Wednesday, 12 December 2012

TURKMENISTAN TO LAUNCH LARGE SCALE PRIVATIZATION

Published in Analytical Articles

By Jan Šír (12/12/2012 issue of the CACI Analyst)

Turkmenistan has officially announced a large scale privatization of state owned industries to be launched beginning of next year. In November 2012, the Turkmen leadership approved a strategic document entitled State Program for Privatization of Enterprises and Objects of State Property in Turkmenistan for 2013-2016, outlining the government’s privatization goals. The program is a major step forward in an attempt to create a genuine private sector in the country.

Turkmenistan has officially announced a large scale privatization of state owned industries to be launched beginning of next year. In November 2012, the Turkmen leadership approved a strategic document entitled State Program for Privatization of Enterprises and Objects of State Property in Turkmenistan for 2013-2016, outlining the government’s privatization goals. The program is a major step forward in an attempt to create a genuine private sector in the country. If implemented, the privatization process has the potential to move the least transformed of all post-communist countries further away from the inherited Soviet central command system towards a free market economy as it is envisaged in Turkmenistan’s constitution.

BACKGROUND: The privatization program was officially discussed during a cabinet meeting of Turkmenistan’s government on November 16, 2012, and was subsequently endorsed by President Berdimuhammedov. The proposed road map outlines existing national development goals and presidential directives, calling on Turkmenistan’s private sector to increase its share of the country's GDP to as much as 70 percent by 2020, the hydrocarbon sector excluded. Taking more than two years, the preparation of the privatization plan has been conducted by the Institute of Strategic Planning and Economic Development, Berdimuhammedov’s main brain trust for macroeconomic policy planning and management.

The unveiled program provides for privatization of state enterprises and state owned property in Turkmenistan, and is extended into three phases till 2016. Major enterprises in manufacturing, construction, transportation and communications, and other industries are to be privatized through direct buyouts, auctions and sales, and transforming the state-owned enterprises into joint stock companies, along with establishing investment funds and stock exchanges and forming a securities market. At the same time, the program identifies key state-owned enterprises and state property defined as being of nationwide importance, which will not be subject to privatization and will be excluded from denationalization and future transition of ownership.

Ever since gaining independence in 1991, Turkmenistan has been the by far least advanced of all post-communist countries in terms of market transition according to most international financial institutions, such as the World Bank or the EBRD. Under the nation's first president-for-life, Saparmurat Turkmenbashi, Turkmenistan pursued an openly isolationist policy, whereby economics were dictated by the country’s quest for autarchy. The ultimate goal of this static strategy was to ensure the regime’s survival, rather than economic reforms. Resource abundance, primarily in oil and gas, made this strategy possible, at least in the short run.

However, after Turkmenbashi’s death in 2006, a number of encouraging reforms have subsequently been enacted under his successor, Kurbanguly Berdimuhammedov. These are part of his overall modernization and diversification effort aimed at bringing Turkmenistan closer to developed nations and facilitating the country’s integration into the global economy. These reform attempts have focused, first of all, on basic capital investments in such priority areas as upstream development of new oil and gas deposits and relevant energy infrastructure that generate most of Turkmenistan’s export revenues and can be used to finance the president’s national projects.

IMPLICATIONS: Furthermore, significant progress has been achieved in restructuring Turkmenistan’s finance and banking system, leading to successful redenomination of the national currency, loosening of the foreign exchange and trade regimes, partial liberalization of prices, and cutting of benefits such as subsidized public transportation, selected food products and cheap gasoline. In addition, the Turkmenistan Stabilization Fund was established in 2008 in order to minimize external pressures and to decrease the national economy’s dependence on oil and gas revenues. Last but not least, after years of total debilitation, Turkmenistan’s government has decided to invest into human capital building. Education and science are among the top recipients.

The promotion of private entrepreneurship has been the key driver to expand the share of the private sector in the country’s GDP. Thus, starting from 2008, ambitious lending schemes have been rolled out in support of developing domestic small and medium size enterprises. These are primarily targeted at agriculture, industry, transportation, communications, IT and innovations on a competitive project basis. Here, preference is given to import substituting and export-oriented production. However, most of these state-directed measures have thus far appeared to favor the promotion of new businesses, rather than restructuring the largely ineffective state enterprises. These are continually dependent on state subventions and subjected to government planning and budgeting. As a result, excessive state regulation and intervention remain among the key structural impediments to the country’s sustainable growth. As of 2012, as much as 75 percent of the country’s GDP is still concentrated in the public sector, according to foreign estimates.

Against this backdrop, it is no exaggeration to say that launching a large scale privatization program with the stated aim of gradually expanding the private sector constitutes nothing short of a groundbreaking event in Turkmenistan’s political and economic context. By introducing elements of a market economy, the privatization can help create a more competitive economic environment and improve the overall efficiency of the market players. However, questions remain. First, from a purely technical standpoint, very little is still known about the legislative rules under which the privatization will unfold. While Turkmenistan has over the past few years introduced a number of important laws in order to improve the country’s business climate, the new bill on denationalization and privatization is still pending, and other implementing regulations in this regard are also yet to be unveiled.

Another, and perhaps far more serious, concern pertains to the feeble institutional and political framework in which the announced privatization is to be carried out. For this endeavor to succeed, certain broader systemic conditions must be addressed in addition to introducing sound legislation. Among them are strict enforcement of the rule of law, good governance, effective public administration, and independence of the judiciary, to name just a few. Obviously, none of these preconditions have ever been features of Turkmenistan’s regime. The experience of other post-Soviet transition countries, including Turkmenistan’s more reform-minded Central Asian neighbors, leaves much uncertainty about the country’s ability to conduct the privatization process in a fair and transparent manner. Moreover, given the prevailing patterns of corruption, cronyism and nepotism, which run rampant in Turkmenistan and do not appear to have been ameliorated under Berdimuhammedov, there is a risk that most of the potentially profitable assets might end up in the hands of those with close ties to the ruling circle. 

CONCLUSIONS: The recent decision of Turkmenistan’s government to launch a large scale privatization program marks an important watershed for Turkmenistan. It could potentially allow the country to depart from the Soviet-style command system towards a new economic model based on market principles. There is no doubt that the privatization of state enterprises and state-owned property is a critical part in this transition process. However, serious concerns remain whether this structural transformation will prove sufficient to attract significant investments, especially considering Turkmenistan’s generally poor investment climate. While foreign citizens and business companies are at least in theory welcome to participate in the upcoming auctioning of state assets, Turkmenistan has not yet gained a reputation as a positive business environment. The only exception is a few strategic sectors of the national economy such as oil and gas, which are explicitly excluded from privatization. It therefore remains to be seen whether potential investors will find the new business opportunities attractive enough to enter Turkmenistan’s market and play according to local rules. 

AUTHOR’S BIO: Jan Šír is Research Fellow with the Institute of International Studies at the Charles University in Prague. He is co-author of the Silk Road Paper titled Dismantling Totalitarianism? Turkmenistan under Berdimuhamedow (Washington, DC: Central Asia-Caucasus Institute and Silk Road Studies Program, 2009).

 

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