Kyrgyzstans Energy Sector: A Poverty and Social Impact Assessment

Commissioned by UNDPs Regional Bureau for Europe and CIS

Draft for comments, not citation.

April 2011 Authors: Rafkat Hasanov, Kemal Izmailov Editor: Ben Slay

TABLE OF CONTENTS List of acronyms ............................................................................................................................... 3 List of figures and tables ................................................................................................................... 5 Executive summary........................................................................................................................... 7 I Economy and poverty ..................................................................................................................... 9 Recent economic trends ................................................................................................................ 9 Poverty trends ............................................................................................................................. 10 II Kyrgyzstans 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 ................................................................................................................................ 46 III. Poverty and household access to energy .................................................................................... 48 Data issues .................................................................................................................................. 48 Household energy expenditures ................................................................................................... 49 Conclusions ................................................................................................................................ 55 IV. Social protection and the energy sector ..................................................................................... 56 Overview .................................................................................................................................... 56 Social policy instruments ............................................................................................................ 57 Effectiveness of social protection ................................................................................................ 60 Social protection and the energy sector ....................................................................................... 62 Conclusions .................................................................................................................................... 64 Bibliography ................................................................................................................................... 71

List of Acronyms ADB GDP SC OJSC QFD CAIPS UE IDA CAUPS FEC CHPP HPP AIMSCEM JEA JICA RES FES NEP EITI FESTI ACGRKS WB HVTL NGO USAID IDB KR MW GMCL GMI LSGs MSBs PFMB UMB AMFI GPW CAPP PESAC SPD MLSD USB MSEC HIV AIDS SSEA DSP&HA RSPDs TSPDs Asian Development Bank Gross Domestic Product State Company Open Joint Stock Company Quasi Fiscal Deficit Integrated Power System of Central Asia Utility Enterprise International Development Association Central Asian United Power System Fuel and Energy Complex Heating and Power Plants Hydropower Plants Automated Information and Measurement System for Commercial Electricity Metering Joint Economic Assessment Japanese Agency of International Cooperation Renewable Energy Sources Fuel and Energy Sector National Energy Program Extractive Industries Transparency Initiative Transparency Initiative in the Fuel and Energy Sector of the Kyrgyz Republic Automatic Commercial Gas Record Keeping System World Bank High-voltage Transmission Line Non-Governmental Organization United States Agency for International Development Islamic Development Bank Kyrgyz Republic Minimum Wage Guaranteed Minimum Consumption Level Guaranteed Minimum Income Local Self-Governments Monthly Social Benefits Monthly Benefit to Poor Families with Children Unified Monthly Benefit Average Monthly Per Capita Family Income Great Patriotic War Chernobyl Atomic Power Plant Public Enterprise Structural Adjustment Credit Social Protection Bodies Ministry of Level and Social Development Unified Social Benefit Medical-Social Experts Commission Human Immunodeficiency Virus Acquired Immunodeficiency Syndrome The State Agency for Social Support under the KRG The Department of Social Protection and Humanitarian Aid Rayon Social Protection Departments Town Social Protection Departments 3

LSGs A/O SBs HUS&E

Local Self-Governments The Aiyl Okmotu State Benefits Housing and Utility Services and Energy

List of Figures and Tables

Chapter I Economy and Poverty

Figures:
Figure 1. Annual GDP Growth Rates (2002-2010) Figure 2. Poverty Trends in Kyrgyzstan (2000-2009) Figure 3. Poverty Rates: Actual and Predicted Figure 4. Changes in Key Indicators Affecting Household Incomes (2005=1) Figure 5. Kyrgyzstan: Increases in External Migration, Remittance Inflows, in 2010

Tables:
Table 1. Macroeconomic Indicators, Kyrgyzstan (2007-2010) Table 2. Fiscal, Social Policy Trends in Kyrgyzstan (2008-2011)

Chapter II Kyrgyzstans energy sector

Figures:
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 (2002-2009 Figure 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, 20062010) 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 2008
Table 4. Energy Sector Privatization Chronology Table 5. End use of Electricity Generated in Kyrgyzstan (2005-2010)

Table 6. Addition tariff for renewables to the maximum tariff Table 7. Full cost of electricity generation in renewable small power plants Table 8. Prices for 1 kWh electricity for 4 groups of selected plants 5

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 Lines

Chapter III. Poverty and household access to energy Figures:

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 Household Deciles, 2009) Figure 35. Shares of Household Energy Expenditures Devoted to Various Energy Sources (by household location, 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 in Electricity Service (2008-2009) Figure 38. Share of Households (by Location) Experiencing Weekly (or More Frequent) Interruptions in Electricity 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 Sector Figures:

Figure 39. Ratio of Monthly Pension, Social Assistance Benefits to the National Monthly Subsistence Minimum (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. Kyrgyzstans Social Protection Instruments: Efficiency and Effectiveness (2005 data)

Executive summary While the uprising that drove President Kurmanbek Bakiyev from power in April 2010 had many causes, energy issues were among the most important. Dramatic increases in power and heat tariffs introduced in January of that year, combined with two winters of electricity rationing, years of rapid growth in household energy costs, and growing concerns about corruption and mismanagement in the energy sector, were key drivers of tensions in Kyrgyzstan. This study explores the socioeconomic background to these events, and their aftermath, by assessing the poverty and social implications of tariff increases and other policy reforms now being introduced (or considered) in Kyrgyzstans energy sector. These trends are playing out at a difficult time. While Kyrgyzstan was one of many countries that experienced slowing economic growth in 2009 (with the impact of the global financial crisis), it is one of the few to have reported a recession in 2010. The 1.4 percent decline in GDP officially reported for last year was a direct result of the political upheavals Kyrgyzstan experienced during April-June last year. While economic growth helped cut Kyrgyzstans income poverty rate in half (from 62.6 to 31.7 percent) during 2000-2008, the poverty rate stabilized in 2009, even though 3 percent GDP growth was reported. Although the 2010 poverty data have not yet been released, the recession could have raised the national poverty rate for the first time in a decade. Even before the developments of 2010, however, winter energy insecurities were afflicting significant numbers of households in Kyrgyzstan, particularly in urban areas. This reflects the impact of the severe winter of 2007-2008 and the subsequent drought of 2008 that reduced water levels in hydropower reservoirs along the Naryn cascade, the depreciation of the countrys 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 as prospects for decentralized renewables in Kyrgyzstan. It focuses in particular on the commercial and regulatory characteristics limiting the attainment of full cost recovery tariffs, as well as on prospects for significant short- and medium-term improvements in management within these sectors. It notes that tariffs for electric and thermal power are being pulled in opposite directions by social acceptability and economic feasibility. Whereas natural gas tariffs depend on the price of imported natural gas, the state sets power and heat tariffs. In so doing, the state is guided primarily by social concernsleaving many energy companies unprofitable. These problems are exacerbated by the monopolistic structures found throughout the energy sector (with the partial exception of coal). The absence of competition and market stimuli creates preconditions for inefficiency and corruption. These problems are aggravated by high levels of fixed asset 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 Kyrgyzstans coal needs. Likewise, virtually all of Kyrgyzstans natural gas is imported, from a single supplier (UzbekTransGaz). The government that came to power following the April 2010 events has responded to these problems by introducing the Fuel and Energy Sector Transparency Initiative. FESTI represents an attempt to improve management and governance within the sector, by introducing greater measures of public participation and transparencybut without raising tariffs, or further privatizing energy sector assets, or significantly increasing the role of market forces. Compared to past policies, FESTI is an important step forward, especially in terms of reducing corruption. But at the same time, by focusing on reducing corruption in and improving the management of state-owned monopoliesrather than transforming them into market actors capable of modernizing the energy sectorFESTI is also a modest step forward. 7

Official household survey data (stretching into 2010) indicate that the energy crisis that began in the winter of 2008 has decreased poor households access to electricity and other energy products and services. These households have also been affected more by interruptions in electricity supplies. Prior to 2010, significant efforts had been invested in reforming Kyrgyzstans social protection system, in part to increase its ability to mitigate the impact of higher energy prices and tariffs or poor and vulnerable households. Unfortunately, there is little evidence to indicate that the social protection system provides these households with effective protection against higher energy costs. Instead, household survey data suggest that Kyrgyzstans social protection system became more regressive during 2008-2009, with growing shares of social benefits paid out to upper-income households. On the other hand, these data indicate that householdslow-income and otherwisedevote relatively small 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 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 householdsthese factors weaken the case for more closely linking social and energy policies. The issue would instead seem to be one of adopting policies to improve the functioning of the energy sector and the social protection system. In this respect, 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 Kyrgyzstans 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

I Economy and poverty Recent economic trends In the years between the Russian financial crisis of 1998-1999 1998 1999 and onset of the global economic crisis in 2009, Kyrgyzstan reported average average annual GDP growth of around 5 percent. However, as the data in Figure 1 indicate, this growth was rather unstable, with strong economic expansions (2000-2001, 2001, 2003-2004, 2003 2007-2008) 2008) being followed by slowdowns or recessions (2002, 2005). This growth pattern tern reflects the impact of a number of internal and external shocks, of both an economic and political nature (e.g., popular uprisings in 2005 and 2010). As a small open economy, Kyrgyzstan is very dependent on other countriesnot countries not only for exports and imp imports, but also, and increasingly, remittances from migrant workers. Whereas remittances were reported at 8 percent of GDP in 2002, preliminary data indicate that they had risen to 27 percent of GDP in 2010.

Figure 1Annual 1 GDP Growth Rates (2002-2010)

8.5% 7.6% 7.0% 5.4% 5.3% 7.0%

3.1%

2.9%

0.0% 2000 2001 2002 2003 2004

-0.2% 2005 2006 2007 2008 2009

-1.4% 2010

Source: State Statistical Committee.

Difficulties in the business and investment climate, and other market distortions, are key reasons for this slow growth.1 As 2010 International Financial Corporation report found that, while recent reforms had improved ved the investment climate, these improvements, and their effects, were rather moderate.2 These difficulties limit inflows of foreign capital, technology, and know-how, know especially outside of the non-ferrous ferrous metallurgical sector, thereby inhibiting the broa broader industrial and agricultural modernization that Kyrgyzstan needs. High rates of unemployment and under underemployment (particularly in subsistence agriculture, which is the economys largest sector in terms of employment) and the inability of growing sectors sectors to absorb redundant labor from agriculture and elsewhere, has resulted into growing internal and external migration. The global crisis had a significant negative impact on Kyrgyzstan. While the low degree of integration with the international economy protected its financial system, GDP growth in 2009 dropped 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 registered in the global competiveness index, or in Transparency International's Corruption Perceptions Index. 2 Investment Climate in the Kyrgyz Republic Republic as Seen by Small and Medium Enterprises, IFC, 2010, p.10

Soaring food prices, which rose by a third in 2008, also contributed to the hardships experienced by vulnerable families. GDP end use data point to a 14 percent decline in personal consumption in 2009.

Table 1Macroeconomic Indicators, Kyrgyzstan (2007-2010) GDP growth rates Inflation rates (annual averages): - Consumer prices - Foodstuffs - Electricity, gas, heat, other fuels Remittances (millions) 2007 8.5% 10% 15% 8% $688 18% 60% 2008 8.4% 25% 33% 30% $1,138 22% 65% 2009 2.9% 7% 2% 22% $967 21% -15% 2010 -1.4% 8% 7% 14% $1,245 27% 29%

Remittances (% to GDP)
Change in remittances Source: National Statistical Committee data, UNDP calculations.

As in many other countries, the government of Kyrgyzstan responded to the crisis by loosening its fiscal and social policy purse strings. As the IMF data in Table 2 below show, the share of GDP devoted to public expenditures rose from 26.2 percent in 2008 to a projected 40.5 percent in 2010. Rising social expendituresparticularly pensionsaccounted for almost half of this increase. While budget support and other grants from donors soared during this time (from 2 to 11 percent of GDP), so did Kyrgyzstans fiscal deficit and public debt. The increases in social protection spending that cushioned the blows from the crisis and then the events of 2010 may not, therefore, be sustainable.

Table 2Fiscal, social policy trends in Kyrgyzstan (2008-2011) Share of GDP devoted to: 2008 2009 2010 Budget revenues 25.9% 28.5% 29.6% - Grants 1.9% 5.3% 11.0% Budget expenditures 26.2% 36.6% 40.5% - Social fund expenditures 5.0% 6.8% 9.4% - Pensions 4.4% 6.1% 9.0% Budget deficit -0.3% -8.1% -10.9% Public debt 48.5% 59.4% 70.0% Source: IMF country report, Kyrgyzstan (October 2010).

2011 30.0% 1.9% 34.2% 9.0% 8.6% -8.2% 68.2%

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. For 2011, the government has projected 6.3 percent GDP growth. Poverty trends As the data in Figure 2 below indicate, Kyrgyzstans official income poverty rate dropped from 62.6 percent in 2000 to 31.7 percent in 2008, before bottoming out in 2009. Kyrgyzstans national Millennium Development Goals Progress Report 20103 argues that GDP growth and final
3

The Kyrgyz Republic, the Second Progress Report on the Millennium Development Goals, Second Edition, (Revised and Amended), Bishkek 2010

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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 2Poverty Trends in Kyrgyzstan (2000-2009)

68% 63% 56% 53% National 62% 55% 45% 50% 45% 60% 57% 46% 36% 28% 30% Rural 56% 51% 43% 40% 35% 27% 48% 42% 37% 37% 32% 32% 23% 23% 22% Urban

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 1Forecasting Forecasting the Poverty Rate: Results of Econometric Exercise

Changes 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 rate
The data used for this analysis s come from Kyrgyzstans balance of payments, and from the official national accounts data.

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.

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While there are some drawbacks to this model, its specification is reasonable. It avoids non-stationarity issues and the adjusted R-squared = 0.59. The following figure 3 illustrates the predictive power of the model. Figure 3Poverty rates: actual and predicted
30 25 20 15 10 5 0 1997 -5 -10 -15 actual data results of modeling 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

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 4Changes in key indicators affecting household incomes (2005 = 1)
2,5 2 1,5 1 0,5 0 2005 2006 2007 2008 2009 2010 4,5 4 3,5 3 2,5 2 1,5 1 0,5 0 GDP level (2005=1) Social protection level (2005=1) Remittances level (2005=1)

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 regionswhich were 12

the flashpoints for the ethnic tensions in May-June May 2010particularly particularly vulnerable to decline declines in remittance inflows. Seen in this context, the stunning increases in external migration outflows from Kyrgyzstans southern regions officially reported for 2010 (see Figure 5), ), combined with the record high remittance inflows reported for the country as as a whole, may be important factors for social stability.
Figure 5Kyrgyzstan: Kyrgyzstan: Increases in external migration, remittance inflows nflows, in 2010

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 in 2008 was 2.1 percent, while in Naryn and Issyk Issyk-Kul Kul oblasts, this rate was 11.6 and 16.9 1 percent, respectively. Whereas the overall poverty rate in Bishkek in 2008 was 15.2 percent, in most other regions it exceeded 40 percent. Much of the pre-2009 pre 2009 progress in poverty reduction was due to developments in Bishkek and Chui oblast. Feminization ion of poverty. In 2008 women omen accounted for the vast majority of pensioners (67 percent of those over retirement age), and of employees in the education and health sectors (76 and 79 percent, respectively). The average salary in these female sectors, and the average retirement pension for women, are below the subsistence minimum. Women working in these sectors receive lower salaries than do men working in these sectors: in 2008 a womans average salary in the education and health sectors is only 78 and 62 percent, respective, of a mans average salary in these sectors.5 Poverty is concentrated in rural areas. Almost three-quarters quarters of Kyrgyzstan Kyrgyzstans poor live in rural 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 with many children, in households headed by women, women, in rural areas, and living by themselves face the

Women and men of the Kyrgyz Republic: A collection of gender-disaggregated disaggregated statistics, Bishkek, 2009, pp. 46, 87, 115.

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greatest poverty risks. This is mainly due to limited opportunities for well paid employment.6 Access to water and communal services is also much lower in rural areas, due in part to the difficulties of delivering these services in mountainous regions. In urban areas, by contrast, households are much more 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 do not have access to at least one of these services. Limited access to these services is a particular burden for women in poor households, many of whom can not afford to purchase labor-saving household appliances. Child poverty rates are high. According to the findings of the integrated household sample survey conducted in 2006, 48.5 percent of children under 18 lived in poverty and 12 percent of these are 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 in Kyrgyzstan generally do not have access to the banking system or financial services. In rural areas the poor generally have smaller plots of land than those who are better-off and due to the fact that the land market is not developed they are not able to use their lands as collateral.

The need to make a thorough analysis of the position of rural women was one of the key recommendations of the UN Committee on the Elimination of Discrimination Against Women in the third periodic report of the Kyrgyz Republic on compliance 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

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II Kyrgyzstans energy sector Prior to the energy crisis that began in early 2008, Kyrgyzstans energy sector suffered from benign neglect. Market reforms had largely ended in the early years of the decade; state-owned state monopolies continued to dominate the sector; attempts to attract private private capital and foreign investment had met with limited success; and effective electricity tariffs were among the lowest in the region (see Figure 6). ). The focus was instead on the state mobilization for the construction of new large hydro-power stations (such as Kambarata-1 Kambarata and -2 2 on the Naryn cascade), and adding to electricity transmission capacity (e.g., via the construction of the Datka-Kemin Datka Kemin high voltage power line).

Figure 6Effective Household Electricity Tariffs in the Former Soviet Republics (2007)
$0.09 $0.07 $0.06 $0.05 $0.04 $0.04 $0.04 $0.02 $0.01 $0.01

Nominal tariff (per kWh) times collection rate

Source: EBRD data, UNDP calculations.

The energy crisis that began in 2008 was something of a wakeup call. As a result of cold temperatures and low water levels in the hydropower stations along the Naryn cascade, electricity blackouts increased abruptly, while sharply higher import prices made gas unaffordable for many households 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 25 and 13 percent, respectively, during 2007-2010. 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 2007-2009. Faced with growing shortages of centrally supplied electricity electricity and unaffordable gas, many households, businesses, and public institutions switched to coal-fired coal fired boilers. Domestic coal production rose some 41 percent during 2007-2010; 2007 2010; apparent consumption (production less net exports) rose 57 percent. In addition ion to encouraging the dash to coal, the government responded to these developments by permitting energy prices and tariffs to rise at rates well above consumer price inflation (see Figure 8). ). It introduced a programme of anti-crisis anti crisis measures (including rotating blackouts and brownouts), raised electricity collection rates, reduced electricity losses,8 and
8

Commercial and technical losses (in kWh), as well as accounts payable (in som) in the electricity sector declined during 2006-2009, 2009, while the ratio of accounts receivable to gross income in the electricity sector also fell.

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accelerated the development of small hydropower plants. The government also tried to reinvigorate privatization processes in the energy sector by putting stakes in six state-owned energy companies up for 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 7Trends in energy production, consumption (2007-2010)
160 140 Electricity consumption* 120 Thermal generation 100 80 60 40 20 0 2007 2008 2009 2010 Thermal consumption** Coal production Coal consumption*** Gas supply^ Gas consumption~ Electricity generation

Source: 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 Bakiyevs departure, these large tariff hikes were scaled back or rescinded, lessening the impact on vulnerable households. Allegations of mismanagement and corruption led to the cancellation of the energy sector privatizations (see Box 2), as well as to the introduction of the Fuel and Energy Sector Transparency Initiative. Nonetheless, despite this more social orientation of energy policy, household energy prices in 2010 continued to rise at rates well above consumer price inflation.

Electricity Production, consumption, and losses. The vertically integrated Kyrgyzenergo was dissolved in 2001 into a single generation company, a single transmission company, and four distribution companies. All these companies are state-owned;9 competitive pressures are weak. Virtually all of Kyrgyzstans power generation assets belong to the Power Plants company, including 15 large hydropower plants, two combined power and thermal plants, and dozens of small-scale power

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 in these companies.

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producers.10 Total power generation capacity is 3,740 megawatts; the large hydropower plants account for 2,950 megawatts, while the combined power and thermal plants have a total capacity of 730 megawatts. The state-owned National Power Grid company manages the electricity transmission infrastructure, while four regional distribution companies (Severelektro, Vostokelektro, Jalalabatelektro, and Oshelektro) monopolize the supply of power in the areas for which they are responsible.
Box 2Energy sector privatization chronology11 Privatization process * A single tender for the privatization of the state-owned stakes in Severelectro, the Bishkek Combined Heat and Power Plant, and the Bishkek District Heating Distribution Company was initiated in late 2008, with a starting price of $137 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. * Two privatization attempts were declared void for lack of bids. The starting price was set at $41 million. * The third attempt, without establishing a starting price, succeeded in February 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. * Two attempts of privatization were voided due to lack of bids. The initial starting price was set at $42 million.

Company Severelektro Power Distribution Company

Vostokelektro Power Distribution Company

Oshelektro Power Distribution Company Jalalabadelektro Power Distribution Company Bishkek Combined Heat and Power Plant, and the Bishkek District Heating Distribution Company

Two attempts of privatization were voided due to lack of bids. The initial starting price was set at $27 million.

* A single tender for the privatization of the state-owned stakes in Severelectro, the Bishkek Combined Heat and Power Plant, and the Bishkek District Heating Distribution Company was initiated in late 2008, with a starting price of $137 million. * The tender was voided due to a lack of bids by the January 2009 deadline. * No further attempts have been made.

The Power Plants generation company produces 99 percent of Kyrgyzstans electricity. Since more than 90 percent of this is generated by hydropower plants on the Naryn cascade with uniform hydrological conditions, market competition in power generation is difficult to imagine for the foreseeable future. Longer term, however, the construction of large coal-fired power plants (such as Kara-Keche), expansion of decentralized renewables, increased industrial co-generation, the
Other power generating companies include Chakan HPP, Koshoi, Kalinin HPP Ltd., and Ark Ltd. Adapted from Joint Economic Assessment: Reconciliation, Recovery, and Reconstruction, World Bank, July 2010, p. 87.
11 10

17

introduction of more flexible management of the hydropower plants on the Naryn cascade, and the possible creation of a regional electricity market, could offer prospects for competition in electricity generation.
Figure 8Household Household energy price inflation trends (2007-2010) 2010)
2007 2008 2009 2010 68%

53%

38% 33%
25% 10% 32%

28% 17% 13%

7% 8%

12% 0% Gas tariffs 1% Heat tariffs

0%
Consumer prices

Electricity tariffs

Annual average increases. Source: State Statistical Committee data, UNDP calculations.

Prospects for market competition in electricity transmission are even more constrained, owing to significant associated economies of scale. The state-owned state owned National Power Grid company, which now performs this function, seems likely to remain a natural monopoly indefinitely.
Electricity production, consumption, losses, and exports (in million kWh, 2005 2005-2010) Figure 9Electricity
14891 14523

14830 11789

Generation Losses 11083

Consumption Exports

11070

7396 7257 4973 2662 2460 2005 2006 4667

7869

7551

7299
6862

4582 3693 2750 2379 2007 552 1034 2008 2009

2010 2629 1579

Source: : State Statistical Committee. Committee

In addition, there is no market competition among electricity distribution companies, each of which operates in its own territory and their territories do not overlap. While some 27 private 18

wholesalers/small distributors were licensed in 2009 to purchase electricity from Power Plants and resell it, these wholesalers typically operate lower-voltage lines, and do not provide most users with an effective alternative to the regional distribution companies. It is possible to imagine competition among distribution companiesparticularly in urban areas that are located close to the borders of one of the existing distribution zones, and particularly if the wholesalers are able to expand their activities. However, policy since April 2010 has emphasized strengthening state control over distribution (and other electricity) companies, in order to improve management and reduce corruption. On the one hand, it is not surprising that all the companies produced by Kyrgyzelektros 2001 unbundling have been included into the state Monopoly Register.12 Their tariffs are therefore subject to close scrutiny by the Antimonopoly Agency. On the other hand, the structural conditions now prevailing in the power sectorunder which a single state-owned monopoly has been replaced by eight such companies, whose prospects for attracting the private capital needed for modernization are quite uncertainnow seem particularly unfortunate.

Table 3End uses of electricity generated in Kyrgyzstan (2005-2010) 2005 2006 2007 2008 2009 Consumption 49% 51% 53% 64% 66% - Households n.a. n.a. 32% 37% 37% - Others n.a. n.a. 21% 28% 29% Losses 33% 32% 31% 31% 25% Exports 18% 17% 16% 5% 9% Source: State Statistical Committee, UNDP calculations.

2010 62% n.a. n.a. 24% 14%

The power sector is characterized by close technological links between production and consumption; a problem in one link can immediately produce downstream ripple effects. Trends in electricity 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 in the share of electricity going to exports, has helped to cushion households from the worst of the decline in electricity generation.13 Losses in Kyrgyzstan nonetheless remain quite high by international standards; losses in the 7-10 percent range are considered a standard benchmark.14 Most (70 percent in 2010) of these losses occur at the distribution stage, due primarily to obsolete equipment, the absence or malfunctioning of meters, inaccurate metering of consumed electricity, as well as outright theft. In Kyrgyzstan, neither the generation, transmission, nor distribution companies are responsible for cash management: payments from end-users are collected and accumulated in escrow accounts and divided among the companies on the basis of percentages set monthly by the Ministry of Energys Regulatory Department. Barter and offsets are also used in settlements between sector

According to Order No. 524 of the State Agency for Anti-Monopoly Regulation, dated 30 December 2009. Losses exist in all power systems. Technical losses occur in electricity generation and transmission from the point of generation to the point of final consumption; their size is determined by the distance over which the electricity is transmitted 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 30 April 2010), pp. 11, 13.
13

12

19

entities, as well as between sector entities and end-users. end users. In addition, trading figures covering the same electricity flows reported by different utilities differ from each other.15

Figure 10Financial results esults for power generation, distribution companies mpanies (in million som, 20062009)
Revenues

Costs

Profit (loss) 11192 9395 9603 11725 12067

13406

8538 8359

179

-208
2006

2007

2008

-533

2009 -1339

Source: Finances of Enterprises of the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010; UNDP calculations. The data include small-scale small enterprises.

In light of these complications, power company finances are likewise rather complicated. In general, these companies show rapid increases in both revenues and costs (in cash-flow cash terms), with cumulative growth in the latter (60 percent) outpacing the former (41 percent) during 2006 2006-2009. (By contrast, cumulative growth in the GDP deflator and producer price index during this time was 46 and 58 percent, respectively.) As a result, the financial results reported by power sector companies deteriorated sharply harply after 2006 (see Figure 10 10). Available data indicate that power sector companies companies responded to these trends by trying to tighten their finances. For example, accounts payable in this sector declined in absolute terms during 2006-2009, 2009, despite large increases in costs and revenues. While accounts receivable (more than half of which are doubtful or unrecoverable debts) in the power sector grew during 2006 2006-2009, relative to sectoral revenues they declined. Households account for about 70 percent of power sector receivables. Collection rates increased during this time (see Figure 11), 1 while the power sectors quasi quasi-fiscal deficit continued to fall, dropping from nearly 13 percent of GDP to under 4 percent during 20082008 16 2009 (see Figure 12). These trends are occurring against a backdrop of electricity tariffs that are still quite low by regional standards (see Figure 6). However, the data analyzed above suggest that the financial problems facing the power sector are not due solely, or perhaps even largely, to slow revenue growth
15

Reductions in electricity losses can be exaggerated, for example, when companies over-estimate over estimate billing and then accounts receivable. 16 The quasi-fiscal fiscal deficit is determined by the sum of: (1) above-standard above standard electricity losses; (2) deviations from a 100 percent cash collection rate; and (3) the difference between tariffs and long-run long run marginal costs (includin (including investment costs), measured on a cash-flow flow basis. The quasi quasi-fiscal fiscal deficit therefore reflects the difference between the income needed to fully cover operating and capital costs in the sector versus actual revenues received. received According to Kyrgyzstans medium-term term budget framework, this deficit is to drop below 2 percent of GDP by 2012. 2012

20

because of low tariffs,17 or the power companies unwillingness/inability unwillingness/inability to collect tariffs or reduce electricity losses. They instead suggest that the key financial problem facing the power sector has been rapid growth in costs. While some of this growth results from large capital outlays for infrastructure investments, estments, it may also reflect the inability of weak market forces or regulatory oversight to contain costs.

Figure 11Collection Collection rates in the electric power sector (2007-2009) 2009)
2007

2008

2009 104% 99% 90% 82%

70%

95% 86% 90%

89%

88%

90%

65%

Overall

Households

Industry

Agriculture

Source: Finances of Enterprises of the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010. The data include 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 Naryn cascade, with installed capacity of 2870 megawatts, account for about 78 percent of Kyrgyzstans total generation capacity. The Toktogul power station, with 1200 megawatts of installed capacity, is Central Asias largest hydropower station, and only multi-year multi year hydropower water storage facility. This reliance on hydropower leaves Kyrgyzstan vulnerable to changes in water levels alon along the Naryn cascade. This was particularly apparent in 2008, when drought conditions helped push water volumes at Toktogul to extremely low levels (see Figure 13). The volume of electricity generated fell 21 percent in that year, and another 6 percent in 2009 2009 as releases were limited by the need to restore water levels. However, because Toktogul is a multi-year multi year storage facility, good management of the water in its reservoir should provide some protection against droughts in the future.18 Investment projects and prospects. According to various estimates, Kyrgyzstan is not using more 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 on hydro power poses a dilemma for policy makers in Kyrgyzstan. The construction of new hydro power plantsboth both along the Naryn cascade and on smaller riversis rivers is an obvious way to increase capacity for winter power generation, as well as boost exports and and promote economic development. This is the vision of the Central Asia and South Asia Regional Energy Market (CASAREM) project, which is
17

The reported 41 percent revenue growth combined with a 23 percent reported reduction in kWh sold during 2006 2006-2009 suggests that effective electricity tariffs rose by 85 percent pe during these years. 18 According to data on the CA WaterInfo website (http://www.cawater-info.net/analysis/index_e.htm ( info.net/analysis/index_e.htm), water inflows into Toktogul in 2007 were also well below historical averages. However, national statistical committee data indicate that electricity 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, mismanagement, rather than drought, caused the sharp drops in water levels at Toktogul in 2007-2008, 2008, and then electricity shortages during subsequent winters. 19 Source: Small and Medium Sized Hydropower Development Programme, approved by presidential decree N 365, 14 October 2008.

21

supported by the donor community working in Central Asia, and to which the government of Kyrgyzstan subscribes. The Ministry Ministry of Energy has conducted feasibility studies for constructing some 47 hydropower plants across the country.

Figure 12 2Electricity 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

2009

Source: Ministry of Energy.

Moreover, prospects for virtually all investment projects in the energy sector are constrained by Kyrgyzstans relatively low electricity tariffs. In addition to reducing the cash flow power companies need to finance investments within the sector directly, low electricity tariffs reduce the commercial feasibility of energy projects in other sectors. This applies both to coal (the demand for which is determined in part by the financial situation in the power sector) and to decentralized renewables, the payback ck period for which shortens as electricity tariffs increase.
Figure 13Trends in electricity lectricity generation, and in water volumes at the Toktogul hydropower reservoir (2008-2010)
50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50%

Toktogul water volume (deviation from multi-year multi average*)

Year-on-year-change change in electricity generated (kWh)

2008

2009

2010

* Calculated relative to the average volume for that month in previous years, going back to 1991-1992. 1991 A zero value means water volume in that month was at its multi multi-year year average (no deviation from normal). Sources: State Statistical Committee, CA WaterInfo website; UNDP calculations.

22

The Kambarata-1 and -2 hydropower projects are at present receiving the greatest attention and assistance from the government. Kambarata-2, the costs of which were estimated at some $100 million in 2007, is under active constructionthe first unit was installed in 2010, with construction to be completed by 2015. Key parameters include: installed capacity360 megawatts (three units of 120 megawatts each); power generation1,148 million kWh; water reservoir capacity70 million m3. The construction is being financed by the government budget and an earmarked credit from the Russian Federation.20 Kambarata HPP-1 would be significantly larger and more expensive: installed capacity of 1,900 megawatts (4 units of 475 megawatts each); power generation of 5,088 million kWh, 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 1200 megawatts, is also under discussion. This plant would generate electricity from coal that would be mined from the Kavaksky lignite basin, where it would be located. In addition to helping to develop the coal industry, Kara-Keche would diversify Kyrgyzstans generation capacity away from its neartotal reliance on hydropower. However, the sources of financing for the construction of this $1.3 billion project have not yet been identified.
Map 1Existing and planned hydropower plants and high-voltage transmission lines

Kemin-Almaty High-voltage transmission line

Kara-Keche Datka-Kemin highvoltage transmission line ($343 million)

Datka transmission line ($229 million)

Aigultash-Samat high-voltage transmission line ($12.9 million)

Source: Ministry of Energy.

Kyrgyzstans topography essentially divides the power transmission network into northern and southern parts, which are linked by a high-voltage transmission line running from Toktogul in the south to Frunzenskaya in the north. Because the Naryn cascade is in the south, Kyrgyzstans southern regions have a power surplus, while the north is in deficit. However, some parts of the southsuch as Leilek in the western part of the Batken regionface power shortages (especially in the winter time) because they are under-served by the existing transmission infrastructure. This problem is being addressed by the construction of the 131 kilometer Aigultash-Samat transmission line, which is to be completed in November of 2011. This project is financed by a $12 million credit from the Islamic Development Bank, as well as $900K from the National Power Grid transmission company.
The Agreement between the Government of the Kyrgyz Republic and the Government of the Russian Federation as of February 3, 2009 "On Construction of Kambarata HPP-1".
20

23

Although Kyrgyzstan imports virtually no electricity, the Toktogul-Frunzenskaya transmission line runs through Uzbekistan and Kazakhstan (see Map 1). Uzbekistans and Kazakhstans November 2009 decision to withdrawal fromand therefore the de facto dissolution ofthe integrated Central Asian electricity transmission grid adds new potential uncertainty to power supplies in Kyrgyzstans northern regions. This uncertainty is to be addressed by the construction of the $570 million DatkaKemin transmission line, the construction of which is expected to be co-financed by Chinas ExportImport Bank, the Asian Development Bank, and others. However, this financing was put on hold following the April 2010 developments; it has not yet been secured. A 1998 government resolution requires the distribution companies to install reliable and safe meters at each service point, and to take regular meter readings. Virtually all electricity meters have been transferred to the balance-sheet of the distribution companies, who must also finance the installation of new meters for the population of the republic and their replacement are to be financed by these enterprises. Thus, all responsibility for electricity metering is placed on distribution enterprises. Offering reliable electricity services to growing numbers of migrant householdsmany of which have an informal characterlocated in peri-urban areas are posing significant problems for distribution 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 Swiss Economic Cooperation Organization), have helped the distribution companies to improve metering, reduce losses, and extend services to new households. Procurement of meters and computer hardware and software (for billing systems) has played a large role in these projects, which have helped reduce losses and boost cash collection rates. Total financing for electricity sector projects, from international 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 World Bank in mid-2010 assessed the immediate needs of the energy sector (i.e., for the winter of 20102011) at $180 million. Out of this amount $124 million was to be allocated to essential and critical repairs for heating plants, district heating systems and to ensure security in electricity generation.21 The funding needed for the generation and transmission projects mentioned above (e.g., Kambarata-1 and -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 to these cities, central heating systems are in place in the towns of Kyzyl-Kiya (covering 60 percent) and Karakol (covering 26 percent).22 Small-scale thermal generation enterprises operate in many smaller towns; 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 and Power Plant) is delivered by the Bishkekteploset and Bishkekteploenergo enterprises; in Osh it is supplied by the Osh combined heating and power plant. Thermal power to 95 percent of consumers in cities and rayon centers is also produced by the state-owned Kyrgyzzhilkommunsoyuz enterprise. All
21

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

of these distribution companies are state-owned: state owned: Bishkekteploset takes the form of a joint joint-stock company in which 84 percent of the shares are state-owned; s owned; Bishkekteploenergo is a municipal enterprises under the Bishkek mayors office; while Kyrgyzzhilkommunsoyuz belongs to the Ministry of Energy. Nor is there competition in distribution: each enterprise has its own non non-overlapping territory of operations. erations. As a result, Bishkekteploset, Bishkekteploenergo, and the territorial divisions of Kyrgyzzhilkommunsoyuz have been included into the State Monopoly Register;23 their tariffs are subject to close inspection by the Antimonopoly Agency. But while important mportant economies of scale are associated with the creation and maintenance of thermal infrastructure, significant inter inter-modal modal competitive forces are present, particularly at the retail level. Consumers unhappy with district heating tariffs or service quality quality can rely more extensively on electric heaters, install gas- or coal coal-fired fired boilers, or burn more firewood. There can be little doubt, for example, that the ability to install coal coal-fired fired boilers (and, in rural areas, burn firewood) has limited the strains ns on vulnerable households presented by the large increases in electricity, gas, and thermal power tariffs since 2007. Exclusive treatment of thermal power as a natural monopoly whose tariffs need to be kept low could distort competition among fuel sourcescompetition source competition that can help limit costs and price increases while also promoting the development of Kyrgyzstans energy sector.

Figure 14Thermal power production roduction, consumption, losses, and exports (in thousand gigacalories, 2006-2010)
Generation
2933 2185

Consumption 3015 2887 2270 2209

Losses
2815 2184

2926

2165

748

761

745

678

631

2006

2007

2008

2009

2010

Source: Finances of Enterprises of the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010. The data include small-scale enterprises.

Production, consumption, and losses. Kyrgyzstans thermal power facilities generate about 3 million gigacalories of thermal power annually (see Figure 14), 1 , two thirds of which come from the Bishkek Combined Heat and Power Plant. Kyrgyzzhilkommunsoyuz and the Osh Combined Heat and Power Plant generate about 540,000 and 120,000 gigacalories annually, respectively respectively. As in the electricity sector, losses are endemic in thermal power, generally exceeding 20 percent of thermal output. However, thanks to reductions in losses from 25 to 22 percent during 2008 2008-2010, the 4 percent cumulative decline in consumption reported for these these years was less than the 7 percent decline in production.

23

According to Order No. 524 of the State Agency for Anti-Monopoly Anti Monopoly Regulation, 30 December 2009.

25

The high thermal power losses are due primarily to wear-and-tear wear tear of pipes and insulation of the network, as well as frequent service interruptions, which lead to high levels of condensation. Th The depreciation of fixed assets in Kyrgyzstans 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 first month of the heating season of 2009-2010 2009 increased by 60 percent as compared to the season of 2007-2008. 2008. The insulation of the main and especially in-house in house heating networks practically does not function and requires capital repairs. This is particularly an issue for Bishkektelposet, where losses increased d to 48 percent in 2009. Thermal sector finances. The financials of the enterprises supplying steam and hot water in recent years have been even less favorable then in the power sector (see Figure 1 15). In 2008 some 588 million som ($16.1 million) in losses were reported40 reported 40 percent of sectoral revenues revenuesbefore dropping back to 343 million som ($8 million) in 2009. As is the case in the electricity sector, thermal power companies reported very rapid growth in costs during 2006-2009 2006 88 percent, while the sectors accounts payable also rose by 66 percent. (By way of comparison the industrial producer price index reported a 58 percent cumulative increase during this time; the consumer price index reported a 47 percent cumulative increase; while the GDP deflator rose 46 percent). While much muchneeded investments to refurbish Kyrgyzstans decaying thermal infrastructure can no doubt explain much of this increase, they may not be able to explain all of it. The rapid growth in accounts payable also so contrasts with the electric power companies success in sharply reducing their payables (in real terms) during 2006-2009. 2009. On the other hand, thermal power companies accounts receivable only grew by 13 percent during 2006-2009 2006 (a decline in real terms). While doubtful or unrecoverable household debts grew rapidly during this time, they comprised less than 10 percent of total receivables in 2009.25

Figure 15Financial results esults for thermal power companies mpanies (in million som, 2006-2009) 2006
Revenues Costs Profit (loss) 2408

2042 1530
1280 949

2065

1454

1119

2006

-331

2007

-411

2008 -588

2009

-343

Source: Finances of Enterprises of the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010; and UNDP calculations. The data include small-scale small enterprises.

24

Source: Finances of Enterprises of the Kyrgyz Republic, National Statistical Committee, Bishkek, 2010. Data on small smallscale enterprises are not included. 25 By contrast, doubtful or unrecoverable household debts were 57 percent of power company receivables in 2009.

26

Revenues reported by thermal power companies increased even faster fasterby 118 percentduring 2006-2009. 2009. However, because thermal power tariffs only cover about 45 percent of service costs, the bulk of these revenues come not from users, but from state and local budgets. In 2009, state budget subsidies for communal service providers reached 1 billion soms ($23 million). For example, despite reporting an improvement in 2010, Kyrgyzzhilkommunsoyuz only covered about 37 percent of its costs from sales last year; the difference difference was financed by state budget, growth in accounts payable, fiscal debts, and the like. The 2011 state budget earmarks 740 million soms ($15 million) for Kyrgyzzhilkommunsoyuz alone.26 The situation is similar with Bishkekteploenergo, which is subsidized by the Bishkek city budget.27 Investment projects and prospects. Some $110 million in projects to reconstruct and modernize Kyrgyzstans central heating system, co-funded co funded by the Asian Development Bank, the World Bank, and 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 plants, replacing inefficient heating boilers, and installing thermal meters (in apartment buildings). Higher prices for heat and hot water (see Figure 8 8) have led many households to install meters on their own initiative.

Gas Natural gasvirtually virtually all of which is imported from Uzbekistanaccounts accounts for 30 percent of total energy consumption in Kyrgyzstan. Gas import, import, transportation, distribution, and sales are handled by the Kyrgyzgaz state-owned state monopoly,28 whose assets include some 800 kilometers of trunk pipelines and some 2300 kilometers retail pipeline infrastructure.

Figure 16Gas supply upply, consumption, and losses (in thousand meters3, 2006-2010) 2006
769 644 783 Imports + production

762 671 648

Consumption Losses

340 247
106 294 214

97

97

77

80

2006

2007

2008

2009

2010*

* 2010 data for consumption, losses are UNDP estimates. Source: : State Statistical Committee. Committee
26

Resolution N 33 of the Government overnment of the Kyrgyz Republic dated December 17 2010 On Draft Law of the Kyrgyz Republic on Republican Budget for 2011 and Forecast for 2012-2013. 2012 27 By contrast, Bishkekteploset does not receive budget subsidies. Instead, it is cross-subsidized cross subsidized from r revenues earned via electricity 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 held another 5.4 percent.

27

There are 279,358 gas consumers, most of which (277,344) (277,344) are households (approximately 1 million individuals); the remainder are utilities, industrial, and commercial entities (2,145 users); and budget-financed financed organizations (129). About 97 percent of household gas users have meters meters. As it is the only major company involved in the purchase, transport, and distribution of gas in Kyrgyzstan,29 it is not surprising that Kyrgyzgaz has been included in the monopoly register, and its tariffs subjected to scrutiny by the Antimonopoly Agency. However, as with thermal, competitive forces are present on the retail gas market: hou households seholds can substitute electricity or coal coal-fired boilers (and, in urban areas, district heating) for gas heat; gas-fired gas fired appliances can likewise be replaced by electric ones. Strengthening competition among these fuel sources can help hold costs and tariff tariffs prices down.
Figure 17Gas sector ector financials (2007-2009, 2009, in million som)
Gross income Costs Profit (loss) 3070 3045 4404 4532

Figure 18Gas, consumer onsumer price inflation trends (2007-2010) 2010)

250 Gas import prices
Household gas tariffs

3789 3320 200

Consumer price index

150
25
2007 = 100

2007

2008

-128 128

2009 -469

100 2007 2008

2009 2010

Sources: 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 in Kyrgyzstan dropped precipitously during 2007-2009, 2007 , as the price of gas imported from Uzbekistan rose from $100 to $240 per thousand cubic meters. Preliminary data indicate that, while the import price dropped slightly in 2010, imports and consumption continued to decline. The cumulative decline in gas consumption nsumption during 2007-2010 2007 2010 seems to have been on the order of 68 percent, with particularly large drops reported in the industrial sector. Although household gas prices only rose by 12 percent last year, 2010 was the seventh consecutive year in which hou household gas prices rose at rates 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 12 14 percent in previous years. These losse losses reflect the debilitated condition of Kyrgyzstans gas pipelines, inaccurate metering, theft, and other factors. The highest losses are recorded in the countrys southern regions. Gas sector financials. Kyrgyzgazs financial performance is determined primarily by trends in wholesale (imported) and retail gas prices, the procurement of which represents some three quarters
29

The KyrKazGaz joint venture company also performs gas transit functions in the territory of Kyrgyzstan.

28

of its total expenditures. As the data in Figures 17 and 18 show, Kyrgyzgazs finances deteriora deteriorated sharply during 2007-2009, 2009, when the price of gas imported from Uzbekistan rose from $100 to $240 per thousand cubic meters. Although retail gas prices also increased sharply (relative to consumer prices) during this time, they were unable to keep pace with with import prices. Exchange-rate Exchange effects further added to these losses, as these gas purchases are priced in dollars, and the som depreciated in nominal terms vis--vis vis the dollar by some 26 percent during 2008-2010. 2008 2010. Fortunately, Uzbektransgaz did not raise e its export prices in 2010, allowing domestic gas prices (which rose another 12 percent last year) to partially make up the lost ground. This suggests that a lower loss figure will be reported for 2010.
Figure 19Fixed assets (by book value) in the gas sector (2006-2009, 2009, in million som)
793 733 80% Share of depreciated fixed assets
496 393

Figure 20Trends Trends in fixed asset depreciation, cash collections ollections (2006-2009)
100%

60% Cash collections 40%

20%

0%
2006 2007

2008

2009

2006

2007

2008

2009

Sources: Finances of Enterprises of the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010; and UNDP calculations.

Despite these losses, Kyrgyzgaz and its subsidiaries have managed to make significant investments in Kyrgyzstans gas infrastructure. infrastr As the data in Figures 19 and 2 20 show, the book value of fixed assets doubled during 2006-2009, 2006 while the share of worn-out t fixed assets dropped from 40 to 28 percent. Kyrgyzgazs high rate (at least 90 percent) of cash collections contributed to financing these capital expenditures. Investment projects and prospects. Investment projects worth some $95 million are currently underway in the gas sectora a figure that is five times the book value of the gas sectors fixed assets. Of this sum, $6 million reflects expenditures to repair damage to the gas distribution network in Osh following the June 2010 events.30 These investments s are mainly to replace unreliable gas pipelines and construct new ones, and to improve metering at gas distribution stations.

Coal Kyrgyzstans coal industry hosts 30 mining companies, which include both privately owned and joint stock companies with significant state participation. However, the largest coal mining enterprise
30

For more see, The Kyrgyz Republic Joint Economic Assessment: Reconciliation, Recovery, and Reconstruction, ADB, IMF, the World Bank, 2010.

29

is the state-owned Kyrgyzkomur, under the Ministry of Energy. As of January 2008 proven reserves at Kyrgyzstans 70 main coal deposits were reported as 1.3 billion tons; prospective reserves are assessed at than 2.2 billion tons, making Kyrgyzstan potentially one of Central Asias coal sector leaders. 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 IssykKul). 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. The monopoly register for 201031 therefore included coal-mining enterprises from Batken, Naryn, and Osh regions, whose wholesale prices were regulated by the state. However, these sellers often face monopsonistic coal buyers (e.g., thermal power plants, municipal enterprises), as well as some large intermediary wholesalers, who resell coal to households and other small-scale final users. A more competitive picture therefore emerges, particularly when Kyrgyzstans large coal imports are taken into account. Still, it is not clear whether this combination of bilateral monopolies and wholesale price controls necessarily reduces coal prices for consumers, most of whom purchase coal on the open market. It may be that the wholesale price controls discourage domestic production in those regions where import competition is feasibleand drive up retail coal prices in those regions in which high transport costs limit the penetration of coal imports. Coal production and trade. Coal production in Kyrgyzstan, which reached a high of 4.5 million tons in 1979, had dropped to only 321,000 tons in 2006. Output nearly doubled during the next three years, rising to 607,000 tons in 2009, before dropping back to some 558,000 tons last year. The electricity shortages, and sky-rocketing gas and heat prices that took hold during these years obviously contributed to this resurgence. These factors helped wholesale coal prices rise by some 150 percent during 2006-2010. However, coal imports, which exceed domestic production, also soared during this time, rising from 728,000 tons in 2007 to 1.1 million tons in 2010 (Figure 21).

Figure 21Coal production, consumption, imports and exports (in thousand tons, 2006-2010)
1651 1358 1066 975 728 694 605 492 321 30 2006 2007 2008 396 58 109 12 7 2009 2010 558 1287 1100 Consumption Imports Production Exports

1093 802

Source: State Statistical Committee, UNDP calculations.

31

The State Regional Registers of subject of natural and permitted monopolies of the Kyrgyz Republic, for 2010. Order by State Antimonopoly Agency under the Government of the Kyrgyz Republic, 30 Decembers 2009, No 525

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Thermal plants are the largest users of coal: in 2009, for example, the Bishkek Combined Heating and Power Plant consumed 796,000 tons of coal, as well as 24 million cubic meters of natural gas and 69,000 tons of fuel oil. Due to its technological requirements, the Bishkek plant has to use imported coalaccounting accounting for virtually all of Kyrgyzstans coal imports. Significant amounts of coal are burned by families living in individual houses, which are not connected to district heating networks. Coal sector financials. Despite this turnaround, coal mining appears to be loss loss-making (Figure 22), ), 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 the utility ility of the sectors financial data. data

Figure 22Financial Financial results of coal companies (in million som, 2006 2006-2009)
Gross income Costs Profit (loss)

463

464

467 439

204
167 135

227

2006

-32

2007

-23

-0.5 2008
2009

-28

Source: Finances of Enterprises of the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010; and UNDP calculations. The data include small-scale small enterprises.

In many respect, the coal industry seems relatively well placed to take advantage of the threats and opportunities now facing the energy sector. Market forces play a large role in setting retail coal prices; private capital and investment are playing significant roles; Kyrgyzstan possess considerable coal reserves for exploitation; ; and the demand for coal could be boosted both by higher electric a and thermal power tariffs (if/when they come) and by the prospective construction of large coal coal-fired power plants (e.g., Kara-Keche) Keche). On the other hand, prospects for coal sector expansion now face a number of obstacles, including the following: Many any coal mines are increasingly tapped out, especially in light of the low-tech mining processes that are often employed. Further expansion of the sector could require large investment outlaysto to increase production from existing mines, to open new ones, a and to 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.

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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 Kyrgyzstans coal mines may also weigh on prospects for the coal industrys development.32

Decentralized renewables Kyrgyzstan has good potential for the application of decentralized renewable energy technologies, primarily small hydropower stations on mountain rivers, solar and wind energy, and biogas plants. In comparison to big hydro and hydro-carbons, decentralized renewable projects are relatively inexpensive (in terms of up-front capital costs), and can attract at least some of the financing needed for their construction and maintenance from donors and the communities in which they are located.33 Despite this, according to one source, less than one percent this potential is being utilized.34 For these reasons, Kyrgyzstans National Energy Programme35 officially recognizes the importance of decentralized renewables; and a programme to develop small and medium-size power plants has been adopted. 36 The law On Renewable Energy (of 31 December 2008) provides the over-arching legal framework. A special public agency, the Directorate for Small and Medium-Size Power Facilities, was established in 2008. The governments programme to develop small and medium-size power plants calls for the construction and reconstruction of 43 small and medium-sized facilities (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 plant near 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 Tojiks (or Pamir Energys) 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.

See, for example, Natalia Antelava, Child labour in Kyrgyz coal mines (http://news.bbc.co.uk/go/pr/fr/-/2/hi/asiapacific/6955202.stm), BBC News, 24 August 2007. 33 Decentralized renewables (and energy efficiency) projects can also attract carbon finance, under the Kyoto Protocols clean 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 Fuel and 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.

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Communities that construct small power plants (often with donor assistance) are too often unable to repair or maintain them. Neither private- or public-sector sector agencies in Tajikistan possess at present the technical expertise needed to construct and especially maintain decentralized renewable energy installations. installat In addition to these sector-specific sector specific challenges, small hydro projects face obstacles that are common to all decentralized renewable technologies in Kyrgyzstan: Finance: Funding unding mechanisms to able to transparently combine and manage government, private-sector, community-based, community and donor funding on both a commercial and grant grantfinancing basis have yet to be fully developed.37 Regulatory: The regulatory and technical requirementsand requirements and the capacity to enforce them them needed to ensure technological standardization standard of power generated from off-grid off power 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, company from cross-subsidies implicitly paid by other her electricity companies or 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 household tariff levels (around $0.015/kWh), these additional costs are considerable.38

Figure 23Additional Additional costs (above current tariff levels) per kWh associated with electricity generated from decentralized renewables

$0.17

$0.09 $0.06
$0.04

$0.06

Small hydro

wind

biomass

geothermal

Solar

Source: UNDP-Kyrgyzstan Kyrgyzstan project Promotion of renewable energy for development in remote regions, 2011.
37

The renewable energy and energy efficiency tru trust st fund proposed by UNDP in Tajikistan could possibly be considered for adoption in Kyrgyzstan as well. 38 However, since decentralized renewables seem unlikely to comprise a significant share of Kyrgyzstans energy balance on the near future, the subsidies needed to cover these additional costs would likewise be insignificant.

33

Thus, despite strong government and donor interest, progress in constructing the requisite legal framework, and growing amounts of resources to finance their development, small hydro and other decentralized renewable energy technologies in Kyrgyzstan remain in their infancy. Generation costs have yet to be brought down to competitive levels; and the technical and commercial regulations needed to facilitate third-party access to the national grid (e.g. feed-in tariffs) have not been made operational.

Energy efficiency Compared to many other former Soviet Republics, Kyrgyzstan is a relatively efficient energy user, in terms of ratios of energy consumption to output. These ratios have generally improved since 2008. In light of Kyrgyzstans energy poverty, and the shortage pressures that have sharpened since 2008, these trends are not surprising. Nonetheless, energy conservation policy in Kyrgyzstan is on the agenda. The National Energy Programme for 2008-201039 called for growth in energy consumption to be limited to 0.4-0.5 percent of each percentage point increase in GDP during 2010-2025. Legislation obliges the government to design and implement energy conservation programmes and projects, and to establish a state energy saving fund. An energy efficient building code was adopted in 2009, 40 while Bishkek and other municipalities have moved ahead with sub-national energy conservation programmes. UNDP, the EBRD, European Commission, and other donors are working with the government to translate these principles into practice. However, much of this legislation remains declarative in nature; questions of implementation and enforcement (e.g., regarding the new building code) and financing investments in energy efficiency continue to loom large. Proposals to retrofit apartment buildings with energy efficient heating systems and insulation often founder on difficulties apartment owners face in collectively decision making. Kyrgyzstans low electricity tariffs reduce the financial attractiveness of many energy efficiency projects.

Energy tariffs and costs Tariff setting: general principles. As virtually all major companies in the energy sector are regulated 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 a bureaucratic, administrative character: enterprises must present to the Regulator detailed planned calculations of expenses, in order to show that the requested tariffs are economically appropriate. The Regulator is obliged to validate these calculations in line with established procedures. Costs are divided into production costs and full costs. Production costs include:
39

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.

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. 40 Order 135 of the State Agency for Architecture and Construction, 2 October 2009.

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Figure 24Actual 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 2012

Note: 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 projection for 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 and thermal 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 production costs, these include investment costs, i.e.,: debt service and principal repayments; and capital costs (for (re)construction of plant and equipment).

Table 4Differences between planned and actual costs of larger power companies (2009-2010) 2009 2010 Cost category Full cost -5% -2% Production cost -5% 2% - Material costs - Labor - Social insurance - Depreciation of fixed assets - Other costs - Taxes Investment costs: - Debt service - Capital investments Source: Ministry of Energy. -4% -11% -12% 5% 14% -62% 120% -67% -11% 16% 16% 20% 14% -32% 14% -47%

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Figure 25Cost Cost share trends in the electric power sector (2006-2009)
51% 39% 38% 54%

2006

2007

2008

2009

25% 26% 26% 25%

25%

27% 15%

11% 10% 9% 9%

13%

Materials

Labor and social insurance

Depreciation

All other costs

Source: Enterprise Finance in the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010. The data cover all enterprises in the electric power industry, including small enterprises.

Cost-plus plus pricing gives companies incentives to overestimate anticipated production costs. The Regulator, who is constrained by the governments social obligations, knows this, and therefore seeks to 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 the companies.

Figure 26Actual Actual versus planned household thermal power tariffs (per gigacal., 2007 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

2012

Note: these figures are average annual household tariff rates in som, multiplied by average annual som/$ exchange rates. 2011-2012 2012 calculations use the average exchange rate for 2010; the actual tariff projection for 2011-2012 2012 assumes no change in current curren (2011) tariff levels. Sources: : The medium term tariff policy of Kyrgyz Republic on thermal energy for 2008-2012, 2008 24 April 2008, government resolution esolution No 165 165; and the medium term tariff policy on electricity lectricity and thermal energy for f 2010-2012, 12 November 2009, government resolution No 699.

36

Actual expenses can deviate from those agreed with the Regulator, for three reasons. The first is the appearance of economically justified costs that were not anticipated at the time the tariff was set (e.g., due to higher-than-expected expected inflation rates). Second, tariff policies may change, necessitating a change in the trajectory of expenses. This happened in Kyrgyzstans electric power sector in 2009 and 2010, when planned tariff increases either did not materialize, materialize, or were rescinded after their introduction (Figure 24). ). Third, some anticipated expenses (e.g., investment programmes) may not be made. In Kyrgyzstans energy sector, production cost over-runs over runs are often offset by cutbacks in investment spending, as is shown in Table 4. 4. Whereas expenses in the power sector were reported at 5 percent below approved levels in 2009 and 2 percent below approved levels in 2010, this was primarily due to systematic failures to execute the capital investment plan. The question ion of whether or not increases in costs costsand and particularly some cost components componentsin the 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 2 show, household electricity tariffs (in dollar terms) are today roughly where they were in 2006. This reflects the fact that an April 2008 decision to increase tariffs during 2009-2012 2009 2012 was not implemented, as well as the April 2010 rescinding of the governments governments December 2009 decision to double tariffs in January 2010.

Figure 27Cost Cost share trends in the thermal power sector (2006 (2006-2009)
72% 68% 67% 70%

2006

2007

2008

2009

18% 18% 17% 19% 6% 5% 4% 4%

8% 9% 9% 5%

Materials

Labor and social insurance

Depreciation

All other costs

Source: Enterprise Finance in the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010. The data cover all enterprises in the thermal power industry, including small enterprises.

As described above, Kyrgyzstans relatively low electricity tariffs have been accompanied by rapid growth in costs in the power sector. As the data in Figure 25 2 show, this growth has been driven primarily by materials expenditures (chiefly for fuels41) by companies in this sector; the share of raw materials costs in total expenditures rose from 39 percent in 2006 to 54 perce percent in 2009. While the fuels42 component of the industrial producer price index registered a 84 percent increase during 2006-2009, 2009, hydropowers dominance in Kyrgyzstans electricity balance should minimize the impact of these rising fuel prices. Nor are th the e investment projects in this sector a good explanation for rising
41

In 2009 fuel purchases accounted for 62 percent of reported raw materials expenditures. Source: Enterprise Finance in the Kyrgyz Republic, National Statistical Committee, Bishkek, 2010. 42 Refined oil products cts and coking coal.

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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 ermal power tariffs (in dollar terms) have risen some 46 percent compared to where they were in 2006 (Figure 2 26).43 However, had the April 2008 decision to increase tariffs during 2009-2012 2009 2012 been implemented, or had the governments December 2009 decision to quintuple thermal power tariffs in January 2010 not been rescinded in April, these would be much higher than is the case today. A similar trend, in terms of increases in the shares of expenditures devoted to materials purchases, is apparent in the therm thermal power sector as well (Figure 27 7). However, it is less pronounced. As the generation of thermal power in Kyrgyzstan necessarily involves the purchase and consumption of fuels (e.g., gas, coal, mazut), one would expect fuel (raw materials) expenditures to play a large role in the sectors cost structure. The data in Figure 27 therefore show the share of raw materials purchases in total costs rising from 68 to 72 percent during 2006 2006-2009. To be sure, it is difficult to generalize about costs across the thermal thermal power sector: whereas some companies (e.g., Kyrgyzzhilkommunsoyuz) generate their own thermal energy, others (e.g., Bishkekteploset) purchase thermal power and distribute it to final users. Nonetheless, onetheless, the data in Figure 27 2 indicating only moderate growth in raw materials costs in the relatively fuel-intensive intensive thermal power sector contrast with the data in Figure 2 25 showing more robust growth in raw materials costs in the less fuel fuel-intensive intensive electric power sector. The character of materials cost trends in electric power stands out even more strongly when contrasted with cost trends in the coal sector, as well as in the thermal power sector (see Figure 28).

Figure 28Shares Shares of material costs in the thermal power sector (2006-2009) (2006
68% 67% 70%

72%

2006

2007

2008

2009

51% 39% 38%

54%

51% 43%

54% 54%

Thermal

Electricity

Coal

Source: Enterprise Finance in the Kyrgyz Republic, National Statistical Committee, Bishkek, 2010. The data cover 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 28 are for heating tariffs, but the trends in hot water tariffs are identical.

38

Legal and regulatory framework The 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 tariffsetting 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 Kyrgyzstans 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

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 industrys restructuring, on the basis of both company and external financing, including from the national budget.

The energy sectors regulatory framework revolves around the Ministry of State Property, the Ministry of Energy, and the latters State Department for Regulating the Fuel and Energy Sector (hereafter the Regulator). The Ministry of State Property formally acts as the owner and manager of state-owned power companies. It designs and implements development strategies (inter alia concerning denationalization and privatization), selects and monitors company management, and the like. The Ministry of Energy performs sectoral functions for the design and implementation of policy development, strategic planning, assessment, and forecasting. This Ministry includes the State Department for Regulating the Fuel and Energy Sector (hereafter the Regulator), whose tasks include: balancing the interests of energy producers and consumers (including dispute resolution); licensing energy sector operations; and setting energy tariffs. In practice, the Regulator is not independent of the Ministry of Energy, so that this Ministry in fact implements both managerial and regulatory functions. The Regulator is therefore often guided by conflicting political and economic interests, which can generate inconsistencies in tariff setting and other dimension of energy policy.

Policy reform to date Prior to the start of reforms in Kyrgyzstans energy sector, electricity was supplied in the domestic market and for export by a vertically integrated state-owned Kyrgyzenergo, which monopolized the generation, transmission, and distribution of electricity. In April 1997, the government adopted a programme to demonopolize and partially privatize the electricity sector, as part of efforts to establishment a competitive environment among electrical and thermal power producers in the domestic market.44 Denationalization and privatization in the electrical power sector was to occur during 1997-1999, in four stages (three of which have been accomplished): The first stage entailed Kyrgyzenergos transformation into a joint-stock company with some 94 percent of its shares being affixed as state property. During the second stage, Kyrgyzenergos 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 countrys 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 JSC Kyrgyzenergoholding.

40

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 state control in the energy sector, with a focus on improving management and reducing corruption. On the other hand, Kyrgyzstans current legal framework does permit the privatization of the Kambarata hydropower stations,45 the Bishkek Combined Heat and Power Plant, and the Bishkek District Heating 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 Country Development Strategy included some reform measures for Kyrgyzzhilkommunsoyuz, but no progress was made afterwards. An April 2009 programme to restructure and privatize Kyrgyzgaz46 was quickly followed by a draft agreement between the governments of the Kyrgyz Republic and the Russian Federation,47 according to which Gazprom would acquire 75 per cent plus 1 share of Kyrgyzgazs 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 to develop a well defined programme for the energy sector. In addition to reassuring the public about the permanence of current energy tariffs, efforts have focused on ensuring the country had adequate energy supplies during the winter of 2010-2011, and on implementing the Fuel and Energy Sector Transparency Initiative. Energy sector transparency has been a major public concern, contributing inter alia to the April 2010 political developments. For example, consumers frequently have difficulty obtaining information about energy company costs or tariff-setting procedures. According to the January 1997 law On Electric Power, the Regulator is to officially inform the public about any change in electricity tariffs through mass-media at least one month before the planned introduction of new tariffs. However, this requirement is sometimes honored in the breach. For example, the decree to double electricity tariffs as of 1 January 2010 was promulgated on 30 December 2009. While legislation gives the public the right to information about the energy sector, these laws are not fully implemented due to a lack of implementing regulations and procedures, and because many citizens are unable to prepare a proper request for information. In order to address these issues, the government in May 2004 adopted the principles of the Extractive 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 of financial information in the mining sector were developed, and relevant reports prepared. However this initiative has focused primarily on disclosure of information about the activity of the government agencies and oil and gas companies, not the electric power industry. Limited civil society involvement in implementation of the initiative has further limited its significance.

Under the 3 February 2009 Agreement on the Construction of Kambarata HPP-1 between the governments of the Kyrgyz Republic and the Russian Federation, a joint-stock company became the owner of the Kambarata-1 hydropower station. 50 percent of the shares in this joint venture belong to Russias INTER RAO EES; 50 percent belong to National Power 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 May 14, 2004; N 361

45

41

Following the April 2010 developments, the government introduced the Fuel and Energy Sector Transparency Initiative (FESTI),49 extending transparency and civic engagement requirements to all enterprises 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 FESTIs July 2010 introduction, agreements have been concluded between the Ministry of Energy and all of Kyrgyzstans major energy companies (i.e., the Power Plants electricity generation company, the National Power Grid transmission company, and the Severelectro, Vostokelektro, Jalalabadelektro, and Oshelektro electricity distribution companies). These agreements concern key financial and operational indicators, which are monitored (many via escrow accounts) on a monthly basis by the companies boards of directors and the Ministry of Energy. The Ministry of Energy has sought to promote social competition by releasing comparisons of electricity 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 implement transparency principles in the electricity sector. The EGI programme, which has been applied in a number of developing countries, is based on a set of 68 policy and regulatory indicators, of which 32 indicators were selected for application in Kyrgyzstan.50 FESTI and its related support initiatives represent an important step forward, in terms of improving public-sector governance and increasing civic engagement in energy. As the April 2010 events preclude for now the accelerated introduction of competitive market forces into the energy sector, increased civic engagement in/oversight of the state-owned monopolies that dominate the sector, 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 the Ministry of State Property (the energy companies nominal owner), the Ministry of Energy, its Regulator, and these companies boards of directors were sufficiently complicated even before the creation of the Supervisory Board. The improvements in regulatory oversight promised by FESTI may need to be accompanied by measures to simplify this external regulatory superstructure, and to strengthen corporate governance within the energy companies themselves.

Energy sector developmentfuture scenarios While efforts to improve public-sector governance and increase civic engagement in energy are certainly important, the breadth and depth of the problems facing Kyrgyzstans energy sector suggest that considerations of more ambitious energy reforms may at some point return to the front burner. In this respect, the delineation of four different development scenarios/directions for the electricity sector now seems possible:
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. 50 Electricity governance in Kyrgyzstan: An institutional assessment, N. Abdyrasulova, N. Kravtsov, Public Fund UNISON, 2009. This 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).
49

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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 sectors basic ownership or organizational characteristics. Scenario 1: Restoring the vertically integrated electricity monopoly. Under this scenario, the electricity generation, transmission, and distribution companies would be merged/rebundled, recreating a single operational center for decision-making and implementation. This scenario reflects the 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 but external to the unbundled companies. It also assumes that the greater internal complexity of the consolidated company would not overwhelm the managers appointed to run it. If such assumptions are correct, then reductions in losses and some improvements in the procurement of raw materials and other supplies could be expected. This could take some of the pressure off of tariffs, and increase the cash flow needed to finance investments in the power sector. However, if this scenario were to be chosen, the rebundled power company would be very large and complicatedarguably more so than during the Soviet period, when the numbers of users (companies and households) were smaller, technologies simpler, and managers (and customers) had fewer choices to make. To the extent that some of todays unbundled companies (which are smaller and simpler to manage than a vertically integrated monopoly would be) face questions about managerial 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 be overwhelmed by losses due to over-centralization, additional managerial staffing, less managerial and entrepreneurial initiative, lengthier decision-making processes, and the reduced transparency that comes with greater organizational complexity. In this case, reductions in pressures on tariffs and improvements in cash flow could be short-lived. Scenario 2: Rebundling/merging the distribution companies, and making the merged entity responsible 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. Changing managerial and organizational incentives facing these companies could therefore improve the functioning 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 applying this approach under Scenario 2 would likewise be smaller. Scenario 3: Return to privatization and marketization. This scenario is based on the belief that the state is often a less effective owner than a private entity, and that, in the end, a regulatory and ownership regime with greater scope for competitive market forces can provide more effective social control over the sector than a framework of state direction. This scenario could feature two key elements: 43

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 distribution company assets to strategic investorswith the observance of relevant legal norms and expectations about transparency and accountability. Such a scenario could also bring much needed capital and know-how to Kyrgyzstans electricity sector, helping to reduce losses, improve financial performance, and modernize the electricity infrastructure. (Such privatizations, as a way to reduce losses and modernize electricity distribution, are common in other transition economies.) Such options could be expanded to generationboth in hydropower (building on the Kambarata-1 model, in which Russias RAO EES would become a majority owner in Kyrgyzstans largest hydropower station) and in coal-fired plants (e.g., Kara-Keche). However, any privatization scenario faces three key weaknessesparticularly at the present moment. 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 once again 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 tariff rates, perceptions (accurate or not) of a poor business environment, political uncertainties, and the like. That is, even if the domestic political calculus should change, Kyrgyzstans efforts to find appropriate strategic investors (e.g., multinational energy companies with deep pockets and proven track records in reducing losses in their subsidiaries) could come up empty. Third, if such privatizations could be effected within the sectors existing structural framework, the new owners would still be monopoly sellers of electricity. International experience indicates that the gains from replacing a publicly owned monopoly with a privately owned one are often chimeric. It also underscores the importance of efforts to improve the quality of sectoral regulationand, if possible, introduce competition from other sources (e.g., small-scale independent power wholesalers, industrial co-generation). Marketization and the further extension of the private sector power delivery could be explored without recourse to privatization, if the role for private distribution companies in the resale of electricity from the four regional power distributors could be expanded. Here, the state-owned distribution companies could outsource service delivery responsibilities to these companies on the basis of competitive tenders, the terms of which could include investment programmes and measures to 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 in Tajikistan (including inter alia donor support for lifeline tariffs for vulnerable households). This approach would face a number of obstacles and drawbacks, including the large variability in distribution costs and cash collection in different regions of Kyrgyzstan, and possible resistance within the state-owned distribution companies (and their allies in the regional governments) to ceding control over assets to potential/actual competitors. On the other hand, Pamir Energys experience in making these arrangements work in the forbidding logistical and commercial conditions of Tajikistans remote Gorno Badakhshan region suggests that this model could be particularly relevant for some of Kyrgyzstans more remote regions.

44

This scenario can not be treated as a viable short-run alternative. It could perhaps be pursued later, when better electricity sector governance and regulation reduce popular opposition to tariff increases and private investment in the energy sector, when competitive forces within the electricity sector are better able to limit cost increases, when concerns about Kyrgyzstans investment climate are addressed, and when Kyrgyzstans social protection system is better able to protect vulnerable households from the consequences of higher electricity tariffs. Scenario 4: Improving management within the electricity sector without changing in the sectors basic ownership or organizational characteristics. This is the scenario currently being pursued, as embodied by FESTI. It is based on the assumption that opportunities for improving the relationships 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 power companies 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 meteringat every stage in the production process, not just for final users/households; and increasing the legal sanctions associated with corruption.

However, FESTI has certain limitationsparticularly if it is not combined with measures to improve the market (as well as governance) environment in which the electricity sector functions. For example, FESTI has led to the appearance of new regulatory bodies (e.g., the Supervisory Board) in a sector in which there is no shortage of supervisory bodies (e.g., the Ministry of State Property, the Ministry of Energy, its Regulator, and the companies boards of directors, etc.). The improvements in regulatory oversight promised by FESTI may therefore need to be accompanied by measures to simplify this external regulatory superstructure, and to strengthen corporate governance within the energy 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 almost exclusively from import; and (iii) the principle that household tariffs should cover costs of service is more firmly grounded in the sectors business model. Scenario 1: Privatizing Kyrgyzgazwith or without unbundling. This would be similar to scenario (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 vertically integrated (unbundled) monopoly. The main benefits of this scenario reflect Gazproms financial and technological 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 ending Kyrgyzstans reliance on a single gas supplier. On the other hand, privatization without unbundling could limit subsequent possibilities for potential competition and additional investment in the gas distribution infrastructure. Moreover, the current socio-political concerns about privatization in the electric power sector would be likely to
51

Detailed proposals for implementing many of these measures have been implemented by the USAID-funded Kyrgyz Energy Advisory Services in Bishkek.

45

extend to Kyrgyzgazs potential privatization/sale to Gazprom as well. This suggests that such a privatization is unlikely to occur for the foreseeable futureand when it does, the sale should be subjected to the highest levels of scrutiny and accountability. Moreover, unless the sale were to be accompanied by large increases in domestically produced gas, it is not clear why this privatization should be expected to reduce gas tariffs for Kyrgyzstani households. Scenario 2: Improving the management of Kyrgyzgaz without changing the gas sectors institutional or ownership framework. This approach is analogous to scenario 4 for the electricity companies described above. That is, better regulation and management of, and governance within, Kyrgyzgaz would be emphasized, rather than privatization or promoting market competition. The logic of FESTItransparent agreements between Kyrgyzgaz and the Ministry of Energy could be drafted to monitor the companys performance; an external supervisory committee could be established; etc. The real questions would perhaps concern whether such arrangements would significantly strengthen incentives to increase efficiency, and where the resources needed to finance the expansion of the gas distribution infrastructure would come from. Reforms in the thermal power sector can likewise be considered within a scenario development framework. Key points in this sector include: (i) the sectors deeply unprofitable nature, and extensive depreciation 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 on electric 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 service provision responsibilities. Scenario 2: Improving company management without changing the sectors institutional or ownership 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 sectors finances, and the extent to which the companies rely heavily on subsidies (often provided implicitly and non-transparently) by the national and municipal governments, it is difficult to imagine significant improvements in this sector if its basic financial parameters 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 20072010; 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.

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While Kyrgyzstans 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 Kyrgyzstans 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, post2007 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 todayin 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 Kyrgyzstans 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 Kyrgyzstans 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 sectorwhere large reserves are present, and where state ownership and price controls play relatively minor rolesto 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.

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III. Poverty and household access to energy This chapter reviews issues related to poverty and household access to energy during 20062010.52 It focuses in particular on household energy consumption during the energy crisis of 2008 and in response to the tariff increase in 2010.

Data issues The household surveys conducted by the National Statistical Committee have since 2003 produced 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 interpretation poses two sets of challenges. First, these data do not always correspond to production and sales data provided by energy companies. For examplewhereas: 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 2 treat 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 been relatively large, changes in household consumption may have been more in line with the demand-side household survey data. (However, since the volume of electricity generated was reported down 6 percent in 2009 and electricity exports nearly doubled, the increases in household electricity consumption suggested by the survey data may not be fully plausible.) Second, these survey data on household expenditures do not always agree with national income accounting data on consumption expenditure. For example, whereas the survey data indicate that household expenditures in real terms declined by 6 percent in 2009,53 Kyrgyzstans national accounts data report a 14 percent reduction in individual consumption for that year. Third, these survey data are not always internally consistent. For example, information on billing for household consumption and actual payments for electricity and gas consumed do not
52 53

Data for 2010 are limited to the first half of the year. Nominal growth in household expenditures in 2009, divided by the change in the consumer price index in 2009.

48

match up: the latter consistently exceed the former by some five percent for gas sales and 10 percent for electricity over a 4.5-year period (January 2006 mid-2010). While such a variance may be within the statistical margin of error, the size of this discrepancy suggests something more systematic may be at work. Possible explanations include: Advance paymentshousehold 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 householdsperhaps 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 Kyrgyzstans 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 2010corresponding 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, than average (Table 5). However, expenditure growth for households in the poorest income decile, as well as for rural households, lagged behind other groups. Household energy consumptionmeasured as nominal growth in household expenditures on energy goods and services55 divided by the change in the energy components of the consumer price indexalso rose during this time (Table 5), for households in all income deciles, locations, and social groups monitored. 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.
The USAID report The Curtailment of Electricity Consumption: Attitude of the Population and Impact on the Quality of 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 (chiefly firewood, peat, kerosene, mazut, dung, and bottled liquefied gas).
54

49

Growth in energy consumption was more moderate in households living in rural and mountainous areas.

Table 5Monthly 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 Extremely poor 1st decile (poorest) 2nd decile 9th decile 10th decile (wealthiest) Urban Rural High mountains Mountains Single parent With many children 685 485 488 567 2037 3218 1534 1117 954 839 1374 1134 835 567 473 685 2498 4177 1970 1356 1125 961 1732 1404 1316 909 745 1093 3349 5585 2729 1985 1812 1768 2500 2005 1225 895 805 1101 3608 5502 2865 1934 1843 1499 2547 1998 n.a. n.a. 644 920 3424 5924 2856 1810 n.a. n.a. n.a. n.a. n.a. n.a. 586 919 3431 6419 2701 1985 n.a. n.a. n.a. n.a. 21% 25% 12% 32% 20% 16% 27% 18% 31% 21% 26% 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 these years. 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, were reported for 2009 (Figure 29). The data in Figure 30 indicate that the shares of household expenditures devoted to energy increased during 2006-2009, before falling back slightly in the first half of 2010. Expenditures on coal 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 energy consumption (5.5-6.5 percent) are not particularly large. Quarterly seasonality is apparent in these data: energy spending typically rises in the last quarter of the year, as household stockpile coal for the winter. Particularly large shares of household budgets were devoted to energy expenditures in the fourth quarter of 2008 (due to large price increases for coal, as well as exceptionally cold winter temperatures, in that year), as well as in the first quarter of 2010 (due to the large tariff increases for electric and thermal power introduced in January of that year).

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Table 6Average 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 Rural High-mountains Mountains 81 61 59 54 55 87 76 72 156 135 137 125 182 130 110 99 329 124 n.a. n.a. 111 56 n.a. n.a. 31% 23% 9% 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 2006 2009 deflated by growth in the energy component of the consumer price index for these years. Source: urce: State Statistical Committee, UNDP calculations.

The data in Figure 32 2 show that energy expenditures absorb a larger share of household budgets in poor families than in high high-income income families. However, they also show the share of household spending devoted to energy expenditures in low-income low income households converging towards national onal averages, by the first half of 2010.

Figure 29Trends in household ousehold expenditures, energy consumption* * (2007-2009) (2007

26% Consumption expenditure Energy consumption 17% 13% 14%

Figure 30Share of household ousehold spending absorbed by energy expenditures xpenditures (2006-2010)
6.5%

6.3% 5.9%

6.2%

5.4%

2007

2008

2009 -6% 2006 -15% 2007 2008

2009 2010:H1

* Nominal expenditure growth deflated by growth in the consumer price index (or its energy component) for these years. Source: State Statistical Committee, UNDP calculations.

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Figure 31Household Household energy expenditures by energy sources (2006 2006-2010)

Coal 50% 40% 30% 20% 10% 0% 2006

Electricity

Gas

Central heat

Hot water

Other

2007

2008

2009

2010:Q1

Note: shares sum to 100 percent. Source: State Statistical Committee, UNDP calculations.

The data in Figures 33 3 and 34 indicate that low-income income households, and household households living in rural and especially mountainous areas, have very limited access to gas, central heating, and hot water supply. This near-total total reliance on electricity and coalespecially coal especially in colder mountainous areas areas underscores USAIDs 2009 finding that electricity electricity tariff increases can have disproportionate effects on real incomes in low-income income households.56 It also means that such households are more likely to be affected by interruptions in electricity supplies. This is particularly the case for Kyrgyzstans po poorest (first decile) households, for whom spending on electricity absorbs about half of energy expenditures. By contrast, urban and upper-income upper income households are more likely to have access to gas, central heating, and hot water.

Figure 32Household Household expenditures on energy, by deciles (2006-2010)

2006 8%

2007

2008

2009

2010:H1

7%

6%

5%

4% 1st decile (poorest)

2nd decile

National average

9th decile

10th decile (wealthiest)

Source: urce: State Statistical Committee, UNDP calculations.

56

The Curtailment of Electricity Consumption: Consumption: the Attitude of the Population and Impact on the Quality of life, USAID 2009. p.4.

52

Figure 33Shares of total household ousehold energy expenditures devoted to various e energy sources (by household decile, 2009)

100% 80% 60% 40% 20% 0% 1 decile Hot water Central heat Gas Electricity Coal

2 decile

National average

9 decile

10 decile

Source: State Statistical Committee, UNDP calculations.

Before the winter of 2008-2009, 2008 quasi-universal universal household connections to Kyrgyzstans electricity grid meant quasi-universal universal access to electricity services. However, the combination of severe frosts, unprecedented low water levels in the Naryn cascade hydropower hydropower reservoirs, and the decapitalization of the countrys electricity transmission and distribution infrastructure led to electricity rationing and unplanned service interruptions for households and other users.

Figure 34Shares of total household h energy expenditures devoted to various arious energy sources (by household location, 2009)

100% 80% 60% 40% 20% 0% High mountain Hot water Central heat Gas Electricity Coal

Rural

Mountain

National average

Urban

Source: urce: State Statistical Committee, UNDP calculations.

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Figure 35Share of households ouseholds reporting interruptions in electricity service ervice (2006-2009)
No interruptions
70% 60% 50% 40% 30% 20% 10% 0% 2006

Few times yearly Several times weekly

Once a month Daily

Once a week

2007

2008

2009

Source: State Statistical Committee, UNDP calculations.

As the data in Figure e 35 show, the frequency of service interruptions increased abruptly in 2008, when nearly half of Kyrgyzstans households reported electricity outages on a daily basis and 70 percent reported several such service interruptions per week. While the situation improved in 2009, daily interruptions still prevailed.57

Figure 36Share of households ouseholds (by income decile) experiencing weekly eekly (or more frequent) interruptions in electricity service (2008-2009)
77% 73% 72% 63% 65% 1st decile (poorest) 2nd decile National average 9th decile 10th decile (wealthiest) 52% 54% 47% 46%

Figure 37Share of households ouseholds (by location) experiencing weekly (or more frequent) interruptions in electricity service ervice (2008-2009)
93% 85% 72% 55% 82% Urban National average Rural 78% Mountains High mountains 62% 55% 54%
43%

2008

2009

2008

2009

Source: urce: State Statistical Committee, UNDP calculations.

The data in Figures 36 6 and 37 indicate that low-income income households, and especially households in rural and mountainous areas, were more likely to be affected by service interruptions in 2008 and

57

Fortunately, reported interruptions in gas, central heating, and hot water supply were much less frequent.

54

2009. As these households are more likely to rely on electricity for heat as well as lighting, these data 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 highincome families, the share of household spending devoted to energy expenditures in lowincome 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 Kyrgyzstans 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 Kyrgyzstans 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 Kyrgyzstans 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.

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IV. Social protection and the energy sector

Overview The Soviet social protection system Kyrgyzstan inherited after independence was poorly prepared the financial and institutional challenges of transition during the 1990s. In order to maintain macroeconomic stability and reduce poverty, many reforms were launched, in order to increase the financial 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 o o o

The Family Code; The Childrens Code; The law On the Rights and Guarantees of Individuals with Limited Abilities; and 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 of the minimum wage. However, because many public employees are paid the minimum wage, fiscal constraints often constrained increases in the minimum wage, in the social payments linked to it. In order to separate public-sector wage policies from poverty reduction efforts, social assistance payments were decoupled from the minimum wage in 2009, with social assistance payments determined by trends in the guaranteed minimum income. This indicator, which is set by the government on an annual basis, reflects fiscal and macroeconomic variables, as well as minimum subsistence considerations for poor households. Despite these efforts, the results of these social policy reforms have at best been partial. 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 be received by non-poor households. The tragic events of April-June 2010 both revealed and aggravated problems in the social sector; inter alia by demonstrating the 56

governments inability to provide effective protection to households perceived as being victims of the large energy tariff increases.

Social policy instruments The pension system dominates social insurance provision, as retirement and disability benefits paid from the Social Fund provide at least three quarters of the transfer payments received by households. Reforms conducted over the past two decades have tightened tightened control over insurance contributions and more closely linked pension benefits to Social Fund contributions made by the insured. These measures have strengthened the financial sustainability of the Social Fund and allowed for increases in pension benefits.

Figure 38Ratio of monthly pension, p social assistance benefits to the national ational monthly subsistence minimum (2007-2009)
45% 2007 2008
2009

32%

31%

22% 16% 18%

4%

3%

4%

Monthly pension benefit

Monthly social benefit

Poor family monthly benefit

Source: State Statistical Committee tee.

Despite this progress, the ratio of the average pension to the average salary (the replacement rate) in 2009 was only 35 percent. This is not enough to keep many pensioners out of p poverty: as the data in Figure 38 show, the average monthly pension benefit is well below the subsistence minimum. Moreover, its pay-as-you-go go character leaves leaves Kyrgyzstans pension system vulnerable to demographic changes, migration outflows, and informal employment at home. These reduce contributions to the Social Fund and its ability to provide current and future beneficiaries with adequate pension benefits. s. By the end of 2010, there were only 1.8 social insurance contributors per pensioner. If farmers and self-employed self employed individuals (who do not make large contributions to the pension system) are excluded from this calculation, this dependency ratio drops to 1.2 contributors per pensioner. This raises important questions about the sustainability of Kyrgyzstans pension system. In order to address these imbalances, a funded pillar was introduced into the pension system in January 2010. Under this system, 2 percent percent of contributors wages are allocated to individual pension accounts. Funds in these accounts are invested by the Social Fund, in order to accumulate resources that can be used to finance beneficiaries subsequent retirement. However, Kyrgyzstans rel relatively 57

shallow financial system and regulatory uncertainties raise questions about the risks of such an approach. In addition to old age benefits, pensions are paid in cases of disabilities and loss of breadwinners. Pension benefits are also supplemented for various social assistance objectivessuch as occurred prior to the large increase in electric and thermal power tariffs introduced in January 2010and for special classes of pensioners (e.g., military men; individuals, who live and work in high-mountain or remote areas; mothers with many or disabled children; workers of companies that have been liquidated; etc.). Social assistance is provided via categorical benefits, the monthly social benefit (for people living with disabilities and for families who have lost a breadwinner), and the means-tested monthly benefit 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 below the subsistence minimum. This is because the value of the guaranteed minimum income (which determines 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) per month). The size of the PFMB is determined by the difference between the guaranteed monthly income and actual per-capita monthly income in an applicant household. Other benefits paid to poor families 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 three100 percent of the guaranteed monthly income; an allowance for twins100 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 Kyrgyzstans only national means tested social assistance benefit. In addition to calculating 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 reasonably well in terms of targeting accuracy. World Bank research59 finds that, in 2005, the poorest 40 percent of the population received 81 percent of total PFMB benefits paid out; and that close to 75 percent of the PFMB beneficiaries were in this group. However, as the data in Figure 40 show, the PFMB is even more modest than the average monthly pension and social benefit. As with the MSB, this is because the value of the guaranteed minimum income (which determines PFMB eligibility) is set below 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

Categorical benefits. Although it has undergone reforms in the past two decades, social assistance in Kyrgyzstan retains many characteristics of the categorical benefits system inherited from the Soviet time. State benefits were assigned to offset low wages, to recognize distinctive merits of various 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 provided in-kind. During 2006-2007 two additional types of cash benefits were added (for housing, communal services and energy, as well as for public transport. As of today there are 25 categories of beneficiaries and eight types of privileged services in Kyrgyzstan, financed by the national (and sometimes local) budget(s).60 The monetization of categorical benefits. In January 2010 the number of categorical benefits was reduced from 38 to 25 categories, while the number of privileged services was reduced from 40 to eight and were fully monetized. Benefits providing households with cash compensation to purchase coal and meet their monthly energy bills were also monetized. The size of these cash benefits (which typically range from 1000 to 7000 som per month) are based on the value of benefits provided before January 2010, and are financed both from national and local government budgets. The elimination of 13 benefit categories also helped reduce the number of beneficiaries from some 281,200 to 53,500 (as of 1 October 2010). These include individuals with incomes above the subsistence level, and individuals of active working age not otherwise suffering from disabilities or disadvantages.

Table 7Kyrgyzstans social protection instruments: Efficiency and effectiveness (2005 data) Monthly Monthly social Categorical benefit benefit benefits61 Pensions62 63 Share 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 12% 6% 1% 48% Poverty 3% 6% 1% 33% Extreme poverty 67 Cost efficiency: 2 3 6 3 Poverty 5 6 27 10 Extreme poverty Source: Social Safety Net in the Kyrgyz Republic: Capitalizing on Achievements and Addressing New Challenges, World Bank, May 2009, p. 11.

As is often the case with the reform of social protection in transition economies, the monetization of categorical benefits in Kyrgyzstan met with considerable popular resistance. In addition to helping to stoke the popular unrest that led to the overthrow of the Bakiyev government in
60

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

April 2010, this resistance has taken the form of refusals of World War II invalids l living in Bishkek to collect cash compensations in lieu of the in-kind in kind subsidies they used to receive for housing, energy, and communal services. In the end, Kyrgyzstan seems likely to continue living with a patchwork social protection system consisting of o old-style style categorical benefits, social assistance that is targeted at low-income income households, and social insurance (e.g., pensions) that absorbs the lions share of 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 Kyrgyzstans most effective social policy instrument, in terms ter of poverty reduction (Table 7). ). The pension system does not explicitly target low-income income households. However, because it contains the lions share of Kyrgyzstans social protection resources, and because so many households are living close to or below the poverty line, the pension system system is the only social policy instrument with the depth and breadth of influence household incomes in a great many families.

Effectiveness of social protection Social protection expenditures expanded dramatically during 2008-2010 2008 2010 (see Table 2). While these increases resulted in part from the monetization of categorical benefits that had previously been delivered in-kind, kind, they also reflected the governments attem attempts pts to ameliorate the social impact of the growth slowdown linked to the global financial crisis (in 2009), and then of the 2010 recession caused by the April-June June political events. These increases were made possible by large increases in budget support grants ants provided by international financial institutions and bilateral donors, which helped offset large fiscal deficits in these years. Whether this fiscal and social policy response to Kyrgyzstans socio-economic economic tensions is sustainable remains to be seen.

Figure 39Trends Trends in the Distribution of Social Benefits* by Household Deciles (2006-2010)
60% 52% 42% 2006

50% 50%

51% 42% 43% 38% 30%

2007 2008 2009 2010:H1

11% 7% 6% 7%

13%

Deciles 1-3 3 (poorest)

Deciles 4-8 (middle class)

Deciles 9-10 10 (wealthiest)

* Pensions plus PFMB, MSB, categorical benefits, benefits paid by enterprises. Source: State Statistical Committee, UNDP calculations.

Did this social policy response have a pro-poor pro poor character, in terms of helping to shield Kyrgyzstans most vulnerable households from the impact of the unfavourable macroeconomic trends during 2009-2010? Since (according to these data) social benefits (including luding pensions) only comprise about 10 percent of household income, it would be difficult for social policy instruments to have a 60

profound impact on household welfare. However, if these social benefits were concentrated in low lowincome households, they could d have an important effect. Unfortunately, as the data in Figure 39 show, only about half of Kyrgyzstans social benefits were received by low-income income households (i.e., the lowest three deciles of the income distribution). This share actually dropped slightly during 2009 2009-2010 2010 (to 50 percent, down from 52 percent in 2008). By contrast, the share of social benefits accruing to upper-income upper income households more than doubled (from 6 to 13 percent) during 2008-2010. 2008 2010. This increase came primarily at the expense of the middle deciles in the income distribution, whose share of total social social benefits paid out dropped to 38 percent (it had been 51 percent in 2007). Thus, the lions share of the increased social policy response to the crisis developments of 2009-2010 2010much of which was financed by donors seems to have leaked to relatively wealthy thy households. Since pensions account for the bulk of social benefits paid out, this result is driven primarily by trends in pension spending. As the data in Figure 40 show, upper-income income households benefitted handsomely from increases in pension spending during 2009-2010: 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 low income households dropped from 24 4 to 14 percent during this time. These data weaken the case for viewing pensions as a poverty povertyreduction instrument in Kyrgyzstan.
Figure 40Trends Trends in the distribution of pension benefits by household ousehold deciles (20082010)
2008 2009 2010:H1 53% 55%

Figure 41Trends Trends in the distribution of categorical benefits by household h deciles (20082010)
65%
2008 2009 2010:H1

48% 38% 28% 23%

17% 14%

46%

43% 42% 38%

24%

31% 20%
11% 4%

Deciles 1-3 (poorest)

Deciles 4-8 (middle class)

Deciles 9-10 (wealthiest)

Deciles 1-3 (poorest)

Deciles 4 4-8 (middle class)

Deciles 9-10 (wealthiest)

The data in Figure 41 indicate that the simplification and monetization of categorical benefits introduced in 2010 deepened the regressive character of Kyrgyzstans social policy framework. The share of categorical benefits including including subsidies for energy and communal services servicesreceived by low-income 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 income households rose from 11 to 38 percent during this time. These trends strengthen the case for means-testing categorical benefits.

61

Figure 42Trends in the distribution istribution of PFMB benefits by household deciles eciles (2008-2010)
2008
64% 56% 49% 47% 40%

Figure 43Trends in the distribution d of MSB benefits by household deciles eciles (2008-2010)
2008

2009 2010:H1 57%

66% 61%

2009 2010:H1

33% 22%

30%
22% 17% 13%

12% 4% 4% 3%

Deciles 1-3 (poorest)

Deciles 4-8 (middle class)

Deciles 9-10 (wealthiest)

Deciles 1-3 (poorest)

Deciles 4-8 8 (middle class)

Deciles 9-10 (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 poor families rising from 49 percent in 2008 to 64 percent during the first half of 201 2010. They also indicate that a very small share of these benefits leak to upper-income upper income households. These trends suggest that Kyrgyzstans social policy institutions are increasingly able to direct means-tested means benefits to the household that need them the most. mos Unfortunately, trends in the monthly social benefit payments paint a less cheerful picture: the share of these benefits going to low-income low income households dropped from 57 percent in 2008 to only 12 percent during the first half of 2010 (Figure 43). 4 Significant cant increases in leakages to middle middle- and upper-income income households seem to have occurred during this time. These trends question the rationale for considering the monthly social benefit to be an instrument for poverty reduction. They also strengthen the case for means-testing categorical benefits. In sum, these data suggest that Kyrgyzstans 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 systems ability to protect vulnerable households from possible future increases in energy prices as well.

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 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 62

energy tariffs and prices. By January 2010, links (1) and (2) had essentially been abandoned. Arguments about transparency and administrative simplicity had led to the cancellation of lifeline tariffs and the monetization 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 increaseswithout corresponding reductions in social benefits; post-April 2010 social contract not to raise household energy tariffs for an unspecified period of timesignaling the ascension of social over economic criteria in energy sector tariff policy; and consolidation of the more regressive character of Kyrgyzstans social protection system that apparently emerged during 2009-2010 (described above).

In light of the relatively small share of household spending apparently devoted to energy expenditures, 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: 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

Conclusions Two decades of reforming Kyrgyzstans 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 governments inability to provide effective protection to households perceived as being victims of the large energy tariff increases. The monetization of categorical benefits in Kyrgyzstanparticularly in terms of the initiatives pursued during 2010has 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 lions 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 Kyrgyzstans 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 2009-2010significant shares of which were financed by donorsseems to have leaked to relatively wealthy households. These data suggest that Kyrgyzstans 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 systems 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 Kyrgyzstans social policy framework. The share of categorical benefitsincluding subsidies for energy and communal servicesreceived 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

By contrast, the share of the poor family monthly benefits programme (Kyrgyzstans 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 Kyrgyzstans 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

V. Conclusions and recommendations

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 during this time. This combination of sharply higher prices and declining consumption necessarily raises concerns about deterioration in household access to reliable, affordable energy services. Despite these inflation rates, energy tariffs and prices generally seem low, relative to other transition economies and to cost-recovery levels in Kyrgyzstan. This reflects strong socio-political opposition to raising tariffs. 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 todayin the form of higher tariffs, higher taxes, or poorer services. 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 Kyrgyzstans 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 economies have run aground in Kyrgyzstan. Privatization measures introduced during the Bakiyev period have been repealed, and electricity tariff increases seem to be off the table for the foreseeable future. The emphasis is instead on reducing corruption within the energy sector by strengthening state control and civic engagement. Whether this approach can significantly reduce losses and attract the capital and expertise needed to modernize Kyrgyzstans energy sector, and improve national and household energy security, remains to be seen. Kyrgyzstans electricity, thermal, gas, and (to a smaller extent) coal sectors seem likely to remain dominated by state-owned monopolies 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 and foreign investment are almost completely absent. Progress towards the creation of a regional electricity market, which could help attract foreign investment into Kyrgyzstans electricity generation and transmission sectors, remains halting at best. 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 from ineffective cost controls when it comes to the procurement of materials (especially fuels), particularly in the electric power sector. 66

Some important progress has been made since the onset of the winter energy crisis in 20072008. Collection rates in the electricity sector have improved significantly as the quasi-fiscal deficit has dropped; fixed asset depreciation 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 Kyrgyzstans 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 sectorwhere large reserves are present, and where state ownership and price controls play smaller rolesto attract significant 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 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. While the shares of household expenditures devoted to energy increased during 2006-2009, compared to many other countries, they are not particularly large (5.5-6.5 percent). And 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. These survey data confirm that 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 for light. This is particularly the case for Kyrgyzstans 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 Kyrgyzstans 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 Kyrgyzstans households reported electricity outages on a daily basis; while 70 percent reported several such service 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 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. The survey data also indicate that households 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. Two decades of reforming Kyrgyzstans social policy framework have produced mixed results, both in general and in terms of links with the energy sector. Many social benefits continue to leak to non-poor households. The tragic events of April-June 2010 both revealed and aggravated 67

problems in the social sector, inter alia by demonstrating the governments inability to provide effective 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, and social insurance (e.g., pensions) that absorbs the lions share of social policy resources and therefore has the largest overall impact in terms of poverty reduction. The official survey data indicate that only about half of Kyrgyzstans social benefits were received by low-income households. 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 upperincome 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 2009-2010significant shares of which were financed by donorsseems to have leaked to relatively wealthy households. These data suggest that Kyrgyzstans social protection system has become less able to direct benefits to the most needy households. This has implications for the systems 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 Kyrgyzstans social policy framework. The share of categorical benefitsincluding subsidies for energy and communal servicesreceived 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 upperincome 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. By contrast, the share of the poor family monthly benefits programme (Kyrgyzstans 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 Kyrgyzstans social policy institutions do have the capacity to direct means-tested benefits to the households that need them the most. Unfortunately, the benefits paid out under this programme are so small as to have only a minimal impact on poverty. 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. 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

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 about transparency and administrative simplicity had led to the cancellation of lifeline tariffs and the monetization 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 increaseswithout corresponding reductions in social benefits; post-April 2010 social contract not to raise household energy tariffs for an unspecified period of timesignaling the ascension of social over economic criteria in energy sector tariff policy; and consolidation of the more regressive character of Kyrgyzstans social protection system that apparently emerged during 2009-2010.

Recommendations In light of the relatively small share of household spending apparently devoted to energy expenditures, 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 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. 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 Kyrgyzstans energy sector; Improving corporate governance in the energy sector; Identifying appropriate energy saving technologies, and policies and programmes to accelerate their introduction; 69

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.

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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/SingleArticle-Issue.118+M5d105dc32fa.0.html).

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