World Bank Transport Global Practice: Uzbekistan’s Aviation Sector

GIF Advisory Council Meeting

Binyam Reja, Practice ManagerChina, Mongolia and Central Asia region

INTRODUCTION TO UZBEKISTAN’S AVIATION SECTOR

2

An unprecedented reform of Uzbekistan’s aviation sector was launched in November 2018 through issuance of a Presidential Decree

Government’s

Objectives

World Bank Group

Support to the

Government

• Modernize the aviation sector to ensure that it contributes to the economic and tourism development

• Develop a safe, convenient, and affordable air transportation to all domestic and international users

• Improve the airport infrastructure by raising and investing significant funds into airport assets

• Improve management of operations in airports

• Increase service levels and benefits to all users

• Minimize fiscal burden of the airport sector on government’s budget

• Implement phased liberalization of the air transport market to gradually to expand market access conditions for air carriers

• Support the aviation sector reform and unbundling of the National Air Company (NAK)

• Analyze options for introducing efficiencies in the airport sector and financing the needed investments

• Develop a roadmap for private sector participation in airports to finance investments for improving state of the infrastructure and compliance with international safety standards, passenger and users’ experience in airports, and achieving a financially sustainable sector

• Develop an approach to maximize benefits to the Government, that is feasible, bankable and attractive for the private sector

• Develop a business model for restructuring airline activities to ensure sustainability of national airline

Policy makingTechnical

RegulationOperations

Accidents

Investigation

ATC Airports Airlines

UZCAA +

MinFin

UZCAAUzbekistan

Airways

Uzbekistan

AirwaysUZCAA

Uzbekistan

AirwaysUzbek

Airways

INSTITUTIONAL AND REGULATORY FRAMEWORK

Prior to Presidential Decree: vertically integrated structure with the airline, airports and air traffic control bundled under a single entity – National Air Company Uzbekistan Airways (NAK)

Vertically integrated system created wrong incentives through cross-subsidization across various business units and resulted in conflict of interest between different institutional functions.

Unbundling of the sector following Presidential Decree: the National Air Company is being reorganized, separating airline and airport operations into independent corporations, as well as policy-making, accidents and safety oversight.

Policy makingTechnical

RegulationOperations

Accidents

Investigation

ATC Airports Airlines

Ministry of

Transport /

Civil Aviation

Board

Civil Aviation

Authority

ATC Operator

/ Airport

Authority

Public and

private airlines

Air Accidents

Investigation

independent

Commission

Airport

Authority /

Private

operators

Ministry of

Transport

(MoT)

Civil Aviation

Agency

UzAir

Navigation

SUE

Uzbekistan

Airways

JSC

Accidents

Investigation

Unit in MoT

Airports

Company

JSC

international practice

proposed for Uzbekistan

INSTITUTIONAL AND REGULATORY REFORM

Each of 11 airports converted from SUE to

LLC under 100% ownership of Airports

Company JSC

International seats to/from Uzbekistan by departing /arriving airport (2018)

5

Bukhara

3%

Urgench

4%

Samarkand

8%

Namangan 3%

Termez

Fergana 3%

Andizhan 1%

Navoi1%

Tashkent

74%

Total international

seats: 4.91 M

CAGR (2010-2018):

4.7%

1%

Airport International seatsGrowth rate(2010-2018)

% change (2018 vs 2017)

Tashkent 3.7 M 4.2% + 22%

Samarkand 376 K 7.0% + 50%

Urgench 173 K 15.7% + 35%

Namangan 167 K 6.9% + 54%

Fergana 162 K 12.1% + 28%

Bukhara 160 K 4.9% + 25%

Termez 50 K 4.8% + 16%

Andizhan 47 K - 5.1% - 22%

Tashkent Airport plays a key role, with 74% of total international seats. Capacity has increased significantly in 2018 by 25% on average for all airports

except Andizhan.

Source: IFC based on OAG data

ON THE BACK OF THE GOVERNMENT’S REFORMS, THE MARKET EXPERIENCED SOLID GROWTH IN 2018

6

0

1

2

3

4

5

2010 2011 2012 2013 2014 2015 2016 2017 2018

Uzbekistan Airways Aeroflot Russian Airlines

UTair Aviation Turkish Airlines

Ural Airlines Other carriersOther carriers

International seats by airline – All Uzbekistan airports2010 to 2018

CAGR 2010-2018:

4.7%

62%6%

6%

5%

5%

16%

Other carriers

62%6%

4%

3%

3%3%3%

16%

Other carriers

Intl. seats by airline – All Uzbekistan airports

2010

2018

Uzbekistan Airways has maintained its capacity share in the market over the last 8 years, which grew by over 45%. In 2018, Uzbekistan Airways

registered strong growth in capacity (+22%). It is also the largest air carrier servicing international routes from Tashkent Airport.

UZBEKISTAN AIRWAYS HOLDS THE LARGEST CAPACITY SHARE IN THE MARKET

Uzbekistan’s domestic route network (2018)

7Source: IFC based on OAG data

TAS

Bukhara

13%

Urgench

24%

Nukus

18%

Samarkand

11%

Namangan

6%

Termez

7%

Fergana

6%Navoi

4%

100%

10 domestic routes to/from TAS

account for 94% of the country’s

domestic seatsRoutes that bypass Tashkent:

• Urgench / Bukhara: 3%

• Nukus/ Samarkand: 1%

• Urgench / Nukus: 1%

• Bukhara / Fergana: 0.5%

Total domestic seats:

0.99 M

Karshi

2%

Andizhan

3%

UZBEKISTAN AIRWAYS IS THE ONLY AIRLINE DELIVERING SERVICES TO THE DOMESTIC MARKET

UZBEKISTAN’S AIR TRAFFIC IS BOLSTERED BY STRONG GROWTH DRIVERS

Robust economy

Expected GDP growth: 5-6% until

2024 (IMF)

Positive demographics

Growing population (1.5% p.a.)

increases consumer base

Increasing competition

Rise of foreign LCCs /legacy carriers

could increase affordability & route

options

Favorable geography

Location of Tashkent and

Uzbekistan at the center of Asia

and Europe helps develop

connectivity

Diversified passenger

mix

Comprising labor outbound

migrants, seasonal tourists, and

business professionals

Strong connectivity

Uzbekistan is well located to attract

airlines to develop high air

connectivity

Market catch up

Market is expected to undergo a

phase of strong catch-up growth

Financial and political

stability

PASSENGER TRAFFIC PROJECTIONS

3.9%

Steady Traffic Growth

Overall traffic growth is assumed to remain at an average (compound annual growth rate) of 3.9% over the course of

the 60 year forecast period. The projections are made as a national average and are consistent across all airports.

Using a compounded annual growth rate of 3.9% across all airports

Term

ez

Past World Trend

The overall world traffic grew on

average 5.2% annually in the last 17

years.

ICAO Long Term Traffic

Forecast (2016)

- Global (2032): 4.6%

- Global (2042): 4.5%

- Western Europe: 4.7%

- Middle East: 8.2%

- Pacific South East Asia: 7.4%

- Central Asia: 7.6%

Which is conservative and within historical

data and global forecasts…

THE TOTAL CAPEX FOR THE INVESTMENT PROGRAM IS ESTIMATED AT USD867 MILLION OVER 35 YEARS

10

Estimated CAPEX by Airport over 35 years

Compliance (ICAO), 517.12Improvement

Works, 167.80

Expansion Works, 182.00

Breakdown by scope

▪ ~73% of all CAPEX works is assumed to be undertaken in

the initial 4-5 year period

▪ CAPEX assumptions are based on visual inspection of

each airport, discussions with management at each

airport, and planning data gathered during the site visits.

These are in line with raffic growth assumptions.

The timing and extent of the CAPEX program has a key influence on the financial sustainability of the airports as a group. It should be refined withthe Government and airports during detailed project preparation to better optimize the spending program depending on real needs, and strategicand economic priorities of the Government.

KEY REFORMS AND POLICIES NEEDED TO ENABLE AIRPORT PPPS IN UZBEKISTAN

11

Compete the implementation of the institutional reform and unbundling of the sector

Define policies for providing access to the market (domestic and international) to other carriers

Determine the priorities and objectives for the development of the airport system

Determine the strategic future and restructure Uzbekistan Airlines to mitigate the risk of default

Set harmonized aeronautical tariffs and charges framework for all airlines

Define the role of the Government with regards to the national airline, the airports and the ANSP

Determine the strategy for cross-border investments in the provision of services and infrastructure

THERE ARE SEVERAL CAPEX FINANCING OPTIONS

12

The investment program can be financed by leveraging private finance, public finance, cross-subsidization, or a mix of the above

THERE IS SCOPE FOR PRIVATE SECTOR PPP TRANSACTION(S) IN THE AIRPORTS SECTOR IN UZBEKISTAN

13

Potential options for airport PPP bundles

Each option has its own merits and shortcomings. All options are financially viable, and do not require subsidies from the national budget

14

THANK YOU

Binyam Reja, Practice ManagerChina, Mongolia and Central Asia region

CTA Department |April 2019

Uzbekistan Project Pipeline

2019 / 2020

Georgi Petrov

Uzbekistan’s Economic Potential

transition to market-oriented

economy driven by the private

sector

Thorough and rapid reforms

35m inhabitants, huge natural

resources

Expected economic growth: 5.5%

in 2019, 6% in 2020

FDI doubled in 2019

Sectorial Approach to Attract FDI

Power

• Harnessing

Uzbekistan’s solar

potential

•Efficiency gains

through combined

cycle power plants

(CCGT)

Transport

• Aviation sector

reform

• PSP solutions for

airports

• Regional highway

corridor integration

Real Sector Assets

• Ferrous and non-

ferrous mining

opportunities

• Chemical industry

development

Long-term Outlook

• Municipal PPPs

and smart city

initiatives for urban

centers

• Privatization

strategy for

Telecom sector

Projects Pipeline

Concession of Uzbek

Airports

Development of

Road InfrastructurePrivatization in Chemical Sector

Liberalization in the Telecom sector

Municipal PPPs

Bernard Atlan

Uzbekistan Power Sector

Opportunities and Constraints

The total installed generation capacity approximates 12,500 MW, and is

dominated by thermal power plants (TPPs), 90% of which use gas as primary

fuel.

TPPs are concentrated around 3 key gas powered TPPs, located in Syrdarya,

Tashkent and Navoi.

A Power Generation Sector Dominated by TPPs

and Natural Gas…

85%

11% 4%

TPP Hydro Power Others

The TPPs are aging. 75% of existing assets are more than 30 years old and 40% are, to

date, nearing retirement age, resulting in increasing loss in capacity (currently

approximately 22%), while poor efficiency is also depleting natural gas resources.

The key challenge is to modernize the current TPPs to achieve simultaneously the

following 3 goals:

• Compensate for the loss of available capacity due to aging of the assets;

• Address the future growth in electricity demand;

• Decrease the consumption of natural gas and the opportunity cost that stems from

low efficiencies; and,

• Ensure reliable base load and increase system flexibility to enable introduction of

intermittent energy in the energy mix.

…In Need of Modernisation to Compensate for

Losses of Capacity and to Address Poor Efficiency

Overreliance on natural gas resources and aging TPPs, create a need to both modernize

existing power plants and change the energy mix. Investment opportunities are

therefore concentrated around:

• Rehabilitation of existing power units and gradual decommissioning of old assets;

• Development of new CCGT based units, and,

• Development of intermittent energy, in particular, by tapping into the solar

potential (approx. 1GW) and wind (500MW)

The short term plans for rehabilitation of aging power assets and introduction of

new generation capacities based on CCGTs are estimated to cost approximately

USD 4-5 billions worth of investments, which will require private sector

participation.

Investment Opportunities …..

• Need for reconstruction and further development of the grid and

distribution networks to ensure reliable and flexible power transmission;

• Need for sector reforms aimed at achieving cost reflectiveness, focused on

tariff structure

• Need for UzbekEnergo financial sustainability to be achieved through cost

reflective tariff and institutional capacity

• Need for overall energy sector reforms (market model, regulation,

governance)

….and Sector Constraints

Bernard Atlan

Global Sector Lead – Thermal Power

IFC Transactions Advisory Services

Phone +1 202 629 6900

Email BAtlan@ifc.org

Thank You

Georgi Petrov

Manager – Europe & Central Asia

IFC Transactions Advisory Services

Phone +1 202 379 5544

Email GPetrov@ifc.org

Infrastructure Support in UzbekistanGIF Advisory Council, April 10, 2019

EBRDIntroduction

2

EU 28

Countries1

63%

EBRD

region

excluding

EU

8%

Others

11%

USA

10%

Japan

9%

Shareholding structure

1. Includes European Community and European Investment Bank

(EIB) each at 3%. Among other EU countries: France, Germany,

Italy, and the UK each holds 8.6%

An international financial institution supporting the development of sustainable well-functioning market economies

Highest credit rating (AAA/Aaa)

Owned by 68 countries and 2 inter-governmental institutions(the EU and EIB)

€30 billion authorised capital(Share: €6.2 bn paid-in/23.5 callable)

1991 Established

1992 Russia and 11 other

members of the former

Soviet Union join

2007 The Czech Republic

becomes the first country to

“graduate” from the EBRD

2012 Starts investing in Egypt,

Jordan, Morocco and

Tunisia

2016 25th anniversary;

China becomes 67th

member

2017 Lebanon became a

country of operation and

the Bank also commenced

operations in West Bank

and Gaza

2018 India and San Marino

become members

(EBRD is not presently undertaking any new business in Russia)

KazakhstanMongolia

—Kyrgyz Republic

—Tajikistan

—Moldova

—Jordan

Azerbaijan

—Morocco

Belarus

Ukraine

—Romania—Serbia

—Kosovo Georgia—

Armenia—

Tunisia—

Croatia—Bosnia and Herzegovina—

Montenegro—

Albania—

FYR Macedonia

—Turkmenistan

—Bulgaria

Estonia—

Latvia—

Lithuania—

Poland

Slovenia—

Czech Republic—(graduated in 2008) —Slovakia

—Hungary

Uzbekistan—

Egypt—

GreeceCyprus

Turkey

3

Where we investEBRD’s increasing footprint

Central

Eastern Europe

SEMED Western Balkans Turkey

Armenia, Azerbaijan, Belarus,

Georgia, Moldova, Ukraine

Central Asia

(incl. Mongolia)

Cyprus, Greece

West Bank

and Gaza

Lebanon

—Lebanon

West Bank & Gaza—

EBRD introductionIFI with a private sector mandate

4

Since 1991, EBRD invested over €125

billion in around 5,325 projectsIn 2018

€9.5billion

395projects

EBRD Top 10 investee countries in 2018 (€m)

Private sector accountedfor share of

73%Debt

83%Equity

9%Guarantee

8%

1 Egypt 1,148

2 Turkey 1,001

3 Greece 846

4 Poland 556

5 Ukraine 543

6 Kazakhstan 472

7 Romania 443

8 Uzbekistan 397

9 Serbia 396

10 Belarus 360

8.18.7 9.2 8.7

1.30.7

0.40.8

0

20

40

60

80

100

120

140

0

1

2

3

4

5

6

7

8

9

10

11

12

13

2015 2016 2017 2018

Ne

t cu

mu

lativ

e b

an

k in

ve

stm

en

tAn

nu

al

bu

sin

es

s in

ve

stm

en

t (A

BI)

Equity ABI

Debt ABI (and guarantees)

Net Cumulative Bank Investment

Uzbekistanat a glance

5

Key information Mineral resource diversity

CapitalTashkent (2.3M)

LanguagesUzbek (official), Russian

(commonly used)

Credit RatingFitch / S&P – BB-

Moodys – B1

Population32.6M (72% under 40)

Urbanization~50%

GDPUSD 43.3 billion

Reserves

Production

Gold

10th

9th

Natural gas

24th

13th

Copper

10th

20th

Uranium

16th

7th

Coal

29th

34th

x Uzbekistan's place in the world

6

Doing Business ranking, 2019

Annual inflation Gross international reserves

Real GDP growth index vs peers

Uzbekistanat a glance

Uzbekistanopportunities & challenges

7

OPPORTUNITIES CHALLENGES

Ambitious privatisation program

Wider opportunities for private

sector mid-term

Liberalised FX market

Local currency is floating

Fast growing economy

Real GDP ~5% in 2018

Reformist government

UZ is a top improver globally

(“Doing Business” 2018 report)

Low government debt

~21% of GDP in 2018

State is dominant in the market

Decision making is comparatively very

centralised

Government debt is growing. More

careful debt management is

expected

Inflation pressure is still high

~17.5% at the end of 2018

Regulation of monopolies

Tariff setting methodologies for

utilities

Implementation of reforms is yet to

be achieved. Many private investors

are still in a “wait-and-see” position

8

Water Sector of Uzbekistan

State of the sector

• Top priority for the Government. Many cities / villages across Uzbekistan lack sewageinfrastructure.

• Availability of reliable water supply is sporadic

• Presidential Decree №2910 dated 20.04.2017 is the key program document settingsector development objectives, investment needs and KPIs

Sector set-up

• Each of 12 regions with its own “suvokova”, a state unitary enterprise responsible forwater and wastewater services in the whole region

• All suvokovas are owned by the Ministry of Utilities

• Private operators generally do not exist

Sector regulation

• Tariffs subject to approval by the Ministry of Finance

• In most cases tariffs do not cover the required investment costs

• Water projects are considered as social projects by the state and are highlysubsidised. Although tariffs are gradually growing, it is expected that state supportwill continue to exist mid term

• Tariff reform initiatives are supported by IFIs, with reform concept for water sector iscurrently being developed by WB

9

Uzbekistanwater projects geography

Tashkent Namangan

Karshi

Water projects signed in 2018 (USD 150 mln)

Samarkand

Pipeline water projects (USD 275 mln)

Horezm

EBRD sovereign loans are provided directly

to the Republic of Uzbekistan

UzbekistanEBRD portfolio & pipeline of water projects

Project nameLoan amount

USD mlnKey components

First tenders

expected

date

Tashkent Water 30Waste water collector, pumping

stations

Namangan Water 60Water treatment plant, network, water

meters

Horezm Water 60Waste water and water treatment

plant

Karshi Waste Water 60Waste water treatment plant, sewage

network

Horezm Waste Water 90Waste water treatment plant, sewage

network

Samarkand Water 60 Water network, ground water intake

Namangan Water 65 Water treatment plant, water network

Total 425

Signed in 2018

Pipeline 2019-2020

2H2020

1H2020

11

Focus on Matching Client Capacity

Sovereign-backed loans

Cheap but can become politicised

Municipal loans or utility loans guaranteed by municipality

Independence for self-financing city

But higher cost and burden on public debt book

Quasi corporate utility loans

Off-balance sheet borrowing for city

Need backing of Public Service Contract + Support Agreement

Loans to private/ PPP companies

Private sector indebtedness

Need robust legal, regulatory and contractual framework

EBRD is flexible and has risk appetite-- we structure projects across the whole

spectrum, e.g., from sovereign loans when legally necessary, municipal loans, public

utility loans backed by municipal guarantee, operational concessions (DBOM), PPPs

based on DBFO to full privatizations

12

Power Sector of Uzbekistan

State of the sector

• Large state incumbents

• High energy and carbon intensity per GDP

• Installed power: 67% natural gas power plants; 17% coal-fired generation;hydro at 11%

Sector reform focus

• EBRD invited to participate in priority investments and energy and powersector reforms

• EBRD – GoU (State Committee on Investments/Ministry of Investmentsand Trade & Uzbekenergo) sign MOU in July 2018

• Three areas: “Roadmap for attracting private sector”; “Tariff affordability”;“Climate, power and renewables”

• EBRD contracted NERA Economic Consulting to develop options forunbundling sector

• Coordination with WBG and ADB

ERBD involvement

• In just over one year, USD 322m in investments in construction oftransmission and generation infrastructure; reform agenda pushingforward

13

PPPs in Uzbekistan

EBRD policy work

✓ EBRD and Squire Patton Boggs have developed the PPP Law

✓ The law has been reviewed by and agreed with the Government

✓ Final comments to the law are expected from other IFIs. Formal adoption is expected in 2Q2019

✓ EBRD also commissioned PPP diagnostic study in Q4 2018

Government approach

✓ First attempts to attract private investments into utilities sector have been made by the Government

through direct negotiations with private investors

✓ Going forward the Government plans to put out concession contracts to a tender.

✓ To this effect a PPP unit was set up within the MoF to screen, structure and implement PPP projects

across Uzbekistan in a systemic way

EBRD approach

✓ Provide support through the Bank’s Project Preparation Facility (SIA)

✓ Need to work both at pre-transaction level (project selection, value for money/life cycle cost

assessments, project prioritization, institutional set-up for infra delivery) and mid-stream project

preparation

✓ EBRD is interested to consider financing of the winning bidder wherever additional

✓ PPP/Concession contracts to be awarded by the Government as a result of an open and competitive

tender

14

Creating well-

prepared projects

Policy advice: helping governments put in place tried and tested reforms,

regulatory improvements, and

institutional approaches to create lasting success

in infrastructure investment

PPP advisory : creating successfully tendered

PPPs through comprehensive advisory

support (complete technical, legal and

financial)

Project preparation & implementation: providing

technical due diligence, project scoping, and supervision, with

‘cross-over’ project development: renewable energy for transport

and municipal investments

Technical assistance: covering feasibility and environmental / social

study needs

Target: 20 PPP

advisory

mandates

2019-2021

Target: 100 public

sector projects

prepared

2019-2021

Sustainable Infrastructure Advisory (SIA) Facility

EBRD funding (~EUR 55m from net reserves) + External Donors (~EUR 20m)

EBRD Team contracts & manages Framework Consultants

Public Sector Clients

8 weeks to mobilisation

UPSTREAM

SUPPORT

FUNCTIONAL AREA

Policy AdvisoryPPP Transaction Advisory Services

MIDSTREAM

SUPPORT FUNCTIONAL AREA

Public Sector Project Preparation

EB

RD

BA

NK

ING

TE

AM

S’ IN

VE

ST

ME

NT

&

PR

IVA

TE

SE

CT

OR

MO

BIL

ISA

TIO

N

EBRD

Lending

&

Mobilis-

ation

SIA Facility’s architecture: designed for both policy and investment support

tetPolicy Advisory*

Public Sector Project Preparation

With an ultimate focus on SI Group business delivery, ssupport to OLs for

both public sector and private sector programmes/projects, inter alia:

▪ PLANNING LEVEL

▪ Programme Planning

▪ Project Appraisal ,Options Analysis, Prioritisation

▪ PPP unit design

▪ National PPF Design

▪ VfM Methodology & Life-Cycle Cost Analysis

▪ Infrastructure resilience and mitigation assessments

▪ Training (Programme/Project management & PPP Certification)

▪ MARKET STRUCTURING LEVEL:

▪ Tariff setting / carbon pricing

▪ Renewables Auctions / Feed-in-tariffs / PPA development

▪ Legislative / Regulatory framework advice

▪ Institutional strengthening

▪ Enabling Environment

▪ PPP “Phase Zero” Assessments

▪ PPP Transaction Preparation (legal, technical & financial)

▪ Works closely with Global Infra Facility

PPP Transaction Advisory Services

UPSTREAM

SUPPORT

FUNCTIONAL AREA

MIDSTREAM

SUPPORT FUNCTIONAL AREA

▪ Pre-feasibility

▪ Feasibility studies

▪ ESIA studies

▪ Other early project due diligence

▪ Green Cities

Structure and scope

17

Capacity Building for PPPs in Uzbekistan: Suggestion for a four-pronged approach

First Track

✓ Make arrangements – with IFI support - to further develop needed PPP skills through APMG

PPP certification program

Second track

✓ Augment capacity with recruitment of transaction advisors (technical, financial and legal) who

should also be shadowed by GoU PPP employees and PPP stakeholders, working side-by-side

with transactions advisors who should mentor GoU PPP staff

Third track

✓ Secure technical assistance from IFIs to assist PPP Agency and GoU in developing PPP building

blocks

Fourth track

✓ Develop broader training programs in areas of economic and financial appraisal of projects,structuring privately financed infrastructure project contracts, procurement of public projects,contract management, project management, and dealing with the private sector.

THANK YOU

Matthew Jordan Tank

Director of Sustainable Infrastructure

Policy and Project Preparation

(SI 3P)

Sustainable Infrastructure Group

One Exchange Square

London, EC2A 2JN UK

Tel: +44 20 7338 7498

Mobile: +44 (0)7912 717 362

Email: jordantm@ebrd.com

18