Report No. 80022-TJ Tajikistan Reinvigorating Growth in the Khatlon Oblast April 2013 Poverty Reduction and Economic Management Unit Europe and Central Asia Document of the World Bank Contents Acronyms and Abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Acknowledgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix I. Khatlon at a Glance – Strategic Importance amidst Poverty and Vulnerability . . . . . . . . . . . . . . . . . . . 1 II. Economic Structure and Comparative Advantage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 III.  A Strategy for Transforming Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Leveraging Economic Geography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Harnessing the Potential of Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Re-shaping Fiscal Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Exploiting the Potential of Free Economic Zones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 A Proposal for Regional Cooperation: A Kurgan-Tube-Dangara-Faizabad-Kunduz Asiaregio. . . . . . . . 28 IV.  Key Risks to Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 The Political Economy Context. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 The Geopolitics of Security and the Narcotics Trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Corruption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Entrepreneurship. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 The Supply of Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Annexes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 A  Donor Presence in Khatlon. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 B  Value Chain Analysis for Selected Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 C  Other Value Chains Considered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 List of Tables 1  Tajikistan: Key Economic Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 Key Selected Khatlon Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3  Tajikistan: Population of the Oblasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4  Key Social Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5  Selected Economic Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6  Khatlon: Changing Pattern of Production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 iii iv Tajikistan: Reinvigorating Growth in the Khatlon Oblast 7  RCA in Key Products in Tajikistan and Khatlon. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 8  Selected Air-Traffic Indicators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 9  Land Tenure Typology in Tajikistan Khatlon. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 10  Proposed Migration Related Policy Recommendations and Actions . . . . . . . . . . . . . . . . . . . . . . . 18 11  Agricultural Output by Region in 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 12  Tajikistan: Rankings for Key Governance Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 13  Selected Governance Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 14  Khatlon: Business Climate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 List of Figures 1  Robust Growth Contributed to Good Progress with Poverty Reduction . . . . . . . . . . . . . . . . . . . . . 2 2  Tajikistan Remains the Poorest Country in Central Asia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3  Khatlon: Exports and Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4  Khatlon-Afghanistan Trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 List of Boxes 1  Possible Pilot HPP Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2  Classification by Livelihood Zones. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3 Agro Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4  The Dangara FEZ. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5  The Panj FEZ. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 List of Maps 1  Khatlon: Administrative Raions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2  Khatlon: Railway and Road Links. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3  Selected CAREC Transport Corridors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4 Creating Asiaregios as a Vehicle for Boosting Khatlon Development – (Kurgan-Tube-Dangara-Faizabad-Kunduz Square). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 5  Major Trafficking Border Districts and Drug Routes in Tajikistan. . . . . . . . . . . . . . . . . . . . . . . . . . 32 Acronyms and Abbreviations NATO North Atlantic Treaty Organization SMEs Small and Medium Enterprises IFC International Finance Corporation VAT Value Added Tax GDP Gross Domestic Product IMU Islamic Movement of Uzbeksitan GNI Gross National Income UN United Nations ECA Europe and Central Asia CIS Commonwealth of Independent States LSMS Living Standards Measurement Survey TALCO Tajik Aluminum Company RRS Rayons of Republican Subordination EU European Union RCA Revealed Comparative Advantage ITC International Trade Center SCO Shanghai Cooperation Organization ADB Asian Development Bank CAREC Central Asia Regional Economic KFW German Development Bank Cooperation WFP World Food Program PPP Public-Private Partnership USAID United States Agency for International HPP Hydro Power Plant Development UAE United Arab Emirates UNDP United National Development Program CURRENCY AND EQUIVALENTS (As of January 14, 2013) Currency Unit = Somoni US$1 = 4.75 WEIGHTS AND MEASURES (Metric system) Vice President Philippe Le Houérou Country Director Saroj Kumar Jha Country Manager Marsha McGraw Olive Sector Director Yvonne Tsikata Sector Manager Ivailo Izvorski Task Team Leader Francisco Galrao Carneiro v Acknowledgments T his report is the result of collaboration team acknowledges with gratitude guidance from between the World Bank and the International Marsha Olive and Ivailo Izvorski who read several Finance Corporation with the support of the drafts of the report and provided comments and sug- Government of Tajikistan and the Governor of the gestions along the way. Emanuel Salinas Munoz and Khatlon oblast. The task was managed by Francisco Lawrence Bouton were peer reviewers and provided Carneiro. Salman Zaidi from the World Bank and useful comments and suggestions that have been Christopher Miller from the IFC provided strategic incorporated into this revised draft. Sarah Nankya guidance at earlier stages of preparation. Saumya Babirye went beyond the call of duty and provided Mitra, Matin Kholmatov, Ian Luyt Marina Bakanova, superb editorial assistance. Yvonne Tsikata and Saroj Francisco Carneiro, Hassan Aliev, Zuhro Qurbonova, Kumar Jha supervised the task and provided strategic and Victor Sulla made significant contributions. The guidance to the team. vii Executive Summary T his report assesses the challenges and oppor- skills, realize scale economies, and diversify output; tunities for the development of the Khatlon (ii) harnessing the potential of agriculture for exports; oblast in Tajikistan. In response to a request (iii) reshaping public policies to encourage entre- from the Governor of the Khatlon oblast, the report preneurship and reduce corruption; and (iv) retool- examines the economic growth prospects for Khatlon ing free economic zones to build in internal supply and proposes a private-sector-driven strategy for chains and conform to modern management prac- accelerating growth over the medium term. Research tices. The report also recognizes the critical impor- conducted for the purposes of this report also con- tance of building security and antinarcotics defenses, sidered the competitiveness of selected activities and but details in these areas lie outside the scope of the sectors based on their revealed comparative advan- work. The underlying belief behind the assessment of tages in order to identify prospective directions for the growth prospects of the oblast is that a rapidly private investments in the oblast. One of the main prosperous Khatlon with rising private investment objectives of such analysis was to explore the possi- would itself be stabilizing. bility of strengthening the development of the private sector in the oblast through favorable policies, sup- A Strategy for Transforming Development ported by the public sector through the identification of major obstacles to private sector development and There has been a shift in the structure of the econ- the required public policy reforms needed to improve omy of Khatlon with a revival of industry led by light development conditions in the region. Given the rel- manufacturing. The oblast is largely rural; agriculture ative strategic importance of Khatlon, the analysis is along with agriculture-based activities are dominant also intended to inform the design of reform policies in production. Approximately one-third of all ginner- and to offer insights to the governments of Tajikistan ies in Tajikistan are in Khatlon, including three new and those of other oblasts. ones that began operations in 2012. It is also encour- The report argues that the rise in the strategic sig- aging to note that Khatlon accounts for two-thirds of nificance of Khatlon must be matched by responses the national raw cotton output, and half of the cot- in public policy and a strong upturn in private invest- ton-fiber production. However, over the past three ment to strengthen economic prospects. The report years, there has been a revival of industry, aided by an postulates that the emphasis of public policy must be upturn in construction and real estate. placed on facilitating private investment and on using Since Khatlon accounts for half of the country’s public resources wisely to avoid waste and corrup- agricultural land and pastures, both the agricul- tion. The report also calls attention to important risks ture and livestock sectors could provide additional that cannot be overlooked. It argues that the nexus of exports. An export-based potential for growth is regional insecurity, the narcotics trade, and poor stan- revealed by the pattern of growing intra-industry dards of governance threatens the realization of the trade, particularly in fruit and vegetable juices, fertiliz- oblast’s potential. ers, spare parts, and dried nuts and fruits. The analysis The report identifies four key reform imperatives of Khatlon’s revealed comparative advantages (RCA) for stimulating growth in the oblast. These are: (i) pro- shows that existing advantages lie in farming (horticul- moting cities and internal connectivity to build labor ture) as well as potentially in some first-level-specific ix x Tajikistan: Reinvigorating Growth in the Khatlon Oblast processing industries (fruits and vegetables, juices/ businesses, the leadership and administration of the beverages, skins, wool and cotton yarn). zones, and the supply of infrastructure will have to Political economy constraints, shortcomings in the be of a wholly different order than in the rest of the business climate, lack of skills, and a narrow produc- country. Also, the management of the zones should be tion base constitute the main barriers to rapid eco- independent and professional. Decisions on entry into nomic growth. These impediments can be addressed the zone will need to be made on objective grounds. only through a partnership between rising private The management authority also needs the capacity, investment and reformist public policies to invigorate resources, and ability to exercise independent judg- growth and raise social indicators. Policies should be ment in promoting and regulating the zone. reoriented to (i) promote cities as the locus for build- Joint public and private investments in transport ing labor skills, realizing scale economies, and diversi- will help achieve a major presidential goal of improv- fying output; (ii) harness the potential of agriculture ing links. All major transport corridors (current or as the driver of exports; (iii) reshape public policies planned) being supported by CAREC or projects to encourage entrepreneurship and reduce corrup- being considered with SCO (Shanghai Cooperation tion; and (iv) amplify outward-orientation by re-tool- Organization) go through the Khatlon oblast. With ing free economic zones to build in internal supply the construction of the 46 km long railroad connecting chains. These policies need to be implemented both Kurgan-Tube to Dushanbe via Vahdat and Yovon both at the national and at the oblast level and there must Kurgan-Tube and Kulyab will be connected directly be a clear commitment by the authorities to design a to Dushanbe bypassing the territory of Uzbekistan. comprehensive reform package where policy actions With the road connecting Dushanbe and Nijni Pyanj at different levels of government are complementary as well as the bridge over the river Pyanj funded by and reinforce each other and facilitate the develop- the U.S. already completed, there are much better ment of the private sector in the region. opportunities to connect to the southern markets and The diversification potential of Khatlon together networks that serve as an alternative to the routes with the sparseness of the current population and north via Uzbekistan and the Kyrgyz Republic. economic activity densities calls for efforts to promote There is plentiful air capacity, but liberalization economic agglomeration. In particular, the effects in civil aviation will be needed to attract additional of agglomeration could be magnified if connectivity private investment. Khatlon’s comparative advantage were to be developed within the two free economic is bolstered by access to three international airports zones being established in the oblast, in Dangara and within close proximity to production sites in Khatlon.1 Nizhni Panj. These zones could stimulate growth in There are flights at various times throughout the year production and exports by reducing the governance, from Dushanbe with 22 airlines to 14 Russian cities2 economic, tax, and regulatory costs of doing business and 10 other international destinations including the and, through supply chain linkages with the rest of Middle East.3 There are also flights to various Russian the oblast, could help accelerate overall economic cities from Kurgan-Tube and Kulyab. Airport capacity growth. Growing production would seek to exploit appears to be plentiful and there is no commercial or the transport links with Dushanbe and beyond, as economic case for the construction of a new airport in well as with northern Afghanistan, that could offer the oblast. However, the liberalization of air services access to the huge south Asian markets. It will be necessary to clarify the purpose of zones and strengthen zone institutions to attract 1 Airports in Kurgan-Tube, Kulyob, and Dushanbe. more investments. The main barriers to investment 2 These cities include Moscow, Saint Petersburg, Novosibirsk, Irkutsk, Tyumen, Chelyabinsk, Samara, in Khatlon are weak governance, corruption, weak Nizhnevartovsk, Surgut, Yekaterinburg, Orenburg, property rights, and energy shortages. In view of this, Khanty-Mansiysk, Krasnodar, Krasnoyarsk, Kazan, Sochi. the legal regime and the application of laws in the 3 Wulumuqi (China), New Delhi, Kiev, Istanbul, Tehran, zones regarding property rights and governance over Frankfurt, Dubai, Bishkek, Almaty, Sharjah (UAE). Executive Summary xi and provision of third-freedom rights is necessary to rate at around 30 percent (especially among the attract private investment especially if rapid transport youth), and modest job creation in Khatlon, labor of perishable, high-value agricultural products is to be migration is there to stay. Exacerbated by a very low facilitated. level of investments to the region (including FDI), There will be no progress in developing the par- remittances are by far the largest source of foreign ticipation of the private sector in the oblast without exchange and income compared to exports, official improved safeguards for property rights and con- development assistance, FDI, and public expenditures. tracts. Private investments require complementary Coupled with a stubbornly high fertility rate during public investments in infrastructure and in human the last 20 years and a large share of youth (15–29) capital. Indeed, such private investments may be that is primarily unemployed or self-employed in facilitated by progress in legislation on public-private agriculture and/or petty trade, labor migration should partnerships; but experience shows that successful be treated as a labor market pressure relief strategy. and durable PPP transactions take place only when The key policy consideration should be around giv- supporting public institutions enjoy high credibility, ing the young generation “employment alternatives” and private confidence in the security of property rather than being worried about “labor export.” rights and the sanctity of contracts is high. Greater predictability in revenues and rising For Khatlon, it is also particularly important to standards in public services will complement pri- reform border procedures and practices with respect vate investment. The reform agenda outlined for to Afghanistan and Uzbekistan. The absence of a the oblast authorities in various parts of this report system of payments guarantees forces the use of con- will require resources and technical knowledge for voying at high fees and generally large logistical and successful implementation. It will be essential to time costs as convoys must be formed, transported, bolster oblast and raion revenues, reduce volatility and cleared as a bunch. To realize the full potential for in revenues, and attain greater predictability in both food and agribusiness exports as well as those in new transfers from the central budget as well as in donor light manufacturing industries, road and freight logis- inflows. A medium-term program towards rais- tics constraints would need to be addressed. Also, a ing capacity to raise local revenues and strengthen number of steps in customs practices reform and trade sub-national autonomy would improve the pros- facilitation are necessary. Corruption in customs, long pects for the success of reforms. government-imposed delays at borders (especially at the Uzbek border), and near-obligatory inspections, Five Risks that Could Hold Back Growth in regardless of risk considerations, are impediments to Khatlon formal and informal trade. Urban development would be assisted by improved First, narrow political participation as a legacy of a marketability of rural land. Rural land should now be fragile polity remains as a latent threat. The Khatlon freely marketable and transferable because the new oblast was the cockpit of the civil war that took place code provides a firm legal basis for land transactions, during 1992 and 1993 and continued with lower a system of registered titles, and also the framework intensity until 1997. The war ended through a peace for the use of land as collateral for credit. The pro- agreement with protocols on military unification, cess of urbanization could be accelerated if poten- where progress has been made with a national army tial migrants were easily able to relinquish land or but fair political participation and division of power able to rent land out. Because all land is state owned remain highly contentious. Despite post-conflict rec- there is scope for better management of reserve lands onciliation, parts of the country (Garm and Rasht in (unused) in a more effective manner. the center of the country; parts of the Pamirs) remain Labor migration into the cities could transform the beyond central control, with occasional outbreaks of shape of growth. With the number of labor migrants violent challenges to the authority of the state from constantly on the rise, an unofficial unemployment warlords and insurgents. xii Tajikistan: Reinvigorating Growth in the Khatlon Oblast Second, the geopolitics of security and the narcot- of informality has grown. Informality may reduce tax ics trade represent serious threats. The importance of and other burdens but at the cost of efficiency and the Khatlon oblast as the front line against extrem- long-term growth. Moreover, informality may also ism and the war on drug trafficking grows with the reflect business conditions prevailing in the oblast. If planned withdrawal of NATO forces from Afghanistan entrepreneurship in Khatlon is to prosper such a trend in 2014. The Afghan-Tajik border—which is 850 must be arrested. Formal enterprises make possible miles long—is highly porous, with minimal, stretched economies of scale, are better able to take advantage police and border guard presence. Attaining firm con- of logistical advantages, and are poised to trade more. trol over the border will require infrastructure invest- Fifth, Khatlon can be the energy power battery ments, electronics and detection equipment, but most of the country, but continuing energy shortages of all improvements in human capacity and skills in restrict growth. Tajikistan has large hydro potential all aspects of border control. estimated at 264 TWh/year or over half of all hydro Third, heavy bureaucracy, underdeveloped insti- potential of Central Asia. Much of this potential lies tutions and pervasive corruption hamper efforts in Khatlon, but unfortunately only about six percent to improve competitiveness and limit growth pros- of this potential is developed. Paradoxically, in a coun- pects in the country, including Khatlon. In Khatlon, try with abundant hydro-power potential and a strong a centralized corrupt network deprives the oblast of inherited Soviet tradition of engineering in the sector, resources. Corruption is a product of state capture by electricity supplies are notoriously deficient and unre- a highly centralized, unitary administration that exer- liable. Energy shortages are exacerbated by privileged cises discretion over wide-ranging decisions with few access accorded to a large aluminum smelter. With checks and balances. A patronage system and clan- too-low tariffs and large energy losses, the sector runs based hiring weaken institutions and sap competence deficits, with consequences of inadequate operations, in public administration by deterring the truly mer- maintenance, and capital spending, and arrears in itocratic from seeking jobs. If Khatlon’s institutions taxes and payments to suppliers. Both infrastructure are to be strengthened, a major donor-assisted effort improvements and management reforms including should be considered for building up the demand side transparency in accounts and financial controls, paid of governance. for partly by rational tariffs, are essential. Fourth, entrepreneurship is constrained by rising A summary of the main reform areas that will informality. Over the past five years, there has been a need the attention of the authorities at the central significant rise—by an annual average of six percent and local levels is presented in Box E.1. The propos- per year—in the number of small enterprises or busi- als for reform reiterate the view that the rise in the nesses as measured by the number of patents issued. strategic significance of Khatlon has to be matched As the number of functioning SMEs has risen only by responses in public policy and a strong upturn in slightly over this period, it appears that the degree private investment to strengthen economic prospects. Executive Summary xiii Box E.1  |  Summary of Major Policy Recommendations Reforms to Attract and Retain Private Reforms to Boost the Potential of Investments Free Economic Zones Risk Mitigating Measures • Focus on institutions and markets. Attention • Clarify the purpose of zones and strengthen • Prepare a medium-term reform program to should be given to land use, public services, zone institutions to improve governance, bolster oblast and raion revenues, reduce and infrastructure quality. reduce corruption, strengthen property rights, volatility in revenues, and attain greater pre- • Improve safeguards for property rights and and reduce energy shortages. dictability in both transfers from the central contracts. • Make the management of the zones indepen- budget as well as in donor inflows. • Rehabilitate roads and feeder roads connect- dent and professional. • Deepen post-conflict reconciliation and ing cities to the hinterland. • Improve transport, and telecom connectivity broaden representation in government and • Simplify customs and borders procedures. within the two free economic zones. civil service in support of stability • Increase public investments in energy gener- • Develop a stratetgic, inter-linked approach to • Enhance security control at the border with ation to raise energy efficiency and thermal infrastructure needs in the zones. Afghanistan with better equipment and generation investments. • Build stronger links between the zones and better human capital • Stimulate marketability of land following the cities in the oblast. the reform of the land code to unlock the • Allow the free movement of labor across the potential of the rural land bank. oblast and zones. • Ease urban zoning transactions. • Invest in training and skills development. • Adopt measures to raise labor skills to facili- • Create and develop labor migration support tate migration to new urban opportunities. infrastructure • Strengthen local executive capacity in the oblast to manage migration. Khatlon at a Glance I Strategic Importance amidst Poverty and Vulnerability T he end of the civil conflict in Tajikistan in per capita grew by more than five percent per annum 1997 ushered in an unbroken period of strong during the past decade, while official government esti- growth in output in the country from a deep mates indicate that the incidence of poverty halved post-Soviet, post-conflict trough. The global crisis in during this period (Figure 1). However, despite a 2008–2009 led to a temporary slowdown in growth. threefold rise in income per capita over the past Growth was aided by stability won through the peace decade, the level of productivity remains low and agreement ending the civil war, favorable regional and Tajikistan’s GNI per capita of $870 is the lowest in world trade conditions, rising exports that reflected Europe and Central Asia (Figure 2). improvements in terms of trade, and some internal Prospects for sustained growth, now that catch-up reforms promoting private markets. Of great signifi- effects are exhausted, will depend greatly on improved cance was the migration of Tajik labor to Russia and public policy and raising private investment. That to a lesser extent to Kazakhstan. Remittances account will require strong market-oriented reforms in gov- today for over 40 percent of GDP—a large stabilizing ernance, property rights and the rule of law, and the influence in an economy with high unemployment, business environment, together with smart policies and the primary coping mechanism for impoverished and investments to reduce economic distance and households. Over this period, agriculture shrank as a improve connectivity in order to maximize the poten- share of total output as the share of services rose. tial of economic agglomeration. Robust economic growth during the past decade The fragile political and security foundations of contributed to progress in reducing poverty. Income the country and the remnants of challenges to cen- tral authority compounded by terrorism across its borders affect private confidence and, therefore, the ability to pursue reforms. The economy is highly Table 1  | Tajikistan: Key Economic Data dependent on labor demand in Russia and hence on (As percent of GDP, unless otherwise specified) the state of the Russian economy, and, more broadly, 2008 2009 2010 2011 on world demand and prices for aluminum and cot- Real GDP growth (per percent change) 7.9 3.9 6.5 7.4 ton. A high proportion of the population is vulnerable to food price shocks. The energy shortages especially CPI inflation (end-of-period percent 11.9 5.0 9.8 9.3 change) during cold winters, given the limitations on gener- ation capacity and the poor state of infrastructure, Public Sector Balance are a heavy constraint to production and investment. Overall revenues and grants 22.1 23.4 23.2 24.9 Thus, the economy faces many-sided, profound risks. Expenditures and net lending 27.6 28.9 26.9 27.0 It is critical that the authorities develop strategies Fiscal balance (including the public –5.5 –5.4 –3.7 –2.5 to mitigate and face such risks by building in fiscal investment program, PIP) adjustment as required, ensuring access to contingent Fiscal balance (excluding PIP) 1.4 –0.5 –0.4 0.5 finance, but, above all, pursuing reforms. Total public 29.2 34.0 34.4 32.5 The oblast of Khatlon is even more exposed Current account balance –7.6 –5.9 2.2 –1.4 to such risks. It borders Afghanistan and lies on the Source: Tajikistan Economic Report (World Bank, 2012). path of major drug-smuggling routes; its poor, 1 2 Tajikistan: Reinvigorating Growth in the Khatlon Oblast Figure 1  | Robust Growth Contributed to Good Progress with Poverty Reduction 200 96.0 100 Poverty headcount rate (percent) Per capita GDP index (2000=100) 180 90 O cal povertyand extreme 160 73.0 72.4 80 140 70 poverty line) 120 53.5 60 100 43.7 50 41.5 80 40 60 30 17.1 40 13.8 20 20 10 0 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Per capita GDP index (left axis) Poverty headcount rate (right axis) Extreme poverty headcount rate (right axis) Source: State Statistical Committee. Figure 2  | Tajikistan Remains the Poorest Country in Map 1  |  Khatlon: Administrative Raions Central Asia 12000 11000 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Tajikistan Kyrgyzstan Uzbekistan Kazakhstan Source: Khatlon – mapping of donor supported projects in agriculture (World Bank, Source: World Bank (Per-capita GDP, 2011). 2012). agriculture-based economy is highly dependent population is employed in the industrial sector.4 on export of labor to Russia; its population is heav- In 2011 334 enterprises were recorded in official sta- ily reliant on remittances from migrant workers; and tistics in Khatlon. it faces severe winter energy constraints despite its The region is situated between the Gissar Range large energy generation potential. Indeed, this report in the north and the Panj River in the south and bor- advances the view that private sector investments ders Afghanistan in the southeast and Uzbekistan in energy generation offer a promising path for growth in the west. It is potentially well connected by road if supported by public sector reforms. and rail and air (where appropriate) to export markets With almost 2.7 million people in 2011, the oblast of Khatlon is the most populous of the four admin- istrative regions of Tajikistan (Sogd, Khatlon, Gorno- 4 In 2009, there were more people listed in official national Badakhshan and Republican territory) and Dushanbe statistics as being employed in “education” (178,000) than in “construction and industry” (164,000). The city; and contains over one-third of the total country same statistics show employment in “agriculture and population. The population is overwhelmingly rural forestry” as 1.468 million. Total employment in all sec- (83 percent) and is engaged predominantly in pri- tors in Tajikistan was approximately 2.2 million. Source: mary agriculture, with less than three percent of the Tajikistan in figures 2010. Tajstat, 2010. Khatlon at a Glance – Strategic Importance amidst Poverty and Vulnerability 3 Table 2  | Key Selected Khatlon Data 2006 2007 2008 2009 2010 Key Administrative Data Year established 1992 Area (thousand sq.km) 24,8 Population, mln people (%), o/w: 2.463 2.519 2.579 2.642 2.7 Urban o/w 0.465 (17%) Kurgan-Tube (in th.) 72.1 71 69.9 68.8 72.9 Kulyab (in th) 90.1 91.9 93.9 96.3 97.5 Rural 2.235 (83%) Center of the oblast Kurgan-Tube Population density (per 1 sq. km) 108.9 Distance from Kurgan-Tube to Dushanbe 100 km (60 miles) Administrative composition 4 cities; 24 rural rayons, 133 jamoats Economy Number of enterprises 334 Share in total industrial output (%) 29.9 28.4 29.9 29.7 29.7 Industrial production (bln somoni) 1.859 1.862 2.153 2.067 1.934 Kurgan-Tube 0.021 0.029 0.032 0.033 0.041 Kulyab 0.035 0.036 0.041 0.047 0.048 Employment (thousand people) 380.6 380.7 381.7 364.3 365.3 Kurgan-Tube 11.1 10.6 11 12.1 11.7 Kulyab 20.1 18.6 18.8 18.2 17.9 Industry 17.5 19 18 15.1 15.3 Construction 8.1 8.7 9.9 8.6 8.2 Kolhoz 109 108.7 100.8 46.7 24.4 Agriculture 154 152.1 159.5 200.4 220.9 Transport 4.3 4.1 4.3 4 4.3 Electricity generated (bln Kw/h) 16,160 15,808 16,214 15,106 15,195 Cotton-fiber production (thousand tons) 59.2 Raw cotton (thousand tons) 240.8 258 259.6 241.1 197.8 Agriculture: Cereal production (tons) 774,000 Potato production 197,000 Vegetable production 461,900 Melons/watermelons 360,500 Cattle (number of heads) o/w 756,400 Cows 394,700 Sheep 172, 060 (continued on next page) 4 Tajikistan: Reinvigorating Growth in the Khatlon Oblast Table 2  | Key Selected Khatlon Data (continued) 2006 2007 2008 2009 2010 Capital investments, bln somoni 0.22 0.52 1.469 1.815 1.02 (% of total investments)) –26 Services to population, bln somoni 0.679 0.813 0.952 1.067 1.194 (% of total) –18 –19.4 –21.3 –21.5 –21.4 Key Social Indicators Number of schools 1303 Number of students 643,600 Number of professional schools 11 Number of students 8,500 Number of universities 5 Number of students 23,600 Number of health facilities 144 Net migration (incoming-outgoing) –6,503 –6,161 –7,469 –5,906 –6,064 Access to telephone (per 1000) 16 17 17 17 17 Source: State Statistical Agency. to the south and north and to the Dushanbe urban and Sugd) because there has been relatively very little market. Khatlon has an area of 24,800 square kilo- investment in non-agricultural activities since the end meters (around 17 percent of the country’s area) and of the Soviet Union. Kurgan-Tube, the regional capi- consists of 24 administrative districts, four towns tal, has a population of approximately 73,000 people and 133 rural jamoats.5 The region is informally split (est. 2009). The second major city, Kulyob, is slightly into Western Khatlon (comprising Kurgan-Tube and larger with a population of approximately 97,000.6 the Kofarnihon and Vakhsh river valleys) and Eastern Only about seven percent of the region’s population Khatlon (Kulyob and the Kyzylsu and Yakhsu river lives in the two major urban centers, leaving the oblast valleys). Kurgan-Tube is located only 100 kilometers predominantly rural. Urban economic opportunities from Dushanbe (see Map 2). are, therefore, severely restricted. Although no statis- Khatlon is more vulnerable to economic shocks tics exist, it is doubtful whether many new jobs of any than the other two major regions in Tajikistan (RRS significant numbers have been created during the past two decades. Table 3  |  Tajikistan: Population of the Oblasts Region Population Urban % Rural % 5 14 districts in Western Khatlon and 10 districts in Khatlon 2,700,200 17.2 82.8 Eastern Khatlon. 6 Source: Food Security and Poverty No 1/ 2011. Statistical Sugd 2,216,900 25.3 74.7 Agency under the President of the Republic of Tajikistan. RRS 1,685,800 12.5 87.5 The other two centers listed as “towns” are Nurek (pop. Gbao 220,600 13.3 86.7 24,000)—built to service Nurek Dam and Hydroelectric Plant—and Sarband (pop. 14,000)—Sarband is home to Dushanbe 706,100 100 — Tajikistan’s only fertilizer manufacturing plant, Tajik Total 7,529,600 26.4 73.6 Azot. Population in the other two major urban cen- Source: Food Security and Poverty No 1/2011. Statistical Agency under the President ters in Tajikistan is as follows: Dushanbe 706,000 and of the Republic of Tajikistan. Khujand 158,000. Khatlon at a Glance – Strategic Importance amidst Poverty and Vulnerability 5 Table 4  | Key Social Indicators percent. While the labor participation rate in Khatlon is higher than the country average (for both men LSMS 2009 Total Khatlon and women), the median monthly wage remains Poverty one of lowest in the country forcing large migration Poverty headcount rate 47.3 53.9 abroad with close to 40 percent of households report- Gini 30.4 26.8 ing at least one migrant. Average monthly consumption per capita 196 172 In comparison to the country as a whole, males Demographics in Khatlon tend to be less educated and partici- pate less in the labor force, but the data for females Total population 7,370,026 2,640,760 is broadly similar to that of Tajikistan as a whole. Average household size 8.0 8.5 The share of female-headed households in the oblast Labor Force is 13.3 percent, but in the lowest income quintile Number of unemployed 220,993 62,775 of the population this share rises to 20.5 percent. Number of employed 1,914,160 821,320 Primary education enrollment is 100 percent, but Unemployment rate 10.4 7.1 female enrollment in secondary education is signifi- Employment rate 42.9 52.7 cantly higher, and even more so in the lowest quintile. Labor force participation rate 47.9 56.8 Female labor force participation is significantly lower than that of males but rises for the post-secondary Participation rate for males 65.3 69.7 cohort. Female earnings overall are one-quarter Participation for females 32.1 45.0 of male earnings, with a particularly large gap in the Median monthly wage (somoni) 200 185 services sector. Migration The Kyrgyz Republic and the Khatlon province Share of households with migrants 35.7 38.9 share some characteristics. Khatlon’s GDP and pop- Source: LSMS 209, WB. ulation represent half of that for the Kyrgyz Republic, but GDP per capita is similar as is the remittance flow per capita from migrants. Migrants as a share The region remains predominantly dependent of the population in Khatlon greatly exceed those upon primary agriculture; most farms and enterprises of the Kyrgyz Republic and of much richer coun- remain at or slightly above subsistence level. There tries such as Armenia and Moldova or even Tajikistan is little or no capital formation (as evidenced by the as a whole. Yet the remittance flow per capita hand-to-mouth nature of capital investment in exist- in Khatlon is much lower, largely reflecting the lower ing enterprises) and the production base is, for the skill level of its migrants. Khatlon enjoys lower offi- most part, aging and decaying. cial development aid than the Kyrgyz Republic Social indicators tell a story of vulnerability. as a whole by around 20 percent. Foreign direct According to the 2009 LSMS, Khatlon has become investment on a per capita basis is a fraction of the the poorest region in the country with a 54 percent Kyrgyz Republic and also very much lower than poverty rate. Being the largest region in the country in Armenia or Moldova. Thus, policy changes towards (36 percent of the total population), Khatlon has attracting much higher volumes of both official and a higher rate of population growth than the national private external flows would be important. Finally, average. The average size of the household is at a stag- Khatlon has a higher share of its population below gering 8.5 people. Given the high share of the youth the poverty line than Tajikistan as a whole, despite in the total population (almost 40 percent below 14), a somewhat higher per capita income, suggesting that Khatlon accounts for only approximately 14 percent inequality is sharper in the oblast than in the country of the labor force and at the same time is character- as a whole. The Kyrgyz Republic and Moldova have ized by a very high unofficial unemployment rate both made much stronger inroads against poverty (35 percent) and official unemployment rate of seven than Khatlon. Table 5  |  Selected Economic Indicators 6 Afghanistan Armenia Moldova Kyrgyz Republic Tajikistan Khatlon Tajikistan: Reinvigorating Growth in the Khatlon Oblast 2001 2011 2001 2011 2001 2011 2001 2011 2001 2011a 2001a Key Economic Indicators Gross Domestic Product (in US$ bln) 2.5 20.3 2.1 10.2 1.5 7.0 1.5 4.8 1.1 6.5 2.1 GDP per capita (US$) 92 576 691 3306 408 1966 308 881 173 853 778 Foreign Direct Investments (in US$ bln) 0.001 0.075 0.070 0.707 0.102 0.197 0.005 0.438 0.009 0.016 0.004 Estimated stock of labor migrants (in mln) — 2.35 — 0.87 — 0.77 — 0.62 — 1.00 0.425 Official development aid (in US$ bln) 0.410 6.400 — 0.528 — 0.245 — 0.315 0.218 0.436 0.128 Official development aid (USD$ per capita)b 15 181 — 170 — 69 — 58 — 57 47 Remittance inflow (US$ per capita) 31 405 67 439 2 234 13 352 259 Total remittances, incoming (in US$ bln) — — 0.095 1.254 0.243 1.562 0.011 1.275 0.079 2.68 0.7 Remittance (% of ODA) b — 238 — 638 — 405 36 615 547 Remittance (% of GDP) b 4 12 16 22 1 27 7 41 33 Remittances (% of exports) 18 65 33 68 2 52 12 224 519 Remittances (in % of FDI) 136 177 238 793 220 291 878 16962 17500 Total exports (in bln US$) — — 0.540 1.940 0.736 2.290 0.563 2.470 0.652 1.195 0.135 Key Demographic Indicators Total population, mln (Jan 1) 26.70 35.32 3.07 3.10 3.63 3.56 4.95 5.45 6.23 7.62 2.7 Total fertility rate 7.60 6.29 1.68 1.74 1.54 1.31 2.40 3.10 3.94 3.58 3.16 Key Labor Market Indicators Working age population, mln (as of Jan 1) 13.27 17.64 1.98 2.12 2.43 2.57 2.97 3.57 3.40 4.51 1.55 Labor Force (in % all population) 25.1 25.6 48.2 46.3 44.8 34.2 42.5 46.4 38.6 37.4 13.8 Official unemployment rate (in % of total population) — — 35.9 19 7.3 7.4 7.8 8.6 — 2.9 0.78 Unemployment rate of 15–29 year old (% of total) — — 48.2 38.8 — 13.9 — 16.7 — 15.4 35.7 Key Social Indicators School enrollment, primary (% of gross) 19 97 102 103 101 94 96 100 97 102 — Maternal mortality rate (per 100,000) — 460.0 — 30.0 — 41.0 — 71.0 — 65.0 — Mortality rate under 5 (per 1000 live births) 132.8 103.9 28.3 18.3 22.9 16.6 45.3 31.7 91.6 62.6 — Life expectancy (at birth) 48.0 74.0 69.0 69.0 67.2 — Population below poverty rate (% of total) c — 36 — 35.8 — 21.9 — 33.7 — 47.2 53.9 Source: Statistical agencies of CIS countries. a some data is preliminary. b own calculations. c based on national poverty lines (with exception of Tajikistan – WB Poverty Assessment, 2010). II Economic Structure and Comparative Advantage T he oblast is largely rural, and agriculture the production of building materials, which is in part as well as agriculture-based activities are domi- related to the remittances sent for housing as well nant in production. The oblast accounts for half as a drug fueled-boom in construction. Light manu- of the agriculture output of the country, with a popu- facturing has also enjoyed a revival as private sector lation of one-third of the country, and for 65 percent activity has grown. of total cotton production. As shown in Table 6, the The revival of industry has been led by light man- relative share of agriculture has grown in the recent ufacturing. The number of ginneries in Tajikistan is past since, following a collapse in output during the on a steady rise from slightly over 20 in 2000 to 50 civil war period, growth in agricultural output has in 2012. Approximately one third of all ginneries are outpaced that of the country as a whole. This has been in Khatlon, including three new ones that opened in mirrored by some deindustrialization: the collapse 2012, with a total capacity to process up to 200,000 of industrial output during the civil war was sharper tons of raw-cotton annually. Khatlon accounts for than in the country as a whole and the subsequently two-thirds of the national raw cotton output, and recovery much more muted. half of the cotton-fiber production. Khatlon is There has been a revival of industry, but neglect largely absent at the next stage of the cotton value of energy has depressed growth. Over the past three chain: its 24 textiles companies have a small output, years, there has been a revival of industry, aided using only 10 percent of all cotton-fiber produced by an upturn in construction and real estate. Within in Tajikistan. industry, the pattern of growth reveals a steady decline The shift in the composition of trade since 2005 sug- of the energy sector reflecting the slowdown in pub- gests that considerable potential for growth can lic investment in the post-Soviet period. This is likely be unlocked if an export-led strategy were to be fol- to be a move away from the oblast’s comparative lowed. In examining the opportunities for private advantage and hence has, together with a similarly market led growth, it is instructive to examine the pronounced fall in machinery and chemical industry pattern of Khatlon’s trade. In 2000, cotton and cotton output, depressed growth. There has also been a rise products accounted for over 90 percent of all exports of building-materials-associated industry, particularly from Khatlon. Since then the share of cotton has been Table 6  | Khatlon: Changing Pattern of Production (Annual average growth in real terms in percent) 1991–1995 1996–2008 2008–2010 Industrial production (Khatlon) –29.0 6.4 9.2 Industrial production (Tajikistan) –18.0 23.0 1.1 Agricultural production (Khatlon) –14.3 7.3 9.9 Agricultural production (Tajikistan) –13.6 5.9 8.6 Source: Bank calculations based on data supplied by oblast authorities. Note: (a) Core years of the civil war; (b) war winds down in 1997 and the following decade of peace and reconstruction. 7 8 Tajikistan: Reinvigorating Growth in the Khatlon Oblast slowly decreasing, reaching 77 percent in 2011 (adjust- An export-based potential for growth is also ing for ballooning oil product re-exports from Khatlon revealed by the pattern of growing intra-industry to Afghanistan). Cotton is now approaching its free trade. This is particularly evident in goods such as fruit market equilibrium point: the forced production and vegetable juices, fertilizers, spare parts and dried of cotton under state command is being wound down nuts/dried fruits. Export-led growth requires working via the introduction of “freedom to farm” policies. with the grain of factor endowment and skill endow- Farms are being restructured into individual units, with ment of the exporter and, therefore, with comparative production decisions becoming more market-based. advantage. The technique of revealed comparative Over the past three years, the tradables sector has advantage (RCA)7 measures how intensely a country expanded in the oblast. This change is a reflection is exporting a given product compared to other trad- of stability and reforms, occurring in parallel with the ing partners in the world. It reflects both a country’s growth in industrial output; the current trade deficit resource endowment and any trade policy that affects is the equivalent of 25 percent of exports (Figure 3). exports. Before 2005, Khatlon enjoyed a trade surplus equiv- Khatlon’s existing advantages lie in farming (hor- alent to 30 percent of its exports. Exports of agricul- ticulture) as well as potentially in some first level tural products and raw materials have been stimulated specific processing industries (fruits and vegetables, by rising output and major improvements in road and juices/beverages, skins, and wool and cotton yarn). bridge infrastructure. Between 2005 and 2011, comparative advantage An export-based growth strategy must focus shifted towards agriculture (Table 7). Specifically, on regional markets. A regional strategy would help Khatlon has a clear advantage in such product expand agriculture production and agro-processing as onions, fresh and dried grapes, and stone fruits. The as well as basic industrial processing, particularly given picture is less clear for wool, which seems to have the largely untapped (and rapidly expanding) markets a cyclical nature. Cotton yarn’s, RCA has been con- in the bordering regions of Afghanistan. As Khatlon tinuously declining since 2005. It is, however still accounts for half of the country’s agricultural land at a respectable level, suggesting either declining and pastures, agriculture and livestock are sectors for actual production or declining demand. One product potential diversification provided that complemen- group clearly gaining weight in the overall picture tary measures for fodder conservation, animal health is hides and skins, which primarily go to Afghanistan and hygiene are appropriately taken. 7 RCA measures how intensely a country is exporting a given product compared to other trading partners in Figure 3  | Khatlon: Exports and Imports the world. It reflects both a country’s resource endow- (In millions of US dollars) ment and any trade policy that has shaped its export capacity. The RCA of country i in product j in year t is 400 defined as: 350 Ei jt / Eit c ijt RCAijt = = 300 Ejt / Et c jt 250 where Eijt is country i export of product j in year t, Eit 200 is country i total export in year t, Ejt is world export 150 of product j, and Et is world total export in year t. If 100 RCAijt>1, country I is said to have a revealed compara- 50 tive advantage in product j in year t. The larger the RCA, the more the country has a comparative advantage in 0 2000 2005 2006 2007 2008 2009 2010 2011 this product or industry. However, the RCA has an important limitation as it could be affected by anything Total export from Khatlon Total imports to Khatlon that distorts (or provides wrong incentives to) trade pat- Source: Customs Committee of Tajikistan, authors estimates. terns, i.e., trade barriers. Economic Structure and Comparative Advantage 9 Table 7  |  RCA in Key Products in Tajikistan and Khatlon STIC Tajikistan product code Name of the product 2005 2006 2007 2008 2009 2010 2011 p04231 Rise, semi-mulled or whole 3 1 1 3 2 2 P05799 Dried fruit not elsewhere specified 189 210 192 391 564 500 P05423 Dried beans 9 6 4 24 27 12 P05451 Onions/shallot, fresh/chilled 54 53 119 110 83 156 p05673 Tomatoes 15 17 7 5 7 3 p05751 Grapes, fresh 8 21 10 8 6 1 P05752 Grapes dried (raisins) 27 22 29 46 54 29 P05776 Walnuts fresh/dried 34 44 72 105 110 55 P05793 Stone fruit (apricots, cherries,peaches) 3 6 3 9 7 8 p05798 Fruit, fresh 14 17 21 11 9 9 p05992 Tomato juice 152 77 59 60 38 4 p05995 Juice, of any fruit or vegetable 23 17 11 11 10 1 P22212 Groundnuts shelled 23 38 19 25 54 24 p28799 Base metal ores 491 629 675 815 800 376 p28823 Aluminium scap 1 0 4 2 0 2 p57112 Polyethilene 2 1 2 2 1 1 P65133 Cotton yarn 14 11 9 11 6 4 p65221 Cotton woven fabrics (not over 200 g) 22 14 11 5 15 16 p65222 Cotton woven fabrics (over 200g) 62 72 24 9 2 1 p67159 Ferro alloys 17 1 10 14 1 1 p68411 Aluminium, unwrought 247 235 214 223 229 221 P68422 Alumimium/alloy wire 1 1 4 3 5 32 P68412 Alumimium alloys, unwrought 13 8 10 24 43 30 Khatlon 2005 2006 2007 2008 2009 2010 2011 P05451 Onions/shallot, fresh/chilled 11 12 50 38 70 18 p05751 Grapes, fresh 1 3 2 2 54 1 P05752 Grapes dried (raisins) 7 7 7 7 6 6 P05793 Stone fruit (apricots, cherries,peaches) 1 1 0 0 7 1 p21111 Hides and skins of animals 13 1 49 257 5676 8216 p26811 Shorn wool 4 0 12 0 12 0 p65133 Cotton yarn 83 43 41 57 14 17 P66183 Articles of asbestos-cement, cement 3 3 2 2 2 2 with cellulose fibers or similar materials: P05451 Onions/shallot, fresh/chilled 6 50 263 16 53 202 p05751 Grapes, fresh 2 52 2 10 11 12 p21111 Hides and skins of animals 12 4 626 2288 8078 9508 Source: Author’s calculations, raw data comes from Customs Committee of Tajikistan. 10 Tajikistan: Reinvigorating Growth in the Khatlon Oblast for onward re-sale to China, Pakistan and Turkey. This advantage, Khatlon accounts for only a third (8 out of suggests a significant opportunity for value added 23) (Table 7).Concerning trade with Afghanistan, this products in this sector, but requires further investi- number goes down to three. This suggests that efforts gation as the entire value chain needs improvements to promote a greater degree of freedom to farm, creat- to address losses from damaged hides. ing hard and soft infrastructure that supports exports There are striking differences in the RCA of both fresh/dried and processed fruits and vegeta- of Tajikistan and Khatlon. Out of 23 products where bles, are pre-requisites for increasing exports from Tajikistan as a country has a known comparative Khatlon. Figure 4 |  Khatlon-Afghanistan Trade (Left chart: total; right chart: without petrol; in millions of US dollars) 70 60 60 50 50 40 Million, US$ Million, US$ 40 30 30 20 20 10 10 0 0 2000 2005 2006 2007 2008 2009 2010 2011 2000 2005 2006 2007 2008 2009 2010 2011 Total export to IRA Total imports from IRA Total imports from IRA Total export to IRA to Khatlon to Khatlon (less Petroleum) Source: Bank calculations based on official data. Note: IRA refers to the Islamic Republic of Afghanistan. III A Strategy for Transforming Development P olitical economy constraints, shortcomings approach. This conclusion is founded on the key in the business climate, lack of skills, and a nar- insights of recent Bank work (World Development row production base constitute the main bar- Report, 2009)8 on the role of economic geography riers to rapid economic growth. These impediments in urban-rural transformations and the complemen- can be addressed only through a partnership between tary roles of public policy and private investments. rising private investment and reformist public poli- In areas of incipient urbanization, (urban shares cies to invigorate growth and raise social indicators. of 25 percent) which are predominantly agricultural Policies need to be reoriented to (i) promoting cities or resource based areas with low economic densities, as the locus for building labor skills, realizing scale the priority in public policy should be to facilitate economies, and diversifying output; (ii) harnessing agglomeration forces and encourage internal econo- the potential of agriculture as the driver of exports; mies of scale for plants, mills, and factories in towns. (iii) reshaping public policies to encourage entrepre- At early stages of urbanization, it would not neurship and reduce corruption; and (iv) amplifying be clear which places would be favored by markets, outward-orientation by retooling free economic zones and for what purposes. Therefore, the need for neu- to build in internal supply chains. These issues are dis- trality between places should govern policymakers. cussed further in this Chapter. The conclusion for Khatlon is that a policy directed at developing the two key cities as centers for growth Leveraging Economic Geography in an incentive-neutral (spatially-blind) manner may offer the best promise for reinvigorating the growth Theme I: Cities as the Locus of Development of the entire oblast. The diversification potential of Khatlon, together Building economic density and facilitating urban with the sparseness of the current population and eco- growth would go a long way toward promoting fur- nomic activity densities, leads to the policy conclusion ther economic development in Khatlon. The Khatlon that it would be optimal to build economic agglomer- province is geographically remote from the main ation. This would require development of two major markets of Europe and Asian Russia, and is sepa- urban centers, thereby raising density, thickening mar- rated from China by largely impassable terrain, but kets, and utilizing economies of scale—all of which is, however, promisingly well located for the markets would benefit productivity. This could be achieved of south Asia. Although it is well connected by road via a thickening of supply chains with low trans- to Dushanbe and to the border with Afghanistan, port and other costs, access to a growing reservoir and has two functioning airports, overall connectiv- of more mobile and skilled human capital, growing ity within the oblast is poor, with dilapidated infra- use and sharing of information, and technology that structure, poor roads, and energy shortages. The oblast is typical of growth through urbanization. Growing is predominantly rural, but contains two major cit- production would seek to exploit the transport links ies, Kurgan-Tube and Kulab, and a few others such with Dushanbe and beyond, as well as with northern as Nurek, Sarband, and Dangara. Policies that promote urbanization with the objective of export diversification offer a promising 8 Reshaping Economic Geography. 11 12 Tajikistan: Reinvigorating Growth in the Khatlon Oblast Afghanistan, and could therefore offer access to the through the bridge in lower Panj. This motorway has huge South Asian markets. strategic importance because of transport connec- Economic development will not happen if there tions with Pakistan. are no credible efforts to reform incentives and insti- The key export routes connect Khatlon with Sugd tutions to support cities. Public policy will have the and Dushanbe. Agricultural exports through rail will task of promoting urban growth in line with market fall as the rail spur from Khatlon to Uzbekistan has forces and encouraging internal economies of scale been closed. Exports from Khatlon have been severely for plants and firms, whilst contending with the costs. impeded by this border closure. Consequently pro- Public policy can facilitate inclusive urbanization duction costs have risen as trade has had to be con- through reforms in institutions and markets (e.g. land ducted through Khojent. Conversely, the opening use, public services, schools, streets, and sanitation) of a major bridge across the Panj River has opened in a neutral way, such that economic agents transact significant potential for markets in south Asia.9 in those cities that are most profitable for them. Khatlon’s weaknesses in infrastructure lie in the The effects of agglomeration could be magnified poor quality of roads, deficiencies in other infrastruc- if connectivity were to be developed between the two ture (telecommunications, financial), distribution free economic zones being established in the oblast: and storage, and logistics supporting commerce and Dangara and Nizhni Panj. These zones could stim- trade. In Tajikistan, nearly 75 percent of all republican ulate growth in production and exports by reducing roads have lost completely or partially their pavement the governance, economic, tax and regulatory costs and about three-quarters of the road network can- of doing business. Through supply chain linkages the not be maintained without expensive rehabilitation. rest of the oblast could help accelerate overall eco- On nearly half of the roads the average driving speed nomic growth. The policies required to ensure such may not exceed 35km/h. It is the roads connecting positive linkages are discussed in a subsequent section cities to the hinterland and feeder roads that require of the report. major upgrades. The public policy support for cities should go hand Theme II: Improving Connectivity, Logistics, in hand with investments in the regions. This should and Energy Security be principally in support of private agriculture, as dis- cussed later in this document, but strictly on the prin- Reducing economic distance by building up den- ciple that investments would strengthen the connec- sity in an oblast like Khatlon will require connec- tivity with cities and go with the grain of the emerging tive infrastructure that is affordable. This requires comparative advantage in private sector led produc- links between villages and towns and Khatlon has tion. Thus, the aims of policy are to promote economic strong transport linkages. The oblast has a highway concentration in the two principal cities by private to Dushanbe and through it to Sugd and Districts investments, to improve regional to city transport and of Republican Subordination (Map 3). This highway other infrastructure linkages, and to reduce the regu- also provides access to Uzbekistan and Kyrgyzstan. latory and other barriers to investment and commerce In contrast to the Dushanbe highway, the road that leads to Sugd passes through an area of high altitude (3,100 meters above sea level). In this regard, the 9 The bridge at Nizhny Panj was completed in August 2007. construction of two road tunnels has been started “Together they might not merely improve access, but undo to provide year-round communications with the the trends of history. During Soviet times, Central Asia faced region. A highway connecting Khatlon province with north and west toward the Kremlin, moving goods to and from Moscow and Soviet cities along the line. Afghanistan Badakhshan, and by extension China, and a highway faced toward Pakistan or Iran, feeling more affinity to connecting Kurgan-Tube, Dusti, and lower Panj are Islamic traders than to the Slavic-led Communists to the currently under reconstruction. The Khatlon region north.” Source: Seeking Trade to Bridge a Political North- is connected to Afghanistan by a motorway, and South Divide. The New York Times. June 2, 2007. A Strategy for Transforming Development 13 Map 2  |  Khatlon: Railway and Road Links Source: Central Asia Regional Economic Cooperation, CAREC (ADB). within the country (as well as exports to Afghanistan The attraction of private investments will require and other neighboring countries). improved safeguards for property rights and con- Joint public and private investments in trans- tracts. Private investments require complementary port will help to achieve a major presidential goal public investments in infrastructure and in human of improving links. All of the major transport capital. Indeed, while they may be facilitated by prog- corridors (current or planned) being supported ress in legislation on public-private partnerships, by CAREC and all of the projects being considered experience shows that successful and durable PPP with SCO (Shanghai Cooperation Organization) transactions take place only when supporting public go through Khatlon oblast. With the construction institutions enjoy high credibility and private confi- of the 46 km long rail road connecting Kurgan-Tube dence in the security of property rights and the sanc- to Dushanbe via Vahdat and Yovon both Kurgan-Tube tity of contracts is high. and Kulyab will be connected directly to Dushanbe, The improvement of connectivity will require ref- bypassing the territory of Uzbekistan. With the road ormation of freight, trade and transport. Improved connecting Dushanbe and Nijni Pyanj as well as the connectivity has an important private sector dimen- bridge over the river Pyanj funded by the U.S. (already sion: the freight industry, transport and trade facili- completed), there are much better opportunities tation, both within the country and across borders. to connect to the southern markets and networks than These are likely to be promising areas for private the routes north via Uzbekistan and Kyrgyz Republic. investments and for subnational public-private part- The intention to open a passenger route between the nerships, once the pre-conditions for successful PPPs cities of Kurgan-Tube and Kunduz will improve inter- identified above are met. A transformation of the national linkages. oblast must involve the rural-urban link, related 14 Tajikistan: Reinvigorating Growth in the Khatlon Oblast Map 3  |  Selected CAREC Transport Corridors Source: Central Asia Regional Economic Cooperation, CAREC (ADB). to the economic interdependence between cities and imposed by the poor business environment. Charges settlements. Thus, analysis at the oblast level should imposed by middlemen such as the trucker’s associa- be based on an area of different types of settlements, tion restrict volumes and competition. Today, a mod- each with its economic function, but with strong ern trucking industry that can engage in international inter relationships, to shape urbanization strategies freight operations exists side by side with an anti- and priorities. quated industry that uses old models of trucks with Difficulties in transport and associated high trans- outdated management and logistical practices. The port costs restrict private sector expansion. This more antiquated industry charges lowers tariffs and is partly a reflection of an absence of integrated logis- offers a lower standard of services, but it also imposes tical services: firms are forced into using fragmented much higher environmental and safety costs. suppliers and agents, each too small-scale to reap There is plentiful air capacity, but liberalization economy gains and each with potential for corrup- in civil aviation will be needed to attract private tion. Thus transactions costs and informal payments investment. Khatlon’s comparative advantage is bol- weigh heavily, exacerbated by inadequate competition stered by access to three international airports within in trucking. Inappropriate actions by the regulators close proximity to production sites.10 There are flights and the road police are also impediments to expan- at various times throughout the year from Dushanbe, sion. A number of detailed logistical and trade facilita- tion studies over the years have pointed to high costs 10 Airports in Kurgan-Tube, Kulyob, and Dushanbe. A Strategy for Transforming Development 15 Table 8  |  Selected Air-Traffic Indicators absence of a payments guarantees system necessi- tates the use of convoying at high fees and gener- Share ally large logistical and time costs—as convoys have Tajikistan Khatlon (percent) to be formed, transported, and cleared in a bunch. Main airports 4 2 50 The bulk of food products are transported today Aerodroms 34 14 41 by rail. To realize the full potential for food and Functional 13 2 15 agribusiness exports as well as those in new light Non-functional 21 12 57 manufacturing industries, road and freight logistics Domestic flights (annual number) 3300 60 2 constraints would need to be addressed. For exam- number of passengers (annual) 144000 300 0 ple, trucks tend to flow into Khatlon filled with freight (annual K, tn) 1200 0 0 goods (especially from China), but leave with sparse loads in the other direction. Freight logistical service International flights (annual 3700 860 23 number) agents could consolidate cargoes, but such skills are insufficient on the ground. number of passengers (annual) 450000 110000 24 There is a large potential for captive power which, freight (annual K, tn) 3700 3 0 if well exploited, could boost economic activity in the Source: State Statistical Agency. oblast. Captive power is defined as privately owned power generation for use by the same, or another, with 22 airlines to 14 Russian cities11 and 10 other private party. The most viable captive power options international destinations including the Middle East.12 would involve industrial power users such as mining There are also flights to various Russian cities from companies, free economic zones, tourism areas, and Kurgan-Tube and Kulyab. Airport capacity appears larger production firms building and operating their to be high and there is unlikely to be any commer- own small hydro power plants. The seasonal nature cial or economic case for the construction of a further of hydro power, however, could be a limitation for airport in the oblast. A liberalization of air services winter power needs of these captive users. and provision of third-freedom rights is necessary Legislation favors private investment in power and to attract private investment, which will be required allows any business entity to construct its own power if rapid transport of perishable, high-value agricultural plant for serving its own power needs. In practice, products is to be facilitated. There may be a need for however, there are few examples of captive power advisory support in the future to assist the relevant for industrial use. Micro hydro plants have been built bodies in structuring competitive access to airport for off-grid community use and some firms have built cargo facilities. hydro plants with the intention of selling the power Border trade, intermediated through lightly-reg- to the national utility. As noted, the national utility ulated bazaars, plays a large role in boosting eco- is not a reliable partner in paying for power; thus, nomic activity and employment, and in countering a captive off taker would be necessary to support pri- poverty.13 However, this potential is under-exploited vate investments in power generation. in Khatlon, and so a number of steps in reforming practices in customs and in facilitating trade need to be taken. Corruption in customs, long (govern- 11 These cities include Moscow, Saint Petersburg, Novosibirsk, ment-imposed) delays at borders (especially at the Irkutsk, Tyumen, Chelyabinsk, Samara, Nizhnevartovsk, Uzbek border), and near-obligatory inspections-per- Surgut, Yekaterinburg, Orenburg, Khanty-Mansiysk, Krasnodar, Krasnoyarsk, Kazan, and Sochi. formed regardless of risk considerations—are impedi- 12 Wulumuqi (China), New Delhi, Kiev, Istanbul, Tehran, ments to formal and informal trade. Frankfurt, Dubai, Bishkek, Almaty, and Sharjah (UAE). For Khatlon, it is particularly important 13 Borderless Bazaars and Regional Trade in Central Asia, to reform the border procedures and practices by Bart Kaminski and Saumya Mitra (World Bank, with respect to Afghanistan and Uzbekistan. The 2012). 16 Tajikistan: Reinvigorating Growth in the Khatlon Oblast Box 1  |  Possible Pilot HPP Project Tajikistan’s Inter-ministerial Working Group on hydro energy has developed an idea for a pilot project to demonstrate commercial viability of HPPs. The Tajik-Chinese Joint Venture “Zarafshon” was suggested as a commercial buyer of hydroelectricity in such a pilot project. JV Zarafshon is a gold mining and processing company, in which the Chinese Zijin Mining Group holds a controlling stake. “Zarafshon” owns the license for exploration activities on a 300,000 hectare territory located near the town of Panjakent in the Sughd region (area of “Seven Lakes”). Estimated reserves are over 158 tons. According to press reports, Zijin plans to increase gold mining in Zarafshon by 5 tons until 2016. For the last four years, Zijin invested $68 million in Zarafshon and over the next 4.5 years total investment in the modernization of the enterprise will reportedly be $100 million. For its expansion plans, the company will need a larger supply of electricity. At present, the company faces power shortages in winter which lead to interruptions in its activities. According to the Tajik-Norwegian Hydro Power Development Center, the company is ready to pay lucrative prices to obtain power supply. Two possible options of HPPs are being considered to increase power supply to Zarafshon: Option 1: a cascade of two HPPs, each with a 3 MW capacity. Option 2: The construction of 2 additional 4 MW HPPs at lower-altitude lakes, with a substation at the lowest HPP. Source: Tajik – Norwegian Small Hydro Power Development Center http://www.tajhydro.tj/. There is encouraging potential for small HPPs required however, and new institutions and practices in Khatlon, with captive power. Besides industrial will need to be created and made effective. It will uses, small HPPs represent an attractive option for be important to move away from past practices where rural electrification, thus driving local development land was not subject to sale and purchase, meaning and job creation. Thus far, there is no single small HPP the land users could only use the land on lease basis. built by a private investor on a fully commercial basis. Urban development would be assisted The interministerial working group on hydro power by improved marketability of rural land. Rural land has a plan to attract a private investor to a first pilot should now be freely marketable and transferable project; this could serve as an option for industrial as the new code provides a firm legal basis for land development in Khatlon. Streamlining of procedures transactions, a system of registered titles, and also the for constructing small HPPs would be necessary. framework for the use of land as collateral for credit. IFC has a technical assistance project on captive The reforms on “freedom to farm” should be followed power which is pursuing pilot captive power projects up by such reforms in the land market so that agricul- to test and improve the regulatory regime for these ture is truly freed and that agri-business possibilities investments and demonstrate the viability of cap- can be fully exploited. The process of urbanization tive power as an energy solution for firms. If there would be speeded up if potential migrants were able is potential for captive power in the regional develop- to easily relinquish land or rent land out. ment strategy for Khatlon, IFC resources can support Unlocking the missed potential of the rural land the pilot development of these projects. bank would provide an additional boost to eco- nomic activity. As all land is state owned (a land Theme III: Land and Labor Reforms to Support user could rent land for 49 years) there is scope for Urbanization better, more effective management of reserve lands (unused). Reserve land (about one-third of total The new land code will promote efficient growth. land in Khatlon or 850 ha of 2470ha) is managed A reform of land markets has been central to promot- by the Land Management and Geodesy Agency and ing growth. Comprehensive amendments to the land partially by local jamoats (unused, personal plots code passed into law in August 2012 laid the founda- and non-irrigated land) but the process of allocation tions for a land-use market, provided security to land is not clear. Additionally, only slightly over 10 per- tenure through modern registers and lead to effi- cent of the total land which is irrigated produces cient resource allocations with stronger incentives close to 90 percent of all agricultural production. to improve land and make possible the use of land Thus, the optimum use of such land is inhibited, as collateral for credit. Supporting regulations are now investments into land improvement and irrigation A Strategy for Transforming Development 17 Table 9  |  Land Tenure Typology in Tajikistan Khatlon Area Population Type of Land (K ha) (K people) Potential Issues Overall Legal recognition and Characteristics Urban land 4,800 464 (i) Non-transparent, complex and confusing According to the Law, all the land in the Republic of procedures for obtaining permission to land Tajikistan is an exclusive property of the state, and the and construction; (ii) high risks of changes reclamation of land formerly belonging to the ancestors in terms of the lease from the state at any is not allowed. time (i.e. protection of land right is very All land in the Republic of Tajikistan constitute a single limited in such cases); (iii) high rates of State Land Fund in accordance with the purpose divided population growth and lack of agricultural into the following categories: lands leading to urbanization, but area for urban growth is limited. 1. Agricultural land; 2. Settlement land (cities and rural areas); Rural land: Incl State farms 563,873 989.3 Decisions related of management of the 3. Industrial, transportation, communications, defense lands farm, in particular, the structure of crops and other purpose; and range of products are made by individ- 4. Land conservation, recreation, recreation and ual managers and the state. research-analysis and cultural facilities; Dehkan farms lands 863,099 415.9 (i) high cost and complicated procedures 5. Ground state forest fund to obtain certificates for the use of land; 6. The ground state of water resources; (ii) numerous violations in the distribution 7. The state land reserve. of land due to inadequate legislation and lack of legal aid; (iii) lack of information Land users in the Republic of Tajikistan shall be indi- on procedures, ignorance and misunder- viduals and legal persons. Individuals and legal persons standing of land use rights by farmers; (iv) can be primary or secondary land users. transfer of debts of restructured collective The primary land users are the legal persons and indi- and state farms on the shoulders of the viduals using the land in perpetuity, futures, or lifetime newly emerging dehkan farms. inheritable use. Households lands (private 113,495 2210.3 (i) population owns most of the livestock, The secondary land users are individuals or legal per- plots) but all pastures are in the balance of state sons using the land under lease in the lifetime inheritable and private farms; (ii) significant part use of land provided to individuals or collectives, citizens of the lands allocated to the population to organize dehkan farms and traditional crafts as well as (households) away from their homes and to the citizens of household plot. is arable lands and with low productivity; In an emergency, use of land may be transferred (iii) in recent years there is a tendency to to individuals and legal persons for a specified period. build housing on households lands due Immediate use of the land may be short—up to three to population growth potentially creating years and long-term, three—twenty years. possible legal complications. Primary land user may transfer land in lease contract. The lease of land should not change the purpose of the State Lands Fund 571,833 15.2 use of the land. Plots of land are leased for a period of Lands not suitable for use 351,100 2669.7 20 years. State registration of rights to land use is the responsibility of state body on land and its local branches Total within the adminis- 2,468,200 covering all individuals and legal persons in the use of trative boundaries of the. land. Khatlon Oblast Sources: Statistics Agency and State Land Fund. do not take place, and revenues to the local budgets use in cities and peri-urban areas needs to be revis- are foregone. Ownership restrictions for such land ited. The general plan of Kurgan-Tube (developed and ability to collateralize land are also important in 2011) governs zoning but much will depend inhibiting factors. on rules-based implementation and on flexibility Urban land transactions should be smooth, and to take account of rapidly changing economic con- property and use rights should be adequately pro- ditions. Between 1990–2005 massive zoning viola- tected through registers. Zoning governing land tions occurred, e.g. residential housing being built 18 Tajikistan: Reinvigorating Growth in the Khatlon Oblast on land not suitable for residential development. (including women) constantly on the rise, an unoffi- Examples include construction in the water protec- cial unemployment rate at around 30 percent, espe- tion zones of city channels Dzhaybor and Hanim, cially among the youth, and modest job creation and also on the site of a former quarry. Now plan- in Khatlon, labor migration is well-established and ning is in place to demolish all buildings in these not likely decrease. Exacerbated by very low level areas. Zoning restrictions do not appear to be a sig- of investments to the region (including foreign direct nificant barrier to business at present, but it would investment or FDI), remittances are by far the larg- be important to create a firm framework going est source of foreign exchange and income compared forwards. to exports, official development assistance, FDI, and Reforms in land taxation will improve efficiency public expenditures. Coupled with a stubbornly high and bolster local revenues. Land taxes appear fertility rate during the last 20 years and a large share to be low, regardless of land use categories. The rent of youth (15–29) that is primarily unemployed (or of agricultural land is determined by the quality and self-employed in agriculture and/or petty trade), the location of the land, taking into account the inven- large number of labor market entrants by far exceeds tory estimate. On average in Khatlon province the the current rate of job creation on Khatlon. Hence annual tax is 25–50 Somoni (between $5–10) per labor migration should be treated as a labor market irrigated hectare and 16–19 Somoni per hectare pressure relief strategy. The key policy considerations of dry land. should be focused around giving the young genera- Tax rates for the use of other types of land are tion “employment alternatives” rather than being defined according to their location, nature of use, envi- worried about “labor export.” The imperative of rais- ronmental and socio-economic characteristics. The ing labor skills to bolster urban output is clear and rates are subject to change depending on soil-site index is linked to reforms in education (discussed later (bonitet) and respective appraisal by points—after any in this paper). A supply of skilled labor into cities reclamation work land valuation may rise, for exam- is critical in underpinning a successful urbanization ple. This leads to an increase in payment rates, and strategy. vice versa, the rate may drop with a decrease in scores Given the urgency, scope, and scale of migra- in soil-site index. A rational system of differentiated tion, and its importance for Khatlon, a number taxation driven purely by criteria of land quality and of urgent local-level initiatives could be undertaken land use would promote greater efficiency in the use by the oblast government and development partners of land. to address the immediate needs of labor migrants and Labor migration into the cities can transform the strengthen the benefits of migration to the cities (see shape of growth. With the number of labor migrants Table 10). Table 10  |  Proposed Migration Related Policy Recommendations and Actions Creating And Developing Labor Migration Strengthen Local Executive Capacity Institutional Development Support Infrastructure to Manage Migration • Develop and connect Khatlon oblast infrastructure • Introducing youth employment programs and • Starting from Oblast, City and rayon management, in support of organized recruitment (as opposed providing a package of services, life-skills, technical conduct rapid training, needs assessment, and ini- to ad hoc) with the central government, especially skills in most demand, job-search, marketability. tial trainings on the role of migration in socio-eco- when it comes to information campaigns (risks and • Develop and expand coverage of pre-employment nomic development of the region. challenges of migration), access to jobs. training for potential migrants. • Link with the local or central Civil service training • Establish a sub-national LM Advisory group • Enhance infrastructure of vocational and technical institute and include a module on migration policy consisting of all key ministries in efforts to better training for youth, unemployed and potential agenda into the learning programs of civil service. coordinate migration related issues (including migrants, including working with secondary and policy, statistics and coordinated actions). tertiary educational establishments to pay special attention to skill development. Source: Bank staff based on research into migration. A Strategy for Transforming Development 19 Harnessing the Potential of Agriculture Table 11  |  Agricultural Output by Region in 2011 Percent Khatlon enjoys a strong advantage in agriculture Somoni of National. exports, but this will only be maintained if policy Region (millions) USD (millions) Agri. GDP reforms are undertaken. Compared to such large and Khatlon 7223,8 1,505 48.7 efficient agricultural producers as Argentina or the Sugd 4609,9 960 31.0 Ukraine, Tajikistan is not well endowed in agricul- RRS 2568,2 535 17.3 tural potential, neither in scope nor scale, nor in the inherent fertility of its soils. The country’s landlocked, Gbao 451,4 94 3.0 isolated status presents logistical challenges. It is also Tajikistan (Total) 14853,3 3,094 100.0 a food-deficit country and imports a substantial part Sources: Social-economic indicators in Tajikistan (January-December). of its staple foods, notably wheat, sugar and vegetable TajStats – May 2012. oils. Food imports14 exceed food exports by a factor of more than three. Only seven percent of the land area foothills. Soils are reasonably good in the south and of 14.3 million hectares is arable. Additionally, most in the upland valley areas, but low precipitation levels farming is dependent upon irrigation, and approxi- limit the scope for rain-fed agriculture and necessitate mately 70 percent, or 724,000 hectares, is irrigated. a reliance on irrigation for crop production. However, Nevertheless, agriculture is arguably the most water resources are abundant. Approximately 71 per- important sector of the economy, employing about cent of arable land is listed as irrigated.18 Agriculture 67 percent of the economically active population. contributes to about 80 percent of the GDP of the Agriculture also accounts for 22 percent of GDP and region and 40 percent to exports. 15 percent of official exports (in 2009).15 Agricultural Khatlon produces half of the country’s total agri- development is consequently not only a question of cultural output (Table 11). Total national agricultural food security, it is also critical to stable development GDP was $3.1 billion in 2011, or 23.8 percent of total and social stability in Tajikistan. GDP.19 The viability of agriculture is affected by very Cotton is still the major crop in the region and low levels of productivity, weakly structured sup- Khatlon produces approximately 60 percent of the ply chains, lack of skills, outdated technologies, and national crop. There is some degree of diversification deteriorating irrigation and other infrastructure, with other crops such as wheat, vegetables, rice, alfalfa, as well as other issues. However, under competent management and appropriate investment in technol- ogy and inputs, production at acceptable yields and 14 Food imports are currently approximately $350– profitability is possible. Furthermore, the proximity 400 million per annum. Source: TAJSTATS Annual to such large markets as Afghanistan, Kazakhstan and Statistics Publication 2011. Russia, and potentially to Iran, Pakistan, the UAE and 15 Comparative advantage and external competitiveness of the Tajik agro-food sector. Gilles Walter. EBRD TAFF Uzbekistan, offers significant export possibilities. research paper. August 2010. In Khatlon, the irrigated river valleys around 16 New Opportunities for the international cotton trade. Kurgan Turbe and Kulyob were reportedly “among Government of Tajikistan. April 2007 the most productive agricultural regions in the Soviet 17 Tajikistan has a total area of 14.3 million hectares, of Union.”16 This was principally due to the exten- which 4.3 million ha is classed as agricultural land—of sive irrigation infrastructure, which supplies water this, only 0.8 million ha is arable. Khatlon has approxi- mately 232,000 hectares of irrigated arable land, which to up to 320,000 ha of arable land in the region.17 is approximately 50 percent of the total irrigated land The oblast has good climatic conditions for growing in Tajikistan. a wide range of crops. It has a continental climate, 18 TajStats 2010. with hot dry summers in the lowland areas, yet cooler 19 In comparison, official remittances from migrant work- and wetter weather in the mountain valleys and ers in 2011 were $3 billion. 20 Tajikistan: Reinvigorating Growth in the Khatlon Oblast Box 2  |  Classification by Livelihood Zones Khatlon can be divided into four zones on the basis of water availability, soil fertility, altitude and topography and according to the classification developed by the Famine Early Warning Systems Network.a • The north-west is a mountainous, agro-pastoral zone that includes Baljuvon, Muminobod, Khovaling, Shurobod and Norek districts. There is some gravity flow irrigation but the majority of households rely on 400 to 600 mm of rainfall per annum. The main crops grown are wheat, legumes (lentils, peas, beans) and fruits (apples, grapes, pears, apricots). Animal traction is the main form of land preparation, though better-off house- holds may use tractors if their fields are flat enough. Pastures and crop residues are the main source of fodder for livestock. Average holdings are between 2 and 10 hectares per household. Livestock sales represent the main source of income for most households. • The southern cotton, vegetable and wheat zone is a fertile zone, where rainfall averages 150–250 mm per annum. Agriculture and, to a lesser degree, animal husbandry are the dominant livelihood activities. Irrigation infrastructure is found throughout the zone, albeit in disrepair in many areas. Most households in the zone are part of the dekhan land tenure system and still grow cotton. In addition to cotton, households also produce wheat, fruits and vegetables—mostly onions, potatoes, carrots, cabbage. Some households also produce fruits such as lemon, grapes, apricots, peaches and pomegranates. Better-off households cultivate larger areas of land, can afford tractor and thresher rental and hire agricultural laborers. • The rainfed wheat and livestock zone. This mixed-agriculture zone includes all hilly, rain-fed wheat areas in Khatlon Region and the southern areas of Rudaki district. The zone receives 350–500 mm of precipitation annually, providing wheat, beans, lentils, sesame, and sunflower crops with enough moisture to mature. A minority of those living in the zone may also produce fruits and pistachios. • The agro-industrial peri-urban zone. This small, densely populated zone is peri-urban, with proximity to Kurgan-Tube and Djilikul, and features intensive agricultural production encouraged by the nearby urban markets. The zone includes southern parts of Jomi and Sarband districts, all of Bokhtar, and western parts of Rumi and Vakhsh districts. The zone’s agro-ecology and the crops produced (cotton, vegetables and wheat) are sim- ilar to the Southwest zone. As in all other zones, poor households earn a significant amount of their cash from remittances sent by family members working in Russia, Kazakhstan and Dushanbe. Better-off households may also receive remittances but will mostly rely on crop and livestock sales. The zone’s proximity to regional markets ensures a steady in/out flow of commodities. Good road networks and affordable transportation allows unhindered access to markets throughout the year. a Livelihoods zoning “plus” activity in Tajikistan. Famine Early Warning Systems Network. January 2011. and potatoes. Cotton however, provides an element summary observations for aromatic and culinary of stability to both income and employment on many herbs, citrus, construction materials, dairy products, farms. Fruits include apricots, apples, and sub-tropical meat, silk and tourism are also covered. fruits such as lemons and oranges. There are extensive Khatlon offers several comparative advantages: the numbers of livestock (cattle, sheep, and goats) most ability to produce early season crops, access to abun- of which are managed at a subsistence level of produc- dant water resources, low labor costs, the potential tion. Agro-processing consists of cotton ginning and for air freight from local airports, and growing access limited processing of fruits, vegetables and livestock, to the South Asian markets. Agro-processing (fruit most of which occurs in small to medium sized enter- and vegetables) and textiles and clothing offer the prises. Apart from cotton ginning and yarn production, most promise for development in terms of potential there are no modern “flagship” agro-processing enter- scale of impact and numbers in employment. There prises and no foreign investment of any significance. is no regional or national strategy for agro-process- The combination of land, water, labor, and favorable ing,20 and so a strategy should be developed to pro- climate means that Khatlon should, with modern man- vide a framework for policy and other reforms. The agement and technologies, be able to improve yields full exploitation of early season crops requires much and productivity and export significant surpluses. closer attention to logistics factors. There is a strong potential for export-led growth in the oblast. The detailed results of a preliminary 20 There is a “State Program on Strengthening Fruit and value chain analysis conducted for fruits and vegeta- Vegetable Processing Sector Export capacity for the bles (in depth) are provided in Annex B. Textiles and years of 2010–2012”. However, this program was not clothing, honey, logistics activities, packing and some referred to in discussions during the mission. This pro- A Strategy for Transforming Development 21 Box 3 | Agro Processing Agro-Industrialization Is Key To Growth The Soviet system, functioning essentially like an agricultural co-operative, under a single marketing channel coupled with financing and extension support from the State, made it possible for farms to access the three prerequisites of markets, skills and finance. However, since independence and, latterly, greater market liberalization, farms have struggled to access these features. Very few farms are successful in this regard under the current deregulated market regime. Agro-processing is potentially an effective tool to facilitate growth in agriculture. Khatlon has about 10–20 agro-processing enterprises (excluding cotton related enterprises), which is a small number in comparison to the potential of the region. Existing agro-processors are without exception operating with outdated and inadequate technology and production processes. Most importantly, their sources of raw material are erratic and unpre- dictable at best. A strong and vibrant agro-processing sector is therefore key to the development of farms as this can, if properly managed, be an insti- tutional delivery mechanism providing market access, extension support, and potentially a conduit for finance and inputs to farms. Key features of the agro-processing industry are: • Processing companies were running at only 37 percent of installed capacity. • Products most commonly produced were fruit juices, sweet products, and tomato group products (paste, puree, juice). • Availability of raw materials competed very strongly with the fresh market where higher prices were generally received. The most significant compe- tition for raw materials was sales into fresh markets. • Key limitations to improved production included the lack of working capital to purchase raw materials during the planting and harvesting season, inadequate raw material quality, unattractive prices, and weaknesses in the production process (inadequate or obsolete equipment). • Almost all processors reported the unreliable power supply as a serious limitation and over 60 percent were seriously limited by inadequate water and heating supplies. • Transportation of both raw materials and finished products (cost and availability) were limitations for many processors. • Average plant processing time was approximately 6 months and average capacity utilization during processing season was 66 percent. • Average age of equipment was approximately 19 years. • It is interesting to note that 79 percent of investments in plant and equipment were made from the enterprise’s own funds and that bank loans were accessed in only one enterprise One potential opportunity is production and quality competitive products. Moreover, technol- export of high quality berries (for example, straw- ogy is outdated, skills are lacking, and energy supply berries, raspberries) or specialty vegetables like and packaging costs22 are unreliable and/ or costly. mange tout and baby corn. An indication of this Furthermore, most products are largely undifferenti- potential is illustrated by a comparable scheme devel- ated and probably mostly uneconomic. oped in Spain (visited during a recent study tour An additional impediment to accessing project from Tajikistan) which now covers over 9,000 hect- finance from institutional lenders is the low lev- ares,21 and comprises small scale producers produc- els of revenue reporting (“revenue transparency”) ing 320,000 tons of berries at an export value of in most companies. These levels are reportedly €350 million per annum (this is three to four times still only at “about 10–15 percent”. There is clearly current total agriculture exports from Tajikistan). no viable prospect of financing investments at bank However, most enterprises in the fruit and vege- interest rates around 30 percent per annum. There tables processing sector are uncompetitive beyond captive local markets for reasons of quality. Exports gram may be the basis for the current expansion of (mostly dried fruit and vegetables, marinades and pre- fruit orchards in Khatlon (and Sugd). The objective serves, and juices) are competitive only in low-end is apparently to develop 35,000 hectares in Khatlon. regional markets and are in many instances depen- Source: Status, Achievements, problems and proposals to enhance the Value Chain approach in Sogd Oblast. Ines dent upon Soviet-era loyalties and the enterprise Weidemann. GTZ. October 2010. of the diaspora network in Russia and Kazakhstan. 21 Investment costs approximately €35,000 per hectare. These markets will not be sustainable in the long term 22 The cost and availability of suitable high quality pack- as younger consumers become accustomed to high aging is a major risk in all agro-processing investments. 22 Tajikistan: Reinvigorating Growth in the Khatlon Oblast is in particular a “missing middle” of investors through leasing, and may therefore offer significant in agro-processing. These are entrepreneurs who opportunity to modernize and expand agro-processing. have investment plans of between approximately First, a number of policy changes are necessary, $200,000 and $2.0 million, but fall under the mini- in addition to the above observations. Despite greater mum project sizes of the institutions, and/or in most official support for private sector development, gov- cases have collateral, corporate governance, and ernment presence in agriculture is still too large and track record issues. Experience has shown that many dominant. Its presence needs to be re-defined to being of these enterprises, when financed and properly a purely supportive role that captures externalities supervised, have the capability to grow into larger (extension services, information) for the common businesses within three to four years. good of farmers. A major question concerns the ability of farms Second, the range and quality of statistics avail- to produce crops in sufficient quantity and qual- able is dire. Official statistics are frequently too aggre- ity. Weak structures and low sophistication of sup- gated, and, while they may be useful to whole sec- ply chains means that most agricultural products tors they are of limited value in assessing single value are sold on an opportunistic spot basis into markets chains. Although data is collected extensively it is not in Dushanbe and regional centers in Khatlon region.23 always made available in a commercially relevant way. The lack of structure is also a serious impediment Frequently, information that should be freely avail- to accessing finance and to consistency in production able within the public domain requires some form and marketing. A further issue is whether the devel- of official letter, which is a time consuming and uncer- opment of new processing facilities will “pull through” tain process. This applies equally to public and private this production (i.e. incentivize farms to respond (donor) players.24 There is an opportunity for the pri- to the demand), and/ or compel agro-processors vate sector to step in and develop a high quality data to invest in vertical integration. service including market analysis.25 Logistics and packaging are not product value Third, a lack of skills in all functions of busi- chains per se. Both functions offer significant oppor- ness is a severe limiting factor in business develop- tunity for investment but are closely dependent upon ment—more so than access to finance on competitive development in the underlying farming and agro-pro- terms. Local training is a long and slow process and cessing sectors. the quality of skills developed may, in many instances, Farm development is hampered by volatile and be questionable. The only solution in the short-term modest profitability. There is consequently little cap- is attracting foreign investment, and the transfer ital formation and so little renewal of capital assets of technology and skills that accompanies these invest- or investment in new technologies. Most farms seem ments. Investor perceptions are damaged by perceived to be consumed with endeavors to keep their busi- and real uncertainties in regulatory and business condi- nesses afloat. The “ability to transform” among farm- tions. There are further limitations to investment also ers is limited by the lack of financial skills, technical skills, competitively–priced capital, knowledge and 23 EBRD see the lack of structure in value chains as a key access to markets, and other support. limitation to investments in agribusiness. A further key challenge in farming will be to create 24 The “Business Atlas” produced this year by the Khatlon a nucleus of competent producers from which clusters Chamber of Commerce is a very good base but will in can form. Farming needs critical mass to enable diversi- time need refinement to highlight and explain sub-sec- fication to succeed and be sustainable. This will be dif- tor opportunities. ficult to achieve via individual farms, and will need 25 Examples of private information providers within the agricultural sector in the CIS region include IKAR proactive government support—the current orchards (www.ikar.ru) and SovEcon (www.sovecon.com) in development program in Khatlon being a possible Russia, and Ukrainian Agribusiness Club (www.agribusi- example. Recent changes in tax regulations govern- ness.kiev.ua) and UkrAgroConsult (www.blackseagrain. ing leasing may encourage investment in capital assets net) in Ukraine. A Strategy for Transforming Development 23 due to lack of scale,26 fragmentation, corporate gover- investment. The reform agenda outlined for the oblast nance weaknesses, policy, and land right uncertainties. authorities in various parts of this report will require One possibility may be a repayable grant fund resources and technical knowledge for successful structured in the format of the “AgriProcessing implementation. It would be essential to bolster oblast Initiative” developed by the Canadian Ministry and raion revenues, reduce volatility in revenues, and of Agriculture (“Agro-Food Canada”). This initiative attain greater predictability in both transfers from the offers repayable, interest-free grants, and is designed central budget as well as in donor inflows. A medi- to improve the competitiveness of agro-processors.27 um-term program towards raising capacity (to raise The Small Enterprise Agency Fund (SEAF) Georgia local revenues and strengthen sub-national autonomy) offers finance on a quasi-equity basis to smaller inves- would improve the prospect of successful reformation. tors and this model may also provide workable solu- Sub-national units account for about one-fourth tions.28 There are comparable countries to Tajikistan of total public expenditures, and play a major role (many small players, relatively small domestic mar- in the provision of public services. Khatlon, together kets): agricultural GDP in Georgia, for example, with its raions, is responsible for the provision of edu- is roughly equal to the agricultural GDP in Khatlon cation (about two-fifths of total spending in 2011), region (approximately $1.5 billion per annum). health, culture and sports, and some general public There is an emerging awareness of the value services.32 Local administrations are also assigned of strategic equity investment partners but rela- tively little or unsophisticated understanding of how to promote and structure joint venture investments.29 26 IFC has, for example, yet to find a manufacturing invest- Goskominvest currently provide the interface between ment in agro-processing or in any sector in Khatlon that investors and local business on investment promo- meets minimum investment scale requirements. tion and incentives. However, more needs to be done 27 See example of a recent beneficiary of API: Bakery to explain and promote the Khatlon investment case. improves competitiveness: http://www.marketwire.com/ press-release/harper-government-helps-increase-bak- Too often simple questions are caught up in a referrals erys-competitiveness-1674942.htm process that may take days or even weeks to respond 28 SEAF website: www.seaf.com. SEAF operate a Central to. Hence there is a strong need to strengthen capacity Asia fund in which IFC are invested. There are how- within Goskominvest.30 ever no investments in Tajikistan. The fund is apparently In the longer term, there is a need to create (or due to be wound up. SEAF has 22 offices in frontier re-create) links between the private and public sec- and emerging economies including the Balkan region, China, South America, South Asia and Central Asia. On tors, in order to re-build the capacity of research and the capital side, SEAF’s funds provide equity, mezzanine extension institutions. This should be a public-private capital and term credit. SEAF also has an interaction partnership arrangement. There is also a need to artic- strategy with its investee companies through which it ulate the investment case for Khatlon more explicitly helps to develop corporate governance, financial control, and effectively. Goskominvest have taken initiatives operational efficiencies, and global networking. through the publication of various brochures; this 29 One recent example is the delegation from Altai Krai in Russia, which visited Khatlon in March 2012. A “forum is a good start but more needs to be done in terms of entrepreneurs of Altai and Khatlon” was subsequently of explaining incentives and protections, and in tar- proposed. Source: www.khovar.tj March 13, 2012. geting specific strategic and/or regional investors. 30 Goskominvest does not, for example, have a common A way should also be found to continue the annual email server. Agribusiness Investment Conference. 31 This section draws heavily on Tajikistan: Public Expenditure Review Policy Notes, (World Bank, 2012). 32 The ministry of education is directly responsible for Re-shaping Fiscal Policies31 specialized secondary schools and universities, while sub-national administrations are responsible for pre- Greater predictability in revenues and rising stan- school and general schools, and finance their costs dards in public services will complement private through their budgets. 24 Tajikistan: Reinvigorating Growth in the Khatlon Oblast responsibility for housing and communal services it aims to improve the efficiency of spending by giving (about one-fourth of total spending), which includes school directors more discretion over the allocation water and sewerage, district heating, street lighting, of their budgets. solid waste management, and maintenance of com- Similar reforms in health financing are also munal property. planned, with primary health care being financed Under the tax code, local taxes—the real estate, on the basis of the number of patients registered motor vehicle, and retail sales taxes—are retained with individual physicians. Hospital care would be entirely by Khatlon and its raions. A propor- financed on a case basis (that is, on the basis of diag- tion of national taxes—the value-added tax (VAT) nostic-related groups). In principle, capitation-based on domestic and foreign transactions, the VAT financing in health would reduce the scope for bar- on transport services, personal and corporate income gaining in much the same way as it would for edu- taxes, excise taxes, and sales taxes on cotton and alu- cation (though, as health care accounts for only minum—are transferred to Khatlon, but this is done 16 percent of sub-national spending, it would have through political negotiations, and not on an objec- a less dramatic effect on intergovernmental relation- tive criteria-based formula. ships). Capitation financing in education and health There are large shifts in tax-sharing rates from has taken more than half of sub-national spending off year to year, introducing a high level of uncertainty. the bargaining table, thereby benefitting both gov- The budget process entails considerable strategic ernance and the prospects for improvement in the maneuvering: overestimation of expenditures and quality of services. These key reforms now need to underestimation of revenues appear to be common be complemented by a formula-based revenue allo- practice. There are several rounds of negotiations cation system. with the central authorities over the summer. Thus, intergovernmental fiscal relations are characterized Exploiting the Potential of Free Economic by high centralization of resources. The development Zones of a real estate and land tax on modern lines (follow- ing the adoption of the amended land code) would The nascent free economic zones offer the potential go a long way towards bolstering both raion/oblast for rapid trade integration, but only if internal supply revenues and autonomy. A formula-based transfer linkages are explicitly developed and modern gover- system would be an obvious improvement from nance arrangements put in place. Public policy plays both governance and medium-term reform planning a critical role in the success of zones. The authorities perspectives. have established two free economic zones in the oblast, On the expenditure side, capitation-based reforms one in Dangara, in the central/east part of the oblast, in education to improve equity and efficiency became the second at Panj, on the border with Afghanistan effective in 2010. Thus, funding for grades 1–11 is now demarcated by the river Panj. If properly structured distributed on the basis of a two-part formula: and administered, these zones offer the potential (i) a fixed amount per school and (ii) a variable of stimulating growth in the oblast and promoting amount based on enrollment. The formula further diversification through urban growth. Public policy distinguishes among schools of various types, with is central to ensuring the success of the two zones special coefficients for certain jurisdictions and for and, in particular, to establishing production and labor multilingual schools. The reform is designed to have linkages to the oblast as a whole to maximize over- two principal benefits: First, it aims to improve the all growth. Isolated free economic zones could bring targeting of educational funds to schools by ensuring benefits of their own, but the oblast as a whole would that money is allocated systematically, that is, on the realize maximal gains in production and employment basis of enrollment and other factors that directly only if the zones bought inputs and labor from the rest affect the cost of education, thereby removing most of the oblast. Thus, both public policy and private firms of the bargaining from the funding process. Second, must be geared to making full use of opportunities. A Strategy for Transforming Development 25 Box 4  |  The Dangara FEZ Fez Dangara was founded in 2010 but it had started its operation only a year ago. It is located in Dangara district of Khatlon region and cov- ers 520 hectares. The zone is located in an area of rich agricultural potential, but it enjoys no advantages such as proximity to an international border, and transport links appear to be weak. The choice of Dangara as a site for a free economic zone appears to have been dictated largely by political considerations. A new airport is planned for the city, but the economic justification is weak given the existence of two other airports in close proximity within the Khatlon oblast. The government has allocated $650,000 to create primary infrastructure, with a connection to an industrial water supply line. Part of the funds will be used for fencing. The government believes that the comparative advantage of Dangara could lie in chemical and petrochemical production, mechanical engineering and metal working, construction materials, production of power plants, agricultural production, automobile assembly and related equipment produc- tion, and the establishment of a transportation and logistics center. There appears to be little justification for such a belief as the zone has no compara- tive advantages and many disadvantages in these areas. At present there are two significant investors in the free economic zone. № Actor’s Name and Title Investor Country Description of Activities 1 LLC «Y & F Service» Tajikistan Construction material production 2 LLC «Kosmos (space)» Tajikistan Assembly of agricultural machinery Source: Information supplied by the Khatlon authorities. The two zones have differing objectives. The of the large regulatory tax and governance barriers Dangara zone aims at fostering production and inno- that affect the rest of the country. These incentives vation, while the Panj zone focusses on trans-border could countervail the serious disadvantages of geo- trade, taking advantage of its location and the sig- graphical isolation and being landlocked. As such nificant Afghan market for oil re-exports and con- they could act as laboratories for trying out busi- sumer goods. Both zones rely on legislation dating ness-friendly approaches that could then be used for from 2011 that permits both domestic and foreign wider economic reforms. There is no indication that firms to carry out activities in the zones, and provides neither the central nor the Khatlon government sees for regulatory and tax exemptions. The zones fall developments in the zones to be possible lessons for under a special customs regime whereby all inflows strategic reforms as of yet. However, if the zones are of goods and services, whether imports or from to be successful and if the oblast as a whole is to ben- the rest of the country, are free of duties, taxes and efit from them a number of policy questions will have non-quantitative restrictions. Similarly, all exports to be considered. from the zones are not subjected to any export duties The stated purpose of the zones appears and are exempt from any export bans or restrictions to be divorced from the realities on the ground. applicable to the rest of the country. Clearly all flows Dangara is economically isolated, and overcoming its of goods and services to and from the rest of the coun- economic and logistical isolation will require large try are subject to the usual import regime however. investments that could have been avoided had it been All goods and services in the zones are exempt decided to proceed with Panj only at an initial stage. from taxation, with two exceptions: First, personal Dangara may not be able to attract the huge volumes income taxes and social taxes are payable. Second, of investment required to support its aspirations, par- no corporate taxes are levied as earnings in the form ticularly as it offers few natural advantages. of profits, dividends and interest on assets are not sub- The clarification of the purposes of the zones ject to taxation. requires a well-developed master plan with support- The two zones offer incentives to domestic and ing institutions and investments. If the zones are seen foreign investors to invest by possibly freeing them as having export processing potential (as appears 26 Tajikistan: Reinvigorating Growth in the Khatlon Oblast Box 5  |  The Panj FEZ The lease tariff in the territory of FEZ is in the amount of $1 per one square meter per year. The international highway Dushanbe-Kabul runs through the territory of FEZ “Panj”, which is a corridor connecting Tajikistan with the Middle East countries and other countries of the region. The Afghan border post across the river Panj is just 600 meters away. Panj is served by a railway that is 40 km away and an airport at Kurgan-Tube 70 kilometers away. The nearest town of Dusti is 20 km away, and has warehousing and office facilities. Founded in 2008, the free economic zone, located in the area of 400 hectares, has an advantageous geographical location, situated at the crossroads of Eurasia, the Middle East and South Asia. Its surrounding raion is endowed with raw materials—cotton fiber, fruits and vegetables, leather and wool—and labor resources. Current International Road Links With Logistics Center “Nizhniy Pyanj“ From To Distance in km Route Time 1 Nizhnyi Panj Kunduz 85 1,5 hours 2 Nizhnyi Panj Kabul 433 6 hours 3 Nizhnyi Panj Bandar Abbas 2433 3 days 4 Nizhnyi Panj Karachi 2211 3 days 5 Nizhnyi Panj Istanbul 4416 5 days 6 Nizhnyi Panj Bandar Imam 2990 3 days The electric substation/grid “Karadum” of 110/35/6 kW of 16000 kVA is located in the free economic zone and is connected to the high-voltage electric line of 110 kV. This ensures reliable energy supply. The comparative advantage of Panj is expected to lie in food production (agro-processing), construction and chemical industries, as well as in a large variety of consumer goods in view of the proximity of the markets of Afghan provinces of Balkh and Kunduz, with a population of 3 million. Four major enterprises operate at Panj. In addition, the FEZ is used for oil and gas transit through the terminal of Tojiron to Afghanistan, represent- ing re-exports. № Actor’s Name and Titled Investor Country Description of Activities 1 LLC «Anbat-Service» Tajikistan International transport of passengers and goods 2 CAC «Burok» Tajikistan Export-import of general goods 3 OAC «Tajikhydroelectromontaj» Tajikistan Manufacture of parts and semi-finished products from flat and rolling material 4 LLC «Romit-Service» Tajikistan Construction of a factory to manufacture glass Source: Information supplied by the Khatlon authorities. to be the case especially in Panj but also in Dangara, will need to be managed to high governance standards given the nature of intended investments), and thus so that investors can have confidence in the security are seen to be able to replicate the huge success of their contracts. of countries like Bangladesh, the Dominican republic, Strengthening zone institutions will be use- Korea, Mauritius, and Vietnam in creating manufac- ful, but will require substantive political commit- turing jobs and pulling labor out of agriculture (and ment to change the status quo. Given that the raising rural productivity as well), then the follow- main barriers to investment are not the trade and ing issues all need to be addressed. Energy reliability tax regimes—though certainly the arbitrary actions and supply, and road connectivity to the rest of the of both customs and tax administrations have a signif- oblast will need to be improved, labor skills will need icant influence on diminishing private investment— to be developed to the required degree, and the zones but weak governance, corruption, weak property A Strategy for Transforming Development 27 rights, and energy shortages, the zones will be suc- labor, inputs, and services from the oblast, exploiting cessful only if these fundamental problems are tack- technology transfers (i.e., international technologies led. Therefore, the legal regime and the application brought in by zone investors and area-specific tech- of laws in the zones regarding areas such as property nologies developed and used in the oblast). Oblast rights and governance over businesses, the leader- firms should be especially encouraged to invest in the ship and administration of the zones, and the supply zones on a competition-neutral manner, as linkages of infrastructure will have to improve. There is little would then grow. This would also help to encourage evidence showing that this is taking place. Political the movement of skilled labor and capital between interests are seemingly dominant in the management the zones and the rest of the oblast. of the zones, and protection over competition and In support of locomotive effects from the property rights is weak. The managers of the zones zones to the oblast, business services would need are political figures with close personal connections to be developed. From the initial stages of zone for- to the high elite of the country, and do not provide mation, public policy has to encourage businesses evidence of independence of action or even modern to be pro-active partners with entrepreneurs in several international standards of awareness and knowledge ways. The promotion of industry clusters and estab- about what sophisticated management of modern lishing links within the cluster across the zone and zones requires. There may be legislation, but there has the oblast is of first importance, as is the integration to be confidence in its implementation. The manage- across the zone and the oblast of regional value chains. ment authority also needs the capacity, resources, and The analysis in Chapter II of agricultural value chains ability to exercise independent judgment in promot- is of direct relevance here. Then the free movement ing and regulating the zone. of labor across the oblast and zones would be neces- International experience suggests the importance sary, and the growth in employment would be likely of aligning the structure (and hence policies) of the to dampen the pressures for outward migration. Skill zones to fit with the comparative advantage of the development and training in the labor force as differ- country.33 Looking at the list of proposed activities ent market needs emerge is a further requirement. for the zones, especially in Dangara, it appears that Removing fundamental impediments to productiv- the focus is misplaced. Bangladesh offers a relevant ity growth will require deep reforms, in order to bol- example where the decision to develop the garments ster skills and plan strategic zone-oblast integration. industry played to its strength in plentiful, low-wage International experience also suggests low labor costs labor. Incentives, customs, and taxes were less import- and tax/trade incentives wear off after a time, and ant and were in fact modest as compared to reliabil- can then create pressures for further incentives. A far ity of electricity supply and the provision of serviced more sustainable, zone-based development approach land infrastructure. Bank research indicates that the requires fundamental impediments to productivity reliability of energy supplies and infrastructure reli- growth to be addressed. This reiterates the impor- ability as a whole had a significant impact on the tance of skills development and innovation—factors success of zones, while incentives had no measurable that require strong linkages between the zones and effect.34 These lessons would appear to be important the rest of the oblast. A key conclusion from Bank for Tajikistan. research is that the integration of the zone and the Aligning the activities of the zones to the com- oblast must go beyond the physical and financial; parative advantage of the oblast as a whole will lead to production in Khatlon moving up the value chain. This will help the oblast to become diversified, 33 T. Farole, Special Economic Zones: What Have We Learned? (World Bank, Economic Premise, No 64, more open in its use of inputs, and in its use of ser- 2011) is the source for these lessons. vices supplied within its main urban agglomerations, 34 Farole, T. and G. Akinci, Special Economic Zones: Progress, but only if supporting policies are put in place. Such Emerging Challenges, and Future Directions (World Bank, policies would encourage zone investors to source 2011). 28 Tajikistan: Reinvigorating Growth in the Khatlon Oblast it also has to be strategic. This requires political sup- during 2005–2010. Furthermore, given that the area port combined with autonomy of management of the within 25 kilometers from the border accounts for zones, as in China, Malaysia, and elsewhere. It requires a large part of the land area (Tajikistan – 64 percent integration of zone policies within the broader eco- and Afghanistan – 26 percent), small-scale trade among nomic policy framework for the oblast, but with bordering regions is widespread. Thousands of peo- proper governance and management it could become ple, mostly residents of contiguous border areas, cross the cutting-edge of the oblast’s development policy, BCPs (border crossing points) every day to exploit dif- as in Mauritius. ferences in prices (both for goods and services), wages, If the proposed reforms are adopted, the pros- and regulatory practices. For many small agricultural pects for the free economic zones contributing to sus- producers, sales at a marketplace across the border tainable growth of the province would be greatly often offer the only opportunity to purchase other enhanced. Adaptations in the policy and management goods. For example, consumers can obtain fresh pro- of the zones could be made periodically in the light duce at an attractive price. For others, intermediating of experience and lessons learned, while ensuring that and supplying services to traders is their only source an environment of stability and predictability for pri- of income, allowing many households to stay out vate investments is safeguarded. Eventually, the con- of poverty. Furthermore, for communities in remote cept of free economic zones could be extended to the areas, lacking the advantages of a well-developed road country as a whole. Tajikistan could enjoy strong network, contacts with similar communities across the advantages as a free economic zone in central Asia, border may be the only opportunity to move beyond bordering on China and South Asia, with a liberal subsistence farming and gain access to desired services tax regime and supportive private investments. This that are not available locally. vision can only be realized with the successful opera- There are indications that the local demand for tion of the existing free economic zones. deeper cooperation, across a range of activities, is strong. Concerted efforts aimed at strengthen- A Proposal for Regional Cooperation: ing investment and trade links between two oblasts A Kurgan-Tube-Dangara-Faizabad-Kunduz in Tajikistan (Khatlon) and Afghanistan (Kunduz) Asiaregio could make a large difference. Examples include joint exhibitions and fairs, facilitating the establish- There are great benefits that Khatlon could capital- ment of joint ventures, attracting investments in ize on with the creation of operational cross-border agro-processing, joint projects to develop infrastruc- cooperation arrangements with the Kunduz province ture (roads)—which is already taking place from both of Afghanistan, similar to the Euroregio model.35 sides of the border, and exchange of knowledge and Euroregios initially emerged as mechanisms to foster information on key products. cooperation and stimulate economic growth in regions The implementation of an Asiaregio framework along internal borders of western European states. might enhance the attractiveness of regions through Capitalizing on prior extensive field work and research economy of scale effects to investors, foreign and covering cross-border trade conducted by the World domestic alike. There are many attractive business areas Bank within CAREC including Tajikistan, Afghanistan, on both sides of the border, and special visa arrange- China, Kyrgyz Republic and Kazakhstan, there are ments might enhance their appeal to potential inves- four key factors that are conducive to generate poten- tors, as would convenient and accessible border crossing tial benefits of Asiaregio for Khatlon. points, together with appropriate infrastructure on both Trade and border trade with immediate neigh- sides of the border and governance arrangements. Two bors have expanded greatly in the recent past, but the potential remains largely untapped, as evidenced 35 See Kaminski, Bart and Saumya Mitra, Borderless by stubbornly low exports from Khatlon to Afghanistan Bazaars and Regional Trade in Central Asia (World Bank, at the level of USD 10 million (excluding oil exports) 2012) for a discussion of this concept. A Strategy for Transforming Development 29 Map 4  | Creating Asiaregios as a Vehicle for Boosting Khatlon Development – (Kurgan-Tube-Dangara-Faizabad-Kunduz Square) Source: Author’s own presentation. free economic zones in Pyanj and Dangara could also between Tajikistan and Afghanistan. In addition provide an additional strong impetus should they to geography, common historical background and be administered with high degree of transparency and existing interdependencies (e.g. supply of oil and elec- rule of law, and have adequate capacity and organiza- tricity from Tajikistan or supply of cheaper commod- tional structure to facilitate investments. ities from Afghanistan) can further provide a strong There are powerful reasons related to history impulse for cross-border co-operation and more and geography that favor cross-border cooperation robust development of Khatlon. IV Key Risks to Growth F ive strategic factors bear heavily on efforts The Geopolitics of Security and the Narcotics to reinvigorate the market economy; these con- Trade stitute serious risks to Khatlon’s growth pros- pects: narrow political participation, the geopolitics A porous border offers little challenge to militants. of narcotics and insecurity, corruption, entrepreneur- The salience of the Khatlon oblast as the front line ship, and the shortages of energy. In the following against extremism and the war on drug trafficking pages, the report discusses how important it is for the grows with the planned withdrawal of NATO forces authorities to place these risk factors at a central level from Afghanistan in 2014. The Afghan-Tajik bor- in the design of policies and approaches, and in strat- der—which is 850 miles long—is highly porous, with egies targeting private sector-led growth. a minimal, stretched police and border guard presence. Khatlon accounts for the eastern portion of the border. The Political Economy Context A significant risk to business confidence in Khatlon arises from growing and varied insurgent threats. The civil war legacy of a fragile polity. The Khatlon A strengthening Islamic Movement of Uzbekistan oblast was the center stage of the civil war and even (IMU) is approaching the border and has central Asian today it bears the imprint of the ferocious conflict that guerrillas. The IMU forces are currently not strong took place between 1992 and 1993, and continued or organized enough to mount an offensive against with lower intensity until 1997. The resistance to the the state, but are likely probing the defenses and con- first post-independence Tajik government was cen- structing infrastructure, developing support for possi- tered in the Khatlon province, which became the cru- ble future activity.36 Other parts of the country that cible of the civil war because of its demographic diver- are partly havens for militants are Rasht and Isfara sity and the divided allegiances of the population. The in the north. Today, Tajikistan has an inadequate capa- civil war left up to 100,000 people dead and 600,000 bility to address an insurgency challenge. (10 percent of the total population) internally dis- Security threats could be countered by sustained placed; and is estimated to have cost $7 billion. economic growth. Attaining firm control over the The war ended through a peace agreement with border will require infrastructure investments, elec- protocols on military unification, where progress has tronics and detection equipment, but most of all been made with a national army, but fair political par- improvements in human capacity and skills in all ticipation and division of power remain highly con- aspects of border control—this is a major donor effort. tentious. Clearly the peace agreement has resulted Moreover, erecting a firm bulwark against the spread in a measure of stability and security for the popu- of instability from Afghanistan will require a dynamic, lace, permitting normal life to be pursued, though prosperous Khatlon with the presence of government political conditions remain highly uncertain. Despite and security forces, and a thriving private sector-based post-conflict reconciliation, parts of the country economy. (Garm and Rasht in the center of the country; parts of the Pamirs) remain beyond central control, with occasional outbreaks of violent challenges from war- 36 Tajikistan: The Changing Insurgent Threats, International lords and insurgents to the authority of the state. Crisis Group, 2011. 31 32 Tajikistan: Reinvigorating Growth in the Khatlon Oblast Map 5  |  Major Trafficking Border Districts and Drug Routes in Tajikistan Source: DCA of Tajikistan, CNPA. Note: The boundaries and names shown and the designations used on this map do not imply official endorsement or acceptance by the United Nations. Drug-trafficking undermines state authority. billion in 2010 from onward sales to Russia.40 The The Afghan-Khatlon border is a major route for the price per kilogram at 70 percent purity for heroin was transport of drugs from Afghanistan to the lucrative $3000 in Afghanistan, $4000 in Khatlon, $10,000 in markets of Russia, Europe, and also China and East Kazakhstan and $22,000 in Russia. This net profit is Asia (Map 5). The trade is associated with crime twice the exports of aluminum, and equivalent to about and corruption, is believed to rely on the protection one-third of GDP of the country. Research shows that of the political elite, and undermines the effective- large organized criminal groups in Khatlon dominate ness of the state.37 The U.S. State Department notes, “Tajik law enforcement makes arrests and seizures in mid- to low-level cases. … The Tajik enforce- 37 The State-Crime Nexus in Central Asia: State Weakness, Organized Crime and Corruption in Kyrgyzstan and ment authorities, however, apparently are unwilling Tajikistan (Silk Road papers), Erica Marat, Johns or unable to target and prosecute major traffickers.”38 Hopkins, SAIS, 2006. The Afghan-Khatlon border is demarcated by the 38 State Department (2010) International Narcotics Control Panj River with a major river port at Pianj/Sher Khan Startegy Report, quoted in Tajikistan: The Changing Bandar. The UN Office on Drugs and Crime estimates Insurgent Threats, (International Crisis Group, 2011). that up to 80 tons of heroin and 20 tons of opium are 39 Opiate Flows through Northern Afghanistan and Central Asia: A Threat Assessment, (UN Office on Drugs and trafficked annually through the Afghan-Tajik border.39 Crime, 2012). The drug trade is responsible for important dis- 40 Only a portion of this figure is consumed or invested torting effects on the Khatlon economy. The UN esti- in the Khatlon economy; the larger part fuels capital mates that net profit of traffickers amounted to $1.4 exports. Key Risks to Growth 33 the trade and are linked to state power structures. The (EIU). The doing business indicator reflects particular degree of state capture is illustrated by the fact that difficulties with trading across borders, getting credit, no drug kingpin has been arrested in Tajikistan. The dealing with construction permits, and reliability drug trade is constituted by five major factions based of electricity supplies. The economic freedom and com- loosely on clans, with the Kulyab clan being import- petitiveness indicators suggest the country is “mostly ant as it is highly influential politically, especially in un-free” in the areas of business freedom and labor Dushanbe which is a major logistics center for distri- freedom, with poor protection for property rights. bution. A further faction in Khatlon, the Kurgan-Tube In addition the poor quality of institutions and the clan is partly integrated with the Kulyab faction. The heavy burden imposed by corruption and the bureau- entire Afghan-Tajik border is divided between these cracy hamper competitiveness (Table 12). and the northern and central clans, sharing control, A centralized, corrupt network deprives Khatlon with clans permeating power structures and also being of resources.42 Corruption is a product of state cap- represented in key law enforcement ministries.41 ture by a highly centralized, unitary administration, The absorption of high volumes of illegal rent and discretions occur over wide-ranging decisions, income severely distorts the local economy. It shifts the with few checks and balances.43 A patronage system terms of trade to the non-tradeables sector, particularly and clan based hiring weaken institutions and sap real estate and services, and leads to a flow of resources competence in public administration by deterring away from productive activity in the tradeables sector. the truly meritocratic from seeking jobs. Central con- Investment in agriculture and industry is therefore dis- trol has mutated into dominance over the economy. couraged. It is possible that the financial system may Privileged groups accumulate wealth through access be contaminated by the demand for services for money to economic resources and opaque privatizations; laundering. The accompanying growth in criminality business-governance linkages protect rents. and corruption has not only deleterious effects on pri- Corruption manifests itself in the form of unofficial vate activity, but also diverts public resources into secu- payments. Evidence from the recent 2010 LITS sheds rity and away from social and productive expenditures. some light into perceptions of people on the need Corruption 41 UN report, op. cit. The key governance indicators for the country are not 42 The formal legislative framework against corruption can be found in an OECD study, “Fighting Corruption in encouraging. The democracy index, based on civil lib- Transition Economies: Tajikistan” (OECD, 2006). erties, electoral pluralism, political participation and 43 The State-Crime Nexus in Central Asia: State Weakness, functioning of government, leads to the classification Organized Crime and Corruption in Kyrgyzstan and of the country as ruled by an “authoritarian regime” Tajikistan, by Erica Marat, (Johns Hopkins, SAIS, 2006). Table 12  | Tajikistan – Rankings for Key Governance Indicators (Lower ranks indicate better performance) Transparency Doing Business International Corruption Heritage Foundation WEF Global EIU Democracy Index Index 2012 Perceptions Index Index 2012 Competitiveness Index 2011 (of 167 countries) (of 183 countries) 2011 (of 183 countries) (of 179 countries) 2011 (of 142 countries) Tajikistan 151 147 152 129 105 ECA average 80.6 72.4 93.1 78.8 72.6 FSU-7 average a 119.9 85.9 134.4 95.6 93.2 Sources: Tajikistan, A Governance Overview, World Bank, mimeo, 2012. a The seven countries are: Armenia, Azerbaijan, Georgia, Kyrgyzstan, Moldova, Tajikistan and Uzbekistan. 34 Tajikistan: Reinvigorating Growth in the Khatlon Oblast to make unofficial payments for various public services. Table 13  |  Selected Governance Issues On judicial services (courts) and public higher edu- Khatlon Total cation, the people of Khatlon reported a higher than average need to make informal payments or provide In your opinion, how often do people like you have to make unofficial payments or gifts in these situations gifts. On all other areas, such as services of the road Interact with the road police police, medical services, primary education, and per- mits, Khatlon scored lower than the country average. Never/seldom 64.9 54.8 The opacity in public policy processes and Sometimes 12.6 16.6 in budgets aids corruption. On the demand side, Usually/always 22.5 28.6 public participation in governance and policy for- Total 100 100 mulation or implementation is weak, media inde- Request official documents pendence is severely circumscribed and journalists Never/seldom 56.8 54.3 exercise self-censorship. If Khatlon’s institutions are Sometimes 30.7 29.9 to be strengthened, a major donor-assisted effort Usually/always 12.6 15.8 should be considered for building up the demand side. Total 100 100 Entrepreneurship Get to courts for a civil matter Never/seldom 67.1 70 There has been a rising trend in informality in the Sometimes 18.4 75.5 Khatlon economy. Over the past five years, there has Usually/always 14.5 12.5 been a significant rise in the number of small enter- Total 100 100 prises or businesses (as measured by the number Source: LSMS 2009. of patents issued) by an annual average of six percent per year. As the number of functioning SMEs has risen little over this period, it appears that the degree country, electricity supply is also a major impediment of informalization has grown. Data based on a head to business growth. count of enterprises show a sharp decline—an annual Rules-based administration will help businesses. average of 13 percent—which represents a squeeze Public policy should concentrate on simplification on the formation of large and medium enterprises. of rules and regulations, lifting border control rigidi- If entrepreneurship in Khatlon is to prosper, such ties, and investments in logistics and market informa- a trend will have to be arrested. tion. There are a number of areas where the discretion There is much to be gained from arresting the of officials looms large and constitutes a major imped- growth of informal activities. Formal enterprises make iment to business growth in Khatlon. possible economies of scale, are better able to take advantage of logistical advantages, and are poised • First, despite the simplification of business regis- to trade more. They also are more promising for invest- tration through a single window, which requires ments external to the firm. Informality may reduce tax a single application (or a signed memorandum and other burdens, but at the cost of efficiency and of association) with a service requirement that long term growth. Moreover, informality may also within three days a certificate of registration reflect business conditions prevailing in the oblast. would be issued, a high degree of discretion has Tax administration hampers business. Measures subverted its operation of business constraints in Khatlon are poor by the • Second, a recent government decision restrict- standards of other CIS countries. The severest con- ing inspections of business premises to being straint arises from tax rates and tax administration; conducted no more often than once every three one third of all businessmen believe that tax rates years is expected to go into effect shortly. The are the number one constraint. Like the rest of the possibility of sudden, discretionary inspections, Key Risks to Growth 35 Table 14  |  Khatlon: Business Climate World Europe & Central Khatlon BEEPS Indicators (2008) Asia (2008) (2008) Permits and Licensing Number of days to obtain an operating license 30 24 24 Number of days to obtain a construction-related permit 69 80 34 Number of days to obtain an import license 20 14 n/a Percentage of firms identifying business licensing and permits as a major constraint 16 16 20 Regulation and tax Percentage of senior management time spent on dealing with requirements 9 10 12 issues of government regulations Average number of visits or required meetings with tax officials in a typical month 2 1.7 1.4 Percentage of firms identifying tax rates as a major constraint 35 39 57 Percentage of firms identifying tax administration as major constraint 23 21 9 Corruption Percentage of firms expected to pay informal payments to public officials (to get 26 24 33 things done) Percentage of firms expected to give gifts to get an operating license 15 13 25 Percentage of firms expected to give gifts at meetings with tax officials 16 14 29 Percentage of firms expected to give gifts to secure a government contract 24 17 23 Percentage of firms identifying corruption as a major constraint 36 34 11 Source: – (2008 BEEPS). insufficiently based on firm criteria for triggering states), while demand is driven up by the use of elec- such inspections, remains however. tricity for heating. Very energy-inefficient buildings • Third, the submission of tax forms requires direct with huge heat losses exacerbate the shortages. In the contact with officials and often a process of nego- absence of electricity supply, large parts of the popu- tiation is involved. lation use unreliable and/or expensive heating options • Finally, obtaining construction permits poses par- (diesel, wood, dung, waste) leading to poor air quality, ticular problems that are discussed in a later sec- health problems, and deforestation. tion of the report. Energy shortages restrict growth. Paradoxically, in a country with abundant hydro-power potential and The Supply of Energy a strong inherited Soviet tradition of engineering in the sector, electricity supplies are notoriously deficient and Khatlon has the potential to become the energy battery unreliable. The exceptionally harsh winter of 2008– of the country. Tajikistan has a large hydro potential, 09 saw a collapse in the energy system, amidst great from both small and large rivers, estimated at 264 TWh/ hardship. Energy shortages are exacerbated by priv- year—over half of all the hydro potential of Central ileged access accorded to a large aluminum smelter. Asia. Much of this potential lies in Khatlon. Only about With too low tariffs and large energy losses, the sector six percent of this potential is developed. Over 94 per- runs deficits, with consequences of inadequate opera- cent of electricity is supplied by hydro power plants tions, maintenance, and capital spending, and arrears (HPPs). Because of uneven water flow in summer and in taxes and payments to suppliers. Both infrastructure in winter, there are significant seasonal fluctuations. improvements and management reforms, including Considerable power shortages occur in winter because transparency in accounts and financial controls, paid power generation is reduced (in order to conserve water for partly by rational tariffs, are essential. The economic in reservoirs for summer release to downstream riparian growth prospects of the country and of Khatlon oblast, 36 Tajikistan: Reinvigorating Growth in the Khatlon Oblast in particular, are greatly damaged by energy shortages working hours. This greatly restricts the use of indus- and uncertainties of supply. trial capacity of the region. The power deficit is estimated at 20 percent Planned investments alone will not be enough of winter demand and costs the economy $150  mil- to eliminate the problem of energy security. HES lion per year (two percent of GDP). About 70 percent Sangtuda 2 would add at most two hours to electricity of the population suffers from blackouts during win- supply. In any case, given the very low domestic tariffs ter. Without action, the gap between winter demand for electricity, generators have an incentive to export and supply could double from 1200 MW to 2400 at international prices. Given the fact that the owners MW by 2020, doubling again by 2040. of both Sangtuda HESs are foreign companies (HES-1 Eliminating the deficit will require a combination – Russia and HES-2 – Iran), and the expressed inter- of actions: an aggressive tariff and energy efficiency est of management of hydroelectric stations in export program, rapid development of coal-fired plants, and of electricity to Afghanistan (through newly con- revitalization of energy trade. By these means the structed electric power lines) we can assume that the deficit could be reduced by 60 percent by 2016 and supply of electricity from HESs Sangtuda will not sig- eliminated by 2020. The combined costs, dominated nificantly affect energy supply in Khatlon. by new generating capacity, amount to $3.7 billion or Institutional constraints to expanding supply. $460 million per year (four percent of GDP)—a cost The state-owned, vertically-integrated utility, Barki that would have to be distributed amongst custom- Tojik, is a highly inefficient, poorly regulated monop- ers through tariff increase, government through pub- oly with little market credibility and a major source lic subsidy, and development partners through pref- of poor governance. It owns and operates most gen- erential financing. A more aggressive set of actions eration assets, the transmission and distribution grids, includes more extensive gas and electricity imports and provides supply services for most of the coun- from Central Asia, accelerating energy efficiency fur- try. The generation assets and the grids are obsolete ther, and load shedding by TALCO during winter and need urgent modernization, but neither Barki months, coincident with maintenance periods. Tojik nor the government have enough funds for the The absence of energy security is a particular needed investment. Barki Tojik is heavily indebted, problem for the Khatlon oblast. Khatlon contains all in large part for failures to collect on its bills, to the the major power generating stations of the country, state owned aluminum company and to government except for the Kairakum hydroelectric station, small ministries. It is the single largest delinquent taxpayer hydroelectric stations in Varzob cascade located near in the country. Dushanbe and Varzob district and the Dushanbe There is no independent energy regulator. heat station. The capacity would be sufficient for the Potential private investors fear the different roles needs of all consumers in the province year round, undertaken by the government (as a policy maker, if the more than 70 percent of power generated in the a regulator, and an investor), lead to conflicts of inter- Khatlon province were not to be directed to the alu- ests. Moreover, tariffs for all types of end users are minum factory of Tursunzade district. regulated and kept below cost, despite recent annual Today, the province is fully provided with electric- increases of up to 25 percent. Residential users pay ity only in the summer. From October, for six months about $0.02 per kWh. Agriculture (irrigation), elec- in the winter, there occurs an acute shortage of elec- tric transport, the public service institutions, and the tricity, with energy supply generally of six hours a day, state aluminum company all pay low regulated tariffs. and in peak winter of perhaps only three to four These factors affect the climate for private invest- hours. Electricity is provided three hours in the eve- ment. Though the state utility is obliged by law ning, from six or seven till nine or ten o’clock, and to purchase private power, the credibility of its ability from five till eight o’clock in the morning. This sched- to pay renders the law meaningless. Rather, Khatlon ule makes it impossible to use even limited electricity must explore the possibility of privately generated for industrial purposes, as electricity is provided after captive power, as discussed in Chapter IV. ANNEXES 38 Tajikistan: Reinvigorating Growth in the Khatlon Oblast Annex A: Donor Presence in Khatlon • Close to 50 various multilateral, bilateral, and fare—each at $58 million, education—$37 mil- non-governmental organizations active in Khatlon. lion, and health—$29 million—together repre- • Close to 200 ongoing projects totaling over senting over 92 percent of all commitments. $0.5 billion. • The EU is the largest donor by number of proj- • Agriculture is by far the largest sector in terms ects (32), followed by the Government of Japan of active projects (almost 40 percent of all proj- (20), and the World Bank (13). ects), followed by health (14 percent), social wel- • The World Bank is the largest donor in terms fare (12 percent), education (nine percent), and of US dollar value of projects, with over multisector (six percent) together representing $80 million committed to Khatlon, fol- almost 80 percent of all projects. lowed closely by the Government of Japan • Agriculture is also by far the largest sector ($70 million), WFP ($60 million), ADB in terms of US dollar value of projects with ($60 million), KFW ($51million), and USAID about $220 million in commitments, followed ($49 million). by energy—$83 million, transport and social wel- Annex B: Value Chain Analysis for Selected Activities 39 Annex B: Value Chain Analysis for Selected Activities Evaluation Criteria Fruit and Vegetables Textiles and Clothing Honey Logistics Packaging Market Opportunity Export Exports to Russia and Two distinct sectors: 1) Textiles Good export pros- Needed to ensure Focus mostly on import Potential Kazakhstan, also poten- and Clothing.a Highly com- pects,but needs EU certi- export potential substitution. May also tially more to Afghanistan. petitive markets globally, will fication. Globally in short of fresh and other be prospects for export Markets are lower end depend upon ability to find supply. Only 2.5 percent agricultural products. of packaging materials of quality spectrum. and focus on niche markets. of production exported. within Central Asia region Needs significant improve- 2) ITC facilitating trade events. in the future. ment in product quality. Kyrgyzstan is a good example. Significant scope for high- value product exports. Import Very limited, but Good prospects provided Tajikistan is largely N/A. Excellent prospects for Substitution increasing imports from quality and price is com- self-sufficient in honey. import substitution. Pakistan, etc., to meet petitive. For example, Production, ~3,000 tons local demand. approximately 200,000 school per annum, is mostly uniforms needed annually. sold into local markets.b Price Prospects Early season advantage Needs product-by-product Very good provided Potentially very good Potentially good demand, needs to be better assessment. Global markets quality standards and demand, possibility monopoly supplier. used. Tajikistan mostly highly competitive. certification met. Local to be monopoly Significant advantage for a price-taker unless market prices are good supplier and significant first mover. able to achieve product by world standards first mover advantages. differentiation. ($5–7 per kg.). Competitors Competition mostly Global market, many com- Global market in short None at present. Currently only glass jar from Turkey and other petitors. and declining supply. Significant advantage production is occurring European/ Mediterranean Future is very positive for for first mover. in Tajikistan. and C Asian countries. high quality honey. Barriers To Trade Tajikistan has preferential Pricing, quality, and consis- Needs export certifi- N/A N/A access to Russian and CIS tency. Other (tariff) barriers cation to be included markets. Quality, consis- need to be assessed market on EU approved list.c tency, and food safety by market. issues will be key. Potential Competitiveness Any Successful There are competitive This is a relatively well-orga- Many small producers. No modern cold There is glass jar pro- Enterprises juice and dried fruit nized sector. Has received very Strong local market and storage or other duction in Sugd region/ Currently In Region producers in Sugd region. good support from ITC. Success demand exceeds supply. logistics enterprises viability of this business No modern production of individual enterprises not Skills and technologies exist currently. unknown. plants in Khatlon. known. Viability of spinning need updating. mills yet to be proven. What Cost Potentially lower land, Potential lower cost of cotton Significant scope No significant com- Depends upon scale Advantages labor and water costs. (transport saving), lower to improve honey yields parables. No modern and other operational Exist Needs to be evaluated labor costs. Advantages may in Khatlon. Much may operations exist. efficiencies. against potentially higher be offset by cost of imported depend upon extent imported inputs and inputs. Cost competitiveness of cotton cultivated. transport costs. Cost com- needs further investigation. petitiveness needs further detailed analysis. (continued on next page) 40 Tajikistan: Reinvigorating Growth in the Khatlon Oblast (continued) Evaluation Criteria Fruit and Vegetables Textiles and Clothing Honey Logistics Packaging What Resource Sunshine, labor, land and No preferred pricing on raw Good scope to expand Good options for loca- Full import of raw materi- Advantages water. Early season advan- cotton, but saving on transport if access to new tech- tions in or near to key als likely. Exist tages. Labor availability costs. Highly skills dependent. nology (bee varieties) logistics points. Will may be an issue. is available. Cotton depend upon farms’ reduction will reduce ability to produce main source for honey quality and quantity. production. Market Access Early season advantages. Depends upon price, quality, Durable high value Significant first mover Potentially access Advantages Significant airfreight and consistency. product, able to afford advantages. to markets in Afghanistan potential. Preferential long transits. and elsewhere in the access to Russian market. central and southern Asian Proximity to South Asian regions. markets. Skills Base Weak skills base in all Skills base is improving. Highly Needs updated technical Poor skills base. Will depend upon foreign functions of business, skills dependent. and marketing expertise. No recent exposure investment and skills. esp. processing. Skills are to modern logistics. most significant limitation to development. Potential Impact Impact on Significant. Labor inten- Significant. Labor intensive, Significant. Labor inten- Significant. Labor Significant. Labor Jobs and Exports sive, opportunities exist opportunities exist especially sive. Very good export intensive. intensive. especially for women. for women. Potentially good potential. Good export potential. exports. Knock-on Benefits Substantial links to farms, Substantial linkages to down- Limited to local area/ Substantial linkages Substantial linkages to Other Business other inputs suppliers, stream and upstream sectors trade and export to downstream and to downstream and packaging, financing, and logistics. upstream sectors. upstream sectors. logistical sectors. Capacity to put structure into supply chains. Is Success Yes, within producing Yes, within producing regions. Yes, within producing Yes, within proximity Yes, depending upon Replicable within regions. regions of relevant production market demand. Tajikistan facilities Investment Strong local interest. Sector viewed as “too volatile” Strong local interest Potentially both local Potentially both local and Prospects Potential FDI in high value by IFC investments. Needs but relatively small and foreign interest. foreign interest. export crops. to show sustainable success investments needed. to test investment case. Very suited to SMEs. Market Opportunity Export Exports to Russia and Two distinct sectors: Textiles Good export prospects, Needed to ensure Focus mostly on import Potential Kazakhstan, also poten- and Clothing.d Highly com- but needs EU certifica- export potential substitution. May also tially more to Afghanistan. petitive markets globally, will tion. Globally in short of fresh and other agri be prospects for export Lower end markets depend upon ability to find supply. Only 2.5 percent products of packaging materials of quality spectrum. and focus on niche markets. of production exported. within Central Asia region Needs significant improve- ITC facilitating trade events. in future. ment in product quality. Kyrgyzstan is a good example. Significant scope for high value product exports. Import Very limited, but increas- Good prospects provided Tajikistan is largely N/A Excellent prospects for Substitution ing imports from Pakistan, quality and price is compet- self-sufficient in honey. import substitution. etc. to meet local demand. itive. For example, approx. Production ~ 3,000 tons 200,000 school uniforms need per annum is mostly sold annually. into local markets.e (continued on next page) Annex B: Value Chain Analysis for Selected Activities 41 (continued) Evaluation Criteria Fruit and Vegetables Textiles and Clothing Honey Logistics Packaging Price Prospects Early season advantage Needs product-by-product Very good provided Potentially very good Potentially good demand, needs to be better used. assessment. Global markets quality standards and demand, possibility monopoly supplier. Tajikistan will be mostly highly competitive. certification met. Local to be monopoly Significant advantage for a price-taker unless market prices are good supplier and significant first mover. it is able to achieve prod- by world standards first mover advantages. uct differentiation. ($5–7 per kg.). Competitors Competition mostly Global market, many com- Global market in short None at present. Currently only glass jar from Turkey and other petitors and declining supply. Significant advantage production is occurring European/ Mediterranean Future is very positive for for first mover. in Tajikistan. and Central Asian high quality honey. countries. Barriers to Trade Tajikistan has preferential Pricing, quality and consis- Needs export certifi- N/A N/A access to Russian and CIS tency. Other (tariff) barriers cation to be included markets. Quality, con- need to be assessed market on EU approved list.f sistency and food safety by market. issues will be key. Potential Competitiveness Any Successful There are competitive This is a relatively well-orga- Many small producers. No modern cold There is glass jar pro- Enterprises juice and dried fruit nized sector. Has received very Strong local market and storage or other duction in Sugd region/ Currently in Region producers in Sugd region. good support from ITC. Success demand exceeds supply. logistics enterprises viability of this business No modern production of individual enterprises not Skills and technologies exist currently. unknown. plants in Khatlon. known. Viability of spinning need updating. mills yet to be proven? What Cost Potentially lower land, Potential lower cost of cotton Significant scope No significant com- Depends upon scale Advantages labor and water costs. (transport saving), lower to improve honey yields parables. No modern and other operational Exist Needs to be evaluated labor costs. Advantages may in Khatlon. Much may operations exist. efficiencies. against potentially higher be offset by cost of imported depend upon extent imported inputs and inputs. Cost competitiveness of cotton cultivated. transport costs. Cost com- needs further investigation. petitiveness needs further detailed analysis. What Resource Sunshine, labor, land and No preferred pricing on raw Good scope to expand Good options for loca- Full import of raw materi- Advantages water. Early season advan- cotton but saving on transport if access to new tech- tions in or near to key als likely. Exist tages. Labor availability costs. Highly skills dependent. nology (bee varieties). logistics points. Will may be an issue. Cotton reduction will depend upon farms’ reduce main source for ability to produce honey production. quality and quantity. Market Access Early season advantages. Depends upon price, quality, Durable high value Significant first mover Potentially access Advantages Significant airfreight and consistency. product, able to afford advantages. to markets in Afghanistan potential. Preferential long transits. and elsewhere in the access to Russian market. central and southern Asian Proximity to South Asian regions. markets. Skills Base Weak skills base in all Skills base is improving. Highly Needs updated technical Poor skills base. Will depend upon foreign functions of business, skills dependent. and marketing expertise. No recent exposure investment and skills. esp. processing. Skills are to modern logistics. most significant limitation to development. (continued on next page) 42 Tajikistan: Reinvigorating Growth in the Khatlon Oblast (continued) Evaluation Criteria Fruit and Vegetables Textiles and Clothing Honey Logistics Packaging Potential Impact Impact on Significant. Labor inten- Significant. Labor intensive Significant. Labor inten- Significant. Labor Significant. Labor Jobs and Exports sive opportunities exist, opportunities exist, especially sive. Very good export intensive. intensive. especially for women. for women. Potentially good potential. Good export potential. exports. Knock-on Benefits Substantial links to farms, Substantial linkages to down- Limited to local area/ Substantial linkages Substantial linkages to Other Business other inputs suppliers, stream and upstream sectors trade and export to downstream and to downstream and packaging, financing, logistics. upstream sectors. upstream sectors. logistical sectors. Capacity to put structure into supply chains. Is Success Yes, within producing Yes, within producing regions. Yes, within producing Yes, within proximity Yes, depending upon Replicable within regions. regions of relevant production market demand. Tajikistan facilities Investment Strong local interest. Sector viewed as “too volatile” Strong local interest Potentially both local Potentially both local and Prospects Potential FDI in high value by IFC investments. Needs but relatively small and foreign interest. foreign interest. export crops. to show sustainable success investments needed. to test investment case. Very suited to SMEs. a Extract from T&C Export Development Strategy (facilitated by ITC). The Strategy is directed at two industry sub-sectors: Textiles and Clothing or “T&C”. Both sub-sectors rely on Tajik farmed cotton and both are becoming increasingly more integrated. Although there are similarities in the objectives, technical and financial requirements of each sub-sector, their business models, the markets they serve, suppliers and distribution channels are different. The textiles and fabrics subsector is characterized by continuous process volume manufacture for large clients where the design of the goods does not change so rapidly—even in areas such as household furnishings. On the other hand, the clothing industry is a fast-moving, consumer-ori- ented business, whose designs and supplies may be changed up to 10 times per year. b Global production of honey is approximately 1.7 million tons (China ~250,000 tons). Global trade is approximately 300,000 tons. Source: Bernard Saubot – Supply Development Manager, Lune de Miel, France, October 2011. c EU certification of honey attests two main issues: (1) residues and (2) adulteration (addition of sugars etc.). d Extract from T&C Export Development Strategy (facilitated by ITC)_: The Strategy is directed at two industry sub-sectors: Textiles and Clothing or “T&C”. Both sub-sectors rely on Tajik farmed cotton and both are becoming increasingly more integrated. Although there are similarities in the objectives, technical and financial requirements of each sub-sector, their business models, the markets they serve, suppliers and distribution channels are different. The textiles and fabrics subsector is characterized by continuous process volume manufacture for large clients where the design of the goods does not change so rapidly—even in areas such as household furnishings. On the other hand, the clothing industry is a fast-moving, consumer-ori- ented business, whose designs and supplies may be changed up to 10 times per year. e Global production of honey is approximately 1.7 million tons (China ~250,000 tons). Global trade is approximately 300,000 tons. Source: Bernard Saubot – Supply Development Manager, Lune de Miel, France – October 2011. f EU certification of honey attests two main issues: (1) residues and (2) adulteration (addition of sugars etc.). Annex C: Other Value Chains Considered 43 Annex C: Other Value Chains Considered Value Chain Description Aromatic and Culinary Herbs Potentially very good scope for both fresh and dried herbs. Will need comprehensive technical and marketing support. UNDP conducted a production and market review in 2011.a Citrus Small, but important value chain. Most lemons produced by households in greenhouses (80 percent of national production in Khatlon). Low level of productivity, but provides source of seasonal income. Expansion potential is limited by capacity of greenhouses. Currently no processing. Most sales into local markets. Not competitive with Mediterranean lemons exported to Russia.b Construction Materials No prospects seen or offered by anyone beyond the cement factory currently being installed by Chinese contractors at Shartuuz. There is a plan for a glass factory in the SEZ at Nizhny Panj. Dairy Products Highly-fragmented value chain. Expensive processing, feed limitation (imports of meal from Kazakhstan), and dependent on pasture, so high seasonality of milk production. Very low productivity per cow. Low milk fat content is a result of poor nutri- tion. Weak or non-existent veterinary and disease controls. No prospective investments of any decent scale in milk processing in Khatlon. Has good potential, but must be preceded by significant regulatory and value chain structural reforms. Meat Products Mostly the same issues as in dairy products. Outdated genetics/weak performance of state breeding farms. Inadequate local source of feed necessitates supplementary imports. Strong demand for lower-value meat cuts but limited demand/ affordability for high quality meat products. However, demand exceeds supply and meat prices have almost tripled during the past 5 years.c Apart from recent poultry investments (viability not yet proven?) there are no prospective investments of any decent scale in meat processing in Khatlon. Silk Silk production was reported in several interviews as not being viable. However, the sector may be worth a more in-depth review. Potential impact is possibly limited. Tourism Realistically, very few external tourist prospects in Khatlon. May be potential for further developments around Nurek Dam and historical sites in Kulyob. Significant infrastructural challenges (airports, roads, hotel facilities) need to be addressed. The development of home-style or farm tourism may be best left to smaller NGOs. Sector needs further investigation. a Sector Study on Aromatic Herbs and Spices Market Development in Tajikistan. Francis Petre. UNDP Tajikistan. July 2011. b Source: Marketing Chain Analyses for Onion, Lemon, Watermelon, Apricot, Tomato and Beef in Tajikistan. USAID Productive Agriculture Project. Dushanbe June 2010. c Source: Tajikistan Market Price Report. World Food Program. June 2012.