The Transport Sector:

Tariff Reductions as a

Means to Economic Growth

Center for Economic Research

November 29, 2013

Economic Growth and Structural Transformation

• To increase the share of industry in GDP from 35,4% in 2010 to 37% in 2030 requires annual growth of industry at 8.3%.

• Diversification of the export structure, reducing the share of raw materials and increasing the share of goods with higher added value.

• An urgent task is to increase the share of manufacturing in the GDP. Increasing the level from 9% in 2010 to 22% by 2030 requires the achievement of annual growth rates of added cost in processing at 11.3% (while average annual growth in mining at the 5% level).

21,330,2 30,5 27,7

7,7

13,7 12,29,1

48,427,5

19,1

11,3

1,75,4

3,8

9,7

2,5 2,9

5,3

5,1

11,7 10,3

11,5 24,8

4,7 6,69,2

6,8

23,4 8,4 5,5

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1995 2000 2005 2010

Structure of Export (%)

machinery and equipment

ferrous and nonferrous materialsenergy resources

chemical products and goods food

cotton

services

others

Transportation Cost and Export Promotion

• Share of transportation costs in the end the price of Uzbekistan’s export goods is 2.5-2.6 times higher than the world averages.

• In order to be competitive in the global markets there are two principal issues to address:

– Constant reduction in shipping costs for domestic producers (domestic and international);

– Optimization of transport sector (institutions, approaches, logistics).

Public roads with hard surface

Public Railways

Transportation of passengers

Freight

• Transport sector accounts for 9% of Uzbekistan’s GDP and 4% of its total employment.

• Role of automobile transport is growing.

• Transport services is one of the key sectors, having high multiplier effect for the economy.

• Transport sector is among the leading recipients of investments. $6,96 bln to be allocated for developing transport infrastructure in 2011-2015.

Transport – One of the Key Sectors of Economy

The diagram shows values for the demand multiplier and the supply multiplier for sectors of the economy.

The farther to the right sectors are in the graph, the more demand they create for the goods of other sectors. The higher sectors are in the graph, the greater the supply they create for other sectors.

By influencing demand and supply, the key sectors have a significant impact on production growth in other sectors.

Sectors whose position in the graph is higher and farther right are priority sectors – drivers of the country’s economic development. Key sectors in the diagram (the top-priority sectors) are highlighted in red and are in the right-hand yellow quadrant.

Transport services

Container Traffic Routes

Intra- and inter-regional merchandise trade in 2010, bln. dollars

OriginDestination

Europe CIS Middle East Asia

Europe 3 998 180 168 524

CIS 308 109 19 88

Middle East 108 5 89 471

Asia 808 85 198 2 464

Source: WTO

• At present more than 90% of the goods traded between the EU and the Asian Pacific are being shipped by sea.

• Development of transit routes in Eurasia, incl. CA region, require cheaper tariffs and customer service in compliance with international standards.

• Transit capacity of Uzbekistan is estimated at $2.2-2.4 bln per year.

Investments and Tariffs for Transportation

• The rapid growth of rail tariffs compared with the Industrial Producer Price Index, leading to decrease in competitiveness of local producers, especially small and medium enterprises in 2010-2011

• The situation is expected to improve in 2013 but rise of tariffs remains a key development challenge

Investments and tariffs

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2004 2005 2006 2007 2008 2009 2010

темпы роста инвестиций в транспорт (правая шкала)

Индекс железнодорожного тарифа

Индекс автомобильного тарифа

Динамика регионального экспорта

Investment growth rates (right scale)Index of railway tariffs Index of automobile tariffs

IPPI

Tariff Indexes for rail transport

Tariff Indexes for automobile transport

The rapid growth of rail tariffs compared with the Industrial Producer Price Index, %

Regional export Dynamics

Railways: Rising tariffs and falling freight intensity

• Over the past 6 years, the annual growth of freight tariffs for Uzbekistan Temir Yollari (UTY) averaged at 55%.

• Labor productivity of Uzbekistan Railways 4.9 times lower comparing to Russian Railways, 1.7 times than Ukrainian railway.

• In general, tariff policy is not targeting small and medium-sized shippers, creates low incentives for export cargo transportation.

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2008 2009 2010 2011%

тыс.

ед

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ре

возо

к/км

Интенсивность грузоперевозок ГАЖК "Узбекистон темир йуллари" (тыс. ед. перевозок)

Индекс железнодорожного тарифа, % (правая шкала)

Intensity of rail freight by UTY(thousands of shipments)

Index of railway tariff, % (right scale)

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ipm

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The intensity of rail freight and the growth of tariffs for rail trucking

24552244

764 698 657 583 489 462

Labor productivity of railway companies (thousands of shipments/emp)

Kazakhstan Russia Ukraine Belarus EU-27 Turkey Egypt Uzbekistan

Average number of personnel per 1 km

Trucking: Poor roads, small companies, rising fuel prices

• Small size of companies – international trucking involves 160 domestic companies with about 1,920 vehicles (12 trucks per 1 company).

• About 80% of trucking vehicles has been in operation for over 15 years, whereas the maximum allowable period is 10 years. The share of heavy and specialized vehicles does not exceed 10%.

• Poor condition of roads, especially in rural areas, decrease speed of movement – 50 km/h average.

• Licensing, certification and other formal barriers to get access into the market for private companies.

Structure of Truck Freight Transportation Costs

Growth of fuel prices outrun growth of tariffs for automobile transportation, %

A-80 fuel pricesAutomobile tariffs

Meeting Demand for Transportation

Growth of freights turnover, %Annual growth

of investments, % All types of transport Railway Automobile

Scenario 1 – 6% 6,3 4,7 7,9 11,3

Scenario 2 – 8% 8,3 6,2 10,5 15,1

Scenario 3 – 10% 10,4 7,8 13,2 18,9

Economic Growth and Transport Sector Development

• During last 5 years freight turnover was growing at 10,2% while GDP growth averaged at 7,6% annually.

• To meet the demand by 2020, the trucking fleet will have to be expanded to 62000 vehicles (4000 new trucks annually).

• To upgrade at least 50% of current trucking fleet by 2020 additional 2400-2500 new trucks need to be purchased by trucking companies annually.

Various freight turnover growth rates and demand for trucking fleet, 2011-2020

Economy of Scale and Better Institutions

• Promoting growth of national trucking companies

– Increasing number and modernizing trucks (licensing and certification, custom fees for imported vehicles, etc.)

– Partnership with UTY (railways) and HY (airways) to go multimodal

• Development of the transport and logistics services market, creation of a network of multimodal transportation and logistics centers (local, regional and international)

– Improvement of the transit regime for freight (by ground and air)

– Increase the stock of containers and the fleet of container carriers, rise the level of containerization of shipments

• Upgrading of the system of institutions for formulation and implementation of transport policy

– Creation of a single governing body (a Ministry of Transport)

– Revision of powers of sectoral agencies and state transport companies

Thank you!

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