World Bank Supports Energy Sector Development in the Kyrgyz Republic

January 29, 2015

WASHINGTON, January 29, 2015 – The World Bank’s Board of Executive Directors today approved a US$24 million Energy Sector Development Policy Operation (Energy Sector DPO) for the Kyrgyz Republic.  The operation will support the Kyrgyz Republic’s reforms aimed at long-term energy supply reliability, through a single tranche of a highly concessional credit of US$13.2 million and a grant of US$10.8 million to be paid directly to the Kyrgyz budget.

Despite its vast hydropower resources, the energy sector in the Kyrgyz Republic, which accounts for about four percent of GDP and 16 percent of the industrial production, suffers from deeply rooted structural issues. The Kyrgyz Republic has the lowest electricity tariffs in the Europe and Central Asia region, which contributes to the inefficient use of energy, severe under-spending on maintenance and new investments, and resulting poor supply reliability and quality. The patchwork regulatory framework and insufficient transparency and accountability result in operational inefficiencies and undermine public trust in the sector.

These underlying weaknesses of the sector, when coupled with cycles of poor hydrology, lead to recurrent winter energy shortages with serious repercussions for the population and the economy. The 2014-2015 winter situation has been particularly alarming because of the significantly reduced water inflows in the Toktogul reservoir caused by insufficient precipitation and glacier melting, low levels of coal and fuel oil reserves due to the dire financial condition of the energy sector, and significant growth of power demand in recent years.

The Energy Sector Development Policy Operation has been designed to support select reforms of the Kyrgyz Government’s Energy Sector Action Plan for 2013-2014, with a focus on three policy areas:

(i)     improving financial viability of the energy sector through tariff reforms;

(ii)    strengthening energy sector governance, transparency, and accountability through establishment of an economic regulator, adoption of a clearly defined tariff setting methodology, implementation of a performance reporting and monitoring framework, as well as public outreach and communication; and

(iii)   managing the impact of power shortages on the poor regions through preparation and implementation of power supply management plans for the regions based on the principles of transparency, equitability, predictability, and preservation of essential services.

“The policy areas of the Energy Sector DPO are interlinked and essential for addressing energy supply reliability in a sustainable manner,”
said Ani Balabanyan, World Bank’s Senior Energy Specialist and Task Team Leader for the Energy Sector DPO. “Firstly, improved financial viability of the energy sector through power and heating tariff reforms will allow investments in maintenance and system improvements, and procurement of fuel for the combined heat and power plants. Secondly, strengthened governance, transparency and accountability of the sector will ensure that increased revenues lead to improvements of sector operational and financial performance for the benefit of all groups of population.  Finally, the management of power shortages will ensure that power rationing is equitable across the country and is not to the detriment of poor regions.”

The Kyrgyz Government’s reforms, initiated to address winter energy shortages and broader energy supply reliability issues, include introduction of the mid-term tariff policy for electricity and heating for 2014-2017, recent amendments to the laws that created a legal basis for clearly delineating roles and responsibilities in the energy sector, and establishment of the State Regulatory Agency of the Fuel and Energy Complex.  The establishment of a performance reporting and monitoring framework, under which the service quality indicators will be regularly monitored and published to build larger accountability and consumer confidence in the sector, is another important achievement of this reform process.

“The reforms supported by this operation will contribute to both economic growth and poverty reduction in the Kyrgyz Republic. The improved reliability of power supply and the increased financial sustainability of the energy sector are critical for improving the competitiveness of businesses, and will help to improve the quality of life for Kyrgyz people,” said Jean-Michel Happi, World Bank Country Manager in the Kyrgyz Republic.It is important that these reforms are accompanied with improvement of the social protection system in order to better target the poor and ensure that access to electricity and heating remains affordable for low-income households.

The World Bank development policy financing aims to help the countries achieve sustainable growth and poverty reduction through non-earmarked general budget financing that supports the countries’ economic and sectoral policies and institutions.

The World Bank’s overall mission in the Kyrgyz Republic is to reduce poverty, and promote economic growth and shared prosperity. Forty-five percent of the World Bank’s assistance to the Kyrgyz Republic is in the form of grants. The other 55 percent is in highly concessional credits with no interest, and only a 0.75 percent service charge. Credits are repayable in 38 years, including a 6-year grace period, while grants require no repayment. The Bank’s financial assistance to the Kyrgyz Republic since 1992 amounts to over US$1 billion.

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