Regions and Countries

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p. 5 of 6 BACK | NEXT I. Current Development Trends and Issues II. The Government's Development Strategy III. ADB's Development Experience IV. ADB's Strategy V. ADB's Assistance Program VI. Risks and Performance Monitoring and Evaluation

Country Strategy and Program 2006–2010: Uzbekistan

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V. ADB's Assistance Program

A. Overall Assistance Level

99. Uzbekistan regained ADF access in 2005 after it was reclassified from group C to group B2.³⁴ It is eligible to borrow limited amounts of ADF in addition to ordinary capital resources (OCR). The ADF component of lending resources for Uzbekistan will be determined by the outcomes of the performance-based allocation exercise. The biennial allocation of ADF resources to Uzbekistan for the 2007–2008 period is $87.5 million. The main criteria under the country performance assessment that affect ADF allocations are shown in Table 6. The performance assessment ratings that form the basis for the 2007–2008 ADF allocations will be made publicly available shortly.

Table 6: Country Performance Assessment: Progress and Areas for Improvement

Criteria Progress and Areas for Improvement Economic Management ·      Implement announced measures to eliminate cash shortages and allow the market to determine the composition of monetary aggregates. ·      Continue the policy of limiting government guarantees to help mitigate the risk of potential contingent fiscal liabilities. ·      Maintain prudent external borrowing policy. Strengthen analytical capacity for debt sustainability analysis and risk management. ·      Adhere to Article VIII convertibility obligations with foreign exchange available for timely conversion. Structural Policies ·      Ease nontariff barriers to trade, further streamlining procedures for foreign-trade contract registration, certification, customs clearance, and transit costs. ·      Implement announced intentions to terminate inappropriate functions performed by commercial banks, restrictions on their access to correspondent accounts at the Central Bank of Uzbekistan, and the distinction between cash and non-cash transactions. ·      Implement announced intentions to improve the business environment, including removal of administrative impediments, and level the playing field. Policies for Social Inclusion and Equality ·      In the health sector, address the staffing imbalance between rural and urban areas. In basic education, close rural–urban disparities in physical and human resourcing of schools. ·      Ensure improved access to credit for women entrepreneurs. ·      Adequately fund programs to control HIV/AIDS, tuberculosis, and malaria. ·      Improve targeting efficiency of social benefits program. ·      Mainstream environmental policy-making in economic and financial planning structures. Public Sector Management and Institutions ·      Make the legal basis for secure property rights more transparent. ·      Hold more frequent consultations with the private sector before passing business-related legislation and regulations. ·      Strengthen budget links to policy priorities. ·      Build capacity to implement a single Treasury system. ·      Move toward a system of timely audited public accounts. ·      Strengthen the match between assignment of revenues and expenditures at different levels of government.   ·      Implement announced measures to comprehensively revise the tax code and strengthen tax administration. ·      Move toward merit-based recruitment and promotion of civil servants. ·      Increase citizens’ access to information. Form partnerships with nongovernment organizations in delivering social services and obtaining feedback on their quality. Portfolio Performance Address problems relating to startup, price verification, and contract registration.

100. This CSP envisages a combined annual ADF and OCR lending level of around $100 million, taking into account Uzbekistan’s debt repayment capacity, absorptive capacity, and portfolio performance. Uzbekistan's debt repayment capacity for moderate amounts of OCR borrowing is satisfactory, an assessment supported by recent debt sustainability analyses (Box 1). Actual assistance levels will depend on the Government’s success in achieving intermediate results agreed to herein, as well as its portfolio performance. Lending could be augmented with OCR resources. Overseas development assistance loan and grant cofinancing and opportunities for commercial cofinancing and guarantees will be sought for appropriate projects.

101. Nonlending assistance is expected to be about $2 million per year. Provision has been made for a TA for CSP monitoring for results. Advisory TA operations will be based on multiyear sequencing through the TA cluster modality. Loan-linked capacity-building TA will be considered when capacity bottlenecks could hamper investment operations.

102. Instrument Selectivity. ADB has extended only project investment loans to Uzbekistan, except for one sector development program loan approved in 2002. The track record on reform suggests continued caution in providing policy-based lending. A proposal has been mooted for development partners to adopt a sector-wide approach (SWAp) in education, where reform has made good progress. A SWAp would be premature as frameworks for sector policy and monitoring and evaluation (M&E) need to be further developed, and progress made toward common implementation arrangements. Should this position change, ADB would be prepared to consider this approach.

103. Project Prioritization. Given its limited resources, ADB needs to be selective in its assistance within the priority areas to ensure maximum impact. A checklist for project prioritization (Box 2) will be used.

104. Knowledge Management. The core diagnostic studies undertaken in 2004–2005 (country poverty analysis, country environment assessment, agriculture sector review, country governance assessment, and private sector assessment) have helped initiate policy debate within Uzbekistan and provided a good foundation for CSP formulation. ADB will continue analytical work linked to the strategic priorities during 2006–2010. Areas of emphasis in the next few years will include rural development (strengthening agriculture and rural development focus of the WISP, agricultural competitiveness, rural finance); enabling PSD (regulatory reforms, competition and industrial policies, privatization); gender (needs assessment for dekhan farmers, particularly women; surveys to determine gender differences in time burdens); and, possibly, social protection issues.

B. ADB Assistance for the Strategic Priorities

105. The lending and nonlending program (Appendix 1, Tables A1.9–A1.10) has been designed to reflect the application of project prioritization criteria (Box 2) to the four strategic priorities identified in Section IV. About 71% of the 3-year forward lending program (and 62% of the projects) will be for rural development, including support for the rural private sector, followed by human development and regional cooperation (13% each) and energy (3%), the last a carryover from the last CSP update. About 40% of advisory TA will be allocated to rural development, 33% to PSD, 18% to human development, and the balance to regional cooperation.

1. ADB Program for Accelerating Environmentally Sustainable Rural Development

106. ADB is assisting the Ministry of Agriculture and Water Resources in three projects that will help reform the state procurement system, boost agricultural productivity, and rehabilitate irrigation infrastructure. The land improvement project planned for Board consideration in 2006 will work with local governments and rural communities in implementing policy reforms and supportive investments for improved agricultural productivity. Under the ADB-led Central Asian Countries Initiative for Land Management (CACILM), policy and program actions are planned to reverse land degradation with significant grant cofinancing from the Global Environment Facility. ADB will continue to support a sustainable cost recovery policy in the water sector initiated under the Amu Zhang Irrigation Rehabilitation Project. To advance the transition in agriculture, ADB will support market infrastructure and farm support services. Complementary financing for market infrastructure and farm support services will be considered under rural small enterprise development project that will include various rural financing options such as leasing. The rural water supply project will help bridge rural–urban disparities in access to safe drinking water and move toward achieving the associated MDG. The rural renewable energy project, with its emphasis on small hydropower, will expand access to reliable energy supply. ³⁵ The rural development TA cluster will help link ADB’s initiatives across the rural space.

107. Specific Issues. The timing of Board consideration of the rural small enterprise development project will depend upon the results of the market demand and rural finance studies, that will assess the performance of related projects in the portfolio. The rural development TA cluster will be designed and implemented by the Uzbekistan Resident Mission (URM).

2. ADB Program for Private Sector Development

108. ADB will provide programmatic TA comprising a series of linked TA projects for PSD. The TA cluster’s scope will include improving institutional capacity of agencies working in areas that interface with the private sector to continuously undertake regulatory reforms, and helping the Government increase transparency of privatization. Key results expected from the cluster TA include (i) a regulatory reform strategy framework and strengthened institutional capacity for advancing the business environment reform agenda, including the use of regulatory impact analyses; (ii) strengthening the competition policy framework, linked with helping the authorities refine industrial policy so that it does not hinder competition or increase the regulatory burden; and (iii) assistance to make privatization transparent, and backstopping support for PSOD in privatization transactions.

109. ADB is pursuing support for the EBRD-sponsored Trade Finance Facilitation Program. PSOD could consider providing advisory services for privatization and post-privatization support in infrastructure and utility services. There are a number of potential transactions from the private sector operations side in the financial and infrastructure sectors. Indicative investments that ADB might consider include (i) equity, debt, and/or guarantee financing for infrastructure projects in sectors such as water, power, energy, transportation, and telecommunications; (ii) equity investments in one or more private local banks as well as loans in the form of tier-2 capital or designated credit lines; (iii) inclusion of commercial banks in ADB’s Trade Finance Facilitation Program; (iv) equity investments or provision of credit lines to leasing companies or other nonbank financial institutions; (v) credit enhancement for securitization of mortgages and leases or other capital market transactions; and (vi) equity in investment funds.

3. ADB Program for Regional Cooperation in Transport and Customs Transit

110. ADB is providing TA to Uzbekistan for preparing a transport sector strategy, that is expected to identify possible areas for ADB assistance under the new CSP. A regional road project is planned for 2007. A regional railway rehabilitation project is expected to be taken to the Board in 2008. ADB has been instrumental in setting up the Customs Cooperation Committee that has provided a forum for discussing customs service procedures reform and integrated customs information systems. The Kyrgyz and Uzbek authorities plan to develop the data exchange conceptual framework, including the cost estimate for the pilot single information area for customs services, and reach a legal agreement to support pilot-testing and implementation. ADB will be prepared to consider the Government's request once this is done.

4. ADB Program for Building Human Capital of the Poor

111. ADB is helping MOPE implement the Education Sector Development Program to address critical gaps in the policy framework, textbook development, and ICT-enabled basic education. ADB expects that the proposed rural basic education project, for Board consideration in 2007, will continue to support the basic education sector, with emphasis on reducing rural– urban disparities. Assistance to MOPE is proposed for an early childhood education initiative in 2008.

C. External Funding Coordination and Partnership Arrangements

112. Although official development assistance has become less significant in recent years, a number of development partners are still spread across the sectors. Among the multilateral partners, the World Bank, EBRD, the UN group, and the Islamic Development Bank are active. Among the bilateral partners, the PRC and Japan account for the largest share. The detailed development coordination matrix covering all sectors is in Table A1.5.

113. The World Bank has been active in public sector financial management, agriculture, environment, health, and urban water supply. The Uzbekistan Country Assistance Strategy (CAS) 2006–2009 of the World Bank is soon to be discussed by its Board. The new International Development Association (IDA) resource envelope, based on its performancebased allocation system for Uzbekistan, is $107 million per year. The funding is to be provided only by IDA in light of the decline in Uzbekistan’s gross national product (GNP) per capita since the last CAS was discussed by the Board, and the World Bank’s assessment of Uzbekistan’s inadequate creditworthiness for International Bank for Reconstruction and Development (IBRD) borrowing. This position will be reviewed during the midterm CAS review. The World Bank proposes to follow a dual-track approach comprising (i) a core program with focus on human development and environmental protection; and (ii) selective lending and significant analytical support for economic growth through macroeconomic stability and acceleration of structural reforms, as these are areas for potential enhanced engagement.

114. EBRD has been active in finance, the private sector, energy, transport, and urban infrastructure. In 2005, it approved a new country strategy for Uzbekistan that limits EBRD assistance to only those private sector projects that are not linked with the Government and its officials. The Government considers this approach appropriate given the semicommercial nature of EBRD’s loans.

115. The UN agencies have prepared an MDG baseline study to develop MDGs, targets, and indicators relevant to Uzbekistan. These are expected to be integrated into the WISP as its M&E framework. The UN is also supporting tax code revision. Specialized UN agencies are active in Uzbekistan.

116. There are some formal mechanisms for aid coordination among external development partners; they exchange information and dialogue on policy issues through informal mechanisms such as the Economists’ Forum and sector-specific donor coordination meetings (e.g., education led by ADB and water resources). ADB has established good relations with international partners in Uzbekistan. URM has played an important role in policy dialogue and partner coordination.

117. Cofinancing. ADB has mobilized cofinancing amounting to $122 million in Uzbekistan. In conjunction with its lending program, ADB will continue to pursue cofinancing, mainly from official sources, particularly with concessional loan cofinanciers. The Islamic Development Bank (IsDB) and OPEC Fund have indicated their interest. However because of project-specific issues, these potential cofinancing opportunities went unrealized. IsDB, OPEC Fund, and the bilateral Middle-Eastern Funds are expected to be the main sources of cofinancing in the midterm. ADB will explore opportunities for grant cofinancing from multilateral sources, particularly for inclusive rural and human development efforts. ADB through URM will formalize cofinancing efforts by developing a cofinancing strategy.

118. WISP Partnership. Now that Uzbekistan is developing its first comprehensive national poverty reduction strategy, external development partners can respond to the Government’s vision. The I-WISP provided a foundation for development partner coordination for World Bank and ADB strategy formulation. The next steps are to prioritize the list of sectoral intentions in each area and to cost them for inclusion in the full WISP. Stakeholder participation could be enhanced. Undertaking policy analysis included in the outline WISP will require capacity building in sector-related poverty assessments and in development of key monitorable outcome indicators in the medium and long term. This would pave the way for closer alignment between the national strategy and externally supported programs.

119. Consultations. During 2004 and early 2005, ADB conducted a number of pre-CSP assessments with developing member country stakeholders on the private sector, governance, the environment, and gender. ADB also consulted with concerned sector ministries and agencies while preparing the thematic results frameworks.

120. Informal Board Seminar. In line with involving the Board in CSP preparation, an informal Board seminar was held in early September 2005. Highlights of the discussions follow:

1. Governance. How does ADB propose to address governance in the new CSP?
2. Private sector development. An integrated approach to PSD is necessary, encompassing public and private sector operations.
3. SME credit lines. The reasons for SMEs’ mixed performance should be examined. Are SMEs constrained by inadequate financing (in which case ADB could consider continuing assistance) or by the policy environment?
4. Selection criteria. The selection criteria developed for the CSP’s strategic priorities are useful. The challenge will be to align ADB’s strategy with the country’s priorities.
5. Proposed focal areas. ADB supports (a) accelerating rural development, (b) building human capital, (c) facilitating regional trade and transport, and (d) building capacity. The issue is how resources are to be allocated among them.
6. Regional cooperation. Lessons learned from ADB’s experience with regional cooperation projects should be reflected in the next strategy. The Government’s commitment to regional cooperation is not evident.
7. World Bank and EBRD strategies. How does ADB’s proposed approach to operations compare with the World Bank’s and EBRD’s?
8. Proposed indicative lending levels. The levels are a working premise. However, the reasons for lowering OCR lending levels are unclear, particularly given that the external debt outlook is judged as sustainable and the World Bank is expected to significantly step up its lending to Uzbekistan.
9. Results framework. The inclusion of a results framework is appreciated. Data and monitoring challenges need to be tackled.

121. During the CSP formulation mission, consultations were held on the CSP’s proposed directions with representatives of local NGOs, the Economists’ Forum (comprising representatives from the international development community), the American Chamber of Commerce, and students and staff of the University of World Economy and Diplomacy. Feedback from these consultations is summarized in Box 3.

122. NGOs have helped implement grant- and loan-funded components of projects, including the Japan Fund for Poverty Reduction (JFPR) project in Karakalpakstan. NGOs could be more involved in project design, implementation of components, and evaluation, as noted during the consultations (Box 3). However, the limits to significant NGO involvement have to be recognized, given that funding has to be channeled through the authorities and given the environment for NGOs.

D. Indicative Internal Resource Requirements

123. An assessment of indicative staff resources required to ensure adequate delivery of the program for the next 3 years indicates that additional staff resources in URM will be required. In 2006, to strengthen the economic and sector work, a professional staff economist position will be moved to URM. This will need to be supplemented by a national economics officer position. In terms of portfolio management, a project analyst position is being added in 2006 to support the portfolio management team comprising one professional staff and four national officers. Also, as further project delegation proceeds, the transfer of a sector specialist position (with sectoral expertise that complements the expertise of URM's present staff) to URM would be necessary. These proposals will also enable URM to take on a greater responsibility for implementing and monitoring the CSP.

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