ministry of economy of the kyrgyz republic investment ... · • mitigating the environmental...

Ministry of Economy of the Kyrgyz Republic

Investment Application for Financingthe Toktogul HPP Rehabilitation Project (Phase 3)

in the amount of US $40 million

November 2015

Table of Contents

Section 1. Project Company Background Information...........................................................................3

Operations and Financial Analysis...................................................................................................................6

Section 2. Project Business Plan...............................................................................................................81.Justification of Project Design Choice and Project Background.........................................................9

1.1.Overview of Energy Sector of the Kyrgyz Republic ..............................................................................9

1.2.Overview of Toktogul HPP.......................................................................................................................13

1.3.Degree of Project Preparation..................................................................................................................16

1.4.Climate Change Impact..............................................................................................................................17

1.5.Project Environmental Impact Assessment and Social Safeguards ...................................................18

2.Proposed Project Solution....................................................................................................................193.Project Financing Structure.................................................................................................................19

а. Proposed Structure and Terms of Project Financing...............................................................................19

b. Proposed Terms of the Eurasian Fund for Stabilization and Development Loan .............................22

с. Proposed Project Financing Arrangement.................................................................................................23

4.Consideration of Expediency and Need to Borrow from the Eurasian Fund for Stabilization andDevelopment.............................................................................................................................................235.Project Economic Objectives...............................................................................................................236.Expected Social and Economic Effects of Project Implementation...................................................24

a. Economic Effects...........................................................................................................................................24

b. Social Effects.................................................................................................................................................24

7.Project Fiscal and Macroeconomic Efficiency....................................................................................258.Project Environmental Impact............................................................................................................259.Expected Project Risks.........................................................................................................................2610.Arrangement to Monitor Fund Resources Use.................................................................................27

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Section 1. Project Company Background Information

Official company name as per foundation documents (full and short) and legal formof incorporation: Open joint stock company “Elektricheskie Stantsii” [Electric Power Plants](Elektricheskie Stantsii OJSC).

Data on registration as a legal entity: Certificate of State Re-Registration: GPR seriesNo. 0085460 of 17 January 2008; registration number: 16312-3300-AO (IU); KPO [NationalClassifier of Enterprises and Organisations] code: 22856351; taxpayer identification number:01810200110062.

Location (registered office and place of business), grounds for possession of theplace of business (if different from the registered office) – 326 Zhibek Zholy Ave., Bishkekcity.

Form of ownership: Private with the state share of 93.65% of the charter capital.Industry: Elektricheskie Stantsii OJSC is the largest power generating company in the

Kyrgyz Republic, accounting for 98% of the country's total electricity generation. ElektricheskieStantsii OJSC was established in 2001 as a result of restructuring Kyrgyzenergo JSC, with a stateshareholding in the charter capital of 93.65%

Types of activity:• generation and sale of electricity and heat (licences No. 00261, No. 00263 of9 November 2001 (perennial));• sale of electricity within the territory of the Kyrgyz Republic to wholesale customersand end-buyers;• exports of electricity from the Kyrgyz Republic;• frequency regulation in the domestic and external electric power markets;• buying electricity from foreign energy producers;• implementation of intergovernmental agreements on the use of water and energyresources;• ensuring reliable and safe operation of power facilities in accordance with theestablished standards and rules; and• mitigating the environmental impact in the process of new construction,reconstruction, operation, and maintenance of facilities of Elektricheskie Stantsii OJSC.Project Company shareholders:• the State Property Management Fund under the Government of the Kyrgyz Republic– 80.48%;• the Social Fund of the Kyrgyz Republic – 13.17%; and• Private individuals and legal entities – 6.35%.Elektricheskie Stantsii OJSC is the asset holder and operator of hydropower plants

(HPPs) and combined heat and power plants (CHP). Elektricheskie Stantsii OJSC includes thefollowing power plants:

• Toktogul HPP with a capacity of 1,200 MW (4x300 MW). The first unit wascommissioned in 1975. Operated for 40 years;• Uch Kurgan HPP with a capacity of 180 MW (4x45 MW). The first unit wascommissioned in 1962. Operated for 53 years. It is the first power plant within the NarynHPP Cascade;• Kurpsay HPP with a capacity of 800 MW (4x200 MW). The first unit wascommissioned in 1981. Operated for 34 years;• Tash-Kumyr HPP with a capacity of 450 MW, (3x150 MW). The first unit wascommissioned in 1985. Operated for 30 years. It reached its designed capacity in 2001;• Shamaldy-Say HPP with a capacity of 240 MW, (3x80 MW). The first unit wascommissioned in 1992. Operated for 23 years. It reached its designed capacity inAugust 2002;

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• At-Bashinskaya HPP with a capacity of 40 MW (4х10 MW). The first unit wascommissioned in 1970. Operated for 45 years;• Kambaratinskaya HPP-2 with the capacity of its first unit of 120 MW. The first unitwas put into operation on 27 November 2010;• Bishkek CHP. The rated power output is 666 MW, the heat output is 1,443.9 Gcal/h.The life cycle is 50 years. It is the key producer of hot water and steam for the KR capitalcity. The power plant uses coal, natural gas, and fuel oil; and• Osh CHP. The rated power output is 50 MW, the heat output is 350.7 Gcal/h. Thelife cycle is 45 years. It co-generates heat and electricity using fuel oil and natural gas.The basic production assets include buildings and structures, transmission devices,

machinery and equipment, vehicles, and other fixed assets. The wear rates of production assetsare as follows:

• transmission devices – 77.5%;• vehicles – 47.0%;• machinery and equipment – 48.8%;• other basic production assets – 79.0%• buildings – 13.2 %; and• structures – 16.0 %.The key operations risks of Elektricheskie Stantsii OJSC are associated with the water

regime of the Naryn River and the fill rate of the Toktogul reservoir, as well as with the timelyand complete supply of fuel to Bishkek CHP and Osh CHP.

Elektricheskie Stantsii OJSC operates in accordance with the national environmentallegislation:

• annually developing, implementing, and reviewing an Action Plan of environmentalprotection and sustainable use of natural resources aimed at reducing and preventingnegative impacts of power plants; maintaining and improving the quality of the naturalenvironment; clearing the Plan with territorial offices of the State Agency ofEnvironmental Protection and Forestry under the Government of the Kyrgyz Republic(SAEPF under the KR Government);• developing ecological passports (EP) – regulatory and technical documentspresenting a set of data expressed in terms of the system of indicators reflecting the levelof use of natural resources by the enterprise and the degree of its environmental impact(the EP validity is 5 years); MPE volumes (maximum permissible emissions) – ascientific and technical, sanitary and hygienic standard established for each specificsource of air pollution, provided that the emissions of pollutants from it and the whole setof sources of the city or another populated area, taking into account their dispersion andtransformation in the atmosphere, as well as the prospects for the enterprise developmentdo not result in ground level concentrations exceeding the established air qualitystandards; MPD norms (maximum permissible discharge) – the mass of a substance insewage water, which is the maximum permissible level for disposal with the establishedregime at a given point of a water body per unit of time in order to comply with the waterquality standards at the control section or prevent deterioration of the established waterquality if it is below the standard; clearing those with territorial offices of the SAEPFunder the KR Government;• receiving in due time permits for pollutant discharges, emissions into theatmosphere, water bodies, and waste disposal, which fix the maximum permissibleemissions, pollutant discharges, as well as other conditions and requirements to ensurethe protection of air and water bodies; permits for the right of water use;• monitoring the compliance with the conditions set for emissions, pollutant dischargeand other harmful impacts on the air, water bodies; the technical condition andorganisation of treatment facility operation;

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• measuring the amount of pollutants using the laboratory and sector computationmethods; calculating charges for environmental pollution;• monitoring the regulatory and actual data on pollutant emissions and discharges intothe environment;• checking and monitoring the compliance with the established standards for exhaustsmoke toxicity and opacity for operated vehicles; and• preparing and submitting to the National Statistical Committee—within thespecified time frame—reports on air protection “2 TP – air”; on water use “2 TP – watermanagement”; on the costs of nature protection “4 OS”.No changes have been recently observed in the production and technological process of

electricity and heat generation.The key coal and fuel oil suppliers to Bishkek CHP and fuel oil suppliers to Osh CHP are

the mining enterprises of the Republic of Kazakhstan and the Kyrgyz Republic, which supplycoal and fuel oil on the basis of regular tenders.

The key gas suppliers to Bishkek CHP and Osh CHP are the Republic of Kazakhstan andthe Russian Federation. Gas supplies are performed on the basis of guarantee agreements.

The key suppliers of electromechanical and heat mechanical equipment are enterprises ofthe Russian Federation.

The dependence on suppliers is minimal, there are alternative options available. Changesoccur in accordance with the terms of government procurement.

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Operations and Financial Analysis

The key financial metrics of the Project Company for 2011-2015 (9 months) arepresented in Table 1.

Table 1. Financial metrics of Elektricheskie Stantsii OJSCData on Elektricheskie Stantsii OJSC (in US $)

31 December2011

31 December2012

31 December2013

31 December2014

30 September2015

BALANCE SHEETFixed assets 337,957,524 335,152,770 330451,193 285,591,339 244,731,920Inventories 29,703,653 41,065,813 48,170,327 34,044,569 38,972,340

Trade receivables 23,216,046 33,694,513 34,481,030 28,337,505 24,134,353Cash 12,164,720 3,366,198 6,872,668 33,948,761 1,782,215

Other assets 56,927,024 39,420,702 9,154,238 118,975,517 90,724,272Total assets 459,968,967 452,699,996 429,129,456 500,897,691 400,345,100

Short-term loans and credits 5,073,354 5,770,609 25,761,070 41,908,149 3,307,293Long-term loans and credits 189,504,888 188,013,481 182,623,518 334,664,327 355,997,481

Accounts payable 13,891,515 20,382,257 11,974,007 5,238,150 12,880,249Other liabilities 101,132,109 110,733,468 107,310,650 97,156,872 80,023,478

Total liabilities 309,601,866 324,899,815 327,669,245 478,967,498 452,208,500Total equity capital 150,367,102 127,800,174 101,460,211 21,930,193 -51,863,400Total liabilities and capital 459,968,968 452,699,989 429,129,456 500,897,691 400,345,100

PROFIT AND LOSS ACCOUNTBusiness receipts 169,412,003 12,594,936 105,193,961 86,223,471 84,193,727Costs -102,089,668 -113,206,443 -93,720,564 -112,879,071 -100,035,852Gross profits 67,322,315 16,388,494 11,473,397 -26,655,600 -15,842,125Profits (losses) from operating activities 52,436,818 -1,477,536 -10,630,684 -35,711,389 -25,923,604Profits (losses) from non-operating activities

1,721,745 1,419,364 4,812,246 26,089,773 2,348,710

Profits before tax 54,158,563 -8,361,702 -17,815,085 -58,310,513 -70,623,847Net profits 48,395,704 -7,805,800 -19,071,878 59,506,437 -70,623,847

CASH FLOW STATEMENTNet cash flow from operating activities 39,992,668 7,237,683 4,202,008 -38,105,484 12,506,375.31Net cash flow from investment activities -13,939,615 -7,296,613 -10,606,815 -3,384,991 1,745,211.438Net cash flow from financial activities -18,466,657 -8,806,996 10,002,010 69,042,893 13,120,820.68Net change in cash 7,586,396 -8,865,926 3,597,245 27,552,417 -27,372,407The US $ exchange rate applied for 2011-2014 is taken as at 31 December 2014 = KGS 58.8865. The US $ exchange rateas at 30 September 2015 = KGS 68.8359

The composition and pattern of the Project Company’s incomes and costs for 2011-2015(9 months) are presented in Table 2.

Table 2. Incomes and costs of Elektricheskie Stantsii OJSCData on Elektricheskie StantsiiOJSC (in US $)

31 December2011

31 December2012

31 December2013

31 December2014

30 September2015

Receipts 169,412,003 129,594,934 105,193,961 82,141,101 84,193,727Electricity 155,182,683 116,391,440 93,374,575 67,932,994 73,788,504

Heat 9,873,543 9,437,060 8,266,357 10,981,315 8,475,076Makeup water 4,355,777 3,766,434 3,553,029 3,226,792 1,930,147

Costs 120,100,584 130,514,509 93,720,564 121,377,938 100,035,852Electricity 66,915,546 74,413,034 52,585,193 76,771,766 77,821,282

Heat 47,867,306 51,116,266 36,367,168 40,805,302 20,159,850Makeup water 5,317,732 4,985,209 4,768,203 3,800,870 2,054,720

Gross profits 49,311,419 -919,574 11,473,397 -39,236,838 -15,842,125The US $ exchange rate applied for 2011-2014 is taken as at 31 December 2014 = KGS 58.8865. The US $ exchange rateas at 30 September 2015 = KGS 68.8359

The Project Company’s cash flows by creditors for 2011-2015 (9 months) are presentedin Table 3.

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Table 3. Cash flows of Elektricheskie Stantsii OJSC, by creditors, 2011-2015 (9 months)Loans to Elektricheskie Stantsii OJSC (‘000 KGS)

disbursed repaid disbursed repaid disbursed repaid disbursed repaid disbursed repaid2011 2012 2013 2014 9 months of 2015

Foreign loans through the MoF, o/wInternational Development Association - 1 (register)

88,738

International Development Association - 2

28,460 57,871 57,101 61,665 25,000


24,396 9,852 61,403 39,490 84,808 25,000


127,545 27,099 11,337 33,067

International Development Association – emergency assistance

42,168 236 265,994 729 3,186 7,667

Restructured loan 97,083 97,181 85,526 98,480 41,197Asian Development Bank 35,882 114 331 666 6,490ТВЕА loan (China) 6,052,923 5,000Total foreign loans 151,941 214,281 79,119 216,691 301,876 194,297 6,056,440 286,353 6,490 96,197Budget loans through the MoF 0 667,098 0 240,392 300,000 167,488 3,725,516 199,149 1,400,000 128,803RSK Bank loan 29,071 3,186 41,267 15,967 182,018 61,482 153,783 84,367EDB loan 879,306 403,393 2,417,086 1,368,699 1,994,909Total: 181,012 884,565 120,386 473,050 1,663,200 826,660 12,199,042 2,007,984 1,406,490 2,304,276

The Project Company’s total accounts receivable and payable are presented in Table 4.

Table 4. Elektricheskie Stantsii OJSC – Accounts receivable and payable as at1 October 2015

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Indicators 1 January 2014 1 January 2015 1 October 2015Total accounts receivable: 1,998.2 8,543.2 8,036.9Total current accounts receivable 1,990.1 2,479.9 1,968.9o/w: Accounts receivable from electric distribution companies 1,010.6 822.7 916.5Accounts receivable from KPP 195.4 278.0 268.5Accounts receivable for electricity exports 165.0 196.4 230.2Accounts receivable from heat consumers 121.6 224.1 98.8Other accounts receivable 497.5 958.7 454.9Total long-term accounts receivable 8.1 6,063.3 6,068.0

Indicators 1 January 2014 1 January 2015 1 October 2015Total accounts payable: 12,069.5 25,127.2 28,151.9Total current accounts payable 2,893.8 4,231.7 2,106.6Accounts payable to fuel suppliers 345.6 199.8 520.8Taxes payable -873.3 -739.8 -583.3Accounts payable to the Social Fund 55.0 58.1 20.6Under loans 1,408.9 2,952.7 324.6Under dividends, total 604.9 545.9 545.7Other current accounts payable 479.4 475.2 694.9Total long-term accounts payable 9,175.7 20,895.5 26,045.2

Section 2. Project Business Plan

Project Name Toktogul HPP Rehabilitation Project (Phase 3).Sector Power generationSummary of Project objectivesand substance

The HPP rehabilitation through replacement of its physicallyand morally obsolete equipment will help: improve the energy security of Kyrgyzstan; reduce the severity of winter electricity shortages in the

country; and ensure more reliable and stable electricity supply to

consumers.Project type Rehabilitation of an existing HPPCountries, in which the Project is to be implemented

Kyrgyz Republic

Key performance indicators Higher productivity, increased power generation, improvedToktogul HPP uptime percentage, better energy security ofthe facilities.

Project Company Open joint stock company “Elektricheskie Stantsii” [ElectricPower Plants] (Elektricheskie Stantsii OJSC)

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1. Justification of Project Design Choice and Project Background

1.1. Overview of Energy Sector of the Kyrgyz Republic

The energy sector is one of the most significant in the economy of the Kyrgyz Republic(KR), accounting for about 4% of GDP and 16% of industrial output. The bulk of the existinggenerating facilities (more than 95%) are within the hydropower generation subsector.

98% of residents of the Kyrgyz Republic have access to electricity. The sector employsmore than 15% of the industrial workforce (about 1% of all working citizens).

The Kyrgyz Republic accounts for 2% of the energy resources and 30% of thehydropower resources of Central Asia, with large coal reserves. According to various sources,the theoretical hydropower potential of the country’s rivers is estimated at up to 163 billion kWhper year, of which the hydropower potential of small rivers and streams is about 5-8 billion kWhper year. The development of its energy complex is one of the strategic comparative advantagesof the KR. The Kyrgyz Republic ranks the third in the CIS by its hydropower potential,following Russia and Tajikistan. 1/10 of its total hydropower potential is currently utilised.

Market structure• The generation of electricity is performed by hydropower plants (HPPs) andcombined heat and power plants (CHPs). All the generating facilities are owned byElektricheskie Stantsii OJSC (7 HPPs, 2 CHPs).• The transmission (transportation and export) of electricity, as well as theoperational dispatch management are performed by Natsionalnaya Elektricheskaya SetKyrgyzstana OJSC (National Electric Grid of Kyrgyzstan) (the production facilities of thetransmission system includes up to 500 kV power transmission lines totalling 70,000km).• The distribution of electricity and bringing it to end-users is performed throughelectric distribution companies, which are independent enterprises with a share of thestate.The generating power plants (HPPs, CHPs) sell electricity to distribution companies and

large end-users, and the electricity is transmitted using high-voltage electric networks owned byNatsionalnaya Elektricheskaya Set Kyrgyzstana OJSC (NESK). Elektricheskie Stantsii OJSCissues bills to distribution companies based on the balance of the actually sold electricitysupplied by NESK. At the same time, the technical electricity losses of Elektricheskie StantsiiOJSC are compensated by NESK, while the commercial losses are acknowledged as expenses ofelectric distribution companies.

The energy sector is regulated by the State Agency for the Fuel and Energy ComplexRegulation under the KR Government, which approves tariffs for electricity, heat, and naturalgas, licenses related activities and monitors compliance with the legislation within the fuel andenergy complex.

Production and Consumption Balance Electricity generation at HPPs depends on the river water flow. In 2012, the total

electricity generation in the KR reached 14.99 billion kWh, of which HPPs produced14.02 billion kWh (94%) and CHPs – 970 million kWh (6%). In 2013, the total electricitygeneration amounted to 13.83 billion kWh, of which HPPs produced 12.93 billion kWh (94%),and CHPs – 896 million kWh (6%). In 2014, the total electricity generation amounted to14.41 billion kWh, of which HPPs produced 13.16 billion kWh (91%), and CHPs – 1.25 billionkWh (9%). As of end of 9 months of 2015, the total electricity generation in the KR amounted to8.73 billion kWh. On average, about 91% of electricity is sold in the domestic market.

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Table 5. Electricity generation, 2009-2015 (9 months), million kWh

Electricity generation in 2009-2015

Unit2009 2010 2011 2012 2013 2014 2015

actual actual actual actual actual actualactual for 9

months

Total electricity generation million kWh 10,889.37 11,857.24 14,957.21 14,988.64 13,825.41 14,414.87 8,732.53Total useful electricity supplied

million kWh9,902.38 10,958.90 13,819.73 14,789.92 13,559.28 13,439.23 9,235.71

o/w in the domestic market million kWh 9,038.32 9,489.42 11,185.37 13,288.05 13,184.43 13,368.87 9,053.49exports million kWh 864.06 1,469.48 2,634.35 1,501.87 374.85 70.36 182.21

in the domestic market % 91% 87% 81% 90% 97% 99% 98%exports % 9% 13% 19% 10% 3% 1% 2%

The total energy consumption in the country is growing year by year. Further growth inelectricity consumption is projected owing to the development of the economy and growingdemand of households. In 2014, the structure of electricity consumption by consumer type wasas follows: households consumed 66% of electricity, industry – 9.3%, public institutions – 10%,and the agricultural sector – 1.3%. Other consumers used 13.5% of electricity.

Table 6. Sales of electricity, by consumer groups, 2009-2014, million kWhElectricity sales in 2009-2014 (million kWh) 2009 2010 2011 2012 2013 2014Domestic sales

Industry 814 901 999 886 888 867Public institutions 649 746 883 964 942 933

Agriculture / irrigation 102 93 91 110 118 121Residential consumers 3,718 3,497 4,871 5,6441 5,874 6,146

Other 853 854 1,062 1,166 1,228 1,259Total domestic sales 6,136 6,091 7,906 8,770 9,050 9,327Exports 864 1,469 2,634 1,502 375 70Total sales 7,000 7,560 10,540 10,272 9,425 9,397

All the electricity generated and sold in the KR is either consumed in the domesticmarket or exported to the neighbouring countries. The total sales, including exports, went downfrom 9.4 billion kWh in 2013 to 9.3 billion kWh in 2014, while exports dropped by 81%, makingless than 1% of total sales in 2014. The key destination country for electricity exports isKazakhstan. The share of households in the total electricity consumption increased from 60% in2009 to 66% in 2014. In view of the existing generating capacities, the growth of domesticconsumption is a significant deterrent to the KR’s prospects of exports in the energy sector. In2009-2014, the domestic consumption growth averaged at 8.5% per year.

The electricity generating capacity is critically affected by the water accumulation inreservoirs. A significant drop of the water level of the Naryn River in 2008-2010 and 2013-2014,and the forced emptying of the Toktogul reservoir to meet the domestic electricity demand inwinter significantly affected the capacity to export. The subsequent drop of the water levels in2013 led to a significant reduction in electricity exports, and faced with power shortages even insummer, the KR stopped its exports in 2014. Under these conditions, the KR had to import216 million kWh of electricity from Tajikistan in May-September 2014. Over the period ofDecember 2014 to April 2015, the KR imported 519 million kWh of electricity from Kazakhstanto cover its electricity shortages.

Further growth in consumption will lead to a significant deficit of electricity—the WorldBank forecasts that by 2020 the electricity shortage will amount to 30% of the 2012 domesticconsumption. In order to satisfy the growing domestic demand and create conditions for therecovery and growth of export earnings, the key task is to commission new facilities. In view ofthe limited internal resources, since its independence (1991) Kyrgyzstan has only commissionedone power plant – Kambaratinskaya HPP-2, with one of its three hydropower units installed andrunning. The capacity of the newly built small HPPs has only a local effect and does not solvethe problems as a whole.

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The assets of the energy sector have been in operation for more than 40 years and areapproaching the end of their useful life. This results in lower reliability and high technical losseswithin the system (over 15% of the useful supply). The sector also faces high commercial losses(over 15% of the useful supply), suffering from ineffective financial management and inefficientoperation, as well as tariffs not covering its costs. In the light of the extremely high growth ofdomestic demand (by 47% over the last 5 years), it is critical to ensure large-scale rehabilitation,replacement, and expansion of the sector's assets.

It is necessary to update the fixed assets of the energy sector, where the wear and tearexceeds all the critical values. According to the Project Company, as of 1 October 2015, the wearrate of production equipment at all the power plants (except for At-Bashinskaya HPP andKambaratinskaya HPP-2) exceeds 50%. At the same time, the wear rate of generators at thesepower stations (except for Shamaldy-Say HPP) exceeds 70%. As at 1 October 2015, the wearrate of the production equipment of Toktogul HPP was 53.9%, and that of its hydropower andturbine units was 72.2%.

Figure 1. Wear rate of power plant production equipment, as at 1 October 2015

Wear rate of power plant production equipment, Elektricheskie Stantsii OJSC, as at 1 October 2015, %

Wea

r ra

te, %

Toktogul HPP Kurpsay HPP Uch Kurgan HPPTash-Kumyr

HPPShamaldy-Say

HPPAt-Bashinskaya

HPPKambaratinskaya

HPP-2Bishkek CHP Osh CHP

wear rate,

%53.9 61.6 55.4 55.2 48.7 28.6 24.1 71.1 56.9

Figure 2. Wear rate of power plant hydropower and turbine units, as at 1 October 2015

Wear rate of power plant hydropower and turbine units, Elektricheskie Stantsii OJSC, as at 1 October 2015, %

Wea

r ra

te, %

Toktogul HPP Kurpsay HPP Uch Kurgan HPP Tash-Kumyr HPP Shamaldy-Say HPP Bishkek CHP Osh CHP Row 1 72.2 85.1 96.4 62.6 50.6 69.6 100.0

This wear rate above the 25% energy security threshold (except for KambaratinskayaHPP-2) is a result of years of repair and rehabilitation under-financing. The risk of powerengineering equipment failure at power plants is growing, the threat of accidents and irreversibleconsequences is aggravated.

Toktogul HPP has been in operation since 1975, and since then there has been nosignificant rehabilitation or modernisation implemented. Its critical equipment breaks down,which leads to its utilisation rate going down to 80%. With no rehabilitation, its utilisation rate isexpected to fall further. An assessment of all the Naryn Cascade HPPs has been made. Thefinding of this assessment show that all the HPPs need rehabilitation, to begin with Toktogul

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HPP1. A failure of Toktogul HPP would affect the sustainability of the single Central AsianPower System (CAPS) and will have disastrous consequences for the KR electricity supply.

Development Plans The KR Government has made the energy sector development a key component of the

KR National Sustainable Development Strategy for 2013-2017, which is aimed at ensuring theKR energy security and developing its export potential. The specific objectives of the Strategyare: (1) to ensure reliable and uninterrupted electricity supply, mainly for residential consumers;(2) to ensure sustainable tariff policies, with the costs of electricity companies covered by thetariffs; (3) to bring down the commercial losses and technical losses; (4) to improve the financialmanagement and corporate governance in the electricity generation sector, while strengtheningthe commercial and financial discipline; (5) to ensure profitable operation of the electricitygeneration sector; (6) to develop the competitive advantages of the KR in the regional electricitymarket; and (7) to improve the conditions for mobilising investments for HPP projects. In thefuture, it is expected that owing to the achievement of its development objectives the KR willhave become a major regional electricity producer by 2017, fully satisfying the demand of itspopulation for electricity and expanding its electricity exports to neighbouring countries.

In 2012, the KR Government approved the Electricity Sector Development Strategy,which outlined medium-term reform goals. In 2013, the KR Government approved the ActionPlan for Reforming the Electricity Sector to implement the Strategy, and the Strategy of the Fueland Energy Complex Development for the period until 2025. In 2014, the KR Governmentapproved the new Medium-Term Electricity Tariff Policy of the Kyrgyz Republic for 2014-2017.

To satisfy the current demand, eliminate winter electricity shortages, and expand exports,the Development Strategy envisages the construction of new power plants for the total amount ofover US $5 billion. Since 2010, efforts have been made to mobilise investments in the powersector, which has benefited the electricity generation (the launch of construction of the Verkhne-Narynsky HPP Cascade, Kambaratinskaya HPP-1, a number of small HPPs, modernisation ofBishkek CHP, preparation of a feasibility study for Kara-Kechin CHP, modernisation of ToktogulHPP, At-Bashinskaya HPP, etc.), electricity transmission (construction of the Datka-Keminsubstation, Datka-Kemin and Datka-Khujand power transmission lines, cascade replacement of anumber of transformers), and the distribution and sale of electricity (replacement of worn cableand overhead lines, installation of modern electronic metering devices, including pre-paid ones,automated systems for electricity control and metering).

The limited financing is a significant deterrent to commissioning new facilities and safeoperation of the energy sector. In general, the energy sector invested about US $370 millionduring the period of 1991-2010, which is less than US $20 million per year. According toexperts, the size of investments needed to maintain the wear rate at the standard level shouldhave been about US $40 million per year during that period. The lack of investments resulted inthe wear rate rising beyond 50%, while the level critical for the sector was 25%.

1.2. Overview of Toktogul HPP

Toktogul HPP is the largest facility, including four units of 300 MW each, with the totalinstalled capacity of 1,200 MW, and a multi-year regulation reservoir. Toktogul HPP is of vitalimportance, it delivers the main and maximum load in the electric power system and carries outfrequency regulation of the 500-kV power transmission network. Toktogul HPP has operated for40 years, its first hydropower unit was put into operation in 1975. The total hours of operation(from the moment of commissioning until end-2014) are:

• unit No. 1 - about 177,556 hours,• unit No. 2 - about 185,793 hours,• unit No. 3 - about 180,110 hours, and

1 ADB. 2010. Technical assistance to the Kyrgyz Republic for the Energy Sector Rehabilitation Project. Manila (TA-7704).

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• unit No. 4 - about 186,358 hours.According to the Project Company, as at 1 April 2015, the wear rate of the power

engineering equipment at Toktogul HPP was 57.1%, while the wear rate of generators was76.8%. Given that the average annual output of the power plant is about 4 billion kWh, or about30% of the total electricity generation in the country, the registered wear rate points at the needfor urgent rehabilitation of the power plant.

Table 7. Key parameters of Toktogul HPP Parameters Unit Value

Installed capacity MW 1,200 (4x300)Average annual output million kWh 4,100Maximum filling level meters above sea level 900Conservation level m 837Maximum head m 180Rated head m 140Minimum head m 110Reservoir surface area km2 284.3Total reservoir capacity million m3 19,500Active reservoir capacity million m3 14,000Dam type concrete gravityWater storage annualSpillway design flood m3/sec 240Total design flood m3/sec 960Total discharge capacity m3/sec 3,500Lower outlet m3/sec 2,340Discharges from spillways m3/sec 1,160Dates of unit commissioning:

Unit No. 1 14 January 1975Unit No. 2 27 November 1975Unit No. 3 10 January 1976Unit No. 4 10 January 1976

The configuration and layout of the power plant units are unique both for the narrowvalley of Naryn and for integrating the power plant building into the reinforced concretestructure of the dam itself.

Figure 3. Toktogul HPP air photo

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Figure 4. Project site map

Figure 5. Toktogul HPP building cross-section

15

Karakol city in the vicinity of ToktogulHPP building

Toktogul HPP building

M41 main road

Figure 6. Toktogul HPP building plan

1.3. Degree of Project Preparation

On 27 May 2012, the KR Government adopted the KR Medium-Term Electric PowerIndustry Development Strategy for 2012-2017. The Action Plan to implement the strategyincludes the Energy Sector Rehabilitation Project, with Toktogul HPP Rehabilitation being oneof its components.

The programme of complete Toktogul HPP rehabilitation includes three phases. The firstone, implemented with the financial support of the Asian Development Bank (ADB), covers thereplacement of auxiliary electrical and mechanical equipment that was identified as a toppriority. The second phase covers the rehabilitation of two of the four power plant hydropowerunits, while the third phase – the rehabilitation of the remaining two hydropower units. The thirdphase also includes the rehabilitation of the structures that can be identified in the framework ofthe ADB-funded dam safety study, which is currently underway. Each phase is a separate projectsupported with a separate feasibility study and is expected to be independent of subsequentphases.

The Agreement between the KR Ministry of Finance and ADB on Financing Phase 1 wassigned on 12 September 2012, ratified by the KR Parliament and came into force on7 December 2012. The budget of the project was US $62 million, of which ADB providedUS $55 million, and the KR Government – US $7 million.

Phase 2 is financed by the EDB and ADB in the following amounts: ADB –US $110 million, EDB – US $100 million. The ADB terms of financing are as follows: a grant ofUS $44.5 million; a 32-year loan of US $65.5 million at 1.5 % per annum (1% per annum –during the 8-year grace period). The EDB terms of financing are as follows: a 20-yearconcessional loan of US $100 million with an 8-year grace period at 1% per annum (during thewhole period of the loan maturity) and a front-end fee of 0.5%. The Financing Agreementbetween the KR and ADB was signed on 26 December 2014 and ratified by KR Law No. 101 of18 May 2015. The Financing Agreement between the KR and EDB was signed on 31 July 2015.It is expected to be ratified by the KR Parliament in the near future.

In February 2013, in the framework of the preparation to the Project implementation,ADB financed the feasibility study for Phase 1 of the Toktogul HPP Rehabilitation Project ofUS $62 million, specifying total cost estimates for Phase 2 (US $252 million) and Phase 3(US $252 million).16

In parallel, ADB provided technical assistance to the Project Company to prepare afeasibility study for Phase 2, and the Consultant started working on that in March 2014. Theconsultant for Phase 2, as well as the feasibility study for Phase 1, was Fichtner Gmbh & Co.KG, a major international company with great experience in preparing such projects. InAugust 2014, the Consultant completed the preparation of the Project Feasibility Study, theHydrologic Study Report for the Toktogul HPP Rehabilitation Project (Phase 2), and the InitialEnvironmental Examination Report. ADB is currently working with experts of Fichtner Gmbh &Co. KG to prepare a feasibility study for Phase 3 of the Project. The Initial EnvironmentalExamination Report is ready.

1.4. Climate Change Impact

The key findings of the Hydrologic Study Report for the Toktogul HPP RehabilitationProject (Phase 2), prepared by Fichtner Gmbh & Co. KG in June 2013, are presented below.

The Toktogul reservoir, which makes part of the Syr Darya River basin, was covered bythe reservoir assessment for the region under the ADB Water and Adaptation Interventions inCentral and West Asia (June 2012).2 Within the framework of this project, a simulation of theglobal warming consequences was made, which pointed at a significant impact on the reservoirsof the region.

Different scenarios were used for the reservoir simulation. The simulation results showthat climate changes affect the reservoir water outflow in summer, but in winter this effect isminimal. This is explained by the fact that the Toktogul reservoir is quite large to accommodateenough water inflows in summer and then release the water in winter.

The electricity generation plans until 2050 are of certain interest for the Toktogul HPPRehabilitation Project. Within the framework of the Water and Adaptation Interventions inCentral and West Asia Project, future water inflows into the Toktogul reservoir were forecastedwith a view to calculating the future electricity generation.

Figure 7. Change in average electricity generation at Toktogul HPP, from 2011 to 2050

The following conclusions can be drawn based on the table showing changes inelectricity generation over 40 years (2011-2050):

• In 2011-2020, the average electricity generation will be approximately6,099.1 GWh).

2 ADB Water and Adaptation Interventions in Central and West Asia, June 2012

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• In 2021-2030, the average electricity generation will slightly decrease to6,082.1 GWh, indicating that the average output will be approximately uniform over thenext 20 years (2011-2030).• In 2031-2040, the average electricity generation will decrease by 11.7% (from6,082.1 to 5,645.2 GWh), and the water inflow will drop by 17.7% (from 478.3 to 429.0m3/sec). The water inflow is expected to decrease over time due to the melting of glaciers.The decrease in average electricity generation (11.7%) is less than the reduction in waterinflow (17.7%), because electricity generation is not a primary function of the reservoirs.The electricity generation is not linear to activities of outflow regulation and depends onboth the water inflow and the reservoir useful pressure based on its water balance, which,in its turn, depends on the reservoir geometry. In addition, the Toktogul reservoir is largeand can hold a sufficient amount of incoming water.• In 2041-2050, the average electricity generation (5,405.2 GWh) will be above theaverage electricity generation (5,015.4 GWh) in 2001-2010. This indicates that theaverage generation of electricity will be going down in the next 40 years (2011-2050), butwill be above the average output for the past 40 years (1971-2010).To summarize, the Water and Adaptation Interventions in Central and West Asia Report

indicates that (i) the dam reservoir and spillways can safely serve the water inflows that will firstincrease (due to the melting of glaciers) and then drop, (ii) the average electricity generation willdecline by 11% over the next 40 years (0.25% per year), and (iii) the sludge sediment balancehas not had a significant impact on the reservoir capacity. The report indicates the need toimplement the Project.

1.5.Project Environmental Impact Assessment and Social Safeguards

In the framework of Phase 3 of the Project, ADB prepared the Initial EnvironmentalExamination Report.

The Project is classified as environmental category B under ADB Safeguard PolicyStatement adopted in June 20093.

The project will be implemented at the existing site of Toktogul HPP, which does notrequire any acquisition of land and resettlement. In the event that acquisition of land and/orresettlement impacts are identified during the implementation of the Project, the ProjectCompany should ensure that such impacts are mitigated in accordance with ADB SafeguardPolicy Statement adopted in June 2009, including the preparation of a plan of acquisition of landand resettlement cleared with the people affected by the activities.

All the activities and work related to equipment installation will be carried out at theexisting hydropower plant. The project does not imply any adverse social impacts on the localcommunities.

The Consultant will fully comply with the procedure of getting an approval of the StateAgency for Environmental Protection and Forestry (SAEPF under the KR Government) for the“Environment Protection Section” containing a detailed Environmental Management Plan(EMP), up to the final approval by the KR authorised government bodies.

The Initial Environmental Examination Report outlines the limitations associated withthe transportation of too large / too heavy cargoes to the HPP (turbine rotor, generator rotor, etc.).

The promising route for the transportation of equipment from abroad to the ToktogulHPP is through Uzbekistan (the original route of equipment transportation at the time of the HPPconstruction in the 1970s). The alternative routes for equipment transportation from abroad arethrough Kazakhstan and through China.

3 ADB Safeguard Policy Statement, June 2009

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2. Proposed Project Solution

1. Rehabilitation of hydropower units 1 and 3:• Replacement / rehabilitation of turbines at hydropower units 1 and 3;• Replacement of turbine rotor speed control systems for hydropower units 1 and 3;• Replacement / rehabilitation (and modernisation) of generators for hydropower units1 and 3;• Replacement of excitation systems for hydropower units 1 and 3;• Replacement of main transformers for hydropower units 1 and 3;• Replacement of control and protection systems for hydropower units 1 and 3;• Replacement of temperature and unit monitoring systems for hydropower units 1and 3;• Replacement of isolated phase bus ducts for hydropower units 1 and 3;• Replacement of electric engineering and mechanical auxiliary systems not coveredunder Phase 1;

2. Rehabilitation of the construction part of hydraulic structures.3. Rehabilitation of the dam monitoring systems at Toktogul HPP and four downstream HPPs.

3. Project Financing Structure

а. Proposed Structure and Terms of Project Financing

The total financing needs for the Toktogul HPP Rehabilitation Project (Phase 3) isUS $175 million.

The project costs include: (i) two general contractor contracts for the Toktogul HPPRehabilitation; (ii) one general contractor contract for the dam monitoring system, (iii) advisoryservices for the Project implementation support, (v) advisory services for business processexamination and management modernisation, (vi) advisory services for the public awarenesscampaign, (vii) external audit, (viii) financial audit, (ix) taxes and fees, (х) current expenses, and(хi) financial costs.

Table 8. Detailed budget estimate for Phase 3, by categories, US $ million Item Foreign

currencyLocal currency,

in US $Total

% of basevalue

А. Investment costs a

1. Toktogul HPP Rehabilitation 92.3 4.9 97.2 68.5%2. Rehabilitation of the construction part of hydraulic structures 2.6 4.9 7.5 5.3%3. Rehabilitation of the HPP monitoring system - 1.7 1.7 1.2%4. Advisory services

a. Business process examination and management modernisation 3.0 2.0 5.0 3.5%b. Project management 2.4 1.6 4.0 2.8%c. Public awareness campaign 0.2 0.2 0.4 0.3%d. Financial audit 0.7 0.5 1.2 0.8%f. External audit 0.1 0.1 0.1 0.1%

В. Taxes and fees b - 24.8 24.8 17.4%Total (A+B) 101.4 40.5 141.9 100.0%

С. Unforeseen c

Physical 19.2 2.4 21.6 15.2%Price 7.9 1.2 9.1 6.4%Total (С) 27.1 3.6 30.7 21.6%

D. Financial payments during implementation d 2.4 - 2.4 1.7%Total (A+B+C+D) 131.0 44.0 175.0 123.4%

a At prices as of mid-2015.b Including taxes and fees to be financed in cash or through exemptions by the Government of the Kyrgyz Republic.

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c The buffer for unforeseen physical costs is calculated as 16% for general contracts and 5% for the remainingcost categories. The buffer for unforeseen price costs is calculated based on price increase factors provided byADB. Assumptions for the purchasing power parity are used to adjust currency exchange rates.

d Includes the interest accrued during construction at 1% per annum under the ADB loan; and 1% per annumunder the EDB loan; and the 0.5% commission fee under the EDB loan.

Phase 3 will be financed from four sources: the Eurasian Fund for Stabilization andDevelopment will allocate US $40 million, the Asian Development Bank – US $110 million,and the KR Government – US $25 million. The borrower under the EFSD Loan Agreement willbe the Kyrgyz Republic.

Table 9. Sources of financing the Toktogul HPP Rehabilitation Project (Phase 3),‘000 US $

Source of financing Amount (US $ million) Share of total (%)EFSD 40.0 22.9ADB 110.0 62.9KR Government 25.0 14.3Total: 175.0 100

The EFSD loan will be used exclusively to finance the general contract of the ToktogulHPP Rehabilitation (hydropower unit replacement). The ADB funds will be used to cover all theother Project components. The KR Government will finance the taxes and fees by grantingexemptions thereof.

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Table 10. Detailed budget estimate for the Project, by sources of financing, US $ million Item ADB EDB loan KR Government Total

ADB loan ADB grant Amount % of thecategory

cost

Amount % of thecategory

costAmount % of the

categorycost


costА. Investment costs a

1. Toktogul HPP Rehabilitation 38.9 40 25.7 26.4 32.7 33.6 - 0 97.22. Rehabilitation of the

construction part of hydraulicstructures

4.5 60.1о3

40.1 0 0 7.5

3. Rehabilitation of the HPP monitoring system

- 0 1.7 100 - 0 - 0 1.7

4. Advisory servicesa. Business process

examination and management modernisation

- 0 4 100 - 0 - 0 4

b. Project management - 0 5 100 - 0 - 0 5c. Public awareness campaign - 0 0.4 100 - 0 - 0 0.4d. Financial audit - 0 1.2 100 - 0 - 0 1.2f. External audit - 0 0.1 100 - 0 - 0 0.1

Total (А) 43.4 37 41.1 35.1 32.7 27.9 - 0 117.1В. Taxes and fees b - 0 - 0 - 0 24.8 100 24.8

Total (A+B) 43.4 30.6 41.1 29 32.7 23 24.8 17.4 21.6С. Unforeseen c

Physical 10.1 46.7 6.3 29.2 5.2 23.9 - 0 21.6Price 4.3 47 2.6 28.6 2.2 24.1 - 0 9.1Total (С) 14.4 46.8 8.9 29 7.4 23.9 - 0 30.7

D. Financial payments during implementation d 2.2 91.8 - 0 - 0 0.2 8.2 2.4

Total (A+B+C+D) 60.0 34.3 50 28.6 40 22.9 25 14.3 175% of total project cost 34.3 28.6 22.9 14.3

Table 11. Detailed budget estimate for the Project, by components, US $ million Item Total

priceHPP

RehabilitationDam monitoring

systemPublic awareness

campaign Management and

business processesAmount % of the

categorycost


cost


cost


costА. Investment costs a

1. Toktogul HPP Rehabilitation 97.2 97.2 100 - 0 - 0 - 02. Rehabilitation of the construction part

of hydraulic structures7.5 7.5 100 - 0 - 0 - 0


1.7 “ 0 1.7 100 - 0 - 0

4. Advisory servicesa. Business process examination and

management modernisation 4.0 0 - 0 - 0 4 100

b. Project management 5.0 - 0 - 0 - 0 5 100c. Public awareness campaign 0.4 0 - 0 0.4 100 - 0d. Financial audit 1.2 - 0 - 0 - 0 1.2 100f. External audit 0.1 - 0 - 0 - 0 0.1 100

В. Taxes and fees b 24.7 23.2 93.9 0.2 0.8 0.1 0.2 1.3 5.1Total (A+B) 141.9 127.9 90.2 1.9 1.3 0.5 0.3 11.6 8.2

С. Unforeseen c

Physical 21.6 20.5 94.7 0.3 1.4 0 0.2 0.8 3.7Price 9.1 8.2 90.2 0.1 1.4 0 0.4 0.7 7.9Total (С) 30.7 28.7 93.4 0.4 1.4 0.1 0.3 1.5 5

D. Financial payments during implementation d

2.4 2.4 100 - 0 - 0 - 0

Total (A+B+C+D) 175 159 90.9 2.4 1.3 0.5 0.3 13.1 7.5

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Table 12. Detailed budget estimate for the Project, by years, US $ million Item Total

priceYear 1 2017

Year 2 2018

Year 3 2019

Year 4 2020

Year 5 2021

Year 6 2022

Year 7 2023

А. Investment costs a

1. Toktogul HPP Rehabilitation 97.2 1 3.9 9.7 14.6 19.4 22.4 26.22. Rehabilitation of the

construction part of hydraulic structures

7.5 0.1 0.3 0.8 1.1 1.5 1.7 2


1.7 0 0.1 0.2 0.3 0.3 0.4 0.5

4. Advisory servicesa. Business process

examination and management modernisation

4.0 0 0.2 0.4 0.6 0.8 0.9 1.1

b. Project management 5.0 0.1 0.2 0.5 0.8 1 1.2 1.4c. Public awareness

campaign0.4 0 0 0 0.1 0.1 0.1 0.1

d. Financial audit 1.2 0 0 0.1 0.2 0.2 0.3 0.3f. External audit 0.1 0 0 0 0 0 0 0

В. Taxes and fees b 24.8 0.2 1 2.5 3.7 5 5.7 6.7Total (A+B) 141.9 1.4 5.7 14.2 21.3 28.4 32.6 38.3

С. Unforeseen c

Physical 21.6 - - - - - - 21.6Price 9.1 - - - - - - 9.1Total (С) 30.7 - - - - - - 30.7

D. Financial payments duringimplementation d

2.4 0 0.1 0.2 0.4 0.5 0.6 0.7

Total (A+B+C+D) 175 1.4 5.8 14.4 21.6 28.9 33.2 69.7

b. Proposed Terms of the Eurasian Fund for Stabilization and Development Loan

Table 13. Project Financing Terms Loan currency US $Loan amount US $40 million Loan closing date 31 December 2023 Loan maturity Maximum 20 yearsGrace period Maximum 8 yearsFront-end fee 0.5% of the loan amountCommitment fee Not applicableMargin Not applicableRisk premium Not applicableInterest rate 1% per annum

The financing provided by the Fund is expected to be disbursed over 7 years, startingfrom 2017, in accordance with the Asian Development Bank Loan Disbursement Handbook(July 2012) and the Asian Development Bank Safeguard Policy Statement (July 2009).

Table 14. Principal repayment schedulePrincipal repayment dates Principal amount to be repaid on each

principal repayment dates30th day of the last month of each calendar quarter starting on 30 September 2024 and ending on 30 March 2036 inclusive.

US $1,666,666.00

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с. Proposed Project Financing Arrangement

The borrower under the investment loan will be the Kyrgyz Republic, and the agenciesresponsible for the Project implementation will the KR Ministry of Finance and the KR Ministryof Economy. The end recipient of the funds will be Elektricheskie Stantsii OJSC.

The KR Government will reflect the funds disbursed by the EFSD in its state budget as asource of its budget deficit financing and as budget expenditures to finance the Project and willhave budget allocations in the KR state budget in an amount necessary to service and repay thefunds borrowed from the EFSD.

4. Consideration of Expediency and Need to Borrow from theEurasian Fund for Stabilization and Development

It should be noted that the financing of this project using the EFSD resources is justifiedand necessary.

The justification of mobilising the EFSD resources is based on complete compliance ofthe Project with the 3 objectives of the Fund: to help overcome the consequences of crises,ensure long-term sustainability, and foster integration among the EFSD member states.

One of the key causes of the social, economic, and political pressures in the KyrgyzRepublic in recent years is the acute shortages of electricity faced by the country during winterheating seasons.

The shortages of electricity are a result of the wear of fixed assets of the energy sector,lack of new generating facilities, high energy losses in the power system, tariffs set below thecost-recovery level, high growth of domestic electricity consumption, and persistentunderfunding of the country’s electric power system. These developments exacerbate the socialand economic pressures, which, in turn, complicate the political situation in the country. Theproposed Project is aimed at the rehabilitation of Toktogul HPP in the energy sector, one of themost important sectors of the economy that is vulnerable to crisis.

In addition to ensuring the country’s energy security, the Project implementation willhave a positive effect on employment in the KR at the stage of the HPP rehabilitation, expandingthe access of households in remote areas to electricity and contributing to higher tax revenues tothe budget. Further details on these effects will be offered in Social and Economic Effects ofProject Implementation.

The need for mobilising the EFSD resources is based on the fact that the fundingenvisaged in the medium-term programmes of the key IFOs operating in the Kyrgyz Republic isinadequate to support the Project implementation. In particular, the funding planned by the AsianDevelopment Bank, which co-finances the Toktogul HPP Rehabilitation Project (Phase 3), tosupport the development of the KR energy sector is not sufficient to fully cover the third phaseof the Project.

Under the IMF Programme for the KR, a zero-limit is fixed for the non-concessionallending within the overall portfolio of external government and government guaranteed loans.The KR has committed not to mobilise loans and not to issue guarantees under loans that canbring the average grant component of the portfolio down below 35%. Therefore, the only optionof raising funds for the Project is highly concessional lending.

The Project cannot be financed on market terms because the KR banks do not have thenecessary resources to support the Project.

Thus, the Eurasian Fund for Stabilization and Development is the only option availableto raise funds to finance the Project.

5. Project Economic Objectives

The Project involves the rehabilitation of Toktogul HPP through the replacement of thefirst and third units combined with the replacement and / or repair of auxiliary systems and

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equipment of the power plant. Toktogul HPP is the country’s major electricity generating facility,covering most of the domestic demand for electricity. The wear rate of the HPP production assetsis extremely high calling for their urgent replacement. The high wear rate of the fixed assetsresults in high losses and electricity shortages, higher repair and operation costs, and greaterrisks of accidents and failures.

If implemented, the Project will help improve the HPP capacity, extend its life cycle,improve the availability, reliability, and safety of the facilities, and reduce the repair andoperation costs.

The Project implementation in the context of comprehensive rehabilitation of the KRenergy sector should enable better productivity and higher electricity generation (combined withpotential exports), better trade balance owing to electricity export growth, and improved energysecurity of the country.

6. Expected Social and Economic Effects of ProjectImplementation

a. Economic Effects

The economic effects of the Toktogul HPP Rehabilitation Project (Phase 2) include thefollowing:

an increase in the Toktogul HPP capacity by 120 MW, with the capacity of each unitimproved by 60 MW;

an improvement in the performance of the new units by 2.5% owing to theimplementation of modern technologies;

an improvement in the Toktogul HPP uptime percentage to 90%. The life cycle of thenew hydropower units will be 35 years;

an improvement in the hydropower unit availability factor from the current 80% to95%;

an improvement in the HPP safety and reliability; lower repair and operation costs; an improvement in the sustainability of the KR energy system and ensuring stable

voltage and frequency control within the single Central Asian Power System; and an improvement in the country’s economic security and independence of electricity

imports.

b. Social Effects

The Project addresses one of the most important structural challenges – an acute shortageof electricity in the winter heating season. Poor households, especially those in remote areas ofthe country, suffer most from power outages as they have to switch to more expensive non-electric energy sources. If implemented, the Project will contribute to improved reliability andstability of electricity supply to consumers. The transparency, accountability, and efficiency ofthe energy sector will have a beneficial effect on the public in general.

In the context of the Kyrgyz Republic, an improvement in the energy infrastructure willboost the development of other industries / businesses and improve the business climate, whichcan become an incentive for foreign investment inflows. The Project implementation will have apositive effect on employment in the KR at the stage of the HPP rehabilitation, contribute to thepoverty reduction, and help expand access of households in remote areas to electricity, whilecontributing to higher budget revenues (including both direct ones associated with the Projectimplementation, and indirect ones associated with favourable conditions for the development ofother sectors).

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Thus, the Project implementation will help improve the structure of the economy interms of strengthening its resilience to external shocks, and also addresses the two most acutesocial and economic challenges: the high poverty rates and unemployment.

7. Project Fiscal and Macroeconomic Efficiency

In 2014, the GDP of the Kyrgyz Republic was about US $6.7 billion. The poverty rate isestimated at 38%.

In 2000-2014, the average economic growth rate was 4.6% per year. The key sectors areagriculture – 14.8%, industry – 15.7%, of which 46.3% is the share of the gold mining enterpriseKumtor, and the energy sector accounts for 13.9%.

At the same time, pressures persist. The global financial turmoil, debt problems, andsigns of recession in a number of EU countries, the slowdown in economic growth in China,Russia, and Kazakhstan – all these factors can fully affect the social and economic developmentof the Kyrgyz Republic. The above developments may entail the following macroeconomicrisks:

• lower external demand and deterioration of the terms of trade with the countries,which are the main KR trading partners;• growing costs of imports of basic food products and energy resources against thebackdrop of the current situation in the foreign exchange market, resulting in additionalinflationary pressures in the economy and lower imports;• growing unemployment rate as part of migrants are returning from Russia andKazakhstan, as well as dropping incomes of households as the inflow of remittancesdeclines;• lower inflows of remittances from migrant workers;• decelerating economic growth due to weaker business activity and lack of sources offinancing for economic growth; and• higher state budget deficit due to lower potential proceeds from loans and grantswith the level of social spending remaining unchanged.The totality of the above factors can pose a real threat to the achievement of the expected

macroeconomic parameters. Despite the potential stabilisation of the fiscal situation, the capacityto finance the infrastructure is significantly reduced.

Thus, the current economic situation of the Kyrgyz Republic points to its inability togenerate financing for infrastructure projects using internal resources, while the prospects ofmobilising foreign investments for these purposes are also extremely limited.

In this regard, the EFSD loan to support the Toktogul HPP rehabilitation will helpmaintain the level of infrastructure investments. Considering the relatively significant share ofthe energy sector in the GDP, the rehabilitation of the energy infrastructure will contribute to thecountry’s economic diversification and reduce its vulnerability to shocks. In addition, therehabilitation project will create new jobs and, to a certain extent, will contribute to GDP growth.An updated assessment can be presented at subsequent stages of the Project development.

8. Project Environmental Impact

The key environmental impacts of the Project include those related to: (i) occupationalhealth and safety at the Project site, (ii) recycling of used oil and waste lubricants, (iii) recyclingscrap and other solid waste, and (iv) delivering construction materials and heavy equipment tothe Project site, as well as the waste removal from the Project site. The EnvironmentalManagement Plan outlines sufficient mitigation measures and a monitoring plan for these typesof impacts. Used oil and scrap metal will be safely stored at specially designated areas at theProject site. To improve their storage, it is planned to allocate funds within the framework ofPhase 1, the funds will be disbursed throughout the entire implementation of the Toktogul HPPRehabilitation Programme. Elektricheskie Stantsii OJSC will be responsible for recycling and25

disposal of oil and scrap metal by licensed companies under the supervision of the Projectimplementation consultant.

ADB has prepared an Initial Environmental Examination Report (IEE), including anEnvironmental Management Plan (EMP). The costs of the EMP risk mitigation measures will beincluded in the turnkey contract, and the costs associated with environmental monitoring will beincluded in the budget covering the services of the Project implementation consultant. Theexpenses of Elektricheskie Stantsii OJSC related to waste disposal will be covered from thefunds generated as a result of waste disposal / sale.

Within the framework of this project, the Government of the Kyrgyz Republic standsready to ensure compliance with the ADB Safeguards.

The legal framework for environmental examination in the Kyrgyz Republic includes theLaw on Environmental Protection (1999), the Law on Environmental Expert Review (StateEnvironmental Expert Review) (1999), the Instruction on State Environmental Expert ReviewProcedures for Pre-Design, Design, and Other Materials in the Kyrgyz Republic (1997), theInstructions on Environmental Impact Assessment Procedures in the Kyrgyz Republic (1997),and other regulations. The Kyrgyz Republic is a Party to the Aarhus Convention on PublicParticipation and the Convention on EIA in a Transboundary Context. The applicableenvironmental laws of the Kyrgyz Republic related to the Project are presented in the followingtable:

Table 15. Applicable environmental impact laws and regulations in the Kyrgyz Republic Law Approved (amended) inConstitution of the Kyrgyz Republic 2010

Law on Environment Protection 1999 (2002, 2003,2004, 2005, 2009)

Law on Air Protection 1999 (2003,2005)

Law on Water 1994 (1995)

Forestry Code 1999

Law on Environmental Expert Review (State Environmental Expert Review)

1999 (2003,2007)

Law on Mineral Resources 1997

Law on Flora Protection and Use 2001 (2003,2007)

Law on Mountain Areas of the Kyrgyz Republic 2002 (2003)

Law on Industrial and Consumption Wastes 2001

Law on Rate of Pollution (Emission, Discharge, Waste Disposal) Charges

2002

9. Expected Project Risks

The project is associated with several categories of risks: environmental, social,technological, design risks, operational, and other risks.

The environmental risks are associated with the potential impact of the project at itsimplementation and operation stage on the environment. The social risks reflect the impact of theproject on local communities. These risks will be mitigated by the KR Government by followingIFOs’ environmental and resettlement policies and procedures.

The Project risks include the risks of cost and time overruns. These risks can bemitigated by introducing sanctions for cost and time overruns to general contractor contracts andgetting independent evaluation of documents performed by consultants under the Project.

The operational and technological risks should be mitigated through careful developmentof a detailed Project design with the engagement of independent consultants.

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Table 16: Summary of risks and their mitigation measuresRisks Mitigation measures

Poor financial management, internal control, and risk management

• The Government is implementing an action plan to reform its public finance management

• An internal audit division has been established at “Elektricheskie Stantsii”• The internal audit requirements meet international standards• Support experts of the Project Implementation Unit• Paying consultants and contractors directly• The management and business processes at “Elektricheskie Stantsii” will

improve as the relevant component of the Project (Phase 2) is implementedThe single Central Asian PowerSystem stops operating and export markets break up

• The cooperation and trade within the region are supported under the Central Asia Regional Economic Cooperation Programme

• Export markets are diversified within the CASA-1000 projectThe Government fails to implement the tariff reforms

• The Parliament has delegated the tariff-setting powers to the Government• The public acceptance of the tariff reforms will improve following the

implementation of the Public Awareness CampaignAccidents at the Naryn CascadeHPPs

• The dam integrity examination is currently underway in the context of a study to evaluate the dam safety and identify the priority remedial actions

• Improved “Elektricheskie Stantsii” tariffs will enable a greater budget for maintenance and operation

Delays in implementation owing to the low procurement capacity

• An international consultancy firm is hired to provide assistance in Project implementation.

The Toktogul HPP rehabilitation activities are insufficient

• A technical examination is currently underway to define the scope of the rehabilitation

• The buffer to cover unforeseen physical costs has been extended beyond its standard level

The high rates of domestic demand growth persist

• The demand will decline as the tariffs increase

No reduction of losses • The programme of installing metering devices in the retail market is underway

10. Arrangement to Monitor Fund Resources Use

The arrangements for control over the use of resources of the Eurasian Fund forStabilization and Development and monitoring the Project implementation will be detailed in theEFSD Investment Loan Agreement.

To ensure proper control over the use of investment loan proceeds, the KR Governmentstands ready to apply ADB’s procurement, disbursement, and Project implementation monitoringpolicies and procedures.

Minister of Economy of the Kyrgyz Republic [signature] A. Kozhoshev

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ministry of economy of the kyrgyz republic investment ... · • mitigating the environmental...

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