The Case of Transport Sector in Kazakhstan and Uzbekistan

Global
Development
Network
Varieties of Governance:
Effective Public
Service Delivery
Effective Governance
Perspectives
in Central Asia:
The Case of
Transport Sector
in Kazakhstan
and Uzbekistan
Farrukh Irnazarov
Roman Vakulchuk
Alexander Libman
Zafar Salmanov
December, 2012
Final Draft: Not to be quoted
The Global Development Network (GDN) is an International Organization of developing and transition country researchers, policy and research institutes promoting the generation, sharing, and application to policy of multidisciplinary knowledge for the purpose of development. Founded in 1999, GDN is headquartered in New Delhi, with offices in Cairo and Washington. This Research Paper has been prepared as part of the research which was conducted under the GDN Global Research Project “Varieties of Governance: Effective Public Service Delivery”, implemented with the aim of building research capacities and strengthening public policy discourse across the Global South. The Global Research Project is supported by the Australian Agency for International Development (AusAID), Department for International Development (DFID), UK, the French Ministry of Foreign and European Affairs, Inter‐American Development Bank (IDB), International Development Research Centre (IDRC), Open Society Institute (OSI), The Partnership for African Social and Governance Research (PASGR) and the World Bank. The views expressed in this publication are those of the author(s) alone. © GDN, 2012 1
Content
Abstract
1. Introduction and research design
2. Country context
2.1. Kazakhstan
2.2. Uzbekistan
3. Methodology
3.1. Descriptive statistics
3.2. Data analysis
3.3. Companies from Kazakhstan and Uzbekistan compared
3.4. Main results
3.5. Further results
3.6. Synchronization of road construction strategies in Kazakhstan and Uzbekistan
Conclusion
Policy implications
List of references
Annex 1. Tables
Annex 2. Case-study on efficiency of construction of international, national and local roads in
Uzbekistan
Annex 3. Flow of funds and decision-making in Uzbekistan
Annex 4. Reflections on the course of research
Annex 5. Transport strategies of Kazakhstan and Uzbekistan
2
Abstract
The development of transport sectors in Kazakhstan and Uzbekistan demonstrate that the
quality of roads and infrastructure in Central Asian republics still remain at a low level. The
aim of the paper was to examine how institutional variation of governance mechanisms,
reflecting the variation in accountability in public service provision, affects the efficiency of
road construction services in two countries. The results demonstrate that Kazakhstan and
Uzbekistan pursued very different strategies of market reforms after the collapse of the Soviet
Union. The economy of Kazakhstan is much more marketized and its markets are more
competitive and governance mechanisms are more decentralized. On the other hand,
Uzbekistan is characterized by lower degree of marketization, stronger persistence of
elements of planned economy, limited competition on the markets and more centralized
bureaucracy. However, at the same time within each country road construction is provided by
companies, which differ substantially from each other (e.g. private vs. public, foreign-owned
vs. domestic), and these differences affect the degree of efficiency of road construction
services.
Thus, this research project was aimed at analyzing current public service provision practices
in the transport sector with subsequent policy-related recommendations for governments of
Kazakhstan and Uzbekistan as well as international and multilateral organizations.
3
1. Introduction and research design
The development of transport sectors in Kazakhstan and Uzbekistan, two locomotives and
regional leaders in Central Asia, remains an extremely important issue due to the strategic
importance it has for overall economic development of two countries. There is low
integration between two countries and the transport system, its infrastructure and the
governance methods, do not act as a spur to the integration processes. This is the niche where
the project aimed at occupying and making innovative theoretical and empirical contributions
to the study of effective governance and institutions in the transport sector of the abovementioned countries with a thorough policy-related outcome for regional integration and
trade.
The research project was aimed at finding out the causal link between the specifics of the
public governance in the road construction and maintenance areas and the efficiency of the
services provided. The aim of the paper was to examine how institutional variation, reflecting
the variation in accountability in public service provision, affects the performance of the
public sector. The institutional variation, in turn, can be present on two levels: the betweencountry and the within-country variation. The between-country variation results from the fact
that Kazakhstan and Uzbekistan pursued very different strategies of market reforms after the
collapse of the Soviet Union, creating very different institutional environment. The economy
of Kazakhstan is much more marketized and its market is more competitive. In addition,
Kazakhstan is also characterized by higher decentralization of bureaucracy. On the other
hand, Uzbekistan is characterized by lower degree of marketization, stronger persistence of
elements of planned economy, limited competition on the market and more centralized
bureaucracy. However, at the same time within each country road construction is provided by
companies, which differ substantially from each other (e.g. private vs. public, foreign-owned
vs. domestic), and these differences could also affect accountability. The empirical design
used in this paper explicitly takes both between- and within-country differentials into
account.
Thus, we have to respond to three questions: (1) how do between-country differences affect
the performance of the companies; (2) how do within-country differences affect the
performance of the companies in each country and (3) how do between-country differences
change the effect of factors differentiating companies within countries. Our analysis is more
helpful in responding to the questions (2) and (3), although we provide some evidence with
respect to question (1) as well.
4
The accountability of public service providers can be perceived through two lenses: that of
accountability vis-à-vis consumers and vis-à-vis the policy makers. The focus of this paper is
on the latter: the road construction in both countries is typically commissioned by the
government, with companies operating within the framework of public contracts. Thus,
accountability vis-à-vis consumers can be ensured merely through the political system, i.e.
the accountability of politicians to their electorate. The interaction between the road
constructing companies and the public officials is also creating a serious principal-agent
problem, where the lack of accountability could have negative consequences on the public
service provision. The ability of bureaucrats to monitor the way companies operate within the
contracts for road construction is limited and, what is more important, the bureaucrats are
incapable of distinguishing between the low effort of the companies and the external
environment factors. In order to resolve this problem, different tools can be used – from
formal contractual arrangements to informal contacts, ensuring better access to information
and better incentives for private companies (as we will show below, these informal contacts
are not as useless within the framework discussed here as one could expect, at least in the
Central Asian context). Hence, the main overarching question was how institutional
differences between countries and company-specific arrangements within countries affect the
extent of shirking by companies.
While on the country level the differences in the degree of accountability can be explained by
the entire set of interdependent institutions described above, on the company level within
each country variation in the degree of accountability can be driven by several factors. First,
the most basic characteristics of the companies are their ownership (private vs. public) and
the presence of foreign owners vs. purely domestic owners. Public companies may be easier
to control for bureaucrats; on the other hand, they are also more likely to capture
bureaucracy, resulting in the misuse of public funds. Private companies may have stronger
incentives to improve their efficiency if subject to the pressure of the market discipline; but
they are also more likely to engage in asset-stripping in the presence of high-risk environment
(Braguinsky and Myerson, 2007). Foreign-owned companies may be subject to stronger
pressure from foreign headquarters ensuring the quality of their operation, but at the same
time, if their work in Central Asia is treated as less crucial for the company, there may be
further principal-agent problems within a multinational company strengthening the deficit of
accountability. Second, we have to look for the way companies receive contracts and interact
with governmental authorities, competitors and contractors – there is likely to exist a
substantial variation from this point of view within a country. Third, it is also possible that
5
bureaucrats treat different companies in a different way. While in some cases they put higher
attention to efficient monitoring and control, for other companies they may be more reluctant
to invest substantial effort (of course, it may also be endogenous to company performance, as
we recognize while interpreting our econometric findings). One way to capture these
differences is to ask the companies themselves about which problems they perceive to be
most crucial while dealing with the governmental officials. Of course, these self-reported
measures could be subject to biases, but can form at least the basis for the further
investigation.
The nature of the principal-agent problem we describe is that companies, which have
received contracts from the government, misuse the resources government provides – either
directly or at least in a way that they do not put sufficient effort into using these resources in
the most efficient way. However, even if the principal-agent problem was not resolved in an
appropriate way, the output of the public services can be very large, if the resources at hand
of the companies are large as well. In fact, this is the typical way a hierarchical bureaucratic
system in the post-communist countries (and, in fact, already in the USSR) responds to the
principal-agent problems: more resources are pumped into the system, ensuring that even for
high level of shirking the output is large enough. Therefore, if we merely look at the output
measures of companies, we fail to capture insofar the principal-agent problem was resolved
(and hence, insofar the accountability of companies vis-à-vis public officials was ensured).
There is, however, an alternative, which has been routinely used in modern econometrics: one
could look at the indicators of technical efficiency, that is, insofar compared to other
companies the company is closer to a production possibility frontier. In this case, even if a
company receives larger resources, but misuses them (or uses them less efficiently) due to the
principal-agent problem, it is likely to be characterized by lower technical efficiency.
It is necessary to point out that the technical efficiency indicator as used here is not a direct
outcome measure; hence, there is, strictly speaking, no reason to maximize technical
efficiency. However, the output measures the effective, but not the efficient service delivery.
Looking merely at the effectiveness of service delivery is, however, acceptable only in the
short run: in the medium and long run it is typically insufficient. From this point of view,
resource-rich Kazakhstan and Uzbekistan are similar to other resource-rich economies: large
resource revenues allow them to ensure high quantities of public service provision, but in an
inefficient way, possibly associated with resource misuse. Hence, looking at technical
efficiency seems to be appropriate in the context of our study. However, one has to point out
that the production possibility frontier is determined relatively to other companies: thus, even
6
the most efficient companies could hypothetically be not effective enough. The low level of
satisfaction with the road quality in Kazakhstan could hypothetically refer to precisely this
feature. This remark is important for interpreting our findings in the results part.
For the purpose of our research we first evaluated the variation in the relative efficiency and
then looked at the determinants of this variation. We define efficiency as the relation between
outputs and inputs of the public service. Our idea is that some projects are able to “achieve
more” with the same inputs (or, stated otherwise, in some cases smaller inputs are needed to
achieve the same level of the service quality), and that this variation is mostly due to the
varieties of governance mechanisms. We use the fact that there is a substantial variation in
the governance modes both across and within the borders of both Central Asian countries we
study, as there is a substantial variation of efficiency. Basically, the logic of the study can be
represented with figure 1. One can immediately see that there are also other channels of
causality than those we analyzed in the first place (mode of governance may affect not just
the efficiency, but also the outputs and inputs). That is why complemented the purely
quantitative with the qualitative approach, as discussed below.
Figure 1. Research design
Main causal
link to study
Public inputs (finance,
human capital, etc.)
Variation of the levels
of
efficiency
Mode of
governance
Public outputs (quality
and quantity of
infrastructure)
The secondary data was used at the first stage of the analysis in order to provide quantitative
assessment of the efficiency of individual projects and regions in the area of transportation
infrastructure. We used mostly the data of the public statistics of both countries; for the
analysis of individual projects we were able to obtain information from road construction and
maintenance companies. Obviously, reliability of these data was questionable, what was the
7
main reason for us complementing the quantitative analysis with the qualitative semistructured interviews.
Collection of primary data was an important part of this project for two reasons: first, the
quality of available secondary data is often very limited and the access is restricted in the
region, and second, the secondary data simply do not cover all instances of the varieties of
governance in the transportation infrastructure – particularly, the role of informal institutions,
which can be claimed to be crucial in the Central Asian context. We collected information
through company-surveys and semi-structured interviews, with the specific scope and
direction designed based on the quantitative analysis. Data collection was done by the
members of the research team. There were three groups of subjects for interviews: experts,
bureaucrats and contractors.
We used a two-stage procedure for the data analysis (“nested analysis”). The first stage
involved the quantitative assessment of the efficiency of road construction and maintenance
projects using the appropriate econometric techniques of the data envelope analysis (DEA)
and related approaches (stochastic frontier analysis, public sector efficiency scores)
evaluating whether the existing inputs for a (public) service could have been used in a more
efficient way to achieve the present outputs. The sample of the analysis was project-specific,
where each observation corresponds to an individual road construction and maintenance
project. We understood that the analysis of the larger construction projects on the regional
level was meaningless, since the decisions made by the central government usually span a
number of regions. The measures of the outputs ought to include a variety of qualitative and
quantitative characteristics of transport infrastructure; the employed inputs were the size of
company, measured by the number of employees; and the age of the company (assuming that
older companies have accumulated larger experience, which can be used as a production
factor).
As a result, for each project we calculated the public service efficiency indicators, which we
then regressed on the institutional and socio-economic characteristics (and, especially, the
characteristics of the governance – private vs. public provision of service, type of
subcontractors, etc.). We identified whether specific governance characteristics are ceteris
paribus correlated with particular levels of efficiency. In the course of our analysis we faced
certain identification problems, particularly selection bias and reverse causality. Given the
limited data availability, it was hardly possible to completely solve these issues using just
econometric techniques. Therefore, we also complemented them by the use of qualitative
analysis, based on the semi-structured interviews.
8
The results of our project provided a twofold contribution. First, there was a quantitative and
rigorous evaluation of relative efficiency of different projects in the area of transportation
infrastructure (which has been missing so far in the region). Second, the relation between the
varieties of governance and the efficiency was evaluated through both qualitative and
quantitative methods, thus ensuring higher validity and reliability of our findings.
In the first part of our paper, we provide the context of transport sector developments in
Kazakhstan and Uzbekistan. The analysis of existing literature demonstrates that little
research on road construction and maintenance services has been done in two countries so
far, and so, there is a need to study this particular area of public service delivery.
In the second part we provide a detailed description of the sample of surveyed companies in
two countries and describe the employed methodological tools for data collection. In this
section we also present our findings in the form of combined quantitative and qualitative data
analysis.
In conclusion we summarize our results and provide relevant policy recommendations.
9
2. Country context
2.1. Kazakhstan
Development of the transport sector in Kazakhstan is seen today as one of the key goals in its
national development strategy (please see annex 5 for detailed overview of the transport
strategy). The country has enormous transit potential, which may contribute to significant
inflow of investments into the economy. The government has set an ambitious goal to largely
invest into construction of roads for the years ahead. “We have to adopt a long-term
transport strategy, which is logically tied to our development. It is necessary for us to
construct a network of modern highways, which would help us promote continental and
transcontinental transit in North-South and West-East directions.” (Decree of the President,
2006). As President Nazarbayev stated, the construction of the Western China - Western
Europe transit corridor would revive the Great Silk Road and “cargo will be transported
three times faster than by sea. This road will open big opportunities for foreign
businessmen…“ (Gazeta, 2011). The formation of a transport hub, connecting key country’s
and regional cities in Kazakhstan should be prioritised (Decree of the President, 2006). As
Tulendiev (2009) argues, Kazakhstan needs an innovative economy, which should intensify
the development of transport services. The competitive environment has to be available in
terms of movement of goods, cargo and people. Kazakhstani scholars view that transport
reforms have to be implemented by means of market economy mechanisms (ibid). At the
moment, the transport sector has strategic importance for the country also due to the
construction of above mentioned transport corridors, which cross Kazakhstan and aimed at
connecting two large continents – Europe and Asia together. The road is to be 8400 km long
and 2700 km of it cross Kazakhstan (Slisarenko, 2010). Kobdikov (2006) argues that
Kazakhstan gains enormous time reduction (almost two times lower) while using West-Asia
corridors compared to the use of the Trans-Siberian highway. It is expected that almost
50,000 people will participate in this project (Tengrinews.kz, 2012). As of today, 35,000
people have been already involved into construction of international transport corridors
(ibid). In order to provide advantages to the regions, in which corridors are built, the
government made a decision that contractors and subcontractors can use materials extracted
and produced only in those regions, in which they work, in case necessary materials are
available there (Kazinform, 2010). Moreover, it is planned within the project that local
population living closely to the corridor roads will benefit economically from small traderelated activities (Popkova, 2011). In terms of transport of freight potential, the Kazakhstani
10
economy is one of the most “capacious” in the region. Besides, it largely depends upon the
international transport system (Vielmini, 2005). What is more important is that in Kazakhstan
as well as in any other countries of Central Asia, the most part of the population is occupied
in agriculture. As a result, the region has “a high demand for facilitation of international
transportation in that area…” (GOPA – TRADEMCO, 2007, p.11).
According to Mirzahmetov (2006), “the geographic location of Kazakhstan gives it
significant advantages in terms of transit services provision. He argues that the country has
an out-of-dated transport system, which may hinder economic development of the country.
Since Kazakhstan extensively extracts and exports its mineral resources, it is necessary to
build a smart logistical transport system (ibid). It is important to note, that today the transit
capacity in Kazakhstan does not meet expectations and does not correspond to its transit
potential (ibid). At present, the main problem for the motor roads of national significance in
all Central Asian countries is their poor operational condition, which has adverse affect on
transit attractiveness of the countries. According to the Ministry of Transport and
Communications of Kazakhstan, the length of roads of national significance in good
condition was only 7.2 thousand km (2008) data which is only 30.5 % of all roads. Moreover,
“poor quality of road pavement is one of the reasons for high rate of road traffic accidents,
high consumption of fuel and lubricants, excessive costs for repair and maintenance of
rolling stock, low service speeds of cargo delivery. These affect negatively the transport
component in the value of goods and services, thus reducing the competitiveness of transit
routes of Kazakhstan” (Bekmagambetov, 2009).
Insufficient funding, as experts point out, is the basic reason of poor operational condition of
roads. According to the Ministry of Transport and Communications of Kazakhstan, standard
requirement for maintenance and current repairs of the national roads was KZT 19 billion in
2008 prices, whereas within the national budget only 39% of the required amount was
allocated (Government Portal of Kazakhstan, 2012).
Tulendiev (2009) argues that “shift to market relations has impacted the basic indicators of
the transport sector” (see figure 1 below). During the first period of development, namely
from 1990 to 2000, the volume of transport of freight drastically declined because of the
industrial collapse of the country (ibid). However, during the second phase, namely from
11
2000 onwards the volume of freight transport largely increased. It grew 1,7 times and reached
almost 2,300 mln tonnes.
Figure 1. Volume of transport of freight by all kinds of transport (Tulendiev, 2009)
3000
mln tonnes
2500
2000
1500
1000
500
0
1990г. 1995г. 2000г. 2001г. 2002г. 2003г. 2004г. 2005г. 2006г. 2007г. 2008г.
The figure 2 below demonstrates that the lion’s share of freight is transported by motor
transport, which has been prioritized for freight delivery into other parts of the Republic.
млн. тонн
Figure 2. The dynamics of transport of freight by all kinds of transport (Tulendiev, 2009)
2400
2200
2000
1800
1600
1400
mln tonnes
Железнодорожный
Rail
Автомобильный
Motor
Речной
River
1200
1000
800
600
400
200
0
Воздушный
(тыс.т.)
Air
Pipelines
Трубопроводный
Sea
Морской
1990г. 1995г. 2000г. 2001г. 2002г. 2003г. 2004г. 2005г. 2006г. 2007г. 2008г.
In 2011, total transport of freight was 23,076 mln tonnes, which was 21,6% higher than in
2010 (Samruk Kazyna, 2012). By 2008 motor transport accounted to 78,3% to the overall
freight market volume, whereas rail transport just to 11,6%, air and sea transport to 1,6%
(Tulendiev, 2009). In 2011, motor transport increased to 82,53% (Samruk Kazyna, 2012).
12
According to the Asian Development Bank (2011, p. 2) motor roads are the key element
within the transport system of the Republic. The table 1 below demonstrates the length of
roads in Kazakhstan from the period of 2006 to 2011.
Table 1. The length of roads in Kazakhstan (Statistics Committee, 2012)
2006
91,563 (km)
2007
93,140
2008
93,612
2009
96,846
2010
96,018
2011
96,000
Thus, we can conclude that the major transport potential of the country is embedded within
effective construction and maintenance of roads.
2.2. Uzbekistan
As with the case in Kazakhstan, Uzbekistan’s transport infrastructure was built in the Soviet
era as a part of a transport system centered in Moscow. Uzbekistan, which became a “doublelandlocked” country after the independence, has experienced access problems to international
markets (Reiser and DeTray, 2007). Therefore, the development of the transport sector has
become one of the key factors for the economic growth of the country. Located 3000 km
away from the Black Sea, 3500 km from Moscow and 5000 km from the major Chinese
ports, Uzbekistan requires long-distance transport that becomes extremely costly. When
transporting by land routes, cargos must pass through multiple countries compounding the
vulnerability to the political situations in such transit countries (MOFA, 2011).
Since March 2006 maintenance and construction of major (common use, national and
international) roads have been administered and funded by the Road Fund, under the
Ministry of Finance, while maintained by Uzavtoyul (Uzavtoyol, 2012). Responsibility for
other roads is divided between regional and municipal authorities and state and other
enterprises. There are thirteen administrative provincially based branches of Uzavtoyol that
are responsible for local, as distinct from national, roads and usually contract the road
maintenance works to one of the 161 district level smaller road repair and construction
enterprises (ADB, 2008). Although the private sector is growing, it is still largely
underrepresented with a very few companies which are capable of implementing capital road
works projects. Those that do operate do not have all the special equipment required for
capital maintenance works, have difficulty accessing essential materials, require close
supervision and are insufficient in number to provide competition in the bidding process.
13
These companies are mainly involved in lower level road maintenance works, principally in
urban areas (ADB, 2008).
According to the officials from Uzavtoyol (2012), the National Road Construction Agency,
transport has a direct impact on the expansion of industrial processes, volumes of reserves,
fuel and industrial production, industrial capacity of the economy in Uzbekistan. As they
point out, “the automobile sector plays the most important role in the economic, industrial
and trade development. The base for the development of any economic activity is automobile
roads”. According to Uzavtoyol, the Government of Uzbekistan signed more than 30
international conventions, agreements and treaties on road and transport highways
(Uzavtoyol, 2012). Currently, the Republic of Uzbekistan is a transit zone for 20 international
transport routes bridging the Eastern Europe, Caucasus, Middle East, South Asia with China
and other South-East Asian countries (Uzavtoyol, 2012).
As of today, Uzbekistan’s transport infrastructure is both inefficient and dilapidated due to
the lack of properly maintained or upgraded road system or insufficient funding after the
independence (ADB, 2006). Maintenance has been and continues to be under-funded,
although the situation is improving with increasing allocations to the Road Fund. Many
sections of primary route are in a deteriorated condition and some may require expensive
reconstruction (ADB, 2006). Following the collapse of the division of labor in the Soviet-era,
the country has seen an increase in exports to outside the former Soviet bloc as well as those
inside the bloc. As a result, Uzbekistan faced the need to build multiple, alternative
international transport systems including a multimodal transport system in addition to
modernizing and upgrading the existing ones. Similar to Kazakhstan, after the independence
in Uzbekistan the transport sector encountered the loss of technicians and management
personnel in the sector, and intensive human resource development that are adaptable to
market economy was required to fulfill the vacancy (MOFA, 2006).
In this regard, a particular attention is paid to the ongoing efforts by Uzbekistan to develop a
regional transport infrastructure, mainly in the context of the President’s initiative on the
creation and modification of the national and regional roads passing through Uzbekistan. As
foreign experts noted, this routes will enable the Central Asian countries to access the most
attractive markets of the Gulf with the annual imports of more than $ 335 billion. Experts
stress that “A convenient geopolitical location of Uzbekistan in the heart of the region
14
provides transport get the best benefits of the transitional potential of the country presenting
the shortest route connecting Europe and Asia overland” (Uzbekistan Today, 2012).
Uzbekistan’s 183,000 km road network comprises 43,000 km of primary roads and 140,000
km of urban, rural, and other roads. A road sector strategy and road map is in place, which
prioritizes the 1,200 km A380 highway. The adjoining road in Kazakhstan (between Beyneu
and Aktau) will add impetus to regional connectivity and increase the viability of the
investment program road (Uzavtoyol, 2012). The Government of Uzbekistan plans to invest
USD 6,935 billion to development of infrastructure, transport and communication
construction within 2011-2015. Of this amount, about USD 3,394 billion is going to be
directed to development of automobile transport system in which 2,306 km of roads will
constructed and reconstructed. Within this national program the Government plans to attract
USD 3,235 billion of foreign investments to implementation of project and allocated USD
1,934 from state budget and targeted state funds. In accordance with the President’s decree,
equipment, raw materials, spare parts, technological documentation and others, which are not
produced in Uzbekistan and imported within the program, will be exempted from customs
payments till 1 January, 2016 (Government of Uzbekistan Portal, 2011).
According to UNDP (2011), roads are an important part of the industrial and social
infrastructure of Uzbekistan. In particular, goods turnover through automobile roads make
about 85 percent of all freight traffic and more than 95 percent of passenger traffic in the
country which emphasizes the special role and significance the automobile network in
Uzbekistan plays (please see annex 5 for detailed overview of the transport strategy).
Figure 3. Transport volume dynamics (ADB, 2010)
15
Figure 4. Freight volume distribution by type of transport (Uzavtoyol, 2012)
Railway transportation used to dominate the freight market, but its market share fell from
90% in 1997 to 57% in 2009 (ADB, 2010). This sharp decrease in freight traffic was caused
by increased motorization, higher number of automobile owners, greater number of private
road hauling companies and shorter transport hauls of manufactured goods. As of 2009, roads
accounted for 43 percent of Uzbekistan’s freight by ton-kilometers (km) and 81 percent of its
passenger by passenger-km. Experts expect this market share to continue to grow (ADB,
2011).
Recognizing the geopolitical importance of Uzbekistan in the region, the large hub with
international intermodal logistic center on the base of the Navoi Airport was put into
operation in 2010. Navoi city, located in the center of the country, on the crossroads of
international, inland and air corridors, represents an ideal regional center for management of
international freight flows (Uzinfoinvest, 2012). Being located in radius of 2000 km from 10
capitals of different countries with total population of 90 million people Navoi hub provides
optimum access to the customers and partners as well as international cargo transportations.
The experts point out that by 2015, transportations within Eurasian area will increase 2.4
times compared to the volume in 2006, while transit of cargo transportations will increase 4
times. Besides, direct proximity of international transport routes (Trans-European Highway
E-40) to the hub provides access to the markets of the Middle East, Caucasus through
Turkmenistan; to China, Russia and further to the European countries through Kazakhstan in
the north; in southern direction through Afghanistan to Pakistan and India (Uzinfoinvest,
2012).
Today, the total length of roads in the Republic of Uzbekistan is 184 thousand km, of which
42,654 km are roads of general use (this includes 2,755-kilometer road – the Uzbek national
16
highway) (Uzavtoyol, 2012). About 4,050 km of roads of international and national
importance were commissioned and completely renovated over the years in the country.
Compared with 1991, today, the length of roads with cement concrete pavement has
increased by 75 km, asphalt – by 1,902 km, black pavement – by 542 km, crushed stone
surface – by 421 km. 175 bridges with total length of 6,645 linear meters (lm), 19 stilted
roads and interchange complexes with total area of 338 lm were built and repaired (Investor
Portal of Uzbekistan, 2012). During 2011, 1,506 km of roads were re-built and renovated
throughout the country, of which 302.5 km of Uzbek national highway were reconstructed,
329.5 km of public roads, 724 km of rural roads, 68 km leading to new housing estates and
42 km of city streets. Disbursed 572 billion soums were repaired. 95 sites along the roadside
service of the Uzbek national highway were constructed and commissioned.
The following is the map showing the major cargo corridors for Uzbekistan.
Figure 5. Major transport corridors in Central Asia
Source: Ministry of Foreign Relations, Investment and Trade of Uzbekistan.
Corridor 1 – to the ports of Baltic States (transit via Kazakhstan and Russia) – Klaipeda (Lithuania), Riga,
Liepaja, Ventspils (Latvia), Tallinn.
Corridor 2 – to EU countries through Belarus and the Ukraine (transiting Kazakhstan and Russia) – crossing
border at Chop (Ukraine) and Brest (Belarus).
Corridor 3 – to Ilyichevsk, the Ukrainian port (transiting Kazakhstan and Russia), accessing the Black Sea.
17
Corridor 4 – to Transcaucasian corridor (through Turkmenistan, Kazakhstan and Azerbaijan) accessing the
Black Sea; the corridor is more known as TRASECA.
Corridor 5 – to Bandar-Abbas, the Iranian port (through Turkmenistan) accessing the Persian Gulf.
Corridor 6 – to the eastern direction through the Kazakh-Chinese border (Dostyk/ Alalshankou) reaching the
eastern ports of China as well as the Far Eastern ports of Nakhodka, Vladivostok and others.
Corridor 7 – to the Chinese ports (through Kyrgyzstan) accessing the Yellow Sea, EasternChinese and
Southern Chinese Seas.
Corridor 8 – settling down of the Afghan related issues creates new opportunities to develop southern
alternative transport routes accessing the ports in Iran and Pakistan through Afghanistan (Government,
2012).
The major international corridors are shown in Figure 6. These corridors serve both
domestic and international traffic (ADB, 2006).
Figure 6. Regional corridors
Source: ADB, 2006.
Considering the transit potential of Kazakhstan and Uzbekistan, the governments of these
countries acknowledge the importance of undertaking large-scale reforms in transport sectors
for the national economies. The major emphasis in this respect is placed on constructing new
and reconstructing the existing road networks of different level of importance. Yet, academic
literature and knowledge base on efficiency of the transport sector in the two countries is
18
scarce and almost non-existent. The referred literature sources mainly revolve around
publications of national and international organizations as well as financial institutions. Due
to the recently announced national transport strategies in the two countries, various types of
consultancy have started to appear. However, the major source of data on transportation
pertains to barriers in the transportation sector, quality of roads, financing but is lacking the
institutional and governance efficiency aspects.
The evaluation of the quality of public service delivery in the transport sector in Kazakhstan
and Uzbekistan is what drives the current research as till today no comprehensive research of
effectiveness of road construction and maintenance has been conducted in two countries.
19
3. Methodology
3.1. Descriptive statistics
The major method for primary data collection we used was a survey of company. 54
companies in Kazakhstan and 52 companies in Uzbekistan were surveyed, which construct,
maintain roads and provide technical services have been conducted. It is important to note
that today there are officially 198 construction companies in Kazakhstan, including 10 large
ones, which may without assistance participate in construction of roads as general contractors
(Panorama, 2010). In Uzbekistan, the number is somewhat similar - 185 construction and
maintenance companies (Uzavtoyul, 2012). The survey for construction companies included
a quantitative part in which answers related to objective observations and subjective
assessments were given according to a pre-defined scale. Our company surveys and
questionnaires for public officials in Kazakhstan were equally structured with the interviews,
which were conducted in Uzbekistan. This allowed making answers and assessments
comparable. Moreover, 12 semi-standardized interviews in each country were conducted with
high-ranking public officials and experts involved into the transport industry.
It is important to mention that one of the major problems in data collection in two countries
was little information available on road construction projects in the country. Besides, official
statistical data may be unreliable and analysing official documents and existing reports only
did not provide sufficient information for our research. In addition, official information does
not often cover the existence of informal institutions and practices, present in the transport
industry. Therefore, primary data collection in the form of surveys and semi-standardized
interviews has become one of just few options, which largely helps obtain data necessary for
the analysis of effectiveness of the road construction industry. In addition, in Uzbekistan
unlike in Kazakhstan there is no e-government option, where one can easily access and obtain
information.
Both domestic and foreign companies from the private sector were approached in our study.
42 road construction companies and 12 road maintenance companies have been surveyed in
Kazakhstan; 36 road construction companies and 16 road maintenance companies in
Uzbekistan. Overall, 12 semi-standardized interviews with high-ranking public officials and
experts were conducted in Kazakhstan and 10 interviews in Uzbekistan (see figure 1):
20
Figure 1. Sample composition
50
40
30
Kazakhstan
Uzbekistan
20
10
0
Cons truction
Roa d m aintena nce
Public officials a nd e xper ts
Regarding ownership structure of surveyed companies, 40 surveys with domestic and 14
surveys with foreign companies were conducted in Kazakhstan (see figure 2). This
proportion, however, does not fully reflect upon the real distribution of domestic and private
companies because of the current dominance of foreign companies in construction of roads in
Kazakhstan. Yet, most of the domestic companies closely cooperate with foreign companies
as the latter often subcontract domestic companies for road construction after winning public
tenders.
Figure 2. Distribution of companies by ownership structure in Kazakhstan
Domestic (40)
Foreign (14)
In Uzbekistan we achieved the comparable results (see figure 3). Namely, 33 domestic and 19
foreign companies were surveyed. The lion’s share of foreign companies was joint ventures
21
with local companies. Therefore, the division foreign/local is slightly blurred in this case. So,
only few purely foreign companies were surveyed.
Figure 3. Distribution of surveyed companies by ownership structure in Uzbekistan
Domestic (33)
Foreign (19)
As regards regional distribution in our sample, the companies based in different regions of
the country were surveyed. Most of the surveyed companies construct roads in 3-4 regions
simultaneously. Thus, we were able to equally address contractor companies in various
regions of the country in an attempt to achieve higher regional representation of our sample.
The same relates to Uzbekistan. Surveyed companies were based in Tashkent region,
Samarkand region and Fergana region. Most of the companies operate in 3-4 regions
simultaneously, what also allowed achieving high regional representation for our sample.
As regards public officials, high-ranking public employees at the governmental and regional
level were evenly approached. It is important to note that it was extremely difficult and timeconsuming to arrange interviews with both - contractors and public officials. 1 While
conducting surveys and interviews, the respondents were guaranteed with full confidentiality
and it was clearly communicated that the results of the surveys would be used only in a
generalised form, without giving names of respondents, their positions and companies they
represent.
In addition to conducted surveys and semi-structured interviews, two round-tables were
organised. The first roundtable with experts and representatives of various companies was
This observation is also based upon our experience in conducting other research projects and addressing these
categories of respondents.
22
conducted in Tashkent jointly with the American Chamber of Commerce and Central Asian
Development Institute (CADI) in February 2012. The second round-table was conducted in
Almaty by CADI in April the same year. Most of the respondents were representatives of
domestic and foreign subcontractor companies. Both round-tables were aimed at obtaining
primary data with respect to road construction and maintenance issues. Apart from that, all
the participants were surveyed and the same questionnaire, as for other participants, was
employed.
3.2. Data analysis
We attempted to evaluate the technical efficiency of the road construction companies, and
then find out the determinants of this technical efficiency. Our approach was based on using
the data envelope analysis (DEA), which allows taking into account multiple inputs. The idea
of DEA was to estimate a production possibility frontier, i.e. the highest possible output a
firm could achieve given the inputs at hand, and then to measure the distance between this
frontier and the actual output of the firm. As the output we considered the length of roads
constructed by the company: we understand that this measure might be problematic since the
quality of roads constructed is very different. Strictly speaking, it is possible that a company
increases the output (the length of roads constructed) by decreasing the quality of the roads
(on the other hand, road quality and quantity of construction may also be complementary to
each other if, for example, learning effects and economies of skill in road construction are
present). The problem is, unfortunately, that of data availability. Measuring quality of roads
is an extremely difficult task. Looking at the duration of travel would be one possible option:
however, regular passenger travel between largest cities in Kazakhstan and Uzbekistan is
typically performed by train and less so by bus or car; and finding systematic information on
the duration of travel outside the passenger transportation is difficult. However, even besides
data availability there are several arguments in favor of focusing on the length of the roads
constructed in our analysis.
First, in Central Asia it is possible to argue that the mere availability of roads is a substantial
problem, which is not so easy to resolve. Hence, finding out which companies are capable of
achieving the best results in terms of length of the road construction is also an important task.
In fact, it is even not entirely clear whether given substantial deficits in the development of
road network one has to advocate a limited construction of high-quality roads or massive
construction of low-quality roads in the first place: while the former may improve
23
connections between already relatively well developed parts of the countries, the later may be
more important in terms of providing better market integration throughout the country. It is
also the case that high-quality roads may be associated with higher maintenance costs –
another factor we cannot include in our analysis given data availability. If that is the case,
again, the cost-benefit analysis may favor the construction of low-quality roads.
Second, the quality of the roads plays a different role in different countries of Central Asia.
According to the 2011 Gallup pool (Hoff, 2012), in Uzbekistan 64% of the population is
satisfied with the quality of roads, which is above the world average (59%) and even Europe
average (61%). In Kazakhstan the respective indicator is much lower and accounts for 39%,
but still above the average for the post-Soviet space (36%).2 Thus, the problem of exchange
of quality for quantity may be less important for Uzbekistan, and thus make at least our
results for this country more valid (interestingly, as we will show in what follows, there is
some evidence that companies from Uzbekistan have higher efficiency according to the
indicators applied in our study as well; thus, one could hypothesize that the quality and
quantity of the road construction may be complements rather than substitutes – this result,
however, is based on a number of relatively restrictive assumptions and thus should be
treated with caution, as discussed below). Clearly, the surveys of the sort described above,
should be treated with caution, particularly if the intra-country comparison is performed: it is
possible that more critical assessment by the Kazakhstani population is due to higher
openness of the country, which allows people to receive more information for comparison.
We could also attempt to capture the quality of roads using more objective indicators. One
could be the share of paved highways in the total length of highways. Here, actually, the
evidence is somewhat inconclusive. According to the data of the CIA Factbook, Uzbekistan’s
share of paved highways is 87.3%, and Kazakhstan’s 94.7%;3 however, the more recent data
for Kazakhstan indicate the share of paved roads of 88.5% in 2009 (from the World Bank
World Development Indicators; no information for Uzbekistan is available from this source).
Thus, even if Kazakhstan does have somewhat higher road quality, this advantage is very low
(besides, World Bank indicates that in 2007-2009 Kazakhstan’s share of paved road was
going down). Interestingly, the length of paved roads in both countries is almost the same (77
thousands km in Kazakhstan and 71 thousands km in Uzbekistan, according to the CIA
2
Moreover, in our study we also regard interviewed experts and public officials as road-users as they shared
with us their perceptions on quality of constructed roads in two countries.
3
See http://www.nationmaster.com/graph/tra_roa_pav-transportation-roadways-paved, accessed November 3,
2012
24
Factbook), thus in spite of its much larger geographical size and spread the magnitude of the
road network in Kazakhstan is comparable to that of Uzbekistan (this could be one of the
factors of higher satisfaction in Uzbekistan – although, since the density of population in
Kazakhstan is much lower, the smaller density of road network may be appropriate).
While calculating the efficiency scores, we used two inputs: (1) the size of company,
measured by the number of employees; (2) the age of the company (assuming that older
companies have accumulated larger experience, which can be used as a production factor).
The first variable indicates that companies with larger number of employees have larger
resources to engage in road construction. The second variable indicates that older companies
have substantial economies of skill, are familiar with the environment they operate in and
have developed business practices – this, again, allows them to increase their output. Because
the production technology of road construction companies in Kazakhstan and Uzbekistan
may differ, in the baseline regressions we calculate the production efficiency separately for
each country. The result is a coefficient from 0 to 1, with 1 being the highest possible
(company at the efficiency frontier). The DEA efficiency scores are calculated, furthermore,
using two assumptions: the variable returns to scale (VRS) and the constant returns to scale
(CRS). It is reasonable to assume that road construction is more likely to be associated with
variable returns to scale (particularly since we estimate the efficiency of companies in terms
of the length of the roads constructed, where economies of scale may be substantial); still, we
use CRS as a robustness check. The resulting score is regressed on a set of company-specific
covariates, allowing us determining their influence on the technical efficiency of road
construction. The literature is divided as to which estimation technique should be used in this
case. Again, we restrict ourselves to the simplest possible and apply tobit.
Since our samples for each country are relatively small and the variables highly collinear, we
estimate multiple specifications adding variables from the survey in groups (either we use
numeric value of response or create dummy variables for various response options). We
always control for the origin of the company (foreign or domestic). In addition to this
baseline specification, we regress the technical efficiency on the following controls.
Generally, they can be divided into two groups. The first group describes access to resources
and main barriers the companies encounter. The second group looks at the channels of
coordination existing in the economy and their success.
25
Access to resources and barriers
(1) two dummies: whether the company receives international help and help from the
government. The reason why we include these variables is that, on the one hand, international
help may be associated with greater access to foreign technology and production practices, as
well as associated with more rigorous monitoring of business practices by the foreign
partners – thus, it could result into higher efficiency. However, dependence on foreign help
may be associated with poor knowledge of local market conditions and business practices –
thus, a decrease of efficiency. On the other hand, governmental help may be associated with
poor oversight through inefficient bureaucracy and soft budget constraints (and thus low
efficiency), but also, if bureaucracy manages to establish successful control over the business,
higher efficiency (ultimately, in this case business efficiency reflects the efficiency of
bureaucracy – compared to the incentive effects of market mechanism, which is in both
countries underdeveloped). Hence, both a positive and a negative sign of this variable can be
expected;
(2) two numeric variables, representing the importance of particular forms of help for the
company. It is possible that while the company does receive foreign or governmental help, it
is relatively less important for it. However, the information on importance of help is likely to
be more subjective than the simple acknowledgement of its existence, so we use both this
variables and the variables described above;
(3) set of dummies describing whether company reports the presence of particular problems
(from bureaucracy and competition to quality of staff and international tenders). The business
efficiency could be constrained by the economic environment in which the company
operates. While we have provided some more general overview of this issue for both
countries above, in Kazakhstan and Uzbekistan individual companies may be subject to
conditions different from others (e.g. because of their connections and experience, geographic
location or mode of operations): thus, we have to check how company-specific perception of
constraints indeed affects its efficiency. It would be plausible to expect all these dummies to
have either a negative, or an insignificant effect on efficiency; thus, our estimations allow us
to establish the main barriers for efficiency of individual companies. We could, however, also
find that companies more likely to report certain problems are more efficient. It may be
driven by reverse causality (we will discuss this issue below; our regressions should be
interpreted as conditional correlations rather than causal claims – more efficient companies
could be more sensitive to certain problems) or by the fact that by overcoming certain
difficulties the companies become particularly efficient. The specific list of variables we use
26
is compelled based on the standard catalogue of possible difficulties a company in developing
countries (and in the post-Soviet world) could have – the list has been mostly confirmed
during our interviews;
(4) three for reasons the company does not utilize its production facilities to the fullest extent
possible. Being unable to utilize its production facilities to the fullest extent possible can be
treated as almost synonymous to being inefficient – thus, in this case we correlate our
measure of efficiency with self-assessment of possible reasons for decline of efficiency
reported by companies. We look at three of them: legal factors (i.e. institutional environment
restricting companies from using their production facilities to the fullest extent); demand
constraint (it is possible that the lack of efficiency is driven not by the effect of governance
on companies but by the overall demand in the economy – some companies may have
inherited their capacities from the Soviet past and thus be forced to under-utilize them) and
internal constraint (all forms of inefficiencies in the internal governance of the companies,
which are not captured by legal environment, but prevent companies to fully utilize their
production potential). All three dummies are expected to have a negative effect on efficiency
(or insignificant, if particular variables are irrelevant);
(5) for the importance of the quality of personnel and whether the company implements
training programs for its workers. These variables, strictly speaking, do not belong to the set
of governance variables. They are primarily measures of availability of resources in one
crucial area – quality of personnel (notice that the size of manpower is accounted for while
constructing our dependent variable).
Mechanisms and tools of coordination
The subsequent variables mostly look at various tools of coordination existing in the
economy. We investigate both whether companies consider coordination to be successful and
which tools are used for coordination. The ability of institutions to ensure coordination actors
is, probably, one of the major functions institutions could generally perform in an economy.
We look at both generic coordination instruments (e.g. courts), coordination with key players
(contractors, regional governments, competitors) and instruments used for coordination at
various stages of production cycle (contract acquisition, implementation of contracts, possible
dispute-settlement mechanisms).
(6) extent of coordination with the regional government and with competitors. We look at
coordination with two key players our previous questions did not capture – the sub-national
governments and competitors (coordination with national government partly is captured by
27
the variables (1) and (2)). Sub-national governments may be especially important for
Kazakhstan given the enormous size of this country. If there are no problems in terms of
coordination, we should expect a positive effect on efficiency;
(7) a measure of the company’s activity in using courts. We look at one of major tools of
coordination across businesses and other actors in an economy based on the rule of law – the
courts as the dispute-settlement mechanisms. We could expect the excessive reliance on
courts to be associated with lower efficiency; but it may also come from higher familiarity
with the legal environment and practices, which allow the company to move away from
traditional informal practices and use instruments of coordination based on law – hence,
higher efficiency;
(8) several variables describing the relation between the company and the contractor. Ability
of companies to successfully coordinate with the contractors is, on the one hand, one of the
major features of the institutional environment, and, on the other hand, a major driver of
efficiency. The better the coordination with the contractors, is, the higher the efficiency
should be;
(9) use of different channels of coordination of interaction of company with the contractor
(governmental decisions, oral communications etc.). These variables have a function similar
to that of the general use of courts, as they account for the coordination mechanisms applied
by companies in dealing with contractors. To some extent, the estimations we obtain in this
case provide us with the information on which type of institutions and coordination
mechanisms are actually allowing companies to increase their efficiency, and which are
associated with less efficient practices. Similarly to what has been mentioned above, more
formal channels (e.g. governmental decisions) may improve efficiency; but, on the other
hand, if the bureaucracy is weak and informal mechanisms allow to facilitate matters, their
use may be associated with higher efficiency;
(10) set of dummies describing the factors determining why company received the contract.
One of the key specific elements in coordinating with contractors is the way company could
have receive contracts. First, companies could receive them based on competitiveness and
quality of their service. Second, the contracts could be allocated according to friendships and
informal connections. Generally, we should expect the latter channel to result in a decrease of
efficiency, as this type of informal networks is typically associated with decreasing market
discipline. However, one could also expect friendships and connections to serve as an
informal selection tool, in an environment of very high information asymmetry allowing to
find out the relatively more efficient companies;
28
(11) variables describing different channels the company uses to resolve conflicts and
conduct negotiations. These variables, as the variables describe above, capture different
forms of coordination used in case conflicts occur – interpretation is similar as above;
Thus, we obtain 11 specifications, which are estimated for both countries for the case of
variable and constant technical efficiency. 4 Overall, our sample includes 106 companies.
However, we have dropped companies operating in street and bridge construction or pure
road maintenance to ensure the compatibility of observations, thus, having 94 companies in
the final sample. The set of variables we use follows the conceptual framework presented
above, and captures possible factors determining the intra-national variation of accountability
and of technical efficiency. In addition, we also look at the quality of personnel, which does
not, strictly speaking, relate to this issue, but turns out to be an important correlate of
technical efficiency, as shown below.
We should acknowledge that some of them may be interpreted through the lens of
endogeneity: this is, however, a typical concern in the literature, see e.g. Geys et al., 2010,
Kalb, 2012 (in fact, we will interpret many of the effects as conditional correlations rather
than causal links). First, technical efficiency of companies could determine the responses of
companies to the items in the questionnaire – we will carefully discuss this reverse causality
interpretations in what follows. Second, the sample selection bias precludes us from
observing the companies which have not received the contracts – this is, however, an almost
inevitable problem in the microeconometrics, as long as no natural experiment design is
available.
The interpretation of our results, however, is confronted with a major problem, which we
have to acknowledge before we proceed to the empirical analysis. The surveyed companies
did not provide any information on their budget. 5 This is an unfortunate, but almost
unavoidable problem if one deals with empirical studies using firm-level data in developing
countries and in such a sensitive area as construction (which implies very strong interaction
with the government). Even if researcher commits to confidential treatment of information, it
is impossible to convince the managers of individual firms to reveal it. Budget is, however, a
major input, may be even more important than the manpower and experience. It is
4
It is necessary to recognize that quite a few of these variables can be endogenous, thus our findings partly
should be interpreted as correlations rather than causal claims; however, even the analysis of these correlations
is likely to be helpful for understanding how the technical efficiency varies among Central Asian construction
companies.
5
In fact, all representatives of private companies refused from sharing information on their budgets as they
found this issue sensitive. So, in the end we skipped the question on budget from our questionnaire.
29
particularly problematic because it creates a sort of omitted variable bias at the level of
calculation of technical efficiency scores: it is possible that the measure of technical
efficiency captures not the relative efficiency of the companies in building the roads but their
efficiency in acquiring contracts. Since DEA is not an econometric estimation technique but
rather an optimization routine, the existence of the omitted variable does not render biased
estimations, but it does affect the way how we should interpret our results. Throughout the
subsequent chapters we will interpret the results in a way that they account for both
possibilities: the effect of certain variables on technical efficiency and on acquisition of
budget. This is a major limitation, which we cannot overcome.
3.3. Companies from Kazakhstan and Uzbekistan compared
Before proceeding to the actual determinants of technical efficiency, it is in our opinion
reasonable to briefly summarize the differences between Kazakhstan and Uzbekistan in terms
of the results obtained for other variables in our survey. The countries are indeed different in
several respects (see table 1).
Table 1: Comparison of means between the Uzbekistan and Kazakhstan companies, only variables with
significant differences reported
Contractor fulfills terms
Contracts received : domestic or foreign
Contracts received : friendships
Contracts received: reputation
Contracts received: form of ownership
Contracts received: market conditions
Coordination: oral communication
Governmental support
Importance governmental support
Importance international help
International help
Length of the roads
No conflicts
Number of employees
Personnel training
Problem: centralization of decision-making
Problem: climate
Problem: deficit of qualified staff
Problem: finance
Problem: intransparent tender
Problem: low quality of staff
Problem: no targeted use of money
Production facilities not used entirely: legal restrictions
Use of courts
Kazakhstan
3.953
0.047
0.023
0.721
0.000
0.953
0.186
3.488
3.558
2.907
3.209
149
0.162
321
3.209
0.140
0.349
0.349
0.023
0.130
0.373
0.163
0.070
0.442
Uzbekistan
3.250
0.173
0.327
0.307
0.077
0.231
0.000
1.385
0.577
0.000
0.000
52
0.000
50
5.577
0.346
0.000
0.019
0.135
0.461
0.080
0.385
0.653
0.884
30
To start with, different factors determine whether companies have a chance to receive the
contract. In Uzbekistan the difference between domestic or foreign, state-owned or private, as
well as friendships and other informal relations play a higher role. Kazakhstani companies, in
line with more developed market economy and advanced reforms in this country, indicate
that market conditions (relevant for 95% of Kazakhstani but only 23% of Uzbekistani
companies) and reputation play an important role in receiving the contract. Kazakhstani
companies are more likely to receive international help and to consider it important (in fact,
no Uzbekistani company indicates that international help is important in our sample). But for
Kazakhstani companies governmental support is also significantly more important. We
should point out that the results of Table 1 are purely descriptive: they do not imply any
conclusions about whether the combination of properties of Kazakhstani companies makes
them more or less efficient as opposed to Uzbekistani companies. Second, we also make no
statements about why governmental support matters. For example, it is possible that in
Kazakhstan in a competitive environment companies with better links to the state receive
larger budget and more (or better) contracts, while in Uzbekistan, where a single publicowned group receives most of the contracts and then sub-contracts them, the state support is
rendered unimportant in getting more budget. But it could also be that in the environment of
strict central control over the economy in Uzbekistan the governmental support is perceived
as a natural condition (possibly, only companies with very strong governmental support
survive and stay in our sample), while in Kazakhstan there is larger variation in this respect,
and thus companies are more aware that they are different from others because of the public
support they receive.
Let us briefly describe the institutional features of both countries from this point of view.
Today in Kazakhstan the key players in road construction activities are mainly private
contractor and subcontractor companies, which provide construction and road maintenance
services. As argued by one of interviewed public officials,
“…today in Kazakhstan there are almost no state construction companies. This has to do, first,
with the fact that construction is too expensive for the state.”
This points also to the fact that during the first years of independence state construction
companies were perceived as ineffective entities, which due to the lack of effective control
mechanisms provided low-quality services and misused public funds. Thus, in an attempt to
decrease public expenditures on road construction and improve image, road construction and
maintenance services were delegated to private firms by the state. This was also the result of
conducted market reforms in the country, which implied increase of private sector
31
participation in road construction and governance. At the moment public construction
companies participate only in construction and maintenance of city roads.6 All interviewed
experts indicate that private companies, which receive assistance from the state, have an
advantage compared to those, which do not enjoy public support. Therefore, for Kazakhstani
companies state support is significantly important. In Kazakhstan, the government actively
supports companies, which participate in public procurement, the system, which was
introduced in 1993-1994 in the country. However, the system itself is not seen as particularly
advantageous for local companies for the reason that usually foreign companies win tenders
as general contractors due to better technical equipment, experience as well as capital means
they possess. This is an advantage, which foreign companies enjoy while participating in
tender bids with local contractor companies. From this perspective, participation of local
companies in tenders and local workforce in construction activities is limited. High-skilled
foreign workforce of categories 1, 2, and partially 3 7 are allowed to work within road
construction projects in Kazakhstan. Thus, the most of strategic work is usually done by
foreign workforce. Yet, as all experts claimed, foreign companies, which usually participate
in road construction projects, often do not provide high-quality construction services. Thus,
although they have modern technical equipment, their main advantage for winning tender is
not the fact that they are very efficient in terms of road construction. Rather, as mentioned
above, foreign companies have more capital, which they need to demonstrate while bidding
for construction tender. According to an expert,
“…one of the pitfalls of the current tender system is that local companies do not have often
enough assets to even participate in tender, whereas foreign companies have enough capital to
participate. Moreover, technical equipment is also usually better in foreign companies. As a
result, foreigners usually win tender and then hire local subcontractors at a much lower price to
do construction work.”
Thus, the tender system in Kazakhstan works as follows. Most of the roads of international
importance and a large number of internal roads (rarely city roads) are contracted to large
foreign companies, which win tenders, and then, hire local subcontractors at a lower price to
do the bulk of the work in the project.
In Uzbekistan, the above-mentioned natural condition is explained by the following fact.
According to “Economic Review” (2011) coupled with the opinions of the majority of
experts in the road construction sector, about 90 percent of all road construction and
6
City roads are constructed, reconstructed and maintained mainly by municipal road agencies and less so by
private domestic companies. Foreign companies rarely participate in constructing and maintaining city roads.
7
Category 1 and 2 – engineers, topographers, land surveyors and project managers; category 3 – asphalt pavers.
32
maintenance works in the country are implemented by “Uzavtoyol” and its member entities.8
As they continue, the reason seems to be that this is due to the fact that “Uzavtoyol” is
comprised of and represented by quite a large number of enterprises in the road construction
sector. Despite Uzavtoyol’s multifaceted organizational nature and the fact that it is
represented by a large number of enterprises each being specialized in its field, Uzavtoyol is
still perceived as a monopolist state-owned holding group (Economic Review, 2011). As
experts indicate, Uzavtoyol and their member entities are subcontracted to and implement
about 70 percent of all projects which are included in the state strategic programs and
financed by the Road Fund. Their yearly capacity in construction and repair works is worth
UZS 350 billion (180 million dollars). Therefore, the road sector in Uzbekistan with respect
to road construction and maintenance is moderately monopolized with the majority of the
projects being contracted to the entities within Uzavtoyol. Despite the situation has been
improving over the recent years, about 90 percent of the total road projects are still contracted
to Uzavtoyol (see appendix 3 for decision-making within Uzavtoyol). Private companies are
mainly engaged in construction of urban and lower-level roads. The major reasons, as actors
within the road sector indicate, is small size, low level of expertise and insufficient financial
as well as physical capacity of private businesses to undertake large-scale projects ordered by
the Road Fund. Yet, due to inconformity of Uzavtoyol to market principles and insufficient
amount of financing the quality of roads, including some international roads, in Uzbekistan
by far remains poor. Yet, as Road Fund’s experts argue, Uzavtoyol targets quality, not profit.
However, Eshonkulov et al. (2011) deem that the volume of planned road construction is
underfinanced which leads to low-quality implementation of works by any subcontracting
companies no matter of its affiliation (ibid). The same is shared by other experts who state
that despite the dominating part of road works are contracted to the enterprises under
Uzavtoyol, such road contracts generate minimum or practically no profit, the situation which
undermines competition, leads to non-performance based contracts and eventually – low-
8
Uzavtoyol is the state-owned joint stock company, road construction and maintenance works are delegated
and distributed among 13 regional territorial road operation organizations, 7 specialized repair-operational
enterprises on maintenance of roads of national and international importance, 10 road construction and repair
organizations which mainly deal with the roads of the local character. Additionally, under their auspices
Uzavtoyol has 7 enterprises, 3 specialized blast-hole drilling work enterprises, Uzdorkomplekt department,
the Automobile Road Research Institute, regional subcontracting repair and exploitation enterprises of road
construction and specialized repair and exploitation enterprises of road bridge construction (Uzavtoyol,
2012). As Audier et al (2008) point out, these region-specific enterprises are involved in repair and
maintenance of national and international roads and their activity may go across regional boundaries.
Uzavtoyol and its core subsidiaries are supported and funded by the public Road Fund.
33
quality work (ADB, 2008: p. 105). The experts and the multiple respondents of the round
table and the conducted survey also indicate this fact stating that the quality of the roads
constructed by Uzavtoyol member enterprises are of poor quality.
Although the operational capacity of Uzavtoyol is the largest, the quality aspects still remain
an issue for building some parts of international roads. In particular, poor quality is caused by
decision making structure when choosing a subcontracting party for implementing road
works of international importance (E-380, for example). As one of the experts during the
interview pointed out,
“…a subcontractor company for laying the first ground layer is selected by the Road Fund and
Uzavtoyol among local enterprises. As a result, the poor quality and time delays in laying a
ground-layer by a local company may further deteriorate quality level of upper layers of the road
laid by a foreign subcontracting company which leads to general poor quality of the road.”
This, according to the expert, is one of the major reasons which raise disputes between the
parties involved, for instance, between ADB and local authorities. In addition, the group of
independent experts agrees that despite the observations are true, most of these enterprises
lack experience cooperating with competent private contractors and service providers. They
believe that Uzavtoyol would not be capable of demonstrating such advantages if the private
road construction and maintenance sectors were highly developed (ADB, 2009: 82).
Another important finding, which was observed during econometric data analysis, is that
companies from Kazakhstan are more likely to have problems with climate (what is hardly
surprising if one thinks about the very geography of this country), low quality and deficit of
qualified staff. Centralization of decision-making, financial constraints, intransparent tender
procedures and use of money not for target purposes are more typical for Uzbekistani
companies. Again, the pattern reveals that the economy of Kazakhstan is more advanced in
terms of reforms and thus the issues companies encounter are more likely to be associated
with market conditions. In the same way, companies from Uzbekistan are much more likely
to under-use their production facilities because of legal restrictions. There are, however,
parameters where Uzbekistan seems to be more advanced than Kazakhstan: companies in this
country are more likely to offer training programs for the personnel (this may be a legacy of
the communist period) and, what is especially surprising, to use courts to resolve disputes (in
Kazakhstan, on the contrary, use of oral agreements is more popular as a form of
communication). Finally, as one could expect, Kazakhstani companies are larger in terms of
employment and road constructed (what does not result in an efficiency gain, as we will show
in what follows). Overall, Kazakhstan seems to be more advanced and market oriented
34
economy. Strong differences between companies from Kazakhstan and Uzbekistan, again,
support our approach to estimate the technical efficiency and its determinants separately for
each country.
3.4. Main results
Tables 2-59 (see annex 1) report the main results of our estimations (for Kazakhstan and for
Uzbekistan, for CRS and VRS assumptions). As one could have expected, the outcomes of
our estimations for Kazakhstan and for Uzbekistan are different. For Kazakhstan we do not
find any evidence of positive or negative impact of governmental support, foreign support or
foreign or domestic ownership in terms of company efficiency. Still, some variables are
significant and deserve more detailed discussion.
1. The most interesting results are obtained if we look at the mechanisms providing
companies with contracts. For the VRS assumptions (which, as mentioned, we use as the
baseline case) we find that the companies reporting that they have received contracts
primarily due to market conditions are less efficient; however, companies that relied on
friendship and informal ties as a tool of contract allocation are more efficient than the rest.
There are several interpretations for this finding. First, if one accepts our dependent variable
as a measure of technical efficiency, our results show that the informal selection mechanism
does function relatively well – at least at the early stage. To some extent, it may reveal the
use of hidden knowledge by the bureaucracy: the existence of long-term ties (personal
contacts) indeed allows selecting the best companies to fulfill the tasks. 10 Second, if we
account for the fact that we do not measure budget, it may mean that companies, which rely
on friendships and informal ties can be more successful in acquiring budget and contracts
from the government and therefore produce larger output for given manpower and
experience. However, if we assume CRS, the effect for friendships changes its sign, so
caution is required in interpreting these effects from the point of view of robustness of
estimations.
2. Unlike Uzbekistan (as we will argue in what follows), quality of personnel does not
improve efficiency, and the presence of training programs sometimes even reduces it. Again,
several explanations are possible. First, that Kazakhstani companies may to a greater extent
For the ease of illustration large tables were added into the appendix.
This analysis, as any econometric investigation, is of course based on the sample of existing companies only:
we do not observe (possibly very efficient) companies, which fail to enter the system due to informal barriers.
However, at least within the pool of “known players” informal selection works reasonably well.
10
35
recruit workers from abroad (e.g. Uzbekistan or Turkey – which plays quite a large role in
construction industry) and hence should less rely on ensuring high quality of personnel.
Therefore there may be no efficiency gains from keeping qualified personnel or investing in
training of workers – there is sufficient supply of skilled workers on the market. Second, it is
possible that companies, which we indicate as more efficient, are those which managed to
obtain larger budget, and thus can compensate for the deficit of quality of manpower by, for
example, increasing capital intensity of construction.
3. One of the most robust results is that companies which have problems because of misuse
of public funds not for targeted purposes are more efficient than the rest, regardless of the
assumptions on the production technology we use. Again, there are several interpretations for
this result. First, the reason for the positive (and highly significant) correlation we observe
could be that if the misuse of public funds becomes more acute the companies are forced to
improve their efficiency to survive. Second, the opposite explanation is also possible (since
we cannot rule out the reverse causality, it should be considered as equally plausible): for less
efficient companies misuse of public funds could be associated with larger opportunities for
revenue (through intransparent schemes), while more efficient companies do not have to rely
on this and thus are more likely to report the misuse of public funds as a problem. Third, if
the technical efficiency score actually measures the propensity of companies to receive larger
budgetary funds, it is possible that those companies which receive larger funds from the
government are more concerned about misuse of these funds. Companies, which receive
smaller funds from the government, may be less concerned, as they can rely on other sources.
We should stress, however, that for this finding the interpretation of our results based on the
access to budget is more speculative. Actually, exactly the companies with large access to
funds could be less concerned about their misuse, given the soft budget constraints for these
companies. The smaller access to funds the harder the budget constraints the stronger concern
for misuse of the funds. Thus, here the interpretation considering the dependent variable we
use as an actual measure of technical efficiency seems to be more plausible.
The set of findings we establish for Uzbekistan can be summarized as follows:
1. We find that companies reporting higher importance of governmental help are at the same
time more efficient. Again, we have to discuss several possible explanations. First, as in case
with Kazakhstan, it could suggest that the bureaucratic apparatus of this country, in fact, is
capable of selecting and monitoring companies, which receive public funds, ensuring their
high efficiency. Either the funds are not provided to less efficient companies, or monitoring
36
and scrutiny associated with higher public funding also ensure higher efficiency. As argued
by interviewed respondents both in Kazakhstan and Uzbekistan, selection and monitoring are
exercised through the mechanism of public procurement, which requires from all participants
to provide detailed information on their previous activities. This information is used for
evaluation of efficiency of construction companies by public agencies. Second, we can expect
the companies which have larger support of the government to have greater access to public
funds. Hence, these companies also manage to produce larger quantity of roads given their
manpower and experience. We cannot discriminate across these two arguments given the data
we have, but they of course suggest very different interpretation of the work of Uzbekistani
bureaucracy – it can either be highly efficient in monitoring, or merely more important in
providing financial support to selected companies (and, as discussed above, the set of these
privileged companies could be smaller).
2. In the VRS framework we find that companies reporting higher problems of centralization
are at the same time significantly more efficient. The set of interpretations we can use in this
case is as follows. First, it may indicate, again, that central control is not as harmful as one
could expect in the countries like Uzbekistan. On the contrary, while centralized decisionmaking constraints the actions of the companies (and thus is perceived as problem by them),
it does so in a way increasing their efficiency (recall that efficiency per se does not
necessarily constitute the main goal of the companies). Second, we have again to
acknowledge the existence of the reverse interpretation: more efficient companies are more
sensitive to centralization in Uzbekistan and thus more likely to report that they are
concerned in this respect. In case of this result, interpretation based on access to larger funds
is less plausible. In Uzbekistan the allocation of funds is highly centralized (more so than in
Kazakhstan), so one should expect the companies, which receive largest possible funds, to be
in fact more content with high centralization than those which do not receive funds (and
could hope that in the decentralized environment they could get access to additional financial
resources).
3. We also find that that companies more often using court as the dispute-resolution
mechanism are more efficient. The first interpretation is, again, that governmental
interventions could improve efficiency rather than reduce it. Again, we have to acknowledge
the reverse causality – possibly more efficient companies are at the same time more efficient
in using the courts. The second explanation is based on interpreting higher DEA score as
better access to budget. In this case companies, which have larger budget, are more capable
of defending their interests in courts, and also produce more roads given manpower and
37
experience. We should stress, however, that there exists an influential line of thinking in
economics (see summary in Libman 2010) that argues that particularly large companies are
typically rather reluctant to use courts and other legal mechanisms of dispute-settlement, as
they prefer to use direct pressure against their competitors. This is precisely the reason why in
developing countries, surprisingly, strong and rich companies prefer poor protection of
property rights by the state. This argument has often been discussed in context of countries
like Russia, Ukraine and Kazakhstan, and much less often mentioned for Uzbekistan (which
has much stronger government and much weaker business interests) though. Still, again, the
interpretation based on better access to budget is highly plausible and cannot be excluded
using our data.
5. High quality of employees is associated with higher efficiency. Thus, in Uzbekistan (unlike
Kazakhstan) access to personnel seems to be a crucial problem. The companies are, as our
results show, quite aware of it (since they are more likely to offer training to the companies),
but still the problem persists. In fact, interviewed respondents both in Kazakhstan and
Uzbekistan argued that the lack of high-skilled personnel is one of the key issues for the road
construction industry. This problem stems from the poor state of the professional education
system in the transport sector. There is no qualified local workforce due to the lack of special
professional institutes and refresher courses for road workers. There are also almost no
locally educated and trained engineers. This forces the state to invite at expensive cost highskilled personnel from abroad and hire experts from international organizations. Here the
interpretation based on budget is possible again: one could expect the companies, which
receive larger budget, to be able to acquire better workers and at the same time to produce
larger road quantity given manpower and experience – thus, in this case we deal with the
classical omitted variable bias, which we cannot take into account given the availability of
data.
3.5. Further results
So far we have assumed that the technology of road construction across these two countries is
entirely incompatible, and therefore, it is necessary to investigate these countries separately.
However, one could at the same time argue that construction technologies in both countries
are in fact very similar, because they both share common Soviet past, still employ engineers
who were trained at the same Soviet schools, use common technology and organization of
production. Interviewed experts share the perception that the use of out-of-dated technologies
38
in the transport sector is a common problem today. This problem acutely pertains not only to
the road construction and maintenance realms, but also to many other areas of economic
development in general. As most of the respondents argue, the lack of advanced technologies
in road construction is a ‘stumbling block’ for effective implementation of a number of local
projects. Yet, according to respondents’ perceptions, unlike internal roads, more advanced
technologies are utilized while constructing international roads in Kazakhstan and
Uzbekistan.
From the point of view that construction technologies are similar in two countries we have
also calculated the VRS and CRS technical efficiency for the full sample and then estimated
regressions for all companies from Kazakhstan and Uzbekistan as a robustness check. Figure
1 and figure 2 (see annex 1) plot the CRS and the VRS technical efficiency estimates under
the common technology assumption and under different technology assumption for both
countries. As one can see, Uzbekistani companies receive relatively similar estimates, while
estimates for Kazakhstani companies vary a lot. Due to the space constraints we do not report
detailed estimation tables for the full sample, yet we provide a brief discussion of our results
below.
First, for the full sample companies, which received contracts through personal contacts, are
likely to have higher efficiency, even controlling for country- and ownership-specific effects.
As we have already mentioned, there are two interpretations of the findings. One is
explaining our results through the better ability of bureaucrats to select more efficient
companies or with stronger informal enforcement through personal contacts than formal
enforcement through legal rules and instruments. Another one argues that personal contacts
provide better access to budget and thus make sure that companies are capable of
constructing more roads given manpower and experience. Second, as one could expect,
companies with more qualified personnel are more efficient. We do not find that public or
international support influences the efficiency of companies. In the CRS framework we find
that companies more often using court as the dispute-resolution mechanism are also more
efficient, and again have to acknowledge two different interpretations: on the one hand,
while initial selection through informal channels might work, it is not the best tool to ensure
the contract enforcement: here more formal mechanisms are required (although companies
which actively use negotiations are also found to be more efficient than the rest), and on the
other hand, companies, receiving larger budget, may be both achieving larger output and
being more successful in courts (with the caveats mentioned above). The result does not
39
survive in the VRS framework though. Coordination with regional governments contributes
to efficiency in the VRS framework, but not in the CRS one.
While running regressions for the full sample, we also add a dummy for Uzbekistan
companies, and, interestingly, find a positive and significant effect (mostly under the CRS
assumption, but also partly under the VRS assumption). This result is interesting for several
reasons, but also allows several interpretations. Let us start with interpreting our dependent
variable as actual measure of efficiency, disregarding the absent information on budget. First,
it indicates, as mentioned above, that the company with more efficient road construction
services in terms of length of road constructed has also higher satisfaction of the population
with the road quality. This could be an argument in favor of the approach used in this paper.
Second, Uzbekistan has a much stricter bureaucratic control over the road construction sector
than Kazakhstan. Our results may indicate that this control could in fact be beneficial for the
technical efficiency of the road construction business. Third, unlike the within-country
comparisons reported above, this result is much less subject to endogeneity due to reverse
causality (although we still cannot exclude the endogeneity due to the sample selection bias):
companies are unlikely to migrate from Uzbekistan to Kazakhstan due to very high barriers
for FDI between these countries existing in Central Asia. Thus, there is a trade-off in
interpreting this result: on the one hand, the endogeneity concern is weakened, but on the
other hand, the assumption of common technology for Kazakhstan and Uzbekistan can be
debated. The second set of interpretations, again, focuses on the fact that we do not have
information on budget of companies. It is possible that in Uzbekistan the budget provided to
companies is simply more generous (at least given the price level of inputs for road
construction in Uzbekistan), and therefore companies of Uzbekistan can produce more given
manpower and experience (we should stress, however, that it implies that the manpower is
growing more slowly than budget – what may be implausible if the employment decisions are
driven by favoritism and result in excessive employment). Another explanation could be that
the quality of roads built in Uzbekistan is worse – in line with the data on paved roads. It
contradicts the data on public satisfaction, but possibly the latter are biased due to
information asymmetries – as we have discussed above.
As a final robustness check, we used the CRS and VRS technical efficiency scores obtained
for the full sample and estimated regressions for Uzbekistan and Kazakhstan sub-samples
separately. This approach assumes that while the technology for road construction is
common, the institutional factors determining its efficiency vary across countries. The results
are heterogeneous and partly not robust. For Uzbekistan for the VRS assumption we find a
40
non-robust, but positive and significant impact of dummy for domestic companies on
efficiency. It may be associated with better ability to coordinate with other actors in the
domestic economic system, which foreign companies could be lacking. It may, however, also
imply that domestic companies are better at acquiring contracts and budget, and thus produce
more given their manpower; or that the foreign companies have higher production standards,
and thus have smaller output in terms of quantity. The results is the opposite for Kazakhstan
(again for the VRS regressions): it is not surprising given a very strong position of foreign
investors in Kazakhstan for the last two decades; here foreign companies have less
coordination problems than in Uzbekistan and may have substantial access to budget and
contracts as well (partly, it may be even better than for domestic companies). Moreover, for
Kazakhstan in some regressions coordination with local governments has a positive effect on
efficiency. Kazakhstan is a very large country in terms of territory, and local governments are
therefore much more relevant partners for business (especially if it is engaged in
infrastructural projects). While today Kazakhstan is more centralized than a decade ago
(when individual local governments often were de-facto quite autonomous from the center),
having an ‘understanding’ with local administrations also matters (both in terms of
coordination and, possibly, in terms of obtaining access to the budget – although from the last
point of view central government may be relatively more important). At the same time,
interviewed experts emphasized that both for Kazakhstan and Uzbekistan poor
synchronization and coordination of transport policy at various policy levels remains a very
serious problem. Despite strong centralization of governance mechanisms, the respondents
pointed out that weak policy coordination between regional and central authorities is mainly
the result of frequent rotation of public officials. Interviewed public officials in two countries
also acknowledged that this is indeed a problem. They argued that rotation as such is an
effective tool for ‘healthy’ public administration since it avoids a possibility for bureaucrats
to stay long occupying one position. However, the problem is that rotation is generally done
too frequently and unsystematically. It has serious implications for efficient functioning of a
department as it may lead to lack of succession in the work of state bodies. As a result,
private business has to constantly meet new persons in the public agencies and start
everything from the beginning what in the end stagnates business activities long-term.
Therefore, often delays within national road construction projects may occur. As a result, this
largely increases the costs both of the government and private construction companies. In
contrast, as put one of the respondents in Kazakhstan,
41
“…participation of international organisations in construction of large international corridors
forces the government to be more committed and consistent in meeting project implementation
deadlines.”
The difference between construction of national and international roads in Kazakhstan has to
be emphasized separately. According to all interviewed respondents, the high-quality roads in
Kazakhstan are usually built only in the regions, which have strategic importance for the state
as well as for international projects. Internal roads are in a worse situation and receive little
finance and maintenance services. The same largely holds true for Uzbekistan (for more
detailed information refer to the case-study in appendix 2). As a result, we can see uneven
development of road construction industry throughout the country. Those regions, which are
closely located to international transport corridors, are equipped with high-quality roads,
whereas remote regions lag significantly behind. The same relates to maintenance services.
Effective maintenance services are provided at international road corridors and lack at
regional roads of secondary importance. At the same time, as one of the interviewed public
officials argues,
“…the regional approach is understandable and pragmatic as the economic situation does not allow
fully and evenly realize the transport strategy overnight; rather, it is necessary to concentrate on
realization of strategic goals such as construction of large international corridors.”
Another important finding is that companies using written contracts are more efficient (what
indicates the importance of formal institutions); the results for other coordination
mechanisms are ambiguous and, while often significant, change signs in different estimation
approaches. We again present two interpretations for these findings: one, which we have
already discussed above, suggests that written contracts and formal institutions may be
associated with lower transaction costs and higher efficiency of the business operations;
another one may be linked to the fact that companies, receiving larger budget, may be
inclined to both using formal contracts (the logic is somewhat similar to the case we have
discussed for the use of courts, but also the same caveats apply) and constructing more roads.
For Kazakhstan coordination with competitors decreases efficiency: it is a reasonable
consequence of cartel-like behavior (which the coordination with competitors stands for),
which is more likely to be observed in a more marketized economy; here interpretation from
the point of view of greater access to the budget seems to be less likely.
42
3.6. Synchronization of road construction strategies in Kazakhstan and
Uzbekistan
The governments of the Central Asian countries, ADB and CAREC “have made tangible
progress in moving its goal of development through cooperation over its first 10 years”
(CAREC, 2012). In particular, international cross-country road infrastructure of CAREC
member countries have been greatly improved allowing faster, more cost efficient and safer
traffic of goods in the respective countries.
The experts of ADB (2006), however, emphasize the importance of distinguishing between
transport strategies for Central Asia in general and for Uzbekistan, Kazakhstan or any single
sovereign state. According to them, the general strategy would likely to be based on
minimizing transport costs in the region whereas the single country strategy rather focuses on
optimizing the national interests of Uzbekistan or Kazakhstan in regional transport which
lead to two different outcomes. “The newly independent countries of Central Asia have quite
“naturally developed country-focused strategies” with limited attention to regional
concerns” (ADB, 2006: p. 113). Although the situation is changing gradually under CAREC
facilitation, experts believe that the primary goals remain national.
Also, national roads as well as local level which are not integrated into the international road
networks under CAREC or any other programme administration are largely overlooked.
Mostly, public national and local roads are financed from the national budgets or local
administrations of the respective territories. This means that there are no clear
standardizations processes of roads of national and local importance as it is the case with the
roads of international importance administered within various integration programs (Roundtable meeting, Uzbekistan, 2012). In particular, it is well-anticipated that internationally
important routes follow and meet the designed standards accepted by member countries. With
the growing integration and cross-border standardization processes underway, road actors
moving across the region are likely to know what quality or standards of roads to expect
along the designated route.
While it is rather early to conclude on the matter, at this stage of research the situation looks
as follows. The governments of Kazakhstan and Uzbekistan do synchronise their activities
within the CAREC Program, but not beyond it. However, the road standards for most noninternational roads remain the same (10 tons per axle). It has nothing to do with
synchronisation, though; it is rather based on old Soviet legacy of road construction which
was barely reconsidered since the collapse of the Soviet Union. Thus, without any external
43
endeavour the countries’ roads construction and maintenance appear to be somewhat similar
due to path dependence and appear to be perfectly synchronised within the roads constructed
with funds and assistance of international organisations.
The mentioned Soviet legacy has to be emphasized separately. The case in point in the box
below provides a summary of respondents’ perceptions on governance within road
construction during Soviet times.
Case in point. Soviet practices and path-dependence in road construction and
maintenance in Kazakhstan
As argued by interviewed experts in Kazakhstan, the major network of roads had been
constructed in the 1980-1990 years, during Soviet times. Today there is a negative trend that
usually the roads are built for the period of 20 years, but are used within the period of 20-30
years without proper technical maintenance. Thus, the roads, especially the internal ones, are
intensively used and soon become worn-down. As one of the experts argued, as of now,
almost 70% of internal roads require reconstruction. By respondents’ estimate, international
roads are in better condition due to the regular maintenance services, which are financed by
the state and international organisations. Another issue, which adds to the problem, is the
fact that during Soviet times the allowed axle weight was 8-10 tonnes. Respectively, the
roads had been built with a maximum of 10 tonnes pressure. However, today most of the
trucks are designed for 13 tonnes. This largely leads to fast destruction of roads. Only in the
period from 2005-2006 the reconstruction of main highways has been launched, which
would resist to pressure of 13 tonnes per axle. However, until now out of more than 90,000
km of roads only 39,000 km of roads have been reconstructed and modernized. Most of the
reconstructed roads are international, whereas internal roads suffer from underfinancing.
One of the interviewed experts argues that “under this schedule we would need 10-12 more
years to fully modernize the roads, given that 1,500-2,000 km of roads are totally used up
per year.” As a solution, the speed of reconstruction and construction of roads has to be
increased up to 2-3 times, which in its turn would require the increase of financing of road
construction up to 2-3 times. Moreover, as the same respondent points,“roads have to be
constructed with service life of no less than 35-50 years. Otherwise, deterioration and
destruction of roads will be happening faster than their reconstruction.” Furthermore,
maintenance of roads was more effective during Soviet times and construction companies
had higher standards in their work. As one of the interviewed experts argues, “financing was
much better during Soviet times. Even in the period from 1991-1992 we invested almost 1
bln dollars into our roads. We repaired almost 18,000 km of roads a year! Then this number
fell to 3,000-4,000 km, and now we repair annually just 1,500 km of roads…”
44
Conclusion
Our results for two countries differ a lot in terms of key drivers of technical efficiency and
policy conclusions. For Uzbekistan two issues seem to matter. First, involvement of central
bureaucracy actually improves technical efficiency, even if it is perceived by the business as a
problem. Probably, it reflects an even lower quality of the business itself. Thus, in a country
with underdeveloped market environment governmental intervention, even if inefficient per
se, could constitute a second best alternative to the pure asset stripping myopic behavior of
business. This idea is of course not new and lies beyond most concepts of industrial policy,
which very often failed to deliver any reasonable results; for Uzbekistan, however, at least in
the construction industry it seems to hold. Thus, deregulation without improvement of
corporate governance mechanisms (increasing control over management) and assignment of
credible property rights is unlikely to improve efficiency: one has to start ‘from the bottom’
in terms of institutional reforms.
What we observe may as well be an ‘equilibrium effect’. Uzbekistan’s economic governance
is still mostly based on the centralized decision-making and market mechanisms are relatively
underdeveloped. Under these conditions, on the one hand, markets have larger problems with
achieving efficient equilibria (given constraints on the adaptation of companies) and, on the
other hand, business is more inclined towards asset-stripping (property rights are not secure; a
typical business tycoon in Uzbekistan rather controls the cash flow of the company through
his position), and therefore even if the bureaucracy is inefficient, its involvement improves
technical efficiency. Hence, the dominance of government in the economy creates
preconditions for making bureaucracy a positive factor determining technical efficiency of
the companies.
As an important caveat, we have again to stress that our analysis does not differentiate
between improvement of efficiency and access to larger budget. It is possible that companies,
which have stronger link to the bureaucracy and better relations to the government, are able
to obtain larger budget and thus increase their output. This result does not automatically
imply any value judgment: these companies may be both efficient or not; but it is important
to take it into account as a note of caution while interpreting our results.
Second, a much more ‘pragmatic’ and ‘short-term’ issue for Uzbekistan is deficit of qualified
staff: here companies differ a lot, and it does have a profound impact on the technical
efficiency. Ensuring access to qualified staff may be therefore crucial for the development of
the Uzbekistani road construction industry.
45
Generally speaking, as expected, Kazakhstan seems to be more advanced than Uzbekistan in
terms of the adaptation of its companies to market conditions. However, our results for this
country are much less robust than for Uzbekistan, so it is more difficult to make any clear-cut
conclusions. Generally, we again observe some evidence of efficient ‘bureaucratic selection’,
although much less robust than for Uzbekistan (and, again, the same caveat regarding access
to budget as an alternative explanation applies). Further interesting results have been obtained
under the assumption of common technology for both countries. Then first, unlike
Uzbekistan, quality of personnel does not really affect technical efficiency of the business.
We find, however, that improving coordination with local governments is important for
improving technical efficiency (or for obtaining larger budget – though in this case, given the
centralized nature of public spending in Kazakhstan, this interpretation is less plausible).
These results are hardly surprising given the size of the country and the possible risks
associated with informal contracts in a capital-intensive industry like road construction.
Second, what is equally interesting is that in Kazakhstan we find some evidence that antitrust regulation in the road construction sector might be important for improving efficiency.
This is not the case in Uzbekistan: here economy is still mostly governed through centralized
decision-making, so private cartels are less important. In Kazakhstan the ‘bottom-level’
institutions ensuring the functioning of the market are more developed: then, of course, more
‘advanced’ issues like antitrust also become more important. It may, however, be also
associated with the fact that companies in Kazakhstan are much larger than in Uzbekistan.
It is again necessary to mention two caveats in the interpretation of our results. First, we have
not resolved the endogeneity bias: therefore for at least some of our findings interpretation
from the point of view of reverse causality is possible. In what has been discussed above we
have mentioned these alternative interpretations in text: strictly speaking, we report mere
correlates of technical efficiency, but do not establish the causal links. Even from this point
of view, given the lack of information on performance of companies in construction sector in
Central Asia, our results may be of interest; furthermore, qualitative results can be used to at
least partly corroborate the existence of causal claims (Lieberman, 2005). This approach is
often used in mixed-methods research popular in political science, although much less often
is used in economics (Libman, 2012). Second, the set of outputs and inputs we consider in
our analysis is highly imperfect (as compared to what is used in the literature, e.g. Kalb,
2012). This is also the reason why throughout the paper we stress alternative explanations –
primarily linked to the greater access to the budget. This is a limitation of the quality of data
available for us we have to acknowledge.
46
Our results clearly indicate that both empirical regularities and policy conclusions for
Uzbekistan and Kazakhstan are very different, regardless of whether we assume common
technology or not. Both countries of Central Asia should not be treated merely as ‘variations’
of the same institutional regime: they represent entirely different economies with different
governance mechanisms. At the same time we find that Uzbekistani companies are somewhat
more efficient than the Kazakhstani ones (or, at least, produce larger quantity given inputs we
can measure: it may also be driven by better budgetary support or by lower quantity of the
roads – the last explanation is not entirely supported by the empirical evidence we have
though). Finally, a word of caution is required with respect to our results: they are generally
not entirely robust to the specification and estimation technique. This is possibly due to the
relatively small sample size, especially in our baseline specification.
47
Policy implications
In our study we analysed the institutional frameworks in two countries. Despite similar
institutional settings during Soviet times, Kazakhstan and Uzbekistan largely departed from
each other as regards their transport strategies. The comparison was thus useful as it pointed
at distinct reforms paths both countries have pursued since independence and may help
elaborate policy recommendations for two countries. Moreover, useful lessons can be learnt
from the comparison of two countries.
As we found out, both countries face both common and different problems, which largely
preclude them from effective delivery of construction and maintenance services. Overall,
based on our results we can argue that in Kazakhstan a more decentralised coordination
system of the road construction industry is in place, whereas in Uzbekistan a centralised
coordination mechanism is adopted. As our analysis demonstrates, neither Kazakhstan’s
transition path in the road industry, nor that of Uzbekistan, has proved to be effective when it
comes to road construction and maintenance. Substantial problems remain. Problems of
maintenance are especially acute and should require more attention from the governments of
two countries. Whereas road construction has relatively developed infrastructure, no stable
infrastructure with respect to road maintenance has been introduced in two countries. All
experts in two countries claimed in one voice that the state lacks effective monitoring
instruments and agencies, which would track the quality of built roads as well as permanently
monitor road maintenance service. The interviewed expert points that,
“…governance of the transport sector ends with construction of roads and no adequate mechanisms of
road maintenance control are available.”
Moreover, a huge problem in two countries today is non-compliance of road users with
technical norms and regulations. The state lacks enough capacity to track the compliance of
technical norms. This is especially relevant for large trucks. As one of the interviewed public
officials in Kazakhstan argues,
“…technical regulations are part and parcel of any project. However, in our case there are no
responsible bodies for control over technical regulations. It often happens that large trucks are 5-6
times more overloaded than they technical characteristics allow. This is our constant problem! And
even checking points is not a good solution. Given our weather, we have to more strictly track
overload of large trucks and cars. During the spring time we have bad roads. Thus, local authorities
have to ban certain groups of trucks to drive our roads during a certain period of time in spring.”
So, the short ban on the use of large trucks during thaw periods is seen by respondents as an
effective solution to maintain roads in Kazakhstan.
48
Another important element for road construction efficiency increase is training of high-
skilled local personnel. As an important policy recommendation, we argue that both countries
need to implement educational reforms in vocational education and training in order to ensure
the emergence of high-skilled domestic workforce for construction and technical maintenance
of roads in the long-run.
Table 1 (page 44) provides the summary of major problems and the level of their importance
at state and regional levels in Kazakhstan and Uzbekistan. These problems also serve as
indicators of areas, which require policy reforms in two countries. As a final note, our results
clearly indicate that both countries face with similar problems in the road construction
industry. Yet, policy recommendations for Uzbekistan and Kazakhstan should be different
considering different modes of governance in two countries.
49
Table 1. Effective governance problems in road construction in Kazakhstan and
Uzbekistan11
Kazakhstan
Problems
Uzbekistan
State (strategic
Regional
State (strategic
Regional
international roads)
(internal roads)
international roads)
(internal roads)
Less important
Very important
Very important
Less important
Less important
Important
Less important
Important
Important
Very important
Important
Less important
Important
Very important
Very important
Very important
Important
Important
Important
Important
1. Low qualification of
specialists, who
construct and maintain
roads; lack of engineers
and high-skilled
personnel
2. Low level of
technologies adopted
and used in the
transport sector
3. Weak
synchronization and
coordination of
transport policy at
various levels
4. Frequent rotation of
public officials in state
bodies
5. Ineffective
monitoring system of
construction and
maintenance activities
11
Based on interviews with experts and public officials in two countries.
50
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54
Annex 1. Tables
Table 2: Determinants of efficiency of road construction companies, dep. var.: DEA score (variable returns to
scale), Uzbekistan
Domestic company
Receives government
help
Importance of
government help
(1)
0.078
(0.098)
(2)
0.085
(0.098)
(3)
0.04
(0.089)
(4)
0.063
(0.102)
(5)
0.121
(0.098)
(6)
0.084
(0.099)
(7)
0.086
(0.102)
(8)
0.085
(0.100)
(9)
0.08
(0.099)
(10)
0.077
(0.096)
(11)
0.041
(0.112)
0.017
(0.023)
0.067**
(0.033)
Problem: intransparent
tender
-0.061
(0.101)
0.109
(0.200)
0.154*
(0.089)
-0.112
(0.078)
0.08
(0.130)
Problem: competition
Problem: bureaucracy
Problem: topography
Problem: finance
Problem:
centralization of
decision making
0.304***
(0.107)
Problem: money used
not for target purposes
-0.1
(0.084)
Problem: deficit of
qualified staff
-0.014
(0.107)
Problem: poor quality
of staff
-0.158
(0.094)
Problem: deficit of
resources
0.230*
(0.122)
Production facilities
not used entirely: legal
restrictions
-0.055
(0.127)
Production facilities
not used entirely:
demand restrictions
-0.11
(0.166)
Production facilities
not used entirely:
deficit of internal
resources
0.046
(0.110)
Coordination with
regional government
0.03
(0.055)
Cooperation with
competitors
0.018
(0.032)
Use of courts
-0.005
(0.041)
Satisfied with
contractor decisions
0.081
(0.062)
Decisions of contractor
clear
0.083*
(0.048)
Contractor fulfills its
obligations
-0.112
(0.075)
Construction terms
realistic
Coordination: written
contracts
(12)
0.039
(0.103)
-0.035
(0.034)
0.131
55
(1)
(2)
(3)
(4)
(5)
(6)
Coordination:
governmental
decisions
(9)
(10)
(11)
(12)
0.406
(0.299)
52
0.557***
(0.068)
52
0.307
(0.311)
52
0.601***
(0.172)
52
0.466***
(0.110)
52
-0.067
(0.176)
Contract received:
form of ownership
0.325
(0.203)
Contract received:
domestic of foreign
-0.038
(0.102)
Contract received:
friendships
0.119
(0.142)
Contract received:
informal ties
0.03
(0.155)
Contract received:
reputation
-0.109
(0.167)
Conflict resolved:
negotiations
0.221
(0.164)
Conflict resolved:
courts
0.255*
(0.128)
Conflict resolved:
friendships
0.171
(0.170)
Quality of employees
Training of personnel
Observations
(8)
-0.009
(0.172)
Contract received:
market conditions
Constant
(7)
(0.172)
0.553***
(0.064)
52
0.526***
(0.081)
52
0.527***
(0.067)
52
0.060**
(0.025)
-0.053
(0.073)
0.611
(0.433)
52
0.262
(0.174)
52
0.537***
(0.161)
52
0.423**
(0.190)
52
Note: robust standard errors in parentheses. *** 1% significance, ** 5%, * 10%
56
Table 3: Determinants of efficiency of road construction companies, dep. var.: DEA score (constant returns to
scale), Uzbekistan
Domestic company
Receives government
help
Importance of
government help
(1)
0.05
(0.092)
(2)
0.057
(0.089)
(3)
0.007
(0.089)
(4)
0.041
(0.093)
(5)
0.095
(0.090)
(6)
0.078
(0.092)
(7)
0.062
(0.094)
(8)
0.057
(0.093)
(9)
0.051
(0.094)
(10)
0.049
(0.091)
(11)
0.001
(0.107)
0.021
(0.022)
0.073***
(0.026)
Problem: intransparent
tender
0.013
(0.100)
0.167
(0.155)
0.133
(0.115)
-0.096
(0.104)
0.047
(0.094)
Problem: competition
Problem: bureaucracy
Problem: topography
Problem: finance
Problem:
centralization of
decision making
0.397***
(0.104)
Problem: money used
not for target purposes
-0.148
(0.092)
Problem: deficit of
qualified staff
-0.191*
(0.102)
Problem: poor quality
of staff
0.015
(0.083)
Problem: deficit of
resources
0.217**
(0.104)
Production facilities
not used entirely: legal
restrictions
-0.087
(0.125)
Production facilities
not used entirely:
demand restrictions
-0.081
(0.166)
Production facilities
not used entirely:
deficit of internal
resources
0.042
(0.101)
Coordination with
regional government
0.013
(0.050)
Cooperation with
competitors
0.006
(0.029)
Use of courts
-0.004
(0.042)
Satisfied with
contractor decisions
0.039
(0.060)
Decisions of contractor
clear
0.075
(0.050)
Contractor fulfills its
obligations
-0.091
(0.065)
Construction terms
realistic
Coordination: written
contracts
(12)
0.045
(0.087)
-0.014
(0.031)
0.322*
(0.161)
57
(1)
(2)
(3)
(4)
(5)
(6)
Coordination:
governmental
decisions
(9)
(10)
(11)
(12)
0.336
(0.261)
52
0.423***
(0.059)
52
0.321
(0.268)
52
0.489***
(0.154)
52
0.266***
(0.085)
52
0.028
(0.160)
Contract received:
form of ownership
0.168
(0.204)
Contract received:
domestic of foreign
0.108
(0.098)
Contract received:
friendships
0.141
(0.133)
Contract received:
informal ties
0.101
(0.142)
Contract received:
reputation
-0.054
(0.152)
Conflict resolved:
negotiations
0.245*
(0.137)
Conflict resolved:
courts
0.337***
(0.119)
Conflict resolved:
friendships
0.082
(0.123)
Quality of employees
Training of personnel
Observations
(8)
0.052
(0.165)
Contract received:
market conditions
Constant
(7)
0.419***
(0.057)
52
0.388***
(0.068)
52
0.392***
(0.058)
52
0.058***
(0.021)
-0.062
(0.071)
0.538
(0.407)
52
0.104
(0.146)
52
0.313**
(0.153)
52
0.091
(0.176)
52
Note: see Table 2
58
Table 4: Determinants of efficiency of road construction companies, dep. var.: DEA score (variable returns to
scale), Kazakhstan
Domestic company
Receives
government help
Receives
international help
Importance of
government help
Importance of
international help
(1)
0.035
(0.126)
(2)
0.128
(0.163)
(3)
0.093
(0.174)
(4)
0.159
(0.123)
(5)
0.043
(0.129)
(6)
0.092
(0.129)
(7)
0.032
(0.123)
(8)
0.077
(0.137)
(9)
0.034
(0.128)
(10)
0.032
(0.130)
(11)
0.007
(0.140)
0.024
(0.027)
-0.033
(0.021)
0.019
(0.036)
-0.045
(0.029)
Problem:
intransparent
tender
-0.084
(0.137)
Problem:
competition
0.107
(0.232)
Problem:
bureaucracy
-0.169
(0.156)
0.129
(0.128)
Problem: climate
Problem:
topography
-0.081
(0.128)
2.37
(0.000)
Problem: finance
Problem:
centralization of
decision making
-0.143
(0.164)
Problem: money
used not for target
purposes
0.605***
(0.196)
Problem: deficit of
qualified staff
-0.027
(0.128)
Problem: poor
quality of staff
0.118
(0.125)
Problem: deficit of
resources
-0.118
(0.132)
Production
facilities not used
entirely: legal
restrictions
0.187
(0.269)
Production
facilities not used
entirely: demand
restrictions
-0.087
(0.128)
Production
facilities not used
entirely: deficit of
internal resources
0.214
(0.146)
Coordination with
regional
government
-0.007
(0.027)
Cooperation with
competitors
Use of courts
(12)
0.139
(0.152)
0.017
(0.024)
-0.004
59
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Satisfied with
contractor
decisions
(10)
(11)
(12)
0.629***
(0.079)
42
0.580***
(0.134)
42
0.586***
(0.087)
42
0.458***
(0.166)
42
0.135
(0.086)
Contractor fulfills
its obligations
-0.143
(0.094)
Construction terms
realistic
0.090*
(0.052)
Coordination:
written contracts
0.037
(0.143)
Coordination:
governmental
decisions
-0.124
(0.148)
Coordination: oral
communication
0.162
(0.148)
Contract received:
market conditions
-0.547**
(0.243)
Contract received:
domestic of
foreign
0.165
(0.098)
Contract received:
friendships
0.307***
(0.088)
Contract received:
informal ties
-0.179
(0.126)
Contract received:
reputation
0.023
(0.142)
Conflict resolved:
negotiations
-0.128
(0.195)
Conflict resolved:
courts
0.014
(0.145)
Conflict resolved:
friendships
-0.054
(0.234)
Quality of
employees
0.006
(0.049)
Training of
personnel
Observations
(9)
(0.042)
-0.13
(0.085)
Decisions of
contractor clear
Constant
(8)
0.626***
(0.071)
42
0.615***
(0.141)
42
0.667***
(0.175)
42
-0.062***
(0.020)
0.756***
(0.189)
42
0.733***
(0.179)
42
1.147***
(0.238)
42
0.578***
(0.148)
42
0.956**
(0.362)
42
Note: see Table 2
60
Table 5: Determinants of efficiency of road construction companies, dep. var.: DEA score (constant returns to
scale), Kazakhstan
Domestic company
Receives
government help
Receives
international help
Importance of
government help
Importance of
international help
(1)
-0.016
(0.121)
(2)
0.085
(0.154)
(3)
0.093
(0.165)
(4)
0.09
(0.117)
(5)
-0.047
(0.123)
(6)
0.04
(0.117)
(7)
-0.018
(0.115)
(8)
0.032
(0.129)
(9)
-0.042
(0.122)
(10)
-0.023
(0.120)
(11)
-0.036
(0.129)
0.034
(0.026)
-0.015
(0.022)
0.041
(0.037)
-0.027
(0.031)
Problem:
intransparent
tender
-0.257*
(0.137)
Problem:
competition
0.001
(0.222)
Problem:
bureaucracy
-0.209
(0.134)
0.071
(0.123)
Problem: climate
Problem:
topography
-0.053
(0.137)
0.533***
(0.152)
Problem: finance
Problem:
centralization of
decision making
-0.202
(0.161)
Problem: money
used not for target
purposes
0.605***
(0.173)
Problem: deficit of
qualified staff
-0.057
(0.130)
Problem: poor
quality of staff
0.025
(0.121)
Problem: deficit of
resources
-0.265*
(0.150)
Production
facilities not used
entirely: legal
restrictions
0.029
(0.137)
Production
facilities not used
entirely: demand
restrictions
-0.135
(0.103)
Production
facilities not used
entirely: deficit of
internal resources
Coordination with
regional
government
Cooperation with
competitors
(12)
0.035
(0.147)
0.258*
(0.136)
0.000
(0.018)
0.02
61
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Use of courts
(11)
(12)
0.401***
(0.105)
42
0.463***
(0.072)
42
0.485***
(0.153)
42
-0.132
(0.079)
Decisions of
contractor clear
0.095
(0.078)
Contractor fulfills
its obligations
-0.084
(0.091)
Construction terms
realistic
0.061
(0.054)
Coordination:
written contracts
-0.114
(0.132)
Coordination:
governmental
decisions
-0.158
(0.138)
Coordination: oral
communication
0.167
(0.168)
Contract received:
market conditions
0.628***
(0.212)
Contract received:
domestic of
foreign
0.299***
(0.081)
Contract received:
friendships
-0.179**
(0.084)
Contract received:
informal ties
-0.083
(0.121)
Contract received:
reputation
-0.007
(0.112)
Conflict resolved:
negotiations
-0.12
(0.172)
Conflict resolved:
courts
-0.134
(0.107)
Conflict resolved:
friendships
-0.044
(0.175)
Quality of
employees
0.007
(0.038)
Training of
personnel
Observations
(10)
(0.017)
-0.057
(0.038)
Satisfied with
contractor
decisions
Constant
(9)
0.497***
(0.060)
42
0.391***
(0.100)
42
0.392***
(0.135)
42
-0.056***
(0.017)
0.609***
(0.147)
42
0.643***
(0.156)
42
1.096***
(0.207)
42
0.599***
(0.138)
42
0.851**
(0.354)
42
0.531***
(0.073)
42
Note: see Table 2
62
1
.8
Both countriess
.4
.6
.2
0
0
.2
.4
.6
Separate countries
Uzbekistan
.8
1
Kazakhstan
0
.2
Both countriess
.4
.6
.8
1
Figure 1: CRS technical efficiency coefficients calculated for the fill sample and for the samples of separate
countries
.2
.4
.6
Separate countries
Uzbekistan
.8
1
Kazakhstan
Figure 2: VRS technical efficiency coefficients calculated for the fill sample and for the samples of separate
countries
63
Annex 2. Case-study on efficiency of construction of international, national and
local roads in Uzbekistan
In 2009 the Uzbek Government launched a large-scale “Uzbek National Highway
Program” which encompasses road construction and infrastructure development from
2009 - 2015. First, it is important to classify roads by their general purpose in Uzbekistan.
They are classified as international, national and local roads (see table 1 in the section of
literature review on Uzbekistan).
Within the framework of the project one of the research hypotheses was to reveal whether
public roads are better (or worse) in terms of construction and maintenance costs than
roads built by or with assistance and financing of international organizations and
multilateral agencies and the reasons which would explain this phenomenon. Since
“better” or “worse” is a very extensive definition and does not fall under one specific
explanation, by common sense it is most likely that the data on whether one road in terms
of construction and maintenance is better than the other one is hardly available. Therefore,
the main taken-for-granted assumption was to refer “better” or “worse” as “higher quality”
or “lower quality” definitions respectively. According to the suggestions of the experts
within the road sector, the assumed “quality” can be defined as “length/cost” ratio. Thus,
the more costly 1 km of road construction is, the higher the standards are likely to be and
the more resources (materials, labor force, etc.) are likely to be spent on that. Hence,
quality of that given piece of road is expected to be higher.
To understand whether the roads built with the assistance and financing of international
financial organizations are of higher quality, it was suggested to compare the respective
“costs per km” indicators. To do so, we calculated “cost per km” by dividing the total
budget allocated for the particular piece of road by its length and included the results in
the separate column titled “costs per km”.
Of course, it should be noted that cost per construction of 1 km of road can vary
depending on number of lanes, number of bridges along the road under construction,
overpasses and tunnels, relief of territory, density of building structures, climatic
conditions, topographic conditions and other factors (Skvortsov, 2011). Nevertheless, cost
can be still a good indicator if seen from the relative perspective of how much financing is
spent on road construction and renovation works in various developed and underdeveloped
countries. For example, according to Novaya Gazeta (2010), average cost per 1 km of
64
four-lane roads in EU averages USD 6,9 million; in the US it is from USD 2,5 to 5,9
million.
Table 1 below represents the investments have been and are planned to be made into the
Uzbek National Highway Project since 2011 until 2015. Within the program it is planned
to build four-lane Category I international roads. That will meet international standards by
enabling vehicles with an axial load of 13 tons to transit through the Uzbek territory. The
major source of financing comes from the Asian Development Bank and the monitoring
part is undertaken by CAREC (Central Asian Regional Economic Cooperation); the major
part of works is implemented by foreign subcontractors (Uzdaily, 2010). One can clearly
see that on average about USD 1.8 million is spent on roads financed by international
financial organizations and the figure which is somewhat in line with the internationally
accepted standards (see the paragraph above).
Table 1. Attractions of foreign investments for construction and reconstruction sites of
roads under the Uzbek National Highway for period 2011-2015 12
Attraction of foreign investments for construction and reconstruction sites of roads under
the Uzbek National Highway for period 2011-2015
Project
Projects and Sites
Length
number
Amount
Cost per
of Loan
km
(mln
mln
in
USD)
Total
453
842,5
1,859
75,3
0,574
600
2,702
km
I
CAREC
Regional
Reconstruction
of
Road
Project.
131
highway
A-380
km
"Guzar-Bukhara-Nukus-Beyneu" Road
Section km 490-581 and km 876-916
II
Central
Asia
Cooperation
Investment
Regional
Corridor
Program
Reconstruction
of
-
Economic
222
2
km
Road
Project
highway
1.
A-380
In tables 3 and 4 the columns titled “Cost per km” was calculated is the outcome of “budget” divided by
“length”.
65
"Guzar-Bukhara-Nukus-Beyneu" Road
Section (Km 315-490, km 581-628
(within
procurement
of
road
construction equipment)
III
Project of IDB "Reconstruction of
100
roadway
km
М-39
"Almaty-Bishkek-
167,2
1,672
Tashkent-Termez" in the section km
1330-1395, 1400-1410, 1426-1451"
Source: http://mf.uz/en/gos-social/193-tend-11.html [Accessed January 12, 2012].
Table 2 represents financing allocated by the government for general use national and
international roads in Uzbekistan. It should be noted, however, that construction and repair
works of roads of international and national importance in 2008 were subcontracted to
local enterprises only and the share of foreign enterprises in these works was zero. It was
only within the Uzbek National Highway Project 2009-2012 when foreign companies
started to be attracted. Table 2 shows that the government spending without the
involvement of the international organizations on construction of 1 km of new roads of
international importance averages USD 837 000 km, the figure which is a lot less that the
governments of other countries generally allocate on such projects.
Table 2. Program on capital and average repair works of automobile roads of public use
and international importance for 2008
Program on capital and average repair works of automobile roads of public use and
international importance for 2008
Type of construction
Capital works
Length
Budget in mln
Cost per km in
UZS
USD13
123 km
44253,8
278 904
-
Existing roads
102 km
21586,8
164 058
-
Newly built roads
21 km
22667,0
836 729
Average repair works
210 km
22926,7
84 629
Source: http://www.uzavtoyul.uz/userfiles/pravo/r/002.doc [Accessed January 15, 2012] the table is adapted.
As of 25.12.2007 USD 1 = UZS 1290; source: http://www.goldenpages.uz/kurs/kurs2007-2008.
66
The situation with the roads of national importance looks different (see Table 3). In
particular, the government spending on construction of 1 km of roads of national
importance is significantly lower than that spent on international roads in the country
making it about USD 363 thousand which is almost 2.5 times as low. This clearly
manifests and confirms the opinions shared by the majority of expert who argue that
presently the situation with the quality level of roads in Uzbekistan is much to be desired
for. In particular, the current spending are not sufficient to cover the increasing demands
and requirements put on quality standards of roads (Eshonkulov et al, 2011). Besides,
occasionally, the implementation of road works by subcontracting companies tends to be
of poor quality. The reason for poor quality of roads is ill-functioning control and
monitoring mechanisms. About 42 percent (580 respondents) of the online surveyed
respondents by www.olam.uz believe that only the control over the implementation of
road works and appropriate resource use and allocation directed to repair and construction
of roads can generally improve the quality of roads in Uzbekistan. About 395 respondents
(28.66 % of all the surveyed) strongly believe that ill-functioning of road authorities and
anti-corruption services heavily undermines the quality of roads (OLAM, 2011). The
situation appears to be especially terrifying especially if one considers the current underfinancing of the road sector coupled with negatively impacting corruption.
During the conducted round-tables and in-depth interviews in Uzbekistan, the interviewees
also mentioned the following impeding factors to successfully implement and maintaining
high quality with respect to road construction projects in Uzbekistan. The first is training
and education of personnel who are directly involved in road construction operations. The
experts point out that at present there are no qualified workforce due to the lack of
specialized education institutions and vocational courses. Also, they mentioned the fact
that the majority of high-skilled road construction specialists became labor migrants and
are currently working outside Uzbekistan.
Outdated technologies and road-construction equipment as well as financial constraints
were mentioned as the factors influencing quality of roads built by local companies.
Foreign companies emphasized that local companies do not meet technical requirements
and standards to implement international road construction projects, although they are
contracted by foreign companies when implementing road construction works.
Currently, Uzbekistan is undertaking a large scale road construction project under ADB
financing. This includes only construction of high quality international roads the
67
construction of which is subcontracted to foreign companies, particularly Chinese, South
Korean and German.
Table 3. Program on capital and average repair works of automobile roads of public use and
national importance for 2008
Program on capital and average repair works of automobile roads of public use and national
importance for 2008
Type of construction
Capital works
Length
Budget in mln
Cost per km in
UZS
USD
143,4 km
36350, 1
197 051
-
Existing roads
108,4 km
19931,6
142 531
-
Newly built roads
35 km
16418,5
363 632
Average repair works
702,5 km
29868,1
32 958
Source: http://www.uzavtoyul.uz/userfiles/pravo/r/002.doc [Accessed January 15, 2015; adapted].
To summarize, based on the above mentioned facts one can deduce that the externally
financed and assisted roads are generally of better quality than public roads which rely on
state financing. One of the main reasons is the lack of adequate financing allocated for all
types of roads (of international, national and local importance). Specifically, on average
USD 836 thousand was spent by the Uzbek government on construction of 1 km of the
roads of international importance which is a far smaller figure if compared to USD 1.8
million allocated for the international type of roads built within the large-scale projects
coordinated and financed by CAREC and ADB respectively. Along with the lack of
financing, the experts and online respondents indicate poor quality control and project
implementation mechanisms as impeding factors for improving quality of roads.
According to them (experts), unless well-functioning control mechanisms are introduced,
it is difficult to avoid misuse of funds.
68
Annex 3. Flow of funds and decision-making in Uzbekistan
The Road Fund along with Uzavtoyol is the body which allocates state-road construction
projects and then sends their decision further to the Cabinet of Ministers for approval
(refer to figure 1 below). After that the Road Fund contracts one of the Uzavtoyol entities
which can decide if they want to contract private companies (Economic Review, 2011).
The following is the depiction of the decision making and subordination hierarchy within
the road sector in Uzbekistan.
Figure 1. Decision-making within the road sector in Uzbekistan
Source: Audier et al, 2008.
It should be noted that when it comes to external financing of international roads, the fund
flow scheme and decision making takes different shapes (refer to figure 2 below). In
particular, when engaging in international road construction projects international
financial organizations such as ADB, EBRD or IMF appear as sponsor only, which
undertake direct payments to contractors and subcontractors but not involved in selection
of these subcontractors. Local authorities such as the Road Fund as well as ADB through
the CAREC board (Central Asian Regional Economic Cooperation) are the ones who are
in charge of selecting foreign contractors to implement road construction projects of
international importance. ADB in this case has a huge capacity level and may give
recommendations on foreign subcontracting options.
Figure 2. Flow of funds and decision making
Source: Audier et al, 2008.
69
The results of the interview showed that it is very rare for private companies to engage in
contracts with the Road Fund. Only the largest and the most full-fledged with the wide
range of technical equipment may decide to engage in contracts with the Road Fund. One
of the main criteria for selection of Uzavtoyol as a general subcontracting organization for
road construction and reconstruction in Uzbekistan is the difficult engineering and
building structures of road construction which require companies to be proficient and have
specific industrial capacities. The respondents believe that other state-owned and private
enterprises do not have sufficient expertise for implementation of large-scale and
engineering-wise complicated projects. The same is confirmed by representatives of the
private sector who argue that the private sector is limited in their capacities. In particular,
it is very difficult for one single company to encompass both projecting and construction
works due to the lack of qualified specialists. For example, within the recent years the
Road Fund awarded two contracts for road projects to private companies (Economic
Review, 2011). However, both of them were unsuccessful because the contractors lacked
the required equipment, the quality of work was below the specified standards and they
failed to complete the work stated in the contracts (ADB, 2009: 85).
Additionally, interviewees mentioned that private companies disqualify for participation in
public tenders on road construction financed by centralized sources due to the strict
requirement for their turnover capital. In particular, banks should provide financial
guarantees to secure turnover capital for at least 20 percent of the total amount of the
project. According to the owners of the road construction businesses, due to their limited
financial as well as physical capacity private companies predominantly engage in
relatively small-scale orders by private (corporate) clients. For example, they are mainly
involved in building roads in factory territory, private neighborhoods, etc. (information
from the round table, 2012).
It was also mentioned why working with Uzavtoyol subsidiary enterprises is more
advantageous than working with the private sector. The first reason is that Uzavtoyol owns
sufficient number of equipment. Secondly, Uzavtoyol has relatively a qualified personnel
base; also, the experts from ADB point out the fact that Uzavtoyol is a state-owned
company and therefore, deemed to be accountable. As one of the major factors why
Uzavtoyol has a competitive advantage is mutual cooperation and assistance between
Uzavtoyol enterprises in exchanging and transferring equipment and staff. Additionally,
not all private companies are scattered across the country as Uzavtoyol is, the fact that
ensures additional competition among companies within Uzavtoyol system of enterprises.
70
Annex 4. Reflections on the course of research
Initial ideas, plans, assumptions
Reason
Correction
1. Inclusion of such an input as
company’s budget
Because of extreme sensitivity and
resultant reluctance of private
companies to share this information
We substituted this input with other
indicators
2. No round-table was planned
Significant degree of distrust to our
project from project participants
(respondents)
To enhance trust of the respondents to our
project, we organised two round-tables in
both countries. Having all participants
together largely helped eliminate this
barrier
3. Comparison of two countries
was not the main focus of our
study
After receiving a feedback on our
interim report, we were advised to
put a stronger emphasis on
comparison of Kazakhstan with
Uzbekistan
In the final report we presented our
results in a more comparative perspective
71
Annex 5. Transport strategies of Kazakhstan and Uzbekistan
Transport Strategy of Kazakhstan
The major document in the transport area in Kazakhstan is the Transport Development
Strategy 2015. The Strategy is the integral part of the Forced Industrial-Innovative Program
of the Republic of Kazakhstan for the period of 2010-2014. It covers all major development
directions until 2020 (Kusainov, 2011). The amount of investments necessary for
construction of respective infrastructure is USD 26 billion (Government, 2012). The Strategy
includes the period from 2006-2015 and is supposed to be implemented in two stages: 1st
stage – 2006-2011, 2nd stage – 2011-2015. The Strategy “is expected to ensure bringing of
the national transport system to a higher level and forming of an optimum transport
network” (ibid). It is supposed that the Strategy will lay a foundation for the introduction of
the self-sufficiency principles, what “will allow accommodating resources for its further
sustainable development and maintenance at a high technical level. Kazakhstani transport
sector is bound to smoothly integrate into the global transport system.” (ibid). All this will
enable to sufficiently increase the share of transit traffic, the main element of which will be
container traffic (ibid). The major goals of the Strategy are the following:
- “the Strategy covers railways, automobile, in-city passenger, air and water carriage,
efficient performance of which to a great extent depends on respective policy pursued
by the Government.
- the Strategy is intended to facilitate growth of trade ties between the West and the
East by means of reliable and accessible transit routes. The Strategy provides for
implementation of a customized model of meridian and latitude arrangement of the
main routes and connecting legs.
- the Strategy provides for modernization of already operating and construction of
new «rectifying” routes and infrastructure facilities, with all transport fleets being
renewed.
- development of pipelines with due consideration of the O&G sector specificity is
being effected within the framework of the State-run Program of Development of the
Kazakhstani Sector of the Caspian Sea and within the Concept of Gas Sector
Development up to 2015” (ibid).
As pointed the Minister of Transport and Communications Kusainov (2011) “until 2015 the
key priority within the transport sector is realization of infrastructure projects in traditional
export-oriented sectors of the economy with a possibility to multiply opportunities for small
and medium business through committed development of local ‘content’. Within the
framework of the Program 50 infrastructure projects are supposed to be implemented within
the major areas of the transport sector: automobile, rail, civil aviation and water transport.”
It is stated in the Strategy that the major attention will be devoted to the private sector and
attraction of private investments, namely “participation of private sector in different
segments of transportation sector will be promoted, including conclusion of long-term
concession agreements, under which infrastructure in the final end is returned back to the
state” (Government, 2012). The financing mechanisms are to be based on public budgeting
and active introduction of public-private partnerships (Decree of the President, 2012). The
strategy implies that motor ways and internal shipping infrastructure remain in government
ownership (Government, 2012). It is estimated in the Strategy that the approximate
investment costs will be 3,4 bln tenge, 70% of which will be coming from private sources.
72
The costs include needs for restoration, reconstruction and construction of various elements
of the transport infrastructure (Decree of the Government, 2006). The figure 1 below shows
us the planned distribution of investments by source.
Figure 1. The road construction investments scheme (Ministry of Transport and
Communications, 2009)
Private investments
Public investments
The Strategy laid the foundation for active participation of the private sector in road
construction in the country, “including conclusion of long-term concession agreements under
which infrastructure in the final end is returned back to the state” (Government, 2012).
Favourable climate for development of private industry is going to be achieved “through
rendering tax allowances and preferences stimulating renewal of fixed assets” (ibid). The
current projects are funded from budgets of all levels; financing is done by means of
investments and also from commercial sources: through state-private partnerships, concession
agreements, and creation of joint ventures (ibid).
As of today, 4 international transport corridors cross the territory of Kazakhstan and are
formed on the basis of transport infrastructure existing in the country. They are:
- Northern Corridor of Trans-Asian Railway Main (TARM): Western Europe – China,
Korean Peninsula and Japan via Russian and Kazakhstan (section Dostyk – Aktogai - Sayak –
Mointy – Astana – Petropavlovsk (Presnogorkovskaya).
- Southern Corridor of TARM: South-Eastern Europe – China and South-Eastern Asia via
Turkey, Iran, Central Asian states and Kazakhstan (section Dostyk – Aktogai – Almaty – Shu
– Arys – Saryagash).
- TRACECA: Eastern Europe – Central Asia via the Black Sea, Caucasus and the Caspian
Sea (section Dostyk – Almaty – Aktau).
- North-South: Northern Europe – Gulf States via Russia and Iran, with Kazakhstan’s
participation in the following sections: sea port Aktau – Ural regions of Russia and Aktau –
Atyrau (Government, 2012).
73
The Transport Strategy includes the completion of construction of 6 major international
transit corridors:
1) Tashkent – Shymkent – Taraz – Almaty – Khorgos;
2) Shymkent – Kyzyl-Orda – Aktobe – Uralsk – Samara;
3) Almaty - Karaganda - Astana - Petropavlovsk;
4) Astrakhan – Atirau – Aktau – border of Turkmenistan;
5) Omsk - Pavlodar - Semipalatinsk - Maikapchagai;
6) Astana - Kostanay - Chelabinsk – Ekaterinburg (Decree of the President,
2012).
It should be mentioned that a large portion of financial assistance and technical expertise the
government receives from various international organisations, which finance the construction
of international corridors in the country. By 2015 Kazakhstan seeks to attract financial
resources to implement the Strategy from Bank for Kazakhstan Development, Innovation
Fund, European Bank for Reconstruction and Development, Asian Development Bank,
World Bank and other organisations (Government, 2012). Mirzahmetov (2006) points that
Kazakhstan has been very active in terms of adapting to international standards in road
construction and joining international treaties and conventions, what in his view is a very
important integration factor. Compared to other states of the region, Kazakhstan actively
participates in a number of regional and international transport projects. At the same time,
there is almost no regional integration in road construction with other Central Asian states.
Tulendiev (2009) argues that it is necessary for Kazakhstan to actively cooperate with Russia,
China, Mongolia, Kyrgyzstan, Turkmenistan, Tajikistan and Uzbekistan in order to establish
logistic centres in the region. Thus, it is reasonable to argue that effective development of the
transport and logistic sectors are impossible without integrating into international and
regional structures and organisations. Today the key international organization in the region
is the Asian Development Bank. The major project it realizes is the transport strategy
CAREC, planned for the period from 2008 to 2018 (Asian Development Bank, 2011). It
includes the development of transport corridors, aimed at improvement of conditions for
regional trade. The Strategy seeks to reduce influence of formal and informal barriers on
regional trade development and free movement of people (ibid).
Before adoption of the Transport Strategy 2015, Kazakhstan faced a number of problems,
which among others precluded the country from effective governance in the transport sector.
One of the problems was the country’s reliance upon its own expertise in road construction,
maintenance and secure road traffic (GOPA – TRADEMCO, 2007: p. 3). The use of mainly
internal expertise was not sufficient to cover ever increasing high international standards in
road construction. The last years demonstrate the increase of participation of foreign
engineers and subcontractors in construction and maintenance of roads. From the point of
view of international cooperation, the Strategy has this important element as one of its major
principles.
Therefore, the government views transport sector as key to economic success in the years
ahead. Many efforts and resources are invested into this direction. Construction of roads is
seen as the major area of involvement given the current transit potential in the country.
Evaluating the official transport policy, we can argue that the interest, understanding of the
existing problems and commitment of the state to conduct a transport ‘breakthrough’ are
there. However, despite the declared ambitious objectives and goals, the effective
mechanisms to successfully implement transport infrastructure projects are often not
available. In the Transport Strategy of Kazakhstan 2015 it is read that “today the transport
sector of the Republic is characterized by inadequate conditions of basic means and poorly
74
developed infrastructure and technologies.” Moreover, “there is a problem of poor condition
of the transport sector fixed assets…” (Government, 2012). One of the key indicators of
effective transport infrastructure is the quality of constructed roads and effective road
maintenance service. According to CAREC, in whole Central Asia about 36% of arterial
roads require reconstruction or rehabilitation (ADB, 2009). It is stated that “although the
CAREC countries have increased budgetary resources and introduced cost-effective
maintenance contracts, road maintenance remains inadequate” (ibid; p. 1).
Transport Strategy of Uzbekistan
According to ADB, the General Concept of Development of Transport and Communications
of the Government of Uzbekistan until 2015 defines the development objectives and strategic
directions in the transport sector (ADB, 2009). It takes into account the Government’s
comprehensive investment program for improving the road network (ADB, 2007: 7). The
investment plan suggests:
- Improvement or reconstruction of the existing major roads
- Construction of new and improving the quality of the existing major roads.
- Realization of road safety measures especially on the international sections of
roads running through the national territory
It emphasizes the significance of international traffic and promotes the improvement and
maintenance of the main highways to bring their level to international standards. The
strategy aims at improving road transit and trade facilitation as well as development of
universal approaches to tariff and customs policies. Additionally, the strategy suggests the
removal of non-physical obstacles to passenger and freight traffic and improvement of
technical equipment at crossing borders in order to facilitate efficient border-crossing
procedures. The ultimate goal is to boost trade between Uzbekistan and its neighboring
trade partners (Audier et al, 2009; ADB, 2009).
The general road construction projects are fully in line with ADB’s country and regional
strategies. The ADB’s 2006-2014 country strategy within the road sector focuses on:
- developing an infrastructure that would open up doors to regional and international
markets
- integrating transport systems to ensure increased safety and service quality
- synchronization of the regulatory framework to promote efficiency
- restructuring and modernizing the transporting sector by facilitating competitive
environment
- setting up competitive marketing measures and tariffs
- making financing and management more efficient and effective
Most of the projects of ADB are undertaken through CAREC, the Central Asian Regional
Economic Cooperation programme which was created in 1997 with the support of ADB.
In 2003, EBRD, the IMF, IDB, UNDP and the World Bank joined (ADB, 2006). Member
countries are: Uzbekistan, Afghanistan, Azerbaijan, China (focusing on Xinjiang Uygur
Autonomous Region), Kazakhstan, Kyrgyz Republic, Mongolia and Tajikistan. The
CAREC Transport Sector Strategy for 2008-2018 elaborated with the assistance of ADB
are in line with national transport strategies of CAREC member countries and focus on the
three goals (CAREC, 2012):
1. Establishing competitive transport corridors across the CAREC region;
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2. Facilitating efficient movement of people and goods across borders;
3. Developing safe, people-friendly transport systems that are environmentally
friendly
So far ADB’s investments into the road sector of Uzbekistan totaled USD 675 million.
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