Country Operations Final Review

December 2016

Turkmenistan (2002–2016)

CURRENCY EQUIVALENTS (As of 30 December 2016)

Currency unit – Turkmen manat (TMT) TMT 1.00 = $0.28

$1.00 = TMT 3.50

ABBREVIATIONS ADB – Asian Development Bank CAREC – Central Asia Regional Economic Cooperation COBP – country operations business plan CPS – country partnership strategy CIS – Commonwealth of Independent States GDP – gross domestic product GNI – gross national income IED – Independent Evaluation Department IMF – International Monetary Fund MDG – Millennium Development Goal TAP – Turkmenistan-Afghanistan-Pakistan TAPI – Turkmenistan-Afghanistan-Pakistan-India TUTAP – Turkmenistan-Uzbekistan-Tajikistan-Afghanistan-Pakistan

CONTENTS

EXECUTIVE SUMMARY I

I. INTRODUCTION 1

II. STRATEGIC CONTEXT 2

A. Country Development Context 2 B. National Development Plans 6

III. ADB STRATEGY AND PROGRAM 7

IV. ASSESSMENT OF PERFORMANCE 13

A. Relevance 13 B. Effectiveness 15 C. Efficiency 17 D. Sustainability 18 E. Development Impact 19 F. ADB and Borrower Performance 20 G. Overall Assessment 20

V. KEY FINDINGS 21

VI. LESSONS 22

VII. RECOMMENDATIONS 23

EXECUTIVE SUMMARY

This Turkmenistan Country Operations Final Review prepared by Central and West Asia Regional Department (CWRD) of the Asian Development Bank (ADB) is a self-assessment of the ADB country program from May 2002 to December 2016. ADB proposes to prepare a first full country partnership strategy (CPS) for 2017–2021 since its Operations Manual requires such a CPS be prepared as a key directional document in any developing member country where lending or non-lending projects are planned. ADB guidelines add that if there is no existing CPS, the concerned operations department prepares a review of completed and ongoing ADB supported country operations, findings from which are to inform the new CPS. As the May 2002 Economic Report and Interim Operational Strategy (ERIOS) is the only strategy approved by ADB for Turkmenistan, besides four programming Country Operations Business Plans (COBP) covering 2014–2018, this Review assesses ADB-supported country operations from May 2002 to December 2016, to be separately validated by ADB’s Independent Evaluation Department (IED). The Country Operations Final Review uses the 2015 IED guidelines and applies the five evaluation criteria to derive the successful performance rating of ADB-supported program, with lessons and recommendations to inform the upcoming CPS for 2017–2021.

Country Context. Turkmenistan was re-classified as an upper middle–income economy

in mid–2012 and its gross national income (GNI) per capita (Atlas method) for 2015 was $7,510. Growth averaged 12.6% in 1998–2015. The main growth driver is natural gas exports, given the country’s fourth largest natural gas reserves after the Russian Federation, Iran and Qatar. However, the country’s export basket remains highly concentrated, with natural gas, oil and cotton averaging an estimated 92.6% of annual exports during 2002–2015, reaching 96% in 2011–2015. There is buyer’s monopoly in its natural gas markets–first, Russian Federation until 2008, and then the People’s Republic of China from December 2009 with the commissioning of the Trans-Asia Gas Pipeline. High rates of government-led gross fixed capital formation were achieved that averaged at 35.9% of GDP in 2002–2014, increasing from 22.8% in 2002–2007 to 47.2% in 2008-2014. This was primarily sourced from its natural gas export revenues.

The planned CPS will be aligned with government’s National Program on Social and

Economic Development for 2011–2030 adopted in May 2010. Its key goals are to increase competitiveness, accelerate economic diversification and improve infrastructure. Within diversification, three approaches are being undertaken by government. The first is to diversify markets for natural gas and power exports, including with ADB support, to tap the South Asian economies. The second is to move up the natural gas value-chain and manufacture higher–value products such as polyethylene, polypropylene, hydrogen methanol, ammonia, urea etc. and develop the chemical industry. The third is to diversify the non-hydrocarbon economy through 2030 with a three–phased privatization program with an interim target to increase share of private sector in nonhydrocarbon economy up to 70% by 2020.

ADB Strategy and Program. ADB prepared the 2002 ERIOS to guide its program through the initial years after Turkmenistan became a member country in 2000. The ERIOS highlighted that a full ADB country strategy would be formulated based on initial implementation experience. The ERIOS rightly calibrated expectations and did not identify a specific resource envelope for lending, but had an annual allocation of $2.5 million for technical assistance. Regional connectivity and cooperation through energy and transport projects was identified as a key ERIOS objective, which remains an ADB priority till date (the other two ERIOS objectives were sustained and stable economic growth and enhanced human and social development). In energy, the ERIOS prioritized exporting natural gas to South Asia, although it added that this would require long-term engagement. No further country strategy was prepared, although

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considerable effort was put during 2011–2013 to prepare a draft interim CPS for 2013–2015, which eventually was not finalized. Four COBPs were prepared for 2014–2018 that continued focus on transport, energy, regional cooperation and integration.

ADB’s country program, as of December 2016, has 1 loan and 15 technical assistance

projects totaling $127.81 million in five sectors, energy, transport, agriculture and natural resources, public sector management and finance. ADB support focused on Turkmenistan’s key growth driver, natural gas, and government’s long standing priority to increase connectivity for its natural gas exports to South Asian markets through the proposed Turkmenistan–Afghanistan–Pakistan–India (TAPI) natural gas pipeline project, designed with an annual export capacity of 33 billion cubic meters for a 30-year period. Here ADB provided fee-based advisory service from November 2013. ADB made progress to increase power exports through Turkmenistan–Uzbekistan–Tajikistan–Afghanistan–Pakistan (TUTAP) initiative with an interconnection between Afghanistan and Turkmenistan (500kV) set for commissioning by 2020 and annual exports projected up to 500 MW. ADB initiated discussions in 2016 for a Turkmenistan–Afghanistan–Pakistan (TAP) power interconnection project using the southern Afghan corridor route, although this is in an early stage with an options study being prepared.

ADB support for the proposed TAPI project has been through technical assistance and a fee–based advisory service. ADB had sustained engagement though five technical assistance projects totaling $3.95 million since December 2002, with the latest approved on September 2011. ADB was TAPI secretariat from 2003 and coordinated 24 ministerial–level steering committee meetings. It enabled signing of key gas purchase and sales agreements between the four TAPI participating countries in 2012–2013. ADB support increased in importance that in November 2013, it was selected as the Transaction Advisor to offer fee-based advisory service, where it was paid for its advice with no financing either provided or committed. Its responsibilities were to create the TAPI pipeline company, which it achieved in November 2014; and then select a commercial consortium leader to build, own and operate the pipeline, which was completed with the appointment of the State Concern Turkmengaz in August 2015. For the services rendered ADB fees consist of a success fee and a monthly retainer fee.

Developing such a complex yet transformative TAPI project using commercial principles

and a project financing approach in collaboration with the four participating countries has been a key ADB contribution, particularly as a Transaction Advisor since November 2013. This is in contrast to implementation during the earlier technical assistance when progress was affected by varying agendas and interests that made reaching consensus among the parties challenging. Recent developments on TAPI include signing the shareholders agreement in December 2015 that elaborates management and operation of the TAPI pipeline company, with Turkmenistan’s state gas company having 85% of equity, and gas companies of Afghanistan, Pakistan and India each with 5%. Then a sum of more than $200 million was committed by the shareholders of the TAPI pipeline company in April 2016 to undertake detailed engineering, route surveys, environment and social safeguards studies. Going forward, capacity issues will be crucial as the project financing approach will involve accessing capital markets. This underscores the need for quick decision-making and having realistic expectations on implementation timelines to bring the project to financial close. On TUTAP, ADB approved project preparatory technical assistance and coordinated negotiations for the power purchase and sales agreement between Turkmenistan and Afghanistan in June 2012, February 2013 and February 2014.

Turkmenistan joined Central Asia Regional Economic Cooperation (CAREC) Program in

2010. In line with CAREC’s Transport and Trade Facilitation Strategy, ADB financed the North–South Railway Project for $116.88 million in 2011, its first loan to the country. It developed

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signaling and telecommunication systems of the Chilmammet–Buzkhun rail section for a length of 288 kilometers (kms). This is part of the North–South railway corridor with a total length of 912.5 kms that runs through Turkmenistan for 700.5 kms connecting Kazakhstan with Iran. A 2007 agreement between the three Heads of State of Turkmenistan, Kazakhstan and Iran formed the basis for the ADB project. The first component of the North–South railway project financed design, supply, installation and commissioning of power supply, signaling and telecommunication systems (contract awarded on turnkey basis to a joint venture between one company in Kazakhstan and one in India), which was completed on November 2016. The second component financed the supply of track maintenance machinery (contract was awarded to an Austrian company) that was completed six weeks ahead of schedule on November 2012. The third component was on institutional capacity development and project implementation support (where a U.S. based consulting firm was selected), although this firm demobilized its work on September 2014, and after ADB intervention, a new project manager was assigned by the executing agency. Despite delay in project completion there was no truncation of planned activities. International experience on corporatization and commercialization of railways were shared with government. Project outcomes are likely to be achieved.

Three technical assistance projects on statistics capacity development, land

management and finance sector did not shape as ADB initially anticipated. The reasons vary from Government’s preferred approach on data and survey findings post-completion (on statistics capacity development) or due to changing government priorities post-approval (on finance sector where ADB was to support legislative processes for electronic signatures and deposit insurance) or changing ADB corporate priorities (ADB withdrawal after coordinating Central Asian Countries Initiatives for Land Management program from July 2006 to July 2010).

Levels of ADB program financing is limited with only one loan project approved during

2002 and 2016. The Government’s decision not to borrow during 2002–2010 corresponded with the years when its economy registered double-digit growth rate, including its pivot to the People’s Republic of China (PRC) markets for its natural gas exports in late 2009. Given two periods of favorable external environment, first in early 2000s and second in early 2010s, which were marked by high international demand and prices for natural commodities, net Official Development Assistance into Turkmenistan averaged only 0.27% of its GNI during 2003–2014. However, falling demand and commodity prices, first in 2008–2009 and then from mid–2014, affected growth and increased macroeconomic imbalances. These episodes of unfavorable external environment increased focus on economic diversification, export orientation and import substitution as national development priorities.

ADB approved a transaction TA in September 2016 to improve network infrastructure of

the national power transmission and a small-scale technical assistance in March 2016 to establish sanitary and phytosanitary measures for food safety and improve accreditation capabilities of food safety laboratories. Collaboration with the Institute of Strategic Planning and Economic Development, a think–tank within the Ministry of Economic Development is ongoing, as part of the ongoing regional study on Good Jobs for Inclusive Growth in Central and West Asia. The Institute prepared an analytical paper titled Favorable Conditions for Inclusive Growth in Turkmenistan using ADB’s regional study framework. A financial intermediation loan of $200 million for small and medium enterprises is under preparation for ADB approval in 2017, which is anticipated to value-add to government’s target to increase private sector contributions in non-hydrocarbon economy up to 70% by 2020 from 56% levels in 2012 and to diversification.

Overall Rating. ADB support in 2002–2016 to diversify markets for natural gas exports

(through the TAPI project), power exports (ongoing TUTAP, planned TAP initiatives) and build

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transport infrastructure for regional connectivity (North–South Railway) has made it a key development partner. The overall ADB country program is rated successful with the technical assistance projects, fee-based advisory service and loan project rated relevant, likely effective, efficient, likely sustainable and with satisfactory levels of development impact.

Key Findings. This Final Review strongly supports government efforts at economic diversification. Despite high growth registered, employment structure is agriculture-based. In 2014, agriculture employed 43% of workforce and remained at similar levels from 2000 when it stood at 47.6%. With only 4% of total land arable, intense surface irrigation and water usage has rendered more than 90% of the arable land saline. The country is extremely susceptible to adverse effects of climate change given its downstream and transboundary water basin location in addition to disaster risks. The hydrocarbon sector that drives more than 90% of annual exports accounts for 1.4% of workforce. And it is estimated that 90-95% of general secondary education level graduates (with 12-year compulsory education) do not progress to higher education or to technical and vocational education and training. With working age population to increase by 30% in two decades it poses human capital challenges to the diversification effort.

Lessons. This Review identifies three lessons. Sustained ADB engagement in areas

prioritized by governments especially in upper middle–income economies increases goodwill for ADB even if it does not involve loan approvals for extended periods. Successful ratings of ADB program are more dependent on direct value addition by ADB to country needs through a variety of modalities. And that at the same time, responding to government needs of upper middle-income countries often result in frequent programming changes.

Recommendations. This Review proposes three recommendations. These are also

aligned with the ADB Governor for Turkmenistan’s statement at the 2016 ADB Annual Meeting for a more active ADB role to realize the government’s national and regional projects.

(i) Continue support to government’s key regional projects on natural gas and power exports. Based on ongoing program, comparative advantage demonstrated by ADB and alignment with national development priorities, ADB could continue support to diversify the country's markets for natural gas through the proposed TAPI, and power exports through the ongoing TUTAP and planned TAP initiatives. Related in-country investments in energy sector could also be explored to further enable these regional initiatives. (ii) Formulate ADB program on the ‘how to’ aspects of diversification of the non-hydrocarbon economy in close consultation with the Government. Potential pathways for ADB support could be investments in institution–building for private sector development. Investments in human capital could be through developing adequate tracks in the sector structure for general secondary education graduates to progress to post–secondary education programs. These could be done through system expansion, system cost efficiency besides improving relevance of students’ and employees’ education and skills for the needs of the labor market in a diversified economy. Areas of support for natural capital development could cover water efficiency issues, climate change mitigation and adaptation based on Government needs. (iii) Continue ADB investments in transport infrastructure improvements to help government efforts to reposition it as a transit country. Building on the implementation experience of the North–South Railway project, ADB could continue with transport infrastructure investments to enhance government’s efforts to reposition Turkmenistan as a transit country.

I. INTRODUCTION 1. Turkmenistan joined the Asian Development Bank (ADB) in 2000. ADB classifies it as a Group C country with access to regular ordinary capital resources.1 The country’s 2015 gross national income (GNI) per capita (Atlas method) was $7,5102 and was re-classified as an upper middle-income economy in mid–2012. Following its independence in 1991 from the former Soviet Union and after a contraction during 1993–1997 the economy grew at an average annual rate of 12.6% during 1998–2015.3 Growth was propelled by hydrocarbon exports, primarily natural gas, as the country possesses the world’s fourth largest natural gas reserves after the Russian Federation, Iran and Qatar.4 2. ADB proposes a full Country Partnership Strategy (CPS) for 2017–2021. This coincides with the country’s National Program on Social and Economic Development 2011–2030 adopted in May 2010 with three programming cycles 2011–2015, 2017–2023 and 2024–2030. ADB’s revised CPS process document mandates ADB to have a valid CPS for any developing member country (DMC) where lending or nonlending activities are planned.5 It further highlights that prior to preparing a new CPS, an evaluation of the existing country strategy, ongoing program and operations needs to be completed to be separately validated by ADB’s Independent Evaluation Department (IED). 3. The objectives of this Country Operations Final Review are: (i) to evaluate relevance of the strategic focus of the country program, sectors of ADB engagement, design and implementation of projects; (ii) identify lessons from past engagement applicable to other ADB developing member countries, especially upper-middle income economies; and (iii) propose forward–looking recommendations as ADB positions to increase its program during the CPS period. In terms of ADB strategies that identified areas of engagement, an Economic Report and Interim Operational Strategy (ERIOS) was prepared in May 20026 followed by four country operations business plans (COBP) covering 2014–2015, 2015–2016, 2016–2017 and 2018.7 Given this, the Country Operations Review assesses its strategic focus and country operations implemented during May 2002 to December 2016.8

4. The ADB country program for Turkmenistan since 2000 reached $127.81 million through 1 loan and 15 technical assistance projects. Sectors covered are energy, transport, public sector management, agriculture and natural resources management and finance. Although program financing was limited to 1 loan during 2002–2016, ADB has had sustained engagement through a series of technical assistance projects and a fee-based transaction advisory service for the proposed Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline project, which is anticipated to export an annual capacity of 33 billion cubic meters (bcm) to South Asian

1 ADB. 2016. Operations Manual. OM Section A1/BP Issued on 4 September 2013 Manila. It does not receive

concessional finance earmarked for countries with low per capita incomes and limited debt repayment capacity. 2 The World Bank. New Country Classifications were released on July 2016. Middle income economies are defined

as those with a GNI per capita, calculated using the World Bank Atlas method, of $1,026 – $12,475 in 2015. The lower-middle-income and upper-middle-income economies are separated at a GNI per capita of $4,035 threshold.

3 International Monetary Fund (IMF). 2016. World Economic Outlook Database. 4 British Petroleum. Statistical Review of World Energy 2016. 5 ADB. 2015. Reforming the Country Partnership Strategy. Manila. 6 ADB. May 2002. Economic Report and Interim Operational Strategy for Turkmenistan. Manila. 7 ADB. December 2013. Turkmenistan: Country Operations Business Plan (2014-2015), Manila; ADB December

2014. Turkmenistan: Country Operations Business Plan (2015-2016), Manila; ADB. October 2015. Turkmenistan: Country Operations Business Plan (2016-2017). Manila; ADB January 2017. Turkmenistan: Country Operations Business Plan (2018).Manila.

8 ADB prepared a draft interim CPS for 2013-2015 although this was not finalized for ADB Board endorsement.

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markets for 30 years. There is also progress in the ongoing Turkmenistan–Uzbekistan–Tajikistan–Afghanistan– Pakistan (TUTAP) regional power initiative, where ADB is financing construction of an interconnection on Afghanistan side (500kV, 1,000 MW capacity), which is set for commissioning by 2020 with projected power exports up to 500 MW per year. ADB initiated discussions in 2016 for the Turkmenistan–Afghanistan–Pakistan (TAP) power interconnection initiative that follows the southern Afghan corridor route and is its secretariat.

5. This Country Operations Final Review uses the evaluation criterion based on 2015 IED guidelines.9 These are relevance (for alignment of ADB strategic objectives with national development priorities, ADB corporate strategy, ADB additionality, design quality of sector programs); effectiveness (achievement of outputs and outcomes by loan, TA projects and advisory service); efficiency (implementation of ADB supported activities, comparison of costs and benefits generated from ADB financed activities, process efficiency); sustainability (institutional, financial, operational sustainability of activities post-completion); and development impact (contributions of ADB supported activities to cross-cutting strategic objectives).

6. The Country Operations Final Review also assesses ADB and government performance in implementing the country program, besides identification of key findings, lessons and recommendations aimed to inform the upcoming CPS. It starts with a section on the strategic context that summarizes thrusts of the national development priorities and key features of the rapid growth trajectory experienced by Turkmenistan. II. STRATEGIC CONTEXT

A. Country Development Context

7. Turkmenistan was classified as an upper middle-income economy in mid–2012 after a period of sustained growth during 1998-2011 when its annual growth rate averaged 13.5%.10 Per capita GDP estimated for 2016 is $6,694.36 (current US$). Annual increase in the consumer price index averaged 5.6% during 2007–2015 as per official data. The country possesses the fourth largest share of global natural gas reserves estimated at 9.4% or 17.5 trillion cubic meters (footnote 4). In 2015, a total of 38.1 bcm were exported through pipelines to the People’s Republic of China (PRC) (27.7 bcm), Iran (7.2 bcm), Russian Federation (2.8 bcm) and Kazakhstan (0.3 bcm).11 8. Prior to this growth phase, the economy underwent contraction and during 1993–1997 its GDP reduced by a cumulative 27.4% as per official data. This was due to a combination of factors like payment problems for its natural gas exports; drop in cotton and wheat production as a result of adverse weather conditions; transition problems from state farms to farming associations and lagging government procurement prices. Inflation reached run-away levels, although this reduced to 7.5% in 2000 with a series of policy measures like limiting credit, improving loan collections and increased subsidization of consumer items (footnote 6). 9. Limited data is available on effects of growth on poverty and inequality, although available non-income poverty indicators show some improvements. The country’s human development index that assesses life expectancy, access to knowledge and decent standard of

9 Independent Evaluation Department. 2015. 2015 Guidelines for the Preparation of Country Assistance Program

Evaluations and Country Partnership Strategy Final Review Validations. Manila. 10 The World Bank. 2016. World Development Indicators. Washington D.C. 11 In 2015, proven oil reserves were 0.6 billion barrels and about 261 thousand barrels were produced per day.

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living rose from 0.665 in 2010 to 0.691 in 2015 with a rank of 111 among countries with a medium human development category.12 Total years schooling at 12 years for primary and general secondary level increased to 97% completion rate.13 Literacy rates of 15 to 24–year olds are estimated at 99.8% in 2015 with the ratio of girls to boys in 2014 for primary levels at 0.98, secondary levels at 0.96, although this falls sharply to 0.64 at tertiary levels.14 On improved access to water supply and use of drinking water sources, in 2012, percentage of urban population with access to either piped–on–premises or other improved drinking water source was 89%, while for rural areas it was 54%, with the overall aggregate at 71%.15 There was a drop of 1% in proportion of population with access to improved water supply in 2012 compared to 2000. Those with access to improved sanitation increased by 14% in 2012 reaching near universal levels at 99% compared to 2000 (footnote 15). 10. The growth trajectory is marked by a highly concentrated export basket dominated by natural gas; oil and related products; and raw cotton.16 Annual exports of natural gas and oil and related products combined for an estimated 87% of total exports during 2001–2015.17 Of this, natural gas averaged 71%, while oil and related products averaged 16%. With raw cotton, the three items averaged 92.6% for 2002–2015 and was as high as 96% in the last five years. This concentrated export basket is reflected in the high Hirschman-Herfindahl Index estimated at 0.7038 for 2015 that averaged 0.6164 in 2011–2015 and 0.5267 in 2002–2015, showing an increase in export concentration over recent years.18 11. The country’s growth is featured by reliance on exports of single product–natural gas–to single markets–first, to Russian Federation and Commonwealth of Independent States (CIS) until 2008, and then to the PRC from December 2009 with the commissioning of the Trans-Asia Gas Pipeline in 2009.19 Since its independence in 1991 until 2008, the country exported slightly over 60% of its annual natural gas, oil and related exports to the Russian Federation and Ukraine, after which it dropped to only 3.1% during 2011–2015. The start of Trans-Asia Gas Pipeline can be seen as a pivot from Russian markets to the PRC, which has purchased on average about 75% of annual exports in 2011–2015. A highly concentrated export basket with natural commodities implies increased susceptibility to exogenous shocks due to the volatile international demand and prices for commodities. 12. Declining natural gas prices from mid–2014 put pressure on the economy. Falling revenues from natural gas exports resulted in lower GDP growth rates from 10.3% in 2014 to 6.5% in 2015 due to smaller public expenditure that reduced consumption. Low global hydrocarbon prices since mid–2014 resulted in a drop in annual revenues from natural gas exports by more than a third from $13.5 billion in 2014 to $8.4 billion in 2015. This averaged at

12 United Nations Development Programme.2016. Country Explanatory Note for Turkmenistan. 13 European Training Foundation. 2012. Turkmenistan. Overview of Vocational Education and Training and the Labor

Market. Turin. 14 ADB. 2015. Basic Statistics. Manila 15 World Health Organization and United Nations Children Fund. 2014. Progress on Drinking Water and Sanitation

Update. Geneva 16 International Trade Centre (ITC). Turkmenistan Country Statistics. Geneva. 17 Estimates uses data from Harmonized Commodity Description and Coding System or the Harmonized System,

which is a multipurpose international product nomenclature developed by World Customs Organization. 18 A perfectly diversified export portfolio would have a HHI index value close to zero, whereas a country which exports

only one product is assigned a value of 1 or least diversified. 19 As of end-2016, main pipelines are the Central Asia-Center Pipeline or northern route supplying CIS markets (with

capacity of 45bcm/year although annual export levels dropped since 2009); three Trans Asia Gas Pipelines that started operating in December 2009 to the PRC (55bcm/year capacity); two smaller pipelines to Iran (24bcm/year capacity); and in-country East West Interconnector commissioned in December 2015.

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$10.6 billion during 2010–2015. Similarly, revenues from oil exports that averaged $4.1 billion during 2010–2015 fell from $4.6 billion in 2014 to $2.5 billion in 2015. Current account deficits (after registering surpluses in 2010 and 2011) rose to 7.1% in 2012 and further to 10.3% in 2015. Moderation of growth in the PRC and recession in the Russian Federation was a factor for lower demand. Linkage with the PRC is through exports that accounted for 75% of total exports during 2010–2015. Imports from PRC reached 15% in 2015, while the PRC investments are focused in the hydrocarbon and transport sectors. Linkage with Russian Federation and CIS countries are primarily through imports, which averaged close to 26% during 2009–2015. 13. While production structure of GDP (Figure 1) changed since 2000, especially the increase in the combined share of industry and construction, the employment structure (Figure 2) has remained relatively unchanged in terms of sector shares to total employment and remains agriculture-based.20 In 2000, the share of industry (including construction) to GDP stood at 41.8%, which rose to 63% in 2014. Mining, covering the hydrocarbon sector, from where more than 90% of annual exports are sourced, employed about 1.4% of total workforce. Relative share of agriculture to GDP fell from 22.9% in 2000 to 8.5% in 2014 although it has consistently employed more than 40% of total workforce.21 Services share rose initially from 35.3% (2000) to 43.6% (2005) but has since then dropped to 28.5% (2014). Women in the workforce increased marginally in the capital city Ashgabat from 2000 levels compared to the other five provinces or velayats.22 Within large and medium–sized enterprises, areas where women dominate are healthcare (physical education, social security 70%), education (68%), credit and insurance (53%), scientific services (48%) and communications (44%) (footnote 21).

Figure 1. Agriculture, Industry, Services Value-Added (as % of GDP)

Note. Industry includes construction, mining and quarrying, manufacturing, electricity, gas steam and air conditioning supply, water supply, sewage waste management, and remediation activities. Source. ADB. 2016. Key Indicators for Asia and the Pacific. Manila.

14. The share of gross fixed capital formation averaged 35.9% in 2002–2014, increasing from 22.8% in 2002–2007 to 47.2% in 2008–2014, which is the highest across Central Asian countries. Much of it is funded by public investments sourced from hydrocarbon export revenues, to improve national infrastructure through programs such as the National Programme on Improvement of Social and Living Conditions in Villages, Settlements, Towns and Districts up to 2020. Data from 2005–2012 show that out of the annual average of 36% increase in gross fixed capital formation, share of private sector was about 40% mostly in hydrocarbons.23

20 ADB. 2016. Key Indicators for Asia and the Pacific. Manila 21 ADB. Asian Development Outlook 2016 and Government of Turkmenistan. Statistical Yearbook of Turkmenistan

2014. 22 The country’s estimated population of 5.31 million (official population data is not published) is spread across

Ashgabat, capital city (12.7% of total population) and five provinces or velayats– Mary (22.7%), Dashoguz (21.1%), Lebap (20.5%), Akhal (14.5%), and Balkan (8.5%).

23 As of January 2016, there are three onshore and four offshore production sharing agreements with private counterparts in place to develop the natural gas fields.

22.9 18.8 14.5 8.5

41.8 37.648.4

63

35.343.6 37.1

28.5

0

50

100

2000 2005 2010 2014

Agriculture Industry (including Construction) Services

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Figure 2: Employment by sector, 2014

Source: Asian Development Outlook 2016. Statistical Yearbook of Turkmenistan 2014

15. The education system consists of elementary and general secondary levels that combine for the 12-year compulsory general education. Technical and vocational education and training (TVET) starts after the end of the 12-year compulsory education. TVET consists of 131 initial vocational schools offering 268 occupations ranging with courses like accountancy and office skills covering 3–18 months; 27 secondary vocational education schools providing free and fee-based programs for more specialized courses like nursing, teacher training for elementary levels, banking, aviation etc.; and continuing TVET organized by employers for their staff in any of the registered educational institutions. For tertiary education, there are 24 higher education institutions, all of which are state-owned. It is estimated that 90–95% of the general secondary education graduates do not currently progress either to TVET or higher education. 16. About 50.8% of population is in urban areas across 25 urban centers. There are two urban agglomerations with a population of more than 300,000—Ashgabat and Dashoguz (provincial capital)—that combine for 30% of total urban population.24 The remaining 70% of urban population is spread across 23 urban centers, of which 21 are small and medium–sized cities with population of at least 8,000. Despite having the third highest urban population in Central Asia,25 the urban population is dispersed beyond the two agglomerations also affecting creation of job opportunities. The rural population appears to be less scattered since only 4% of total area is cultivable and as the Karakum Desert covers much of total land area.26

17. While the country possesses the lowest internal renewable surface water resources in Central Asia at an estimated 275 cubic meters per person for a year, its total actual renewable surface water resources is estimated at 4,851 cubic meters per person for a year, with a high dependency ratio of over 90% (footnote 26). A high dependency ratio means that almost all of the total renewable water resources originate in upstream countries outside its territorial domain. On water use, agriculture uses 90% of total supply, followed by power generation at 4.2%, industry at 3.3% and domestic consumption at 2.5%.27 The Karakum canal that is about 1,300 kms. transfers water from Amu Darya, Murghab and Tedjen river systems to irrigate the south and divert water to Ashgabat. Data on cropping patterns show wheat and legumes cover

24 United Nations. World Urbanization Prospects: The 2014 Revision. 2015 25 UNESCAP, UNDP, Center for Economic Research. 2014. Urbanization in Central Asia: Challenges, Issues and

Prospects. Tashkent. 26 Food and Agriculture Organization. 2013. Irrigation in Central Asia in Figures. Aquastat Survey 2012. On average,

water resources allocated to Turkmenistan in the Amu Darya basin are about 22 cubic km/year, including 0.68 cubic km/year of internal renewable surface water resources based on the January 1996 agreement between Turkmenistan and Uzbekistan. It has similar water-sharing agreements with Iran.

27 ADB. 2016. Assessment of Agriculture, Natural Resources and Rural Development Sector Manila[Draft]

42.9%

9.4%9.3%

7.5%

7.3%

6.7%

3.8%

3.3%1.7%

1.6%1.5% 1.4% 1.4%

1.3%0.9%

AgricultureManufacturingConstructionEducationWholesale and retail tradeTransport and communicationOtherHealth careExtractive industryPublic admin and defenceArts, entertainmentReal estateProfessional, scientificDistribution of utilitiesFinance

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57% and cotton 37% of total cropped area. With the entire cultivated land irrigated and high cropping intensity or the percentage of harvested irrigated area to total area irrigated, effects of low water use efficiency are magnified as more than 90% of arable land is saline (footnote 26).

B. National Development Plans 18. The Government was guided by two national development strategies during 2002–2016, the period covered by this Country Operations Final Review. The two plans are the Strategy for Socio-Economic Development to 2010, and the National Program for Social and Economic Development from 2011 to 2030. These were preceded by an initial period of transition and stabilization during 1992–2001. Table 1 summarizes its key objectives and priorities:

Table 1. Strategic Priorities of the National Development Plans

10 years of stability- Transition and Stabilization

Strategy of Socio-Economic Development to the period 2010

National Program of Social and Economic Development 2011–203028

Stabilization phase covered 1992–2001. This phase was planned for a decade before prices, trade and enterprise activities were to be determined by market forces.

First strategy covered 1999–2010. Its four objectives were:

Economic independence with high growth, macroeconomic stability, diversification, entrepreneurship, and promotion of foreign investment;

Food security with domestically produced foodstuff with strict quality control;

Social security and improved social safety nets, and

Ecological safety and increased provision of drinking water, prevention of soil erosion and soil salinity.

Second strategy covered 2011–2030. Its objectives are strong and sustainable economic growth, strengthen geopolitical and geo-economic situation, and improve living conditions of the population. Has three programming cycles:

Government-led investments to increase living standards of population during 2011–2015;

Increased private sector contribution in non-hydrocarbon economy up to 70% during 2017–2023 at which time the country’s human capital will be further strengthened; and

Deepened private sector to diversify economy with industries, advanced engineering and social infrastructure in 2024–2030.

Source: National Development Strategy (Summary) prepared for the ADB Interim Country Partnership Strategy 2013-2015; and ADB. May 2002. Economic Report and Interim Operational Strategy for Turkmenistan. Manila.

19. The country has remained reliant on natural gas exports as it is the foundation of growth, fuelled by public investments and domestic consumption. Net Official Development Assistance (ODA) averaged only 0.27% of gross national income during 2003–2014, while the Net ODA disbursements per capita averaged $7.31 for the same period. In terms of amount, the annual ODA averaged $40.13 million, with bilateral donors accounting for 73% and multilateral partners

28 Includes National Rural Development Program (2008), Sectoral and Regional Development programs (2011).

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the remaining 27%.29 In the last five years, the Islamic Development Bank, ADB and the European Bank for Reconstruction and Development (EBRD) were the top-three multilateral partners in terms of financing, while Turkey and United States of America were the top two bilateral development partners. The EBRD has provided credit lines to banks since 1990s and resumed investments from mid–2008 totaling about 250 million Euros in the private sector.30 The World Bank has a reimbursable advisory services program covering macroeconomic statistics, investment climate reforms, privatization, in addition to studies on diversification. The United Nations coordinates quarterly meetings of development partners. 20. During the periods of favorable external environment, first in the early 2000s and second in early 2010s, marked by high international demand and prices for natural commodities, the current account remained healthy. In 2009 and 2010 the current account was affected by falling energy prices triggered by the global financial crisis, which negatively affected the country. From 2011 to mid-2014 higher global energy prices to a certain extent helped stabilizing the current account, but could not prevent its gradual deterioration. Falling international commodity prices from mid-2014 and 2015 affected GDP growth rates and increased macroeconomic imbalances. The current account as a percentage of GDP turned into double-digit negative territory in 2015. On 1 January 2015, the Central Bank of Turkmenistan devalued the currency (Manat) by 22.8% that had remained at 2.85 per US dollar since mid–2008 to 3.50 in January 2015, tightened capital controls and importers’ access to foreign currency. Currency reserves reduced from 30 months of import cover in October 2015 to 24 months in April 2016 (footnote 30). The unfavorable external environment increased focus on economic diversification, export orientation and import substitution as key national development priorities. 21. Within the overall increase in the human development index from 0.665 in 2010 to 0.691 in 2015 (para 9), exponential increases were registered in the gross national income per capita, combined with steady increases in life expectancy and expected years of schooling (footnote 12). In March 2016, Turkmenistan completed consultations with the United Nations Country Team to adopt the 17 Sustainable Development Goals (SDGs). As part of the consultative process, the government discussed all 17 SDGs and agreed to 148 out of 169 global targets, of which 121 global targets were adopted as is, while another 27 targets were modified given in-country contexts.31 The country’s Intended Nationally Determined Contributions prepared well in advance to the United Nations Climate Conference in Paris in December 2015 identified energy efficiency and conservation, sustainable use of natural gas and increased use of alternate energy sources as pathways to contribute to global targets on climate change.32 III. ADB STRATEGY AND PROGRAM 22. Promoting regional cooperation and integration through sustained investments in energy and transport sectors has remained an ADB priority during 2002–2016. The overall objective of the 2002 ERIOS was to improve living standards of population in a gradual and sustainable manner through three channels of ADB support:

One, human and social development through improved delivery of services like drinking water, sanitation and heating; and increased quality of basic education and healthcare.

29 AidFlows tracks how much development aid has been provided across the world. It is a partnership between ADB,

OECD's Development Assistance Committee, World Bank, and the Inter-American Development Bank. 30 ADB. 2016. Sector Assessment (Summary): Private and Financial Sectors (Draft). Manila 31 UN Country Team Turkmenistan. 2016. A structured Approach to SDG Rollout 17 days of consultations to identify

the goals, targets and indicators to be adopted in Turkmenistan. Ashgabat. 32 United Nations Framework Convention on Climate Change (UNFCCC). 2015. Intended nationally determined

contribution of Turkmenistan in accordance with decision 1/CP. 20 UNFCCC.

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Second, sustainable economic growth through strengthened public sector management, statistics capacity development, improved analysis on agriculture sector and enhanced water resources and soil management.

Three, regional cooperation through energy and transport programs. In energy, exporting natural gas to the South Asia markets was prioritized; while in transport, it was rehabilitating the 115–km road linking the country with the Afghanistan border.

23. The ERIOS highlighted that these three approaches were indicative and other areas could be added over the course of ADB support in response to government needs. The four subsequent COBPs covering 2014–2018 continued the focus on energy and transport infrastructure investments to enhance regional cooperation.

Table 2. ADB Country Strategy Priorities and Program 2002–2016

Economic Report and Interim Operations Strategy

Country Operations Business Plan

Country Operations Business Plan

Country Operations Business Plan

Country Operations Business Plan

May 2002 2014–2015 2015–2016 2016–2017 2018 Improve in-country living standards by (i) Human and Social development, (ii) Sustainable economic growth, (iii) Regional cooperation through energy and transport.

Energy and Transport infrastructure to enhance regional cooperation and integration.

Energy and transport infrastructure to enhance regional cooperation and integration

Energy and transport infrastructure to enhance regional cooperation and integration

Energy, transport, finance aligned with ADB strategic agendas

No resource envelope identified for lending as ADB operations were to start with pilot activities before being scaled-up.

OCR envelope of $160 million

OCR envelope of $104 million

OCR envelope raised to $1 billion

Indicative resources available $50 million.

Annual TA operations of $2.5 million identified.

$1.2 million mainly for project preparatory TA

$1 million mainly for project preparatory TA

Planned 3 TRTAs and 1 KSTA

Actual program totaled $127.81 million

Approval in this COBP period was $500,000

No new approvals

Approvals in this COBP period totals $225,000

COBP= Country Operations Business Plan, KSTA=knowledge and support technical assistance, OCR=ordinary capital resources, TA= technical assistance, TRTA = transaction technical assistance. Source: ADB Country Operations Review Team.

24. ADB program as of December 2016 consists of 16 projects (Figure 3) with a total resource envelope of $127.81 million (Figure 4). These covered five sectors energy, transport, agriculture and natural resources, public sector management and finance. In terms of number of projects, the energy sector consisting of 7 projects (5 regional TA projects and 2 transaction TA or previously PPTA) and transport and information and communications technologies (ICT) sector consisting of 3 projects (1 loan and 2 transaction TA or PPTA) are key areas of ADB engagement since 2002. ADB has also continued dialogue the Finance sector.

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Figure 3. ADB-financed projects 2002–2016, by type (total =16)

TRTA = transaction TA (includes previous project preparatory TA), KSTA = knowledge and support TA (includes previous policy and advisory TA) Source: ADB projects database.

25. Of the total portfolio amount of $127.81 million, transport and energy account for about 96%, of which about 98% is disbursed. ADB provided a loan in the transport sector for the North–South Railways project approved in 2011 with an amount of $116.8 million.33 In the energy sector, it sequenced seven technical assistance projects that totaled $5.47 million, which has catalyzed potential investment opportunities under the proposed TAPI natural gas project. There is also recent progress for power exports as part of the ADB-led TUTAP initiative.

Figure 4. ADB country portfolio 2002–2016, by amount (total=$127.81 million)

Source: ADB projects database

26. Table 3 lists the 16 projects approved during 2002–2016 in the five sectors. It needs to be noted that as the country joined the Central Asia Regional Economic Cooperation (CAREC) program in 2010, it accessed additional regional TA projects, although these are not included in ADB portfolio identified below since they financed only some in-country activities.

33 ADB .2011. Report and Recommendation of the President to the Board of Directors. Proposed Loan TKM: North

South Railway Project. Manila. Approved in 15 March 2011 and loan amount reduced to $116.88 million.

122

5

3 2 10

2

4

6

8

Energy Transport andICT

Public SectorManagement

Agriculture andNatural

Resources

Finance

Loan TRTA KSTA

Transport and ICT

91.6%

Energy4.3%

Agriculture and Natural Resources

3.3%

Public Sector Management

0.4%

Finance 0.4%

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Table 3. ADB projects approved during 2002–2016 Approval

Date Project Name Project

Type Approved Amount

Disbursed Amount

Closing Date

ENERGY

6-Dec-02 TA 6066 REG Feasibility Studies of the Turkmenistan – Afghanistan – Pakistan Natural Gas Pipeline Project

REG-TA 1,000,000 954,805.26 31-Dec-07

18-Dec-03 TA 6153 REG Turkmenistan-Afghanistan-Pakistan Natural Gas Pipeline Project (Phase II)

REG-TA 700,000 504,690.02 16-Dec-08

5-Nov-10 TA 7632 REG Turkmenistan-Afghanistan-Pakistan-India Natural Gas Pipeline Project

REG-TA 225,000 217,430.00 31-Dec-10

23-Dec-10 TA 7756 REG Turkmenistan-Afghanistan-Pakistan-India Natural Gas Pipeline project (Phase II)

REG-TA 525,000 505,473.00 31-May-12

24-May-12 TA 8083-REG: Turkmenistan Afghanistan Pakistan India Natural Gas Pipeline Project, Phase 3

RDTA 1,500,000 1,143,847.46 30-Jun-17

5-Sep-11 PPTA 7853 Afghanistan and Turkmenistan: Regional Power Interconnection Project

PPTA 1,300,000 1,138,902.44 30-Apr-14

22–Sep–16 TA 9175-TKM: Power Sector Development Project

TRTA $225,000 0.00 1-Oct -17

TRANSPORT AND ICT

3-Apr-02 SS-PPTA Rehabilitation of the Atamyrat-Imamnazar Road, Turkmenistan

SS-PPTA

150,000 150,000.00

14-May-10 PPTA 7531 North-South Railway Project

PPTA 350,000 275,537.99 30-Jun-11

15-Mar-11 Loan 2737 North-South Railway Project

Loan 116,520,000 116,112,000.00 30-Nov-16

PUBLIC SECTOR MANAGEMENT

8-Aug-01 SSTA 3702 Seminars on ADB Operational Policies and Procedures

SS-ADTA

150,000 150,000.00

2-Oct-02 ADTA 3937 Improving the Statistical Methodology of the National Institute of State Statistics and Information

ADTA 265,000 204,741.82 31-Dec-04

26-Jan-07 ADTA 4915 Seminars on ADB Operational Policies and Procedures (Phase II)

ADTA 150,000 95,282.65 30-Sep-10

AGRICULTURE, NATURAL RESOURCES AND RURAL DEVELOPMENT

24-Nov-06 TA 6357-REG: Central Asian Countries Initiative for Land Management (CACILM) Multicountry Partnership Framework Support Project.

REG-TA 4,025,000 3,444,323.78 18-May-11

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Approval Date

Project Name Project Type

Approved Amount

Disbursed Amount

Closing Date

11-Mar-16 S-PATA 9084 Modernization of Sanitary and Phytosanitary Measures for Food Safety

SS PATA

225,000 0.00 30-Sep-17

FINANCE

12-Nov-14 PATA8755 Financial Sector Reforms

PATA 500,000 0.00 5-May-16

Total 127,810,000 124,897,034

ADTA = advisory technical assistance, PATA = policy and advisory technical assistance, PPTA = project preparatory technical assistance, RDTA = research and development technical assistance, REG-TA=regional technical assistance, SS = small scale, TA= technical assistance, TRTA = transaction technical assistance. Source: ADB Projects Database.

27. The CAREC regional TA projects supported different aspects of the ADB Turkmenistan program. These include TA 6409–REG: Strengthening Central Asia Economic Cooperation that financed a technical working group meeting for the proposed TAPI project in March 2011. TA 8665–REG: Improving the Capacity and Integrity of Procurement Processes in Central Asia financed telecommunications and signaling consultants in the North-South Railway Project. And TA 8789–REG: CAREC Knowledge Sharing and Services in Transport and Trade Facilitation enabled dissemination of international experience on corporatization and commercialization of railways to government counterparts, again as part of the North–South Railway project. Also, a regional TA project on water resources management that initially included Turkmenistan did not receive government clearance to participate.34 Table 4 summarizes the ongoing ADB program.

Table 4. Areas of engagement in ongoing ADB portfolio (as of December 2016)

Sector Areas of ADB engagement

Energy Proposed Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline project. ADB adopted a two-fold approach. One, through its transaction advisory role ADB brought to bear commercial principles to a complex regional cooperation project. Two, it previously created enabling conditions for dialogue between the four participating governments with five technical assistance projects. ADB as Transaction Advisor from 19 November 2013

Facilitated creation of TAPI Pipeline Company Limited (TPCL) in 11 November 2014 to build, own and operate the pipeline with four state gas companies;

Enabled selection of State Concern Turkmengaz on 7 August 2015 as the consortium leader to construct and operate the pipeline;

Finalized Shareholders Agreement signed on 13 December 2015 with Galkynysh Pipeline Company and state gas companies of four participating countries taking equity that elaborated management and operation of TPCL;

Ensured signing of Investment Agreement on 7 April 2016 with TPCL shareholders committing more than $200 million for detailed engineering, route surveys, environmental and social safeguards studies;

ADB has started negotiations with TPCL for a Financial Advisory Services Agreement potentially covering guidance on fund–raising strategy, financial due diligence etc. and other related actions to achieve financial close of the project.

34 ADB. TA 7532-REG Water and Adaptation Interventions in Central and West Asia approved on 13 May 2010 with a

resource envelope of $1,000,000 could not cover Turkmenistan as initially planned.

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Sector Areas of ADB engagement

ADB as the TAPI Secretariat from 2003

Gas Pipeline Framework Agreement signed on December 2010 and Inter-Governmental Agreement that committed Heads of State to undertake and complete the project;

Heads of Agreement signed on September 2010 that stipulated supply and off-take obligations of each government, listed principles of Gas Sales and Purchase Agreements;

Three separate gas sales and purchase agreements between Turkmenistan with India and Pakistan (May 2012), and with Afghanistan (July 2013).

ADB coordinated 24 ministerial level steering committee meetings and prepared studies financed through technical assistance to inform policymakers.

On-going Turkmenistan-Uzbekistan-Tajikistan-Afghanistan-Pakistan (TUTAP) and planned Turkmenistan-Afghanistan-Pakistan (TAP) power interconnection initiatives.

ADB is supporting construction of the interconnection with Afghanistan (500kV, 1,000 MW capacity) on the Afghan side with the commissioning expected by 2020. Anticipated exports are projected initially at 500 MW/year.

Memorandum of Understanding signed by heads of governments of Turkmenistan, Afghanistan and Pakistan on 13 December 2015 to construct a Turkmenistan– Afghanistan–Pakistan (TAP) transmission line along a more western and southern route. ADB is the project secretariat for TAP.

Transport and ICT

ADB approved the North–South Railway Project with a loan of $116.88 million in 2011. It developed signaling and telecommunication systems of the Chilmammet–Buzkhun rail section (288 kms) that connects Turkmenistan with Kazakhstan and Iran. The project was completed in November 2016. Future priorities for rail/roads in CAREC Transport and Trade Facilitation Strategy 2020 are improving East-West connectivity on Turkmenbashi–Ashgabat–Turkmenabad route along CAREC Corridor 2 and construction of a logistics center in Turkmenbashi.

Agriculture and Natural Resources

Technical assistance project totaling $225,000 approved in March 2016 to (i) establish sanitary and phytosanitary (SPS) measures for food safety, (ii) improve accreditation capabilities of food safety laboratories; and (iii) strengthen capacity to implement food safety and animal and plant health measures.35 Executing agency is the Ministry of Health and Medical Industry. This support is a crucial first step as there is no existing formal strategy for sanitary and phytosanitary measures. Related administrative laws are based on the State Standards inherited from the times of the former Soviet Union.

Finance

Proposed market–based financial intermediation project targeting small and medium enterprises finance in 2017 with either the Central Bank of Turkmenistan or the State Bank for Foreign Economic Affairs of Turkmenistan as the potential executing agency. Planned resource envelope is $200 million. Ongoing discussions include selection of participating private financial institutions, selection criteria for sub-borrowers and interest rates. Proposed project aligned with the country’s banking sector development strategy that has corporatization and partial privatization as key priorities.

35 ADB. 2016. TA 9084-TKM: Modernization of Sanitary and Phytosanitary Measures for Food Safety. This was

approved on 11 March 2016 with a resource envelope of $225,000.

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Sector Areas of ADB engagement

While PATA 8755 on Financial Sector Reforms was planned to support the legislative processes for electronic signatures and deposit insurance, this was terminated in 2016 due to changes in priorities of the executing agency. ADB plans to provide reimbursable technical assistance in areas like industrial development and economic diversification.

Source: ADB Country Operations Final Review Team.

IV. ASSESSMENT OF PERFORMANCE

A. Relevance 28. ADB strategy and program from 2002 to 2016 was closely aligned with the country’s development needs and challenges on one hand, and ADB corporate strategies and priorities on the other. The 2002 ERIOS was prepared to guide ADB program during 2002–2005 after which it noted that a full country strategy was to be prepared based on the implementation experience during these initial years. The strategic focus in the 2002 ERIOS was wide with a three-pronged approach (para 22), although these were indicative. It was aligned with the Government’s Strategy of Socio-Economic Development to 2010 and key national development priorities. In terms of the planned program, the ERIOS rightly calibrated expectations and did not identify a specific resource envelope for lending, but had an annual allocation of $2.5 million for TA. It added that ADB operations were to start small before being scaled-up.

29. The government’s decision not to borrow from ADB in 2002–2010 corresponded with the years when its economy registered double-digit growth rates. The country commenced discussions with the PRC and entered into a breakthrough agreement in 2006 for a 30-year, 30 bcm gas sale and purchase agreement. The government commissioned the Trans-Asia Gas Pipeline in December 2009, ending the near buyer’s monopoly of the Russian Federation and CIS markets for its gas exports. Since 2007, when it signed a multilateral agreement with neighboring countries–Kazakhstan and Iran–to construct a north–south railway line to increase regional trade, the country is gradually repositioning itself as a transit and trade hub focusing on energy and transport programs, although it still maintains the permanent neutrality doctrine. 30. Despite limited demand for financing, the government sought ADB support for the TAPI natural gas pipeline project since December 2002, especially given ADB’s stature as a multilateral development bank viewed to be both neutral and professional by member countries. The government sought technical assistance and analyses from background studies to inform its policy discussions, finalize gas sales and purchase agreements and followed up with the transaction advisory service agreement of November 2013 that increased ADB non-financial additionality. ADB support is crucial to the government as it prospects for opportunities to diversify its markets for natural gas exports to South Asia and also its long-term vision to diversify its nonhydrocarbon economy to reduce susceptibility to external shocks triggered by volatile international demand and commodity prices. 31. An interim CPS was planned to cover 2013–2015 for which ADB fielded the first consultation mission in mid–2011. It identified infrastructure development in transport and energy sectors and supporting government’s full engagement in the CAREC program as priorities. The four COBPs covering 2014–2018 continued focus on development of energy and transport infrastructure to enhance regional connectivity. ADB focus on deepening regional connectivity through energy and transport infrastructure investments has remained a consistent priority from 2002 to 2016.

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32. In the energy sector, ADB support to facilitate the government channel its natural gas to South Asian markets through the proposed TAPI and power exports again to South Asian markets through the ongoing TUTAP and planned TAP programs are highly relevant. The 2002 ERIOS rightly pointed that for the TAPI natural gas pipeline project, while long-term efforts were needed to achieve this, it added that such efforts, if successful, would promise long-term rewards. ADB ensured sustained engagement through five technical assistance projects totaling $3.95 million starting from December 2002 with the latest approved in September 2011. ADB involvement has ensured to reduce political risks and set the stage for private investments to a complex regional initiative. On power exports through the ongoing TUTAP initiative, ADB support for the interconnection with Afghanistan on the Afghan side scheduled for commissioning by 2020 is again critical. So is the recently proposed TAP regional interconnection initiative for which ADB is the secretariat.

33. In the transport sector, ADB support in railways is highly relevant in increasing regional connectivity, as the improved north–south railway line will reduce the distance for freight transportation by about 680 kms from Central Asia to Persian Gulf ports linking Kazakhstan with Iran. Freight traffic through this line is projected to increase from a baseline of 3–4 million tons to 13 million tons by 2020 (footnote 33). The ADB-financed project consists of physical infrastructure for track maintenance and safety equipment; and deployment of signaling, power and telecommunications systems in addition to institutional development and project implementation support. ADB financing is closely aligned with the strategic objective of developing transport infrastructure to enhance regional integration. 34. In public sector management, the two TA projects–Seminars on ADB Operational Policies and Procedures were relevant in mentoring counterparts on managing ADB financed activities and providing logistical support to ADB operations until the creation of the Resident Mission in August 2010.36 ADB support through a TA project on statistics capacity development for the National Institute of State Statistics Information or the Turkmen Milli Hasabat (TMH) during January 2003–June 2005 was relevant. Areas covered were conducting a Turkmenistan Living Standards Survey (TLSS) in 2003 building on World Bank’s earlier support in 1998 to administer the same; preparing an updated socio-economic profile of households; and strengthening the Family Budget Survey as a policy instrument.37 35. In finance, ongoing preparation for a market–based financial intermediation loan with a resource envelope of $200 million is relevant despite presence of below-cost lending programs of the government. In the context of government plans to increase private sector contribution in nonhydrocarbon economy up to 70% by 2020 from 56% in 2012 and its ongoing three-phased privatization program, ADB financing could value-add by bringing to bear international experience from other countries. The government plans to corporatize and move to privatize state-owned enterprises in construction, energy, transport and communications through foreign direct investments. ADB support is also anticipated to contribute to Government efforts on diversification and industry development. 36. In agriculture and natural resources, ADB approved a small-scale TA in March 2016 (footnote 35) as a point of entry to establish sanitary and phytosanitary (SPS) measures for food safety, improve accreditation capabilities of food safety laboratories, and strengthen capacity to

36 ADB. 2010. Technical Assistance Completion Report. TA4915 TKM: Seminars on ADB Operational Policies and

Procedures (Phase 2). Manila 37 ADB. 2007. Technical Assistance Completion Report. TA 3937-TKM: Improving the Statistical Methodology of the

National Institute of State Statistics and Information. Approved on 2 October 2002 and closed on 25 June 2005.

15

implement animal and plant health measures. This support is relevant since there is no existing formal strategy for SPS measures and a number of administrative laws based on the State Standards inherited from the times of the former Soviet Union are used. Earlier, ADB coordinated the Central Asian Countries Initiatives for Land Management (CACILM)38 from July 2006 until it withdrew in July 2010 due to changes in its corporate priorities. Here, ADB provided technical assistance for a sustainable land management information system for participating countries, and for Turkmenistan, the focus was pasture management.39 The termination of the joint program following the withdrawal of ADB in 2010 has seen no subsequent collaborative approach across development partners to combat desertification, which is still a key challenge. 37. ADB engagement at the strategy level, following the 2002 ERIOS, remained limited. While it did make a concerted effort to prepare a draft interim CPS covering 2013–2015, this was not eventually finalized. There were four COBPs approved (footnote 7) that presented the rationale for ADB sectors of engagement. ADB financing has been limited during 2002–2016 with only one lending project in railways, although this is more a function of limited financing needs of a rapidly growing country that was reclassified as upper middle-income in mid–2012. ADB support to deepen regional connectivity through improving the energy and transport infrastructure, which has remained a consistent theme, is proving to be critical to the country. While the strategic approach and positioning of ADB remains highly appropriate, given the limited sector program, in terms of volume, ADB support during 2000–2016 is rated relevant.

B. Effectiveness 38. ADB support for the proposed TAPI natural gas pipeline project is likely to bring in commercial principles and develop a project financing approach to a complex regional initiative. ADB financed technical studies like the 2008 feasibility study that confirmed gas markets in Pakistan and India; validated commitments of countries through gas sale and purchase agreements; and assessed security issues and alternative methods to build, operate and maintain the pipeline.40 ADB is the secretariat for the TAPI natural gas pipeline project since 2003, where it organized 24 ministerial level steering committee meetings.41 Signing of gas purchase and sales agreements were completed as chronologically highlighted in Table 4. Continued effectiveness of ADB support is reflected how in November 2013, it was selected to become a transaction advisor for the TAPI natural gas pipeline project with the responsibility to guide the creation of a TAPI pipeline company (TPCL), which it achieved in November 2014; and select a commercial consortium leader to build, own and operate the pipeline, which was completed with the appointment of State Concern Turkmengaz in August 2015 as consortium leader. The shareholders committed more than $200 million under the Investment Agreement in April 2016 to undertake detailed engineering, route surveys, environment and social safeguards studies. Progress has been on-track to ensure satisfactory development results. 39. For TUTAP, ADB is supporting since 2012 for a power interconnection between Turkmenistan and Afghanistan, which constitutes TUTAP’s third phase. ADB provided PPTA for a feasibility study and coordinated negotiations for the power purchase and sales agreement

38The Central Asian Countries Initiative for Land Management (CACILM) was initially planned as a 10-year

partnership that started in 2006 to combat land degradation and improve rural livelihoods. Participating countries were Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan.

39 TA 6357-REG: Central Asian Countries Initiative for Land Management (CACILM) Multicountry Partnership Framework Support Project. Manila.

40 ADB. 2008. Technical Assistance Completion Report. Feasibility Studies of the Turkmenistan-Afghanistan-Pakistan Natural Gas Pipeline Project. Manila

41 Turkmenistan-Afghanistan-Pakistan-India (TAPI) Pipeline Information Packet for September 2012 Roadshows

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between Turkmenistan and Afghanistan in June 2012, February 2013 and February 2014.42 While ADB approved the Afghanistan component of the interconnection in December 2012 for which the procurement activities are ongoing, the Turkmenistan component was financed through the Japanese Export Credit Agency. The third phase is expected to be completed by 2020.43 ADB support in the energy sector is rated likely effective. 40. In the transport sector, the ADB financed North–South Railway project was completed in November 2016. The North–South railway corridor (912.5 kms) runs through Turkmenistan (700.5 kms) and connects Uzen in Kazakhstan with Gorgan in Iran. The three components financed by ADB in the northern segment (288 kms) are Design, supply, installation and commissioning of power supply, signaling, and telecommunication systems (contract awarded on turnkey basis to a consortium of a company from Kazakhstan and India completed on November 2016); Supply of track maintenance machinery (contract awarded to an Austrian company that completed work six weeks ahead of schedule on November 2012); and institutional capacity development and project implementation support (U.S. based consulting firm). Physical infrastructure from ADB financing are signaling, power and telecommunications systems for 288 kms of railway line; and track maintenance equipment like ballast cleaning and sand removal machines and train derailment sensors. Further, international experience on corporatization and commercialization of railways were shared with government counterparts (para 27). ADB support in the transport sector is rated likely effective. 41. ADB support for statistics capacity development is rated less than effective. The support was to conduct a TLSS in 2003, prepare an updated socio-economic profile of households and strengthen Family Budget Survey instrument during January 2003–June 2005 with a resource envelope of $204,741.82. There is evidence that capacity of the staff in the implementing agency was strengthened to administer living standards surveys and analyze the data collected according to international good practice. However, the TA completion report highlighted that the final publication could have provided a comprehensive and updated profile of the in-country living standards. In agriculture and natural resources management, although limited results were achieved under the TA project on CACILM (footnote 39), combating desertification is a key challenge faced by the country today and there is demand from government counterparts for a second phase of CACILM. 42. The outcomes of ADB project and technical assistance were in line with those defined in the original documents approved. ADB has been instrumental in shaping the proposed TAPI natural gas pipeline project through the past decade for which engineering, route surveys, environmental and social safeguards studies are to be undertaken on the basis of an investment agreement of April 2016 between the state gas companies of the TAPI participating countries. However, eventual effectiveness of ADB support to develop the energy infrastructure, either through TAPI natural gas pipeline project and TUTAP and TAP regional power transmission initiatives would also depend on external factors, such as improvements in the security situation in Afghanistan. Overall ADB support is rated likely effective.

42 ADB. Turkmenistan: Afghanistan and Turkmenistan: Regional Power Interconnection Project. Project Data sheet. 43 The first phase of TUTAP ($35 million) was power interconnection between Afghanistan and Uzbekistan from

February 2009 (300 MW). The second phase ($47 million) was between Tajikistan and Afghanistan since October 2011 to export the summer surplus from Tajikistan. The third phase ($160 million) was approved by ADB in 2012 and is under implementation between Afghanistan and Turkmenistan. A PPSA between both countries was signed in November 2015 for a ten–year power trade. The fourth phase was approved by ADB in December 2015 to extend the AFG-TKM interconnection (500 MW).

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C. Efficiency

43. Since ADB’s appointment as a transaction advisor on November 2013 for the proposed TAPI natural gas pipeline project, levels of process efficiency improved. The shareholders agreement was signed in December 2015 that elaborated management and operation of the pipeline company, with state gas company of Turkmenistan State Concern Turkmengaz holding 85% of its equity while the gas companies of Afghanistan, Pakistan and India each have a 5% stake. Developing this transformative project using commercial principles and a project financing approach ensuring economic sustainability is in contrast to implementation of the earlier TA projects that were significantly affected by varying agendas, capacities and interests that made reaching consensus among parties challenging.44 For the first time, ADB received a success fee and a monthly retainer fee and was paid just for its advice where no financing was either provided or committed. 44. On TUTAP, although ADB processed a transaction TA for the Turkmenistan component with a total amount of $1.4 million, it was unable to follow this up with program financing as the country financed this through the Japanese export credit agency. ADB approved the Afghanistan component of the interconnection in December 2012 and the turnkey contracts were awarded in 2015 which are expected to be completed by 2020. 45. Given the country’s small population, traffic on railways and roads remained low in the past although it is steadily increasing due to a combination of increased international trade and greater vehicle ownership.45 The government is focusing on expansion of freight rail traffic with neighboring countries like Kazakhstan, Iran and Afghanistan through new rail corridors. There are plans for the government to invest substantially in building major expressways. 46. Implementation difficulties were faced in the North–South railway project. The project management consulting firm demobilized its work on September 2014 and delays in payments to the contractor were also experienced, but these were due to it being the first ADB project to be implemented in the country. With ADB intervention, a new project manager was assigned by the executing agency to supervise the project. While the loan was extended until 30 November 2016, there was no truncation of planned activities during implementation. 47. The economic rationale for the North–South Railway project was reduction of transit costs, lower travel time, improve accessibility to external markets and increase revenues to railways from freight traffic, in addition to externalities for development of a local tourism zone. Demand analysis for the 30-year period used forecasts from the Ministry of Railway Transport, which showed the project contributing more to increased freight railway with limited increases in passenger traffic. With the resource base in the project area primarily agricultural and given the mineral potential (coal, kaolin, oil and gas and phosphates), it is anticipated that the traffic projections could further rise. The project completion report is scheduled to be finalized in 2018. 48. Two transaction TA projects totaling $1.4 million did not materialize into ADB loans. The first was the small–scale project preparatory TA for the rehabilitation of the Atamyrat-Imannazar road with an approved amount of $150,000 in April 2002. The Government did not borrow from ADB for the subsequent loan as it stemmed partly from the perception about ADB lending procedures as being time-consuming and so it funded the road rehabilitation works itself. The

44 ADB. 2012. Technical Assistance Completion Report Turkmenistan-Afghanistan-Pakistan-India Natural Gas

Pipeline Project (TA 7632-REG and 7756-REG). Manila 45 ADB. 2016. Sector Assessment (Summary): Transport, Information and Communications Technologies. [Draft]

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other was the project preparatory TA for the Turkmenistan component of the Afghanistan–Turkmenistan interconnection with an amount of $1.4 million in September 2011, as the country arranged subsequent funding through the Japanese export credit agency.

49. Two TA projects–seminars on ADB operational policies and procedures that provided administrative support for the implementation of ADB operations until the setting up of the Resident Mission in August 2010 contributed to improve efficiency and deepen ADB country engagement. In balance, ADB support delivered to the country is rated efficient.

D. Sustainability

50. There are differences in the sustainability factors for ADB support to the proposed TAPI natural gas pipeline project and ongoing TUTAP regional power initiative, which are based on the differences in their respective designs. While TAPI natural gas pipeline is a standalone project with an expected construction period of three to four years, the TUTAP initiative is a series of individually justified investments being implemented through a phased approach to allow interconnection between the different electricity grids of Central Asia and South Asia. 51. Following the transaction advisory services agreement in November 2013 for TAPI, ADB has guided the creation of a pipeline consortium owned by the gas companies of the four participating TAPI countries. A consortium leader was then selected to build and operate the pipeline, followed by an investment agreement where the shareholders committed to provide more than $200 million for engineering, route surveys, environment and social safeguards studies. Developing this, using commercial principles and a project financing approach is anticipated to ensure sustainability of ADB support. Capacity issues will be crucial as the project financing approach will involve accessing capital markets that underscores the need for quick decision-making and having realistic expectations on implementation timelines. 52. Financial sustainability of ADB investments in the railways sector is assured based on the solvency of the country’s railway system and increasing freight traffic in terms of both volumes and revenues. Freight along the ADB financed railway segment is largely expected to be transit traffic and the executing agency possesses the wherewithal to operate and maintain the infrastructure improvements post-completion.

53. The country’s macroeconomic position poses limited risks due to substantial revenues generated from natural gas exports. The risk of debt distress is low. New debt is associated with development of gas fields and is self-liquidating or that it generates revenue in foreign currency. However, ADB has not undertaken a country procurement diagnostic, nor are reports such as Public Expenditure Financial Accountability assessments available from other development partners. The government also has limited experience in international competitive bidding due to few lending operations by development partners. ADB will therefore need to support the executing agencies on proper international competitive bidding processes like how it undertook for the North–South Railway Project. 54. Data on government’s budgeting and financial reporting have restricted circulation. The public financial management (PFM) processes are presently transitioning to comply with international standards. Some PFM issues that need reform include enhancing budget transparency, predictability and control, and reporting; curtailing public funds that do not flow through the state budget; or maintaining the ongoing process of aligning national accounting standards with the International Financial Reporting Standards and International Public Sector

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Accounting Standards. Despite these areas where ADB could provide future support, and given that much of the previous ADB support centered in energy and transport sectors, the overall ADB country program is rated likely sustainable.

E. Development Impact

55. ADB support in energy and transport sectors is poised to translate into significant impacts at regional cooperation and integration. During the start of the first TA project for the TAPI natural gas pipeline back in December 2002, the purpose or the impact statement as articulated in the TA report was to establish technical feasibility and economic and financial viability for constructing and operating a gas pipeline from Turkmenistan through Afghanistan, and Pakistan. The TAPI project is poised to evolve into a flagship reality that offers a unique platform for regional cooperation with the potential for regional security. 56. For Turkmenistan, which is charting its diversification agenda through 2030, the proposed TAPI project will enable diversification of markets for its natural gas exports to South Asia and reduce buyer’s monopoly of the PRC market. For Afghanistan, Pakistan and India; the project will strengthen energy security by providing a cleaner fuel source for future power plants and reduce dependency on fossil fuels. The incorporation of commercial principles and a project financing approach in TAPI is expected to have demonstrative effects on the role of the private sector with the upcoming actions on financial due diligence, fundraising efforts and related actions to achieve financial close. ADB support through TUTAP has focused to expand and diversify power exports and markets through commercially viable projects. 57. ADB financed North–South Railway project is the first loan since the country became a developing member country of ADB in 2000. International bidding was undertaken for the two components. Project management consultants were expected to work directly with the department staff at the Ministry of Railway Transport to plan, implement and manage the procurement process and project accounts, while this function was also performed by the new project manager assigned by the executing agency to supervise the project. Additional support was provided by international railway consultants, an international legal expert and an international environmental consultant. 58. To ensure environmental and social sustainability, ADB applied the Safeguard Policy Statement (2009) to the North–South Railway Project, Regional Power Interconnection transaction TA, and reviewed initial findings on TAPI natural gas pipeline project. For the North–South Railway Project the environmental dimensions were identified as B (medium-scale impact) and C (no impact) for involuntary resettlement. An Initial Environmental Examination was prepared, with the Environmental Management Plan as an output of the transaction TA. During construction stage the contractor implemented the environment management plan, while supervision consultants monitored its implementation. For the Regional Power Interconnection project, ADB was involved in preparing environmental and social safeguard documents, while ADB reviewed the preliminary environmental assessment of TAPI natural gas pipeline project prepared by consultants. 59. Going forward targeted support for improved environmental management and social safeguards requirements could be potentially undertaken after assessments of country systems. Considerable achievements through ADB supported activities in energy and transport sectors were made in regional cooperation and integration, compared to the other two cross-cutting agendas of the ERIOS namely human and social development, and sustainable and stable

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economic growth. This was however, due to limited ADB support in these areas. However, when viewed in totality, development impact of ADB support and efforts is rated satisfactory.

F. ADB and Borrower Performance 60. Given the upper middle-income country context with limited demand for financing, ADB was nevertheless successful to differentiate itself from other development partners and remain engaged in the core sector of the economy, namely, natural gas. As secretariat of the TAPI natural gas pipeline project, ADB approved five technical assistance projects totaling $3.95 million starting in December 2002 with the most recent approved on September 2011. It organized 24 ministerial level steering committee meetings that resulted in key agreements at governmental and commercial levels. Related outputs included pre-feasibility studies, risk analysis and mitigation, underground storage facilities, legal advice, market analysis and security assessments. 61. The transaction advisory service agreement signed by the state gas companies of the four participating TAPI countries with ADB on 19 November 2013 is a significant milestone. This culminated in the selection of State Concern Turkmengaz on August 2015 as the consortium leader to build, own and operate the pipeline. ADB fees include a success fee and a monthly retainer fee. ADB was paid just for its advice where no financing was either provided or committed. In this manner, ADB transitioned from providing free services as a secretariat of TAPI to offering fee-based advisory services. Further, through the ongoing TUTAP and planned TAP, ADB is contributing to diversify the country’s markets for power exports to South Asia. In transport, ADB provided a loan for the railway project. Based on these results ADB performance is rated satisfactory. 62. On the government side, there appears to be increased engagement for a deeper ADB role. Reasons for this are a combination of ADB-centric factors and adverse external factors faced by government, primarily for natural gas exports. ADB engagement to diversify the country’s markets for natural gas exports and power exports has made it a key development partner. Low hydrocarbon prices despite long-term natural gas contracts, economic downturn in its major trading partners and currency pressures have underscored to government the need to increase competitiveness, continue with diversification and improve infrastructure, all priorities in its National Program for Socio-Economic Development 2011–2030. Government performance in implementing the ADB program is rated satisfactory.

G. Overall Assessment

63. ADB engagement in Turkmenistan during 2002 and 2016 is rated successful. The country program as of December 2016 consisted of 16 projects with a total resource envelope of $127.81 million across five sectors–energy, transport, agriculture and natural resources, public sector management and finance. ADB program financing was limited with only one loan project in the railways subsector, although this is more a function of limited financing needs of Turkmenistan a rapidly growing country reclassified as an upper middle-income economy in mid–2012. In terms of the number of projects, the energy sector consisting of 7 projects (5 regional TA projects on TAPI and 2 transaction TA) and transport and ICT sector consisting of 3 projects (1 loan and 2 transaction TA) were the main areas of ADB engagement. 64. ADB support focused on Turkmenistan’s key growth driver with its long term priority to diversify markets for its natural gas exports (through the proposed TAPI natural gas pipeline project) and more recently for power exports (through ongoing TUTAP), with also investments in

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transport infrastructure (North–South Railway corridor linking Turkmenistan with Kazakhstan and Iran). ADB support for TAPI and TUTAP has been through technical assistance, although an attempt was made to finance a loan to the Turkmenistan side of the Turkmenistan–Afghanistan interconnection. Turkmenistan joined ADB–led CAREC program in 2010. ADB provided its first loan in 2011 for the railway project completed in November 2016, which has contributed to increase regional connectivity with Kazakhstan and Iran, following the 2007 agreement between the three Heads of State of Turkmenistan, Kazakhstan and Iran. 65. However, technical assistance for statistics capacity development, land management and financial sector development did not evolve as ADB initially anticipated. Reasons vary from Government’s preference to keep some areas outside of the purview of development partners postcompletion (on statistics capacity development) or due to changing government priorities post-approval (on finance sector where ADB was to support legislative processes for electronic signatures and deposit insurance) or changing ADB corporate priorities (withdrawal of ADB in July 2010 after coordinating Central Asian Countries Initiatives for Land Management program).

66. Overall, ADB demonstrated success in regional initiatives such as the proposed TAPI project where it became its secretariat in 2003 and then a transaction advisor from November 2013; the ongoing TUTAP that involves construction of transmission lines for power exports; and the North–South railway project linking Turkmenistan, Kazakhstan and Iran. ADB technical assistance, transaction TAs, loan for the railway project and fee-based advisory service during 2002 to 2016 are rated relevant, likely effective, efficient and likely sustainable with satisfactory levels of development impact. The ADB Governor of Turkmenistan’s statement in 2016 ADB Annual Meeting in Frankfurt, Germany called for a more active ADB role to realize national projects and further implement the country’s regional projects.46 V. KEY FINDINGS 67. Government’s diversification efforts. Given that the country possesses the fourth largest natural gas reserves in the world, it is expected that natural gas will remain the key growth driver through the medium-term. However, falling hydrocarbon prices in 2014–2015 despite long-term gas contracts, economic downturn in its major trading partners and currency pressures validated Government’s anticipatory steps to move up the natural gas value chain through construction of manufacturing plants for polyethylene, polypropylene, synthetic gas etc.; and diversify its natural gas exports markets. As part of the national 2030 Strategy, it also undertook a three-phased privatization program with a target to increase contribution of private sector in the nonhydrocarbon economy to 70% by 2020 with the present level for 2016 at 68% as per government estimates. 68. High growth has yet to transform the economy in terms of employment structure. While the economy registered high growth rates, this growth has yet to translate into structural transformation in the nonhydrocarbon sectors especially in the creation of higher paying jobs. In 2014, agriculture employed 43% of workforce and has remained at similar levels compared to 2000 when it stood at 47.6%. Mining, covering the hydrocarbon sector that drives more than 90% of annual exports accounts for 1.4% of total workforce (para 13). Qualifications of workforce are predominantly those with compulsory 12-year general secondary education. ADB engaged with government in 2016 as part of its ongoing flagship study on Good Jobs for Inclusive Growth in Central and West Asia, and collaborated with the Institute of Strategic

46 ADB. 2016. Annual Meeting in Frankfurt. Turkmenistan ADB Governor’s Statement Weblink:

http://www.adb.org/sites/default/files/annual-meeting/2015/statements/TKM_49thAM_GS-50.pdf?1463021429=

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Planning and Economic Development in the Ministry of Economic Development. The Institute prepared an analytical paper on Favorable conditions for inclusive growth in Turkmenistan using the framework of ADB’s regional study. 69. Educational qualifications of workforce offer greater headroom for improvements. The education system consists of elementary level and general secondary level that combine to form the 12-year compulsory general education. Technical vocational education and training (TVET) starts at the end of this 12-year compulsory general education. However, 90-95% of general secondary education level graduates do not progress either to TVET or higher education. With the working age population set to increase by 30% over the next two decades, it poses human capital challenges, given government priorities to diversify the economy beyond the hydrocarbon sector.47 Related to this, ADB undertook discussions previously in 2013 for engagement in the education sector. There was follow-up by the Ministry through its letter that identified areas for ADB support through technical assistance that covered higher education including a higher education roadmap and ICT based learning programs. 70. High proportion of surface irrigation and high cropping intensity has contributed to high levels of soil salinity. All of the cultivated land is irrigated. Cropping intensity which is the percentage of harvested irrigated area to total area irrigated is also high. With such usage patterns of surface irrigation, effects of low water usage efficiency are magnified, and more than 90% of arable land is rated saline. Issues related to Government priorities to double irrigated area are the need for improved irrigation efficiency that is dependent on rehabilitation of irrigation systems covering headworks, conveyance and distribution canals; crop varieties that require less water; irrigation technologies; and reliable hydrometeorological data (footnote 27).

71. Separate National Action Plans for Climate Change Mitigation and Climate Change Adaptation under preparation. The country is extremely susceptible to adverse effects of climate change and disaster risks such as recurrent high winds, landslides, floods and droughts. Being a downstream country in the transboundary water basins, it is vulnerable not only to local factors of climate change, but also to basin-wide factors affecting the region (footnote 27). Separate action plans are being prepared for mitigation and adaptation as noted in the Intended Nationally Determined Contribution.48 The three approaches identified to limit GHG emissions are energy efficiency and conservation, sustainable use of natural gas and increased use of alternative energy sources. In terms of prospective estimates on greenhouse gas emissions, the government has projections for two scenarios, baseline scenario where activities under the national strategy are implemented as is, and an alternate scenario, featured by accelerated modernization and technological upgradation of productive processes. Decreases in the alternate scenario is dependent on reforms like adoption of energy efficiency measures with enabling policy, regulatory, financing mechanisms to reduce greenhouse gas emissions.49 VI. LESSONS 72. Sustained ADB engagement in areas prioritized by governments, especially in upper middle-income country settings, increases goodwill for ADB even if it does not involve loan approvals for extended periods. As was pointed in the 2002 ERIOS that while

47 ADB. 2016. Education Sector Consultation Mission for the Country Partnership Strategy for Turkmenistan. Manila 48 Intended Nationally Determined Contribution of Turkmenistan in accordance with decision 1/CP. 20 UNFCCC. 49 Ministry of Nature Protection, 2015. Third National Communication of Turkmenistan under the United Nations

Framework Convention on Climate Change (UNFCCC). Ashgabat.

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long-term efforts by ADB was needed for the TAPI natural gas pipeline project, it added that such efforts, if successful, would promise long-term rewards. ADB’s sustained engagement since 2002 enabled it to graduate from being the secretariat to a transaction advisor starting November 2013. ADB provided fee-based advisory services that included a monthly retainer fee and a success fee and where no financing was either provided or committed. 73. Success of ADB program in upper middle-income economies is more dependent on direct value addition by ADB to country needs through its range of modalities rather than just program financing. In the case of Turkmenistan, net official development assistance averaged 0.27% of the GNI during 2003–2014 (para 19) reflecting limited needs that the country has had for program financing from multilateral institutions. At the same time, findings from different studies that were prepared through technical assistance for TAPI like pre-feasibility studies, security assessments, market analyses informed discussions and decisions of policymakers, which highlight the value–addition function done by ADB.

74. Responding to Governments needs of upper middle-income countries could result in frequent programming changes. The priorities and needs of the government are prone to changes and therefore ADB would need to be flexible in terms of responding to government needs. These could involve changes in the project pipeline or changes in the planned years of approval of appraised projects. Such changes or shifts in timing of approvals need to be viewed especially during ex-post evaluation as a sign of ADB responsiveness rather than as disconnect between existing ADB country strategy and the actual ADB program. VII. RECOMMENDATIONS 75. The Country Operations Review proposes three recommendations:

(i) Continue support to government key regional projects on natural gas and power exports. Based on ongoing work, comparative advantage demonstrated by ADB and close alignment with national development priorities, ADB could continue support to diversify the markets for natural gas and power exports through the proposed TAPI, ongoing TUTAP and planned TAP initiatives. In-country investments in energy sector could also be explored.

(ii) Formulate ADB program on the ‘how to’ aspects of diversification of the

nonhydrocarbon economy in close consultation with the Government. Potential pathways for ADB support could be through investments in institution-building for private sector development starting with market–based financial intermediation for small and medium enterprises. Investments in human capital could be explored through developing adequate tracks in sector structure for secondary education graduates to progress to post-secondary education programs. These could be done through system expansion, system cost efficiency besides improving relevance of students’ and employees’ education and skills for the needs of the labor market. Areas of support for natural resources management could cover water efficiency improvement, climate change mitigation and adaptation based on Government needs.

(iii) Continue ADB investments in transport infrastructure improvements to help

government efforts to reposition it as a transit country. Building on the implementation experience of the North–South Railway project, ADB could continue making investments to develop the regional transport infrastructure. ADB could further enhance the government’s efforts to position it as a transit country. Related policy advice is becoming more important.