Kyrgyz Republic: Power Sector Improvement Project

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Lessons

A thorough assessment of the implementation risks and consistent follow-up to effectively carry out risk mitigation measures are essential to minimizing project delays.

At appraisal, this project was envisaged to be implemented from January 2010 to December 2013. But it took until July 2018 for the project to be completed, with a three-time extension. The long delay was caused by a host of factors, including (i) delayed loan effectiveness and signing of the subsidiary financing agreement, (ii) protracted recruitment and poor performance of the project management consultant, (iii) delayed procurement of the supply and turnkey contracts, (iv) slow implementation of the polychlorinated biphenyl testing, and (v) scope changes to purchase more equipment using the loan savings. Although the risk of implementation delay was identified at appraisal, and mitigation measures incorporated in the project design, efforts were apparently insufficient. A thorough risk assessment needs to be included in the preparation of future projects. Sufficient mitigation measures, including advance procurement and recruitment activities, clear financing arrangements, streamlined government approval processes, and adequate project staff training and implementation support from ADB, must be adopted and effectively carried out.

Project Cycle Stage:

Preparation

Implementation

Financing project contingencies through counterpart funds can encourage better utilization of loan and grant proceeds.

Rehabilitating energy assets and strengthening energy security requires significant assistance from development partners. However, some of the loan and grant proceeds under this project were not fully utilized and were cancelled at financial closure. This was because (i) about 10.8% of the loan and grant proceeds was reserved as “unallocated” in the project budget and needed to be reallocated during implementation; and (ii) all loan and grant proceeds were relent to the Joint Stock Company National Grid of Kyrgyzstan (NEGK). Considering its debt burden and the cost of capital, NEGK was not willing to fully use the loan. Financing project contingencies through counterpart funds can help avoid loan and/or grant reallocations in future projects. Executing agencies can prepare contingent subprojects to be financed by loan or grant savings, if any.

Project Cycle Stage:

Preparation

Governments need to explore various possible financing arrangements to help power companies achieve financial sustainability.

In situations where sector reforms are ongoing parallel to investment projects, financing arrangements between the borrowing governments and the energy companies need to consider the financial position of the latter. Where electricity tariffs are low, governments can explore the use of equity contributions to make energy companies more financially viable.

Project Cycle Stage:

Preparation

Implementation

Procurement plans and terms of reference for key consultants need to be clearly established during project preparation to avoid startup and implementation delays.

Disagreements over contract terms related to payable taxes, reimbursable expenses, and the proportion of home and field work inputs held back the contract award for the project management consultant (PMC) by about six months. Bidding document revisions and disagreement over the procurement method for the turnkey contract created further delays. Such delays could have been prevented had the procurement plan and PMC terms of reference been settled during project processing. Preparation of the project procurement plan and bidding documents would have been facilitated by the engagement of experts.

Project Cycle Stage:

Preparation

Implementation

Background

The Kyrgyz Republic, because of abundant hydropower resources, was the largest net power exporter in the Central Asian Power System during the 1990s and 2000s. However, load shedding was common during years when the river water levels and discharges were low due to hydrologic fluctuations. While such a supply pattern called for increased regional power trade to balance supply and demand, the reliability of power supply in the country was also hindered by (i) high system losses; (ii) obsolete and inefficient, technology; (iii) power cuts caused by dilapidated equipment in use since the Soviet era, and (iv) poor governance and financial management. Thus, even if the entire energy sector required modernization, the government prioritized the rehabilitation of key generation, transmission, and distribution assets; reducing losses; and more effective governance to improve commercial operations and restore people’s confidence in the energy sector and ensure socioeconomic stability.

To help the government achieve its sector priorities, the Asian Development Bank (ADB) approved a loan of $16.7 million equivalent and a grant of $28.10 million for the Power Sector Improvement Project in September 2010. The project was designed to boost energy security, energy efficiency, and regional power trade. Its expected impact was stronger reliability of national and regional power supply in the Kyrgyz Republic and Central Asia, achieved through the project outcome of better operational efficiency of power utilities.

At appraisal, the project included three physical components: (i) installation of an automated metering and data acquisition (AMDA) system for the national electricity transmission network, (ii) rehabilitation of facilities in more than 50 electricity transmission substations, and (iii) installation of a supervisory control and data acquisition (SCADA) system linking seven major substations. Its nonphysical components comprised: (i) recommending a suitable settlement mechanism for wholesale electricity transactions, and (ii) improving the financial management capacities and strategic business plans of the Joint-Stock Company National Electric Grid of Kyrgyzstan (NEGK), the national electricity transmission company. During implementation, the project scope was amended to reflect actual needs and fully utilize the ADB loan and grant.

Despite implementation delays, the AMDA and SCADA systems were developed and commissioned as planned. Out of 197 NEGK substations, 118 were rehabilitated, which is almost 4 times the 50 substations planned at appraisal. However, this was still not enough to fully achieve the operational efficiency targets as rehabilitation works addressed only the most critical needs of the aging substations which have already been operating for over 25 years.

Nevertheless, the project’s physical outputs have improved the efficiency and transparency of electricity generation, transmission, and distribution in the country, as well as increased the electricity supply. Its nonphysical outputs have significantly enhanced institutional capacity within the energy sector. The settlement center was established in 2015 and has been equipped through another ADB-financed project. A ministerial workshop on improving the financial management of NEGK, attended by representatives of the government and power companies, was held under the project. The NEGK’s business plan has been put into effect.

Substantial output deliveries have enabled the project to fully or substantially achieve most of its outcome and impact targets. Net electricity exports were 1,213 gigawatt-hours (GWh) in 2017 and 753 GWh in 2018; although this is lower than the impact target of 3,000 GWh in 2017, the shortfall can mainly be explained by rapidly increasing domestic demand, combined with a decrease in demand from neighboring countries. Grid outages reduction targets were met, and so were the targets on aggregate transmission and distribution losses, which saved 2,820 GWh in 2018. The electricity savings enabled the Kyrgyz Republic to sign a power-purchase agreement under the Central Asia – South Asia 1000 project to export 1,000 GWh of electricity to Pakistan and Afghanistan starting in 2023.

The project had two executing agencies: the Ministry of Energy for the nonphysical components, and the NEGK for the physical components. The NEGK assigned its existing project implementation unit to oversee the execution of the physical components.

Project Information

Project Name:

Power Sector Improvement Project

Report Date:

July, 2020

Main Sector:

Energy

Country:

Kyrgyz Republic

Project Number:

43456-023

Report Type: