Sustainable Development and Growth: Managing Resources More Efficiently (Vision-2030)

Center for Economic Research Tashkent, 2015

Uzbekistan: New Development Goals Towards 2030

Development goals and trends towards 2030:

• Ultimate goal – to ensure sustainable economic growth at 7-8% per annum;

• Transformation of GDP structure by increasing the share of manufacturing from 9% in 2012 to 22% in 2030; shift towards production of more sophisticated services;

• Transformation of pattern of enterprises: more large and medium enterprises;

• Population growth, change in the demographic pattern and growth of personal income;

• Transformation of employment pattern and related social transformations contributing to the change of the lifestyle, consumption pattern, behavioral stereotypes;

All this will transform the demand for infrastructure and resources.

To cope with the new challenges and employ the emerging opportunities the revision of the existing pattern of resource consumption may be required

9,1 9 17 22 14,1

26,4 19,4 15

28 19,5 10,5 8

48,9 45,1 52 55

0%

20%

40%

60%

80%

100%

2005 2012 2020 2030

Processing industry Mining industry

Agriculture Services

Uzbekistan: Transformation of GDP structure to 2030, %

Population Growth and Transformation of Demographic

Structure: 2012 vs 2030

2,3

18,2

9,1

5,1

22,1

10

0

5

10

15

20

25

Above theworking age

Working-agepeople

Below theworking age

2012 2030

44,5

32,3

19,1

4,1

0

10

20

30

40

50

2015 2020 2025 2030

Transformation of the pattern of enterprises: Value added

Uzbekistan: Transformation of the Structure of Society

Existing Model of Resource Consumption: Key Features Adjusted Net Savings in Uzbekistan have negative value – the country will

experience net loss of its reserves (% of GNP, 2010)

Ratio of the Return on Natural Capital to the Return of Intangible Capital in Uzbekistan is 6.5 times as high as in the Upper-middle Income Countries

• Natural capital plays a major role in generating economic growth; limited contribution of intangible capital.

• Adjusted net savings have a negative value, while the net and gross saving values are positive.

• The country will experience net loss of its stock of natural resources.

• This is due to the existing resource-intensive model of economic growth.

• This model was feasible for the transition economy: in the context of moderate economic growth and low efficiency of institutions, it enabled to develop basic industries and sustain macroeconomic stability.

• As transformation accelerates, reliance on the existing model will lead to the loss of more than half of country’s natural resource base by 2030.

Uzbekistan Upper-middle

income countries

Human capital 0.15-0.17 0.17-0.20

Intangible capital 0.16-0.18 0.2-0.5

Production capital 0.3-0.6 0.2

Natural capital 0.1 0.03

Expected economic

growth

4-6% 8-10%

Will the Existing Pattern of Resource Consumption Enable to Reach the New Development Goals? Energy Sector

• If the current model of resource consumption is retained, the deficit of energy resources will be estimated at 65.4% in 2030.

• Rates of economic growth will decline to -0.1% per annum Goals of the Strategy will not be achieved.

• This is because demand for energy resources will grow by 6.88% in 2014-2030 due to the following reasons:

• Higher income will boost consumption and use of air conditioners, computers, washing machines; Increasing rates of urbanization will spur greater energy use;

• Greater emphasis on manufacturing will increase energy consumption in the economy;

• To fulfill social rights of people in the future the underconsumption of energy by population (5.8% in 2013) will be eliminated.

The economic growth will slow down to -0.1%

If the current model is retained the deficit of energy balance will grow to 65,4% by 2030

8%

-0,1%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2013 2030

Will the Existing Pattern of Resource Consumption Enable to Reach the New Development Goals? Land and Water

• With the current model of land and water resource management, by 2030 the deficit of grain will grow to 21.2%, of meat – to 48%, of milk - to 41% , of sugar - to 30%, of fruit – to 23.6%.

• Taking into account that due to the climate change, irrigation norms will increase by 5-10%, deficit of water for irrigation will grow to 11.7% by 2030.

• The area of land with medium and high rate of salinization will not decrease and remain stable at 18-19%.

• Projected resource deficit indicates that production capacity by itself can not enable to achieve the goals of the Strategy towards 2030.

• To achieve the objectives towards 2030, it is important to implement the transition to the resource-efficient development model.

Under the current model of land and water resource management, the food deficit will grow

Water stock will shrink, the area of salinized lands will not decrease

0%10%20%30%40%50%60%70%80%90%

100%

Production

Deficit

Consumption in 2030

6,6 5,8 6,3

11,7

0

2

4

6

8

10

12

14

16

18

20

2015 2020 2025 2030

Deficit of waterfor irrigation, %

Lands withmedium and highrate ofsalinization, %

Transition to the Resource-Efficient Growth Pattern: Energy Sector - 2 Viable Options

• Two viable options of transition to the resource-efficient model in energy sector:

• Option 1 – phased approach: increase in extraction of energy resources by 1.5%, while reducing energy intensity down to 40% by 2030 Energy balance deficit at 31.9%, maximum economic growth of 5% towards 2030.

• Option 2 – fast-track: growth in extraction of energy resources by 2%, combined with reduction of energy intensity by 2.3-fold until 2030 5.5% surplus of the energy balance; growth at more than 8% per annum.

Option 2 will enable to attain the goals of the Strategy

Option Annual growth

of production

of energy

resources, %

Annual

growth of

energy

efficiency, %

Structure of energy balance Energy

balance,

%

Maximum

economic

growth?

%

No additional policies

-0,5 1 -65.4 -0.1

Phased approach

1.5

2.8

33.5% of demand covered by expansion of production &

energy efficiency 0.6 % - by solar energy, 0.4% -

by biogas, shale oil, etc.

- 31.9

5

Fast – track approach

2

4.7

70 % of demand covered by expansion of production &

energy efficiency 0.6 % - by solar energy, 0.4% -

by biogas, shale oil, etc.

+5.5

Over 8%

How to implement Resource-Efficient Growth Pattern in Energy Sector: Improve Energy Efficiency of Economy

Strategies to improve energy efficiency towards 2030:

1. Complete phase-out of incandescent bulbs, upgrade outdated heating boilers and pumps in all sectors;

2. Introduce within 2 years special systems to track energy and financial flows in the sector (ERP systems, electronic trading, IFRS reporting);

3. Introduce online system of monitoring and billing for households (the integrated system of metering of energy consumption), change the principles of settling accounts with farmers;

4. Introduce technologies to monitor energy flows while transportation (SCADA); complete modernization of power distribution networks and transformers by 2020;

How to implement Resource-Efficient Growth Pattern in Energy Sector: Develop Solar Energy

• Solar energy should become the key driver of energy sector development and account for 6% in the power balance in 2030.

• Potential of renewables in Uzbekistan is 3.1 times as high as the current production of primary energy resources.

• Development of solar energy will generate direct and multiplier effects by boosting demand in the associated sectors, expanding consumption and thus, generating demand for labor and accelerating transformation processes.

2020 2025 2030

Generation of solar energy

(3000 MW), GWt 1827.7 3655.4 5483.1

Total amount of electricity

generated 67500 78600 90100

Share of solar energy in energy

balance 2.7% 4.7% 6.1%

Share of solar energy could grow to 6% by 2030

Multiplier effects to be generated from solar energy

Effects of solar energy development

2013-2030

Direct and first level multiplier effects

3.5 bln USD

Second-level multiplier effects 0.87 bln USD

Gas savings 2.9 bln USD

Net benefit (annual) 204.5 mln USD

Energy source Technical

potential

Employed

potential

Hydro 2.32 0.72

Solar 176.8 appr. 0

Wind 0.4 appr. 0

Biomass 0.5 appr. 0

Total 182.3 0.72

Potential of Renewables in Uzbekistan, mln t.o.e.

How to implement Resource-Efficient Growth Pattern in Energy Sector: Institutional Reforms

1. Implementation of the suggested solutions is not possible without the institutional reforms

2. To identify the strategies for institutional reforms in Uzbekistan, we looked at the experience of countries, that encountered with the problem of scarcity of energy resources - net importers of energy resources

What does experience of net importers suggest?

Regulatory function not performed by NOC

NOC budget is not approved by Government

Chairman is not a minister of energy and not

appointed by government officials

Competition

Privatization in the system of energy distribution

Emphasis on energy efficiency, prices for energy are higher than in net exporters

What we recommend for Uzbekistan?

Split up business functions from regulatory functions in the energy sector. This requires to set up one regulatory body (Ministry of Energy) and leave companies to explicitly focus on business operations

Gradually reduce the difference between prices for domestic consumers and export prices of gas by raising domestic tariffs (with mechanisms to ensure affordability for low-income group)

After 2020 gradual privatization in the system of energy distribution and transmission could be started to attract private investments into the sector.

Effective Solutions for Institutional Reforms: Net Exporters VS Net Importers of Energy Resources

Korea

China

Malaysia

Vietnam

KOGAS CNPC SINOPEC CNOOC Petronas

PetroVietna

m

Ownership

(public vs private)

60,9 vs

39,1

86.29 vs

13.71 76 vs 24

66% vs

34% 100% public 100% public

Competition

Yes, a number of

foreign companies on

the market

Yes, main competitors

–Chinese companies,

foreign companies.

Competition

is limited

No

competition

Is chairman also minister of energy

or appointed by head of state? No No No No Yes Yes

Institutional structure score: 100 -

regulatory function not performed

by NOC; 0 – All the regulatory

functions are performed by NOC

66 66 66 66 45 40

Independence of NOC capital and

budget process: 100 - No

governmental approval of NOC

budget required; 25 - NOC budget is

approved by central government

75 75 75 75 50 50

Performance: E&P production

growth, % (2008) 6,62 1,99 15,5 3,67

Reserves replacement rate, % 121,25 80,39 68 90

How to implement Resource-Efficient Growth Pattern in Land

Management 1) Diversify structure of cropping and focus on production of foods in which Uzbekistan has a comparative advantage

• Reallocate 42 thous. ha from grain to fruit and 60 th. ha from cotton to vegetables;

• Increase crop yield of fruit twice, of vegetables – by 1,6 times.

2) Step up research and development in agriculture to create more efficient local varieties of plants and breeds of animals (90 mln. USD)

3) Introduce advanced agro-technologies to raise the crop yield and livestock productivity

This will require to: A) Establish an efficient cold storage system for fresh and processed foods

B) Develop an efficient system of food processing

Land laser leveling

technology is introduced

Reduction of mechanisation costs by 14%

Reduction of labor costs by 23%

Decrease of water use by 30%

Rise of productivity by 4 centners per ha

Profitability increase by 22% in a year and by

37% in 2 years

Ensure 5,8 cubic meters of cold

storage facilities in 2025

30% decrease in losses due to the

ineffective storage

Additional investment of

1,4 bln USD required

Total benefit of the nation = +2,095

bln. USD

Multiplier effect for other sectors

2,4 bln. USD

Access to food provided throughout all the seasons, seasonal volatility of food

prices is smoothed

In 2025 Uzbekistan needs to become an

upper middle income country

Transformation of lifestyle, behavioral

stereotypes, structure and mode

of nutrition

Annual benefits of 600 mln USD

67275 jobs generated

Share of processing should increase: - for meat from 6,9% to 30% - For milk – from 11% to 50%

- For fruit and veg. – from 13,3% to 30% - For grapes – from 15% to 35%

Additional investment of 4,3 bln USD required

Vegetables VS

Cotton

Fruit VS Wheat

Change in the sown area, thous. ha 60 -60 42 -42

Change in yields, centners per hectare 180 1.2 100 2.4

Change in output, thous. tons 5810.4 -11.94 3283.0 164.19

Change in production costs, bln soums 1154.4 -59.8 149.1 -26.5

Change in export revenues (import costs), mln.

USD

2232.2 -256.4 4866.8 -57.2

Additional investments, mln USD 728.36 1576.7

Change in employment 125.8 -28.2 37.7 -1.68

Total benefit, mln USD 1384.2 3398.2

New jobs, thous pers. 97.6 36

How to implement Resource-Efficient Growth Pattern in Water Management

1) Expand use of water-efficient irrigation methods by 2030: drip irrigation on the area of 100,000 hectares and intensive farming zones in areas of piedmont and mountainous zones

2) Increase efficiency of irrigation systems to 0.74 and maintain sustainable use of irrigation and drainage infrastructure. Re-use collector and drainage waters for irrigation by mixing with irrigation water. 3) This will eliminate the deficit of water, reduce the area of salinized land from 19% in 2013 to 4.1% in 2030

Drip irrigation is applied for 100,000 ha

Investments of 455,4 mln USD are required

30% less fertilizers are needed to grow crops

Production costs decrease

Productivity and total revenue increase by 40%

Quality of soil by 2030 Deficit of water by 2030

0

20

40

60

80

100

2013 2015 2020 2025 2030

Lands with medium and high salinization

Furtile lands

Lands in good amelioration state

80

85

90

95

100

105

-7

-6

-5

-4

-3

-2

-1

0

1

2015 2020 2025 2030

Balance, % (left axis) Water supply, %

How to implement Resource-Efficient Growth Pattern in Land and Water Management: Institutional Reforms

1) Reform the agrarian institutions and optimize size of farms by expanding the animal farms to 1000 heads of livestock, vegetable-growing farms - to 85 ha, fruit-growing farms - to 40 ha

2) Promote greater independence for farmers, creating incentives for long-term investments:

• Greater independence of farmers in decision-making related to land use; • More opportunities for crop rotation in order to improve soil quality and

boost yields; • Transfering farmland to those, who can use it effectively (through bankruptcy,

liquidation, and sublease). 3) Introduce the mechanism of partial compensation of water supply costs (payment for delivery of water). This could:

• Reduce government expenditures for maintenance of water supply infrastructure, thus contributing to financial sustainability of water sector in the long-run;

• Create incentives for the rational use of water in agriculture.

Size of animal farms is expanded to 1000 heads

Extra investments of 929,6 mln USD required

Due to the economies of scale productivity of farms

increase by 35%

If the additional amount of meat is exported extra

revenue will be 2,25 bln. USD

Road Map Towards 2030

Next Steps: Implementation of the Policy Recommendations

Process of preparation of the Report:

• Involved a number of high-level experts from government agencies: the Ministry of Economy, Ministry of Finance, National Holding “Uzbekneftegas”, Ministry of Agriculture and Water Resources, scientific-research institutes

• A number of international commentators were involved into discussion at various stages of preparation of the Report: UNEP, World Bank, UNDP, UNIDO, UNDP Policy Center in Seoul, London School of Economics

• Effective dialogue among all the stakeholders has been established

Obtained Results and Implementation

• The government instruction had been made to work out the National Program “On Reduction of Energy Consumption, Introduction of Energy Saving Technologies and Systems in the Branches of the Economy and Social Sphere for 2015-2019 (now final draft is being prepared, deadline is 1st of March).

– Improvement of legal framework;

– Measures on upgrading energy efficiency in the branches of the economy;

– Financing of policies on energy saving.

• The main part of this Program will consist of the “Road map” based on the measures and suggestions, presented in the Report.

Questions for discussion

• Are we on the right path?

• Are there any dimensions, critical issues which were omitted, should get considered in more detail?

• What approaches, methods and indicators need to be revised?

• What’s next? How can we jump to formulating the detailed Action Plan and Road Map for the Vision? Suggested formats and models.

• Are there windows for synergies?

Thank you!

Resources in English: http://www.cer.uz http://transformation.cer.uz/ https://www.facebook.com/CER.Uzbekistan

For more information, please, contact info@cer.uz