| Project Detail |
Project Name Kyrgyz Republic: Assessing Public–Private Partnership Opportunities
Project Number 57045-001
Country / Economy Kyrgyz Republic
Project Status Approved
Project Type / Modality of Assistance Technical Assistance
1.The knowledge and support technical assistance (TA) will support the Government of the Kyrgyz Republic in developing a pipeline of bankable small and medium-sized solar and wind independent power producer (IPP) projects. This will create an IPP program that the Asian Development Bank (ADB) transaction support products can support, potentially including transaction advisory services and partial credit guarantees. The TA will provide capacity building for the identification and screening of IPP projects. It will also confirm whether the enabling environment for renewable energy projects can support the IPP approach and the use of ADBs partial credit guarantees to facilitate private investment in power generation in the Kyrgyz Republic.
2.The TA is aligned with ADBs Strategy 2030, which identifies private sector operations, including public-private partnerships (PPPs), and strengthening ADBs knowledge services as operational priorities. It also responds to the Independent Evaluation Departments paper on ADB Support for Public-Private Partnerships, 2009-2019, which recommends that ADB rapidly expand the use and scale of risk mitigation products and provide political risk and partial credit guarantees to facilitate private investment in infrastructure projects.
3.Further, the TA supports the strategic objectives and operational priorities in ADBs country partnership strategy with the Kyrgyz Republic, 2023-2027. Under this strategy, ADB will (i) continue to support the government in reforming the energy sector, tapping the countrys renewable energy potential and modernizing energy assets; (ii) support the Kyrgyz Republic in addressing its climate-related challenges and meeting its nationally determined contributions by developing infrastructure assets, including hydropower and renewable energy generation; and (iii) support ongoing reforms to strengthen governance and the private sector.
Project Rationale and Linkage to Country/Regional Strategy
1.Augmenting solar and wind power generation and identifying independent power producer projects. Hydropower comprises 77% of the installed power generation capacity in the Kyrgyz Republic, but 50% is beyond its useful life. Hence, the electricity supply is not reliable because of lower water inflows and higher demand during the winter months. Further, while demand centers are in the north, more than 80% of hydropower capacity is in the south.
2.In 2021 and 2022, the Kyrgyz Republic experienced a significant shortfall in power generation, exposing the severe susceptibility of the countrys energy security to seasonal and weather-related fluctuations. On 25 July 2023, the President of the Kyrgyz Republic declared a state of emergency in the energy sector. Because of the lack of water for its hydropower plants, the Ministry of Energy announced on 12 September 2023 that it would import 3.2 billion kilowatt-hours to 3.8 billion kilowatt-hours of energy during the 2023-2024 winter period to cover the countrys power generation gap.
3.To meet projected demand growth, renewable energy, particularly solar and wind power generation projects-will be a major part of the Kyrgyz Republics power expansion. In July 2023, the President of the Kyrgyz Republic granted the Ministry of Energy special rights to transfer land suitable for IPP projects from local governments, ministries, and other public sector agencies to the national government to implement IPP projects. 1,400 hectares of land with the most solar and wind potential (IPP project sites) are expected to be transferred under the Ministry of Energys ownership by the end of 2023. In October 2023, the Ministry of Energy informed ADB that it is prepared to identify solar and wind IPP projects with a combined capacity of up to 2 gigawatts for a program that could be strengthened by ADB transaction support products.
4.The Ministry of Energy requires assistance for screening IPP project sites to build a pipeline of credible and bankable solar and wind IPP projects that can be supported by the ADB transaction support products and successfully brought to the global market.
5.Independent power producer project enabling environment. In 2019, ADB provided project definition support, which included an assessment of the legal and regulatory environment for IPP projects in the Kyrgyz Republic. The ADB support, funded by the Asia Pacific Project Preparation Facility (AP3F), focused on the implementation of hydropower IPP projects. The AP3F legal assessment concluded that the implementation of hydropower and other renewable IPP projects was not possible in the Kyrgyz Republic. Without developed local capital markets, the power purchase agreements (PPAs) were only available in local currency with commercially not sustainable validly periods and no provision for tariff adjustments for foreign and local currency exchange rate fluctuations. Competitive auction procedures were also not required for IPP projects.
6.As private investments can boost the power generation capacity in the Kyrgyz Republic, the government carried out several legal and regulatory reforms from 2022 to 2023. For example, the government granted IPP sponsors an exemption from income taxes and value-added taxes on imported specialized plant and equipment for supporting renewable IPPs. The government also revised the law on renewable energy in July 2023 to allow for auction procedures, long-term PPAs validity periods and tariff adjustment procedures to make IPP projects commercially viable. However, an independent quality review of the legal and regulatory framework has not been undertaken to confirm whether the issues preventing or undermining the successful implementation of IPP projects in the Kyrgyz Republic have been eradicated.
7.Credit enhancement. The government also undertook institutional reforms in the energy sector from 2022 to 2023. In November 2022, the government established the Green Energy Fund to backstop the governments payment obligations under IPP projects; in May 2023, the government increased residential electricity tariffs. State-owned KyrgyzEnergo, which owned and operated the electricity and heat production subsector, was restructured and unbundled in 2002, with the Ministry of Energy taking over responsibility for the provision of electricity to the public. Despite these initiatives, significant challenges to attracting private investment for power generation remain in the Kyrgyz Republic.
8.The Green Energy Fund and the Ministry of Energy (off-takers) do not have a credit rating or sufficient credit history to generate confidence in the countrys IPP market among quality international sponsors. Further, the increase in residential electricity tariffs has not eliminated the need for state subsidies for IPP tariffs. The government also has not identified sustainable funding sources for subsidizing the IPP tariffs over the 20-25 years required for supporting IPP projects. As finance sector development is still at an early stage, it is unable to provide financing in sufficient amounts, tenors, and interest rates to address the countrys infrastructure needs. The perceived high level of political risk and excessive regulation constrain international private financing.
9.In February 2023, the Ministry of Finance expressed strong interest in using the ADB guaranteed letter of credit (G-L/C) mechanism to support the implementation of IPP projects. The G-L/C is a mechanism that can be used to backstop government payment obligations, typically in investment projects that rely on a steady stream of payments from a government agency or a state-owned enterprise, such as a public utility. The ADB G-L/C is expected to mitigate the off-takers lack of credit rating, improve market confidence and foster competition, and reduce the cost of private capital and ultimately electricity tariffs. It will also help establish a market that could be built on while the state-owned off-takers establish their creditworthiness. Given its leveraging ratio, the ADB G-L/C is also expected to augment substantially the mobilization of much-needed private capital for supporting the energy sector in the Kyrgyz Republic.
10.In July 2023, the Office of the President of the Kyrgyz Republic commissioned the Ministry of Finance, the Green Energy Fund, and the Ministry of Energy to work out a G-L/C mechanism with multilateral development banks (MDBs) to support the development of IPP projects. In September 2023, the Ministry of Finance confirmed its continued interest and readiness to engage with ADB to mobilize the ADB G-L/C mechanism for IPP projects.
11.Despite the strong government interest in ADBs credit enhancement, an independent quality review of the current legal framework has not been undertaken to determine if it can support sovereign guarantees for backstopping the off-takers payment obligations under IPP projects and the provision of the necessary sovereign partial credit guarantees to support the ADB G-L/C.
12.Independent power producer project implementation capacity and management of direct and contingent liabilities. While a limited number of IPP projects have reached commercial and financial close in the Kyrgyz Republic, these have been predominantly driven by private sector initiatives in response to the demand of private off-takers. The Ministry of Energy and the Green Energy Fund do not have substantial experience in awarding IPP projects through competitive auction procedures. The 2019 project definition support by AP3F included the preparation of a screening manual for the evaluation of IPP projects, consistent with the APMG PPP Certification Guide. However, the screening manual was limited to hydropower IPP projects. To bridge the Kyrgyz Republics gap in power generation infrastructure, the Ministry of Energy and the Green Energy Fund need to strengthen their capacity to package sustainable IPP projects, including solar and wind, and develop a common framework incorporating international best practices and private sector requirements for screening and preparation of IPP projects.
13.The Kyrgyz Republic also has no experience in awarding numerous infrastructure projects with private sector participation. This would have required building substantial capacity at the Ministry of Finance for managing direct and contingent liabilities arising from multiple PPP contract awards. Thus, the Ministry of Finance and the Green Energy Fund need to develop their internal capacity, preferably based on a common digital platform, to enable the management of direct and contingent liabilities arising from multiple PPAs. This would help to ensure the sustainability of the countrys public debt and the ability to meet all its current and future payment obligations under the IPP program without exceptional financial assistance or defaulting.
Impact
i)Sustainability of private sector investments in IPP projects in the DMC improved; |
