UZBEKISTAN - The Problems.

In having energy self-sufficiency, however, Uzbekistan pays a high price. Since independence in the early 1990s, the energy sector has borrowed over US$2 bn from foreign banks under state guarantees. Due to inadequate cost recovery - oil, gas and coal are sold at a fraction of world market prices - the ability of the energy sector to repay its debt is questionable. Electricity prices charged to all sectors are a fraction of long run marginal cost - an average weighted tariff posted on June 1, 2003 of 1.26 US cents/kWh against about 3.5 UScents/kWh. The retail gas price is below long run marginal cost.

In early 2002, Tashkent adopted a medium-term energy price programme calling for quarterly energy price increases totalling around 50% per annum in nominal terms. According to a World Bank report in June 2003, however, energy price increases at that pace barely kept up with inflation and were unlikely to substantially improve the sector's financial situation. Non-payment is wide-spread. In some energy sub-sectors non-payments are said to exceed 50% of total billings, and barter offsetting schemes are common.

Because of low cost-recovery and reinvestment, the capital stock in parts of the energy sector has been run down and, according to the World Bank, has been "in urgent need of rehabilitation or replacement". Required investment in thermal power plants alone could exceed $1.5 bn in the next two to four years.

Low energy prices buttress massive energy inefficiency. The energy intensity of the Uzbek economy remains very high (2.2 tons oe/US$1000 in 1999), over three times as high as in countries like China or Vietnam, and far above the levels of Kazakhstan or Russia. Energy inefficiencies are prevalent in the whole economy. Gas transmission and distribution losses are estimated at about 27%, at least 22-25 percentage points above industry standard. Technical and commercial losses reported by the state power utility, UzbekEnergo, amount to 18% of electricity generated, almost twice the 10% level routinely achieved elsewhere. In addition to low prices and problems with non-payment of bills, inadequate metering of energy consumption further reduces the incentives to use energy efficiently (see background in Vol. 63, Downstream Trends No. 15).

The government has opted to attract private investment by offering for sale minority stakes in state companies responsible for oil and gas production, transportation and refining, and the electricity sector, to strategic foreign investors. But the process in this respect has very slow and fraught with problems resulting from low pricing of energy, lack of financial discipline, and the monopolistic nature of the companies in question. There is also the lack of appropriate legal and regulatory frameworks, with the repressive regime of President Karimov unwilling to institute the reforms required (see OMT).