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  • 1. Kyrgyzstan’s Energy Sector: A Poverty and Social Impact Assessment Commissioned by UNDP’s Regional Bureau for Europe and CIS Draft for comments, not citation.April 2011Authors: Rafkat Hasanov, Kemal IzmailovEditor: Ben Slay
  • 2. TABLE OF CONTENTSList of acronyms ............................................................................................................................... 3List of figures and tables ................................................................................................................... 5Executive summary........................................................................................................................... 7I Economy and poverty ..................................................................................................................... 9 Recent economic trends ................................................................................................................ 9 Poverty trends ............................................................................................................................. 10II Kyrgyzstan’s energy sector.......................................................................................................... 15 Electricity ................................................................................................................................... 16 Thermal power ............................................................................................................................ 24 Gas ............................................................................................................................................. 27 Coal ............................................................................................................................................ 29 Decentralized renewables ............................................................................................................ 32 Energy tariffs and costs ............................................................................................................... 34 Legal and regulatory framework.................................................................................................. 39 Policy reform to date ................................................................................................................... 40 Energy sector development: future scenarios ............................................................................... 42 Conclusions ................................................................................................................................ 46III. Poverty and household access to energy .................................................................................... 48 Data issues .................................................................................................................................. 48 Household energy expenditures ................................................................................................... 49 Conclusions ................................................................................................................................ 55IV. Social protection and the energy sector ..................................................................................... 56 Overview .................................................................................................................................... 56 Social policy instruments ............................................................................................................ 57 Effectiveness of social protection ................................................................................................ 60 Social protection and the energy sector ....................................................................................... 62Conclusions .................................................................................................................................... 64Bibliography ................................................................................................................................... 71 2
  • 3. List of AcronymsADB Asian Development BankGDP Gross Domestic ProductSC State CompanyOJSC Open Joint Stock CompanyQFD Quasi Fiscal DeficitCAIPS Integrated Power System of Central AsiaUE Utility EnterpriseIDA International Development AssociationCAUPS Central Asian United Power SystemFEC Fuel and Energy ComplexCHPP Heating and Power PlantsHPP Hydropower PlantsAIMSCEM Automated Information and Measurement System for Commercial Electricity MeteringJEA Joint Economic AssessmentJICA Japanese Agency of International CooperationRES Renewable Energy SourcesFES Fuel and Energy SectorNEP National Energy ProgramEITI Extractive Industries Transparency InitiativeFESTI Transparency Initiative in the Fuel and Energy Sector of the Kyrgyz RepublicACGRKS Automatic Commercial Gas Record Keeping SystemWB World BankHVTL High-voltage Transmission LineNGO Non-Governmental OrganizationUSAID United States Agency for International DevelopmentIDB Islamic Development BankKR Kyrgyz RepublicMW Minimum WageGMCL Guaranteed Minimum Consumption LevelGMI Guaranteed Minimum IncomeLSGs Local Self-GovernmentsMSBs Monthly Social BenefitsPFMB Monthly Benefit to Poor Families with ChildrenUMB Unified Monthly BenefitAMFI Average Monthly Per Capita Family IncomeGPW Great Patriotic WarCAPP Chernobyl Atomic Power PlantPESAC Public Enterprise Structural Adjustment CreditSPD Social Protection BodiesMLSD Ministry of Level and Social DevelopmentUSB Unified Social BenefitMSEC Medical-Social Experts CommissionHIV Human Immunodeficiency VirusAIDS Acquired Immunodeficiency SyndromeSSEA The State Agency for Social Support under the KRGDSP&HA The Department of Social Protection and Humanitarian AidRSPDs Rayon Social Protection DepartmentsTSPDs Town Social Protection Departments 3
  • 4. LSGs Local Self-GovernmentsA/O The Aiyl OkmotuSBs State BenefitsHUS&E Housing and Utility Services and Energy 4
  • 5. List of Figures and TablesChapter I Economy and PovertyFigures:Figure 1. Annual GDP Growth Rates (2002-2010)Figure 2. Poverty Trends in Kyrgyzstan (2000-2009)Figure 3. Poverty Rates: Actual and PredictedFigure 4. Changes in Key Indicators Affecting Household Incomes (2005=1)Figure 5. Kyrgyzstan: Increases in External Migration, Remittance Inflows, in 2010Tables:Table 1. Macroeconomic Indicators, Kyrgyzstan (2007-2010)Table 2. Fiscal, Social Policy Trends in Kyrgyzstan (2008-2011)Chapter II Kyrgyzstan’s energy sectorFigures:Figure 6. Trends in Energy Consumption (oil equivalent)Figure 7. Consumption of Energy Goods (2005=100)Figure 8. Effective Household Electricity Tariffs in the Former Soviet Republics (2007)Figure 9. Trends in Energy Production, Consumption (2007-2010)Figure 10. Household Energy Price Inflation Trends (2007-2010)Figure 11. Electricity Production, Consumption, Losses, and Exports (in million kWh, 2005-2010)Figure 12. Financial Results for Power Generation, Distribution Companies (in million som, 2006-2009)Figure 13. Collection Rates in the Electricity Sector (2007-2009)Figure 14. Electricity Sector Quasi-Fiscal Deficit (2002-2009Figure 15. Trends in Electricity Generation, and in Water Volumes at the Toktogul Hydropower Reservoir(2008-2010)Figure 16. Thermal Power Production, Consumption, Losses, and Exports (in thousand gigacalories, 2006-2010)Figure 17. Financial Results for Thermal Power Companies (in million som, 2006-2009)Figure 18. Gas Supply, Consumption, and Losses (in thousand meters3, 2006-2010)Figure 19. Gas Sector Financials (2007-2009, in million som)Figure 20. Gas, Consumer Price Trends (2007-2010)Figure 21. Fixed Assets (by book value) in the Gas Sector (2006-2009, in million soms)Figure 22. Trends in Fixed Asset Depreciation, Cash Collections (2006-2009)Figure 23. Coal Production, Consumption, Imports and Exports (in thousand tons, 2006-2010)Figure 24. Financial Results for Coal Companies (in million som, 2006-2009)Figure 25. Actual Versus Planned Household Electricity tariffs (per kWh, 2006-2012)Figure 26. Cost Share Trends in the Electric Power Sector (2006-2009)Figure 27. Actual Versus Planned Household Thermal Power Tariffs (per gigacal., 2007-2012)Figure 28. Cost Share Trends in the Thermal Power Sector (2006-2009)Figure 29. Shares of Material Costs in the Thermal Power Sector (2006-2009)Tables:Table 3. Main Energy Indicators of the Central Asian Countries in 2008Table 4. Energy Sector Privatization ChronologyTable 5. End use of Electricity Generated in Kyrgyzstan (2005-2010)Table 6. Addition tariff for renewables to the maximum tariffTable 7. Full cost of electricity generation in renewable small power plantsTable 8. Prices for 1 kWh electricity for 4 groups of selected plants 5
  • 6. Table 9. Differences between Planned and Actual Costs of Larger Power Enterprises (2009-2010)Maps:Map 1. Existing and Planned Hydropower Plants and High-Voltage Transmission LinesChapter III. Poverty and household access to energyFigures:Figure 30. Trends in Household Expenditures, Energy Consumption (2007-2009)Figure 31. Share of Household Spending Absorbed by Energy Expenditures (2006-2010)Figure 32. Household Energy Expenditures by Various Energy Sources (2006-2010)Figure 33. Household Expenditures on Energy, by Deciles (2006-2010)Figure 34. Shares of Household Energy Expenditures Devoted to Various Energy Sources (by HouseholdDeciles, 2009)Figure 35. Shares of Household Energy Expenditures Devoted to Various Energy Sources (by householdlocation, 2009)Figure 36. Share of Households Reporting Interruptions in Electricity Service (2006-2009)Figure 37. Share of Households (by Income Decile) Experiencing Weekly (or More Frequent) Interruptions inElectricity Service (2008-2009)Figure 38. Share of Households (by Location) Experiencing Weekly (or More Frequent) Interruptions inElectricity Service (2008-2009)Tables:Table 10. Monthly Per-Capita Household Expenditures (in som, 2006-2010)Table 11. Average Per-Capita Monthly Energy Expenditures, by decile group (in som)Chapter IV. Social Protection and the Energy SectorFigures:Figure 39. Ratio of Monthly Pension, Social Assistance Benefits to the National Monthly SubsistenceMinimum (2007-2009)Figure 40. Trends in the Distribution of Social Benefits BY Household Deciles (2006-2010)Figure 41. Trends in the Distribution of Pension Benefits by Household Deciles (2008-2010)Figure 42. Trends in the Distribution of Categorical Benefits by Household Deciles (2008-2010)Figure 43. Trends in the Distribution of PFMB benefits by Household Deciles (2008-2010)Figure 44. Trends in the Distribution of MSB benefits by Household Deciles (2008-2010)Tables:Table 12. Kyrgyzstan’s Social Protection Instruments: Efficiency and Effectiveness (2005 data) 6
  • 7. Executive summary While the uprising that drove President Kurmanbek Bakiyev from power in April 2010 hadmany causes, energy issues were among the most important. Dramatic increases in power and heattariffs introduced in January of that year, combined with two winters of electricity rationing, years ofrapid growth in household energy costs, and growing concerns about corruption and mismanagementin the energy sector, were key drivers of tensions in Kyrgyzstan. This study explores the socio-economic background to these events, and their aftermath, by assessing the poverty and socialimplications of tariff increases and other policy reforms now being introduced (or considered) inKyrgyzstan’s energy sector. These trends are playing out at a difficult time. While Kyrgyzstan was one of many countriesthat experienced slowing economic growth in 2009 (with the impact of the global financial crisis), itis one of the few to have reported a recession in 2010. The 1.4 percent decline in GDP officiallyreported for last year was a direct result of the political upheavals Kyrgyzstan experienced duringApril-June last year. While economic growth helped cut Kyrgyzstan’s income poverty rate in half(from 62.6 to 31.7 percent) during 2000-2008, the poverty rate stabilized in 2009, even though 3percent GDP growth was reported. Although the 2010 poverty data have not yet been released, therecession could have raised the national poverty rate for the first time in a decade. Even before thedevelopments of 2010, however, winter energy insecurities were afflicting significant numbers ofhouseholds in Kyrgyzstan, particularly in urban areas. This reflects the impact of the severe winter of2007-2008 and the subsequent drought of 2008 that reduced water levels in hydropower reservoirsalong the Naryn cascade, the depreciation of the country’s electric and thermal power infrastructure,and the absence of decisive market reforms in the energy sector. This study analyzes recent trends in the electricity, thermal, gas, and coal sectors, as well asprospects for decentralized renewables in Kyrgyzstan. It focuses in particular on the commercial andregulatory characteristics limiting the attainment of full cost recovery tariffs, as well as on prospectsfor significant short- and medium-term improvements in management within these sectors. It notesthat tariffs for electric and thermal power are being pulled in opposite directions by socialacceptability and economic feasibility. Whereas natural gas tariffs depend on the price of importednatural gas, the state sets power and heat tariffs. In so doing, the state is guided primarily by socialconcerns—leaving many energy companies unprofitable. These problems are exacerbated by the monopolistic structures found throughout the energysector (with the partial exception of coal). The absence of competition and market stimuli createspreconditions for inefficiency and corruption. These problems are aggravated by high levels of fixedasset depreciation, particularly in the power and gas sectors. Modernizing energy production,transmission, and distribution in Kyrgyzstan will require billions of dollars in new investments—which may not be forthcoming at current tariff levels, and with the current regulatory environment.Despite having large coal reserves and reporting large increases in coal production during 2006-2009,imports continue to cover between half and two thirds of Kyrgyzstan’s coal needs. Likewise, virtuallyall of Kyrgyzstan’s natural gas is imported, from a single supplier (UzbekTransGaz). The government that came to power following the April 2010 events has responded to theseproblems by introducing the Fuel and Energy Sector Transparency Initiative. FESTI represents anattempt to improve management and governance within the sector, by introducing greater measures ofpublic participation and transparency—but without raising tariffs, or further privatizing energy sectorassets, or significantly increasing the role of market forces. Compared to past policies, FESTI is animportant step forward, especially in terms of reducing corruption. But at the same time, by focusingon reducing corruption in and improving the management of state-owned monopolies—rather thantransforming them into market actors capable of modernizing the energy sector—FESTI is also amodest step forward. 7
  • 8. Official household survey data (stretching into 2010) indicate that the energy crisis that beganin the winter of 2008 has decreased poor households’ access to electricity and other energy productsand services. These households have also been affected more by interruptions in electricity supplies.Prior to 2010, significant efforts had been invested in reforming Kyrgyzstan’s social protectionsystem, in part to increase its ability to mitigate the impact of higher energy prices and tariffs or poorand vulnerable households. Unfortunately, there is little evidence to indicate that the social protectionsystem provides these households with effective protection against higher energy costs. Instead,household survey data suggest that Kyrgyzstan’s social protection system became more regressiveduring 2008-2009, with growing shares of social benefits paid out to upper-income households. Onthe other hand, these data indicate that households—low-income and otherwise—devote relativelysmall shares of their budgets to energy productions and services. In light of the above, this study makes the following recommendations: The relatively small shares of household budgets devoted to energy expenditures, the smalllikelihood that household electricity tariffs will be increased in the short (and possibly medium) term,and the difficulties in targeting social benefits to poor households—these factors weaken the case formore closely linking social and energy policies. The issue would instead seem to be one of adoptingpolicies to improve the functioning of the energy sector and the social protection system. In thisrespect, important changes would include: • More closely linking the poor family monthly benefit to the guaranteed minimum income, which should itself be more closely linked to the minimum subsistence level; • Means-testing the monthly social benefit and categorical benefits, to reduce their regressive character; and • Considering the reintroduction of lifeline electricity tariffs. Reductions in tariffs for small volumes of household electricity consumption could be offset by higher tariffs for consumption above this level, thereby leaving average tariff levels unchanged. A number of important research questions have been identified in this report. These pertain to: • Improvements in the quality of household survey and production/sales data regarding the energy sector, in order to remove inconsistencies within and between these data sets; • Developing possible scenarios for the future of Kyrgyzstan’s energy sector; • Improving corporate governance in the energy sector; • Identifying appropriate energy saving technologies, and policies and programmes to accelerate their introduction; • Strengthening the role of affordability analyses in regulating energy tariff increases; • Analysis of obstacles to the accelerated development of small hydropower plants and other decentralized renewable energy technologies, with proposed solutions; • Analysis of the costs of electric and thermal power production and tariff setting; and • Analysis of the results of the Fuel and Energy Sector Transparency Initiative. 8
  • 9. I Economy and poverty Recent economic trends In the years between the Russian financial crisis of 1998-1999 and onset of the global 1998 1999economic crisis in 2009, Kyrgyzstan reported average annual GDP growth of around 5 percent. averageHowever, as the data in Figure 1 indicate, this growth was rather unstable, with strong economicexpansions (2000-2001, 2003-2004, 2007-2008) being followed by slowdowns or recessions (2002, 2001, 2003 2008)2005). This growth pattern reflects the impact of a number of internal and external shocks, of both an terneconomic and political nature (e.g., popular uprisings in 2005 and 2010). As a small open economy,Kyrgyzstan is very dependent on other countries—not only for exports and imp countries not imports, but also, andincreasingly, remittances from migrant workers. Whereas remittances were reported at 8 percent ofGDP in 2002, preliminary data indicate that they had risen to 27 percent of GDP in 2010. Figure 1—Annual GDP Growth Rates (2002-2010) 1 8.5% 7.6% 7.0% 7.0% 5.4% 5.3% 3.1% 2.9% 0.0% -0.2% -1.4% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Source: State Statistical Committee. Difficulties in the business and investment climate, and other market distortions, are keyreasons for this slow growth.1 As 2010 International Financial Corporation report found that, whilerecent reforms had improved the investment climate, these improvements, and their effects, were vedrather moderate.2 These difficulties limit inflows of foreign capital, technology, and know-how, knowespecially outside of the non-ferrous metallurgical sector, thereby inhibiting the broa ferrous broader industrial andagricultural modernization that Kyrgyzstan needs. High rates of unemployment and under under-employment (particularly in subsistence agriculture, which is the economy’s largest sector in terms ofemployment) and the inability of growing sectors to absorb “redundant” labor from agriculture and sectorselsewhere, has resulted into growing internal and external migration. The global crisis had a significant negative impact on Kyrgyzstan. While the low degree ofintegration with the international economy protected its financial system, GDP growth in 2009dropped to under 3 percent, on the back of a 15 percent reported decline in remittances (see Table 1).1 While Kyrgyzstan moved up in the World Bank “Doing business” ranking during this time, little progress was registeredin the global competiveness index, or in Transparency Internationals Corruption Perceptions Index.2 “Investment Climate in the Kyrgyz Republic as Seen by Small and Medium Enterprises”, IFC, 2010, p.10 Republic 9
  • 10. Soaring food prices, which rose by a third in 2008, also contributed to the hardships experienced byvulnerable families. GDP end use data point to a 14 percent decline in personal consumption in 2009. Table 1—Macroeconomic Indicators, Kyrgyzstan (2007-2010) 2007 2008 2009 2010 GDP growth rates 8.5% 8.4% 2.9% -1.4% Inflation rates (annual averages): - Consumer prices 10% 25% 7% 8% - Foodstuffs 15% 33% 2% 7% - Electricity, gas, heat, other fuels 8% 30% 22% 14% Remittances (millions) $688 $1,138 $967 $1,245 Remittances (% to GDP) 18% 22% 21% 27% Change in remittances 60% 65% -15% 29%Source: National Statistical Committee data, UNDP calculations. As in many other countries, the government of Kyrgyzstan responded to the crisis byloosening its fiscal and social policy purse strings. As the IMF data in Table 2 below show, the shareof GDP devoted to public expenditures rose from 26.2 percent in 2008 to a projected 40.5 percent in2010. Rising social expenditures—particularly pensions—accounted for almost half of this increase.While budget support and other grants from donors soared during this time (from 2 to 11 percent ofGDP), so did Kyrgyzstan’s fiscal deficit and public debt. The increases in social protection spendingthat cushioned the blows from the crisis and then the events of 2010 may not, therefore, besustainable. Table 2—Fiscal, social policy trends in Kyrgyzstan (2008-2011) Share of GDP devoted to: 2008 2009 2010 2011 Budget revenues 25.9% 28.5% 29.6% 30.0% - Grants 1.9% 5.3% 11.0% 1.9% Budget expenditures 26.2% 36.6% 40.5% 34.2% - Social fund expenditures 5.0% 6.8% 9.4% 9.0% - Pensions 4.4% 6.1% 9.0% 8.6% Budget deficit -0.3% -8.1% -10.9% -8.2% Public debt 48.5% 59.4% 70.0% 68.2%Source: IMF country report, Kyrgyzstan (October 2010). While GDP end use data are not yet available for 2010, the large increase in the budget deficit,social expenditures, and remittances suggest that final consumption may have increased last year. For2011, the government has projected 6.3 percent GDP growth. Poverty trends As the data in Figure 2 below indicate, Kyrgyzstan’s official income poverty rate droppedfrom 62.6 percent in 2000 to 31.7 percent in 2008, before bottoming out in 2009. Kyrgyzstan’snational Millennium Development Goals Progress Report 20103 argues that GDP growth and final3 The Kyrgyz Republic, the Second Progress Report on the Millennium Development Goals, Second Edition, (Revisedand Amended), Bishkek 2010 10
  • 11. consumption growth have been main factors of the poverty reduction. Survey on impact of the global financial crisis on labor migration from Kyrgyzstan to Russia4 says that increase in private consumption (gross consumption of households) which is the most important component of G GDP, is positively correlated with the flow of migrant remittances (see Box 1). Likewise, the 15 percent decline in remittances registered in 2009 corresponds to a 15 percent decline in individual consumption reported in that year. Figure 2—Poverty Trends in Kyrgyzstan (2000-2009) 68% National 63% 62% 60% Rural 56% 57% 56% 53% 55% 51% Urban 50% 45% 46% 48% 45% 43% 42% 40% 36% 37% 37% 35% 30% 32% 32% 28% 27% 23% 23% 22% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: State Statistical Committee. An econometric analysis of the relationship between the national poverty rate, GDP growth, and trends in social spending and remittances is presented in Box 1 and in Figures 3 and 4 below. Box 1—Forecasting the Poverty Rate: Results of Econometric Exercise ForecastingChanges of poverty rates can be forecast depending on changes in GDP, remittances, and social transfers,using the below equation: Pov=-1.77*GDP - 0.35*Soc - 0.14*Rem + 10.69 (-2.59) (- -3.46) (-2.82) – t-statistics Where Pov = change in the poverty rate GDP = real GDP per capita growth rate Soc = real growth in social protection expenditures Rem = Lagged remittance growth rateThe data used for this analysis come from Kyrgyzstan’s balance of payments, and from the official snational accounts data. 4 Irina Lukashova, Irina Makenbaeva, “Impact of the global financial crisis on labour migration from Kyrgyzstan to Russia. Qualitative overview and quantitative survey”, CASE Kyrgyzstan, OSCE. Centre in Bishkek, ACTED, European Commission. Bishkek, 2009, p. 55. 11
  • 12. While there are some drawbacks to this model, its specification is reasonable. It avoids non-stationarityissues and the adjusted R-squared = 0.59.The following figure 3 illustrates the predictive power of the model.Figure 3—Poverty rates: actual and predicted 30 25 20 15 10 5 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 -5 -10 -15 actual data results of modeling This model indicates that the national poverty rate in 2010 may have fallen, as the effects of the moderate decline in GDP may have been offset by increases in social spending and the rebound in remittances. Figure 4—Changes in key indicators affecting household incomes (2005 = 1) 2,5 4,5 4 2 3,5 GDP level (2005=1) 3 1,5 2,5 Social protection 2 level (2005=1) 1 1,5 Remittances level (2005=1) 0,5 1 0,5 0 0 2005 2006 2007 2008 2009 2010 Notwithstanding the progress reported during 2001-2010, Kyrgyzstan continues to face significant poverty reduction challenges. Recent years have seen poverty rates rising in Issyk-Kul and Chui oblasts, and in Bishkek. The average share of remittances in household incomes in the southern Osh, Jalalabad, and Batken oblasts exceeds 20 percent, while in northern regions this indicator does not exceed 1 percent of household. This makes living standards in the southern regions—which were 12
  • 13. the flashpoints for the ethnic tensions in May-June 2010—particularly vulnerable to decline in May particularly declinesremittance inflows. Seen in this context, the stunning increases in external migration outflows fromKyrgyzstan’s southern regions officially reported for 2010 (see Figure 5), combined with the record ),high remittance inflows reported for the country as a whole, may be important factors for social asstability. Figure 5—Kyrgyzstan: Increases in external migration, remittance inflows in 2010 Kyrgyzstan: nflows,Relative to 2009. State Statistical Committee data, UNDP calculations. Other important characteristics of poverty in Kyrgyzstan include the following: Significant differences in regional poverty rates. In Bishkek, the extreme poverty rate in2008 was 2.1 percent, while in Naryn and Issyk Kul oblasts, this rate was 11.6 and 16.9 percent, Issyk-Kul 1respectively. Whereas the overall poverty rate in Bishkek in 2008 was 15.2 percent, in most otherregions it exceeded 40 percent. Much of the pre-2009 progress in poverty reduction was due to pre 2009developments in Bishkek and Chui oblast. Feminization of poverty. In 2008 women accounted for the vast majority of pensioners (67 ion omenpercent of those over retirement age), and of employees in the education and health sectors (76 and 79percent, respectively). The average salary in these “female” sectors, and the average retirementpension for women, are below the subsistence minimum. Women working in these sectors receivelower salaries than do men working in these sectors: in 2008 a woman’s average salary in theeducation and health sectors is only 78 and 62 percent, respective, of a man’s average salary in thesesectors.5 Poverty is concentrated in rural areas. Almost three-quarters of Kyrgyzstan poor live in quarters Kyrgyzstan’srural areas; in 2009 37.1 percent of the rural population lives below the national poverty line(compared to 21.9 percent of the urban population). Children, people living in large households withmany children, in households headed by women, in rural areas, and living by themselves face the women,5 “Women and men of the Kyrgyz Republic: A collection of gender-disaggregated statistics,” Bishkek, 2009, pp. 46, 87, disaggregated115. 13
  • 14. greatest poverty risks. This is mainly due to limited opportunities for well paid employment.6 Accessto water and communal services is also much lower in rural areas, due in part to the difficulties ofdelivering these services in mountainous regions. In urban areas, by contrast, households are muchmore likely to have access to central heating, gas, and hot water, improved water and sanitation,fixed-line telecommunications, and the internet. However, at least a third of the urban non-poor donot have access to at least one of these services. Limited access to these services is a particular burdenfor women in poor households, many of whom can not afford to purchase labor-saving householdappliances. Child poverty rates are high. According to the findings of the integrated household samplesurvey conducted in 2006, 48.5 percent of children under 18 lived in poverty and 12 percent of theseare extremely poor. The number of underweight children is still high and in 2009 was 4.6 percent.7 Limited opportunities for the poor to create their own capital. Poor households inKyrgyzstan generally do not have access to the banking system or financial services. In rural areas thepoor generally have smaller plots of land than those who are better-off and due to the fact that theland market is not developed they are not able to use their lands as collateral.6 The need to make a thorough analysis of the position of rural women was one of the key recommendations of the UNCommittee on the Elimination of Discrimination Against Women in the third periodic report of the Kyrgyz Republic oncompliance with the UN Convention on the Elimination of all Forms of Discrimination Against Women, articles 41-42.7 Source: NSC, http://212.42.101.124:1041/stat1.kg/index.php?option=com_content&task=view&id=45&Itemid=100 14
  • 15. II Kyrgyzstan’s energy sector Prior to the energy crisis that began in early 2008, Kyrgyzstan’s energy sector suffered frombenign neglect. Market reforms had largely ended in the early years of the decade; state-owned statemonopolies continued to dominate the sector; attempts to attract private capital and foreign privateinvestment had met with limited success; and effective electricity tariffs were among the lowest in theregion (see Figure 6). The focus was instead on the state mobilization for the construction of new ).large hydro-power stations (such as Kambarata-1 and -2 on the Naryn cascade), and adding to Kambarata 2electricity transmission capacity (e.g., via the construction of the Datka-Kemin high voltage power Datka Keminline). Figure 6—Effective Household Electricity Tariffs in the Former Soviet Republics (2007) $0.09 $0.07 Nominal tariff (per kWh) $0.06 times collection rate $0.05 $0.04 $0.04 $0.04 $0.02 $0.01 $0.01Source: EBRD data, UNDP calculations. The energy crisis that began in 2008 was something of a wakeup call. As a result of coldtemperatures and low water levels in the hydropower stations along the Naryn cascade, electricityblackouts increased abruptly, while sharply higher import prices made gas unaffordable for manyhouseholds and businesses. These trends are apparent in Figure 7, which show that electricity ,generation and consumption (generation less net exports and losses) dropped by some 2 and 13 25percent, respectively, during 2007-2010. Gas consumption dropped by almost two thirds, as prices of 2007 2010.gas imported from Uzbekistan rose from $100 to $240 per 1000 cubic meters during 2007 2007-2009.Faced with growing shortages of centrally supplied electricity and unaffordable gas, many electricityhouseholds, businesses, and public institutions switched to coal-fired boilers. Domestic coal coal firedproduction rose some 41 percent during 2007-2010; apparent consumption (production less net 2007 2010;exports) rose 57 percent. In addition to encouraging the “dash to coal”, the government responded to these iondevelopments by permitting energy prices and tariffs to rise at rates well above consumer priceinflation (see Figure 8). It introduced a programme of anti-crisis measures (including rotating ). anti crisisblackouts and brownouts), raised electricity collection rates, reduced electricity losses,8 and8 Commercial and technical losses (in kWh), as well as accounts payable (in som) in the electricity sector declined during2006-2009, while the ratio of accounts receivable to gross income in the electricity sector also fell. 2009, 15
  • 16. accelerated the development of small hydropower plants. The government also tried to reinvigorateprivatization processes in the energy sector by putting stakes in six state-owned energy companies upfor sale. Last but not least, in January 2010 it doubled household electricity tariffs (from $0.017 to$0.034 per kWh), and quadrupled household thermal power tariffs (from $5.9 to $23.7 per gcal).These tariff hikes fed into the growing popular dissatisfaction with President Kurmanbek Bakiyev,who was driven from power by unrest and demonstrations in April 2010. Figure 7—Trends in energy production, consumption (2007-2010) 160 Electricity generation 140 Electricity consumption* 120 Thermal generation 100 Thermal consumption** 80 60 Coal production 40 Coal consumption*** 20 Gas supply^ 0 Gas consumption~ 2007 2008 2009 2010Source: State Statistical Committee data, UNDP calculations* Generation less exports and losses.** Generation less losses.*** Production less net exports.^ Imports plus domestic production.~ Gas supply less losses. Following Bakiyev’s departure, these large tariff hikes were scaled back or rescinded,lessening the impact on vulnerable households. Allegations of mismanagement and corruption led tothe cancellation of the energy sector privatizations (see Box 2), as well as to the introduction of theFuel and Energy Sector Transparency Initiative. Nonetheless, despite this more “social” orientation ofenergy policy, household energy prices in 2010 continued to rise at rates well above consumer priceinflation. Electricity Production, consumption, and losses. The vertically integrated Kyrgyzenergo was dissolved in2001 into a single generation company, a single transmission company, and four distributioncompanies. All these companies are state-owned;9 competitive pressures are weak. Virtually all ofKyrgyzstan’s power generation assets belong to the “Power Plants” company, including 15 largehydropower plants, two combined power and thermal plants, and dozens of small-scale power9 As of 2010, the Ministry of State Property held 80.5 percent equity stakes in “Power Plants” (generation), “Power Grid”(transmission), and in the electricity distribution companies. The Social Fund held another 13.2 percent of the shares inthese companies. 16
  • 17. producers.10 Total power generation capacity is 3,740 megawatts; the large hydropower plantsaccount for 2,950 megawatts, while the combined power and thermal plants have a total capacity of730 megawatts. The state-owned “National Power Grid” company manages the electricitytransmission infrastructure, while four regional distribution companies (“Severelektro”,“Vostokelektro”, “Jalalabatelektro”, and “Oshelektro”) monopolize the supply of power in the areasfor which they are responsible. Box 2—Energy sector privatization chronology11Company Privatization processSeverelektro * A single tender for the privatization of the state-owned stakes in Severelectro, thePower Bishkek Combined Heat and Power Plant, and the Bishkek District HeatingDistribution Distribution Company was initiated in late 2008, with a starting price of $137Company million. The tender was voided due to a lack of bids by the January 2009 deadline. * A second attempt to sell Severelectro separately was voided in July 2009, for the same reason. * A third attempt, without establishing a starting price, succeeded in December 2009, with the Chakan GES generating company announced the winner. Terms of sale included up-front payment of $3 million and capital investments of some $70 million over 10 years. Reportedly, no performance conditions were included in the tendering documents. * Following allegations of corruption and mismanagement and the events of April 2010, the government nationalized Chakan GES.Vostokelektro * Two privatization attempts were declared void for lack of bids. The starting pricePower was set at $41 million.Distribution * The third attempt, without establishing a starting price, succeeded in FebruaryCompany 2010 with the same Chakan GES announced the winner. The terms of sale included payment of about $1.2 million and investments of $30 million over 10 years. * Following allegations of corruption and mismanagement and the events of April 2010, the government nationalized Chakan GES.Oshelektro Power * Two attempts of privatization were voided due to lack of bids. The initial startingDistribution price was set at $42 million.CompanyJalalabadelektro Two attempts of privatization were voided due to lack of bids. The initial startingPower price was set at $27 million.DistributionCompanyBishkek Combined * A single tender for the privatization of the state-owned stakes in Severelectro, theHeat and Power Bishkek Combined Heat and Power Plant, and the Bishkek District HeatingPlant, and the Distribution Company was initiated in late 2008, with a starting price of $137Bishkek District million.Heating * The tender was voided due to a lack of bids by the January 2009 deadline.Distribution * No further attempts have been made.Company The “Power Plants” generation company produces 99 percent of Kyrgyzstan’s electricity. Sincemore than 90 percent of this is generated by hydropower plants on the Naryn cascade with uniformhydrological conditions, market competition in power generation is difficult to imagine for theforeseeable future. Longer term, however, the construction of large coal-fired power plants (such asKara-Keche), expansion of decentralized renewables, increased industrial co-generation, the10 Other power generating companies include Chakan HPP, Koshoi, Kalinin HPP Ltd., and Ark Ltd.11 Adapted from Joint Economic Assessment: Reconciliation, Recovery, and Reconstruction, World Bank, July 2010, p.87. 17
  • 18. introduction of more flexible management of the hydropower plants on the Naryn cascade, and thepossible creation of a regional electricity market, could offer prospects for competition in electricitygeneration. Figure 8—Household energy price inflation trends (2007-2010) Household 2010) 2007 68% 2008 2009 53% 2010 38% 33% 32% 28% 25% 17% 13% 12% 10% 7% 8% 0% 0% 1% Consumer prices Electricity tariffs Gas tariffs Heat tariffsAnnual average increases. Source: State Statistical Committee data, UNDP calculations. Prospects for market competition in electricity transmission are even more constrained, owingto significant associated economies of scale. The state-owned “National Power Grid” company, state ownedwhich now performs this function, seems likely to remain a natural monopoly indefinitely. Figure 9—Electricity production, consumption, losses, and exports (in million kWh, 2005 Electricity 2005-2010) Generation Consumption 14523 14830 14891 Losses Exports 11789 11083 11070 7869 7551 7396 7299 7257 6862 4667 4582 4973 3693 2750 2662 2629 2460 2379 552 1579 1034 2005 2006 2007 2008 2009 2010Source: State Statistical Committee. : Committee In addition, there is no market competition among electricity distribution companies, each ofwhich operates in its own territory and their territories do not overlap. While some 27 private 18
  • 19. wholesalers/small distributors were licensed in 2009 to purchase electricity from “Power Plants” andresell it, these wholesalers typically operate lower-voltage lines, and do not provide most users withan effective alternative to the regional distribution companies. It is possible to imagine competitionamong distribution companies—particularly in urban areas that are located close to the borders of oneof the existing distribution zones, and particularly if the wholesalers are able to expand theiractivities. However, policy since April 2010 has emphasized strengthening state control overdistribution (and other electricity) companies, in order to improve management and reducecorruption. On the one hand, it is not surprising that all the companies produced by Kyrgyzelektro’s 2001unbundling have been included into the state Monopoly Register.12 Their tariffs are therefore subjectto close scrutiny by the Antimonopoly Agency. On the other hand, the structural conditions nowprevailing in the power sector—under which a single state-owned monopoly has been replaced byeight such companies, whose prospects for attracting the private capital needed for modernization arequite uncertain—now seem particularly unfortunate. Table 3—End uses of electricity generated in Kyrgyzstan (2005-2010) 2005 2006 2007 2008 2009 2010 Consumption 49% 51% 53% 64% 66% 62% - Households n.a. n.a. 32% 37% 37% n.a. - Others n.a. n.a. 21% 28% 29% n.a. Losses 33% 32% 31% 31% 25% 24% Exports 18% 17% 16% 5% 9% 14%Source: State Statistical Committee, UNDP calculations. The power sector is characterized by close technological links between production andconsumption; a problem in one link can immediately produce downstream ripple effects. Trends inelectricity generation and use, and in the distribution of electricity generated, across consumption(and for households and other users), exports, and losses, are shown in Figure 9, and in Table 3.These data indicate that electricity losses have declined since 2005 which, along with reductions inthe share of electricity going to exports, has helped to cushion households from the worst of thedecline in electricity generation.13 Losses in Kyrgyzstan nonetheless remain quite high byinternational standards; losses in the 7-10 percent range are considered a “standard benchmark”.14Most (70 percent in 2010) of these losses occur at the distribution stage, due primarily to obsoleteequipment, the absence or malfunctioning of meters, inaccurate metering of consumed electricity, aswell as outright theft. In Kyrgyzstan, neither the generation, transmission, nor distribution companies are responsiblefor cash management: payments from end-users are collected and accumulated in escrow accountsand divided among the companies on the basis of percentages set monthly by the Ministry ofEnergy’s Regulatory Department. Barter and offsets are also used in settlements between sector12 According to Order No. 524 of the State Agency for Anti-Monopoly Regulation, dated 30 December 2009.13 Losses exist in all power systems. Technical losses occur in electricity generation and transmission from the point ofgeneration to the point of final consumption; their size is determined by the distance over which the electricity istransmitted and the quality of transmission equipment. Commercial losses represent the difference between the price(tariff) of electricity supplied to the end user and the payment collected for its consumption.14 Source: Electricity Loss Reduction Strategy for the Kyrgyz Power Sector, USAID, Bishkek, 25 March 2010 (revised 30April 2010), pp. 11, 13. 19
  • 20. entities, as well as between sector entities and end-users. In addition, trading figures covering the end users.same electricity flows reported by different utilities differ from each other.15 Figure 10—Financial results for power generation, distribution companies (in million som, 2006- esults mpanies 2009) Revenues Costs Profit (loss) 13406 11725 12067 11192 9395 9603 8538 8359 179 -208 2006 2007 2008 -533 2009 -1339Source: Finances of Enterprises of the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010; UNDPcalculations. The data include small-scale enterprises. small In light of these complications, power company finances are likewise rather complicated. Ingeneral, these companies show rapid increases in both revenues and costs (in cash-flow terms), with cashcumulative growth in the latter (60 percent) outpacing the former (41 percent) during 2006 2006-2009. (Bycontrast, cumulative growth in the GDP deflator and producer price index during this time was 46 and58 percent, respectively.) As a result, the financial results reported by power sector companiesdeteriorated sharply after 2006 (see Figure 10 harply 10). Available data indicate that power sector companies responded to these trends by trying to companiestighten their finances. For example, accounts payable in this sector declined in absolute terms during2006-2009, despite large increases in costs and revenues. While accounts receivable (more than half 2009,of which are doubtful or unrecoverable debts) in the power sector grew during 2006 2006-2009, relative tosectoral revenues they declined. Households account for about 70 percent of power sector receivables.Collection rates increased during this time (see Figure 11), while the power sector’s quasi 1 quasi-fiscaldeficit continued to fall, dropping from nearly 13 percent of GDP to under 4 percent during 2008-2008 162009 (see Figure 12). These trends are occurring against a backdrop of electricity tariffs that are still quite low byregional standards (see Figure 6). However, the data analyzed above suggest that the financialproblems facing the power sector are not due solely, or perhaps even largely, to slow revenue growth15 Reductions in electricity losses can be exaggerated, for example, when companies over-estimate billing and then over estimateaccounts receivable.16 The quasi-fiscal deficit is determined by the sum of: (1) “above-standard” electricity losses; (2) deviations from a 100 fiscal “above standard”percent cash collection rate; and (3) the difference between tariffs and long-run marginal costs (includin investment long run (includingcosts), measured on a cash-flow basis. The quasi fiscal deficit therefore reflects the difference between the income needed flow quasi-fiscalto fully cover operating and capital costs in the sector versus actual revenues received. According to Kyrgyzstan’s receivedmedium-term budget framework, this deficit is to drop below 2 percent of GDP by 2012. term 2012 20
  • 21. because of “low tariffs”,17 or the power companies’ unwillingness/inability to collect tariffs or reduce unwillingness/inabilityelectricity losses. They instead suggest that the key financial problem facing the power sector hasbeen rapid growth in costs. While some of this growth results from large capital outlays forinfrastructure investments, it may also reflect the inability of weak market forces or regulatory estments,oversight to contain costs. Figure 11—Collection rates in the electric power sector (2007-2009) Collection 2009) 2007 2008 2009 104% 99% 95% 90% 90% 89% 88% 90% 86% 82% 70% 65% Overall Households Industry AgricultureSource: Finances of Enterprises of the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010. The datainclude small-scale enterprises. Hydropower challenges. Electricity generation in Kyrgyzstan is dominated by hydropower,which provides more than 90 percent of total electricity output. Hydropower plants along the Naryncascade, with installed capacity of 2870 megawatts, account for about 78 percent of Kyrgyzstan’stotal generation capacity. The Toktogul power station, with 1200 megawatts of installed capacity, isCentral Asia’s largest hydropower station, and only multi-year hydropower water storage facility. multi yearThis reliance on hydropower leaves Kyrgyzstan vulnerable to changes in water levels alon the Naryn alongcascade. This was particularly apparent in 2008, when drought conditions helped push water volumesat Toktogul to extremely low levels (see Figure 13). The volume of electricity generated fell 21percent in that year, and another 6 percent in 2009 as releases were limited by the need to restore 2009water levels. However, because Toktogul is a multi-year storage facility, good management of the multi yearwater in its reservoir should provide some protection against droughts in the future.18 Investment projects and prospects. According to various estimates, Kyrgyzstan is not usingmore than 10 percent of its total hydropower capacity, which is assessed at 140 billion kWh by the“National Power Grid” company.19 The combination of abundant water resources and relia reliance onhydro power poses a dilemma for policy makers in Kyrgyzstan. The construction of new hydro powerplants—both along the Naryn cascade and on smaller rivers—is an obvious way to increase capacity both rivers isfor winter power generation, as well as boost exports and promote economic development. This is the andvision of the Central Asia and South Asia Regional Energy Market (CASAREM) project, which is17 The reported 41 percent revenue growth combined with a 23 percent reported reduction in kWh sold during 2006 2006-2009suggests that effective electricity tariffs rose by 85 percent during these years. pe18 According to data on the CA WaterInfo website (http://www.cawater-info.net/analysis/index_e.htm water inflows into ( info.net/analysis/index_e.htm),Toktogul in 2007 were also well below historical averages. However, national statistical committee data indicate thatelectricity generation rose 2 percent that year, while exports and losses absorbed almost half of the electricity produced(see Table 3). This has given rise to claims that mismanagement, rather than drought, caused the sharp drops in water mismanagement,levels at Toktogul in 2007-2008, and then electricity shortages during subsequent winters. 2008,19 Source: Small and Medium Sized Hydropower Development Programme, approved by presidential decree N 365, 14October 2008. 21
  • 22. supported by the donor community working in Central Asia, and to which the government ofKyrgyzstan subscribes. The Ministry of Energy has conducted feasibility studies for constructing Ministrysome 47 hydropower plants across the country. Figure 12 2—Electricity sector quasi-fiscal deficit (2002-2009) 2009) 12.8% As a share of GDP 7.6% 5.9% 4.9% 3.7% 3.9% 2002 2005 2006 2007 2008 2009Source: Ministry of Energy. Moreover, prospects for virtually all investment projects in the energy sector are constrainedby Kyrgyzstan’s relatively low electricity tariffs. In addition to reducing the cash flow powercompanies need to finance investments within the sector directly, low electricity tariffs reduce thecommercial feasibility of energy projects in other sectors. This applies both to coal (the demandfor which is determined in part by the financial situation in the power sector) and to decentralizedrenewables, the payback period for which shortens as electricity tariffs increase. ck Figure 13—Trends in electricity generation, and in water volumes at the Toktogul hydropower lectricity reservoir (2008-2010) 50% Toktogul water volume (deviation from multi-year average*) multi 40% Year-on-year-change in electricity generated (kWh) change 30% 20% 10% 2008 2009 2010 0% -10% -20% -30% -40% -50%* Calculated relative to the average volume for that month in previous years, going back to 1991-1992. A zero 1991value means water volume in that month was at its multi year average (no deviation from normal). multi-yearSources: State Statistical Committee, CA WaterInfo website; UNDP calculations. 22
  • 23. The Kambarata-1 and -2 hydropower projects are at present receiving the greatest attention andassistance from the government. Kambarata-2, the costs of which were estimated at some $100million in 2007, is under active construction—the first unit was installed in 2010, with construction tobe completed by 2015. Key parameters include: installed capacity—360 megawatts (three units of120 megawatts each); power generation—1,148 million kWh; water reservoir capacity—70 millionm3. The construction is being financed by the government budget and an earmarked credit from theRussian Federation.20 Kambarata HPP-1 would be significantly larger and more expensive: installedcapacity of 1,900 megawatts (4 units of 475 megawatts each); power generation of 5,088 millionkWh, and a water reservoir capacity of 4,650 million m3; and construction costs of some $1.7 billion. The construction of the Kara-Keche coal-fired power station, with a capacity of at least 1200megawatts, is also under discussion. This plant would generate electricity from coal that would bemined from the Kavaksky lignite basin, where it would be located. In addition to helping to developthe coal industry, Kara-Keche would diversify Kyrgyzstan’s generation capacity away from its near-total reliance on hydropower. However, the sources of financing for the construction of this $1.3billion project have not yet been identified. Map 1—Existing and planned hydropower plants and high-voltage transmission lines “Kemin-Almaty” High-voltage transmission line Kara-Keche “Datka-Kemin” high- voltage transmission line ($343 million) “Datka” transmission line ($229 million) “Aigultash-Samat” high-voltage transmission line ($12.9 million)Source: Ministry of Energy. Kyrgyzstan’s topography essentially divides the power transmission network into northern andsouthern parts, which are linked by a high-voltage transmission line running from Toktogul in thesouth to Frunzenskaya in the north. Because the Naryn cascade is in the south, Kyrgyzstan’s southernregions have a power surplus, while the north is in deficit. However, some parts of the south—such asLeilek in the western part of the Batken region—face power shortages (especially in the winter time)because they are under-served by the existing transmission infrastructure. This problem is beingaddressed by the construction of the 131 kilometer Aigultash-Samat transmission line, which is to becompleted in November of 2011. This project is financed by a $12 million credit from the IslamicDevelopment Bank, as well as $900K from the “National Power Grid” transmission company.20 The Agreement between the Government of the Kyrgyz Republic and the Government of the Russian Federation as ofFebruary 3, 2009 "On Construction of Kambarata HPP-1". 23
  • 24. Although Kyrgyzstan imports virtually no electricity, the Toktogul-Frunzenskaya transmissionline runs through Uzbekistan and Kazakhstan (see Map 1). Uzbekistan’s and Kazakhstan’s November2009 decision to withdrawal from—and therefore the de facto dissolution of—the integrated CentralAsian electricity transmission grid adds new potential uncertainty to power supplies in Kyrgyzstan’snorthern regions. This uncertainty is to be addressed by the construction of the $570 million Datka-Kemin transmission line, the construction of which is expected to be co-financed by China’s Export-Import Bank, the Asian Development Bank, and others. However, this financing was put on holdfollowing the April 2010 developments; it has not yet been secured. A 1998 government resolution requires the distribution companies to install reliable and safemeters at each service point, and to take regular meter readings. Virtually all electricity meters havebeen transferred to the balance-sheet of the distribution companies, who must also finance theinstallation of new meters for the population of the republic and their replacement are to be financedby these enterprises. Thus, all responsibility for electricity metering is placed on distributionenterprises. Offering reliable electricity services to growing numbers of migrant households—manyof which have an informal character—located in peri-urban areas are posing significant problems fordistribution companies. This is particularly the case for Severelektro, which serves Bishkek city. As a result, since 2006 a number of projects (financed by the World Bank, KFW, and the SwissEconomic Cooperation Organization), have helped the distribution companies to improve metering,reduce losses, and extend services to new households. Procurement of meters and computer hardwareand software (for billing systems) has played a large role in these projects, which have helped reducelosses and boost cash collection rates. Total financing for electricity sector projects, frominternational organizations and from the state budget, amounts to about $98 million. This is far short of what is necessary: the Joint Economic Assessment published by the WorldBank in mid-2010 assessed the immediate needs of the energy sector (i.e., for the winter of 2010-2011) at $180 million. Out of this amount $124 million was to be allocated to essential and criticalrepairs for heating plants, district heating systems and to ensure security in electricity generation.21The funding needed for the generation and transmission projects mentioned above (e.g., Kambarata-1and -2, Kemin-Datka, Kara-Keche) is estimated in the $5-6 billion range. It is not clear when,whether, or from whom these funds could be obtained. Thermal power Two combined thermal and electric power plants are in operation in Bishkek and Osh cities,covering 85 and 35-40 percent of the households in these two locations, respectively. In addition tothese cities, central heating systems are in place in the towns of Kyzyl-Kiya (covering 60 percent) andKarakol (covering 26 percent).22 Small-scale thermal generation enterprises operate in many smallertowns; and residents of stand-alone houses often have their own thermal generating equipment(stoves, boilers, heaters, etc.). Thermal power in Bishkek (most of which is generated by the Bishkek Combined Heat andPower Plant) is delivered by the Bishkekteploset and Bishkekteploenergo enterprises; in Osh it issupplied by the Osh combined heating and power plant. Thermal power to 95 percent of consumers incities and rayon centers is also produced by the state-owned Kyrgyzzhilkommunsoyuz enterprise. All21 For more see, “The Kyrgyz Republic Joint Economic Assessment: Reconciliation, Recovery, and Reconstruction”,ADB, IMF, the World Bank, 2010.22 Source: Country Development Strategy for 2008-2011. 24
  • 25. of these distribution companies are state-owned: Bishkekteploset’ takes the form of a joint state owned: joint-stockcompany in which 84 percent of the shares are state-owned; Bishkekteploenergo is a municipal s owned;enterprises under the Bishkek mayor’s office; while Kyrgyzzhilkommunsoyuz belongs to the Ministryof Energy. Nor is there competition in distribution: each enterprise has its own non non-overlappingterritory of operations. As a result, Bishkekteploset, Bishkekteploenergo, and the territorial divisions erations.of Kyrgyzzhilkommunsoyuz have been included into the State Monopoly Register;23 their tariffs aresubject to close inspection by the Antimonopoly Agency. But while important economies of scale are associated with the creation and maintenance of mportantthermal infrastructure, significant inter modal competitive forces are present, particularly at the retail inter-modallevel. Consumers unhappy with district heating tariffs or service quality can rely more extensively on qualityelectric heaters, install gas- or coal fired boilers, or burn more firewood. There can be little doubt, for coal-firedexample, that the ability to install coal fired boilers (and, in rural areas, burn firewood) has limited the coal-firedstrains on vulnerable households presented by the large increases in electricity, gas, and thermal nspower tariffs since 2007. Exclusive treatment of thermal power as a natural monopoly whose tariffsneed to be kept low could distort competition among fuel sources—competition that can help limit source competitioncosts and price increases while also promoting the development of Kyrgyzstan’s energy sector. Figure 14—Thermal power production consumption, losses, and exports (in thousand gigacalories, roduction, 2006-2010) Generation Consumption Losses 2933 2926 3015 2887 2815 2185 2165 2270 2209 2184 748 761 745 678 631 2006 2007 2008 2009 2010Source: Finances of Enterprises of the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010. The datainclude small-scale enterprises. Production, consumption, and losses. Kyrgyzstan’s thermal power facilities generate about 3million gigacalories of thermal power annually (see Figure 14), two thirds of which come from the 1 ,Bishkek Combined Heat and Power Plant. Kyrgyzzhilkommunsoyuz and the Osh Combined Heat andPower Plant generate about 540,000 and 120,000 gigacalories annually, respectively As in the respectively.electricity sector, losses are endemic in thermal power, generally exceeding 20 percent of thermaloutput. However, thanks to reductions in losses from 25 to 22 percent during 2008 2008-2010, the 4percent cumulative decline in consumption reported for these years was less than the 7 percent thesedecline in production.23 According to Order No. 524 of the State Agency for Anti-Monopoly Regulation, 30 December 2009. Anti Monopoly 25
  • 26. The high thermal power losses are due primarily to wear-and-tear of pipes and insulation of the wear tearnetwork, as well as frequent service interruptions, which lead to high levels of condensation. Th Thedepreciation of fixed assets in Kyrgyzstan’s thermal power sector is estimated at 60 percent.24 Thus,according to the Ministry of Energy, the number of accidents in the OJSC Bishkekteploset’ in the firstmonth of the heating season of 2009-2010 increased by 60 percent as compared to the season of 20092007-2008. The insulation of the main and especially in-house heating networks practically does not 2008. in housefunction and requires capital repairs. This is particularly an issue for Bishkektelposet’, where lossesincreased to 48 percent in 2009. d Thermal sector finances. The financials of the enterprises supplying steam and hot water inrecent years have been even less favorable then in the power sector (see Figure 1 In 2008 some 588 15).million som ($16.1 million) in losses were reported—40 percent of sectoral revenues reported 40 revenues—beforedropping back to 343 million som ($8 million) in 2009. As is the case in the electricity sector, thermalpower companies reported very rapid growth in costs during 2006-2009— percent, while the 2006 —88sector’s accounts payable also rose by 66 percent. (By way of comparison the industrial producerprice index reported a 58 percent cumulative increase during this time; the consumer price indexreported a 47 percent cumulative increase; while the GDP deflator rose 46 percent). While much much-needed investments to refurbish Kyrgyzstan’s decaying thermal infrastructure can no doubt explainmuch of this increase, they may not be able to explain all of it. The rapid growth in accounts payablealso contrasts with the electric power companies’ success in sharply reducing their payables (in real soterms) during 2006-2009. On the other hand, thermal power companies’ accounts receivable only 2009.grew by 13 percent during 2006-2009 (a decline in real terms). While doubtful or unrecoverable 2006household debts grew rapidly during this time, they comprised less than 10 percent of totalreceivables in 2009.25 Figure 15—Financial results for thermal power companies (in million som, 2006-2009) esults mpanies 2006 Revenues 2408 Costs 2042 2065 Profit (loss) 1530 1454 1280 1119 949 2006 -331 2007 2008 2009 -343 -411 -588Source: Finances of Enterprises of the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010; andUNDP calculations. The data include small-scale enterprises. small24 Source: Finances of Enterprises of the Kyrgyz Republic, National Statistical Committee, Bishkek, 2010. Data on small , small-scale enterprises are not included.25 By contrast, doubtful or unrecoverable household debts were 57 percent of power company receivables in 2009. 26
  • 27. Revenues reported by thermal power companies increased even faster— 118 percent—during faster—by2006-2009. However, because thermal power tariffs only cover about 45 percent of service costs, the 2009.bulk of these revenues come not from users, but from state and local budgets. In 2009, state budgetsubsidies for communal service providers reached 1 billion soms ($23 million). For example, despitereporting an improvement in 2010, Kyrgyzzhilkommunsoyuz only covered about 37 percent of itscosts from sales last year; the difference was financed by state budget, growth in accounts payable, differencefiscal debts, and the like. The 2011 state budget earmarks 740 million soms ($15 million) forKyrgyzzhilkommunsoyuz alone.26 The situation is similar with Bishkekteploenergo, which issubsidized by the Bishkek city budget.27 Investment projects and prospects. Some $110 million in projects to reconstruct and modernizeKyrgyzstan’s central heating system, co-funded by the Asian Development Bank, the World Bank, co fundedand other international organizations (as well as the state budget) are currently being implemented.These projects focus on modernizing the Bishkek and Osh combined heat and power plants replacing plants,inefficient heating boilers, and installing thermal meters (in apartment buildings). Higher prices forheat and hot water (see Figure 8 have led many households to install meters on their own initiative. 8) Gas Natural gas—virtually all of which is imported from Uzbekistan—accounts for 30 percent of virtually accountstotal energy consumption in Kyrgyzstan. Gas import, transportation, distribution, and sales are import,handled by the Kyrgyzgaz state-owned monopoly,28 whose assets include some 800 kilometers of statetrunk pipelines and some 2300 kilometers retail pipeline infrastructure. Figure 16—Gas supply consumption, and losses (in thousand meters3, 2006-2010) upply, 2006 Imports + production 769 783 762 Consumption 671 648 644 Losses 340 294 247 214 106 97 97 80 77 2006 2007 2008 2009 2010** 2010 data for consumption, losses are UNDP estimates.Source: State Statistical Committee. : Committee26 Resolution N 33 of the Government of the Kyrgyz Republic dated December 17 2010 “On Draft Law of the Kyrgyz overnmentRepublic on Republican Budget for 2011 and Forecast for 2012-2013”. 201227 By contrast, Bishkekteploset does not receive budget subsidies. Instead, it is cross-subsidized from r cross subsidized revenues earned viaelectricity exports by the “Power Plants” transmission company.28 As of 2010, the Ministry of State Property held an 87.9 percent equity stakes in Kyrgyzgaz; the Social Fund heldanother 5.4 percent. 27
  • 28. There are 279,358 gas consumers, most of which (277,344) are households (approximately 1 (277,344)million individuals); the remainder are utilities, industrial, and commercial entities (2,145 users); andbudget-financed organizations (129). About 97 percent of household gas users have meters financed meters. As it is the only major company involved in the purchase, transport, and distribution of gas inKyrgyzstan,29 it is not surprising that Kyrgyzgaz has been included in the monopoly register, and itstariffs subjected to scrutiny by the Antimonopoly Agency. However, as with thermal, competitiveforces are present on the retail gas market: households can substitute electricity or coal households coal-fired boilers(and, in urban areas, district heating) for gas heat; gas-fired appliances can likewise be replaced by gas firedelectric ones. Strengthening competition among these fuel sources can help hold costs and tariff tariffsprices down. Figure 17—Gas sector financials ector Figure 18—Gas, consumer price inflation trends onsumer (2007-2009, in million som) 2009, (2007-2010) 2010) Gross income 250 Gas import prices Costs 4404 4532 Household gas tariffs Profit (loss) 3789 Consumer price index 3320 3070 3045 200 150 25 2007 = 100 128 -128 100 2007 2008 2009 -469 2007 2008 2009 2010Sources: State Statistical Committee, especially Finances of Enterprises of the Kyrgyz Republic, Bishkek,2010; and UNDP calculations. Imports, consumption, and losses. As the data in Figure 16 show, gas consumption inKyrgyzstan dropped precipitously during 2007-2009, as the price of gas imported from Uzbekistan 2007 ,rose from $100 to $240 per thousand cubic meters. Preliminary data indicate that, while the importprice dropped slightly in 2010, imports and consumption continued to decline. The cumulativedecline in gas consumption during 2007-2010 seems to have been on the order of 68 percent, with nsumption 2007 2010particularly large drops reported in the industrial sector. Although household gas prices “only” roseby 12 percent last year, 2010 was the seventh consecutive year in which hou household gas prices rose atrates in excess of consumer price inflation. Losses in the gas sector are significant: in 2009 they comprised 23 percent of total gas supply(imports plus domestic production), up from 12-14 percent in previous years. These losse reflect the 12 14 lossesdebilitated condition of Kyrgyzstan’s gas pipelines, inaccurate metering, theft, and other factors. Thehighest losses are recorded in the country’s southern regions. Gas sector financials. Kyrgyzgaz’s financial performance is determined primarily by trends inwholesale (imported) and retail gas prices, the procurement of which represents some three quarters29 The KyrKazGaz joint venture company also performs gas transit functions in the territory of Kyrgyzstan. 28
  • 29. of its total expenditures. As the data in Figures 17 and 18 show, Kyrgyzgaz’s finances deteriora deterioratedsharply during 2007-2009, when the price of gas imported from Uzbekistan rose from $100 to $240 2009,per thousand cubic meters. Although retail gas prices also increased sharply (relative to consumerprices) during this time, they were unable to keep pace with import prices. Exchange-rate effects with Exchangefurther added to these losses, as these gas purchases are priced in dollars, and the som depreciated innominal terms vis-à-vis the dollar by some 26 percent during 2008-2010. Fortunately, Uzbektransgaz vis 2008 2010.did not raise its export prices in 2010, allowing domestic gas prices (which rose another 12 percent elast year) to partially make up the lost ground. This suggests that a lower loss figure will be reportedfor 2010. Figure 19—Fixed assets (by book value) in the gas Figure 20—Trends in fixed asset depreciation, Trends sector (2006-2009, in million som) 2009, cash collections (2006-2009) ollections 793 100% 733 80% Share of depreciated fixed assets 496 60% 393 Cash collections 40% 20% 0% 2006 2007 2008 2009 2006 2007 2008 2009Sources: Finances of Enterprises of the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010; andUNDP calculations. Despite these losses, Kyrgyzgaz and its subsidiaries have managed to make significantinvestments in Kyrgyzstan’s gas infrastructure. As the data in Figures 19 and 2 show, the book value infrastr 20of fixed assets doubled during 2006-2009, while the share of worn-out fixed assets dropped from 40 2006 tto 28 percent. Kyrgyzgaz’s high rate (at least 90 percent) of cash collections contributed to financingthese capital expenditures. Investment projects and prospects. Investment projects worth some $95 million are currentlyunderway in the gas sector—a figure that is five times the book value of the gas sector’s fixed assets. aOf this sum, $6 million reflects expenditures to repair damage to the gas distribution network in Oshfollowing the June 2010 events.30 These investments are mainly to replace unreliable gas pipelines sand construct new ones, and to improve metering at gas distribution stations. Coal Kyrgyzstan’s coal industry hosts 30 mining companies, which include both privately owned andjoint stock companies with significant state participation. However, the largest coal mining enterprise30 For more see, “The Kyrgyz Republic Joint Economic Assessment: Reconciliation, Recovery, and Reconstruction”,ADB, IMF, the World Bank, 2010. 29
  • 30. is the state-owned Kyrgyzkomur, under the Ministry of Energy. As of January 2008 proven reservesat Kyrgyzstan’s 70 main coal deposits were reported as 1.3 billion tons; prospective reserves areassessed at than 2.2 billion tons, making Kyrgyzstan potentially one of Central Asia’s coal sectorleaders. Deposits are concentrated in four coal basins (Southern Fergana, Northern Fergana, Uzgen,and Kavak) and three smaller coal-bearing areas (Alai, Alabuka-Chatyr-Kol, and Southern Issyk-Kul). Both underground and strip mining extraction technologies are used. While there is no leading national coal company, transport costs segment the national market,so that a number of coal-mining enterprises have quasi-monopolistic regional positions. Themonopoly register for 201031 therefore included coal-mining enterprises from Batken, Naryn, andOsh regions, whose wholesale prices were regulated by the state. However, these sellers often facemonopsonistic coal buyers (e.g., thermal power plants, municipal enterprises), as well as some largeintermediary wholesalers, who resell coal to households and other small-scale final users. A morecompetitive picture therefore emerges, particularly when Kyrgyzstan’s large coal imports are takeninto account. Still, it is not clear whether this combination of bilateral monopolies and wholesale pricecontrols necessarily reduces coal prices for consumers, most of whom purchase coal on the openmarket. It may be that the wholesale price controls discourage domestic production in those regionswhere import competition is feasible—and drive up retail coal prices in those regions in which hightransport costs limit the penetration of coal imports. Coal production and trade. Coal production in Kyrgyzstan, which reached a high of 4.5 milliontons in 1979, had dropped to only 321,000 tons in 2006. Output nearly doubled during the next threeyears, rising to 607,000 tons in 2009, before dropping back to some 558,000 tons last year. Theelectricity shortages, and sky-rocketing gas and heat prices that took hold during these yearsobviously contributed to this resurgence. These factors helped wholesale coal prices rise by some 150percent during 2006-2010. However, coal imports, which exceed domestic production, also soaredduring this time, rising from 728,000 tons in 2007 to 1.1 million tons in 2010 (Figure 21). Figure 21—Coal production, consumption, imports and exports (in thousand tons, 2006-2010) 1651 1358 1287 1066 1093 975 1100 Consumption 802 728 694 Imports Production 558 605 Exports 492 321 396 109 58 12 30 7 2006 2007 2008 2009 2010Source: State Statistical Committee, UNDP calculations.31 The State Regional Registers of subject of natural and permitted monopolies of the Kyrgyz Republic, for 2010. Orderby State Antimonopoly Agency under the Government of the Kyrgyz Republic, 30 Decembers 2009, No 525 30
  • 31. Thermal plants are the largest users of coal: in 2009, for example, the Bishkek CombinedHeating and Power Plant consumed 796,000 tons of coal, as well as 24 million cubic meters of naturalgas and 69,000 tons of fuel oil. Due to its technological requirements, the Bishkek plant has to useimported coal—accounting for virtually all of Kyrgyzstan’s coal imports. Significant amounts of coal accountingare burned by families living in individual houses, which are not connected to district heatingnetworks. Coal sector financials. Despite this turnaround, coal mining appears to be loss loss-making (Figure22), as cost growth seems to have more than matched growth in revenues. However, by all accounts, ),the coal sector is plagued by extensive criminal and shadow economy activities, which reduce theutility of the sector’s financial data. ility data Figure 22—Financial results of coal companies (in million som, 2006 Financial 2006-2009) Gross income 463 464 467 Costs 439 Profit (loss) 227 204 167 135 -23 -0.5 -28 -32 2006 2007 2008 2009Source: Finances of Enterprises of the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010; andUNDP calculations. The data include small-scale enterprises. small In many respect, the coal industry seems relatively well placed to take advantage of the threatsand opportunities now facing the energy sector. Market forces play a large role in setting retail coalprices; private capital and investment are playing significant roles; Kyrgyzstan possess considerablecoal reserves for exploitation; and the demand for coal could be boosted both by higher electric a ; andthermal power tariffs (if/when they come) and by the prospective construction of large coal coal-firedpower plants (e.g., Kara-Keche) On the other hand, prospects for coal sector expansion now face a Keche).number of obstacles, including the following: • Many coal mines are increasingly tapped out, especially in light of the low-tech mining any processes that are often employed. Further expansion of the sector could require large investment outlays—to increase production from existing mines, to open new ones, a to to and create the infrastructure needed to get the coal to market. It is not clear that the financing for such investments would be easily forthcoming. • Informal and criminal activities in the coal sector are quite large; property rights can be difficult to protect. These uncertainties limit the attractiveness of investment projects in the coal industry. 31
  • 32. • Many coal companies (like other mining enterprises) experience pressures from the local authorities to address local social problems (e.g., provision of free coal). While not unreasonable in and of themselves, such pressures can deter investment in the coal sector. • Allegations of child labour at work in Kyrgyzstan’s coal mines may also weigh on prospects for the coal industry’s development.32 Decentralized renewables Kyrgyzstan has good potential for the application of decentralized renewable energytechnologies, primarily small hydropower stations on mountain rivers, solar and wind energy, andbiogas plants. In comparison to big hydro and hydro-carbons, decentralized renewable projects arerelatively inexpensive (in terms of up-front capital costs), and can attract at least some of thefinancing needed for their construction and maintenance from donors and the communities in whichthey are located.33 Despite this, according to one source, less than one percent this potential is beingutilized.34 For these reasons, Kyrgyzstan’s National Energy Programme35 officially recognizes theimportance of decentralized renewables; and a programme to develop small and medium-size powerplants has been adopted. 36 The law “On Renewable Energy” (of 31 December 2008) provides theover-arching legal framework. A special public agency, the Directorate for Small and Medium-SizePower Facilities, was established in 2008. The government’s programme to develop small andmedium-size power plants calls for the construction and reconstruction of 43 small and medium-sizedfacilities (primarily small hydropower plants, in mostly the 2-3 megawatt installed capacity range)with total installed capacity of 277 megawatts. It also calls for the construction of a wind power plantnear Balykchi with a rated capacity of 22 megawatts. However, small hydro projects in Kyrgyzstan face a number of important obstacles. • Seasonality: The streams on which many of these facilities are located are more likely (than larger rivers) to freeze in the winter. These facilities can therefore be rendered inoperable during the season when power and heat are in greatest demand, and when central grids are unable to compensate. By contrast, many communities that are connected to Barqi Tojik’s (or Pamir Energy’s) grids draw on them during the summer time (when power is relatively abundant), thereby reducing the demand for off-grid power and decreasing the commercial viability of small hydro (and other decentralized renewables) projects. • Hydrology: These streams are also more likely (than larger rivers) to undergo significant reductions in water flow during periods of drought, thereby reducing their de facto generation capacity. • Capacity: The knowledge base of local companies in constructing and especially maintaining small hydropower stations (and their equipment/spare parts) remains underdeveloped.32 See, for example, Natalia Antelava, “Child labour in Kyrgyz coal mines” (http://news.bbc.co.uk/go/pr/fr/-/2/hi/asia-pacific/6955202.stm), BBC News, 24 August 2007.33 Decentralized renewables (and energy efficiency) projects can also attract carbon finance, under the Kyoto Protocol’sclean development mechanism.34 Omorov, A. “Small hydro for rural development”.35 “The National Energy Program of the Kyrgyz Republic for 2008-2010 and the Strategy for Development of the Fueland Energy Sector until 2025”, approved by parliamentary decree on 24 April 2008, N 346-IV.36 Approved by presidential decree on 14 October 2008, N 365. 32
  • 33. Communities that construct small power plants (often with donor assistance) are too often unable to repair or maintain them. Neither private- or public-sector agencies in Tajikistan sector possess at present the technical expertise needed to construct and especially maintain decentralized renewable energy installations. installat In addition to these sector-specific challenges, small hydro projects face obstacles that are sector specificcommon to all decentralized renewable technologies in Kyrgyzstan: • Finance: Funding mechanisms to able to transparently combine and manage government, unding private-sector, community-based, and donor funding on both a commercial and grant community grant- financing basis have yet to be fully developed.37 • Regulatory: The regulatory and technical requirements—and the capacity to enforce them— requirements and them needed to ensure technological standardization of power generated from off-grid power standard off producers is not fully in place. • Tariffs: As long as tariffs for electricity generated from other sources remain relatively low (e.g., compared to other countries), the “National Power Grid” has little reason to purchase “expensive” electricity from generators using decentralized renewable technologies. Such purchases must ultimately be subsidized, either from the retained earnings of the national transmission company, from cross-subsidies implicitly paid by other electricity companies or company her consumers of power generated from sources, from the state budget, or by donors. Estimates of additional costs associated with generating electricity from decentralized renewables are shown in Figure 23. Relative to current household tariff levels (around $0.015/kWh), these household additional costs are considerable.38 Figure 23—Additional costs (above current tariff levels) per kWh associated with electricity generated Additional from decentralized renewables $0.17 $0.09 $0.06 $0.06 $0.04 Small hydro wind biomass geothermal SolarSource: UNDP-Kyrgyzstan project “Promotion of renewable energy for development in remote regions”, Kyrgyzstan2011.37 The renewable energy and energy efficiency trust fund proposed by UNDP in Tajikistan could possibly be considered trustfor adoption in Kyrgyzstan as well.38 However, since decentralized renewables seem unlikely to comprise a significant share of Kyrgyzstan’s energy balanceon the near future, the subsidies needed to cover these additional costs would likewise be insignificant. 33
  • 34. Thus, despite strong government and donor interest, progress in constructing the requisite legalframework, and growing amounts of resources to finance their development, small hydro and otherdecentralized renewable energy technologies in Kyrgyzstan remain in their infancy. Generation costshave yet to be brought down to “competitive” levels; and the technical and commercial regulationsneeded to facilitate third-party access to the national grid (e.g. feed-in tariffs) have not been madeoperational. Energy efficiency Compared to many other former Soviet Republics, Kyrgyzstan is a relatively efficient energyuser, in terms of ratios of energy consumption to output. These ratios have generally improved since2008. In light of Kyrgyzstan’s energy poverty, and the shortage pressures that have sharpened since2008, these trends are not surprising. Nonetheless, energy conservation policy in Kyrgyzstan is on theagenda. The National Energy Programme for 2008-201039 called for growth in energy consumption tobe limited to 0.4-0.5 percent of each percentage point increase in GDP during 2010-2025. Legislationobliges the government to design and implement energy conservation programmes and projects, andto establish a state energy saving fund. An energy efficient building code was adopted in 2009, 40while Bishkek and other municipalities have moved ahead with sub-national energy conservationprogrammes. UNDP, the EBRD, European Commission, and other donors are working with thegovernment to translate these principles into practice. However, much of this legislation remains declarative in nature; questions of implementationand enforcement (e.g., regarding the new building code) and financing investments in energyefficiency continue to loom large. Proposals to retrofit apartment buildings with energy efficientheating systems and insulation often founder on difficulties apartment owners face in collectivelydecision making. Kyrgyzstan’s low electricity tariffs reduce the financial attractiveness of manyenergy efficiency projects. Energy tariffs and costs Tariff setting: general principles. As virtually all major companies in the energy sector areregulated as natural monopolies, their tariffs must be “justified” on the basis of “approved costs”.This necessarily gives energy prices a cost-plus character. It also gives energy price determination abureaucratic, administrative character: enterprises must present to the Regulator detailed plannedcalculations of expenses, in order to show that the requested tariffs are economically appropriate. TheRegulator is obliged to validate these calculations in line with established procedures. Costs are divided into production costs and full costs. Production costs include: • Material costs (e.g., raw materials and supplies, components and semi-finished products, industrial services, fuel and energy); • Labor costs; • Social insurance costs; • Depreciation of fixed assets; • Other costs; and • Taxes.39 The National Energy Program for 2008-2010 and the Strategy for the Fuel and Energy Sector Development until 2025dated April 24, 2008, N 346-IV.40 Order № 135 of the State Agency for Architecture and Construction, 2 October 2009. 34
  • 35. Figure 24—Actual versus planned household electricity tariffs (per kWh, 2006-2012) $0.045 Actual tariffs $0.040 Tariffs per April 2008 policy $0.035 Tariffs per December 2009 policy $0.030 $0.025 $0.020 $0.015 $0.010 2006 2007 2008 2009 2010 2011 2012Note: these figures are average annual household tariff rates in som, multiplied by the average annual som/$exchange rate. 2011-2012 calculations use the average exchange rate for 2010; the “actual tariff” projectionfor 2011-2012 assumes no change in current (2011) tariff levels.Source: The medium term tariff policy of Kyrgyz Republic on electricity for 2008-2012 as of 24 April 2008,government resolution No 164; and the medium term tariff policy of Kyrgyz Republic on electricity andthermal energy for 2010-2012, 12 November 2009, Government Resolution No 699. Full costs are the sum of production costs and operating expenses. In addition to productioncosts, these include investment costs, i.e.,: • debt service and principal repayments; and • capital costs (for (re)construction of plant and equipment). Table 4—Differences between planned and actual costs of larger power companies (2009-2010) Cost category 2009 2010 Full cost -5% -2% Production cost -5% 2% - Material costs -4% -11% - Labor -11% 16% - Social insurance -12% 16% - Depreciation of fixed assets 5% 20% - Other costs 14% 14% - Taxes -62% -32% Investment costs: - Debt service 120% 14% - Capital investments -67% -47%Source: Ministry of Energy. 35
  • 36. Figure 25—Cost share trends in the electric power sector (2006- Cost -2009) 54% 2006 2007 2008 2009 51% 39% 38% 27% 25% 26% 26% 25% 25% 15% 13% 11% 10% 9% 9% Materials Labor and social Depreciation All other costs insuranceSource: Enterprise Finance in the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010. The data coverall enterprises in the electric power industry, including small enterprises. Cost-plus pricing gives companies incentives to overestimate anticipated production costs. The plusRegulator, who is constrained by the government’s social obligations, knows this, and therefore seeksto pare back the companies’ requests as much as is economically admissible. However, the Regulator .does not always have the capacity and resources needed to validate the calculations presented by thecompanies. Figure 26—Actual versus planned household thermal power tariffs (per gigacal., 2007 Actual 2007-2012) $60 Actual tariffs $50 Tariffs per April 2008 policy $40 Tariffs per December 2009 policy $30 $20 $10 $0 2007 2008 2009 2010 2011 2012Note: these figures are average annual household tariff rates in som, multiplied by average annual som/$exchange rates. 2011-2012 calculations use the average exchange rate for 2010; the “actual tariff” projection 2012for 2011-2012 assumes no change in current (2011) tariff levels. Sources: The medium term tariff policy of 2012 curren :Kyrgyz Republic on thermal energy for 2008-2012, 24 April 2008, government resolution No 165 and the 2008 esolution 165;medium term tariff policy on electricity and thermal energy for 2010-2012, 12 November 2009, government lectricity fresolution No 699. 36
  • 37. Actual expenses can deviate from those agreed with the Regulator, for three reasons. The first isthe appearance of economically justified costs that were not anticipated at the time the tariff was set(e.g., due to higher-than-expected inflation rates). Second, tariff policies may change, necessitating a expectedchange in the trajectory of expenses. This happened in Kyrgyzstan’s electric power sector in 2009 and2010, when planned tariff increases either did not materialize, or were rescinded after their materialize,introduction (Figure 24). Third, some anticipated expenses (e.g., investment programmes) may not be ).made. In Kyrgyzstan’s energy sector, production cost over-runs are often offset by cutbacks in over runsinvestment spending, as is shown in Table 4. Whereas expenses in the power sector were reported at 5 4.percent below approved levels in 2009 and 2 percent below approved levels in 2010, this wasprimarily due to systematic failures to execute the capital investment plan. The question of whether or not increases in costs and particularly some cost components ion costs—and components—inthe energy sector is now taken up, with a particular focus on the electric and thermal power trends. Tariff and costs in the electric power sector. As the data in Figure 24 show, household 2electricity tariffs (in dollar terms) are today roughly where they were in 2006. This reflects the factthat an April 2008 decision to increase tariffs during 2009-2012 was not implemented, as well as the 2009 2012April 2010 rescinding of the government’s December 2009 decision to double tariffs in January 2010. government’s Figure 27—Cost share trends in the thermal power sector (2006 Cost (2006-2009) 72% 68% 67% 70% 2006 2007 2008 2009 18% 18% 17% 19% 8% 9% 9% 6% 5% 4% 4% 5% Materials Labor and social Depreciation All other costs insuranceSource: Enterprise Finance in the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010. The data coverall enterprises in the thermal power industry, including small enterprises. As described above, Kyrgyzstan’s relatively low electricity tariffs have been accompanied byrapid growth in costs in the power sector. As the data in Figure 25 show, this growth has been driven 2primarily by materials expenditures (chiefly for “fuels”41) by companies in this sector; the share ofraw materials costs in total expenditures rose from 39 percent in 2006 to 54 perce in 2009. While percentthe “fuels”42 component of the industrial producer price index registered a 84 percent increase during2006-2009, hydropower’s dominance in Kyrgyzstan’s electricity balance should minimize the impact 2009,of these rising fuel prices. Nor are the investment projects in this sector a good explanation for rising the41 In 2009 fuel purchases accounted for 62 percent of reported raw materials expenditures. Source: Enterprise Finance inthe Kyrgyz Republic, National Statistical Committee, Bishkek, 2010. ,42 Refined oil products and coking coal. cts 37
  • 38. fuel costs, as capital outlays under these projects would show up under the “other costs” or possibly“depreciation” categories. Tariff and costs in the thermal power sector. Household thermal power tariffs (in dollar terms) ermalhave risen some 46 percent compared to where they were in 2006 (Figure 2 43 However, had the 26).April 2008 decision to increase tariffs during 2009-2012 been implemented, or had the government’s 2009 2012December 2009 decision to quintuple thermal power tariffs in January 2010 not been rescinded inApril, these would be much higher than is the case today. A similar trend, in terms of increases in the shares of expenditures devoted to materialspurchases, is apparent in the therm power sector as well (Figure 27 However, it is less thermal 7).pronounced. As the generation of thermal power in Kyrgyzstan necessarily involves the purchase andconsumption of fuels (e.g., gas, coal, mazut), one would expect fuel (raw materials) expenditures toplay a large role in the sector’s cost structure. The data in Figure 27 therefore show the share of rawmaterials purchases in total costs rising from 68 to 72 percent during 20062006-2009. To be sure, it isdifficult to generalize about costs across the thermal power sector: whereas some companies (e.g., thermalKyrgyzzhilkommunsoyuz) generate their own thermal energy, others (e.g., Bishkekteploset’)purchase thermal power and distribute it to final users. Nonetheless, the data in Figure 27 indicating only moderate growth in raw materials costs in the onetheless, 2relatively fuel-intensive thermal power sector contrast with the data in Figure 2 showing more robust intensive 25growth in raw materials costs in the less fuel intensive electric power sector. The character of fuel-intensivematerials cost trends in electric power stands out even more strongly when contrasted with cost trendsin the coal sector, as well as in the thermal power sector (see Figure 28). Figure 28—Shares of material costs in the thermal power sector (2006 Shares (2006-2009) 72% 2006 2007 2008 2009 68% 67% 70% 54% 54% 54% 51% 51% 43% 39% 38% Thermal Electricity CoalSource: Enterprise Finance in the Kyrgyz Republic, National Statistical Committee, Bishkek, 2010. The datacover all enterprises in these sectors, including small enterprises.43 Household thermal power tariffs are split into tariffs for heating and tariffs for hot water. The data shown in Figure 28are for heating tariffs, but the trends in hot water tariffs are identical. 38
  • 39. Legal and regulatory frameworkThe regulation of the energy sector is based on a number of legal acts. These include: • The 30 October 1996 law “On Energy” (N 56), which allowed “enterprises in the fuel and energy sector to have any organizational-legal form of operation and any form of ownership (public, municipal and private)”. However, this law also assumed predominant government management in the energy sector: an authorized public agency is empowered to set economically justified and socially reasonable price- and tariff- setting mechanisms for electric and heat energy as well as natural gas. This framework frequently results in policy-making proceeding primarily from social, rather than economic criteria. • The market principles for energy sector operations were established in the 28 January 1997 law “On Electric Power” (N 8), which called for “creating a competitive environment and the formation of an energy market”, as well as “encouraging development of the private sector and attracting investments”. This law also set forth the rights and obligations of consumers and contractual relations with suppliers. Thus, distribution companies were obliged to ensure safe, reliable and uninterrupted electricity supply; continuous improvements in the quality of services; the adoption of timely handling of customer complaints; and to compensate consumers for material damages incurred, if the company should be at fault. Distribution companies are entitled to cut the power supply to users who do not make timely payments for electricity consumed. • The 10 December 1997 law “On Consumer Protection” (N 90) protects consumers against supplier non-compliance with their obligations to deliver services. Administrative penalties are provided for the non-compliance. • The Administrative Code of 4 August 1998 (N 114) protects the integrity of engineering systems and facilities against unauthorized use of energy, and non-compliance with the instructions of power enterprises. • The 21 January 2002 law “On the Special Status of the Toktogul Cascade and the National High-Voltage Transmission Line” (N 7) precludes the privatization of the state-owned “Power Plants” generating and “National Power Grids” transmission companies. However, the Bishkek Combined Heat and Power Plant may undergo privatization. This law also specifies that ownership of the Kambarata-1 and -2 hydropower shall be regulated by separate legislation. Thus, while the privatization of Kyrgyzstan’s existing large hydropower stations and transmission infrastructure is precluded, the way is open for the privatization of other electricity generation and distribution assets. • The 31 December 2008 law “On Renewable Energy” (N 283), which regulates the development and use of decentralized renewable energy technologies. It calls for mechanisms to stimulate the development of these technologies, and to support producers and consumers of decentralized renewables. In particular, the government is to support tariff-setting so as to guarantee an eight-year payback period for decentralized renewable projects. However, while this law created the legal framework for 39
  • 40. decentralized renewables, the practical framework for its implementation has yet to be fully introduced. • The 3 February 1999 law “On Coal” (N 18) specifies that coal deposits are state property, and makes local governments and local state administrations responsible for allocating land and licensing geological and mining activities. It also seeks to protect the rights of consumers, and calls for the conditions to attract investment and increase output. This law calls for the coal industry’s restructuring, on the basis of both company and external financing, including from the national budget. The energy sector’s regulatory framework revolves around the Ministry of State Property, theMinistry of Energy, and the latter’s State Department for Regulating the Fuel and Energy Sector(hereafter the Regulator). The Ministry of State Property formally acts as the owner and manager ofstate-owned power companies. It designs and implements development strategies (inter aliaconcerning denationalization and privatization), selects and monitors company management, and thelike. The Ministry of Energy performs sectoral functions for the design and implementation of policydevelopment, strategic planning, assessment, and forecasting. This Ministry includes the StateDepartment for Regulating the Fuel and Energy Sector (hereafter the Regulator), whose tasks include:balancing the interests of energy producers and consumers (including dispute resolution); licensingenergy sector operations; and setting energy tariffs. In practice, the Regulator is not independent of the Ministry of Energy, so that this Ministry infact implements both managerial and regulatory functions. The Regulator is therefore often guided byconflicting political and economic interests, which can generate inconsistencies in tariff setting andother dimension of energy policy. Policy reform to date Prior to the start of reforms in Kyrgyzstan’s energy sector, electricity was supplied in thedomestic market and for export by a vertically integrated state-owned Kyrgyzenergo, whichmonopolized the generation, transmission, and distribution of electricity. In April 1997, thegovernment adopted a programme to demonopolize and partially privatize the electricity sector, aspart of efforts to “establishment a competitive environment among electrical and thermal powerproducers in the domestic market”.44 Denationalization and privatization in the electrical power sectorwas to occur during 1997-1999, in four stages (three of which have been accomplished): • The first stage entailed Kyrgyzenergo’s transformation into a joint-stock company with some 94 percent of its shares being affixed as state property. • During the second stage, Kyrgyzenergo’s auxiliary enterprises (e.g., repair and maintenance companies) and social entities were transferred to local government ownership. • During the third stage, separate generation, transmission, and distribution companies were divested from Kyrgyzenergo. This reflected the desire to unbundle the country’s power system into independent companies according to their functional characteristics, whose activities could then be regulated (at least in part) by market logic. (Reality since then suggests that such expectations may have been exaggerated).44 Government resolution of 23 April 1997 “On the Denationalization and Privatization of the Kyrgyz State Holding JSCKyrgyzenergoholding”. 40
  • 41. • The fourth stage of the reforms envisaged privatization of distribution companies. However, this has not yet come to fruition. Nor, in light of the developments described in Box 2 above, does this seem likely to happen any time soon. Instead, policy since April 2010 has emphasized the restoration and modernization of statecontrol in the energy sector, with a focus on improving management and reducing corruption. On theother hand, Kyrgyzstan’s current legal framework does permit the privatization of the Kambaratahydropower stations,45 the Bishkek Combined Heat and Power Plant, and the Bishkek DistrictHeating Distribution Company, should the government so choose (and appropriate buyers be found). By contrast, there have been no reforms in thermal power sector. The 2009-2011 CountryDevelopment Strategy included some reform measures for Kyrgyzzhilkommunsoyuz, but no progresswas made afterwards. An April 2009 programme to restructure and privatize Kyrgyzgaz46 wasquickly followed by a draft agreement between the governments of the Kyrgyz Republic and theRussian Federation,47 according to which Gazprom would acquire 75 per cent plus 1 share ofKyrgyzgaz’s authorized capital. However, Kyrgyzgaz has not been privatized so far. Thus, market reforms in the energy sector have effectively been suspended since April 2010.The new government that took power in late 2010 (following parliamentary elections) has yet todevelop a well defined programme for the energy sector. In addition to reassuring the public about thepermanence of current energy tariffs, efforts have focused on ensuring the country had adequateenergy supplies during the winter of 2010-2011, and on implementing the Fuel and Energy SectorTransparency Initiative. Energy sector transparency has been a major public concern, contributing inter alia to the April2010 political developments. For example, consumers frequently have difficulty obtaininginformation about energy company costs or tariff-setting procedures. According to the January 1997law “On Electric Power”, the Regulator is to officially inform the public about any change inelectricity tariffs through mass-media at least one month before the planned introduction of newtariffs. However, this requirement is sometimes honored in the breach. For example, the decree todouble electricity tariffs as of 1 January 2010 was promulgated on 30 December 2009. Whilelegislation gives the public the right to information about the energy sector, these laws are not fullyimplemented due to a lack of implementing regulations and procedures, and because many citizensare unable to prepare a proper request for information. In order to address these issues, the government in May 2004 adopted the principles of theExtractive Industries Transparency Initiative on increased transparency of mining industry operations(EITI).48 An action plan to implement EITI principles was adopted; statistical forms for disclosing offinancial information in the mining sector were developed, and relevant reports prepared. Howeverthis initiative has focused primarily on disclosure of information about the activity of the governmentagencies and oil and gas companies, not the electric power industry. Limited civil societyinvolvement in implementation of the initiative has further limited its significance.45 Under the 3 February 2009 “Agreement on the Construction of Kambarata HPP-1” between the governments of theKyrgyz Republic and the Russian Federation, a joint-stock company became the owner of the Kambarata-1 hydropowerstation. 50 percent of the shares in this joint venture belong to Russia’s INTER RAO EES; 50 percent belong to “NationalPower Grid”. The Russian partner agreed to find the resources to finance the construction of Kambarata-1.46 Approved by the KRG Resolution No 229 dated 21 April 2000.47 Approved by the KRG Resolution no 317-p dated 15 June 2009.48 Government Decree “About Measures to Increase Transparency of Operations in the Mining Industries” issued on May14, 2004; N 361 41
  • 42. Following the April 2010 developments, the government introduced the Fuel and Energy SectorTransparency Initiative (FESTI),49 extending transparency and civic engagement requirements to allenterprises in this sector. In particular, FESTI calls for: • Creating a public advisory board for the energy sector; • More regular, complete disclosure of financial information in the energy sector, based on the use of modern financial information management systems; • The expanded use of escrow accounts in the sector; and • The introduction of competitive tenders and auctions for electricity export and import, as well as for major energy sector procurements. Since FESTI’s July 2010 introduction, agreements have been concluded between the Ministryof Energy and all of Kyrgyzstan’s major energy companies (i.e., the “Power Plants” electricitygeneration company, the “National Power Grid” transmission company, and the “Severelectro”,“Vostokelektro”, “Jalalabadelektro”, and “Oshelektro” electricity distribution companies). Theseagreements concern key financial and operational indicators, which are monitored (many via escrowaccounts) on a monthly basis by the companies’ boards of directors and the Ministry of Energy. TheMinistry of Energy has sought to promote “social competition” by releasing comparisons ofelectricity companies’ collection rates. Civic engagement in the energy sector has since 2009 been led by a working group of experts,supported inter alia by the Electricity Governance Initiative (EGI), which seeks to implementtransparency principles in the electricity sector. The EGI programme, which has been applied in anumber of developing countries, is based on a set of 68 policy and regulatory indicators, of which 32indicators were selected for application in Kyrgyzstan.50 FESTI and its related support initiatives represent an important step forward, in terms ofimproving public-sector governance and increasing civic engagement in energy. As the April 2010events preclude for now the accelerated introduction of competitive market forces into the energysector, increased civic engagement in/oversight of the state-owned monopolies that dominate thesector, on the basis of simple, transparent performance indicators, seems most desirable. However,there is no shortage of supervisory bodies already present in the energy sector; relations between theMinistry of State Property (the energy companies’ nominal owner), the Ministry of Energy, itsRegulator, and these companies’ boards of directors were sufficiently complicated even before thecreation of the Supervisory Board. The improvements in regulatory oversight promised by FESTImay need to be accompanied by measures to simplify this external regulatory superstructure, and tostrengthen corporate governance within the energy companies themselves. Energy sector development—future scenarios While efforts to improve public-sector governance and increase civic engagement in energyare certainly important, the breadth and depth of the problems facing Kyrgyzstan’s energy sectorsuggest that considerations of more ambitious energy reforms may at some point return to the frontburner. In this respect, the delineation of four different development scenarios/directions for theelectricity sector now seems possible:49 Decree by the President of the Kyrgyz Republic “On Transparency Initiative in the Fuel and Energy Sector of theKyrgyz Republic” as of July 20, 2010; №49.50 Electricity governance in Kyrgyzstan: An institutional assessment, N. Abdyrasulova, N. Kravtsov, Public FundUNISON, 2009. This document is prepared by a team of experts from public organizations of Kyrgyzstan, with support ofthe World Resource Institute (USA) and Prayas Energy Group (India). 42
  • 43. 1) Restoring vertically integrated energy companies; 2) Rebundling/merging the distribution enterprises, and making the merged entity responsible for reducing losses; 3) Returning to privatizing and marketing power companies; and 4) Improving management within the electricity sector without changing in the sector’s basic ownership or organizational characteristics. Scenario 1: Restoring the vertically integrated electricity monopoly. Under this scenario, theelectricity generation, transmission, and distribution companies would be merged/rebundled,recreating a single operational center for decision-making and implementation. This scenario reflectsthe belief that such a rebundling would allow for better internal control over the power sector,particularly in terms of contracting and other commercial activities that are internal to the sector butexternal to the unbundled companies. It also assumes that the greater internal complexity of theconsolidated company would not overwhelm the managers appointed to run it. If such assumptionsare correct, then reductions in losses and some improvements in the procurement of raw materials andother supplies could be expected. This could take some of the pressure off of tariffs, and increase thecash flow needed to finance investments in the power sector. However, if this scenario were to be chosen, the rebundled power company would be verylarge and complicated—arguably more so than during the Soviet period, when the numbers of users(companies and households) were smaller, technologies simpler, and managers (and customers) hadfewer choices to make. To the extent that some of today’s unbundled companies (which are smallerand simpler to manage than a vertically integrated monopoly would be) face questions aboutmanagerial capacity, these questions would be multiplied many times over in a rebundling scenario.Efficiency gains from reductions in uncertainties due to external contracting and pricing could beoverwhelmed by losses due to over-centralization, additional managerial staffing, less managerial andentrepreneurial initiative, lengthier decision-making processes, and the reduced transparency thatcomes with greater organizational complexity. In this case, reductions in pressures on tariffs andimprovements in cash flow could be short-lived. Scenario 2: Rebundling/merging the distribution companies, and making the merged entityresponsible for reducing losses. This scenario reflects the view that the distribution companies,which interact directly with final users, are the “weak link” in the electricity chain. Changingmanagerial and organizational incentives facing these companies could therefore improve thefunctioning of the whole sector. In particular, this scenario would feature: • Keeping the existing model for power generation and transmission; • Merging the four regional distribution enterprises into a single company, which would inter alia be responsible for reducing losses; • Thereby helping to strengthen central state control over distribution (at the expense of the regional authorities). This approach shares many of the strengths and weaknesses set forth in Scenario 1 above.Because the scale of the renationalization would be smaller, the benefits and costs (risks) of applyingthis approach under Scenario 2 would likewise be smaller. Scenario 3: Return to privatization and marketization. This scenario is based on the beliefthat the state is often a less effective owner than a private entity, and that, in the end, a regulatory andownership regime with greater scope for competitive market forces can provide more effective socialcontrol over the sector than a framework of state direction. This scenario could feature two keyelements: 43
  • 44. • Privatization of power companies to strategic investors; and • A greater role for private distribution companies in the resale of electricity from the four regional power distributors. Prospective privatization options would presumably start with the sale of distributioncompany assets to strategic investors—with the observance of relevant legal norms and expectationsabout transparency and accountability. Such a scenario could also bring much needed capital andknow-how to Kyrgyzstan’s electricity sector, helping to reduce losses, improve financialperformance, and modernize the electricity infrastructure. (Such privatizations, as a way to reducelosses and modernize electricity distribution, are common in other transition economies.) Suchoptions could be expanded to generation—both in hydropower (building on the Kambarata-1 model,in which Russia’s RAO EES would become a majority owner in Kyrgyzstan’s largest hydropowerstation) and in coal-fired plants (e.g., Kara-Keche). However, any privatization scenario faces three key weaknesses—particularly at the presentmoment. First: this model was attempted with the proposed sales of the “Severelektro” and“Vostokelektro” distribution companies, and it did not withstand public scrutiny. Attempts to onceagain move in this direction may not, at present, be politically feasible. In principle, this scenario could be pursued later, under conditions of full transparency. If so,this would lead to a second set of commercial and reputational obstacles, linked to the “low” tariffrates, perceptions (accurate or not) of a poor business environment, political uncertainties, and thelike. That is, even if the domestic political calculus should change, Kyrgyzstan’s efforts to findappropriate strategic investors (e.g., multinational energy companies with deep pockets and proventrack records in reducing losses in their subsidiaries) could come up empty. Third, if such privatizations could be effected within the sector’s existing structuralframework, the new owners would still be monopoly sellers of electricity. International experienceindicates that the gains from replacing a publicly owned monopoly with a privately owned one areoften chimeric. It also underscores the importance of efforts to improve the quality of sectoralregulation—and, if possible, introduce competition from other sources (e.g., small-scale independentpower wholesalers, industrial co-generation). Marketization and the further extension of the private sector power delivery could be exploredwithout recourse to privatization, if the role for private distribution companies in the resale ofelectricity from the four regional power distributors could be expanded. Here, the state-owneddistribution companies could outsource service delivery responsibilities to these companies on thebasis of competitive tenders, the terms of which could include investment programmes and measuresto reduce losses. These tenders could take the form of management contracts, long-term concessions,or other public-private partnership modalities, building on the experience of Pamir Energy inTajikistan (including inter alia donor support for lifeline tariffs for vulnerable households). This approach would face a number of obstacles and drawbacks, including the large variabilityin distribution costs and cash collection in different regions of Kyrgyzstan, and possible resistancewithin the state-owned distribution companies (and their allies in the regional governments) to cedingcontrol over assets to potential/actual competitors. On the other hand, Pamir Energy’s experience inmaking these arrangements work in the forbidding logistical and commercial conditions ofTajikistan’s remote Gorno Badakhshan region suggests that this model could be particularly relevantfor some of Kyrgyzstan’s more remote regions. 44
  • 45. This scenario can not be treated as a viable short-run alternative. It could perhaps be pursuedlater, when better electricity sector governance and regulation reduce popular opposition to tariffincreases and private investment in the energy sector, when competitive forces within the electricitysector are better able to limit cost increases, when concerns about Kyrgyzstan’s investment climateare addressed, and when Kyrgyzstan’s social protection system is better able to protect vulnerablehouseholds from the consequences of higher electricity tariffs. Scenario 4: Improving management within the electricity sector without changing in thesector’s basic ownership or organizational characteristics. This is the scenario currently beingpursued, as embodied by FESTI. It is based on the assumption that opportunities for improving therelationships between and among enterprises and regulators in this sector have not been exhausted.Measures to increase the quality and quantity of financial information disclosed by the powercompanies include:51 • mandatory income and asset statements by top managers (and their families); • stronger roles for public hearings, external supervisory boards, and other institutionalized forms of consumer protection; • modernizing billing, tendering, contractual, and other financial management processes (including via the expanded use of escrow accounts); • strengthening the institutional capacity of the Regulator; • modernizing power metering—at every stage in the production process, not just for final users/households; and • increasing the legal sanctions associated with corruption. However, FESTI has certain limitations—particularly if it is not combined with measures toimprove the market (as well as governance) environment in which the electricity sector functions. Forexample, FESTI has led to the appearance of new regulatory bodies (e.g., the Supervisory Board) in asector in which there is no shortage of supervisory bodies (e.g., the Ministry of State Property, theMinistry of Energy, its Regulator, and the companies’ boards of directors, etc.). The improvements inregulatory oversight promised by FESTI may therefore need to be accompanied by measures tosimplify this external regulatory superstructure, and to strengthen corporate governance within theenergy companies themselves. A similar scenario exercise can be developed for the gas sector, but with three key differences:(i) Kyrgyzgaz has not (yet) been unbundled; (ii) the power source/fuel in question (gas) comes almostexclusively from import; and (iii) the principle that household tariffs should cover costs of service ismore firmly grounded in the sector’s business model. Scenario 1: Privatizing Kyrgyzgaz—with or without unbundling. This would be similar toscenario (3) for the electric power sector set forth above, with the proviso that the strategic investor(Gazprom) seems most interested in purchasing a controlling stake in Kyrgyzgaz as a verticallyintegrated (unbundled) monopoly. The main benefits of this scenario reflect Gazprom’s financial andtechnological capacity, which could be used to expand household access to gas services. In addition,supplies from Gazprom could provide an alternative to deliveries from Uzbektransgaz, thereby endingKyrgyzstan’s reliance on a single gas supplier. On the other hand, privatization without unbundling could limit subsequent possibilities forpotential competition and additional investment in the gas distribution infrastructure. Moreover, thecurrent socio-political concerns about privatization in the electric power sector would be likely to51 Detailed proposals for implementing many of these measures have been implemented by the USAID-funded KyrgyzEnergy Advisory Services in Bishkek. 45
  • 46. extend to Kyrgyzgaz’s potential privatization/sale to Gazprom as well. This suggests that such aprivatization is unlikely to occur for the foreseeable future—and when it does, the sale should besubjected to the highest levels of scrutiny and accountability. Moreover, unless the sale were to beaccompanied by large increases in domestically produced gas, it is not clear why this privatizationshould be expected to reduce gas tariffs for Kyrgyzstani households. Scenario 2: Improving the management of Kyrgyzgaz without changing the gas sector’sinstitutional or ownership framework. This approach is analogous to scenario 4 for the electricitycompanies described above. That is, better regulation and management of, and governance within,Kyrgyzgaz would be emphasized, rather than privatization or promoting market competition. Thelogic of FESTI—transparent agreements between Kyrgyzgaz and the Ministry of Energy could bedrafted to monitor the company’s performance; an external supervisory committee could beestablished; etc. The real questions would perhaps concern whether such arrangements wouldsignificantly strengthen incentives to increase efficiency, and where the resources needed to financethe expansion of the gas distribution infrastructure would come from. Reforms in the thermal power sector can likewise be considered within a scenario developmentframework. Key points in this sector include: (i) the sector’s deeply unprofitable nature, and extensivedepreciation of fixed assets; combined with (ii) significant competition from other energy sources.Consumers unhappy with district heating tariffs or service quality can rely more extensively onelectric heaters, install coal- or gas-fired boilers, or burn firewood. Scenario 1: Privatizing the major companies (Bishkekteploset’, Kyrgyzzhilkommunsoyuz,Bishkekteploenergo). This scenario does not seem realistic without significant tariff increases,possibly combined with explicit subsidies to the private company(s) that would take over serviceprovision responsibilities. Scenario 2: Improving company management without changing the sector’s institutional orownership framework. This approach would be similar to scenario (4) for electric power, or scenario(2) for thermal power. Efforts to improve financial management in and regulation of these companies,inter alia by enhancing transparency and promoting civic engagement, could certainly be pursued.However, given the dismal state of the sector’s finances, and the extent to which the companies relyheavily on subsidies (often provided implicitly and non-transparently) by the national and municipalgovernments, it is difficult to imagine significant improvements in this sector if its basic financialparameters are not changed. Conclusions • Production and sales data indicate that Kyrgyzstan since 2007 has experienced significant increases in energy prices and reductions in energy production and consumption. These data indicate that electricity generation and consumption (generation less net exports and losses) dropped by some 25 and 13 percent, respectively, during 2007-2010. Gas consumption dropped by almost two thirds, as prices of gas imported from Uzbekistan rose from $100 to $240 per 1000 cubic meters during 2007-2009. Faced with growing shortages of centrally supplied electricity and unaffordable gas, many households, businesses, and public institutions switched to coal-fired boilers. Domestic coal production rose some 41 percent during 2007- 2010; apparent consumption (production less net exports) rose 57 percent. On the whole, household energy prices during 2007-2010 rose by 81 percent, compared to a 44 percent increase in the consumer price index. 46
  • 47. • While Kyrgyzstan’s power, thermal, gas, and coal sectors have many differences, they share some important similarities. The companies in these sectors are mostly state-owned monopolists that generally report negative profitability, high technical and commercial losses, and (with the exception of the gas sector), high or growing depreciation rates (reaching 60 percent for fixed assets in the thermal power sector). Many of these sectors report large accounts receivable, payable, or both. Outside of the coal sector, private capital is a rarity; and foreign investment is almost completely absent. Progress towards the creation of a regional electricity market, which could help attract foreign investment into Kyrgyzstan’s electricity generation and transmission sectors, remains halting at best.• Energy tariffs and prices generally seem low, both compared to other transition economies and relative to cost-recovery levels. This reflects strong political and social opposition to raising tariffs. However, since 2007 virtually all of these sectors have reported price or tariff increases well in excess of consumer price inflation. But except for the coal industry, post- 2007 declines in production/generation and consumption are the norm; for some sectors (e.g., gas), these declines are quite large. This combination of sharply higher prices and declining consumption necessarily raises concerns about deterioration in vulnerable households’ access to reliable, affordable energy services. To be sure, household energy consumption is currently being subsidized, from the state budget (which provides up to 75 percent of the revenues received by thermal power producer Kyrgyzzhilkommunsoyuz), from municipal budgets, via cross-subsidies from electricity exports, and from future generations, who will ultimately have to cover the differences between revenues and costs in the energy sector today—in the form of higher tariffs, higher taxes, or poorer services in the future. Since most of these subsidies increase with the quantity of energy consumed, which in turn is linked to income, they are not likely to help protect Kyrgyzstan’s most vulnerable households.• To be sure, some important progress has been made since 2007. Collection rates in the electricity sector have improved significantly as the quasi-fiscal deficit has dropped; the rate of depreciation of fixed assets in the gas sector has fallen; and the basic legal framework for the development of decentralized renewable energy technologies has been introduced. New electricity generation capacity has been brought on line, particularly in terms of the Kambarata-2 hydropower plant. The Fuel and Energy Sector Transparency Initiative is beginning to improve regulatory governance and increase civic engagement. Still, taken as a whole, the scale of Kyrgyzstan’s energy problems remains daunting. Particularly worrisome is absence of a concept for attracting private capital and know-how into a sector that is dominated by state-owned monopolies. The inability of the coal sector—where large reserves are present, and where state ownership and price controls play relatively minor roles—to attract significant amounts of private investment is not a hopeful sign.• The deterioration in energy sector financial performance during a time of sharply rising prices can be explained in part by the declines in consumption, but also by rapid growth in costs. While some of this cost growth reflects the need to build new and refurbish depreciated infrastructure, it may also stem for a lack of effective cost controls when it comes to the procurement of materials (especially fuels), particularly in the electric power sector. 47
  • 48. III. Poverty and household access to energy This chapter reviews issues related to poverty and household access to energy during 2006-2010.52 It focuses in particular on household energy consumption during the energy crisis of 2008 andin response to the tariff increase in 2010. Data issues The household surveys conducted by the National Statistical Committee have since 2003produced data on a number of important indicators. These include: • Presence of gas/water/electricity meters; • Interruptions in gas/water/electricity services; • Types of fuel used for heating; • Value of types of fuel used for heating; • Heating and cooking expenditures; • Bills to be paid; • Actual payments; and • Volume of energy consumption These data are extremely important, and require careful analysis. However, their interpretationposes two sets of challenges. First, these data do not always correspond to production and sales dataprovided by energy companies. For example—whereas: • supply-side data indicate that apparent household electricity consumption (generation less net exports and losses) declined by 3 percent in 2009 (see Figure 7), the survey data indicate that electricity consumption grew 2009; and • supply-side data indicate that apparent household coal consumption (production less net exports) rose by some 21 percent during 2007-2009 (see Figure 21), the survey data show a decline during this time. We believe that the former anomaly may reflect the fact that the data referred in Chapter 2treat some electricity sales to small businesses located in residential areas as sales to households.Since interruptions of electricity services to small businesses during 2008-2009 seem to have beenrelatively large, changes in household consumption may have been more in line with the demand-sidehousehold survey data. (However, since the volume of electricity generated was reported down 6percent in 2009 and electricity exports nearly doubled, the increases in household electricityconsumption suggested by the survey data may not be fully plausible.) Second, these survey data on household expenditures do not always agree with nationalincome accounting data on consumption expenditure. For example, whereas the survey data indicatethat household expenditures in real terms declined by 6 percent in 2009,53 Kyrgyzstan’s nationalaccounts data report a 14 percent reduction in individual consumption for that year. Third, these survey data are not always internally consistent. For example, information onbilling for household consumption and actual payments for electricity and gas consumed do not52 Data for 2010 are limited to the first half of the year.53 Nominal growth in household expenditures in 2009, divided by the change in the consumer price index in 2009. 48
  • 49. match up: the latter consistently exceed the former by some five percent for gas sales and 10 percentfor electricity over a 4.5-year period (January 2006 – mid-2010). While such a variance may bewithin the statistical margin of error, the size of this discrepancy suggests something more systematicmay be at work. Possible explanations include: • Advance payments—household can pay in advance for future energy consumption. However, while such behavior might happen for 1-2 quarters, it does not seem plausible for a 4.5-year period. • Bank transaction fees incurred when settling energy bills. However, such transactions are quite rare outside of Bishkek; and even there the numbers of users of such services are not significant. • Overestimation of actual expenditures by households—perhaps in light of popular sentiments that energy tariffs and expenditures are too high. However, no such variance among billing and payments is reported for coal, district heating, or other forms of energy. • Corruption: households may collude with payment collectors to conceal the full magnitude of energy consumption. Such an explanation can be supported not only by the process of elimination, but also by other research on Kyrgyzstan’s energy sector.54 It is also noteworthy that: o this discrepancy amounted to 79 million som ($1.8 million) for gas and 274 million som ($6.4 million) for electricity, in 2009; o the January 2010 increase in electricity tariffs resulted into a spike in this value during the first quarter of 2010—corresponding to an annualized total of 564 million som ($12.3 million); and o as a share of household expenditures, these discrepancies (additional payments for electricity and gas) are larger for low-income than upper-income households. To the extent that they are not a statistical aberration, these discrepancies can be seen as a “corruption tax” on the poor. Household energy expenditures Aggregate household expenditures during 2006-2009 grew by some 21 percent in real terms,with expenditures in poor and extremely poor households growing as fast as, or slightly faster, thanaverage (Table 5). However, expenditure growth for households in the poorest income decile, as wellas for rural households, lagged behind other groups. Household energy consumption—measured as nominal growth in household expenditures onenergy goods and services55 divided by the change in the energy components of the consumer priceindex—also rose during this time (Table 5), for households in all income deciles, locations, and socialgroups monitored. Growth in energy consumption seems to have been particularly rapid in poor andextremely poor households, households in urban areas, and in households headed by a single parent.54 The USAID report “The Curtailment of Electricity Consumption: Attitude of the Population and Impact on the Qualityof Life” (February 2009) found that “respondents still declare that they pay for electricity regularly and always on time”.55 These include expenditures on electricity, central heating, gas, hot water, coal and other energy sources (chieflyfirewood, peat, kerosene, mazut, dung, and bottled liquefied gas). 49
  • 50. Growth in energy consumption was more moderate in households living in rural and mountainousareas. Table 5—Monthly per-capita household expenditures (in som, 2006-2010) Real growth 2010 (I 2010 (II (cumulative,Households 2006 2007 2008 2009 quarter) quarter) 2006-2009)*National average 1272 1579 2253 2264 2198 2250 21%Poor 685 835 1316 1225 n.a. n.a. 21%Extremely poor 485 567 909 895 n.a. n.a. 25%1st decile (poorest) 488 473 745 805 644 586 12%2nd decile 567 685 1093 1101 920 919 32%9th decile 2037 2498 3349 3608 3424 3431 20%10th decile (wealthiest) 3218 4177 5585 5502 5924 6419 16%Urban 1534 1970 2729 2865 2856 2701 27%Rural 1117 1356 1985 1934 1810 1985 18%High mountains 954 1125 1812 1843 n.a. n.a. 31%Mountains 839 961 1768 1499 n.a. n.a. 21%Single parent 1374 1732 2500 2547 n.a. n.a. 26%With many children 1134 1404 2005 1998 n.a. n.a. 20% With disabled members 1180 1547 1937 2097 n.a. n.a. 21%* Nominal expenditure growth during 2006-2009 deflated by growth in the consumer price index for theseyears. Source: State Statistical Committee, UNDP calculations. It is noteworthy that all of this growth in energy consumption occurred during 2006-2008;declines in overall household expenditures, and especially in household energy consumption, werereported for 2009 (Figure 29). The data in Figure 30 indicate that the shares of household expenditures devoted to energyincreased during 2006-2009, before falling back slightly in the first half of 2010. Expenditures oncoal and electricity account for most of this, followed by expenditures on gas (Figure 31). However,compared to many other countries, these shares of household expenditures devoted to energyconsumption (5.5-6.5 percent) are not particularly large. Quarterly seasonality is apparent in these data: energy spending typically rises in the lastquarter of the year, as household stockpile coal for the winter. Particularly large shares of householdbudgets were devoted to energy expenditures in the fourth quarter of 2008 (due to large priceincreases for coal, as well as exceptionally cold winter temperatures, in that year), as well as in thefirst quarter of 2010 (due to the large tariff increases for electric and thermal power introduced inJanuary of that year). 50
  • 51. Table 6—Average per--capita monthly energy expenditures, by decile group (in som) , Real cum. growth* Household 2006 06 2007 2008 2009 2010:Q1 2010:Q2 (2006-2009) National average 69 94 143 148 200 76 26% Poor 38 52 74 85 n.a. n.a. 31% Extremely poor 25 30 40 72 n.a. n.a. 68% st 1 decile (poorest) 25 33 58 55 59 21 28% nd 2 decile 36 51 85 77 61 23 23% 9th decile 109 152 217 216 323 130 15% 10th decile (wealthiest) 150 172 266 297 562 197 15% Urban 81 55 156 182 329 111 31% Rural 61 87 135 130 124 56 23% High-mountains 59 76 137 110 n.a. n.a. 9% Mountains 54 72 125 99 n.a. n.a. 8% Single parents 80 108 168 185 n.a. n.a. 35% With many children 58 79 123 124 n.a. n.a. 25% With disabled 70 93 143 149 n.a. n.a. 24%* Nominal expenditure growth during 2006-2009 deflated by growth in the energy component of the consumer 2006 2009price index for these years. Source: State Statistical Committee, UNDP calculations. urce: The data in Figure 32 show that energy expenditures absorb a larger share of household 2budgets in poor families than in high income families. However, they also show the share of high-incomehousehold spending devoted to energy expenditures in low-income households converging towards low incomenational averages, by the first half of 2010. onal Figure 29—Trends in household expenditures, ousehold Figure 30—Share of household spending absorbed by ousehold energy consumption* (2007-2009) * (2007 energy expenditures (2006-2010) xpenditures 26% Consumption expenditure 6.5% Energy consumption 6.3% 6.2% 17% 5.9% 14% 13% 5.4% 2007 2008 2009 -6% 2006 2007 2008 2009 2010:H1 -15%* Nominal expenditure growth deflated by growth in the consumer price index (or its energy component) forthese years. Source: State Statistical Committee, UNDP calculations. 51
  • 52. Figure 31—Household energy expenditures by energy sources (2006 Household 2006-2010) Coal Electricity Gas Central heat Hot water Other 50% 40% 30% 20% 10% 0% 2006 2007 2008 2009 2010:Q1Note: shares sum to 100 percent. Source: State Statistical Committee, UNDP calculations. The data in Figures 33 and 34 indicate that low-income households, and household living in 3 income householdsrural and especially mountainous areas, have very limited access to gas, central heating, and hot watersupply. This near-total reliance on electricity and coal—especially in colder mountainous areas total coal especially areas—underscores USAID’s 2009 finding that electricity tariff increases can have disproportionate effects electricityon real incomes in low-income households.56 It also means that such households are more likely to be incomeaffected by interruptions in electricity supplies. This is particularly the case for Kyrgyzstan’s po poorest(first decile) households, for whom spending on electricity absorbs about half of energy expenditures.By contrast, urban and upper-income households are more likely to have access to gas, central upper incomeheating, and hot water. Figure 32—Household expenditures on energy, by deciles (2006- Household -2010) 2006 2007 2008 2009 2010:H1 8% 7% 6% 5% 4% 1st decile 2nd decile National average 9th decile 10th decile (poorest) (wealthiest)Source: State Statistical Committee, UNDP calculations. urce:56 The Curtailment of Electricity Consumption: the Attitude of the Population and Impact on the Quality of life, USAID Consumption:2009. p.4. 52
  • 53. Figure 33—Shares of total household energy expenditures devoted to various e ousehold energy sources (by household decile, 2009) 100% 80% Hot water Central heat 60% Gas 40% Electricity Coal 20% 0% 1 decile 2 decile National 9 decile 10 decile averageSource: State Statistical Committee, UNDP calculations. Before the winter of 2008-2009, quasi-universal household connections to Kyrgyzstan’s 2008 universalelectricity grid meant quasi-universal access to electricity services. However, the combination of universalsevere frosts, unprecedented low water levels in the Naryn cascade hydropower reservoirs, and the hydropowerdecapitalization of the country’s electricity transmission and distribution infrastructure led toelectricity rationing and unplanned service interruptions for households and other users. Figure 34—Shares of total household energy expenditures devoted to various energy sources (by h arious household location, 2009) 100% 80% Hot water Central heat 60% Gas 40% Electricity Coal 20% 0% High Rural Mountain National Urban mountain averageSource: State Statistical Committee, UNDP calculations. urce: 53
  • 54. Figure 35—Share of households reporting interruptions in electricity service (2006-2009) ouseholds ervice No interruptions Few times yearly Once a month 70% Once a week Several times weekly Daily 60% 50% 40% 30% 20% 10% 0% 2006 2007 2008 2009Source: State Statistical Committee, UNDP calculations. As the data in Figure 35 show, the frequency of service interruptions increased abruptly in e2008, when nearly half of Kyrgyzstan’s households reported electricity outages on a daily basis and70 percent reported several such service interruptions per week. While the situation improved in2009, daily interruptions still prevailed.57 Figure 36—Share of households (by income ouseholds Figure 37—Share of households (by location) ouseholdsdecile) experiencing weekly (or more frequent) eekly experiencing weekly (or more frequent)interruptions in electricity service (2008-2009) interruptions in electricity service (2008-2009) ervice 1st decile (poorest) Urban 77% 2nd decile National average 73% 72% 93% National average 85% Rural 9th decile 82% 63% 65% 10th decile (wealthiest) Mountains 78% 72% High mountains 52% 54% 62% 46% 47% 55% 54% 55% 43% 2008 2009 2008 2009Source: State Statistical Committee, UNDP calculations. urce: The data in Figures 36 and 37 indicate that low-income households, and especially households 6 incomein rural and mountainous areas, were more likely to be affected by service interruptions in 2008 and57 Fortunately, reported interruptions in gas, central heating, and hot water supply were much less frequent. 54
  • 55. 2009. As these households’ are more likely to rely on electricity for heat as well as lighting, thesedata underscore the severity of recent winter hardships. Conclusions • Both household expenditures in general, and on energy in particular, increased in real terms during 2006-2009. However, all this growth occurred during 2006-2008; declines in real household expenditures and especially energy consumption were reported in 2009. • Growth in energy consumption seems to have been particularly rapid in poor and extremely poor households, households in urban areas, and in households headed by a single parent. Growth in energy consumption was more moderate in households living in rural and mountainous areas. • The share of household expenditures devoted to energy increased during 2006-2009, but compared to many other countries, they are not particularly large (5.5-6.5 percent). While energy expenditures absorb a larger share of household budgets in poor families than in high- income families, the share of household spending devoted to energy expenditures in low- income households had converged towards national averages by the first half of 2010. • Low-income households, and households in rural and mountainous areas, have very limited access to gas, central heating, and hot water supply. They tend to rely almost exclusively on coal and electricity for heating, as well as illumination. This is particularly the case for Kyrgyzstan’s poorest (first decile) households, for whom spending on electricity absorbs about half of energy expenditures. It also means that such households are more likely to be affected by interruptions in electricity supplies. By contrast, urban and upper-income households are more likely to have access to gas, central heating, and hot water. • Shortages have broken the link between connection to the grid and access to reliable electricity supplies. Until 2008, quasi-universal household connections to Kyrgyzstan’s electricity grid meant quasi-universal access to electricity services. However, the winter energy crisis in that year led to a sharp increase in the frequency of service interruptions: nearly half of Kyrgyzstan’s households reported electricity outages on a daily basis; while 70 percent reported several such service interruptions per week. While the situation improved in 2009, daily interruptions still prevailed. • Low-income households, and especially households in rural and mountainous areas, are most likely to be affected by service interruptions. As these households’ rely on electricity for heat as well as lighting, these data underscore the severity of the recent winter hardships experienced. • Households apparently pay more for electricity and gas than billing information suggests. While this discrepancy can be explained in various ways, corruptive collusion among households and bill collectors may be responsible for this outcome. If so, this “corruption tax” seems to be a particularly heavy burden on low-income households. 55
  • 56. IV. Social protection and the energy sector Overview The Soviet social protection system Kyrgyzstan inherited after independence was poorlyprepared the financial and institutional challenges of transition during the 1990s. In order to maintainmacroeconomic stability and reduce poverty, many reforms were launched, in order to increase thefinancial sustainability of social policies and better target social support to vulnerable groups. Important progress in creating the corresponding legal has been made. Key legal acts include: • The 1998 law “On State Benefits”, which called for a transition to a targeted system of social benefits directed at low income households (as part of a World Bank-supported social sector reform programme, which began in 1995); • The 2001 law “On the Fundamentals of Social Services” (which, unfortunately, is still not fully implemented); • During 2003-2008 the following legal acts were adopted: o The Family Code; o The Children’s Code; o The law “On the Rights and Guarantees of Individuals with Limited Abilities”; and o The law “On State Social Order”. • During 2009-2010, the law “On Minimum Social Standards” and the amended law “On State Benefits” went into force; and the monetization of social benefits (the introduction of which had begun earlier) accelerated. • The following bylaws have been developed to implement the Law “On State Benefits”: o on the definition of household income in allocating the uniform monthly benefit; and o on the guaranteed minimum consumption level. Before the law “On State Benefits” was adopted, state benefits were calculated on the basis ofthe minimum wage. However, because many public employees are paid the minimum wage, fiscalconstraints often constrained increases in the minimum wage, in the social payments linked to it. Inorder to separate public-sector wage policies from poverty reduction efforts, social assistancepayments were decoupled from the minimum wage in 2009, with social assistance paymentsdetermined by trends in the guaranteed minimum income. This indicator, which is set by thegovernment on an annual basis, reflects fiscal and macroeconomic variables, as well as minimumsubsistence considerations for poor households. Despite these efforts, the results of these social policy reforms have at best been partial. Theeffectiveness of social protection remains constrained by a lack of uniform policies, and imperfectcoordination among local governments, ministries, and social service providers. As a result, manysocial benefits continue to be received by non-poor households. The tragic events of April-June 2010both revealed and aggravated problems in the social sector; inter alia by demonstrating the 56
  • 57. government’s inability to provide effective protection to households perceived as being victims of thelarge energy tariff increases. Social policy instruments The pension system dominates social insurance provision, as retirement and disability benefitspaid from the Social Fund provide at least three quarters of the transfer payments received byhouseholds. Reforms conducted over the past two decades have tightened control over insurance tightenedcontributions and more closely linked pension benefits to Social Fund contributions made by theinsured. These measures have strengthened the financial sustainability of the Social Fund and allowedfor increases in pension benefits. Figure 38—Ratio of monthly p pension, social assistance benefits to the national monthly subsistence ational minimum (2007-2009) 45% 2007 2008 2009 32% 31% 22% 18% 16% 4% 3% 4% Monthly pension benefit Monthly social benefit Poor family monthly benefitSource: State Statistical Committee tee. Despite this progress, the ratio of the average pension to the average salary (the “replacementrate”) in 2009 was only 35 percent. This is not enough to keep many pensioners out of p poverty: as thedata in Figure 38 show, the average monthly pension benefit is well below the subsistence minimum.Moreover, its “pay-as-you-go” character leaves Kyrgyzstan’s pension system vulnerable to go” leavesdemographic changes, migration outflows, and informal employment at home. These reducecontributions to the Social Fund and its ability to provide current and future beneficiaries withadequate pension benefits. By the end of 2010, there were only 1.8 social insurance contributors per s.pensioner. If farmers and self-employed individuals (who do not make large contributions to the self employedpension system) are excluded from this calculation, this dependency ratio drops to 1.2 contributorsper pensioner. This raises important questions about the sustainability of Kyrgyzstan’s pensionsystem. In order to address these imbalances, a funded pillar was introduced into the pension system inJanuary 2010. Under this system, 2 percent of contributors’ wages are allocated to individual pension percentaccounts. Funds in these accounts are invested by the Social Fund, in order to accumulate resourcesthat can be used to finance beneficiaries’ subsequent retirement. However, Kyrgyzstan’s rel relatively 57
  • 58. shallow financial system and regulatory uncertainties raise questions about the risks of such anapproach. In addition to old age benefits, pensions are paid in cases of disabilities and loss ofbreadwinners. Pension benefits are also supplemented for various social assistance objectives—suchas occurred prior to the large increase in electric and thermal power tariffs introduced in January2010—and for special classes of pensioners (e.g., military men; individuals, who live and work inhigh-mountain or remote areas; mothers with many or disabled children; workers of companies thathave been liquidated; etc.). Social assistance is provided via categorical benefits, the monthly social benefit (for peopleliving with disabilities and for families who have lost a breadwinner), and the means-tested monthlybenefit to poor families with children.58 Monthly social benefits. The MSB is available to: • people living with disabilities; • children who have lost one or both parents; • the elderly who have reached retirement age but are not receiving a pension; and • others who, due to age or disease, are not able to provide for their own welfare. Since January 2010, ranges from 1,000-2,000 som ($21-$42) per month, which is well belowthe subsistence minimum. This is because the value of the guaranteed minimum income (whichdetermines MSB eligibility) is set below the extreme poverty line. Monthly benefits to poor families with children, which is paid to families with children,whose incomes are below the guaranteed minimum income level (which is currently 310 som ($7) permonth). The size of the PFMB is determined by the difference between the guaranteed monthlyincome and actual per-capita monthly income in an applicant household. Other benefits paid to poorfamilies with children under this programme include: • a lump-sum allowance equal to 300 percent of the guaranteed monthly income, paid when a child is born; • an allowance for children below age three—100 percent of the guaranteed monthly income; • an allowance for twins—100 percent of the guaranteed monthly income upon their birth; • an allowance for triplets (and larger births)—150 percent of the guaranteed monthly income upon the birth of each child. The PFMB is Kyrgyzstan’s only national means tested social assistance benefit. In addition tocalculating recipient households’ monetary and in-kind (e.g., from agriculture) incomes, family assets(e.g., durable goods, draft animals) are also taken into account. As a result, it performs reasonablywell in terms of targeting accuracy. World Bank research59 finds that, in 2005, the poorest 40 percentof the population received 81 percent of total PFMB benefits paid out; and that close to 75 percent ofthe PFMB beneficiaries were in this group. However, as the data in Figure 40 show, the PFMB iseven more modest than the average monthly pension and social benefit. As with the MSB, this isbecause the value of the guaranteed minimum income (which determines PFMB eligibility) is setbelow the extreme poverty line.58 Before 2010 this was called the universal monthly benefit. Its name was changed by the 2009 law on State Benefits,which went into effect in January 2010.59 Social Safety Net in the Kyrgyz Republic: Capitalizing on Achievements and Addressing New Challenges, World Bank,May 20, 2009. 58
  • 59. Categorical benefits. Although it has undergone reforms in the past two decades, socialassistance in Kyrgyzstan retains many characteristics of the categorical benefits system inherited fromthe Soviet time. State benefits were assigned to offset low wages, to recognize distinctive merits ofvarious groups, and to remediate the health consequences of natural and anthropomorphic disasters. Before 2006 there were 38 beneficiary categories, compensation for 29 of which was providedin-kind. During 2006-2007 two additional types of cash benefits were added (for housing, communalservices and energy, as well as for public transport. As of today there are 25 categories ofbeneficiaries and eight types of privileged services in Kyrgyzstan, financed by the national (andsometimes local) budget(s).60 The monetization of categorical benefits. In January 2010 the number of categorical benefitswas reduced from 38 to 25 categories, while the number of privileged services was reduced from 40to eight and were fully monetized. Benefits providing households with cash compensation to purchasecoal and meet their monthly energy bills were also monetized. The size of these cash benefits (whichtypically range from 1000 to 7000 som per month) are based on the value of benefits provided beforeJanuary 2010, and are financed both from national and local government budgets. The elimination of13 benefit categories also helped reduce the number of beneficiaries from some 281,200 to 53,500 (asof 1 October 2010). These include individuals with incomes above the subsistence level, andindividuals of active working age not otherwise suffering from disabilities or disadvantages. Table 7—Kyrgyzstan’s social protection instruments: Efficiency and effectiveness (2005 data) Monthly Monthly social Categorical benefit benefit benefits61 Pensions62 63Share of GDP 0.53% 0.21% 0.6% 5.1%Coverage of poorest quintile 28% 13% 16% 56%Targeting accuracy64 38% 33% 13% 29%Benefit generosity65 7% 8% 1% 25%Poverty impact:66• Poverty 12% 6% 1% 48%• Extreme poverty 3% 6% 1% 33% 67Cost efficiency:• Poverty 2 3 6 3• Extreme poverty 5 6 27 10Source: Social Safety Net in the Kyrgyz Republic: Capitalizing on Achievements and Addressing NewChallenges, World Bank, May 2009, p. 11. As is often the case with the reform of social protection in transition economies, themonetization of categorical benefits in Kyrgyzstan met with considerable popular resistance. Inaddition to helping to stoke the popular unrest that led to the overthrow of the Bakiyev government in60 Significant in-kind benefits are also provided by public- (and private-sector) enterprises to their employees (e.g.,vacation vouchers), and by donors to low-income or vulnerable households (e.g., foodstuffs).61 Except for “share of GDP”, all data refer to categorical housing and utilities (including energy) subsidies.62 Old age, disability, survivor pensions.63 2007 data.64 Share of benefits captured by poorest quintile.65 Ratio of benefit to estimated beneficiaries’ consumption expenditures.66 Relative reduction in the (extreme) poverty gap.67 Nominal cost (to the state budget) of reducing the (extreme) poverty gap by one som. 59
  • 60. April 2010, this resistance has taken the form of refusals of World War II invalids l living in Bishkekto collect cash compensations in lieu of the in-kind subsidies they used to receive for housing, energy, in kindand communal services. In the end, Kyrgyzstan seems likely to continue living with a “patchwork”social protection system consisting of “old-style” categorical benefits, social assistance that is o style”targeted at low-income households, and social insurance (e.g., pensions) that absorbs the lion’s share incomeof social policy resources and therefore has the largest overall impact in terms of poverty reduction. In any case, until recently pensions have in many respects been Kyrgyzstan’s most effectivesocial policy instrument, in terms of poverty reduction (Table 7). The pension system does not ter ).explicitly target low-income households. However, because it contains the lion’s share of incomeKyrgyzstan’s social protection resources, and because so many households are living close to orbelow the poverty line, the pension system is the only social policy instrument with the depth and systembreadth of influence household incomes in a great many families. Effectiveness of social protection Social protection expenditures expanded dramatically during 2008-2010 (see Table 2). While 2008 2010these increases resulted in part from the monetization of categorical benefits that had previously beendelivered in-kind, they also reflected the government’s attempts to ameliorate the social impact of the kind, attemptsgrowth slowdown linked to the global financial crisis (in 2009), and then of the 2010 recession causedby the April-June political events. These increases were made possible by large increases in budget Junesupport grants provided by international financial institutions and bilateral donors, which helped antsoffset large fiscal deficits in these years. Whether this fiscal and social policy response toKyrgyzstan’s socio-economic tensions is sustainable remains to be seen. economic Figure 39—Trends in the Distribution of Social Benefits* by Household Deciles (2006-2010) Trends 60% 2006 52% 51% 2007 50% 50% 2008 42% 42% 43% 38% 2009 30% 2010:H1 11% 13% 7% 6% 7% Deciles 1-3 (poorest) 3 Deciles 4-8 (middle class) Deciles 9-10 (wealthiest) 10* Pensions plus PFMB, MSB, categorical benefits, benefits paid by enterprises. Source: State StatisticalCommittee, UNDP calculations. Did this social policy response have a pro-poor character, in terms of helping to shield pro poorKyrgyzstan’s most vulnerable households from the impact of the unfavourable macroeconomic trendsduring 2009-2010? Since (according to these data) social benefits (including pensions) only comprise ludingabout 10 percent of household income, it would be difficult for social policy instruments to have a 60
  • 61. profound impact on household welfare. However, if these social benefits were concentrated in low low-income households, they could have an important effect. d Unfortunately, as the data in Figure 39 show, only about half of Kyrgyzstan’s social benefitswere received by low-income households (i.e., the lowest three deciles of the income distribution). incomeThis share actually dropped slightly during 2009 2010 (to 50 percent, down from 52 percent in 2008). 2009-2010By contrast, the share of social benefits accruing to upper-income households more than doubled upper income(from 6 to 13 percent) during 2008 2010. This increase came primarily at the expense of the middle 2008-2010.deciles in the income distribution, whose share of total social benefits paid out dropped to 38 percent social(it had been 51 percent in 2007). Thus, the lion’s share of the increased social policy response to thecrisis developments of 2009-2010 2010—much of which was financed by donors— —seems to have leaked torelatively wealthy households. thy Since pensions account for the bulk of social benefits paid out, this result is driven primarilyby trends in pension spending. As the data in Figure 40 show, upper-income households benefitted incomehandsomely from increases in pension spending during 2009-2010: the share of pension benefits 2010:accruing to relatively wealthy households rose from 23 percent in 2008 to 38 percent during the firsthalf of 2010. By contrast, the share of pension benefits accruing to low-income households dropped low incomefrom 24 to 14 percent during this time. These data weaken the case for viewing pensions as a poverty 4 poverty-reduction instrument in Kyrgyzstan. Figure 40—Trends in the distribution of Trends Figure 41—Trends in the distribution of Trends pension benefits by household deciles (2008- ousehold categorical benefits by h household deciles (2008- 2010) 2010) 2008 65% 2008 53% 55% 2009 2009 48% 2010:H1 2010:H1 38% 46% 43% 42% 38% 28% 24% 31% 23% 17% 20% 14% 11% 4% Deciles 1-3 -8 Deciles 4- Deciles 9-10 Deciles 1-3 Deciles 4 4-8 Deciles 9-10 (poorest) (middle class) (wealthiest) (poorest) (middle class) (wealthiest) The data in Figure 41 indicate that the simplification and monetization of categorical benefitsintroduced in 2010 deepened the regressive character of Kyrgyzstan’s social policy framework. Theshare of categorical benefits—including subsidies for energy and communal services —including services—received bylow-income households dropped from 46 percent in 2009 to only 20 percent during the first half of income2010. (This share had been at 65 percent in 2008.) By contrast, the share of categorical benefitsaccruing to upper-income households rose from 11 to 38 percent during this time. These trends incomestrengthen the case for means- -testing categorical benefits. 61
  • 62. Figure 42—Trends in the distribution of PFMB istribution Figure 43—Trends in the ddistribution of MSB benefits by household deciles (2008-2010) eciles benefits by household deciles (2008-2010) eciles 2008 2008 64% 66% 2009 61% 2009 56% 57% 2010:H1 2010:H1 49% 47% 40% 33% 30% 22% 22% 17% 12% 13% 4% 4% 3% Deciles 1-3 Deciles 4-8 Deciles 9-10 Deciles 1-3 Deciles 4-8 8 Deciles 9-10 (poorest) (middle class) (wealthiest) (poorest) (middle class) (wealthiest) The data in Figure 42, regarding the distribution of transfers under the poor family monthly ,benefits programme, tell a more hopeful story: they show the share of total benefits accruing to poorfamilies rising from 49 percent in 2008 to 64 percent during the first half of 201 They also indicate 2010.that a very small share of these benefits leak to upper-income households. These trends suggest that upper incomeKyrgyzstan’s social policy institutions are increasingly able to direct means-tested benefits to the meanshousehold that need them the most. mos Unfortunately, trends in the monthly social benefit payments paint a less cheerful picture: theshare of these benefits going to low-income households dropped from 57 percent in 2008 to only 12 low incomepercent during the first half of 2010 (Figure 43). Significant increases in leakages to middle and 4 cant middle-upper-income households seem to have occurred during this time. These trends question the rationale incomefor considering the monthly social benefit to be an instrument for poverty reduction. They alsostrengthen the case for means--testing categorical benefits. In sum, these data suggest that Kyrgyzstan’s social protection system has become less able todirect benefits to the most needy households during the past two years. This has implications for thesystem’s ability to protect vulnerable households from possible future increases in energy prices aswell. Social protection and the energy sector Social and energy policies in Kyrgyzstan have traditionally been linked in four ways: 1. Categorical benefits providing households with cash compensation to purchase coal and meet their monthly energy bills; 2. The use of lifeline electricity tariffs, under which the consumption of small amounts of electricity was billed at lower rates; 3. Decisions about tariff increases, in which government bodies have sought to address social which concerns as well as financial sustainability issues; and 4. Decisions to raise pensions, the PFMB and MSB, in order to provide compensation for higher 62
  • 63. energy tariffs and prices. By January 2010, links (1) and (2) had essentially been abandoned. Arguments abouttransparency and administrative simplicity had led to the cancellation of lifeline tariffs and themonetization of categorical benefits related to energy consumption. Instead, the emphasis switched to(3) and (4). The consequences of this switch included the: • social unrest evoked by the January 2010 energy tariff increases and the monetization of social benefits, followed by the April 2010 rescinding of some (not all) of these tariff increases—without corresponding reductions in social benefits; • post-April 2010 social contract not to raise household energy tariffs for an unspecified period of time—signaling the ascension of “social” over “economic” criteria in energy sector tariff policy; and • consolidation of the more regressive character of Kyrgyzstan’s social protection system that apparently emerged during 2009-2010 (described above). In light of the relatively small share of household spending apparently devoted to energyexpenditures, the small likelihood that household electricity tariffs will be increased in the short- (andpossibly medium) term, and the difficulties in targeting social benefits to poor households, the casefor more closely linking social and energy policies is difficult to make. The issue would instead seemto be one of adopting policies to improve the functioning of the energy sector (as explored in Chapter2) and the social protection system. In this respect, important changes would include: • More closely linking the PFMB to the guaranteed minimum income, which should itself be more closely linked to the minimum subsistence level; • Means-testing the MSB and categorical benefits, to reduce their regressive character; and • Consideration of the reintroduction of lifeline electricity tariffs. Reductions in tariffs for small volumes of household electricity consumption could be offset by higher tariffs for consumption above this level, thereby leaving average tariff levels unchanged. 63
  • 64. Conclusions• Two decades of reforming Kyrgyzstan’s social policy framework have produced mixed results, both in general and in terms of links with the energy sector in particular. The effectiveness of social protection remains constrained by a lack of uniform policies, and imperfect coordination among local governments, ministries, and social service providers. As a result, many social benefits continue to leak to non-poor households. The tragic events of April-June 2010 both revealed and aggravated problems in the social sector, inter alia by demonstrating the government’s inability to provide effective protection to households perceived as being victims of the large energy tariff increases.• The monetization of categorical benefits in Kyrgyzstan—particularly in terms of the initiatives pursued during 2010—has met with considerable popular resistance. Kyrgyzstan seems likely to continue living with a “patchwork” social protection system consisting of “old-style” categorical benefits, social assistance that is targeted at low-income households, and social insurance (e.g., pensions) that absorbs the lion’s share of social policy resources and therefore has the largest overall impact in terms of poverty reduction.• The most recent household survey data indicate that only about half of Kyrgyzstan’s social benefits were received by low-income households (i.e., the lowest three deciles of the income distribution). This share actually dropped slightly during 2009-2010 (to 50 percent, down from 52 percent in 2008). By contrast, the share of social benefits accruing to upper-income households more than doubled (from 6 to 13 percent) during 2008-2010. Much of the increased social spending in response to the crisis developments of 2009-2010—significant shares of which were financed by donors—seems to have leaked to relatively wealthy households. These data suggest that Kyrgyzstan’s social protection system has become less able to direct benefits to the most needy households during the past two years. This has implications for the system’s ability to protect vulnerable households from possible future increases in energy prices as well.• Since pensions account for the bulk of social benefits paid out, this result is driven primarily by trends in pension spending. Upper-income households seem to have benefitted handsomely from increases in pension spending during 2009-2010: the share of pension benefits accruing to relatively wealthy households rose from 23 percent in 2008 to 38 percent during the first half of 2010. By contrast, the share of pension benefits accruing to low-income households dropped from 24 to 14 percent during this time. These data weaken the case for viewing pensions as a poverty-reduction instrument in Kyrgyzstan.• The simplification and monetization of categorical benefits introduced in 2010 seems to have deepened the regressive character of Kyrgyzstan’s social policy framework. The share of categorical benefits—including subsidies for energy and communal services—received by low-income households dropped from 46 percent in 2009 to only 20 percent during the first half of 2010. (This share had been at 65 percent in 2008.) By contrast, the share of categorical benefits accruing to upper-income households rose from 11 to 38 percent during this time.• Likewise, the share of the monthly social benefits (accruing primarily to people with disabilities, to households that have lost a breadwinner, and to retirees not receiving old-age pensions) going to low-income households dropped from 57 percent in 2008 to only 12 percent during the first half of 2010. These trends question the rationale for considering the monthly social benefit to be an instrument for poverty reduction. 64
  • 65. • By contrast, the share of the poor family monthly benefits programme (Kyrgyzstan’s only national means tested social policy instrument) accruing to low-income families rose from 49 percent in 2008 to 64 percent during the first half of 2010. Likewise, very small shares (3-4 percent) of these benefits leak to upper-income households. These trends suggest that Kyrgyzstan’s social policy institutions are increasingly able to direct means-tested benefits to the household that need them the most. Unfortunately, the benefits paid out under this programme are so small as to have only a minimal poverty-reduction impact. These trends strengthen the case for transferring resources from other social protection programmes to the PFMB programme, and for means testing categorical benefits and the monthly social benefit.• In light of the relatively small share of household spending apparently devoted to energy expenditures (see Chapter 3), the small likelihood that household electricity tariffs will be increased in the short- (and possibly medium) term, and the difficulties in targeting social benefits to poor households, the case for more closely linking social and energy policies is difficult to make. The issue would instead seem to be one of adopting policies to improve the functioning of the energy sector (as explored in Chapter 2) and the social protection system. In this respect, important changes would include: o More closely linking the PFMB to the guaranteed minimum income, which should itself be more closely linked to the minimum subsistence level; o Means-testing the MSB and categorical benefits, to reduce their regressive character; and o Consideration of the reintroduction of lifeline electricity tariffs. Reductions in tariffs for small volumes of household electricity consumption could be offset by higher tariffs for consumption above this level, thereby leaving average tariff levels unchanged. 65
  • 66. V. Conclusions and recommendations Conclusions Production and sales data indicate that Kyrgyzstan since 2007 has experienced significantincreases in energy prices and reductions in energy production and consumption. These data indicatethat electricity generation and consumption (generation less net exports and losses) dropped by some25 and 13 percent, respectively, during 2007-2010. Gas consumption dropped by almost two thirds,as prices of gas imported from Uzbekistan rose from $100 to $240 per 1000 cubic meters during2007-2009. Faced with growing shortages of centrally supplied electricity and unaffordable gas,many households, businesses, and public institutions switched to coal-fired boilers. Domestic coalproduction rose some 41 percent during 2007-2010; apparent consumption (production less netexports) rose 57 percent. On the whole, household energy prices during 2007-2010 rose by 81percent, compared to a 44 percent increase in the consumer price index during this time. Thiscombination of sharply higher prices and declining consumption necessarily raises concerns aboutdeterioration in household access to reliable, affordable energy services. Despite these inflation rates, energy tariffs and prices generally seem low, relative to othertransition economies and to cost-recovery levels in Kyrgyzstan. This reflects strong socio-politicalopposition to raising tariffs. Household energy consumption is currently being subsidized, from thestate budget (which provides up to 75 percent of the revenues received by thermal power producerKyrgyzzhilkommunsoyuz), from municipal budgets, via cross-subsidies from electricity exports, andfrom future generations, who will ultimately have to cover the differences between revenues and costsin the energy sector today—in the form of higher tariffs, higher taxes, or poorer services. Since mostof these subsidies increase with the quantity of energy consumed, which in turn is linked to income,they are not likely to help protect Kyrgyzstan’s most vulnerable households. Strategies based on tariff rebalancing, unbundling, and privatization via sales to strategic(often foreign) investors that have underpinned energy sector reforms in many transition economieshave run aground in Kyrgyzstan. Privatization measures introduced during the Bakiyev period havebeen repealed, and electricity tariff increases seem to be off the table for the foreseeable future. Theemphasis is instead on reducing corruption within the energy sector by strengthening state control andcivic engagement. Whether this approach can significantly reduce losses and attract the capital andexpertise needed to modernize Kyrgyzstan’s energy sector, and improve national and householdenergy security, remains to be seen. Kyrgyzstan’s electricity, thermal, gas, and (to a smaller extent) coal sectors seem likely toremain dominated by state-owned monopolies that generally report negative profitability, hightechnical and commercial losses, and (with the exception of the gas sector), high or growingdepreciation rates (reaching 60 percent for fixed assets in the thermal power sector). Many of thesesectors report large accounts receivable, payable, or both. Outside of the coal sector, private capitaland foreign investment are almost completely absent. Progress towards the creation of a regionalelectricity market, which could help attract foreign investment into Kyrgyzstan’s electricitygeneration and transmission sectors, remains halting at best. The deterioration in energy sector financial performance during a time of sharply rising pricescan be explained in part by the declines in consumption, but also by rapid growth in costs. Whilesome of this cost growth reflects the need to build new and refurbish depreciated infrastructure, itmay also stem from ineffective cost controls when it comes to the procurement of materials(especially fuels), particularly in the electric power sector. 66
  • 67. Some important progress has been made since the onset of the winter energy crisis in 2007-2008. Collection rates in the electricity sector have improved significantly as the quasi-fiscal deficithas dropped; fixed asset depreciation in the gas sector has fallen; and the basic legal framework forthe development of decentralized renewable energy technologies has been introduced. New electricitygeneration capacity has been brought on line, particularly in terms of the Kambarata-2 hydropowerplant. The Fuel and Energy Sector Transparency Initiative is beginning to improve regulatorygovernance and increase civic engagement. Still, taken as a whole, the scale of Kyrgyzstan’s energy problems remains daunting.Particularly worrisome is absence of a concept for attracting private capital and know-how into asector that is dominated by state-owned monopolies. The inability of the coal sector—where largereserves are present, and where state ownership and price controls play smaller roles—to attractsignificant amounts of private investment is not a hopeful sign. Official survey data indicate that energy consumption increased during 2006-2009. However,all this growth occurred during 2006-2008; large declines in energy consumption were reported in2009. Growth in energy consumption seems to have been particularly rapid in poor and extremelypoor households, households in urban areas, and in households headed by a single parent. Growth inenergy consumption was more moderate in households living in rural and mountainous areas. Whilethe shares of household expenditures devoted to energy increased during 2006-2009, compared tomany other countries, they are not particularly large (5.5-6.5 percent). And while energy expendituresabsorb a larger share of household budgets in poor families than in high-income families, the share ofhousehold spending devoted to energy expenditures in low-income households had convergedtowards national averages by the first half of 2010. These survey data confirm that low-income households, and households in rural andmountainous areas, have very limited access to gas, central heating, and hot water supply. They tendto rely almost exclusively on coal and electricity for heating, as well as for light. This is particularlythe case for Kyrgyzstan’s poorest (first decile) households, for whom spending on electricity absorbsabout half of energy expenditures. It also means that such households are more likely to be affectedby interruptions in electricity supplies. By contrast, urban and upper-income households are morelikely to have access to gas, central heating, and hot water. Shortages have broken the link between connection to the grid and access to reliableelectricity supplies. Until 2008, quasi-universal household connections to Kyrgyzstan’s electricitygrid meant quasi-universal access to electricity services. However, the winter energy crisis in thatyear led to a sharp increase in the frequency of service interruptions: nearly half of Kyrgyzstan’shouseholds reported electricity outages on a daily basis; while 70 percent reported several suchservice interruptions per week. While the situation has improved since then, service outages continue.Survey data indicate that low-income households, and especially households in rural and mountainousareas, are most likely to be affected by service interruptions. As these households’ rely on electricityfor heat as well as lighting, these data underscore the severity of the recent winter hardshipsexperienced. The survey data also indicate that households pay more for electricity and gas than billinginformation suggests. While this discrepancy can be explained in various ways, corruptive collusionamong households and bill collectors may be responsible for this outcome. If so, this “corruption tax”seems to be a particularly heavy burden on low-income households. Two decades of reforming Kyrgyzstan’s social policy framework have produced mixedresults, both in general and in terms of links with the energy sector. Many social benefits continue toleak to non-poor households. The tragic events of April-June 2010 both revealed and aggravated 67
  • 68. problems in the social sector, inter alia by demonstrating the government’s inability to provideeffective protection to households perceived as being victims of the large energy tariff increases.Kyrgyzstan seems likely to continue living with a “patchwork” social protection system consisting of“old-style” categorical benefits, social assistance that is targeted at low-income households, andsocial insurance (e.g., pensions) that absorbs the lion’s share of social policy resources and thereforehas the largest overall impact in terms of poverty reduction. The official survey data indicate that only about half of Kyrgyzstan’s social benefits werereceived by low-income households. This share actually dropped slightly during 2009-2010 (to 50percent, down from 52 percent in 2008). By contrast, the share of social benefits accruing to upper-income households more than doubled (from 6 to 13 percent) during 2008-2010. Much of theincreased social spending in response to the crisis developments of 2009-2010—significant shares ofwhich were financed by donors—seems to have leaked to relatively wealthy households. These datasuggest that Kyrgyzstan’s social protection system has become less able to direct benefits to the mostneedy households. This has implications for the system’s ability to protect vulnerable householdsfrom possible future increases in energy prices as well. Since pensions account for the bulk of social benefits paid out, this result is driven primarilyby trends in pension spending. Upper-income households seem to have benefitted handsomely fromincreases in pension spending during 2009-2010: the share of pension benefits accruing to relativelywealthy households rose from 23 percent in 2008 to 38 percent during the first half of 2010. Bycontrast, the share of pension benefits accruing to low-income households dropped from 24 to 14percent during this time. These data weaken the case for viewing pensions as a poverty-reductioninstrument in Kyrgyzstan. The simplification and monetization of categorical benefits introduced in 2010 seems to havedeepened the regressive character of Kyrgyzstan’s social policy framework. The share of categoricalbenefits—including subsidies for energy and communal services—received by low-incomehouseholds dropped from 46 percent in 2009 to only 20 percent during the first half of 2010. (Thisshare had been at 65 percent in 2008.) By contrast, the share of categorical benefits accruing to upper-income households rose from 11 to 38 percent during this time. Likewise, the share of the monthlysocial benefits (accruing primarily to people with disabilities, to households that have lost abreadwinner, and to retirees not receiving old-age pensions) going to low-income households droppedfrom 57 percent in 2008 to only 12 percent during the first half of 2010. These trends question therationale for considering the monthly social benefit to be an instrument for poverty reduction. By contrast, the share of the poor family monthly benefits programme (Kyrgyzstan’s onlynational means tested social policy instrument) accruing to low-income families rose from 49 percentin 2008 to 64 percent during the first half of 2010. Likewise, very small shares (3-4 percent) of thesebenefits leak to upper-income households. These trends suggest that Kyrgyzstan’s social policyinstitutions do have the capacity to direct means-tested benefits to the households that need them themost. Unfortunately, the benefits paid out under this programme are so small as to have only aminimal impact on poverty. These trends strengthen the case for transferring resources from othersocial protection programmes to the PFMB programme, and for means testing categorical benefitsand the monthly social benefit. Social and energy policies in Kyrgyzstan have traditionally been linked in four ways: 1) Categorical benefits providing households with cash compensation to purchase coal and meet their monthly energy bills; 2) The use of lifeline electricity tariffs, under which the consumption of small amounts of electricity was billed at lower rates; 68
  • 69. 3) Decisions about tariff increases, in which government bodies have sought to address social concerns as well as financial sustainability issues; and 4) Decisions to raise pensions, the PFMB and MSB, in order to provide compensation for higher energy tariffs and prices. By January 2010, links (1) and (2) had essentially been abandoned. Arguments abouttransparency and administrative simplicity had led to the cancellation of lifeline tariffs and themonetization of categorical benefits related to energy consumption. Instead, the emphasis switched to(3) and (4). The consequences of this switch included the: • social unrest evoked by the January 2010 energy tariff increases and the monetization of social benefits, followed by the April 2010 rescinding of some (not all) of these tariff increases—without corresponding reductions in social benefits; • post-April 2010 social contract not to raise household energy tariffs for an unspecified period of time—signaling the ascension of “social” over “economic” criteria in energy sector tariff policy; and • consolidation of the more regressive character of Kyrgyzstan’s social protection system that apparently emerged during 2009-2010. Recommendations In light of the relatively small share of household spending apparently devoted to energyexpenditures, the small likelihood that household electricity tariffs will be increased in the short- (andpossibly medium) term, and the difficulties in targeting social benefits to poor households, the casefor more closely linking social and energy policies is difficult to make. The issue would instead seemto be one of adopting policies to improve the functioning of the energy sector and the socialprotection system. In this respect, important changes would include: • More closely linking the PFMB to the guaranteed minimum income, which should itself be more closely linked to the minimum subsistence level; • Means-testing the MSB and categorical benefits, to reduce their regressive character; and • Consideration of the reintroduction of lifeline electricity tariffs. Reductions in tariffs for small volumes of household electricity consumption could be offset by higher tariffs for consumption above this level, thereby leaving average tariff levels unchanged. A number of important research questions have been identified in this report. These pertain to: • Improvements in the quality of household survey and production/sales data regarding the energy sector, in order to remove inconsistencies within and between these data sets; • Developing possible scenarios for the future of Kyrgyzstan’s energy sector; • Improving corporate governance in the energy sector; • Identifying appropriate energy saving technologies, and policies and programmes to accelerate their introduction; 69
  • 70. • Strengthening the role of affordability analyses in regulating energy tariff increases;• Analysis of obstacles to the accelerated development of small hydropower plants and other decentralized renewable energy technologies, with proposed solutions;• Analysis of the costs of electric and thermal power production and tariff setting; and• Analysis of the results of the Fuel and Energy Sector Transparency Initiative. 70
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  • 72. 24. Decree by the President of the Kyrgyz Republic “On Transparency Initiative in the Fuel and Energy Sector of the Kyrgyz Republic” as of July 20, 2010; №49.25. Electricity governance in Kyrgyzstan: an institutional assessment /N.Abdyrasulova, N.Kravtsov - Public Fund "UNISON", 2009, 142 pp. The Document is prepared by a team of experts from public organizations of Kyrgyzstan, with support of the World Resource Institute (USA) and Prayas Energy Group (India).26. Finance of the enterprises of the Kyrgyz Republic. National statistics committee of the Kyrgyz Republic. - Bishkek-2010. The data cover all enterprises of electric power industry, including small enterprises.27. Finance of the enterprises of the Kyrgyz Republic. National statistics committee of the Kyrgyz Republic. Bishkek, 2010.28. Social Safety Net in the Kyrgyz Republic Capitalizing on Achievements and Addressing New Challenges, Document of the World Bank, May 20, 2009;29. The KR Law "On Energy Saving" dated July 7, 1998, N 88.30. The National Energy Program for 2008-2010 and the Strategy for the Fuel and Energy Sector Development until 2025 dated April 24, 2008, N 346-IV;31. Edil Bogombayev and Ularbek Mateyev, “Prospects for Renewable Energy in Kyrgyzstan”, Development and Transition, 25 June 2008 (http://www.developmentandtransition.net/Single- Article-Issue.118+M5d105dc32fa.0.html). 72