and transport companies, levying a profit tax on the amount prepaid to the freight forwarder, interpreting the total advance payment sum as a profit.

B. Key Stakeholders on Transportation and Trade Facilitation in Uzbekistan

B.1. International Donors

There are numerous international conventions and bilateral agreements on various aspects of TTF (See Annex A) to which Uzbekistan and Kazakhstan are signatories.

International financial institutions and donors carry out regional and country specific projects on TTF and allocate substantial financial resources and technical assistance. Just to name a few, TRACECA, Special Programme for the Economies of Central Asia

These and many other issues and problems of domestic transport industry including Freight forwarding companies and road carriers are well known and have been reported to the GoU numerous times. In 2006, the round table discussion of the proposed Draft Law on Freight Forwarding services took place in

Tashkent organized with the assistance of USAID Trade and Investment Project. The draft legislation remained as a draft, was never adopted so far.

STAKEHOLDER MAPPING OF TRANSPORTATION AND TRADE FACILITATION 13

(SPECA) and CAREC are aimed at developing efficient transit transport system in the region. However, results have been modest thus far, as they failed to address barriers to international trade and transport with a holistic approach and due to many serious regional issues that currently impede trade and economic growth in the CAR.

B.1.1. Asian Development Bank (ADB)

ADB is one of the primary stakeholders who provide assistance to the Government of

Uzbekistan in TTF. ADB is involved in both large infrastructure projects (building roads, equipping certain BCP, etc.) as well as in institutional development assistance. ADB’s established Regional Customs Cooperation Committee (CCC) is meant to serve as a platform for regional Customs Services and developing regional Customs strategies, including adoption of modern Customs legislation and international methods and practices. The CCC meets regularly in one of the capitals of the region and discusses these matters. However, reviews of the Action Plan of the CCC for the year 2003-04 illustrates that no significant reforms and changes took place since. Issues on the Action

Plan still remain pending.

ADB also conducts in depth research and field work on assessing the problems and key measures and recommendations to make sectors of transportation and logistics cost-competitive. ADB’s Central Asia Regional Economic

Cooperation (CAREC) project has been a primary forum for Central Asian governments and stakeholders to discuss, adopt and implement certain policy measures to reap the benefits from regional cooperation in the area of TTF.

CAREC Corridor Performance Measurement & Monitoring (CPMM). The study was based on collection of 4,754 samples of road, rail and multi-modal shipments collected from ten participating freight forwarder associations in the Central Asian

Region. In the samples, 76 percent of the records were road transport, rail accounted for

20 percent, while the remaining four percent was multi-modal. Half of all road transport samples used TIR, while 75 percent of all samples crossed borders. The top five commodity categories included agricultural products (17.1 percent), textiles (12.8 percent), base metals (12.5 percent), industrial materials and machineries (9.3%), and manufactured items (8.8 percent). Fruits and vegetables remained the most popular product transported in Central Asia.

Samples were collected from six CAREC corridors:

Corridor Countries

CAREC 1 Europe-East Asia Kazakhstan, Kyrgyzstan, and Xinjiang

Uyghur Autonomous Region

CAREC 2 Mediterranean – East Asia

Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, and Xinjiang Uyghur

Autonomous Region

CAREC – The Central Asia Regional Economic Cooperation is ADB initiated program with partnership of 10 countries and 6 multinational institutions

, “Common Action Plan Update and Proposed Work plan for 2003-04, endorsed by the Customs

Cooperation Committee.

CAREC 3

Russian Federation –

Middle East and South Asia

Afghanistan, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan

CAREC 4

Russian Federation – East

Asia

Mongolia, Inner Mongolia Autonomous

Region, and Xinjiang Uyghur Autonomous

Region

CAREC 5

East Asia – Middle East and

South Asia

Afghanistan, Kyrgyzstan, Tajikistan, and

Xinjiang Uyghur Autonomous Region

CAREC 6

Europe – Middle East and

South Asia

Afghanistan, Kazakhstan, Tajikistan, and

Uzbekistan

CPMM looked at four Trade Facilitation indicators for both Road and Rail Transport:

i. Indicator One: Time to Clear a Border Crossing Point (in hours)

ii. Indicator Two: Cost incurred at Border Crossing Clearance

iii. Indicator Three: Cost incurred to Travel a Corridor Section

iv. Indicator Four: Speed to Travel on CAREC Corridors

All four indicators monitor the sum of actions and projects taken by various stakeholders involved in TTF in the CAREC countries. CAREC related activities include:

renovation of BCP by CAREC countries and multilateral institution partners adoption of new and/or amended Customs codes;

investments in automating Customs information systems; and moves toward establishing national Single Windows and upgrading border control risk management systems.

All above listed activities are related to the four indicators above, and take place in

CAREC countries with varying degrees of progress, if at all. The Government of

Uzbekistan is more willing to cooperate on activities related to (i) and (iii), which involve investments in infrastructure and equipment, rather than (ii) and (iv), which cannot be implemented without addressing trade policy reforms, which are still lacking.

Shipments stop at BCP to undergo Customs clearance, SPS inspection, border security checks, and vehicle registration. Non-regulatory activities that contribute significantly to delays include loading and unloading of cargo and waiting in queues. Complex procedures and redundant submission of the same import/export information encumber the journey significantly. The duration of these delays varies from one BCP to another.

CPMM identified the most common transit delays and cost factors in CAREC corridors as:

border security;

customs clearance;

waiting time;

weight/standard inspection; and phytosanitary inspections.

STAKEHOLDER MAPPING OF TRANSPORTATION AND TRADE FACILITATION 15

However, most time consuming delays were:

customs clearance;

emergency repairs;

escort/convoy;

border security control;

loading/unloading; and waiting time in queues.

Customs clearance and waiting time in queues during border crossings are the two most common and time consuming delays. Therefore, any efficiency for these two stop activities will bring about considerable improvements in the transport time along CAREC corridors. It should be noted, that adequate implementation of GATT Article V for the

Freedom of transit primarily refers to seamless operations of the above listed activities.

Whereas proper operation of Customs clearance and sanitary and veterinary inspections means proper application of Customs valuation methods associated with GATT Article

VII), rules of origin and proper application of Risk Assessment and Management methodology (Kyoto Convention) can be efficiently applied with an automated Customs database system.

Two BCP pairs which had extremely high values include Khorgos- Khorgos (China-

Kazakhstan) in 1b sub corridor and Tazhen-Autota (Kazakhstan-Uzbekistan) in 2a and 6a sub corridors. Railway delays in these BCP were mainly attributed to loading and unloading, waiting time, and gauge change.

CPMM also tracked expenses incurred along each section of the journey, both official and unofficial payments. For road transport, payments included:

customs clearance fees;

transport inspection;

weight inspection;

phytosanitary inspection;

visa/immigration;

veterinary inspections;

escort/convoy; and loading/unloading.

Four BCP pairs appeared to be the most expensive to cross. They were Khorgos-Khorgos

(China-Kazakhstan), Kenysbaeva-Yallama (Kazakhstan-Uzbekistan), Alat-Farap

(Uzbekistan-Turkmenistan) and Karamik-Karamik (Kyrgyzstan-Tajikistan).

Customs fees and formalities are regulated by GATT Article VIII and should not be excessive. Fees should only cover expenses for the services rendered, and should be fixed in concrete amounts, rather than ad valorem, which is still the case in Uzbekistan. The existence of excessive fees was also one of the issues raised by WTO member countries during the multilateral negotiations.

Table 2. CAREC Corridors

CAREC Corridor 1 is most popular, comprising 35 percent of data samples. Sub corridor

1c very popular among Kyrgyz shippers and drivers. Ak-Zhol-Kordai (Kyrgyzstan-

Kazakhstan) is most serves trade between Kazakhstan and Kyrgyzstan, and is also a vital trade link between Russia and Kyrgyzstan, where Kazakhstan is a transit nation (re-exports from China through Kyrgyzstan to Kazakhstan and Russia). This is considered the fastest with the best roads. Sub-corridor 1b BCP Khorgos-Khorgos (Kazakhstan-

China) is nevertheless considered to be one of four most burdensome.

CAREC Corridors 2, 3 and 6 are the ones crossing Uzbek border. Corridor 2(a) (UZB

KAZ) and 2b are essential for Uzbekistan’s regional trade. Route 2a facilitates trade between Russia and Uzbekistan via Kazakhstan. Tashkent mostly exports yarn in 40 foot containers to Moscow and Moscow exports machineries and value added food products, base metals, animals and home appliances to Uzbekistan. Corridor 2b is an important route for goods from Mediterranean or Iranian seaports to access Central Asia, including many shipments from Istanbul. Uzbekistan is a heavy user of sub-corridors 2a and 2b. It exports fresh vegetables, dried fruits and cotton through sub-corridor 2b.CPMM data reveal an active trade between Turkey and Uzbekistan. It is also a transit nation for overseas suppliers shipping goods to other parts of Central Asia, e.g. agricultural products from Tashkent, Samarkand and Navoi to Astana, Karaganda and Kostanai. In summary, Corridor 2 is strategic, as sections of it are key transit corridors.

Corridor 3 shows a north-south direction. There are two popular routes in Corridor 3. One is the road transit of imported goods from Iran to Uzbekistan and the second is cargo movement between Russian and Central Asia. The first is not conducive to the shipment of perishables, as delays at border crossing are significant. Agricultural products and textiles are sent in through the second route of Corridor 3 to Russia, while equipment and manufactured goods come from Russia to Central Asia. In general, Corridor 3 serves both intraregional trade and international trade. The four most frequently crossed BCP are also the ones presenting the most sever delays. Two of them are Konysbaeva-Yallama (KAZ-

UZB) and Alat-Farap (UZB-TKM). The average border crossing delay was more than 10 hours.

Corridor 4 is a vital passageway for Mongolia.

Corridor 5 is one of the most time consuming and costly. Shipments from China to

Tajikistan take 28 hours and activities and additional 35 hours. Corridor 5 ships scrap iron from Central Asia to Pakistan. Afghanistan requires “Transit Form” fees, USD 100 fee for each truck under the TIR system.

Corridor 6 is a north-south corridor that shares sections with other corridors. Corridor 6 is a route used heavily by Uzbek freight forwarders to move exports and imports from Iran and Russia. Through this route, Uzbekistan plays the role of a transit nation for Middle

East and Russia in sending goods to Central Asia. Goods come from as far as Turkey, Estonia and Latvia. Corridor 6 is also the only corridor that connects both Iranian and

STAKEHOLDER MAPPING OF TRANSPORTATION AND TRADE FACILITATION 17

Pakistani seaports in the south to Central Asia in the north. Corridor 6 consists of three sub-corridors 6a, 6b and 6c.

For 6a, no movement towards AFG was observed from Uzbekistan, so there were no samples collected that travelled to Termez-Hairatan (UZB-AFG) along 6a.

Hairatan – Termez BCP is very challenging for Afghan goods to enter Uzbekistan. The goods need to be trans-loaded into a boat and ferried across to Termez. Drivers complained about long waiting time of nearly 8 hours in queue. Even more challenging was the longer time required for loading/unloading of goods, which averaged 19 hours and customs clearance took nearly 6 hours. Besides border security fees, loading/unloading, road tolls and waiting in queue results in rather high payments, where each activity costs more than USD 100. Border crossing to Afghanistan is currently very problematic from the Central Asian countries, yet there are high expectations in the

TRACECA countries to see growing trade, initially in emergency shipments. The development of the route towards Afghanistan is important for the Central Asian

Republics. The southern city of Termez is one of the few entry points into Afghanistan together with a few other ones in Turkmenistan. ADB supports the improvement of the road between Turkmenistan and Afghanistan. Once the infrastructure on the Afghanistan territory is available again, the route Termez-Mazaar i Sharif – Heart Qandahar-Karachi becomes a very attractive alternative for Uzbekistan, and potentially also for transit traffic through KZ and Russian.

The major delays happen at Tazhen and Dautota due to long waiting time. For exports, the goods mostly originated from Tashkent or Andijan, destined for Moscow. 6b sub-corridor is mainly used by Uzbek shippers to export agricultural products to Kazakhstan

(dried fruits).

Source: Adapted from CPMM Annual Report 2011

Results of CPMM study confirm the issues described in Part 2 of this paper. Although the latest 2012 CPMM reports on certain improvements compared to earlier studies, no significant time and cost reduction was witnessed.

B.1.2. United Nations Development Program (UNDP) Uzbekistan

Another active stakeholder in Uzbekistan involved in TTF activities is UNDP

Uzbekistan. UNDP Uzbekistan, through its joint “Support to External Economic Policy” project with the MFERIT, implements its support to the Government of Uzbekistan

(GoU). UNDP Uzbekistan operates under close supervision of the GoU on a number of development projects, and each is directly coordinated by one of the key government officials. Most of the project managers within UNDP are former government officials.

UNDP’s Center for Economic Research, although funded by UNDP, is monitored and censored by the Vice Prime Minister Azimov and other senior officials. Projects involving trade policy and trade facilitation conducted by UNDP started in 2006, following completion of the USAID Trade and Investment Project (TFI)’s activity in

Uzbekistan. During the period of 2006-2009, UNDP produced the Investment Guides and

Catalogues for 2007 and 2009, the Cost of Doing Business in Uzbekistan for 2007 and

2009, and Guides for the Processing Sector in Ferghana Valley

. UNDP supported national partners at conducting a trade exhibition in Afghanistan, an investment forum of

Uzbekistan in Malaysia, and produced several research papers.

Currently, there are two ongoing projects that UNDP supports in trade. UNDP has provided assistance in amending the Customs Code since early 2006 to build upon the new draft of the Customs Code prepared by the Customs Service, with the assistance of

USAID TFI and EU-funded Customs experts.

The UNDP has brought former Russian

Customs official Mr. Lobzenko to provide comments and speak at seminars. Formally, there is a working group within Customs, but its work is not transparent.

In 2010, UNDP commenced a new TTF project under the direct supervision of the

MFERIT. MFERIT’s “Uzinfoinvest” is the main national partner, as well as the Chamber of Commerce and Industry (CCI). The new project intended to assist the government of

Uzbekistan in “strengthening its capacities for trade facilitation, export promotion and foreign investment promotion institutions, and improving regulatory framework for foreign trade and investments.” For this purpose, Namangan region was selected for the piloting of these services. UNDP’s role in TTF projects contains no mechanism for implementing effective institutional and legal reforms in the area of trade policy. In fact, none of the activities of the current project contain actual TTF impact. The current support to the government on TTF in Namangan region is an invention of Mr. Golishev, the Advisor to the President on Economic Policy.