Report and Recommendation of the President to the Board of Directors. Proposed Loan and Grant Kyrgyz Republic: Power Sector Rehabilitation Project

Transcription

1 Report and Recommendation of the President to the Board of Directors Project Number: May 2012 Proposed Loan and Grant Kyrgyz Republic: Power Sector Rehabilitation Project

2 CURRENCY EQUIVALENTS (as of 16 May 2012) Currency unit som (Som) Som1.00 = $ $1.00 = Som47.06 ABBREVIATIONS ADB Asian Development Bank CAPS Central Asian power system CHPP combined heat and power plant EMP environmental management plan EPP Electric Power Plants (open joint-stock company) GWh gigawatt-hour HEPP hydroelectric power plant IEE initial environmental examination KESC Kyrgyz electricity settlement center MOE Ministry of Energy and Industry PAM project administration manual PIU project implementation unit TA technical assistance NOTE In this report, $ refers to US dollars unless otherwise stated. Vice-President X. Zhao, Operations 1 Director General K. Gerhaeusser, Central and West Asia Department (CWRD) Director R. Stroem, Energy Division, CWRD Team leader Team members Peer reviewer J. Liston, Principal Energy Specialist, CWRD M. Eshenaliev, Senior Project Officer, Kyrgyz Resident Mission, CWRD P. Koh, Young Professional, CWRD K. Mitsuhashi, Energy Specialist, CWRD J. Ngai, Counsel, Office of the General Counsel I. Setyawati, Social Development Specialist, CWRD P.Tran, Senior Environment Specialist, CWRD Z. Lei, Energy Specialist, South Asia Department In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

3 CONTENTS Page PROJECT AT A GLANCE I. THE PROPOSAL 1 II. THE PROJECT 1 A. Rationale 1 B. Impact and Outcome 4 C. Outputs 4 D. Investment and Financing Plans 4 E. Implementation Arrangements 5 III. DUE DILIGENCE 6 A. Technical 6 B. Economic and Financial 7 C. Governance 7 D. Poverty and Social 8 E. Safeguards 8 F. Risks and Mitigating Measures 9 IV. ASSURANCES AND CONDITIONS 10 V. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework List of Linked Documents 13

4 PROJECT AT A GLANCE 1. Project Name: Power Sector Rehabilitation Project 2. Project Number: Country: Kyrgyz Republic 4. Department/Division: Central and West Asia Department/Energy Division 5. Sector Classification: Sectors Primary Subsectors Energy Energy efficiency and conservation Electricity transmission and distribution 6. Thematic Classification: 6a. Climate Change Impact No Climate Change Indicator available. 7. Targeting Classification: General Intervention Geographic dimensions of inclusive growth 9. Project Risk Categorization: Low Energy sector development Themes Primary Subthemes Economic growth Promoting economic efficiency and enabling business environment Regional cooperation and integration Trade and investments Targeted Intervention Millennium development goals Income poverty at household level 6b. Gender Mainstreaming Gender equity theme (GEN) Effective gender mainstreaming (EGM) Some gender benefits (SGB) No gender elements (NGE) 8. Location Impact: National Regional High Medium 10. Safeguards Categorization: 11. ADB Financing: 12. Cofinancing: Environment Involuntary resettlement Indigenous peoples Sovereign/Nonsovereign Modality Source Amount ($ Million) Sovereign Project grant Asian Development Fund 40.0 Sovereign Project loan Asian Development Fund 15.0 Total 55.0 No Cofinancing available. B C C 13. Counterpart Financing: 14. Aid Effectiveness: Source Amount ($ Million) Government 7.0 Total 7.0 Parallel project implementation unit Program-based approach No No

5 1 I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on (i) a proposed loan, and (ii) a proposed grant, both to the Kyrgyz Republic for the Power Sector Rehabilitation Project The project will (i) rehabilitate Toktogul hydroelectric power plant (HEPP) by replacing existing mechanical and electrical equipment, (ii) establish an electricity transactions settlement center, (iii) conduct a safety assessment of dams on the Naryn cascade, and (iv) conduct a public information program on sector reforms. The project 2 will improve energy supply, reduce system commercial losses, identify dam rehabilitation measures, and inform the public on sector developments. II. THE PROJECT A. Rationale 3. The Kyrgyz Republic power sector is characterized by aging assets, high commercial losses, below-cost tariffs, and poor performance of sector companies. The project addresses these issues by (i) rehabilitating the 1,200-megawatt Toktogul HEPP, which is critical for national and regional power supply; (ii) establishing the Kyrgyz electricity settlement center (KESC), which will reduce commercial losses and improve sector financial performance; (iii) assessing the safety condition of dams on the Naryn cascade and identifying remedial measures; and (iv) conducting a public information program to gain support for sector reforms. 4. The Kyrgyz Republic is a landlocked Central Asian country with a low per capita income (ranked 186 in the world); small area (200,000 square kilometers); and low population (5.55 million). The country enjoys abundant hydropower potential owing to its mountainous terrain covering 80% of the country. The Kyrgyz Republic is a net exporter of electricity to the regional Central Asian power system (CAPS). 5. Total installed generation capacity is 3,863 megawatts, of which 81% comes from HEPPs and 19% from thermal combined heat and power plants (CHPPs). Toktogul HEPP and other HEPPs in the downstream Naryn cascade have produced an average of 92% of the total country electricity output since Almost 100% of the population is connected to the electric grid. Toktogul HEPP, with multiyear storage capacity and producing 50% of the average electricity output, plays a critical role as an export source and a frequency regulator of the CAPS. 6. The country is the largest net exporter of electricity to the CAPS, with average annual exports of 2,100 gigawatt-hours (GWh) since Exports of hydro-based electricity occur during summer when electricity is produced above domestic demand; this is associated with water release for regional irrigation needs. Coal, oil, and gas are imported during winter to supply CHPPs. However, winter demand is not met because of (i) limitation of hydro generation caused by water release constraints, (ii) insufficient CHPP capacity, and (iii) lack of import sources with surplus electricity. Unserved winter demand is estimated at 20% of total supply or 1,200 GWh. 1 The design and monitoring framework is in Appendix 1. 2 The Asian Development Bank (ADB) provided project preparatory technical assistance. ADB Technical Assistance to Power Sector Rehabilitation Project. Manila (TA 7704-KGZ).

6 2 7. Power assets are generally over 30 years old and approaching the end of their economic life. This results in reed reliability and high system technical losses (15% of net supply). Despite modest domestic growth forecast at 1.5% per annum, major rehabilitation, replacement, and augmentation of power sector assets is required. The sector also suffers from high commercial losses (25% of net supply), poor financial management and performance, and tariffs below cost recovery. 8. The Government of the Kyrgyz Republic has identified $4 billion of planned investments in the power sector from 2012 to This is consistent with required investments of $6 billion from 2012 to 2022, as identified in a sector study financed by the Asian Development Bank (ADB). 4 Required investments include rehabilitation and construction of new thermal and hydropower plants and transmission and distribution assets. Financing for future sector investments is being coordinated through the ADB-sponsored Central Asia Regional Economic Cooperation program. The project addresses a time slice of required sector investments. 9. Considering the extent of financing available and the critical importance of HEPPs, the government identified rehabilitation of HEPPs as a top priority. An assessment of HEPPs on the Naryn cascade was conducted and it was concluded that all HEPPs require rehabilitation; rehabilitation of Toktogul HEPP was identified as the first priority. Failure of Toktogul HEPP would affect the stability of the CAPS and be catastrophic for the Kyrgyz Republic s electric supply. Toktogul HEPP has been in operation for over 35 years, but no large rehabilitation has been undertaken. Critical equipment is failing, resulting in availability dropping to 80%. It is considered that availability rates will continue to drop in the absence of rehabilitation. A complete rehabilitation of primary and secondary electrical and mechanical equipment is required. 10. A phased rehabilitation program of Toktogul HEPP has been prepared. The project includes the replacement of secondary electrical and mechanical equipment, which has been identified as the first priority. Replacement of this equipment is critical as failure could result in loss of the total station output for over 1 year. Following completion of the priority phase, further rehabilitation should be done on a turbine and generator unit basis as part of future sector investments. The rehabilitation work to be carried out under the project is independent of future phases and is required regardless of timing of implementation of future phases. 11. Except for Kambarata 2, dams on the Naryn cascade were designed and built from 1960 to Since then, international design criteria for dam hydrological and seismic safety have become more stringent. Naryn hydropower plants lie in an active seismic zone, increasing the geological hazard of rockfalls and landslides. Furthermore, existing dam designs may not cater for the impact of climate change on hydrology and variation in seasonal flow rates. The structural safety of the dams needs to be assessed and dam monitoring procedures reviewed. A dam safety assessment study of Naryn cascade dams is essential to identify required remedial measures and is proposed as part of the project. Impacts of climate change will be identified in a separate study to be financed by the Global Environment Fund. 12. Tariffs are below cost recovery, with a weighted average consumer tariff of $0.022 per kilowatt-hour. It is estimated that a weighted average tariff of $0.05 per kilowatt-hour is required 3 Ministry of Energy and Industry. Energy Strategy, Draft. 4 ADB Technical Assistance to Central Asia Regional Economic Cooperation for the Power Sector Regional Master Plan. Manila (TA 7558-REG).

7 3 for full cost recovery. A review of the tariff policy is being conducted, with general acceptance from all sections of the government that tariffs must be raised. The Ministry of Energy and Industry (MOE) draft energy strategy includes a target of reaching the full cost recovery tariff by Nevertheless, the government is concerned about implementing tariff reform after negative public reaction in 2010 following tariff increases (which have since been partly reversed). A public information program as part of the project will be carried out in 2013 to inform the population on (i) experiences in similar countries, (ii) ongoing sector developments and reforms, and (iii) benefits to be achieved from an effective tariff policy. 13. High commercial losses and poor sector financial performance are partly attributable to inadequate wholesale and retail metering; and poor procedures for distribution of sector revenues to generation, transmission, and distribution companies. Reliable and current data on energy flows are not available, which impedes identification of losses. In addition, distribution of sector revenues by the MOE is based on operational priorities and carried out in an inconsistent manner preventing proper financial planning by power companies, including open joint-stock company Electric Power Plants (EPP), the owner of Toktogul HEPP. 14. Projects to improve retail metering, under funding from the Government of Germany, and wholesale metering, under ADB funding, 5 are under implementation. The wholesale metering project will introduce an automated metering and data acquisition system that will identify domestic and international energy flows. Also under implementation under the ADB project is a study 6 on the corporate structure, organizational design, and technical system configuration for the proposed KESC. 15. KESC, to be established as part of the project, will take over control of distribution of sector revenues. KESC will use the automated metering and data acquisition system to identify energy flows and manage distribution of sector revenues in a transparent manner in accordance with a defined methodology, allowing sector companies to conduct prudent financial planning and budgeting. KESC will also publish details of energy flows between sector companies. Energy flows to distribution companies from transmission substations will be identified for each outgoing distribution feeder, allowing identification of energy flows on a district basis. By identifying the gap between energy flows and energy sales, commercial losses can be identified on a district basis. This information will allow distribution companies to focus commercial loss reduction programs on high loss districts, increasing the effectiveness of such programs. Public release of commercial loss figures on a district basis will also increase pressure on distribution companies to reduce losses in a measurable and time-bound manner. 16. The government has identified development of the energy sector as a major component of its development plan. 7 The project is aligned with the government s and ADB s strategy to (i) reduce electricity losses and theft, (ii) improve sector financial performance and corporate management, (iii) increase energy security through the development of domestic resources, (iv) expand regional power exports, and (v) phase in cost-recovery tariffs over the medium term. The project is included in ADB s country operations business plan ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan and Grant to the Kyrgyz Republic for the Power Sector Improvement Project. Manila (Loan 2671-KGZ and Grant 0218-KGZ). 6 Study on the Wholesale Electricity Transaction Settlement System (Grant KGZ). 7 Government of the Kyrgyz Republic Medium-Term Development Program of the Kyrgyz Republic, Bishkek (approved by Government Resolution No. 540 on 8 September). 8 ADB Country Operations Business Plan: Kyrgyz Republic, Manila.

8 4 B. Impact and Outcome 17. The impact will be increased reliability of national and regional power systems. This will be achieved by (i) improving Toktogul HEPP performance, which will allow average exports to be maintained; and (ii) increasing domestic sales to cover demand increase and winter unserved demand. The outcome will be improved operational performance of the power sector. This will be achieved by increasing time when Toktogul HEPP is availabile for operation, and reducing commercial losses. C. Outputs 18. Outputs will be as follows: (i) (ii) (iii) (iv) rehabilitation of Toktogul HEPP by replacing existing secondary electrical and mechanical equipment with new equipment to include (a) 500-kilovolt cables, (b) an excitation system, (c) a governor system, (d) generator circuit breakers, and (e) spare stator windings; establishment of KESC, with operation by an international firm for an initial 2-year period, and national staff recruited and trained to take over after the initial period; a dam safety assessment study that will assess the condition of dams on the Naryn cascade, with necessary remedial measures identified; and conduct of a public information program that will raise public awareness of developments in the electricity sector and the benefits of reform. D. Investment and Financing Plans 19. The project is estimated to cost $62 million (Table 1). Item Table 1: Project Investment Plan ($ million) Amount A. Base Cost a 1 Rehabilitation of Toktogul HEPP Consultants a. Implementation consultant 4.00 b. Kyrgyz electricity settlement center 3.00 c. Public information program 0.40 d. Dam safety assessment 2.00 e. External audit Taxes and duties 6.00 Subtotal (A) B. Contingencies b 5.50 C. Financing Charges During Implementation c 1.00 Total (A+B+C) HEPP = hydroelectric power plant. a In mid-2011 prices. b Physical contingencies were computed at 10% for the turnkey contract. Price contingencies were computed at 2% for foreign exchange costs and 7% for local currency costs. c Interest during construction has been computed at 1.0%. Source: Asian Development Bank estimates.

9 5 20. The government has requested a loan in various currencies equivalent to SDR9,703,000, and a grant not exceeding $40,000,000, both from ADB s Special Funds resources, to help finance the project. The loan will have a 32-year term, including a grace period of 8 years; an interest rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; and such other terms and conditions set forth in the draft financing and project agreements. ADB will finance a total of $55,000,000 equivalent. The government will allocate $5,400,000 to the MOE for the establishment of KESC, a public information program, and a dam safety assessment. The remaining $49,600,000 will be relent to EPP to fund the turnkey rehabilitation contract, consulting services for project implementation, and external audit. The relending is for a 25-year term, including a grace period of 5 years, and an interest rate of 1.5% per annum. Foreign exchange risk will be borne by EPP. 21. The financial plan is in Table 2. The government and EPP will contribute $7 million to the project, including the financing or exemption of taxes and duties. The government will (i) allocate additional funds from the budget to cover taxes and duties accrued on project expenditures, or (ii) exempt the project from such taxes and duties, or (iii) ensure that MOE and EPP have other financial resources sufficient to cover such taxes and duties. Detailed cost estimates are in the project administration manual (PAM). 9 Table 2: Financing Plan ($ million) Source Amount ($ million) Share of Total (%) Asian Development Bank a Government and Electronic Power Plants (open joint-stock company) Total a $40 million (73%) is an Asian Development Fund grant and $15 million (27%) is an Asian Development Fund loan. Source: Asian Development Bank estimates. E. Implementation Arrangements 22. The MOE is responsible for (i) establishing KESC, (ii) managing the public information program, and (iii) supervising the dam safety assessment. 23. EPP is responsible for rehabilitation of Toktogul HEPP. The EPP project implementation unit (PIU) will oversee execution of the turnkey contract. EPP will be assisted by an international consulting firm whose services will include bid evaluation, construction supervision, project accounting, safeguard monitoring, and reporting to the government and ADB. A single turnkey contract will be awarded for design, equipment supply, shipment, construction, and commissioning. 24. The implementation arrangements are summarized in Table 3 and described in detail in the PAM. 9 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

10 6 Table 3: Implementation Arrangements Aspects Arrangements Implementation period February 2013 December 2016 Estimated completion date 31 December 2016 Management (i) Executing agencies Ministry of Energy and Industry and Electric Power Plants (open joint-stock company) Procurement (i) Toktogul HEPP rehabilitation ICB 1 contract $40 million Consulting services (i) Project implementation QCBS (90:10) 148 person-months $4.0 million (ii) Dam safety assessment QCBS (90:10) 50 person-months $2.0 million (iii) Kyrgyz electricity settlement center and public information program QCBS (90:10) 78 person-months $3.4 million (iv) External audit CQS $100,000 Advance contracting Advance contracting will be conducted for consulting services in accordance with ADB guidelines. Disbursement The loan and/or grant proceeds will be disbursed in accordance with ADB s Loan Disbursement Handbook (2007, as amended from time to time) and detailed arrangements agreed upon between the Government of the Kyrgyz Republic and ADB. Direct payment, commitment and reimbursement procedures will be used. ADB = Asian Development Bank, CQS = consultant s qualification selection, HEPP = hydroelectric power plant, ICB = international competitive bidding, QCBS = quality- and cost-based selection. Source: Asian Development Bank estimates. III. DUE DILIGENCE A. Technical 25. An international consulting firm was recruited under the project preparatory technical assistance (TA) to conduct due diligence of the rehabilitation of Toktogul HEPP. The project preparatory TA consultant identified that secondary electrical and mechanical equipment was beyond its economic life and needed to be replaced as a top priority. Suitable replacement equipment is available in the international market; it is proven technology and is appropriate for Toktogul site conditions. The project preparatory TA consultant has prepared technical specifications for a turnkey contractor to design, manufacture, install, and commission the new equipment in accordance with industry practice. Firms qualified to perform the turnkey contract are available in the international market. The turnkey contractor will train EPP staff in operation and maintenance. 26. The standard approach for rehabilitation of a hydropower plant aims to extend the expected lifetime of the power plant by years. The project addresses the priority components requiring immediate rehabilitation in Toktogul HEPP. This will bring early benefits such as increasing the average plant availability from 80% to 90% to allow increased output. This will cover expected deterioration in output of other hydro and thermal plants, allowing a 10-year average generation output of 13.2 GWh to be maintained or slightly increased. 27. The reduction in commercial losses, from 25% to 10% of net supply, represents a saving of 1,500 GWh based on 2010 net Kyrgyz Republic supply of 10,100 GWh and sales of 6,100 GWh. It is assumed that 50% of this saving will result in reduced demand and 50% in new sales. Based on a forecast demand increase of 1.5% per annum, total sales by 2017 can reach 7,600 GWh. With 13.2 GWh of generation output and total losses at 25% of domestic supply

11 7 (15% technical and 10% commercial), excess over domestic demand and losses amount to 2,300 GWh. This excess can allow 10-year average exports to be maintained while making a contribution to unserved demand. Requirements for exports to be made during summer (resulting from regional irrigation needs), combined with high winter domestic demand, mean that exports cannot be cancelled to meet winter unserved demand. 28. Following the priority phase of rehabilitation of Toktogul HEPP, rehabilitation should be done on a turbine and generator unit basis. Each unit with all its auxiliary systems should be refurbished and rehabilitated. The mechanical components (such as the turbine runner and wicket gate) should be replaced by state-of-the art equipment to increase efficiency, output, and enhance the range of operation. The entire control and protection systems and the supervision, control, and data acquisition system should be replaced to optimize operation of the power plant and the whole Naryn cascade. B. Economic and Financial 29. Rehabilitation of Toktogul HEPP has been identified as the least-cost solution for reliable power supply to the country and the CAPS. Toktogul HEPP also provides frequency regulation services for the regional transmission grid without any equivalent alternatives in the country. 30. The economic internal rate of return is calculated at 21.3%, which compares favorably with the 12% opportunity cost of capital. 10 The project s economic viability takes into account streams of costs and benefits resulting from the rehabilitation of Toktogul HEPP and operation over the project s life. The incremental benefits come from avoided outages and major incidents and associated repair costs, and reduced energy import. Regional economic benefits are not included in the economic internal rate of return calculations since they accrue to countries other than the Kyrgyz Republic. 31. The financial internal rate of return is calculated at 12.3%, which compares favorably with the weighted average cost of capital (1.1%). Financial viability was gauged by comparing the revenue and cost streams of scenarios with and without the project. The results of a sensitivity analysis support the project s robust economic and financial viability even under unfavorable circumstances. 32. EPP has difficulty in financial planning and budgeting because of insufficient control over its revenue. EPP s revenue is primarily dependent on the tariff set by the regulator (a division of the MOE) and the amount and timing of revenue distribution among the four distribution companies, the National Electric Grid of Kyrgyzstan, and EPP. The MOE determines revenue distribution based on the financial liquidity of sector participants. EPP s revenue is suppressed if system losses increase and tariff collection decreases. Increased revenue predictability through a more transparent mechanism, together with a higher tariff, will facilitate EPP s proper operation and investment required to ensure energy security and financial sustainability. The KESC to be established under the project will ensure predictable distribution of sector revenues. C. Governance 33. Improving sector governance is a high priority of the government and of development partners. The project will support this aim through public disclosure by KESC of commercial losses and sector funds flow and through public disclosure of government sector policies and 10 Financial and Economic Analysis (accessible from the list of linked documents in Appendix 2).

12 8 reforms via the public information program. The project is coordinated with related governance initiatives by German development cooperation through KfW (distribution metering project), the United States Agency for International Development (management improvement of EPP), and the World Bank (proposed regulation and transparency initiative). 34. A financial management assessment, including a risk management assessment, was prepared in accordance with ADB guidelines. Similar to the country s weak public financial management, EPP s financial management capabilities are weak. Internal control is lacking, and adherence to accounting standards, disclosure, and auditing requirement is insufficient. A procurement capacity assessment was also conducted, which found that procedures are not followed and capacity is weak. Building up financial management capabilities and effective internal control and auditing, and improving procurement capacity and procedures, is critical to improving corporate performance. This is being addressed under the Regional Energy Security, Efficiency and Trade Project of the United States Agency for International Development. 35. To bolster the corporate and financial management capacities of EPP and to ensure governance in project-related activities, the project will include the following measures: (i) (ii) (iii) (iv) strengthening the existing PIU and maintaining separate project accounts, recruiting an international consulting firm to provide assistance in project implementation, establishing a direct payment procedure and/or commitment procedure for disbursements to contractors and consultants, and auditing project and corporate accounts annually in accordance with international standards by an independent auditor acceptable to ADB. 36. ADB s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and EPP. The specific policy requirements and supplementary measures are described in the PAM. D. Poverty and Social 37. The public will benefit from a transparent, accountable, and efficient power sector. Since the poor are the first to be cut off from supply during winter power shortages, system loss reduction and stronger supply reliability will particularly benefit the poor and socially excluded. During power cuts, the poor are disproportionally affected as they must rely on more expensive nonelectric energy sources. 38. The project does not entail impacts on affordability or operational employment opportunities. During construction, the turnkey contractor will be required to ensure equal opportunities for all social groups, equal pay for equal work regardless of gender, and prohibition of child labor. The contractor will also be required to undertake HIV/AIDS awareness activities with imported workers. E. Safeguards 39. The project is classified environment category B under ADB s Safeguard Policy Statement (2009). An initial environmental examination (IEE), including an environmental management plan (EMP), was prepared and the final version was disclosed on 14 May 2012 in accordance with ADB s public disclosure requirements. Public consultation was carried out and

13 9 the records have been included in the IEE. The PIU and the implementation consultant will update the IEE based on the detailed design by the turnkey contractor. 40. The main environmental impacts of the project include (i) occupational health and safety at the project site, (ii) management of the used oil and grease wastes, (iii) disposal of scrap metal and other solid waste, and (iv) proper handing and monitoring of circuit breakers. The EMP specifies adequate mitigation measures and monitoring plans to cover these impacts. 41. The PIU will be responsible for EMP implementation, with assistance from the implementation consultant and environmental specialists from EPP. Environmental monitoring will be performed by the implementation consultant. Monitoring results will be included in the project quarterly progress reports and semiannual environmental reports. 42. The cost for implementing the EMP will be covered by the loan and the grant. The costs of mitigation measures will be included in the turnkey contract, and the cost for environmental monitoring will be included in the consulting services of the project implementation consultant. 43. The project is classified category C for both involuntary resettlement and indigenous peoples under ADB s Safeguard Policy Statement. The project investment will be implemented in the existing Toktogul HEPP where land acquisition and resettlement impacts are not envisaged. The project is not expected to affect indigenous peoples as defined under ADB s Safeguard Policy Statement. The project is not expected to affect indigenous peoples as defined under ADB s Safeguard Policy Statement. F. Risks and Mitigating Measures 44. Major risks and mitigating measures are summarized in Table 4. The overall assessment is that risks have been identified and mitigated and that the integrated benefits and impacts are expected to outweigh the costs. Table 4: Summary of Risks and Mitigating Measures Risks The Government of the Kyrgyz Republic does not implement tariff reforms. CAPS ceases to operate and export markets collapse. Failure of dams on the Naryn cascade Procurement delays and poor implementation quality due to weak project management capacity Rehabilitation measures of Toktogul HEPP are insufficient. Retail and wholesale metering projects are delayed or cancelled. Reduction in commercial losses does not occur and distribution of sector revenues remains arbitrary and nontransparent. Weak internal financial control of open joint-stock company Electric Power Plants. Mitigating Measures Public acceptance of tariff reforms increases after the public information program is implemented. Regional cooperation and trade is supported by the Central Asia Regional Economic Cooperation. Dam integrity assessed by dam safety assessment study and priority remedial measures are identified and addressed. International consulting firm is recruited to assist in project implementation. Due diligence on identifying priority measures has been conducted. Wholesale metering project is being implemented under ADB loan. Completion of retail metering is included as a loan covenant. KESC will be established, increasing transparency, assisting in loss reduction through loss identification, and managing funds distribution. Requirement for external audits to international standard ADB = Asian Development Bank, CAPS = Central Asian power system HEPP = hydroelectric power plant, KESC = Kyrgyz electricity settlement center. Source: Asian Development Bank.

14 10 IV. ASSURANCES AND CONDITIONS 45. The government and EPP have assured ADB that implementation of the project shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and loan documents. 46. The government and EPP have agreed with ADB on certain covenants for the project which are set forth in the financing agreement and project agreement. V. RECOMMENDATION 47. I am satisfied that the proposed loan and the proposed grant would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve (i) (ii) the loan in various currencies equivalent to SDR9,703,000 to the Kyrgyz Republic for the Power Sector Rehabilitation Project, from ADB s Special Funds resources, with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; for a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft financing and project agreements presented to the Board; and the grant not exceeding $40,000,000 to the Kyrgyz Republic from ADB s Special Funds resources, for the Power Sector Rehabilitation Project, on terms and conditions that are substantially in accordance with those set forth in the draft financing and project agreements presented to the Board. Haruhiko Kuroda President 21 May 2012

15 Appendix 1 11 DESIGN AND MONITORING FRAMEWORK Design Summary Impact Increased reliability of national and regional power systems Performance Targets and Indicators with Baselines 10-year average of net exports by 2019 will be maintained at average of 2,000 GWh/year Domestic supply increased to 8,500 GWh in 2019 from 6,100 GWh in 2010 Data Sources and Reporting Mechanisms Annual report by the Central Asian Power System Coordinated Dispatch Center KESC publications and website on electricity production, exports, and imports Central Asia Regional Economic Cooperation sector reports Assumptions and Risks Assumptions Continued demand in export markets for summer electricity Commercial losses reduced to 10% of net supply Revenues from exports and frequency regulation support winter fuel imports Risk Reduction in exports caused by reduced water volume and/or lack of regional cooperation Outcome Improved operational performance of the Kyrgyz Republic power sector % of time Toktogul HEPP is available to operate reaches 90% in 2017 against 80% in 2010 Commercial losses reduce from 24% in 2010 to 10% in 2016 KESC publications and website Operation reports of Toktogul HEPP Financial statements of distribution companies, NEGK, and Electric Power Plants open joint-stock company Assumption ADB wholesale and KfW retail metering projects are implemented. Risks Tariffs are not sufficiently increased. Failure of other HEPPs and combined heat and power plants Outputs 1. Rehabilitation of Toktogul HEPP Toktogul HEPP rehabilitated according to specifications by 2016 Project completion report and commissioning certificate Assumption Priority rehabilitation measures in Toktogul HEPP have been identified. Risk Need for additional rehabilitation is identified during execution 2. Establishment of electricity settlement center KESC publishes data on electricity flows by 2014 and carries out settlement operations by KESC website Assumption The government remains committed to establishing KESC. Risk Delay in obtaining legislative reforms 3. Dam safety assessment Dam safety assessment report is approved by MOE by 2014 Dam safety assessment report Assumption Data are made available to the consultant. Risk Related climate impact study is delayed.

16 12 Appendix 1 Design Summary 4. Public information program Activities with Milestones Performance Targets and Indicators with Baselines Increased public awareness on sector issues as demonstrated by one public consumer consultation, three Kyrgyz Republic newspaper articles, and two television reports in 2013 and 2014 Data Sources and Reporting Mechanisms Published newspaper articles Pamphlets distributed Television coverage 1. Rehabilitation of Toktogul HEPP Activity Scheduled Start Scheduled Finish 1.1 ADB approves the 21 May June 2012 project 1.2 Financing agreement 3 July December 2012 becomes effective 1.3 Implementation 5 February December 2016 consultant services 1.4 Procure turnkey 5 February February 2014 contractor to rehabilitate Toktogul HEPP 1.5 Turnkey contractor 5 February December 2016 executes contract 2. Establishment of electricity settlement center Activity Scheduled Start Scheduled Finish 2.1 Review of feasibility study 2.2 Finalize terms of reference 2.3 Recruitment of consultant 2.4 Establishment of settlement center 2.5 Handover to KESC national staff 1 March September October February February August September February February June 2016 Assumptions and Risks Assumption The government remains committed to open dialogue with the public. Risk The government wishes to restrict data on required level of tariff increase. Inputs ADB loan (ADF) $15.0 million ADB grant (ADF) $40.0 million Government $7.0 million ADB: $55 million Items Toktogul rehabilitation ($40 million) Consultants ($9.5 million) Contingencies ($5.5million) Government: $7 million Item Taxes and Duties ($6 million) Interest during construction ($1million) 3. Dam safety assessment Activity Scheduled Start Scheduled Finish 3.1 Preparation of terms 1 April July 2012 of reference 3.2 Recruitment of 1 August February 2013 consultants 3.3 Dam safety 6 February February 2016 assessment 4. Public Information Program Activity Scheduled Start Scheduled Finish 4.1 Implement public 1 September September 2014 information program ADB = Asian Development Bank, ADF = Asian Development Fund, GWh = gigawatt-hour, HEPP = hydroelectric power plant, KESC = Kyrgyz electricity settlement center, MOE = Ministry of Energy and Industry, NEGK = National Electric Grid of Kyrgyzstan Source: Asian Development Bank.

17 Appendix Financing Agreement 2. Project Agreement LIST OF LINKED DOCUMENTS 3. Sector Assessment (Summary): Energy 4. Project Administration Manual 5. Contribution to the ADB Results Framework 6. Development Coordination 7. Economic and Financial Analysis 8. Country Economic Indicators 9. Summary Poverty Reduction and Social Strategy 10. Initial Environmental Examination 11. Risk Assessment and Risk Management Plan Supplementary Documents 12. Financial Management Assessment 13. Financial Performance of Open Joint-Stock Company Electric Power Plants 14. Project Technical Description