Consultant’s Report

August 2012

TA 7819-KGZ: Enabling Identification of

Public-Private Partnership (PPP) Projects and

Capacity Building in Kyrgyz Republic

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and

ADB and the Government cannot be held liable for its contents.

Prepared by: Robert Brown

Eastbourne, United Kingdom

For Asian Development Bank

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ABBREVIATIONS

ADB - Asian Development Bank

CDA - City Development Agency (of the Bishkek Municipality)

EBRD - European Bank for Reconstruction and Development

GOK - Government of the Kyrgyz Republic

ICIP - Investment Climate Improvement Program

IFI - International Finance Institution

JICA - Japan International Cooperation Agency

KfW - Kreditanstalt für Wiederaufbau

KYRM - Kyrgyz Resident Mission (of ADB)

MEAP - Ministry of Economy and Anti-Monopoly Policy

(formerly Ministry of Economy and Economic Regulation-MER) MOF - Ministry of Finance

MTC - Ministry of Transport and Communications

PPP - Public Private Partnership

PPPA - Public Private Partnership Authority

RMU - PPP Risk Management Unit

TA - Technical Assistance

UNDP - United Nations Development Program

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CONTENTS This report contains the main sections covering;

I. Executive Summary

II. Main Report

A. Introduction

B. Background

C. Scope of Work under the TA

D. Time Inputs

E. Activities of the Consultant under the Scope of Work

F. PPP Project Development Activities

G. Constraints and Issues

H. Conclusions

I. Recommendations

III. Appendices

A. Revised TOR for International Consultant

B. PPP Framework Activities/Documents

a. The 2012 PPP Law in English (edited)

b. Assessment of the Compliance of the Kyrgyz Republic PPP Law of February

2012

c. MOF RMU Policy in English

d. Comments to MEAP on Risk Management Policy

e. Draft Summary Guidelines for RMU Activities

f. PPP Project Cycle-Risk Assessment Focused

g. General Risk Matrix

h. Screening and Identification of PPP Projects

i. First draft PPP policy for consideration by MEAP

C. PPP Project Activities/Documents

a. List of the Draft Project Briefs

b. Draft PPP Project Briefs for;

1. Osh Airport (updated May 2012)

2. Bishkek Car Parking (updated May 2012)

3. Bishkek Kara Balta Toll Road

4. Bishkek Lighting

5. Bishkek Solid Waste Management

6. Bazar Korgon – Kyzyl Unkur – Sargata Toll Road

7. Issyk-kul airport

D. Framework for the PPP Working Group

E. People and Organizations Met

F. Reports

G. Draft MEAP PPP Work Program

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Executive Summary 1. Introduction

a. This report provides the final report required under TA 7819 by Robert Brown, PPP

Consultant. The TA was undertaken on an intermittent basis between September 2011 and June 2012. The Consultant’s input was provided over 7 field visits each of approximately 2 weeks duration.

b. The Mid-term Development Program, 2012-20141, is the strategic planning document of the Government of the Kyrgyz Republic. This document confirms the Government’s commitment to the development of PPPs. This TA program represents support to the Government in achieving its objectives related to PPP development.

c. The fundamental components of the TA comprised support to (i) the developing PPP Framework (ii) PPP project development and (iii) PPP capacity building.

d. The assignment was extended at the request of the Government and with agreement of ADB from 60 to 125 working days to meet the circumstances in the field and to take the opportunity to develop seven PPP Project Briefs.

e. The Consultant worked cooperatively with various Ministries and the City Development Authority (CDA) of the Bishkek Municipality, and was well supported from ADB/KYRM2, and through experienced national consultant inputs3.

Description of Findings and Activities: 2. PPP Framework

a. The PPP diagnosis undertaken at the outset indicated a weak PPP framework. The draft

PPP law was progressing slowly and had significant deficiencies. There was no PPP Policy. There was no policy on risk management and financial support.

b. The Consultant supported the Ministry of Economy and Anti-Monopoly Policy (MEAP) on a number of major PPP issues. He contributed4 to ensuring a number of significant changes were incorporated in the PPP Law such that when it was signed into law in February 2012 it could be considered as compliant with good international practice.

c. The Consultant worked with the Ministry of Finance (MOF) over several months to agree a risk management and financial support policy for PPPs.

d. The Consultant worked with MEAP to support the implementation of a Government Resolution which will endorse (i) the MEAP as the home of the PPP Authority (ii) the MOF as the home of the PPP Risk Management Unit (RMU) and (iii) the objectives of the PPP RMU. This resolution is now (week of May 28, 2012) at the Ministry of Justice for processing.

e. The Consultant drafted an initial PPP policy now being finalized by MEAP, a number of PPP technical notes including on PPP cost recovery and a framework for the PPP Working Group which met for the first time on May 30th 2012.

1 Mid-term Development Program of the Kyrgyz Republic for 2012-2014. Approved by the Government of the Kyrgyz Republic Decree #239, April 12, 2012 2 The Consultant appreciates the support from ADB Manila (Senior Project Officer, Jurgen Conrad) and from KYRM, Bishkek especially from Project Officer, Mirdin Eshenaliev 3 Bakyt Kartanbaev and Nurlan Abdyshev 4 Many bodies made comment including the Consultant who drafted 10 specific suggestions which were subsequently almost entirely included in the new PPP Law.

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3. PPP Project Development

a. There were few PPP project initiatives at the outset of the assignment. b. The Consultant developed a PPP project screening methodology and discussions have

started with MEAP to adopt the screening criteria through a ministerial decree. c. Simultaneously with the development of screening criteria, several projects were

selected for initial evaluation in Energy, Transport and the Municipality. By January 2012 it had been agreed by GOK that seven projects would be submitted by MEAP to ADB, with the help of the Consultant, as part of the ADB funded Investment Climate Improvement Program (ICIP) Matrix and Action Plan.

d. With the support and assistance of the Ministry of Transport and Communications (MTC) and the CDA, seven project briefs, 4 in transport and 3 under the Municipality, have been drafted.

e. The Consultant also drafted a PPP Project Cycle. f. The Consultant also provided comments on a number of projects initiated by the private

sector (unsolicited projects). These projects included housing, power and airport projects.

g. As briefed by ADB, the Consultant also discussed cooperation between ADB and other IFIs/donors in relation to the development of PPP Projects. Cooperation is advanced with JICA on the car parking project and very useful discussions have taken place with IFC and KfW consultants on PPP in the health sector and a number of discussions were held with EBRD on solid waste management and municipal projects. There were also discussions with UNDP.

4. PPP Capacity Building

a. Some 15 workshops were held in MEAP, MOF, MTC, Ministry of Energy, the Municipality

and the Chamber of Commerce and other private sector organizations. A seminar was held at the request of the Municipality on 24th May and some 70 people attended including the First Vice Mayor and the ADB Country Director. It was understood to be useful as it was the first exposure to PPPs for many Municipal staff.

b. Preliminary PPP Guidelines were developed at the request of the MOF RMU.

5. Reports

Six progress reports, one Inception report and a draft final report were produced as per contract. This report is the Final Report. Conclusions of the Consultant 6. Overview on the Technical Assistance - TA7819 KGZ

a. The Consultant considers the TA has met all of its key objectives and activities under the

TA will provide support for future PPP development. b. The TA support has been critically important to the Government and has been

welcomed by them and the private sector. It is doubtful if the PPP Law, Risk Management policy, the seven project briefs and on-going work could have been achieved and implemented consistent with international standards and/or acceptable to the ADB without this ADB TA.

c. The TA was designed to be implemented on an intermittent basis and this has proved to have provided a flexible approach for the support to Government with a number of on-going changes being made to the TOR during the assignment to ensure its effectiveness.

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d. It is felt that the combination of (i) the enthusiasm and commitment of mid to senior level government staff (ii) the on-going support from ADB, including importantly on the ground from KYRM, and (iii) the inputs of the TA consulting ‘team’ have been very effective in achieving the key objectives.

e. Current on-going ADB support to MEAP on the revision of PPP associated laws and regulations to make them internally consistent with the new PPP law, is also important.

7. The PPP Planning Framework

a. The initial development of the PPP framework is nearing completion with the new PPP Law now implemented and PPP Risk Management nearing implementation. PPP Policy and consistency within laws and regulations are under preparation5 and should be finalized soon.

b. The PPP Law provides a generally good basis for PPP development but there are many places in the Law where there is considerable need for subsequent amplification. The need for clear lower level implementing decrees, regulations and guidelines is therefore substantial with this need currently being met in part by the three legal consultants funded by ADB in the MEAP.

c. The continued amplification of the PPP framework is needed and will need intensive TA support. The PPP framework still needs PPP operational procedures and guidelines, draft model contracts, tender documentation, terms of reference and procedures for the activities of the PPP network and other PPP planning and processing activities.

8. Institutional and Capacity Issues

a. The PPP network is at an embryonic stage. There are a limited number of staff with some responsibilities for PPP in MEAP, in MOF and in some line ministries such as transport, health and the CDA.

b. MEAP has two senior government staff responsible for PPPs, and a PPP Unit, with one of these senior officials as its head but neither of these two staff are fully dedicated to PPP duties. Commitment in MEAP appears to be strong but overall capacity remains weak, and the institutional structure is yet to be formally defined. The PPP Law describes a PPP Authority (PPPA), which is under implementation (noted in 2.d above). However, its detailed functions, tasks, PPP network links and staffing have yet to be seen.

c. The key issue is that the institutional network6 is still weak and capacity (time available, seniority and expertise) of staff extremely limited. Currently, there is a combination of problems. Sometimes a PPP institution is not functioning effectively, or the staff have almost no PPP knowledge or experience, or the staff dealing with PPP have knowledge and experience such as in MEAP but have no time because PPP is only a (minor) part of their duties.

d. The government risks making expensive mistakes in PPP development by not resolving the issue of adequate staff numbers and capacity within a currently ineffective PPP network.

e. We also conclude that capacity building by IFIs is wasteful both (i) without sufficient and dedicated staff who will stay in post a reasonable time and (ii) without some PPP projects to relate to.

f. Overall, GOK is streamlining its budget including possibly by reducing numbers in the civil service and this could impede strengthening PPP capacity or developing new PPP agencies. Further, reshuffling of staff who are knowledgeable and experience about PPP

5 A priority list of 10 laws and 3 codes identified by MEAP in February 2012 for amendment 6 The PPP Network comprising MEAP, MOF and „Public Partners‟ as defined under the PPP law (Public Partners are normally referred to as executing agencies and are usually line ministries and municipal bodies)

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away from PPP positions, and too much external training, has a very serious impact on MEAP capacity.

g. The Municipality and their PPP staff remain committed and active and, through the City Development Agency, it constitutes (effectively) a PPP node. There has been serious and constructive dialogue on PPP with the Municipality. Capacity remains limited however.

h. After a slow start at the beginning of the TA, the MTC became more positive over the period of the TA but the PPP contact point/’node’ is understaffed and needs more training, staff and resources.

i. Support to MOF-RMU is also very much needed given their almost total lack of experience in Risk Management, in PPP related fiscal control procedures and lack of understanding of their important role (in coordination with other parts of the PPP network) in overall PPP project preparation and the project cycle.

j. Private sector understanding of PPP has improved but still remains limited k. The domestic financing environment appears difficult but perhaps more related to the

cost and conditions of borrowing rather than unavailability. International financing is related to governance issues which are not included within this scope of work but remains an area that must be considered.

9. PPP Projects

a. Based on the conclusions related to the PPP framework and capacity, it seems unlikely that GOK will be ready to implement major feasibility studies for some time yet7 but support to on-going project preparation remains an important need that should be addressed in the next TA program.

b. The seven PPP projects all have some merit and been have progressed through information supplied by the MTC and the CDA (including through the templates supplied by the Consultant and completed by them).

c. While there has been support from the Public Partners for the 7 projects, few detailed comments have yet been received by the Consultant on the PPP Project Briefs.

d. Feasibility studies are still under consideration rather than for immediate implementation, but without any donor commitment for funding of feasibility studies, either there will be few or no PPP projects developed or the Government will rely on unsolicited projects.

10. Recommendations It is the Consultants recommendations that based on the experience of this current TA 7819 KGZ that ADB and the Government should;

a. Continue discussing the next phase of TA support to PPP development under ICIP. b. Agree that the next TA could run (nominally) for 2 years and comprise four components

running in parallel. i. Component 1: PPP Framework: Continued amplification of the PPP Framework including

the on-going preparation of the PPP Policy, laws and regulations and Risk Management policy being implemented. Procedures, Guidelines and other similar material to be drafted, passed and applied.

ii. Component 2: PPP Project development. In the next 6-12 months, prepare a pipeline of potential projects. Prioritize and finalize a limited number of project briefs, adding new

7 As has been stressed to GOK, the resources (staff time) and finance for feasibility studies is extremely high, so the projects need to be continuously researched by GOK with donor support and for projects with potential, these will need Project Briefs prepared (or something of a similar nature) and when agreed TORs for feasibility and the tendering of the studies will take some months. Thus the commencement of any study should be many months away, except possibly for small municipal projects.

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projects that may be suggested from the continued screening of longer lists of public sector projects. Draft and cost TORs for pre-feasibility studies for the priority projects. Prequalify Consultants. In the following 12-24 months, undertake selected feasibility studies for priority PPP projects. A PPP Conference might be anticipated towards the end of this first period depending on progress and assuming PPP institutions are adequately established and resourced.

iii. Component 3: PPP Institutions: PPP institutional structures planned in the context of a PPP Network of (i) MEAP/PPP Authority, (ii) MOF/RMU and (iii) the Public Partners/Executing Agencies, with TA support to the development and operation of PPP institutional structures (including TOR for each PPP body)

iv. Component 4: PPP Capacity: PPP capacity support to the PPP network with regular training and capacity building focussed on the needs of the institutions and staff within the network.

c. Agree that the TA priority by Government is to commit to: i. Providing sufficient staff, wholly dedicated to PPP, within MEAP, MOF-RMU and two

line ministries and the CDA. ii. The TA to be based with the PPP Authority but review its effectiveness after one year

and if not functioning effectively, consider a PPP Authority as an independent agency.

iii. Establishing an explicit and focused work program within MEAP/PPP Authority iv. Proposing how to keep the senior PPP staff in their positions for the 2 years of TA

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A. INTRODUCTION This report is the final report prepared under TA 7819 KGZ and follows the Consultant’s seventh visit8 to the Kyrgyz Republic at the end of May 2012. It sets out the overall progress, conclusions, recommendations and outputs of the TA resulting after all 7 visits9. B. BACKGROUND

The Mid-term Development Program, 2012-201410, is the strategic planning document of the Government of the Kyrgyz Republic. This document confirms the Government’s commitment to the development of PPPs. This TA program represents support to the Government in achieving its objectives related to PPP development. The following11 sets out some key parts of the Program extracted from the document to provide background to the TA Report. The main goal of the reforms declared by the Government in this document is to increase the living standards of the population and poverty alleviation based on economic growth, improvement of the business environment and development of an efficient governance system. This goal will be achieved through addressing the following objectives: (i) reform in the public administration and formation of the compact government; (ii) reduction of the public expenditures and increasing of revenues; (iii) accelerated development of the economy through startup of new national projects; (iv) effective public asset management; (v) reform of the license-permitting and control-supervisory systems; (vi) reform in the social sphere; reform in the security sphere; (vii) reform in the judicial system. Considering the practice and international experience on privatization issues and the state property use and management, the legislation base will be improved, and sources of financing to develop the state property management system will be defined on legal base. Priorities will be revised, which have been set in policy area of the state asset management. The principles of the public-private partnership will be developed further. Within the Law on public-private partnerships of the Kyrgyz Republic adopted on February 22, 2012, this mechanism will be broadly introduced in infrastructure projects. PPP In Infrastructure: Therefore, based on the public-private partnership, the Government intends to launch two projects on construction of two highways12: (i) Kara-Balta–Kemin and (ii) Alma-Ata –Kemin – Cholpon-Ata. The US Government declared its willingness to allocate grant in amount of 30.0 million USD to the Kyrgyz Republic for modernization of the air-navigation equipment. Investment13 for modernization of the airports “Osh” and “Issyk-Kul” will be attracted. PPP in Education: To ensure affordability of preschool education, including for children from poor families a mechanism of public-private partnership in early childhood education and establishment of alternative pre-school organizations will be launched.

8 The dates of the six field visits to Kyrgyz were; September 5th - September 16th

, October 18th to October 28th, November 20th to

December 3rd, January 15th to January 27th, February 21st to March 3rd, March 18th to March 29th, May 14th to May 31st 9 Continued support from KYRM is gratefully acknowledged 10 Mid-term Development Program of the Kyrgyz Republic for 2012-2014. Approved by the Government of the Kyrgyz Republic Decree #239, April 12, 2012 11 Document text only edited and highlighted by the Consultant from the original 12 These two highway links are very similar to Bishkek-Kara Balta and Bishkek-Tokmok-Issykul referred to in the PPP project section of this TA 7819 Report and the PPP Project Brief on Bishkek Kara Balta 13 This is also referred to independently in the Report section on PPP projects (airports) and in the two airport Project Briefs

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PPP in Health: The crisis of April-June 2010 showed that public health organizations were able to cope with an influx of patients during the conflict. However, the crisis also clearly demonstrated the weakness and limitations of the public health system, deterioration of the infrastructure and lack of appropriate equipment and supplies. Despite the achievements, there are still a number of unresolved problems across the public health sector. The Mid Term Development Program notes that there is inadequate legislation for the introduction of public-private partnership mechanisms in the public health sector. Therefore, for development of market mechanisms in the public health system mechanisms, including for public-private partnerships, will be developed and introduced. Regional Development: By 2014 the Kyrgyz Republic shall become a country in which the conditions for moderate but stable growth rates of the regional economy and improving living standards of the population in the regions will be created. Conditions will be created for: (i) reduction of the uneven economic development of the regions; (ii) capacity growth of local economies and their investment attractiveness; (iii) reduction of the population outflow from rural areas and (iv) formation of public-private partnership and development infrastructure at the local and regional levels. Regional Development involves formation of a new economic matrix of Kyrgyzstan, consisting of economic districts. As part of this process it is scheduled (among many others) to develop a system of public-private partnership of local authorities and business and strengthen the capacity of public authorities in the regions and local governments to develop strategies, investment initiatives and projects. C. SCOPE OF WORK UNDER THE TA

The scope of work14 (SOW) has a number of key elements with various sub-elements, the three key elements being (i) support to the PPP Framework (ii) the identification and creation of a pipeline of PPP Projects, and (iii) capacity building. These fundamentals of the TA remained constant over the 10 month elapsed time period of the TA. However, the original SOW was amended in late 2011 due to the circumstances which demanded that considerably more work was required under the PPP framework elements than originally anticipated. Further, by late 2011 ADB considered that 7 PPP Project Briefs should be a specific output of the TA and this requirement was thus included in the Draft Matrix and Action Plan for the ICIP in the Aide Memoire of December 2011. The current TOR is attached as Appendix A.

The scope of work comprises:

1. A brief diagnostic study for PPPs.

2. Organize and meet the government, ministries and agencies to identify potential projects in

PPPs.

3. Organize and meet private sector companies, financial institutions, international financial

institutions, business houses and councils to study the business and financing environment.

4. Help strengthen the enabling environment for PPP.

5. Analyze and shortlist projects as PPP potential projects.

6. Provide a project development cycle for each identified project.

7. Identify areas that the Government needs to strengthen further to promote PPPs.

14 Appendix A.-Revised TOR: The SOW remains largely as before in the revised TOR

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8. Participate in workshops and seminars on PPP.

9. Complete project reports.

D. TIME INPUTS

1. International Consultant

Total time in the field in the Kyrgyz Republic including international travel amounted to about 85

working days. Additional working days were spent in the home office in preparation, reports and on

specific project work. The total contract time was 12515 working days.

2. National Consultants

The TA has employed 5 national consultants. Bakyt Kartanbaev16 supported the international consultant at meetings, translations, in active discussions with Ministries and in PPP framework and project documentation. Nurlan Abdyshev made a start on supporting the international consultant on (i) Financial analysis for the Osh airport PPP Project Brief and (ii) Data collection. It was also proposed that he would undertake discussions with representatives of the financial sector in Bishkek. However, due to family/personal reasons, little concrete work was achieved by him. Three local legal consultants17 are providing input under TA funds to support the proposed work on helping to make laws and codes consistent with the PPP Law 2012. The international consultant has had limited interaction with them due to the timing of their mobilization but has been available for any support that they might need. E. ACTIVITIES OF THE CONSULTANT UNDER THE SCOPE OF WORK

1. A brief diagnostic study for PPPs

The Consultant carried out an assessment of the PPP framework in the country at the start of the assignment in September 2011. The PPP framework comprises policy, law, regulation, finance, risk and institutions. Procedures and Guidelines are part of the framework.

NB: This is the assessment carried out in September 2012

a. PPP Law: A draft PPP law had been prepared by the Government because the previous PPP law of 2009 was not consistent with international standards. However, the new draft PPP Law, after much revision and previous ADB comments, still requires major changes in a number of areas before it can be said to provide a reasonable basis for PPP development. The inconsistency of national and sector PPP laws is also an important issue.

b. Policy: A PPP policy does not exist and both MER and MOF have asked for ADB help to draft the national PPP policy

c. Economic Regulation: This is currently minimal in the widest sense of economic regulation but tariffs tend to be inflexible and low, often also complicated and heavily regulated by Ministries due to the social and political implications of tariffs.

d. Risks: The RMU has a scope of work by decree (translated in Appendix G) but no Risk Management policy yet.

15 As noted later, the original scope required 60 working days (wd). Variation order#1 extended this to 111 wd and budget savings on international travel allowed an additional 14 wds under Variation order#2. 16 Bakyt Kartanbaev replaced Leila Talipova in December 2011 17 Natalia Dolinskaya, Murat Madykov, Tokun Shakeev

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e. Financial: There is no framework or fund18 for financial support and subsidies towards PPP projects.

f. Institutions: A PPP institutional framework would include a PPP central unit, a MOF/RMU unit and line ministry nodes, as well as the network arrangements for project processing between them19. The PPP unit in MEAP is within the Division of Investment and PPP. The MOF/RMU unit is within an existing Fiscal Risk (not only PPP) unit. There are no PPP nodes per se, except possibly in the Municipality. The municipality’s ‘node’ is newly set up and staffed by generally capable people but again almost entirely without experience of PPP. Overall, there is little or no concept of, or the need for, PPP network linkages.

g. Consultation: There has been no mention of staged consultation on projects within Government, with the private sector or the general public.

h. Procedures and Guidelines: Apart from the draft law, the procedures for implementing projects as well as procedures and guidelines are almost totally absent in Government although ICIP produced some excellent report material20.

2. Organize and meet the government, ministries and agencies to identify potential PPP

projects

All main ministries were met including the Ministry of Economy and Anti-trust Policy (MEAP), Finance (MOF), Energy (MOE), Transport (MTC), Culture and Tourism (MC&T) Education (MOED) and Health (MOH), as well as the Municipality of Bishkek (CDA).

MEAP, MOF, MTC and the CDA have been met continuously over the assignment.

3. Help strengthen the enabling environment for PPP

Based upon the diagnostic carried out at the beginning of the assignment the Consultant reported upon the prevailing PPP environment in the Inception and initial Progress Reports. Following discussions with ADB and government the TA was refocused for some months on substantially supporting and strengthening the enabling environment and especially providing input to the draft PPP Law. The following indicates the status of the PPP Framework by the end of May 2012 and inputs from the Consultant.

a. PPP Law: The PPP Law was signed by the President in February 2012. The Consultant made

substantial comments on the draft Law in writing and prepared a report for ADB on its compliance with international practice. The PPP Law and the compliance report are shown in Appendix B.

b. MEAP has prepared a draft Action Plan/Program (Appendix G) and requested support from the ADB TA with both legal and technical aspects for activities contained therein. Support was provided on a number of issues including through three legal consultants on ensuring related laws were consistent with the new PPP Law.

c. Draft PPP Policy: The Consultant prepared a preliminary draft policy statement in March and this is now being actively built upon by MEAP (with the legal consultants who are supporting MEAP under ADB). Included in Appendix B.

18 Many countries have a „Viability Gap Fund‟ which provides sufficient financial/fiscal support to projects which are otherwise not financially viable 19 This would be the ideal situation once PPP development is moving ahead. Initially, a lesser structure may be necessary 20There may be a gap between well prepared and detailed ADB reports in English and policies, guidelines and procedures in Russian

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d. PPP Financial Support and Risk Management (RM) Policy: Drafts were circulated between the Consultant and MOF until a draft acceptable to ADB was ready to be adopted by MOF. The RM policy will be adopted when the government resolution mentioned in 2d above is passed. Included in Appendix B.

e. Financial: Financial and economic support policy is included explicitly in the PPP Law and as related to financial support in the RM policy. There is no planned fund for financial support to PPP projects.

f. Institutions: A PPP institutional framework is in embryonic form with a PPP Authority and RMU subject to a current government resolution in the MOJ, and PPP nodes under consideration within Public Partners. The PPP Authority is planned within the MEAP and the RMU within the existing Fiscal Risk (not only PPP) unit at the MOF. There are no PPP nodes per se, except possibly in the Municipality. The municipality’s ‘node’ is newly set up and staffed by capable people but again almost entirely without experience of PPP. The Prime Minister’s office has required a PPP working group be established and the Consultant helped draft a framework terms of reference. The first meeting of this inter-ministerial group took place on 30th May and is intended to meet every 2 weeks with reporting to the PM’s office perhaps every 1-2 months. The Consultant drafted a framework/TOR for this Working Group. Considerable support was given to the PPP institutions directly but little input on the evolving PPP framework/network due to other priorities by the Consultant.

g. Consultation: There has been no mention of staged consultation on PPP projects within Government, with the private sector or the general public.

h. Procedures and Guidelines: Apart from the draft law, the procedures for implementing projects as well as procedures and guidelines are almost totally absent in Government although ICIP produced some excellent report material. Some guidelines were produced by the Consultant for MOF RMU and included in Appendix B.

4. Analyze and shortlist projects as PPP potential projects

At the outset of the assignment, the only specific PPP projects were under planning were in the energy sector where Consultants under EBRD funding and other Consultants under UNDP funding were preparing some small scale HPP projects. Limited progress is reported on these due to tariff constraints. No other PPP projects were under preparation.

Identification and analysis of projects is a vital component of the TA and this requirement was addressed in two ways. Firstly, potential projects were collected from the transport and energy ministries and the Bishkek Municipality.

Secondly, a screening methodology was prepared based on Multi Criteria Analysis (MCA). This was discussed and trials were undertaken with the Municipality and MEAP. PPP Project Shortlisting By the end of the third visit, a number of potential projects had been identified and agreed with GOK as having some potential for PPP subject to further data collection and analysis. The Consultant started to prepare initial project dossiers, of about 3 pages in length, on a number of projects that seemed to have potential. Data and information was extremely limited on most projects. The Consultant therefore prepared a questionnaire type template for each project, which had a feasibility type structure of headings, and MTC and CDA were asked to complete the sections where data was missing. They did this quite diligently although not always completely.

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A number of these initial projects were subject to a preliminary financial analysis by the Consultant using his Excel base spread sheet model. Subsequently, the ADB Aide Memoire of 2/12/2011 for ICIP Subprogram 2 has indicated that full compliance for D.2.1 related to the ‘PPP Project Pipeline developed’ requires GOK to submit 7 PPP Project Briefs21 (PBs) in January 2012. This is a larger task than the preparation of the 3 page PPP project dossiers under preparation but work on these potential PPP projects had started, so there was some base work upon which to build for the PBs. By January 2012 it had been agreed by GOK that seven projects would be submitted by MEAP to ADB, with the help of the Consultant, as part of the ICIP Matrix and Action Plan. With the support and assistance of the Ministry of Transport and the Bishkek Municipality, seven PBs, 4 in transport and 3 under the Municipality, have been drafted. Five were produced in January and the remaining two by May 2012. The PBs vary somewhat according to the amount of data and information available but the key constant is that the information therein is meaningful to GOK and allow it to decide on whether to go further on information gathering for any particular project. They will also include explanation of the PPP process and a project cycle. Each brief has a preliminary financial analysis which provides a broad indication of financial viability.

The following lists the Project Briefs prepared under TA 7819 KGZ

a. Development of Osh Airport b. Car Parking Development Project in Bishkek City c. Toll Road - Bishkek-Kara Balta d. Street Lighting Improvement Project in Bishkek City e. Solid Waste Management Project in Bishkek City f. Toll Road - Bazar Korgon – Kyzyl Unkur – Sargata Road g. Development of Issyk-kul Airport

All seven Project Briefs (PBs) are attached within Appendix C. The Consultant also provided comments on projects initiated by the private sector (unsolicited projects). These projects included housing, power and airport projects. PPP Project Identification and Screening Methodology The Consultant prepared a draft Multi Criteria Analysis (MCA) format, and this was discussed and utilised with CDA and MEAP and PPP projects identified by the Consultant and GOK were ranked. Refinement of the MCA was agreed to continue and this was discussed with MEAP on several occasions. However, further application of the methodology22 to long lists of public sector projects has been delayed because of the time constraints of MEAP.

21 Initially, these project reports were called PPP Information Memoranda (IMs) but were renamed PPP Project Briefs at the request of the ADB as it was suggested that IMs would be a misleading term 22 Appendix B.h describes the methodology, how it was applied and provides some examples of scoring and ranking

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An issue that the Consultant has emphasized with MEAP is that the above way in which projects are selected as having PPP potential and then screened is not entirely satisfactory. The screening procedure can be used as described above, but its most effective use is in evaluating (ranking) of long lists of public sector procurement projects. We were not able to obtain any long lists from either MEAP or MTC, except a medium list from the CDA and a 9 project list from MTC. MEAP indicated that they would try and obtain such ‘long’ lists from line ministries including Transport, Energy and the Municipality so that we could use the MCA more appropriately, both as a tool and for capacity building. However, no list has been forthcoming. We have obtained the Public Investment Program (PIP) for 2011 and the Consultant undertook a trial screening and the result of this screening is shown in Appendix C. However, MEAP has expressed satisfaction with the methodology and the criteria so that the final discussions with MEAP led to agreement that the screening criteria would be adopted through a ministerial decree.

As included in his SOW, the Consultant has also discussed cooperation between ADB and other agencies in relation to the development of PPP Projects. Cooperation is advanced with JICA on the car parking project and very useful discussions have taken place with IFC and KfW consultants on PPP in the health sector, and a number of discussions were held with EBRD on solid waste management and municipal projects. UNDP expressed interest in cooperating through their UNDP-GEF TA project on Small Scale Hydro Power Development. The Consultant did follow up a number of potential projects but either the project was not suitable or information and viability was a concern. When the proposed law on sustainability and tariffs for renewables is passed, small scale energy projects could be reviewed again. Discussions were also undertaken with the USAID (Local Development Program) and some of their current assistance relates to developing new tourism flights into the two Issyk-kul international airports. Their project has helped increase substantially tourist numbers, albeit to a still low volume, particularly from Almaty into Tamchy airport. The Consultant suggested that USAID could cooperate on Issyk-kul through undertaking a tourism/airport demand study for the Issyk-kul region.

5. Provide a project development cycle for each identified project

With each of the seven Project Brief, steps in project preparation/the project cycle were detailed up to tender stage. This is shown as table 1 below. A draft project cycle was prepared and discussed with MEAP and MOF. This is attached as table 2 below.

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Table 1 Steps in Project Preparation for a PPP Project/Project Cycle (Up to Tender Stage)

No. Step Action Comments

1 Identification of Needs for a priority project

By Government and Public Partner23 to prepare initial data on project

2 Project Funding Review Public Partner examines whether funding of project by public procurement or if not whether possibly by PPP

Usually if public sector does not have funds then consider PPP. However, there are other reasons for PPP. If by PPP step 3.

3 For PPP: PPP Project Brief (PB)-Preliminary. (Current Stage)

Puts together available data on the project in a PPP format

Usually complete data not available, so preliminary PB puts together what data and information is available and indicates critically needed data, issues, opportunities, constraints etc.

4 Review of PB Government PPP agencies (Public Partner) review whether project appears to have sufficient potential to progress further under PPP

If positive decision from GOK, Public Partner obtains and collects the required data specified in Step 3

5 PPP Project Brief (PB)-Final PPP agencies review and decide or not to go to Pre-Feasibility Study (FS)

PB contains as much information as necessary to make a decision to continue to FS. It includes TOR for Feasibility Study including approximate cost of study

6 Pre-Feasibility study By Consultants and managed by Public Partner in consultation with MEAP and MOF

Study is in 2 parts; If FS positive in Part 1, Part 2 includes draft Tender Documents

7 Review PPP agencies review If positive, project goes to tender

8 Tender for Private Partner

NB: Article 7 of the Proposed PPP law states that the public agencies authorized for state regulation of PPP are: - Government; - Authorized public agency (MEAP/PPP Authority); - Public risk management unit (MOF); - Public partners (e.g. line ministries such as MTC)

23 Kyrgyz PPP law designates a „Public Partner‟. In other countries this might be called the line ministry or the executing agency

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Table 2 Diagrammatic Project Cycle by Institutional Responsibility

DRAFT

* Key Steps are required under Project Preparation. Both may require full approvals: First the decision to proceed with an FS (requires funding). Second to Proceed to Bidding after the FS is completed

** Approvals by Government to be detailed within 'PPP Procedures' to be drafted after PPP Law adopted

*** Under PPP Law, for all proposed PPP projects

**** Information Memo can also be called a PPP Project Brief/Project Dossier or similar, which should also include a draft TOR and budget for subsequent Feasibility Study

PPP Agencies under the

PPP Law

GOVERNMENT

PPP AUTHORITY/MEAP

MOF/RMU

LINE MINISTRY

LOCAL GOVERNMENT

Project Preparation Stage* Project Transaction/Execution Stage

Review or Approval**

Review Review

Review***

Project Identification

FeasibilityStudy (FS)

Consultation Pre

Qual

Bidding Bid

Evaluation

Contract Finalization and Signing

Construction and monitoring

Review*

Review

Approval of Contract Award

Information Memo (DataAnalysis)

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6. Identify areas that the Government needs to strengthen further to promote PPPs

Following the diagnoses at the outset of the assignment the Consultant has identified areas needed for TA 7819 support and a substantial amount of progress has been made to help the Government of the Kyrgyz Republic to strengthen the PPP enabling environment as described above. Under the conclusions and recommendations of this report, the Consultant has identified four areas needing for continued strengthening to promote PPPs in any subsequent TA.

a. PPP Framework: Continued amplification of the PPP Framework including the on-going preparation of the PPP Policy, laws and regulations and Risk Management policy being implemented. Procedures, Guidelines and other similar material to be drafted and applied. PPP Project development. In the next 6-12 months, prepare a pipeline of potential projects. Prioritize and finalize a limited number of project briefs, adding new projects that may be suggested from the continued screening of longer lists of public sector projects. Draft and cost TORs for pre-feasibility studies for the priority projects. Prequalify Consultants. In the following 12-24 months, undertake selected feasibility studies for priority PPP projects A PPP Forum or PPP Conference might be anticipated towards the end of this first period depending on progress with continued development of the framework and projects and assuming PPP institutions are adequately resourced.

b. PPP Institutions: PPP institutional structures planned in the context of a PPP Network of (i) MEAP/PPP Authority (PPPA), (ii) MOF/RMU and (iii) the Public Partners/Executing Agencies, with TA support to the development and operation of PPP institutional structures (including TOR for each PPP body). We have noted elsewhere the difficulties faced by MEAP in implementing PPP policy and it remains to be seen if the PPPA will be able to function effectively within MEAP if MEAP provides insufficient resources.

c. PPP Capacity: PPP capacity support to the PPP network with regular training and capacity building focussed on the needs of the institutions and staff within the network. Over a two year period, some focussed, limited and well planned study tours in relevant Asian counties might be anticipated for PPP professionals in the government

The Consultant suggests that the Government also needs to commit to:

a. Providing sufficient staff, wholly dedicated to PPP, within MEAP, MOF-RMU and two line ministries and the CDA.

b. The TA to be based with the PPP Authority. c. Establishing an explicit and focused work program within MEAP/PPP Authority. d. Proposing how to keep the senior PPP staff in their positions for the 2 years of TA.

7. Participate in workshops and seminars on PPP

There have been some 15 Ministry/CDA focussed small scale24 workshops and seminars organized by the Consultant during visits 1 to 5, including substantive participation in the workshop planned by the Chamber of Commerce on 24th November which focused on the draft PPP Law.

24 About 20 staff from MTC attended the two largest workshops, but other workshops also designed around a requested subject were attended by about 4-6 government staff. Several workshops were held with the private sector with about 12 attendees each.

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A major seminar was held at the request of the Municipality on 24th May and some 70 people attended including the First Vice Mayor and the ADB Country Director. It was understood to be useful as it was the first exposure to PPPs for many Municipal staff.

8. Complete project reports

There have been 7 field visits and 6 progress reports (September, November, December 2011 and January, February, March 2012) and one Inception report (October). This report is now the Final Report under the contract.

9. Organize and meet private sector companies, financial institutions, international

financial institutions, business houses and councils to study the business and financing environment

The three main private sector associations and a PPP sub-committee of the Chamber of Commerce a few relevant individual companies were met on numerous occasions. The agenda of such meetings concentrated on the PPP framework and PPP projects. However, some insights into the financing environment have been observed following such discussions. Projects are at a very early stage of development so business financing needs remain low for the immediate future and review of the financing environment has been limited. Discussions have indicated that investment is constrained by;

i. Governance issues: For PPP projects the concern is that tendering will not be transparent and

that even if the tender evaluation is undertaken according to good practice, there will be on-

going interference by government or special interests.

ii. Labour: Shortage of skilled labour

iii. Energy: Power supply limitations especially in the distribution of power supplies

iv. Finance: Domestic banks are willing to lend but under very onerous conditions. These include

high interest rates, short repayment periods and high collateral demands/guarantees. New

start-up projects are not favoured unless substantial collateral can be offered.

All the major IFIs in Bishkek were met including World Bank, IFC, EBRD, UNDP, JICA, KfW, Aga Khan

Development Network and the Eurasian Development Bank.

F. PPP PROJECT DEVELOPMENT ACTIVITIES The following section provides in more detail activities related to developing PPP projects under the TA. It includes a description of projects which were assessed as having potential for PPP development. The first seven showed good potential for PPPs during the assignment and these seven have draft PPP Project Briefs (PB). However, many more potential projects are possible and hence the importance of developing long lists, using the MCA methodology to screen and rank projects. Identifying potential projects on a more ad hoc basis, such as through on-going studies and networking is a useful and effective complementary method. All assumptions used in the analyses in the PPP Project Briefs are preliminary, and survey based studies could show them to need major variation. Table 3 shows a summary of projects considered as having PPP potential including those for which Project Briefs were prepared.

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Projects to be initiated by the Public Sector

1. Osh Airport (PB)

The PPP Project Brief has been well received as this is a priority national project with objectives to improve safety, provide adequate facilities to meet demand and promote regional economic development. It appears to have the possibility to be a viable PPP project. MTC, Manas International Airport Company (owner and operator of Osh airport) and MEAP have all given positive but varying support to this project. Airport projects are very suitable for PPP financing because they can be flexibly structured and government/IFI support could be forthcoming for some of the safety oriented components such as air traffic control. However, the project is relatively large and a full feasibility study will be expensive. It is likely to be financially viable without major financial support under the assumptions used. Since the initial PB was prepared, traffic data for 2011 became available and the Consultant’s financial analysis was updated resulting in a somewhat more favourable FIRR. The Consultant also therefore added an outline TOR to the original PB.

2. Bishkek Car Parking (PB)

A small project but one which can be implemented at different levels of scale, location and within a phased development of city car parking. Discussions with CDA and JICA have agreed that this is a suitable project for cooperation with ADB. JICA have now agreed to expand the scope of their Bishkek Transport Master Plan to include more comprehensive parking surveys and the initial draft Project Brief has been expanded by the Consultant to include (i) initial JICA parking data, (ii) more detailed information requirements and (iii) an outline TOR for the feasibility study. The project should be integrated within the city traffic management/transport plans but could go ahead to feasibility study perhaps in early 2013 given more information being provided by JICA’s consultants.

3. Bishkek – Kara-Balta Toll Road (PB)

This project has potential with high and growing traffic levels on the existing road, but needs more technical work on alignment, construction costs and the likely extent of traffic diversion to the new road. It is possibly financially viable without major financial support although it may need land provision and resettlement, road connections and traffic management along the existing road which might need to be met as financial/economic support. The feasibility study should include a range of PPP project design options including new road alignments and much improved use of the existing road (under tolling).

4. Bazar Korgon – Kyzyl Unkur – Sargata Road Toll Road (PB)

Appears viable but MTC mentioned that they are considering by passing a longer part of the Bishkek-Osh road which would make this project redundant (this newer project appears a mega project with little scope for development in the next 5 years). Project could be financially viable because of the large distance and time savings but a toll fee which reflects such cost savings might be unacceptably high. Safeguard issues should be assessed in depth.

5. Solid Waste Management–SWM (PB)

This project is under planning with support from EBRD. Bishkek Municipality requested assistance from the Consultant with this project to develop it under a PPP modality. The Consultants attended a major presentation by the EBRD consultants to the Mayor and city officials. Contact was made with EBRD and their Consultants and EBRD are happy to discuss this further, and other potential municipal projects, but pending the Interim Report (IR) of the Consultant, CEMI (from Hungary). The

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IR will contain options for private sector participation and it will be necessary to discuss cooperation and how PPP might be introduced to the investment options. It was also mentioned that the ToR for the SWM requires definition of a potential PPP project for using refused derived fuel (RDF) at Bishkek CHPP II, which is fully connected to the heating system of the city, newly built in 1989 and but ran only for several months. The plant, on the south-western edge of the city, has not been fully completed but is kept in operational condition by regular maintenance. This also might be of interest for PPP and it should be kept in mind along with other projects resulting from the CEMI study.

6. Issyk-Kul Airport (PB)

The transport needs for the tourism development of the Issyk-Kul require that air transport facilities need upgrading especially to cater for visitors from regional countries and other potential origins. The constraint is that airport facilities are very limited and current air passenger volumes are very low. However, the volumes needed to justify in financial viability terms the proposed expenditure (not confirmed) would entail very substantial increases in demand. These increases in demand could be possible but the demand risk would be high without possibly direct financial support and/or some sort of guarantees. However, airport expansion could be staged. This project is unlikely to be financially viable without support but the GOK is very interested to develop this project due to its potential national and regional economic development impact and is possibly offering various types of support packages to assist the implementation of this project including under a PPP modality. Discussions were undertaken with the USAID (Local Development Program) and some of their current assistance relates to developing new tourism flights into the two Issyk-kul international airports. Their project has helped increase substantially tourist numbers, albeit to a still low volume, particularly from Almaty into Tamchy airport, and of the seasonal nature. There has also been discussion of the development of a Special Economic Zone (SEZ) and in other countries SEZ have been found suitable for development under a PPP arrangement. Because of its viability and financial risk issues, this project would possibly be ranked as medium/low priority for PPP, but given its special importance and there could be ways to structure a successful PPP, the Consultant has included this project within the required seven PBs.

7. Bishkek Lighting (PB)

Initially this was proposed as a small PPP outsourcing project of possibly around $1million. However, subsequently, a larger project was suggested which involves a partial, and in the future, a complete replacement of the city light sources (lamp posts), fed by a centralized electricity to modern LED lighting based on a solar (photovoltaic) system. An autonomous power supply system based on the solar module allows a solution to the problem of lighting areas that are not connected to the centralized power system as well as addresses the increasingly prioritized clean energy aspect. The principle of operation of the system is simple and reliable. During daylight hours the photoelectric element charges the battery through solar energy. By nightfall, the lighting turns on automatically and provides coverage until the morning. The batteries do not need direct sunlight to recharge them as the solar battery is able to capture solar energy even on cloudy days and winter nights. The PPP structure and financial viability part of the PB for this project is less developed than the other 6 but the project appears to have merit for continued assessment.

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8. Bishkek District Heating

Discussions have been held with the Bishkek District Heating Company (public) as they need substantial investment in a number of sub projects to upgrade their system. These sub projects include renewal of system pipes and installation of metering. This is a complex but a very important project with strong socio economic benefits if could be realised. Its current operation is linked to the central power station in Bishkek. It was found to be too ambitious for the time remaining under this TA but is a vitally important social project and could be reconsidered under later technical assistance.

9. Small scale Hydro project

An initial assessment was made of this project, but was not pursued for a number of reasons including (very low) tariff issues. Consultant has been asked to seek out an energy project as one of initial PPP projects and further discussions took place with UNDP25. Two projects were discussed. However, the first project is being pursued as a totally private project and may be discussed with PSOD. The second project is a 1.5 Mw HPP near Karakol but no details have been obtained yet or were forthcoming.

10. Other potential projects: a. Performance Based Contracting and Highway Tolling

Discussion has been undertaken on Performance Based Contracting (PBC) for road maintenance. Time did not allow further progression to a Project Brief on the Osh – Gulcha road as there are a number of complex issues involved in PBC in Kyrgyz Republic. Discussion was also undertaken on the possibility of tolling newly built roads to meet two objectives. Firstly, to ensure adequate maintenance of new roads and secondly to support repayment of any loans that may be funding projects. The road Bishkek – Tokmok and its extension eastwards could be considered for tolling after completion of construction. PBC is a useful form of PPP but needs a separate sub study undertaken by Consultants with specific expertise and wide experience in this modality.

b. Health Sector

Between January and March 2012, the Consultant supported MoH with various draft Ministerial resolutions and the financing of the health sector ‘Concept’ report. ADB also discussed with KfW coordination and possible cooperation on PPP in the health sector which was followed up during the final visit of the Consultant in May. The Consultant met with the MOH State Secretary and senior staff and explained ADB’s current TA activities and willingness to coordinate with and/or support the work of KfW/IFC on PPPs in the health sector. Subsequently, the Consultant was invited to a major meeting chaired by the Minister of Health, with the theme of ‘Development of the Health Sector within the Reform Program 2012-2016’. PPPs and privately funded health care is an important part (but only a part) of the new program.

The Consultant prepared a number of comments on the resolutions and Concept report,

the key observation being that clarity is needed in definitions between privately funded health care and PPPs as these are different, although possibly overlapping, concepts.

25 UNDP expressed interest in cooperating through their UNDP-GEF TA project on Small Scale Hydro Power Development

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Socially acceptable tariffs will be paramount so that cost recovery arrangements for

private PPP investment become of particular importance. Sources of revenue and /or financial support therefore become critical and should be identified at an early project preparation stage. Such sources include health insurance, the Government budget, other fees and private revenues, as well as possible financial support (capital or annual) from donors/IFIs.

In the Consultants opinion, a number of different types of PPP arrangements, cross

referenced to different types of medical activities could be selected and very initial project dossiers prepared and an assessment made of the feasibility of each type.

PPP arrangements could be outsourcing, lease and concession. Sector PPP activities

could be non-clinical/clinical;

a. Non-clinical could be cleaning, building maintenance, patient transport, emergency ambulances and meals.

b. Clinical services could range from primary health care to clinical support e.g. central laboratory and testing type activities, to specialized dialysis, radio and chemotherapy to day surgery through to hospital management, new and rehabilitated hospitals or wings of hospitals.

Such preliminary analyses could open up thinking as to what types of PPPs are possible and desirable and what types are unlikely to be acceptable or appropriate, highlighting the advantages and disadvantages of each type.

c. Tourism sector

As a potential major industry and sector in the country, tourism is still not being adequately supported with weak and inconsistent institutions and with minimal planning activity. A meeting was held with the Deputy Minister of tourism within the Ministry of Culture and Tourism (responsibility for tourism was moved from MEAP). In the Consultants opinion, the new Deputy Minister26 has a difficult task and almost no staff but seems very able and knowledgeable and given time could have turned round the sector. The Ministry is interested in PPPs and this may fit with a strategy that was explained of encouraging private money into the Issyk-Kul region and putting public money into other less well developed and poorer regions.

The consultant also met a major private sector tourism sector entrepreneur/investor and discussed various issues. He mentioned the need for a strategic plan for tourism and the Government have indicated the desirability of this but this may take some time/years to implement. He suggested a cluster approach to the development of the Issyk-Kul region with tourism product diversification to expand its current focus on 90 days of summer tourism and limited skiing in winter.

He supported the objectives of the ADB project (Loan 2556/ Grant 0163-KGZ: Issyk-Kul Sustainable Development Project) which could be expanded in scope to prevent pollution of Issyk-kul lake by hotels and other commercial enterprises. Also discussed was the possibility of more limited expansion of both Tamchy and Karakol airports

26 It was reported that the Deputy Minister, appointed in February 2012 was dismissed on 28th May 2012.

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noting, in his opinion, major airport expansions were not needed, with Bishkek and Almaty relatively close. Both he and this Consultant (independently) considered current investment plans at Tamchy airport would probably require 500,000 passengers per year or more to make the currently proposed27 size of investment viable28.

PPPs in tourism are not widespread worldwide but range from simple arrangements for Tourism Boards (Jersey, UK) to building leases for hotels, to operation and management of national parks (South Africa) to concessions for major superstructure and infrastructure developments. As there are major issues of power, water, sewage, road access, land and forestry access in the country, possibly only a partnership approach could resolve such issues, in combination with appropriate PPP projects.

d. Transport

The Consultant was invited to a Donors’ meeting at KYRM with a presentation by ADB consultants preparing the Transport Sector Master Plan. This was attended by EBRD, WB, USAID, Aga Khan Foundation, JICA, EDB29 and EU, with ADB Manila on VC.

The reform of road maintenance through PBM was discussed by the transport consultants as was the possibility of raising tolls for maintenance. They stressed the early stage of their study. Their Development Framework report will be prepared by July and PPP will be considered for funding, and logistics parks in Bishkek and Osh may be suitable for PPP financing.

The Consultant briefed the donor’s meeting on TA 7819 KGZ and made a number of comments including the need to amend the draft Toll Road Law if tolls were proposed to be applied on existing roads where no alternative existed. It was however noted that Bishkek –Tokmok road could be tolled (as there is an alternative route available). The Consultant suggested the development of SEZs under the PPP modality.

In general the transport sector has good potential for PPP as it has good scope for cost recovery and value for money over traditional public procurement.

e. Other

The Consultant also discussed with ADB KYRM staff the possibility of PPP within the ADB supported project, Loan 2556/ Grant 0163-KGZ: Issyk-Kul Sustainable Development Project. The Project Officer considered that there should be scope for PPP within the required investment planned for landfills, water supply, sewage and city infrastructure in general. The Consultant has no time to follow this up but considers it would be desirable for all ADBs projects in Kyrgyz to have a small component that includes reviewing the possibility of PPP finance for all or some parts of appropriate investment projects.

f. Project Pipeline

Discussion has taken place with MEAP and KYRM on continuing to develop a pipeline of projects beyond those above. The current list of PPP projects is summarised in table 1.

27 By Manas International Airport Joint Stock Company which operates these two airports 28 Depending in part on airport charges but in any case a considerable expansion from the current very low levels 29 Eurasian Development Bank

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Table 3 List of Potential PPP Projects

No. Project Agency Sector Approx.

Cost Consultant’s Comments Status Project Brief

1 Osh Airport MTC Transport $130-$150m

Appears to have good potential and support

within GOK

Under consideration by MTC

Draft Completed

2 Bishkek –Kara-Balta Toll Road

MTC Transport $300m Potential Under consideration by MTC

Draft Completed

3 Bishkek Solid Waste Management

CDA Municipal $30m Potential and discussions are on-going with CDA

Agreed with EBRD to follow up in future and

especially after their consultants have

reported

Draft Completed

4 Car Parking CDA Municipal $5m Appears to have potential as not too large, not too complex and has support

ADB agreed cooperation with JICA which is now

surveying and studying in more detail with the

Bishkek City Master Plan

Draft Completed

5 Bazar Korgon – Kyzyl Unkur – Sargata Toll Road

MTC Transport $90m Potential Under consideration by MTC

Draft Completed

6 Issyk-kul airport MTC Transport $80m Project has support but low traffic currently. Possibility

but structuring and risks maybe indicate not the

easiest of projects. However, potentially very large regional and national

development benefits

Only recently submitted to GOK and MTC

Draft Completed

7 Bishkek Lighting CDA Municipal Various options

Possibility On-going analysis Draft Completed

Other Projects

8 PBM for Osh – Gulcha

MTC Transport Not Known

Possibility On-going analysis No PB prepared

9 Small Scale Hydro Project

MoE Energy 20m Possibility Discussions during 6th

visit have not led to an to an energy sector project

No information

provided yet by

UNDP

10 Bishkek District Heating

MoE Energy $140m Too complex at this stage On-going analysis Deferred by

Consultant

Source: GOK and Consultant

Unsolicited Projects-Projects Initiated by a Private Partner 1. Naryn Airport

It should also be noted that the GOK/MEAP is considering a proposal from the Aga Khan Foundation for the development of Naryn airport. The Consultant was asked for his opinion on the project and reviewed some limited documentation. While this project is to be welcomed in principle, the Consultant has informed the MEAP that, in his opinion;

i. If it is a viable project, and properly developed, it could move forward pending due diligence.

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ii. However, as understood, this project is promoted by the Private sector (Aga Khan Foundation) and therefore it should proceed as a project initiated by the private sector (unsolicited) under the new PPP law.

iii. As such, the private sector should prepare the FS study first and then discuss draft contracts.

iv. Without the full study or draft or even a pre-FS, any contract discussion could well be premature.

v. The Consultant has indicated that he would be more than willing to make more comments if requested

vi. All documents should be carefully reviewed for risk and financial implications for the government

2. Energy

A meeting was arranged at KYRM related to 4 HPP projects being proposed by the private sector on three rivers in the north of the country. The WB and IFC may support these projects to be prepared by one company with a total capacity of 18Mw and costing $30m and small consortium of international companies are also requesting ADB participation. However, this turned out not to be a PPP project but wholly private enterprise and KYRM have now referred it to ADB’s PSOD. 3. Housing

Another company are interested to develop and sell apartments under a PPP modality. However, it transpired that some of the blocks are already constructed and part of the scheme is to finance purchase of these apartments. Further, the project requires considerable input of finance from government. Consultants suggested restructure the project to require (much) less finance from government and to create new housing supply. G. CONSTRAINTS AND ISSUES

We may conclude that the TA can be regarded as meeting both its key objectives and will pave the way for future PPP development under future TA support. However, we should note some constraints and issues faced under this TA as both relevant to the current TA and as possibly to be taken into account in future TA design. Generally, Consultants cannot work in a vacuum and governments must provide adequate staff (time, seniority and expertise) to work with them if a TA is to produce effective results. In the Consultant's opinion, if MEAP, MTC and other agencies had been able to provide additional staff time to work with the Consultant, PPP project screening and PPP policy are two areas that could have been implemented sooner. More detailed project briefs could also have been produced. In other circumstances, the lack of interaction could have had a very negative impact on TA effectiveness but the Consultant was also able to work with other agencies such as MOF, MTC, CDA, MOH and was also able to work on his own to produce material. This point is significant if the follow on TA will expect much more time being spent with MEAP or MOF or MTC staff and such Government staff resources are not forthcoming The intermittent basis of consultants inputs worked quite effectively in these TA conditions but may not necessarily be so effective in such short inputs (1.5 weeks on average) for a differently designed TA.

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The Consultant started the first few visits with many meetings and a considerable number of workshops, mostly in Ministry offices. Apart from meetings, work was undertaken in the KYRM office and at the Consultant’s base. Again, depending on the design of a future TA, a base in MEAP or MOF or a public partner’s office may prove to be more effective assuming good working facilities are provided.

TA 7819 did not specifically include any time dedicated to capacity building with private sector organizations. The Consultant believes the private sector needs as much guidance as the public sector. When the private sector misunderstands or is misinformed, they put pressure on government to take inappropriate and rushed decisions. Perhaps the next TA could include some seminars or workshops focused solely on the needs of the private sector.

H. CONCLUSIONS

Conclusions of the Consultant

1. Technical Assistance TA7819

a. The Consultant considers the TA successful, in meeting its objectives as set out in the Scope of Work. However, as agreed with the ADB, little was undertaken on the financing environment. The Consultant believes the TA will also provide a good basis for future PPP development.

b. The TA support has therefore been critically important to the Government and has been welcomed by them and the private sector. It is doubtful if the PPP Law, Risk Management policy, the seven project briefs and on-going work could have been achieved and implemented consistent with international standards and/or acceptable to the ADB without this ADB TA.

c. The TA was designed to be implemented on an intermittent basis and this has proved to have provided a flexible approach for the support to Government with a number of on-going changes being made to the TOR during the assignment to ensure its effectiveness.

d. It is felt that the combination of (i) the enthusiasm and commitment of mid to senior level government staff (ii) the support from ADB, including importantly on the ground from KYRM, and (iii) the inputs of the TA consulting ‘team’ have been very effective in achieving the key objectives.

e. Current ADB support to MEAP with the revision of associated laws and regulations to make them internally consistent with the new PPP law is also important.

2. The PPP Planning Framework

a. The initial development of the PPP framework is nearing completion with the new PPP Law now implemented and PPP Risk Management nearing implementation. PPP Policy and consistency within laws and regulations should be finalized soon by MEAP.

b. The PPP Law provides a generally good basis for PPP development but there are many places in the Law where there is considerable need for (subsequent) amplification. Following his assessment, the Consultant considers that the PPP Law provides the basis for PPP development but needs;

i. Implementing regulations to provide the regulatory details which are

needed to complement the PPP Law ii. A PPP policy document

iii. Implementing Guidelines and Procedures

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c. The need for clear lower level implementing decrees, regulations and guidelines is therefore substantial with this need currently being met in part by the three legal consultants funded by ADB in the MEAP.

d. The continued amplification of the PPP framework is needed and will need intensive TA

support. The PPP framework still needs operational procedures and guidelines, draft model contracts, tender documentation, terms of reference and procedures for the PPP network and PPP Project Procedure Manuals and Guidelines for feasibility studies, risk management and other planning and PPP processing activities.

3. Institutional and Capacity Issues

a. The PPP network is in an embryonic stage. There are a limited number of staff with some

responsibilities for PPP in MEAP, in MOF and in some line ministries such as transport, health and the CDA.

b. MEAP has two senior government staff responsible for PPPs, and a PPP Unit with one of these senior officials as its head but neither of these two staff are fully dedicated to PPP duties. Commitment in MEAP appears strong but overall capacity remains weak, and the institutional structure is yet to be formally defined. The PPP Law describes a PPP Authority (PPPA), which is under implementation (noted above). However, its detailed functions, tasks, PPP network links and staffing have yet to be seen by the ADB.

c. The key issue is that the institutional framework30 is still weak and capacity (time available, seniority and expertise) of staff extremely limited. Currently, there is a combination of problems. Sometimes the institution is not functioning effectively, and/or the staff have almost no PPP knowledge or experience, and/or the staff dealing with PPP have knowledge and experience such as in MEAP but have no time because PPP is only a (minor) part of their duties.

d. The government risks making expensive mistakes in PPP development by not resolving the issue of adequate staff capacity within a (currently) ineffective PPP network.

e. We also conclude that capacity building is wasteful both (i) without sufficient and dedicated staff who will stay in post a reasonable time and (ii) without some PPP projects to support/develop/implement.

f. Overall, GOK is streamlining its budget including possibly by reducing numbers in the civil service and this could impede strengthening PPP capacity or developing new PPP agencies. Further, reshuffling of staff who are knowledgeable and experience about PPP away from PPP positions would have a very serious impact on MEAP capacity.

g. The Municipality and their PPP staff remain committed and active and, through the City Development Agency, it constitutes (effectively) a PPP node. There has been serious and constructive dialogue on PPP with the Municipality. Capacity remains limited however. Small projects could well be transacted/implemented in the next 12-24 months and a good example would be the car parking project. We also note that the Municipality is reported31 to be implementing PPPs through bus shelters with advertising. It remains to be seen if this is a real (risk related) PPP but certainly the Municipality is showing considerable initiative.

h. MTC became more positive over the period of the TA but the PPP node is staffed by one person who, however professional and committed can do little without more training, staff and resources.

30 The PPP Network comprising Public Agency (MEAP), (RMU) MOF and „Public Partners‟ as defined under the PPP law (Public Partners are normally referred to as executing agencies and are usually line ministries and municipal bodies) 31 A news agency in Bishkek (Tazabek) indicated this on 5/6/2012

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i. Support to MOF-RMU is also very much needed given their almost total lack of experience in Risk Management, in PPP related fiscal control procedures and lack of understanding of their important role (in coordination with other parts of the PPP network) in overall PPP project preparation and the project cycle.

4. PPP Projects

a. Based on the conclusions related to the PPP framework and capacity, it seems unlikely

that GOK will be ready to implement major feasibility studies for some time yet32 but support to on-going project preparation remains an important need that should be addressed in the next TA program. This would also maintain enthusiasm within the GOK agencies and avoid them going off on ‘fast tracks’33 which could have negative consequences.

b. The Municipal projects all have some merit (because they have been screened by the CDA’s PPP staff and the Consultant), and been have progressed through information supplied by the CDA (including the requested information templates supplied by the Consultant).

c. While there has been support from the Public Partners for the 7 projects, few detailed comments have yet been received by the Consultant on the PPP Project Briefs.

d. Feasibility studies are still under consideration rather than immediate implementation, but without any donor commitment for funding of feasibility studies, either there will be few or no PPP projects developed or the Government will rely on unsolicited projects.

I. RECOMMENDATIONS It is the Consultants recommendations that based on the experience of this current TA 7819 KGZ that ADB and the Government should;

i. Continue discussing the next phase of TA support to PPP development under ICIP.

ii. Agree that the next TA could run (nominally) for 2 years and comprise four components running in parallel. a. Component 1: PPP Framework: Continued amplification of the PPP Framework

including the on-going preparation of the PPP Policy, laws and regulations and Risk Management policy being implemented. Procedures, Guidelines and other similar material to be drafted, passed and applied.

b. Component 2: PPP Project development. In the next 6-12 months, prepare a pipeline

of potential projects. Prioritize and finalize a limited number of project briefs, adding new projects that may be suggested from the continued screening of longer lists of public sector projects. Draft and cost TORs for pre-feasibility studies for the priority projects. Prequalify Consultants. In the following 12-24 months, undertake selected feasibility studies for priority PPP projects. A PPP Conference might be anticipated towards the end of this first period depending on progress and assuming PPP institutions are adequately established and resourced.

32 As has been stressed to GOK, the resources (staff time) and finance for feasibility studies is extremely high, so the projects need to be continuously researched by GOK with donor support and for projects with potential, these will need Project Briefs prepared (or something of a similar nature) and when agreed TORs for feasibility and the tendering of the studies will take some months. Thus the commencement of any study should be many months away, except possibly for small municipal projects. 33 International experience consistently shows that trying to speed up project preparation by „short cuts‟ always leads to slower implementation

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c. Component 3: PPP Institutions: PPP institutional structures planned in the context of

a PPP Network of (i) MEAP/PPP Authority, (ii) MOF/RMU and (iii) the Public Partners/Executing Agencies, with TA support to the development and operation of PPP institutional structures (including TOR for each PPP body).

d. Component 4: PPP Capacity: PPP capacity support to the PPP network with regular

training and capacity building focussed on the needs of the institutions and staff within the network.

iii. Agree that the TA priority by Government is to commit to:

a. Providing sufficient staff, wholly dedicated to PPP, within MEAP, MOF-RMU and two

line ministries and the CDA. b. The TA to be based with the PPP Authority but review its effectiveness after one year

and if not functioning effectively, consider a PPP Authority as an independent agency.

c. Establishing an explicit and focused work program within MEAP/PPP Authority d. Proposing how to keep the senior PPP staff in their positions for the 2 years of the

TA.

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APPENDICES

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APPENDIX A: Revised34 TOR of International Consultant

Proposed Small Scale Technical Assistance for ‘Enabling Identification of

Public Private Partnership (PPP) Projects and Capacity Building’ in Kyrgyz Republic

34 Revised TOR under Contract Variation#1, January 2012

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APPENDIX B: PPP Framework Activities/Documents

a. The 2012 PPP Law–English (Edited)

The Law On Public-Private Partnerships in the Kyrgyz Republic

Article 1. Basic terms

The following basic terms, concepts and definitions are used in this Law: Public-private Partnership (PPP) means a long-term (up to fifty years) interaction between

public and private partners for engaging the private partner by the public partner in designing, financing, construction, rehabilitation, reconstruction of assets, as well as the management of existing or newly created assets, including infrastructure assets;

Government guarantees means guarantees provided to private partners and project companies aimed to protect investments made into the PPP projects;

Government support means public financial support, public economic support and/or other support aimed to create favorable and mutually beneficial conditions for the implementation of PPP projects and to secure the commitments of public partners under PPP agreements;

State Risk Management Unit means the public agency authorized by the Government of the Kyrgyz Republic (the Government) to develop the state policy for the management of risks associated with the implementation of projects;

Public partner means the Government, executive public agencies including ministries, state committees, administrative departments, and local state administrations, as well as executive bodies of local self-government and municipal enterprises;

Infrastructure services means works and/or services made and provided using an infrastructure asset;

Infrastructure asset means publicly, municipally or privately owned property or property complexes for social, economic or industrial purposes;

Tender means a two-stage selection process consisting of the pre-qualification stage and selecting the winner stage.

Minimum requirements for the project means minimum mandatory requirements, whether technical, operational, commercial or other, necessary for PPP project implementation, developed by the public partner, when preparing a proposal to initiate the PPP project;

PPP project means a system of relationships regulated by the PPP agreement and dealing with the private partner’s engagement by the public partner in designing, construction, rehabilitation, reconstruction, or management of existing or newly created infrastructure assets;

Government-approved project means a PPP project requiring government approval in view of the social relevance of the infrastructure asset and/or the amount of investment required, as established by the Government;

Project company means a legal entity established under the legislation of the Kyrgyz Republic as a for-profit or non-profit organization aimed solely at implementation of a PPP project;

PPP agreement means a written agreement between the public and private partners setting forth the rights, obligations and liability of the parties, as well as other conditions of the PPP project implementation for the purpose of carrying out certain activities in various areas based on the PPP principles in the manner and form prescribed by this Law and other regulatory legal acts of the Kyrgyz Republic;

Authorized public agency means a Government-established organization, the primary objective thereof is to develop public-private partnerships in the Kyrgyz Republic and

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whose powers thereof are defined in this Law and other regulatory legal acts enacted by the Kyrgyz Republic;

Special funds means funds established by the Government or public partners to accumulate financial resources securing and guaranteeing the performance of the public partners of their obligations under PPP agreements;

PPP stages means the PPP project preparation, the private partner selection and the PPP project implementation;

Feasibility study (FS) means technical, financial, economic, legal and environmental assessment and evaluation of key risks and viability of the PPP project;

Winner determination stage means a process of selecting the winner in accordance with the PPP principles from among the pre-qualified private partners;

Tender documents include those prepared by the public partner related to criteria for selecting the private partner, identifying and allocating risks between the public and private partners, the draft PPP agreement and other documents and information necessary for conducting a tender;

Private partner means an individual entrepreneur, or a legal entity registered under the legislation of the Kyrgyz Republic or a legal entity registered under the legislation of the foreign country, or an association of such legal entities.

Financial institution means banking and other financial and lending or credit institutions registered under the legislation of the Kyrgyz Republic or the foreign country and involved in financing and/or guaranteeing PPP projects.

Article 2. Legislation of Kyrgyz Republic on PPP

1. The PPP legislation of the Kyrgyz Republic is based on the Constitution of the Kyrgyz Republic and comprises of the Civil Code, this Law and other regulatory legal acts enacted based on this Law.

2. International treaties on PPP, duly entered into law by virtue of which the Kyrgyz Republic is a party, shall be a constituent part of the legal system of the Kyrgyz Republic.

Article 3. The use of public-private partnerships

1. PPP applies to infrastructure assets and/or infrastructure services in the following sectors: - Generation, transmission and distribution of electric and thermal power; - Processing, storage, transportation, transmission and distribution of oil and natural gas; - Automobile, railway, water, air, urban electric transport; - Roads and railways (including bridges and tunnels); - Public utilities and public services; - Medical, medico-preventive and other activities in the health care system; - Education, upbringing, culture and social services; - Mobile and fixed communications and telecommunication services; - Tourism, recreation and sports; - Water resources; - Other sectors involving the provision of services to a wide range of consumers.

2. PPP can be applied to other infrastructure facilities and infrastructure services except for those on the list thereof determined by the Government.

3. PPP shall not apply to relationships associated with the use of mineral resources, public procurement and privatization.

Article 4. PPP principles

PPP in the Kyrgyz Republic is based upon and is guided by the following principles:

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- The Rule of Law: the strict execution of laws and other relevant regulatory legal acts by all governmental agencies, officials and others;

- Justice: the equal treatment of all bidders; the objective and impartial selection of the private partner; through fair and mutually beneficial cooperation between the public and private partners; by mutually agreed separation and distribution of powers, liabilities and risks; the equality before the law of the public and private partners;

- Transparency: access to information concerning PPP projects by the private and public partners at all stages of PPP on the conditions set forth in the legislation of the Kyrgyz Republic;

- Competition: the absence of discriminatory restrictions on participation in the bidding; - Freedom of Contract: the right of the public and private partners to freely determine the

rights and obligations of the parties to the PPP agreement, in addition to the rights and obligations of the parties set forth in the present Law and regulatory legal acts of the Kyrgyz Republic;

- Environmentally Friendly: the compliance of PPP projects with environmental protection requirements.

Article 5. Allocation of risks between public and private partners

1. The allocation of risks between the public and private partners is a mandatory condition of a PPP project.

2. Regulations and general guiding principles in respect of the procedure for determination and distribution of risks between the public and private partners shall be developed and enacted by the authorized public agency.

Article 6. Forms of private sector participation in PPP projects

The forms of private sector participation under PPP are diverse, depending on type of the infrastructure asset or infrastructure services, the industry it belongs to, the purpose of the PPP project and arrangements of the parties to the PPP agreement. Instructions on the form of private participation in PPP projects (or PPP models) by the private partner shall be developed and approved by the authorized public agency.

Article 7. Authorized public agencies in the sphere of PPP

The authorized public agencies responsible for State regulations in the sphere of PPP are the: - Government; - Authorized public agency; - Public risk management unit; - Public partners. Article 8. Authority of the Government

The Government’s authority in the sphere of PPP shall extend to the following matters: - implementing and coordinating public policies and programs for PPP development in the Kyrgyz

Republic; - establishing the authorized public agency; - identifying the public risk management unit; - creating special funds, accumulating financial resources to ensure implementation of government

commitments to their partners under PPP agreements;

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- adopting regulations and other legal acts, which govern PPP stages and the monitoring and evaluation of PPP project implementation, and which are necessary for the implementation and uniform application of the provisions of this Law;

- approving the proposals submitted by the public partner for the initiation of PPP projects and tender documents for projects which are to be approved by the Government;

- exercising all other powers conferred by this Law.

Article 9. Authority of the authorized public agency

The authority of the authorized public agency shall include the following: - implementing public policy and PPP development programs in the Kyrgyz Republic; - submitting proposals to the Government on public policy and PPP development programs,

or drafting and making amendments or supplements to regulatory legal acts of the Kyrgyz Republic on the PPP matters;

- submitting annual reports on implementation of public policy and PPP development programs to the Government;

- assisting the public partners in searching for, and selecting, prospective PPP projects, in preparing tender documents, and in implementing the PPP projects;

- evaluating proposals to initiate PPP projects and the tender documents prepared by the public partners;

- developing and adopting guidelines, instructions, regulations, rules and other documents necessary for the unified application of the provisions of this Law for PPP participants;

- providing clarification to all persons concerned regarding the implementation of policy and programs and the application of the PPP legislation;

- informing the public on all matters related to the PPP project preparation and implementation that are not related to proprietary information under the legislation of the Kyrgyz Republic;

- collecting and analyzing information about initiated and ongoing PPP projects; - keeping a register of PPP projects; - organizing PPP training for public partners, private partners and all stakeholders concerned

with the implementation of PPP projects; - exercising other powers conferred by this Law and PPP regulations adopted by the

Government.

Article 10. Authority of the Public Risk Management Unit The authority of the public risk management unit includes: - Concurrence with PPP projects, tender documents and PPP agreements involving the provision of the government’s financial support from the State budget; - providing an opinion on the risks of the PPP projects which do not envisage the provision of the government’s financial support from the State budget.

Article 11. Authority of the Public Partner

The authority of the public partner includes:

- preparing a PPP project; - selecting the private partner; - monitoring and evaluating PPP project implementation; - exercising other powers conferred by this Law and regulations on PPP adopted by the

Government.

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Article 12. Government Financial Support

1. To assist in the implementation of PPP projects, the public partner may provide or help in the provision of government financial support to the private partner and/or project company.

2. The government financial support may be provided using the funds of the State and/or the municipal budget, or using special funds or by other means not prohibited by the legislation of the Kyrgyz Republic.

3. Government financial support to the private partner and/or project company may be provided in the following ways:

1) provision of loans on preferential terms necessary for PPP project implementation; 2) provision of bank guarantees; 3) provision of guarantees securing performance of the public partner’s obligations; 4) provision of tariff subsidies; 5) provision of the financial resources necessary for PPP project implementation; 6) granting tax benefits and/or tax postponements and/or payment of tax by installments

on terms and on conditions provided for in the legislation of the Kyrgyz Republic; 7) granting customs duties preferences and/or postponements and/or installments on

terms and on conditions provided for in the legislation of the Kyrgyz Republic. Article 13. Government Economic Support

1. To assist in the implementation of PPP projects, the public partner may provide, or help in

the provision of, government economic support to the private partner and/or project company; 2. Government economic support to the private partner and/or project company may be

provided in the following ways: 1) in addition to rights to an infrastructure asset, providing rights to other movable or

immovable property in accordance with the legislation of the Kyrgyz Republic; 2) assisting in obtaining licenses, permits, approvals; 3) providing easements in respect of publicly and/or municipally owned movable or

immovable property; 4) granting the right to collect tariffs and to generate revenues from other types of

activities not directly associated with the implementation of the PPP project; 5) setting discounted rental payments for use of the publicly and/or municipally

owned property; 6) granting of exclusive rights to engage in the activity in the framework of the

concluded PPP agreement in accordance with the legislation of the Kyrgyz Republic;

7) providing other kinds of support on the part of the public partner that deos not contradict the legislation of the Kyrgyz Republic.

Article 14. Government guarantees

For the purposes of guaranteeing the protection of private investments into the PPP project, the private partner and the project company shall be guaranteed:

- non-interference by the public partner with the business of the private partner and project company, except as stipulated in the PPP agreement and by the legislation of the Kyrgyz Republic;

- protection of the property of the private partner and project company from nationalization or any other measure of similar effect in the manner envisaged by the legislation of the Kyrgyz Republic;

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- the right to freedom of ownership, use and disposal of the investments made in the PPP project and the revenues and profits received from such investments for the purposes not prohibited by the legislation of the Kyrgyz Republic;

- the right to free convertibility of the national currency of the Kyrgyz Republic into any other foreign currency and free export or repatriation of the currency received as a result of the implementation of the PPP project;

- the right to recover losses incurred as a result of unlawful action (inaction) of public and/or municipal authorities or their officials, which caused damages to the private partner and/or project company, in accordance with the conditions of the PPP agreement;

- the right to review the terms and conditions of the PPP agreement or early termination of the PPP agreement, and to obtain redress for damages caused, by the adoption of regulatory legal acts entailing worse conditions for implementation of the PPP project by the private partner and/or project company in comparison to the terms of the PPP agreement.

Article 15. PPP Project Stages

1. The PPP project stages are: 1) PPP project preparation; 2) Private partner selection; 3) PPP project implementation.

2. PPP Project preparation includes identification and initiation of the PPP project, formation of the tender commission, preparation of tender rules and documents.

3. Private partner selection includes holding the tender, conducting negotiations and conclusion of the PPP agreement with the winning bidder.

4. PPP project implementation commences on the effective start date of the PPP agreement and ends on the date of its termination.

5. The public partners may engage independent consultants to prepare and carry out any PPP stage.

Article 16. PPP project identification and initiation

1. The PPP projects shall be identified and initiated by the public partner subject to the

government and municipal programs for promotion of public-private partnership, socio-economic development programs, industry development programs and other national, regional and local development programs and plans.

PPP projects may be initiated by the Government. The projects initiated by the Government shall be transferred to the relevant public partner to perform all procedures required by the legislation to approve the PPP project.

2. For the purposes of initiating the PPP project, the public partner shall evaluate the prospective project, including its rationale and feasibility under PPP, the minimum requirements for the project, the types and conditions for providing government financial and/or economic guarantees and the development of other documents required under respective regulations approved by the Government and the authorized public agency. 3. Based on the documents and information mentioned in paragraph 2 of this Article, at the time the public partner makes a decision to initiate a PPP project, it shall notify the authorized public agency.

4. The decision to initiate the PPP project by the public partner which involves the provision of government financial support from the State budget shall be approved by the public risk management unit.

5. In respect of Government approved projects, the decision to initiate the PPP project shall be made by the Government subject to the positive expert opinion of the authorized public agency, and

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in the case of requiring government financial support from the State budget, subject to a favourable opinion of the public risk management unit. Article 17. Initiation of a PPP project by private partner

1. Private partners may apply to the public partner or the Government with a proposal to initiate a PPP project. The proposal must be accompanied by a preliminary feasibility study, a document confirming the private partner’s expenses in preparing the preliminary feasibility study, the rationale for the application of PPP to the selected infrastructure, an environmental impact assessment and the main conditions of the PPP agreement. In addition to the said documents, the private partner may submit other documents relevant to the proposed PPP project.

The public partner must accept or reject the proposal within 60 days. If the proposal is rejected, the public partner must notify the private partner a notice of the reasons for rejection and return to the private partner all originals and copies of the earlier submitted documents.

The public partner may request for additional information only once. This request must be supported by the statement of reasons. The private partner must provide the requested information within 30 calendar days of the receipt of the request. If the public partner requests for additional information, the decision whether to accept or reject the proposal shall be made within 30 calendar days of the receipt of additional information from the private partner. If no additional information is received from the private partner within the aforementioned term, the decision whether to accept or reject the proposal shall be made within 30 calendar days following the expiration of the term for the provision of additional information. 2. In the event that the public partner accepts the proposal initiated by the private partner, the public partner shall notify the private partner and the authorized public agency of this decision. The selection of (a winning) private partner for the PPP project initiated by a private partner shall be made through a tender in the manner provided by this law and other regulations of the Kyrgyz Republic. 3. If the private partner which initiated the PPP project fails to win the tender, the winner of the tender must reimburse the private partner which initiated the PPP project for expenses incurred to prepare the preliminary feasibility study. 4. All documents and information provided by the private partner initiating the PPP project to the public partner shall be deemed confidential and used only to evaluate the proposal of the private partner to initiate the PPP project, unless the public and private partners agree otherwise.

Article 18. Preparation for private partner selection If the PPP project initiation is approved, the public partner shall form the tender commission, develop the tender rules and tender documents. At the public partner’s request, the authorized public agency shall assist the public partner in forming the tender commission and preparing the tender rules and tender documents.

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Article 19. The Tender Commission

1. The authority of the tender commission shall extend to the holding of tender. 2. The tender commission shall be formed for each PPP project. The composition of the tender

commission shall be formed and approved by the public partner. In respect of the projects to be approved by the Government, the tender commission shall be formed and approved by the Government. The tender commission shall have an odd number of members of at least 5 people. The tender commission shall include a representative of the authorized public agency, a specialist having experience and knowledge in respect of the relevant infrastructure asset, a specialist in the field of economics or finance, a specialist in the field of law, and a representative of the local community directly impacted by the PPP project. The members of the tender commission may be subject to qualification requirements approved by the authorized public agency. The members of the tender commission must not have conflict of interest in respect of the project concerned.

3. The procedure for formation, approval, as well as the operations and powers of the tender commission shall be in accord with this Law and regulations enacted by the Government.

Article 20. The Tender Process

1. The tender process shall consist of two stages: pre-qualification and selection of the winning bidder.

2. The tender commission shall pre-qualify private partners having sufficient capability and qualification necessary to implement the PPP project.

3. The tender commission shall publish an invitation to participate in the pre-qualification stage in the mass media and on the official website of the authorized public agency. The text of the invitation shall be in the state and official languages and where necessary in foreign languages. From the date of the publication of the invitation, the tender commission shall make the tender rules and tender documents publicly accessible. The bids for participation in the pre-qualification shall be submitted within 30 calendar days following the date of publication of the invitation to the tender.

4. Upon expiration of the term specified in paragraph 3 of this Article, the tender commission shall, within 30 calendar days, evaluate each private partner’s pre-qualification bid. Based on the evaluation results, the tender commission shall send an invitation to participate in the winner selection stage of the tender to the pre-qualified private partners. The number of the pre-qualified private partners must not be less than 2. Otherwise, the tender shall be declared void.

5. The pre-qualified private partners shall submit their proposals within the term set by the tender commission but not less than 30 calendar days of receipt of the invitation to participate in the winner selection stage of the tender.

6. The tender commission shall evaluate the private partners’ proposals within the time limits specified in the tender documents, but not more than 60 calendar days following the end date specified under Article 5. The proposals shall be evaluated in two stages. At the first stage, the tender commission shall assess whether the private partner meets the qualification requirements set forth in the tender documents. The proposals which do not meet the said requirements shall be rejected. The proposals selected at the first stage shall be evaluated at the second stage for compliance with social, financial and economic criteria set forth in the tender documents.

7. The tender commission shall announce the winning bidder within 5 working days of the tender commission’s decision on selection of the winning bidder.

8. All documents and information provided to the tender commission by the tender participants shall be deemed confidential. The members of the tender commission shall be prohibited

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from providing the received documents (their copies) or information to third parties, including other private partners participating in the tender, or using such documents (their copies) or information for the purposes other than the evaluation of the proposals received during the tender.

9. The procedure for preparing the tender rules and tender documents are governed by this Law and regulations adopted by the Government.

Article 21. Parties to PPP Agreement and governing law applicable to a PPP agreement

The PPP agreement shall be concluded between the public partner and the private partner announced as the winning bidder. In addition to the said parties, the party to the agreement may be a project company. The PPP agreement shall be governed by the legislation of the Kyrgyz Republic. Article 22. Mandatory provisions of a PPP agreement

The PPP agreement must contain the following mandatory provisions:

- Subject and object of the PPP agreement; - Rights, obligations and liabilities of the parties; - The term of the PPP agreement; - The minimum scope, procedure of providing and quality standards of infrastructure services

made and/or rendered in the process of the PPP project implementation, and the payment mechanisms for infrastructure services;

- terms and conditions of financing the PPP project; - types and conditions of providing the government’s financial and economic support, if any; - distribution of risks, among the parties to the PPP agreement, associated with implementation

of the PPP project; - guarantees of performance of the agreement in respect of works and operation; - procedure for application of tariffs or charges related to the infrastructure services, as well as

methods and formulas of calculation of such tariffs or charges; - procedure for possession and use of any infrastructure asset transferred by the public partner

to the private partner in order to implement the PPP project; - methods of securing the obligations of the parties to the PPP agreement; - procedure for monitoring and evaluation of the PPP project; - requirements for insurance of the PPP project; - procedure for assignment of rights under the PPP project to financial institutions; - procedure for return to the public partner of the infrastructure asset and other rights conferred

in connection with the performance of the PPP agreement at the expiration of the agreement; - environmental and operational safety requirements to be observed during the PPP project

implementation; - the procedure for resettlement and the payment of appropriate compensation if the PPP

project involves the resettlement; - actions of the parties in the event of force majeure; - procedures for the compensation for damage caused by the adoption of the regulations

worsening the PPP project implementation conditions for the private partner as compared to the conditions set forth in the PPP agreement;

- procedure and conditions for amending, extending and terminating the PPP agreement, including the grounds for early termination of the PPP agreement and the procedure for compensation for damage caused by the early termination of the PPP agreement;

- the governing law and mechanisms of resolution of disputes arising out of the PPP agreement and associated with the PPP project implementation.

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Article 23. Other provisions of a PPP Agreement In addition to mandatory provisions specified in Article 22 hereof, the PPP agreement may contain other provisions to the extent not contradicting the legislation of the Kyrgyz Republic. Article 24. Time limits for executing a PPP agreement

1. The PPP agreement shall be concluded within not more than 60 calendar days after the winning bidder is publicly announced in mass media.

2. Unless otherwise specified in the PPP agreement the private partner must be provided not less than 120 calendar days from the date of the announcement of the winning bidder is published in mass media to complete the conclusion of agreements with a financial institution to finance the PPP project.

3. If upon expiration of the time limit specified in paragraph 1 of this Article, the winning bidder fails to sign the PPP agreement, the tender commission has a right to disqualify the winning bidder and announce the private partner who won the next place as the winning bidder.

4. When the winning bidder is announced by the tender commission, the public partner may not unilaterally refuse to conclude the PPP agreement, and the tender commission may not cancel the results of the tender except if the tender commission reveals that information provided by the bidder is misleading which is confirmed by a documentary evidence. Article 25. Assignment of rights and obligations of private partner and project company under a PPP agreement The rights and obligations of the private partner and the project company may be assigned to the financial institutions providing finance for the PPP project implementation with the prior written consent of the public partner. Article 26. Term and extension of a PPP agreement The PPP agreement can be concluded for a period of up to 50 years. The period of the PPP agreement may be extended in cases specified in the PPP agreement. Article 27. Termination of a PPP agreement

The PPP agreement may be terminated in the following cases: - upon expiration of the term of the agreement; - by mutual written consent of all parties to the agreement; - by an initiative of one of the parties to the agreement in the manner required by the agreement; - by a decision of a body or person authorized by the parties to resolve disputes; - in the event the project company or private partner is dissolved or declared bankrupt (insolvent).

Article 28. Implications of termination of PPP agreement

1. If the PPP agreement is terminated, the private partner and the project company must undertake the following actions, unless otherwise stipulated in the PPP agreement:

1) transfer to the public partner of the infrastructure and other assets received from the public partner free and clear of any encumbrances or liens of third parties as provided by the agreement;

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2) train personnel of the public partner in the operation and maintenance of the infrastructure asset;

3) ensure continuity of the provision of ancillary services and supply of resources including spare parts, if required, within a reasonable time after transfer of the infrastructure and other assets to the public partner.

2. The early termination of the PPP agreement due to the fault of one of the parties to the PPP agreement shall entail an obligation to compensate the other party for damages incurred.

Article 29. The Project Company

1. The private partner announced as the winning bidder has a right to establish a project company to implement the PPP project in accordance with the legislation of the Kyrgyz Republic.

2. The public partner may act as a co-founder of the project company, provided that its shareholding shall not exceed one third of the equity of the project company and such shareholding is not prohibited by the legislation of the Kyrgyz Republic. The requirements for the public partner in the project company must be stipulated in the tender documents and the PPP agreement.

3. Termination of project activities, the mortgage of property, transfer or pledge of shares (in property, shares) in the project company, change of the authorized (equity) capital of the project company shall be made only with a prior written notice to the public partner and the authorized public agency, unless otherwise specified in the PPP agreement. Article 30. PPP project financing

1. The private partner and the project company have the right to borrow, obtain loans or credit or to use other methods of financing the PPP project.

2. To finance the PPP project, the private partner may pledge its own property and use other methods of securing its obligations without consent of the public partner.

3. The publicly or municipally owned property transferred to the private partner or project company for temporary possession and use, may be pledged, unless otherwise provided in the PPP agreement. Article 31. Rights of consumers of infrastructure services

1. Unless otherwise provided by the legislation of the Kyrgyz Republic or the PPP agreement, in the course of the PPP project implementation the project company must ensure an equal treatment of consumers of infrastructure services.

2. The relations between the project company and consumers of infrastructure services are subject to the legislation of the Kyrgyz Republic on consumer protection, technical regulation and other regulations.

Article 32. Monitoring and evaluation of PPP project implementation

1. Monitoring and evaluation of the PPP project shall be carried out by the public partner. The authorized public agency may also monitor and evaluate the PPP project.

2. Annually, by not later than the 1st of May each year, the private partner or the project company shall submit to the public partner and the authorized public agency a report on the PPP project and a financial report for the previous year. The annual report on the PPP project, if it is submitted by the project company, must be preliminarily confirmed by the private partner. The annual financial report must be preliminarily confirmed by an independent auditor.

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3. The monitoring and evaluation procedures shall be regulated by this Law and regulations adopted by the Government and within the PPP agreement.

Article 33. PPP projects registry

1. The authorized public agency shall keep a registry of PPP projects. 2. The purpose of keeping the registry is to maintain the full, timely and accurate record of

overall information on all PPP projects implemented in the Kyrgyz Republic. 3. The data contained in the registry shall be available to all interested parties. The rules for

keeping the registry shall be adopted by the Government. Article 34. Dispute resolution

1. All disputes arising out of or in connection with the procedure of selection of private partners shall be settled in the courts of the Kyrgyz Republic.

2. All disputes arising out of, or in connection with, the conclusion, performance and termination of the PPP agreement shall be settled by negotiation in accordance with provisions of the PPP agreement. If the dispute cannot be settled by negotiations, the dispute shall be settled by the body determined by the parties in the PPP agreement. The parties to the PPP agreement may determine that the courts of the Kyrgyz Republic or arbitration tribunals of the Kyrgyz Republic or international commercial arbitration institutions will be the acceptable venue for dispute resolution.

3. All disputes arising out of, or in connection with, the provision by the private partner or the project company of infrastructure services to consumers in the course of the PPP project implementation, shall be settled in the courts of the Kyrgyz Republic. When executing the PPP agreement, the public partner may demand that the private partner or the project company establish simple and efficient mechanisms to resolve such disputes as a method for pretrial dispute resolution.

Article 35. Entry into force of this Law

1. This Law shall enter into force upon expiration of three months following the date of the official publication.

2. The Government of the Kyrgyz Republic shall undertake the following within six months after the publication of this Law:

A. amend its regulatory legal acts to comply with this Law; B. ensure the enactment of the implementing regulations for this Law.

3.From the date of entry into force of this Law, the Law of the Kyrgyz Republic “On Public-Private Partnership in the Kyrgyz Republic” dated May 11, 2009 No. 154 (Bulletin of Jogorku Kenesh of Kyrgyz Republic, 2009, No5, page 471) shall be deemed null and void.

President of Kyrgyz Republic A. Atambaev City of Bishkek 27 February 2012 No 7 NOTE: Final Translation above by Robert Brown under ADB TA 7819. The definitive version is the original law in Russian. The sub section numbering and formats above remains as in the original for ease of reference.

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b. Assessment of the Compliance of the Kyrgyz Republic PPP Law of February 2012 (the

PPP Law)-By Robert Brown

1. Executive Summary

a. The purpose of this review is to assess whether the PPP Law as enacted in February 2012 complies with policy conditions under SP2 of the ICIP program.

b. The assessment has been made by reference to the EBRD ‘Core Principles’ (of Concession laws) which themselves include and reference other sources and especially those from UNCITRAL.

c. It should be noted that the Kyrgyz PPP Law covers a wider range of PPP modalities than only ‘concessions’.

d. There are ten EBRD Core Principles which we reproduce below and the Consultant makes comment after each Principle as to how far the Consultant considers that the PPP Law of 2012 meets those Principles.

e. The Consultant considers that the PPP Law fully meets best international practice related to many Principles, such as providing a legislative sound basis and detailing PPP project support. Other Principles, such as clarity of rules are largely met but with the need for comprehensive detailing of provisions through implementing regulations and guidelines. Therefore the Consultant considers that the PPP Law meets international ‘good’ practice rather than meeting every detail of international ‘best’ practice as described under the EBRD Principles.

f. Therefore, while we make a number of comments and recommendations, the overall assessment is that the PPP Law is compliant with the condition that it should be aligned with international best practices as referenced under the EBRD Core Principles.

g. The Consultant also notes that the PPP Law of 2012 fully meets the criteria under ADB TA 7067-KGZ undertaken in 2008/9 to support development of the PPP framework including PPP laws.

2. Introduction

The following is the assessment made by the PPP Consultant under SSTA 7819 KGZ of the PPP Law as enacted in February 2012 (subsequently the PPP Law). This independent assessment is required by the under SP2 of ICIP (and ADB's Legal Department) for ADB to confirm full compliance35 with the respective policy conditions under SP2. However, this assessment reviews and analyses to what degree the law meets international best practice as measured against UNCITRAL, OECD or any other standards for PPP legislation (model laws). An assessment related to financial criteria and risk is contained in the assessment on Risk Management Policy already prepared by the Consultant36. The EBRD Core Principles for a Modern Concessions Law (the Core Principles) of 2006 underpin this assessment. The stated purpose of the Core Principles is to identify and promote sound modern principles of concession laws. By promoting clearness, fairness, stability, predictability and flexibility among their major objectives, the Core Principles aim to protect both investors and the public sector

35 D.1.1 Align the legal framework for PPP with international best practices and develop an overall policy framework for PPP projects that

establishes criteria for financial support and risk-sharing. 36 February Progress Report of the Consultant under TA 7819 KGZ

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from unfair treatment and abuses, thus promoting much increased investment and national socio-economic growth.

3. The EBRD Core principles for a Modern Concession Law37

The Core Principles are based on key internationally accepted standards and best practices and the following were mainly used in their drafting:

• UNIDO Guidelines for Infrastructure Development through Build Operate Transfer (BOT)

Projects, 1996 (UNIDO BOT Guidelines); • OECD Basic Elements of a Law on Concession Agreements, 1999-2000; • UNCITRAL Legislative Guide on Privately Financed Infrastructure Projects, 2000 (UNCITRAL

Legislative Guide); • UNCITRAL Model Legislative Provisions on Privately Financed Infrastructure Projects, 2003

(UNCITRAL Model Legislative Provisions). The UNCITRAL Legislative Guide and the UNCITRAL Legislative Provisions are stated as the primary sources used for drafting the Core Principles as they closely relate to concession-type projects and provide guidance as to the effective legal framework aimed at fostering an attractive investment environment for privately financed projects. The other source documents were used mostly as general guidelines. EBRD lists 10 principles for a PPP (Concession) Law which aims to protect both investors and the public sector from unfair treatment and abuses, thus promoting investment. These are summarised and related to the PPP Law of 2012 in Section 4 following.

4. Principles of a sound PPP law with reference to the Kyrgyz PPP Law of 2012 a. Principle 1: A PPP law should be based on a clear policy for Private Sector

Participation. A clear government policy/strategy for Public Private Partnerships (PPP) is important for signalling the commitment of the government to develop a stable and attractive investment environment and to reflect its efforts in improving the legal environment. Consultant’s Comments: The PPP policy should ideally be prepared in advance of the PPP law. Discussion has been on-going to prepare such a policy under TA 7819 KGZ but little progress has been made so far, only due to time constraints. Even though the PPP policy document cannot now be prepared before the Law, it remains an important part of the PPP Framework and given the enactment of the Law, should not be too difficult. It should be prepared as part of the GOK’s Action Plan and as soon as possible.

b. Principle 2: The law should create a sound legislative foundation for concessions and other PPP modalities.

Effective participation of the private sector through PPPs and the effective functioning of the PPP regime require a sound enabling legal framework. An enabling legislative foundation is important for establishing roles and responsibilities of all parties and for estimating ‘country’ risk by potential investors. The legal framework should foster a clear, fair, predictable and stable legal environment

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for concession projects. The importance of solid concession legislation not only for clarity and stability but also for signalling a political commitment of the state is also emphasized. Consultant’s Comments: The PPP Law is sufficiently clear and signals the commitment of the Government to the principle of PPP. While much work is required on related resolutions and guidelines to implement the Law comprehensively, the key elements of a PPP law are provided under the PPP Law. In particular, the PPP Law includes;

i. Definitions ii. Sectors and types or projects to which the Law applies

iii. Four levels of Government responsibility iv. Stages in Project Preparation v. Projects initiated by the Private sector

vi. Tendering procedures and tendering time limits for both the private sector and public sectors

vii. Key components of the PPP Agreement Work on related laws, codes, implementing regulations and guidelines is required to be completed, before the PPP Law can be comprehensively implemented according to the Principles.

c. Principle 3: The PPP law should provide clarity of rules. A PPP law should be predictable in its application, to provide stability and validity of the concession agreement as well as for the prevention of ungrounded arbitrary actions by the contracting authorities. With this purpose, the PPP law should provide an exhaustive definition of a “concession”, a list of sectors concerned, contracting authorities, and eligible concessionaires. The importance of identifying in the law, the bodies/officials at various levels of government empowered to act as contracting authorities as well as sectors in which concessions may be awarded are stressed.

Consultant’s Comments: As noted under Principle 2, the scope of the PPP Law is comprehensive but should/must be fully detailed under implementing regulations and guidelines. There is not an exhaustive definition of types of concessions or PPP agreements as the PPP Law requires the various PPP modalities be defined in implementing regulations. However, a PPP agreement is well defined under the PPP Law. The authority of the four levels of government involved in the various stages and types of PPP implementing activities are quite comprehensively described being Government (including policy, laws, and approvals etc.), PPP Authority (advisory), Risk Management Unit and Public Partner (Executive Body) the latter with authority as the contracting agency. Guidelines are needed to detail the procedural framework, responsibilities and activities of these bodies. Sectors allowed and eligible concessionaires are described fully.

d. Principle 4: The PPP law should provide a stable and predictable legal framework.

Generally, PPP projects are long-lasting. However, many different factors influencing projects may change in the course of their implementation, one of them being legislation. The risk of changing legislation may endanger the validity of the project agreement and thus the sustainability of the project itself. In order to ensure the stability of the project agreement and the parties’ capacity to carry out their rights and duties, the state should avoid frequent changes to concession-related

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legislation and the concession law should foresee a mandatory provision in the agreement stipulating the surviving applicability of the regime in force at the moment of agreement or other mechanisms for dealing with legal risks. The PPP law should require the concession agreement to address the potential legal risk and set forth provisions regarding compensation for the negative consequences of legislative changes as well as mechanisms for revising the terms of the agreement following the occurrence of such changes. The OECD Basic Elements of a Law on Concession Agreements also contain a so-called “stability clause” that is meant to protect the concessionaire from the possible changes in legislation. Consultant’s Comments: The PPP Law provides guarantees against activities by GOK which would negatively impact private partners’ projects. Mechanisms are not elucidated but are planned to be elucidated under implementing regulations.

e. Principle 5: The PPP law should promote fairness, transparency and accessibility of concession rules and procedures.

Explanation: This principle relates to the fairness, transparency and accessibility of the rules and procedures governing the selection of concessionaires, awarding and further implementation of a concession. Under this principle, the PPP law should foresee the process which would guarantee a transparent and competitive selection process (including exceptions from competitive procedure), equal treatment of potential investors, opportunity to challenge the rules and decisions of contracting authorities and competitive rules for unsolicited proposals. Consultant’s Comments: In general the PPP Law provides fairness, transparency and accessibility of rules related to procurement of the private partner, including for unsolicited projects (under the PPP Law, these are called “projects initiated by the private partner”). The PPP Law does not include exceptions to competitive procedures and any opportunity to challenge the rules are lacking. However, these may be relatively minor weaknesses to be corrected subsequently, but they are not perceived as being fundamental flaws in the Laws.

f. Principle 6 PPP law should be consistent with the country’s legal system and particular laws.

PPP law should be consistent with the rest of the country’s legislation so as to avoid unnecessary collisions of laws and inconsistency in their application. Appropriate amendments should be made to legislative acts to ensure the coherence and consistency of the legislative base. Consultant’s Comments: The need for consistency with other laws and regulations has been recognized by the GOK and the Action Plan38 prepared by the GOK lists 10 laws and 3 Codes that need to be amended. GOK has requested support from ADB to help with these requirements and local legal consultants are planned to be mobilized in April 2012.

g. Principle 7 The PPP law should allow for negotiability of concession agreements.

Freedom to negotiate concession agreements is important because it allows the factoring in of a greater variety of circumstances while allocating risks between the parties and thus elaborating a more creative and financially efficient approach to risk allocation. Successful implementation of this

38 See TA7819 Progress Report for February 2012

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principle also requires the clear identification in the concession law of the body authorised to negotiate the agreement, implement and monitor the performance under the agreement, including the clear division of powers between central and local authorities. Ideally, it is important to identify persons or offices empowered to enter into commitments at different stages of agreement negotiation. It is also important to foresee in the concession law the proper allocation of powers between the different levels of government (central and local authorities) during the negotiation and implementation of the project, in order to consider a wide range of factors and thus allocate risks effectively. Consultant’s Comments: The PPP Law includes negotiations under Article 15 related to Stages of a PPP Project. The contents of the Agreement can include negotiations and any other aspects of the contract that need to be specified unless contrary to Kyrgyz law or regulations. However, implementing regulations need to detail principles for, and procedures and authorized bodies related to, negotiations.

h. Principle 8 The PPP law should allow for enforceable court or arbitral determinations.

A PPP law should ensure the possibility to protect the rights and interests of both parties under an effective system of dispute resolution (including the possibility for international arbitration and enforcement of arbitral awards). This principle is especially important for creating a more secure, predictable and attractive climate for investors. Consultant’s Comments: Under the PPP Law, all disputes arising out of, or in connection with, the conclusion, performance and termination of the PPP agreement shall be settled by negotiation in accordance with provisions of the PPP agreement. If the dispute cannot be settled by negotiations, the dispute shall be settled by the body determined by the parties in the PPP agreement. The parties to the PPP agreement may determine that the courts of the Kyrgyz Republic or arbitration tribunals of the Kyrgyz Republic or international commercial arbitration institutions will be the acceptable venue for dispute resolution. When executing the PPP agreement, the public partner may demand that the private partner or the project company establish simple and efficient mechanisms to resolve such disputes as a method for pretrial dispute resolution.

The PPP Law therefore generally meets the requirements of this Principle. However, it should be noted that the PPP Law also specifies that:

i. All disputes arising out of or in connection with the procedure of selection of private partners shall be settled in the courts of the Kyrgyz Republic.

ii. All disputes arising out of, or in connection with, the provision by the private partner or the project company of infrastructure services to consumers in the course of the PPP project implementation, shall be settled in the courts of the Kyrgyz Republic.

The PPP Law also includes that “the governing law and mechanisms of resolution of disputes arising out of the PPP agreement and associated with the PPP project implementation” shall be mandatory provisions of the Agreement.

i. Principle 9 The PPP law should allow for state undertakings (to support) and guarantees.

It is important that a PPP law contains provisions that allow the government a possibility to support the project financially or guarantee the contracting authority’s proper fulfilment of its obligations. Government support is often essential for increasing the level of comfort of potential investors, enhancing the attractiveness of investment as well as for supporting the execution of projects. It should also contain clear provisions with regard to both the type of authorities that may provide support and the type of support provided.

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Consultant’s Comments: The PPP Law contains several detailed Articles (12, 13, 14) related to Support and Guarantees. The types of the authorities that may provide support are not specified but may be in implementing regulations.

j. Principle 10 The PPP law should accommodate security interests.

As a rule, only approximately 30% of a concession project is financed by the concessionaire itself. The other 70% is usually borrowed from the banks (lenders) under a security arrangement according to which the concessionaire gives to the lenders security over its rights under the concession agreement. However, in order for this security to be effective, the state should also provide an assurance that in case of the security’s enforcement, the proper procedures would allow the concession to be carried out and the lenders to “step-in” to the concession agreement. Thus, this mechanism guarantees the continuation and sustainability of the concession project and effectiveness of the investment. Consultant’s Comments: Article 25 states that “the rights and obligations of the private partner and the project company may be assigned to the financial institutions providing finance for the PPP project implementation with the prior written consent of the public partner”. Also under Article 22, Mandatory Provisions, the “procedure for assignment of rights under the PPP project to financial institutions” shall be specified in the Agreement.

5. Consistency with the previous ADB TA

A previous ADB TA supported PPP development in the Kyrgyz republic. This was TA 7067-KGZ; Investment Climate Improvement Program (Infrastructure Component). It concluded in a succinct fashion in 2008/9 that based on UNICITRAL and other international experience of PPP laws that;

“The conclusion can be drawn that apart from specifying the various sectors and PPP types covered, a good PPP law should outline the institutional arrangements for PPP projects, specify the government agencies acting as the public sector partners, and assign the responsibility for PPP project identification and preparation. Equally important, the law should stipulate the rules, procedure and responsibility for the selection of the private sector partners and describe the procedure for handling unsolicited PPP project proposals from private investors”.

Consultant’s Comments: The PPP Law of 2012 would meet satisfactorily, in his opinion, all of these criteria.

Key Abbreviations

EBRD European Bank for Reconstruction and Development OECD Organization for Economic Development and Cooperation UNCITRAL United Nations Commission on International Trade Law UNIDO United Nations Industrial Development Organization

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c. MOF RMU Policy in English

The Financial Risk Management Policy for PPP Projects in the Kyrgyz Republic

1. General Provisions

The Financial Risk Management Policy on PPP projects (the Policy) described herein is designed in accordance with the Constitution of the Kyrgyz Republic, the Law “On Public-Private Partnership in the Kyrgyz Republic” (as of 22.02.2012 #7) and the regulations of the Kyrgyz Republic39. The Policy aims to ensure effective financial control of the implementation of public private partnership projects (hereinafter PPP). Under the PPP Law, to help implement PPP projects, a public partner has the right to grant, or assist in the provision of, government financial assistance to a private partner and or a project company. The Policy defines goals, objectives and principles of financial risk management for PPP projects.

2. Goals and Objectives of Policy The goal of this Policy is to ensure efficiency and transparency in procedures for the allocation of funds from the State budget for the implementation of PPP projects, as well as consistency and timeliness of the adoption of appropriate measures to manage financial risks. The financial risk management Policy is aimed at: - Creating the conditions necessary to effectively identify, allocate and manage financial risks; - Ensuring efficient and effective implementation of budget liabilities for PPP projects; - Supporting the implementing of priority and publicly significant projects. Objectives of Financial Risk Management Policy: - Carrying out analyses of the fiscal risks of PPP projects financed by the State budget; - Evaluating qualitative and quantitative features of PPP projects to verify their compliance with established criteria; - Applying measures related to identifying and taking appropriate decisions for the effective management of financial risks. - Creating an effective financial risk management system for PPP projects.

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Including Decree#116, 20/7/2011 on Duties and Structure of the MOF-RMU

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3. Basic Criteria for Financial Support The implementation of Policy is based upon a comprehensive assessment through Due Diligence that ensures early identification of financial risks and prompt steps to enable effective and efficient decision-making that will help eliminate or mitigate the above risks related to the proposed PPP projects. Criteria for financial support: - Legality means any activity within the field of financial risk management policy is carried out in

accordance with the legislation of the Kyrgyz Republic and internationally recognized norms. - Quality Project means a PPP project must meet all requirements established by the PPP legislation

related to project preparation, tendering and selection of the private partner. - Fiscal Prudence means that necessary steps are taken to prevent contingent budget liabilities

and/or mitigate fiscal risks that may emerge in the course of implementation of PPP projects. Also that the support does not breach planned parameters of involvement and fiscal cost/budget expenditure. Financial Risk Management Policy must be committed to the immutability principle. Any modifications to it must be approved and substantiated.

- Responsibility means any party to a PPP project, including government agencies, while putting

forward an initiative or joining into the implementation of the PPP project, must bear responsibility for the consequences of the actions taken. The principle in question seeks to increase the efficiency of every participant in the PPP project.

- Transparency means financial risk management process must be implemented openly and

transparently. Financial support should be as transparent as needed to ensure the meeting of objectives. Any PPP party must be granted access to information on PPP project progress.

- Consistency means that proposed support is consistent with the government’s policies and sector development programs.

4. Allocation of Financial Risks

Financial risk management involves the effective and detailed analysis of financial risks under the PPP project framework, i.e. identification, quantitative assessment, and allocation of risks identified either by the public or by private partners during pre- and full feasibility studies. Therefore, financial risk management includes risk analyses at early stages to achieve Policy objectives. The fundamental basis of financial risk management is the principle that risks must be allocated between/among parties that are best suited to handle and minimize those. This principle assumes that financial risks are allocated adequately and with consideration of circumstances. Financial risks may be allocated according to three broad categories:

a) Risks assumed by a government; b) Risks assumed by private sector;

с) Risks shared by both the government and private sector.

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5. Authorized Financial Risk Management Agency The Ministry of Finance is authorized body on financial risk management on PPP projects. Ministry of Finance of the Kyrgyz Republic concurs with PPP projects, bidding documentation and PPP agreements. The Ministry of Finance will develop indicators and procedures to implement the financial risk management Policy. The Ministry of Finance shall monitor and evaluate the implementation of PPP projects.

6. Final Provisions

Financial Risk Management Policy for PPP projects is a document that establishes the goals, the objectives and the principles of financial risk management and determines the position of the Government with regard to PPPs as one of the priority economic development areas. Effective implementation of this Policy will be ensured through the practical implementation of priority programs and projects under the framework of government economic policies. The development of the methodology for the detailed financial risk assessment of PPP projects shall be made during Policy implementation. NB: Final Draft agreed March 2012

a. Draft GOV decree on authorization of PPP public bodies (By MEAP)

Received May 14th 2012

“To implement the Law on the PPP government decides:

1. Determine the MEAP as authorized public agency on PPP, and assign to it the following duties:

implementing public policy and PPP development programs in the Kyrgyz Republic;

submitting proposals to the Government on public policy and PPP development programs, or drafting and making amendments or supplements to regulatory legal acts of the Kyrgyz Republic on the PPP matters;

submitting annual reports on implementation of public policy and PPP development programs to the Government;

assisting the public partners in searching for, and selecting, prospective PPP projects, in preparing tender documents, and in implementing the PPP projects;

evaluating proposals to initiate PPP projects and the tender documents prepared by the public partners;

developing and adopting guidelines, instructions, regulations, rules and other documents necessary for the unified application of the provisions of this Law for PPP participants;

providing clarification to all persons concerned regarding the implementation of policy and programs and the application of the PPP legislation;

informing the public on all matters related to the PPP project preparation and implementation that are not related to proprietary information under the legislation of the Kyrgyz Republic;

collecting and analyzing information about initiated and ongoing PPP projects;

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keeping a register of PPP projects;

organizing PPP training for public partners, private partners and all stakeholders concerned with the implementation of PPP projects;

exercising other powers conferred by this Law and PPP regulations adopted by the Government.

2. To define Ministry of Finance as the state authority on financial risks and assign to it the following

duties:

Concurrence with PPP projects, tender documents and PPP agreements involving the provision of the government’s financial support from the State budget and/or the municipal budget, special funds, or other means not prohibited by the legislation;

providing an opinion on the risks of the PPP projects which do not envisage the provision of the government’s financial support from the State budget;

Developing and adopting guidelines, instructions, regulations, rules and other documents for the provision of state financial support from the state budget, in accordance with the PPP Law.

3. To establish that certain functions of the authorized state body and public authority on risk

management can be transferred to subordinate structural bodies according to the legislation.”

========================

Subsequently:

b. Ministry of Finance has the following comments and proposals on the draft GOV decree on

authorized government agencies for the PPP:

In accordance with its Provision, the Ministry of Finance analyzes the threats and risks of the state

budget execution. Also, the Ministry plans to adopt regulations for the financing of PPP projects

under "capital investment" and "incentive grants" budget lines. Existing legislation stipulates that

the Ministry of Finance formulates objects for financing under the above budget lines.

In accordance with the above, the Ministry proposes to revise the paragraph 2 of the draft GOV

decree as follows:

2. To define Ministry of Finance as the state authority on financial risks and assign to it the following

duties:

- to agree PPP projects, tender documentation and PPP agreements, to give an opinion on financial

risks on PPP projects which includes financial support from the state budget and / or the municipal

budget, special funds, or other means not prohibited by the legislation;

- to develop and adoption of guidelines, instructions, regulations, rules and other documents to

regulate provision of state financial support from the state budget, in accordance with the PPP law.

2.1. To determine that authorized public agency and public partners are public bodies to manage

other risks (political, legal, sectoral and others) and assign the following functions:

- to give an opinion on the risks of PPP projects that do not include the provision of state support

from the state budget.

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Subsequently:

d. Comments to MEAP/MOF on the Risk Management Policy (From RG Brown, TA 7819 Consultant) 15/05/12

The PPP Law of 2012 states that ‘The authority of the public risk management unit includes:

- Concurrence with PPP projects, tender documents and PPP agreements involving the provision of the government’s financial support from the State budget;

- providing an opinion on the risks of the PPP projects which do not envisage the provision of the government’s financial support from the State budget’.

Although this is an analytical requirement covering the review of the assessment (identification, allocation, mitigation) of risks (already) carried out by the public partner/PPP Authority, MOF are concerned about a number of issues including;

1. That they cannot assess sector risks, political risks etc. 2. That this requirement leaves them responsible for contingent liabilities that may result from

contractual problems after implementation of a PPP contract 3. That they have no budget and staff to undertake these additional PPP related tasks as

required under the law

(It is not clear if these are three independent issues or, if MOF has a bigger budget, it could undertake items 1 and 2 above).

The revisions proposed by MOF would not seem to be compliant with the Law or the intention of the Law, or good PPP practice.

As was indicated in the Guidelines produced for MOF/RMU by the Consultant in March 2012, the MOF will be a key player in specific aspects in the preparation of the PPP feasibility study (FS) that must be prepared by the public partner for every PPP project. The FS will also be formally submitted to MOF for its consideration.

MOF should/will be involved informally in the TOR for the FS which will include a financial analysis and comprehensive risk assessment (all risks) whether any government support is involved or not. In all or most cases, the FS study will be carried out by professional advisers/consultants.

MOF’s role is then to review the FS already undertaken and it should ensure (through the TOR) that all aspects which are of relevance to them are covered in every FS. However, all risks have, ultimately, financial implications. I suggest the following draft (compromise) resolution might be a basis for further discussion with MOF;

To define Ministry of Finance as the state authority on PPP risk management and assign to it the

following duties:

1. to concur PPP projects, tender documentation and PPP agreements, which include financial

support from the state budget and / or the municipal budget, special funds, or other means

not prohibited by the legislation;

2. to give an opinion on the comprehensive risk assessment provided by (or through, for

projects initiated by the private sector) the designated executing agency for each

submitted/proposed PPP project, and especially on the financial risks and financial

implications of each PPP project for the State Budget

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3. to develop and adopt of guidelines, instructions, regulations, rules and other documents to (i)

regulate the provision of state financial support from the state budget and (ii) for risk

assessment reviews for all projects in accordance with the PPP law.

4. The MOF shall also assist the public partner and the public authority in the field of PPP in the

monitoring and prevention of all possible risks with financial implications for the State

Budget during the implementation stages of the PPP agreement.

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e. DRAFT SUMMARY GUIDELINES for RMU Activities

Prepared by Consultant in March 2012 and extended in May (shown in item f.)

1. PPP Projects Initiated by the Government (Solicited Projects)

Stage Activity Action by RMU i. Initial PPP Project

Preparation PPP Project Brief Oversight and comment on fiscal implications,

risks, support. Desirable but optional action.

ii. TOR for Evaluation / Feasibility Study

Designing and planning the project Study

Commenting on the TOR: Ensuring inclusion of proper risk assessment. Highly desirable.

iii. Evaluation / Feasibility Study

Undertaking the Study of the PPP project

Commenting on Draft Reports: Ensuring adequate assessment is undertaken and commenting on analyses, conclusions and recommendations.

1. Risk identification 2. Risk analysis, quantification 3. Risk allocation 4. Risk mitigation

Essential.

iv. Draft Concession Contract

Drafting of the terms of the contract

Commenting on the terms of the contract. Essential.

v. Negotiations Negotiating the terms of the finally agreed contract

Commenting on the negotiated terms. Essential.

vi. Implementation 1. Construction 2. Operations 3. Maintenance

Monitoring of the project and financial implications. Essential.

2. B. PPP Projects Initiated by the Private Partner (Unsolicited projects)

Stage Activity by RMU

i. Initial PPP Project Preparation by Private Sector

Preliminary Discussions by PS with GOK

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Review and commenting on any discussions relevant to RMU e.g. fiscal risks, support, other risks. Essential.

ii. PPP Project Preparation

Submission of Pre-Feasibility study to GOK

Review and commenting on the study. Essential.

iii. Draft Concession Contract

Drafting of the terms of the contract

Commenting on the terms of the contract. Essential.

iv. Negotiations Negotiating the terms of the finally agreed contract

Commenting on the negotiated terms. Essential.

v. Implementation 1. Construction 2. Operations 3. Maintenance

Monitoring of the project and financial implications. Essential

3. Application of the Summary Guidelines

Stage Activity Action by RMU

i. Initial PPP PPP Project Brief Oversight and comment on fiscal

40 By GOK , it is meant any of the PPP bodies or agencies involved in PPP

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Project Preparation

implications, risks, support

1. Introduction

The RMU should be prepared to consult with other PPP bodies and agencies at the earliest opportunity in order to avoid subsequent problems which may then be difficult to resolve.

This is an early consultation by the RMU with other key players. It will necessarily be an informal action by RMU. The Project Brief (an initial description of the project) should have a section on risks and the possible need for financial support.

2. RMU Responsibility

RMU should comment on whether the extent of any possible support could be available from the State budget, bearing in mind the subject project and other projects committed or in the pipeline. RMU should also make very general comments on the risks which will only be broadly identified at this stage.

RMU should ensure that the likely fiscal commitment is known to some extent at this stage, maybe under broad headings i.e. no support, little support, medium support and large support. There is no advantage in proceeding to the study stage if very substantial support is needed but very little fiscal budget is actually available. RMU should ensure that other PPP projects (requiring support) are prioritized. However, this will require a flexible approach as support needs will be refined continuously through the project preparation process only being finally known at contract finalization stage. Further project structuring or support outside the fiscal budget e.g. land, tax holidays etc. may be decided at a later stage in project preparation.

ii. TOR for Evaluation / Feasibility Study

Designing and planning the project Study

Commenting on the TOR: Ensuring inclusion of proper risk assessment

1. Introduction

At this stage the GOK has (probably41) agreed to proceed to commissioning an evaluation/feasibility

study of the PPP project. Therefore this stage involves the drafting of the Terms of Reference (TOR)

for the Study, and RMU should ensure the TOR includes all of the aspects and concerns that the MOF

RMU need to be covered by the Consultants.

2. RMU Responsibility

iii.Evaluation / Feasibility Study

Undertaking the Study of the PPP project

Commenting on Draft Reports: Ensuring adequate assessment is undertaken and commenting on analyses, conclusions and recommendations.

1. Risk identification 2. Risk analysis, quantification 3. Risk allocation 4. Risk mitigation

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It would be unlikely that TORs are prepared and not implemented but that may occur in some cases.

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1. Introduction

The evaluation of the project or evaluation/feasibility study is the central component of the project preparation stage. It is therefore most important that RMU takes an interest and is fully engaged in the study analyses. The RMU will have been involved in the TOR for the study, so the scope of work that is relevant to MOF RMU will already have been decided.

2. RMU Responsibility

At this stage the RMU will want to review all draft reports to ensure;

The relevant parts of the TOR are followed correctly

Any new elements are identified and included

The conclusions and recommendations of the financial analyses are consistent with MOF

RMU policy

In light of the above, RMU may wish to make comment to the Public Partner and/or the PPP

Authority on the output of the study.

Particular comments may cover the;

Legal basis of the project

Project conforms to sector and government policy

Adequacy and quality of the financial analyses

Adequacy of the risk management analyses42 including identification, allocation and

mitigation

Financial support is necessary and minimised

Amount of financial support may be within Budget limits

Support is responsible

Contingent budget liabilities are avoided/limited

Fiscal commitments can be direct or contingent.

Direct fiscal commitments may include;

Up front capital subsidy to private partner

Regular payments over the project lifetime based on;

o Project availability

o An indicator such as vehicle/kms

Direct commitments are estimated in the study stage and are the difference between project cost

and project revenue but can vary by demand or by exchange rates

Contingent liabilities

These may include;

Guarantees: Revenue, demand or exchange rate related

Compensation for damage or loss

Termination payments

Debt guarantees/credit enhancements

Contingent liabilities can be assessed by;

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Full lists of risks can be downloaded from the internet but in Appendix 1 and Table 1 we include a summary

of Risk Management practice and typical infrastructure risks respectively.

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Scenario analysis (More usual, easier but simpler)

Contingent liabilities can be estimated through best to worst case scenarios including estimated

defaults, exchange rate risks, guarantees, demand/traffic risk etc.

Probabilistic analysis (Infrequently applied, not easy but more comprehensive)

Sophisticated methods to estimate contingent liabilities are available but possibly better to ensure all liabilities are identified and quantified in the evaluation/feasibility study although RMU will need to understand and review such assessments.

iv. Draft Concession Contract

Drafting of the terms of the contract

Commenting on the terms of the contract

1. Introduction

This stage of preparation may be integrated within the above study or implemented as a separate component. Usually draft concession contracts are prepared at the end of the Evaluation/Feasibility study. If the PPP Authority has already prepared model (draft) concession documents, these will have been reviewed by the RMU.

2. RMU Responsibility

Assuming there are no model concession contracts available, the Public Partner (or PPP Authority) will prepare a draft concession contract for each project. The RMU will review this to ensure the RMU policy objectives are included as overriding elements in the draft.

v. Negotiations Negotiating the terms of the finally agreed contract

Commenting on the negotiated terms

1. Introduction

The private partner that is selected for negotiations will already have submitted its bid on the basis of the draft contract included within the Tender Documents. The tender of the private partner will include basic agreement to the terms of the draft contract but will often include requests to vary some clauses. These requests to vary the contract will form the basis of negotiations and will need to be considered carefully by all of the public agencies and especially the RMU which will assess these possible changes which usually have financial implications.

2. RMU Responsibility

As with the responsibility under iv. above, the RMU must assess the requested changes for financial and risk implications.

Affordability may be assessed by projecting expected payments forward against the budget or introducing a budget ceiling for all PPP payments including the current project being assessed.

vi. Implementation 1. Construction 2. Operations 3. Maintenance

Monitoring of the project and financial performance of the Project

1. Introduction

The Public agencies involved in the PPP project must develop sound and effective monitoring institutions and systems well in advance of the start of construction and operations. The RMU is a central party to the monitoring process.

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2. RMU Responsibility

The RMU must receive and analyse progress reports from the private partner on a regular basis and submit demands for information to the private partner should it need more data and data supplied more frequently.

Appendix to Guidelines: Risk Management Guidance The RMU needs to understand the fundamental principles of risk management together with frequently applied best practice. This appendix sets out some principles and common practice in identifying, allocating and mitigating risks.

The general approach to the minimisation of the financial implication of PPP project risks is discussed below and should form the central guidelines for the RMU

Risk Management comprises two key interrelated elements;

a. Avoiding risks through effective project preparation

Many direct and/or contingent liabilities arise from inadequate PPP project preparation. The RMU therefore needs to ensure that the project has been properly prepared. This means reviewing evaluation/feasibility studies to ensure;

i. The project has a sound rationale and is not excessively over-sized (6 lanes when 4 would be adequate in a first stage)

ii. Project costs are well prepared, comprehensive and include contingency iii. The cost benefit analysis is sound and the demand forecasts are realistic iv. Social impacts and especially land acquisition are fully assessed v. The need for financial support and guarantees are fully justified

vi. The project has been prepared by experienced advisors vii. The funding plan is realistic

viii. That there is no undue political interference (including to promote unjustified projects) ix. There has been adequate consultation x. Transparency

xi. Draft model contracts are effective This broad brush approach is then supported by reviewing the specific risks of the PPP project

b. Identification, allocation and mitigation of specific project risks

Risk management of projects comprises three main stages;

1. Risk identification:

There are many potential risks that may be encountered in a PPP project. Many of these are encountered under public procurement and the advantage of PPP is that appropriate risks are transferred to the private partner e.g. construction cost and time over runs.

The extent of risks will vary by type of PPP, and of course type of project, country etc. Maintenance contracts have significantly fewer risks to government than say BOOT.

RMU’s often group risks into those that need a common approach such as political, market and performance risks.

Risks that are frequently encountered in PPP infrastructure projects are shown in Table 1, with allocation and mitigation practices frequently applied.

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2. Risk Allocation

Risk should be borne by the partner best able to manage/mitigate at least cost. Maximising risk transfer to the private sector would then be self-defeating because if excessive risk is transferred to a party, it is not managed properly and/or the private sector will charge a higher risk premium which results in higher than necessary costs to the users.

Proper risk allocation should include incentives and penalties. Construction and operational risks are usually allocated to the private partner as they can manage them, with incentives and penalties for good and poor performance respectively.

As the table shows, risks are often shared where allocation to a single party will be less effective in managing the risks.

It is common practice that in exchange for shared risk with possible contingent fiscal support, the government claws back higher than anticipated profit in later years.

Regulatory risk is borne by the government as it controls the regulatory framework and can decide or not to ensure conditions agreed in the contract are adhered to, such as inflation based tariff increases. Compensation will be necessary to maintain investor confidence in the country if there are regulatory defaults.

3. Risk Mitigation

Risk mitigation means that both parties take appropriate steps to avoid or limit additional costs that may arise. A few risks are impossible or very difficult to mitigate such as natural disasters or terrorism.

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f. PPP PROJECT CYCLE - Risk Assessment Focused (Prepared for MOF RMU for Projects not

Requiring Financial Support)

PROJECT STAGE PROJECT OUTPUT

RISK ASSESSMENT Line Ministry (LM) (may include PPP Authority inputs)

MOF Function (in liaison with LM and PPP Authority)

Initial Project Planning PPP Project Brief Preliminary Responsible May have input (Working with LM)

TOR for Feasibility Study TOR for Consultant study

Includes requirement for Identification, allocation and mitigation of all risks

Responsible Must have input to TOR (Working with LM)

Project Feasibility Study Feasibility Study All Risks identified, allocated and mitigated

Responsible Comments and Inputs during study (Ensures risk assessment includes all MOF needs); Opinion at end

Initial Draft Contract: Government (MEAP, MOF, others) agreed Model Contract provides basis for specific Draft Contract for Project

Draft Project PPP Contract (based on pre prepared Kyrgyz model contract)

Risks allocated between private and public on preliminary basis by advisors

Responsible Opinion

Finalised Draft Contract Draft Contract Government agreed risk allocation

LM but based on agreement with LM, MOF, PPP Authority

Working with LM

Invitation to Tender Tender Proposals Proposals include risk agreement by potential private partners (Bidders)

Information Working with LM

Tender Evaluation Decision on Best Bid: Final Contract

Risks confirmed and allocated by GOK side

Evaluation (and Negotiation if necessary)

Working with LM

Operational Stage Monitoring reports Reports reviewed to ensure risks correctly dealt with

Responsible Working with LM

g. Table 1 General Risk Matrix for Infrastructure PPP Projects

Identified Risks Typical Risk Allocation Possible Risk Mitigation Measures

Item Description / Comments Shared GOK Private

1-Land availability / acquisition

Responsibility for ensuring ownership rights and giving possession without any incumbencies for land required for the PPP project.

The risk is that the project land is not available and has not been acquired. If the land has not been acquired the risk is compounded by uncertainty on costs and availability at the required time.

The GOK should make available the project land at the point of tender.

2-Landsite unsuitability

Unanticipated adverse physical conditions of the terrain.

The risk is that these are discovered.

The private sector entity should conduct proper due diligence on the site suitability for the specific type of project envisaged.

3-Environmental

Environmental impact and associated costs of mitigation.

The risk is that there are major adverse environmental impacts requiring major mitigation cost.

The private sector entity should conduct proper due diligence to assess any major environmental impacts and associated mitigation cost.

4-Health, Safety, and Permits/Licenses

Compliance with health, safety, and permits/licenses standards and regulations.

The risk is that these regulatory items are not complied with or have been obtained in a timely manner.

Government may undertake to expedite necessary approvals.

5-Availability & Transferability

Currency and profit repatriation.

The risk is that foreign currency is not available and profits cannot be repatriated.

The GOK provides a guarantee on currency availability and ability to repatriate profits. Multi-lateral assistance may be available. (E.g. MIGA, OPIC).

6-Operating Costs

Inflation.

The risk is that operating cost is higher than anticipated.

It is up to the private operator to manage efficiently and also there is an inflation factor in the tariff escalation formula.

7-Interest Rate Debt servicing.

The risk is that debt service cost is higher due to a rise in interest rates and thus the total cost of implementing the project.

The private sector entity could finance the project with a fixed-rate loan or use a hedge on interest rates. The financial structure should minimise restructuring risk.

8-Exchange Rate

Debt servicing.

The risk is that debt service cost is higher

The private sector entity could use currency swaps. Government and multi-lateral support may be available.

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because of currency fluctuation.

9-Market Cash flow risk (demand and pricing).

a. The risk is that actual demand is less than anticipated.

b. The risk is that the tariff is not adjusted according to the escalation formula agreed.

The GOK could provide a minimum revenue guarantee; the private sector entity could arrange for a standby facility in the project financing.

The GOK compensates because it is a breach of contract.

10-Responsibility of Design

Responsibility for preliminary design.

The risk is that the GOK has provided incorrect and/or inappropriate design.

Appointment of experienced and reputable consultants

11 Detailed Design, Specifications and Standards

Responsibility for the detailed engineering design including setting design specifications and standards.

The risk is that the design, specifications, and standards are inappropriate.

The private sector entity could mitigate this risk to a third party through a fixed-priced, turnkey, EPC* contract.

Appointment of experienced and reputable consultants

12-Design Data Responsibility for accuracy of design data

The risk is that erroneous data is used in the construction.

The private sector entity could shift this risk to a third party through a fixed-priced, turnkey, EPC contract.

13-Procurement & Construction

Responsibility for construction of the PPP project.

The risk is that completion will be delayed and thus greater costs are incurred and the timing of revenue expectations is not realized.

The private sector entity could shift this risk to a third party through a fixed-priced, turnkey, EPC contract.

14 Construction Cost

Cost over-run risk for design and construction.

The risk is that there will be a cost over-run.

The risk must be managed by the Contractor, unless overrun is caused by the Government requests or failure to provide complimentary infrastructure.

15-Works Programming

Programme risk and responsibility for delivering on time.

The risk is that there will be a delay in construction and cost over-run due to faulty work scheduling.

The private sector entity could shift this risk to a third party through a fixed-priced, turnkey, EPC contract. But then there is a risk of counterparty failure.

16-Operation Responsibility for the operation of the infrastructure according to the PPP agreement

The risk is that the infrastructure is not fully functioning.

The private sector entity could outsource O&M activities to a third party.

17-Maintenance Responsibility for maintenance. The private sector entity could

outsource O&M activities to a

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The risk is that the infrastructure is not properly maintained.

third party.

18-Ancillary Facilities

Provision of ancillary infrastructure and related services.

The risk is that ancillary infrastructure and related services will not be provided or provided on time.

The private sector entity could insist that non-provision of such ancillary infrastructure and related services would constitute a breach of contract.

19-Transfer Compliance with transfer requirements, i.e. project is transferred to the GOK in accordance with what is stipulated in the PPP agreement.

The private sector entity could mitigate by ensuring there is proper maintenance.

20-Regulatory Risk

Responsibility that the terms and conditions in the PPP agreement are not fulfilled, e.g. the airport operator is prevented from charging the airport tax required for financial viability and there is no corresponding compensation as a result.

The private sector entity could mitigate through agreed compensatory changes to the PPP contract.

21-Political / Sovereign

Adverse political actions by the GOK such as nationalization of the infrastructure and related services provided.

The risk is that the GOK will nationalize the project.

The private sector entity could mitigate such events through some form of political insurance e.g. MIGA and OPIC.

22-Force Majeure

Responsibility for acts of God and man-made events.

The risk is that the project is significantly damaged or destroyed due to terrorism, riots, war, natural catastrophes (earthquake, flooding, etc.)

The GOK and private sector entity could jointly mitigate against man-made events through some form of political insurance, e.g. MIGA and OPIC.

23 Government Default risk

The risk that Government subsidies are not paid in future years.

24 Contracting risk

The risk that Government or the Agency does not adhere to the terms of the contract (Government Guarantee, arbitration, etc.)

*EPC: Engineering, Procurement and Construction (contract)

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h. Screening and Identification of PPP Projects

A number of screening exercises were undertaken under this scope of work within the TA. The main body of the report describes the work undertaken. This appendix shows the methodology and some of the matrices prepared. It should be noted that the country is at an early stage in PPP development, so the following note provides an explanation of the introductory screening process undertaken. Subsequent application of the methodology will be more detailed and will vary according to economic sector, types of projects and screening stage (within the government’s planning process). Guidelines will be needed to document the methodology and its application including across sectors and projects. Methodology The methodology selected is called Multi Criteria Analysis (MCA). This is a relatively simple, but well used and a worldwide accepted, procedure for identifying and ranking PPP projects where limited hard data is available. It uses a mix of subjective and objective assessment of selected project criteria. For each project, a score is estimated for each criterion. These scores are then added and projects can then be ranked by their total score. Normally, the number of criteria is a maximum of ten and the score estimated for each criterion is between 0 and 10 points so the maximum potential total score would be 100 points The first step was to prepare a set of criteria relevant for infrastructure projects and these are listed are listed in Table 1. The information required to complete the process will be a mix of hard and soft data and such information needs are shown in the right hand column.

Table 1 Proposed Selection Criteria and Information Needs

Criteria Data/Information Needs and Processes

1. Government Priority Assessment as to whether the project is included in a priority list of public sector procurement projects.

2. Capital Cost Cost of Project: Excessively small or large projects are usually not desirable, especially the latter as they are too complicated

3. Likely Financial Viability Assessment of likely financial viability can be difficult at an early stage but use of a very simple financial model is often sufficient. Otherwise some subjective assessment based on the level of passenger volumes for an airport project or likely tariff levels for energy project. If financial support is needed, the likely extent of support and likely budget support available from government needs to be broadly estimated.

4. Land Acquisition: Involuntary Resettlement

Indication of the degree of complexity of the land acquisition issues and/or of the issues related to resettlement are very important indicators as to whether a project is suitable for PPP.

5. Environmental Impacts Indication of the degree of complexity of the environmental and other social issues (these can be both positive and negative).

6. Socio Economic Benefits Assessment of social and economic rationale and benefits of a project and EIRR if available from studies. Employment, poverty alleviation and investment in Human Resource Development are positive impacts if known

7. Risks The number and seriousness of the risks with a focus on project risks

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8. Project Readiness to proceed to PPP

Are there any available studies, reports or data that would facilitate the preparation of any preliminary project dossier or project briefs

9. Stakeholder Support Indication of the consultation undertaken with various stakeholders and their level of support

10. Safety Aspects Are specific safety objectives being met by the project.

Source: Consultant

A list of public procurement projects, usually derived from the government’s development program, is then subject to the MCA prioritization process. Criteria scoring can be un-weighted or weighted. The use of un-weighted criteria assumes that each criterion has the same or equal importance. If some criteria are considered to be more important than others, they should be weighted accordingly. Under the MCA of PPP projects, financial, risk and readiness criteria are often held to be more important than others, if weighting is considered desirable.

Usually, the maximum score for each criterion is 10 and a score must be attached to each criterion and often ‘High’ impact, benefits or similar could score between 10 and 7; ‘Medium’ could score between 6 and 4, and a ‘Low’ assessment between 3 and 0. This exercise is performed for each criterion and summed to give a total score for each project which subsequently is averaged. This average can then be compared and used for ranking as shown in Table 2b.

In order to minimize individual bias, this process should be done by a team and the results averaged. Table 2bshows the result of a MCA assessment by 2 MEAP staff and 2 consultants. Ideally, the MCA should not be undertaken by Consultants except for training and demonstration purposes.

Table 2 a First Trial run of the methodology for screening PPP projects

Criteria

Current Government Priority

Capital Cost Financial

Positive Economic/Social

Impacts

Land Needed

or acquired

Environ‟al/

Readiness (Reports/Dat

a etc.) Risks Safety

Stakeholder support

SCORES Resettlement

Issues

Revenue Stream

Support Needed

(Negative)

Projects

(maximum 10 score)

10 10 10 10 10 10 10 10 10 10 100

Toll road Kara Balta

Toll road short cut

Osh airport

Energy

Parking

Solid Waste management

Lighting

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Table 2 b Summary of Results

Participants*

Project N B F M AVG RANK

Osh airport 78 98 65 75 79 1

Solid Waste management 73 82 74 79 77 2

Energy 63 93 73 72 75 3

Lighting 58 90 65 63 69 4

Parking 68 79 54 62 66 5

Toll road Kara Balta

67 73 59 61 65 6

Toll road short cut 63 65 53 50 58 7

*There were 4 participants in the ranking; N, B, F,M

Table 3 presents the results of the MCA of the car parking project. It achieves an un-weighted score

of 66. All public priority projects are subject to the MCA analysis and then compared as shown in

Table 3 MCA applied to the Bishkek Car Parking Project

Criteria Car Parking

Score in Words Score

1 Municipal Priority Medium rank priority 6

2 Capital Cost Low cost =medium score 5

3 Likely Financial Viability High viability=high score 7

4 Land Acquisition: Involuntary Resettlement:

Few Problems=high score 8

5 Environmental Impacts Few Problems=high score 6

6 Socio Economic Benefits Medium impact=medium score

5

7 Risks: Low risks=high score 8

8 Project Readiness to proceed to PPP Medium 8

9 Stakeholder Support High support=high score 8

10 Safety Aspects: Low to medium 5

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Table 4 shows the MCA applied to a longer list of projects but was uncompleted due to time limitations in working with MEAP. For training purposes, the criteria were slightly varied.

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NOTES: All projects after the last were classified as not suitable for PPP. This list is for methodology only and does

not reflect any choice of real PPP projects.

Table 4 Multi Criteria Analysis For Identification of PPP Projects Under TA 7819 KGZ CRITERIA

Ongoing projects under

the Public Investment

Program (PIP)

Project Type

Government Priority

Cost Size Financial Economic/Social

Impacts

Land Needed

or acquired

Environ’al/ impacts

Readiness Can be

Structured for PPP

Risks SCORES

Creating a national

system of emergency medicine

S 8 8.8 5 6 8 9 9 8 7 8 68.0

Infrastrukutra City of

Bishkek and Osh

I 9 14.4 6 6 8 7 7 7 9 7 66.0

Improving the efficiency of

electricity distribution networks "

I 9 27.8 7.0 3 8 8 8 7 8 7 65.0

Customs Modernization

and Infrastructure Development

I/S 9 7.5 5 7 8 8 7 7 7 7 65.0

CAREC Regional

Road Corridor Improvement

I 8 48.6 7.0 5 8 7 7 8 8 6 64.0

Improvement of the local network, Bishkek

I 9 13.4 6.0 3 8 8 8 7 8 7 64.0

Emergency

power sector I 8 15.0 7.0 3 8 8 8 7 8 7 64.0

Improving power in

Bishkek and Osh

I 8 23.1 7.0 3 8 8 8 7 8 7 64.0

LEP

Aygultash - Samat

I 8 12.8 6.0 3 8 8 8 7 8 7 63.0

Sustainable development of Issyk-Kul

I 8 30.0 8 4 8 8 5 5 8 8 62.0

Rehabilitation of drinking

water in Karakol

I 8 7.5 5.0 3 8 8 8 7 8 7 62.0

Improved

water supply in Bishkek

I 8 5.5 5.0 3 8 8 8 7 8 7 62.0

Modernization of power lines

in southern Kyrgyzstan

I 8 208.0 5.0 3 8 8 8 7 8 7 62.0

Vocational education and

skills development

S 8 10.0 5 6 8 8 9 7 5 5 61.0

Better management

of water resources

S 9 23.4 7.0 2 8 8 8 6 4 4 56.0

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i. First Draft PPP Policy For consideration by MEAP

Notes: this was prepared in several stages, firstly a draft was prepared in October 2011 including a contents list and some initial sections of the policy. MEAP responded with some text which was edited and inserted into the Consultants original. Finally, the Consultant completed a full draft for use by MEAP in May 2012.

A. The need for a PPP Policy

There is the need for a PPP Policy, that should be more detailed and beyond the often brief statements made by the Government. International best practice suggests that the PPP policy should come and then followed by the PPP Law. In Kyrgyz republic, the Law came first but the need for a PPP policy remains.

Best practice suggests that a PPP policy would describe in straight forward non legalistic terms, the PPP framework including the legal basis, procedures, institutions and financial principles. Its target audience would be officials in all government institutions, domestic and international investors, the private sector generally and the public.

It would describe the aims of PPP to;

a) Promote inclusive social and economic development through the provision of infrastructure

b) Leverage public funds with private financing from local and international markets c) Encourage and facilitate investment by the private sector by creating an enabling

environment in PPP in infrastructure

It would describe the means to:

a) Administer efficient and transparent arrangements for project preparation and procurement through procedures and implementing institutions

b) Protect the interests of all stakeholders including end users, affected people, government and the private sector

c) Develop efficient risk sharing mechanisms such that the party best equipped bears the appropriate level of risk

d) Provide financial support for priority projects

B. The PPP Policy Framework

Given the intense global competition for capital, the Government should be aware of the urgent need for a PPP policy that would improve the investment climate by providing clarity and certainty to both investors and government. The PPP policy summarizes and outlines;

(i) The aims and legal basis for PPP; (ii) Sectors in which PPP is encouraged (iii) Fair risk sharing procedures between the public and private sector; (iv) The financial arrangements for PPPs ranging from full cost recovery to

limited support; (v) The institutional arrangements for PPPs; (vi) The PPP project cycle, including the arrangements for solicited and privately

initiated projects (vii) Strengthened regulatory arrangements, including effective mechanisms for

dispute resolution

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The following sets out a draft PPP policy for the Kyrgyz Republic preceded by a comprehensive explanatory introduction.

A. Introductory Background

From the moment of collapse of USSR and gaining independence, Kyrgyzstan has started major changes in the political and economic systems of the country. During transferring from a traditional planned economy to a market one, the reforms and other radical changes in the country made society look differently at all the aspects of political and economic life in the country. Those radical changes embraced almost everything including a huge impact on not only the sphere of provision of infrastructure services, but also on other spheres of the economy.

The Soviet Union has left the Kyrgyz Republic with a broad range of infrastructure facilities and almost full coverage of population with fundamental infrastructure services. However, since independence, the country encountered serious economic hardships and budgetary deficits. Therefore, over time, the infrastructure system is becoming obsolete with inadequate financial support from the state budget to maintain and/or rehabilitate the existing facilities or to construct new facilities. The bad roads and frequent electricity shortages create one of the factors hampering further economic growth and which may engender social hazards in the future. In addition, the main infrastructure objects are run by the government, where there are poor mechanisms for good management and attracting private capital for the rehabilitation and modernization of infrastructure.

It is necessary to note that quality of infrastructure plays important role in the level of economic growth. If the country suffers from poor infrastructure services, the country’s development will be hampered by lack of continuous and power supply, high transport costs, and other infrastructure problems. In this regard, the government should strive to develop public-private partnership institutions and mechanisms for attracting private investment for infrastructure projects, as well as improving the legal basis for such projects, as it has already been done in almost all the developing economies.

In the recent times, governments of many countries, regardless of the degree of economic development and market situation, are striving for improvement of public-private partnership. Such kind of cooperation is being implemented primarily in the areas where the government traditionally takes responsibility: public infrastructure services such as energy distribution, road construction, public transportation services, etc. The government cannot fully get rid of its participation in the mentioned areas of economy and has to keep some control of them. So, the public-private partnership (PPP) must serve as an effective mechanism of cooperation between government and private sector.

B. ESSENCE AND ECONOMIC IMPLICATIONS OF PPPS

Improving social infrastructure and increasing quality of services for population and business is one of the important challenges for any country in the world. Many countries encounter strong demands for improving the quality of infrastructure in order to achieve competitiveness of their economies and ensure economic growth. In such cases, attraction of private sector resources can serve a good basis for solving the infrastructure gap challenges through application of public-private partnership (PPP) mechanisms.

The Kyrgyz Republic is also no exception. In 2007, under the Country Development Strategy of the Kyrgyz Republic, one of main economic and social policy priorities for long and

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medium term perspective was the development of public infrastructure for economic and social needs.

Financial commitments of the government in social and economic development are growing, since those areas are considered to be capital-intensive with low profitability. However, the government budget cannot thoroughly support those areas. For example, only 1.15% of the total budget expenditure is spent for road construction in the Kyrgyz Republic, which is quite low compared to other countries.

In this situation an appropriate alternative to attract financial sources from the private sector is through public-private partnerships (PPP).

Application of mechanisms of PPPs can primarily be helpful for implementation of public projects especially where public financing is unlikely for many years to come. PPPs are alos expected to increase the efficiency of the projects due to participation of private capital, which is, as a rule, more market-oriented and efficient than governmental institutions. Also, through PPP mechanisms, it will be possible to decrease the burden on budget by sharing part of the costs of the service with users. The commercialization of services and increasing the opportunities for attracting better management personnel and technologies will lead to improving the quality of the services for the final consumers. PPPs allow the government to focus on its more characteristic administrative and sector planning functions and decrease governmental risks (especially time and cost overruns) through risk-sharing with the private sector.

C. FORMS OF COOPERATION WITH THE PRIVATE SECTOR IN THE KYRGYZ REPUBLIC

There are various forms of contractual relationships between government and the private sector.

1. Public Procurement

In the Kyrgyz Republic, the practice of involvement of the private sector in construction of public service facilities has traditionally been implemented in the form of public procurement, which includes the areas of physical infrastructure facilities such as roads, social objects, and procurement of equipment and furniture. This process is realized by organizing competitive bidding among interested private companies. The companies bid to build a physical asset or provide a service and are paid directly by government immediately on satisfactory completion of their contracted tasks.

A popular form of public procurement for major projects are Engineering Procurement Construction ("EPC") contracts which typically pass all design development and construction risks to the contractor. The developer acquires a "bankable" turnkey project and, at least theoretically, pays a premium for the assumption of risk by the contractor.

Public procurement is undertaken according to the relevant procurement legislation. There are two phases of bidding. In the first phase, the bidders submit their initial applications without showing the bidding prices. The state procurement agency considers the bidding offers on the basis of technical quality and other characteristics of the service, as well as professional characteristics of the bidders. In this phase, the bidders selected in the first phase should submit the final bidding documentations including the bidding cost. The procurement agency has the right to change or exclude any initially offered technical and procurement characteristics and criteria for assessment for bidders to win the bidding.

Procurement under PPP is now regulated by the 2012 PPP law of the Kyrgyz Republic.

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2. Concession

On March 6, 1992, the Kyrgyz Republic adopted the Law of the Kyrgyz Republic “On concessions and concessional agreements”. According to the given Law, concessional agreement is concluded as a result of contest or direct negotiations.

In contest based selection of concession bidders, the information on conducting the contest and the conditions for receiving contest documentations are published in mass media. The contest commission considers all applications submitted by the bidders. Selection of the winners is conducted through conferring grades to each of the contest criteria, and the company which gets the maximum grades i.e. provides the best conditions, wins the contest.

As in the contracting out procedures, the concession procedures are also conducted in two phases, where the offered project is technically complicated and dangerous. In the first phase, the contest commission assesses technical and organizational solutions on criteria set by the government agency. In the second phase considered criteria are those related to financial aspects of the application.

The direct negotiations are held in the case that there is only one bidder to submit application, and in case if a potential investor emerges to invest to a project which is out of the list of entities offered for concession.

The real estate and other properties transferred to concession, including also the invested improvements of the property under the concession, belong to the government if other conditions are not stipulated in the concessional agreement.

However, using this Law, currently, only one project, a gold mining company “Kumtor”, is operating on the basis of the concession legislation represented above.

3. Privatization

The other form of private sector involvement in public assets is privatization. Privatization has different perceptions in different parts of the world. In Eastern Europe and post-Soviet countries, including the Kyrgyz Republic, privatization was an important part of initial reforms for transferring from a planned economy to the market one. After getting independence, with the purpose of forming a market economy there was a sharp necessity for privatization of public assets. Privatization was considered to be a vital step for further development of the country and it was launched a nation-wide privatization program in 1991 and implemented in several phases.

The first phase of privatization lasted from 1991 through 1993, within which, the necessary legislative basis was introduced and the necessary instruments worked out. The first phase aimed at privatization of 35% of government assets and the main tasks included: privatization of a part of public assets on competitive basis, partial de-monopolization of industries and attraction of the population to the processes of selling government assets with social orientation by providing preferences for the personnel.

The second phase of privatization (1994-1995) was distinct with its significant orientation towards creating strong private sector, widening of the scope of participants of the privatization process through the new mass privatization program, assistance to the low-profit enterprises and privatization of 20-25% of public assets.

The third phase started in February 1996 and finished in 2005. This program, unlike the previous ones, aimed at privatization of large monopolized enterprises with the use of

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individual schemes of privatization. The partly privatized enterprises, with a large share of government stock, were prepared for further share issue. Foreign and domestic investments were actively attracted at this stage. As a result of the privatization program, the level of privatized assets reached almost 73 % or 7,251 entities.

The final stage of privatization started in 2006, including planned to privatize strategically important enterprises of telecommunications, electricity, mining and airways.

D. PPPs AS AN ALTERNATIVE WAY

In the Kyrgyz Republic, both privatization and public procurement are practiced in the framework of developing public facilities and services

PPPs, as a form of private sector involvement in providing public service activities is considered as an alternative way of developing public facilities and services by attracting private capital, efficiency and knowhow. Generally, the PPP concept involves active private sector participation in designing, building and management of a public service entity and, what is also important, in retaining government ownership, rights and interests.

The Policy Framework describes below sets out the objectives and means to achieve the development of facilities and services (usually) formerly provided by the public sector, directly through the private sector.

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DRAFT PPP POLICY FRAMEWORK

Contents

1. Introduction

2. Objectives of the PPP Policy

3. Scope of the PPP Policy

4. Financial Aspects

5. Government Guarantees

6. Institutional Roles and Responsibilities

7. Legal Framework

8. Forms of Private Sector Participation in PPP Projects

9. Risk Sharing And Management Framework

10. The PPP Project Cycle

11. Government Initiated Projects

12. Privately initiated Projects

13. Safeguarding the Public Interest and Consumers

14. Consultation

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1. INTRODUCTION

The term “public–private partnership” describes a range of possible relationships between public and private entities in the context of infrastructure and other services. The public partners in a PPP are government entities, including ministries, departments, municipalities, or state-owned enterprises. The private partners can be local or international and may include businesses or investors with technical or financial expertise relevant to the project. PPPs may also include nongovernment organizations (NGOs) and/or community-based organizations (CBOs) who represent stakeholders directly affected by the project.

The three main needs that motivate governments to enter into PPPs for infrastructure are:

a. to attract private capital investment (often to either supplement public resources or release them for other public needs);

b. to increase efficiency and use available resources more effectively; and c. to reform sectors through a reallocation of roles, incentives, and accountability.

Effective PPPs recognize that the public and the private sectors each have certain advantages, relative to the other, in providing facilities and services.

The government’s contribution to a PPP may take the form of financial support, a transfer of assets, or other commitments or in-kind contributions that support the partnership. The government also provides social responsibility, environmental awareness, local knowledge, and an ability to mobilize political support.

The private partner usually also contributes investment capital depending on the form of contract and makes use of its expertise in commerce, management, operations, and innovation to run the business efficiently.

The structure of the partnership should be designed to allocate risks to the partners who are best able to manage those risks and thus minimize costs while improving performance.

PPPs is a form of private sector participation in providing public service activities and is considered as an alternative way of attracting private capital, efficiency and various types of knowhow for the provision of traditionally provided public services. Generally, the PPP concept can involve private sector participation in designing, financing, building and management of a public service entity whilst retaining, rights and interests and ultimately government ownership. The degree of private involvement can be said to lie between privatization and traditional public procurement.

2. OBJECTIVES OF PPP POLICY

The Government of the Kyrgyz Republic adopted a new PPP law in February 2012. This subsequent PPP policy sets out the framework for PPP based on the new Law and should assist in the development of more detailed implementing regulations and guidelines. The objectives of the PPP Policy are to make explicit the overriding legal framework under the PPP Law of the Kyrgyz Republic including the;

a. The aims and legal basis for PPP; b. Sectors in which PPP is encouraged c. Risk management procedures between the public and private sector; d. The financial arrangements for PPPs including cost recovery and support; e. The institutional arrangements for PPPs;

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f. The PPP project cycle, including the arrangements for Government initiated and private sector (privately initiated) initiated projects

g. Regulatory arrangements, including effective mechanisms for dispute resolution The key objectives of PPP and this policy are to:

a) Promote inclusive social and economic development through the provision of infrastructure b) Leverage public funds with private financing from local and international markets c) Encourage and facilitate investment by the private sector by creating an enabling environment

in PPP in infrastructure d) Protect the interests of all stakeholders including end users, affected people, government and

the private sector e) Set up efficient and transparent institutional arrangements for identification, structuring and

competitive tendering of projects f) Develop efficient risk sharing mechanisms such that the party best equipped bears the

appropriate level of risk g) Provide for viability gap funding where the projects' viability is insufficient to attract private

sector funding. PPP Policy is targeted to provide a wider variety of better quality and timely services. This will be achieved through faster project implementation, maximum leveraging of public funds, enhanced accountability and a shift to life cycle costing and infrastructure management by the private sector:

3. SCOPE OF PPP PROJECTS Sector eligibility The PPP policy herein covers, but is not limited to, the following infrastructure sectors:

generation, transmission and distribution of electric and thermal power;

processing, storage, transportation, transmission and distribution of oil and natural gas;

automobile, railway, water, air, urban electric transport;

roads and railways (including bridges and tunnels);

public utilities and public services;

medical, medico-preventive and other health care services;

education, upbringing, culture and social services;

mobile and stationery telecom services;

tourism, recreation and sports;

water resources;

other sectors involving the provision of services to a wide range of consumers.

PPP may apply to other infrastructure assets and infrastructure services except for those to be determined as restricted by the Government within Guidelines. However, PPP shall not apply to relationships associated with the use of mineral resources, government procurement and privatization.

4. FINANCIAL ASPECTS When the private sector invests, it needs to recover its costs and make a profit. Cost recovery within PPP arrangements can take several forms depending on the type of PPP project and the likely financial performance of the project. Cost recovery can be directly from the user via tariffs, from the government or from a mix of tariffs and government (support). These are described as follows:

a. Tariff Based PPP Projects

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In the case of viable projects, project revenue derives solely from user charges/tariffs. Initial tariffs, and subsequent tariff escalation formulas, are initially determined within feasibility studies prepared by contracting agencies to ensure an appropriate or market acceptable rate of return based on an efficient operation. Competitive bidding process aims to minimize the initial government estimated tariffs and the subsequent escalation.

b. Unitary/Annuity/Availability based Cost Recovery Unitary/annuity/availability type PPP projects are those wherein the Government contracts to pay the concessionaire for providing the infrastructure and related services, either an agreed fixed amount each year of operation or an amount based on the future situation e.g. future demand levels. Such payments can either be linked with user charges or can be independent of them. For suitable projects, the Government’s project feasibility study can recommend a system of annual unitary payments based solely on outputs (i.e. the meeting of specific project targets/outputs or availability) by the concessionaire.

c. Projects requiring Government Support For projects that have been appraised as not being 'bankable43' without support, support may be offered by GOK and can comprise various types and come from various sources. This is to ensure that with such support, the project is, ultimately, financially viable/bankable and is therefore attractive to the private sector. Any proposed subsidy will be finally determined through competitive bidding to ensure the lowest liability for Government. Under the PPP Law44 to assist in the implementation of PPP projects, support may include any of the following;

Financial Support

i. provision of loans on preferential terms; ii. provision of bank guarantees;

iii. provision of guarantees securing performance of the public partner’s obligations; iv. provision of tariff subsidies; v. provision of financial resources;

vi. granting tax benefits and/or tax postponements and/or payment of tax by installments vii. granting customs duties preferences and/or postponements and/or installments

Economic Support

i. in addition to rights to an infrastructure asset, providing rights to other movable or immovable property;

ii. assisting in obtaining licenses, permits, approvals; iii. providing easements in respect of publicly and/or municipally owned movable or

immovable property; iv. granting the right to collect tariffs and to generate revenues from other types of activities

not directly associated with the implementation of the PPP project; v. setting discounted rental payments for use of the publicly and/or municipally owned

property;

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Bankable refers to a project being able to raise sufficient equity and debt funding from the market. 44

See Articles 12 and 13 for fuller details

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Such support would be on terms and on conditions provided for/consistent with the legislation of the Kyrgyz Republic.

5. GOVERNMENT GUARANTEES

For the purposes of guaranteeing the protection of private investments into the PPP project, the private

partner and the project company shall be guaranteed:

non-interference by the public partner with the business of the private partner and project

company, except as stipulated in the PPP agreement and by the legislation of the Republic;

protection of the property of the private partner and project company from nationalization or

any other measure of similar effect in the manner envisaged by the legislation of the Republic;

the right to freedom of ownership, use and disposal of the investments made in the PPP project

and the revenues and profits received from such investments for the purposes not prohibited by

the legislation of the Republic;

the right to free convertibility of the national currency of the Kyrgyz Republic into any other

foreign currency and free export or repatriation of the currency received as a result of the

implementation of the PPP project;

the right to recover losses incurred as a result of unlawful action (inaction) of public and/or

municipal authorities or their officials, which caused damages to the private partner and/or

project company, in accordance with the conditions of the PPP agreement;

the right to review the terms and conditions of the PPP agreement or early termination of the

PPP agreement, and to obtain redress for damages caused, by the adoption of regulatory legal

acts entailing worse conditions for implementation of the PPP project by the private partner

and/or project company in comparison to the terms of the PPP agreement.

6. INSTITUTIONAL ROLES AND RESPONSIBILITIES

The PPP law of 2012 defines various institutional roles and responsibilities. The authorized public

agencies responsible for state regulation of PPP under Articles 8, 9, 10 and 11 are:

a. Government;

b. Authorized public agency;

c. Risk management unit;

d. Public partners.

Their key45 responsibilities are as follows:

a. The Government

i. implementing and coordinating public PPP policies and programs;

ii. creating special funds, accumulating financial resources to ensure

implementation of government commitments to their partners under PPP

agreements;

iii. adopting regulations and other legal acts, which govern PPP stages and the

monitoring and evaluation of PPP project implementation, under the provisions

of the PPP Law;

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Excluding institutional creation activities

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iv. approving the proposals submitted by the public partner for the initiation of PPP

projects and tender documents for projects which are to be approved by the

Government;

b. Authorized public agency (Public Private Partnership Authority)

i. Implementing public policy and PPP development programs;

ii. Submitting proposals to the Government on public policy and PPP development

programs

iii. Drafting and making amendments or supplements to regulatory legal acts of the

Kyrgyz Republic on PPP matters;

iv. Submitting annual reports on implementation of public policy and PPP

development programs to the Government;

v. Assisting the public partners in;

1. searching for, and selecting, prospective PPP projects,

2. preparing tender documents, and

3. implementing the PPP projects;

vi. Evaluating proposals to initiate PPP projects and the tender documents prepared by the

public partners;

vii. Developing and adopting guidelines, instructions, regulations, rules and other

documents necessary for the unified application of the provisions of this Law for PPP

participants;

viii. Providing clarification to all persons concerned regarding the implementation of policy

and programs and the application of the PPP legislation;

ix. Informing the public on all matters related to the PPP project preparation and

implementation that are not related to proprietary information under the legislation of

the Kyrgyz Republic;

x. Collecting and analyzing information about initiated and ongoing PPP projects;

xi. Keeping a register of PPP projects;

xii. Organizing PPP training for public partners, private partners and all stakeholders

concerned with the implementation of PPP projects;

xiii. Exercising other powers conferred by this Law and PPP regulations adopted by the

Government.

c. The Public Risk Management Unit

i. Concurrence with PPP projects, tender documents and PPP agreements involving the

provision of the financial support from the State budget;

ii. Providing an opinion on the risks of the PPP projects which do not envisage the

provision of the government’s financial support from the State budget.

d. Authority of the Public Partner

i. PPP Project Preparation;

ii. Selecting the private partner;

iii. Monitoring and evaluating PPP project implementation;

iv. Exercising other powers conferred by the Law and regulations on PPP adopted by the

Government.

7. LEGAL AND REGULATORY FRAMEWORK

The PPP law signed by the President in February 2012:

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(i) Develops a clear legal framework and regulations for PPP investment, being consistent with existing sector legal and regulatory practices.

(ii) Covers legal protection of all stakeholders including the private sector, end users and government departments

(iii) Is consistent with GOK policies

Each PPP project will be legally based under contract law in overall compliance with the PPP Law.

Each contract will comprise mandatory contents as set out in the PPP law including rights and obligations, risk sharing, time limits, basis for termination and compensation and step in rights by sources of finance.

8. FORMS OF PRIVATE SECTOR PARTICIPATION IN PPP PROJECTS

The forms of private sector participation under PPP are diverse, depending on type of the infrastructure asset or infrastructure services, the industry it belongs to, the purpose of the PPP project and arrangements of the parties to the PPP agreement. The forms of private participation in PPP projects (or PPP models) by the private partner shall be developed and approved by the authorized public agency.

These will include the internationally type of PPP options ranging from service contracts to concessions and Build Operate Transfer (BOT) type arrangements

9. RISK SHARING AND MANAGEMENT FRAMEWORK

Under public procurement, the government bears all or most of the risks. Under PPP, a major advantage is that as many risks as appropriate are moved to the private sector, which also then receives the rewards for its investment and risk. Risks can be looked at from the perspective of the different parties concerned: the sponsors, the lenders, the government, and the users/clients of the project.

Risks can also be grouped into categories according to type: commercial risk, that is, risks related to the sector or business activity being contemplated (e.g., cargo handling in a port, investment in a power station); risks specific to a country (including political, economic, and financial risks); or risks of a general nature such as force majeure;

The general risk process, which will be followed by PPP institutions when developing PPP projects, is described under the following headings.

a. Risk Identification

The particular project/sector and the choice of a PPP modality clearly dictates what risks are applicable.

b. Risk Allocation

According to best practice, risks will generally be borne by the party (private or government) best able to manage it at minimum cost. Some risks may be shared where appropriate.

c. Risk Mitigation

Government will ensure that the private sector takes appropriate and least-cost mitigation measures in order to sustain the project. Guidelines will be issued on risk mitigation principles.

The RMU has adopted a risk management policy whose objectives are to;

a. Carry out analyses of the fiscal risks of PPP projects financed by the State budget; b. Evaluate qualitative and quantitative features of PPP projects thereby verifying their compliance

with established criteria; c. Effectively manage fiscal/financial risks.

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d. Create an effective fiscal risk management system for PPP projects.

Risks and the PPP Contract

The PPP contract will specifically reflect how risks have been allocated and mitigated between the two parties.

10. THE PPP PROJECT LIFE CYCLE FOR GOVERNMENT ORIGINATED PROJECTS

The PPP project stages are:

a. PPP project preparation;

b. Private partner selection; c. PPP project implementation.

PPP Project preparation includes identification and initiation of the PPP project, formation of the tender

commission, preparation of tender rules and documents.

Private partner selection includes holding the tender, conducting negotiations and conclusion of the PPP

agreement with the winning bidder.

PPP project implementation commences on the effective start date of the PPP agreement and includes private

sector design, construction and operations and maintenance. It ends on the date of contract termination.

11. PROCUREMENT OF THE PRIVATE SECTOR PARTNER (GOVERNMENT INITIATED PROJECTS)

Solicited or government initiated projects are those projects selected by the government (Federal/Provincial/Local) mainly from their priority public sector development programs for PPP implementation through the steps described above.

The Government will provide administrative support to the private sector for the implementation of infrastructure projects, from initial project approval through to post-financial close operations. This includes ensuring appropriate and timely approvals and adequate legislative and administrative support for the levying and collection of user charges.

Approval authority is essential to clarify to both private and public sectors the appropriate arrangements for PPP development. In Kyrgyz Republic, sectors vary as to approval procedures. Approval authority can be/has been delegated to specialist agencies which have the legal authority to implement PPP projects.

The MEAP PPP unit has a major policy dissemination role in advising other Government PPP institutions and the private sector on the current approval process and procedures. The approval process by relevant public institutions follows the key stages of a PPP project:

i. Public Partner (Line Ministry or Local government body) will act as the contracting authority

ii. Preparation Stage: Projects will be subject to feasibility studies designed and funded by the Public Partner in collaboration with the PPP Authority and the RMU. The project preparation studies will be reviewed and evaluated by the appropriate public institutions.

iii. Government will make final decisions on project planning and implementation to ensure consistency with GOK’s strategic financial, infrastructure and legal frameworks

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iv. Ministry of Finance will assess fiscal liabilities and approve or otherwise required levels of fiscal support or likely levels of contingent liabilities including capping support, contingent or otherwise

v. The Public Private Partnership Authority has a major role in the provision of guidance including advising on the potential for a project to be an PPP (but this does not amount to a formal approval)

vi. Approval of Project Structuring and draft concession contract before tendering (as above )

vii. Approval of the award of the PPP concession to the successful bidder by the public partner and ongoing monitoring by the appropriate agencies including the MOF.

The above Approval Authority includes interrelated processes: These are clear and unambiguous processes in order to support competition, transparency and the best possible outcome for PPP transactions.

Guidelines for Inception, Project Feasibility and Procurement and other processes will be prepared and disseminated by the PPP Authority.

12. PROCESS FOR PRIVATELY INITIATED PROPOSALS

Section 10 above refers to government initiated PPP projects.

Privately initiated projects, by contrast, are proposed by the private sector and submitted to government as being worthy of consideration as a PPP project. Such projects will come almost exclusively from outside the above mentioned government development programs.

All privately initiated proposals will be treated on a case-by-case basis and limited to projects that demonstrate genuine and substantial need, innovation and support public policy.

Government’s policy on privately initiated proposals aims to balance its desire to stimulate innovation and to create new opportunities for the private sector, with the need to ensure that the Government and consumers get value for money in PPP transactions. However, there is the additional consideration that such privately initiated projects may edge out higher priority Government initiated projects given that PPP capacity is limited.

Innovation, reasoned analysis, a demonstrated appreciation of the requirements of the country and a project’s likely inability to be implemented by other means should be the minimum considerations of a privately initiated proposal.

The presumption will be against financial or fiscal support for privately initiated proposals.

The process for privately initiated proposals is as follows;

1. Private sector identifies a potential project 2. Private sector seeks guidance from GOK on the framework for privately initiated projects. The

project principles and objectives must conform to (to be) issued Guidelines, be of public merit and that the Government has no objection in principle46.

3. Private Sector prepares its own Pre-Feasibility Study at own cost and risk 4. Private sector submits study and proposal to GOK 5. GOK appraises project and;

Accepts project in principle and processes, or

Requires more information on, or changes to, the Project, or

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Such „no objection‟ does not commit government to subsequently approve the project, merely that at this stage it conforms to guidelines and potential

needs.

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Rejects Bid outright due to major non-compliance with original concept. 6. In the event that the public partner accepts the proposal initiated by the private partner, the

selection of (a winning) private partner for the PPP project initiated by a private partner shall be made through a tender in the manner provided by the PPP law and other regulations of the Kyrgyz Republic.

7. If the private partner which initiated the PPP project fails to win the tender, the winner of the tender must reimburse the private partner which initiated the PPP project for expenses incurred to prepare the preliminary feasibility study.

Detailed guidelines on privately initiated proposals will be issued.

In general, The Government would verify project performance including viability with the assistance of independent transaction advisors.

The GOK may require competitive bidding that will take into account the interest of the initiating private entity.

13. SAFEGUARDING PUBLIC INTEREST AND CONSUMER

The Government is committed to ensure that each project is delivered through a contractual relationship with the private sector under this policy which shall have positive impact upon the public interest. The following issues will be addressed in PPP transactions:

Safeguards to those negatively impacted by the project, particularly those falling in the vulnerable groups;

Ensuring public health, safety, social safeguards and protection of environment;

Providing information to the public about the obligations of the private sector and the government relating to PPP projects;

Setting affordable user charges and tariff structures 14. PPP CONSULTATION

PPP projects will require consultation with the private sector including project developers, contractors and sources of finance to ensure that projects will be taken up by the market and be tendered competitively. Through ‘Market Sounding’ the project will be ‘sounded out’ in the market through regular dialogue in the project preparation stages before finally going to tender.

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APPPENDIX C: PPP Project Activities/Documents

a. List of Project Briefs prepared under TA 7819 KGZ

1. Development of Osh Airport

2. Car Parking Development Project in Bishkek City

3. Toll Road - Bishkek-Kara Balta

4. Street Lighting Improvement Project in Bishkek City

5. Solid Waste Management Project in Bishkek City

6. Toll Road - Bazar Korgon – Kyzyl Unkur – Sargata Road

7. Development of Issyk-kul Airport

b. Draft PPP Project Briefs

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DRAFT

PPP Project Brief for the Osh Airport Development Project

Prepared for the Ministry of Economy and Anti-Monopoly Policy (MEAP)

Under ADB TA 7819 KGZ

by Robert Brown, PPP Consultant

January 31, 2012

(Updated May 2012)

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DRAFT PPP Project Brief (PB) for Osh Airport

1. Introduction and Objectives of the PB

2. Legal Background

3. Economic Background

4. The Air Transport Sector and Air Traffic Aspects

5. The Project

a. Its Objectives

b. Technical Aspects

6. Project Costs

7. Social and Environmental Impacts

8. Economic Analysis

9. Financial Analysis

10. Risk Management

11. Project Structuring

12. Project Readiness

13. Project Issues

14. Preliminary Conclusions

15. Next Stages

16. Outline Draft Terms of Reference

Appendices

A1 Steps in the Preparation of a PPP Project (up to Tender)

A2 Airport data

A3 Current Airport Tariffs

A4 Defining PPPs

A5 How the Private Partner Is Repaid For Its Investment

A6 PPP Project Cycle

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1. Introduction and Objectives

Osh Airport Development Project has been designated as a potential project for PPP47 development in the Kyrgyz

Republic (KR) and which, if found appropriate, will be undertaken according to the PPP law of 2012.

That is, it will be prepared with due diligence, including an international standard pre or full feasibility study48,

and be implemented under and within a competitive and transparent tender framework.

It should be noted that the project has been considered for PPP because public funding for the project is unlikely

in the near future but the development is urgently needed.

The function of this PB49 is to provide a first step50 in the PPP project preparation process. The PB reviews available data from relevant studies, considers in particular a possible traffic demand scenario, preliminary project capital costs and undertakes a very preliminary financial analysis. It should be noted that a PB is not a feasibility or prefeasibility study and is an initial part of the project preparation process that leads to such studies. The PB summarizes outstanding issues, provides conclusions and recommends the next steps including filling of information gaps. Progression to the further study and tendering will depend on the outcome of the data gathered and the decisions of Government. The objective of the PB is, therefore, to bring together all available information in a form which can help accelerate the implementation of this project through providing the basis for an essential independent feasibility study and also provide a basis for a preliminary market sounding. Recent traffic and project and operating costs and data are based on the 2011 report entitled “The Reconstruction of Osh International Airport, Project Profile which was prepared by Kazakh airport Consultants for Manas International Airport - Joint Stock Company51 MIA-JSC.

2. Legal Framework

The PB confirms that the project will be implemented according to the PPP Law and international best practice.

If the project needs fiscal support, the implementation of the project will be assessed by the MOF/RMU according

to the Order of the Ministry of Finance from the 10 June 2010 #257 and the Risk Management Policy (to be)

adopted by MOF.

3. Economic Background

Economic performance52

After modest growth of 2.9% in 2009, the country was recovering well from the global economic crisis as GDP

growth bounded to 16.4% in the first quarter of 2010. But the closure of international borders following the April

47 Appendix A2 describes the definition and characteristics of Public Private Partnerships 48 F/S or pre F/S. The main difference between a full F/S and pre F/S is that the engineering design and costs are developed more fully. The pre F/S will develop a preliminary design. Final design is undertaken by the winning private partner. 49 This PB is prepared under TA 7819 KGZ Identification of PPP Projects and Capacity Building in the Kyrgyz Republic, undertaken by Robert Brown, International PPP Expert. This TA is part of the ICIP (Investment Climate Improvement Program) Sub Program 2 whose purpose is to improve the investment climate for the private sector, a critical cornerstone of the Government‟s economic policies. Actions needed for full compliance with objective 2, “PPP Project Pipeline developed”, is for MEAP to submit project PBs for 7 potential PPP projects. This PB constitutes one of the requisite seven. 50 Appendix A1 shows the step by step process 51 90% owned by the government with some public share ownership 52 This largely was written by Nurbek Jenish, consultant of the Kyrgyz Resident Mission as part of the 2011 update of the ADB Kyrgyz Country Report. A fuller summary is provided in Appendix C.

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and June events stopped imports and exports at times, intensifying the impact of the internal disruptions on the

economy. For all 2010, GDP dropped by 1.4%

Economic prospects

The economy is expected to pick up with GDP growing at around 5% in 2011 and 2012. The forecasts rest on

expectations of a normal security environment, continued reconstruction works, full resumption of trade and

services flows, and improved investor confidence. They also rely heavily on construction growing by about 40%,

mainly due to large scale reconstruction works in the south. Services and industry are seen growing by 6% and

4%, respectively.

Economic expansion of the Russian Federation and Kazakhstan will also contribute to growth through increased

demand for the Kyrgyz Republic’s exports

Osh: The city of Osh is the second city by population in the KR and had a population nearing 300,000 people.

More than 50% of the population lives in Osh, Jalal-Abad and Batken which would be served by the airport. There

is considerable industry concentrated on cotton and silk, agro processing and wood processing. There are also

considerable tourism resources.

4. Air Transport Sector and Air Traffic Aspects

Air transport plays a vital role in KR. There are 11 public airports operated by MIA-JSC including Bishkek which is also the HQ. There are two branch offices in Osh and Karakol. There are three airports licensed for international flights i.e. Bishkek, Osh and Issyk-Kul (Tamchy).

The modernization of Osh airport and its sustainable development is a priority for MAC.

Osh Airport Data

Table 4.1 shows recent traffic at Osh airport and growth rates over the period 2005-2011.

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Table 4.1 Traffic at Osh Airport 2005-2010

2005 2006 2007 2008 2009 2010 2011 AAGR*

Flights

International 384 641 1,204 1,822 1,700 2,381 3,276

Domestic 3,499 4,440 4,691 3,909 4,421 4,538 4,572

Total Flights 3,883 5,081 5,895 5,731 6,121 6,919 7,848 12%

Passengers

International 25,107 58,525 102,587 148,928 158,825 271,232 429,751

Domestic 112,570 142,784 162,961 149,060 162,150 190,135 195,544

Total

Passengers 137,677 201,309 265,548 297,988 320,975 461,367 625,295 29%

Cargo

International 78 194 820 2,173 1,459 1,977 n/a

Domestic 168 164 149 121 118 1,043 n/a

Total Cargo 246 358 969 2,294 1,577 3,020 n/a 65%

Source: Osh Branch

*Average Annual Growth Rate 2005-2011

Traffic Forecasts

For the purposes of the financial analysis, we have assumed 5% growth per year. This will likely underestimate

both the demand and the financial viability as there is likely to be faster growth in the years immediately after

implementation than later years, although 5% is rather modest in any case.

Ultimately, the traffic forecasts prepared with a pre-feasibility study will need to take into account;

Passenger demand: New services53, routes and operators as well as the trend to increased air travel both domestic and international. Increased tourism related demand both inward and outward should be considered.

Cargo demand: Traffic generated by new airport facilities and import export demand potentially created by new commercial and industrial zones in the Osh region and the potential use of the new cargo facilities as a regional cargo hub.

53

Including suppressed demand

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5. The Project

a. Its Objectives

Osh: The city of Osh is the second city by population in the KR and had a population nearing 300,000 people.

More than 50% of the population lives in Osh, Jalal-Abad and Batken which would be served by the airport. There

is considerable industry concentrated on cotton and silk, agro processing and wood processing. There are also

considerable tourism resources.

The country is divided geographically between Bishkek and Osh by 2 mountain ranges and the winter weather

both contribute to somewhat separate catchment areas for Osh and Bishkek airport

The Project: The project is designed to safely develop the airport both to meet International Aviation Standards

and demand, in terms of capacity and throughout the year in a financially sustainable manner. The project

includes major improvements to the runway pavement, lighting, power supply, terminal upgrades, security and

addition of a cargo terminal.

In 2010 the airport handled about 460,000 passengers and some 3,000 tonnes of cargo. The current demand is

currently suppressed due to poor airport infrastructure but passenger demand has been growing quite strongly.

Cargo traffic is limited currently with very few facilities.

The Project: The project is designed to safely develop the airport both to meet International Aviation Standards

and current and future demand by providing additional physical capacity and by extending its operating windows,

in a financially sustainable manner. The project includes major improvements to the runway pavement, lighting,

power supply, terminal upgrades, security and addition of a cargo terminal.

Osh airport was built in the 1960s and requires modernisation and expansion. It was designed for domestic flights

and cannot handle more than 200 passengers per hour with a shortage of space and check-in counters. The MIA-

JSC management says that airlines will not come to Osh for services, technical and safety reasons. The

deterioration of the physical strength of the runway means the airport restricts the volume and weight of aircraft

using it. Use of the airport at night time and in bad weather is also restricted.

Currently the runway is 2614 x 50 metres and is of asphalt-concrete construction. It is used by B737-700, TU 334-

100, A 321-100 and A320 type aircraft and international services operate to Moscow, Urumchi, Novosibir and St

Petersburg, while there are internal flights to Bishkek and Issyk-Kul and flights to Batken and Kerben via Bishkek.

b. Technical Aspects

The main objective is to develop a modern airport that is safe, caters for demand and supports the national and

local economy. The task is to expand the airport in line with ICAO standards, allowing more and heavier aircraft to

use the airport therefore expanding safety and traffic in line with economic and financial benefits.

General: The overall project is for the airport to provide:

For aircraft up to Il-76, B767, B757, A310, A300 and similar size aircraft, with a TO weight of 271t and a maximum of 300t.

Parking for 10 aircraft will be provided for large aircraft

An additional passenger terminal with a capacity of 500 passengers per hour with the current terminal to be used for domestic flights.

A cargo terminal with a capacity of 2,000 tonnes.

Upgrading of various other operational areas to ensure safety and efficiency

All proposals are in compliance with ICAO standards.

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Specific Requirements: A new strengthened runway will be provided, with new lighting, the development of new

passenger and cargo terminal complexes, 2 new air bridges, modern power supply, new fire fighting equipment

and general upgrading of rescue equipment, new apron lighting, security equipment and new apron vehicles. It is

understood that the runway will not be lengthened under this project.

Fig. 5.1 Elements of the Project Plan

It should also be noted that Osh airport has recently had some improvements/upgrades as follows;

Some new lighting

New substation

Some construction works related to taxiway, existing aprons and 200m runway extension54.

6. Estimated Project Costs

Construction cost estimates have been prepared by a Kazakh Consulting company for an expanded airport

consistent with the traffic forecasts developed in section 5 above. It is not clear why the costs are in 2001 prices.

54 Not clear if the 200m is included in the stated 2,614m existing length of runway.

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Table 6.1 Project Cost Breakdown

No. Item

Cost

(US$m)

1 Site Preparation 4.11

2 Construction of Basic Airport Infrastructure 59.12

3 Auxiliary Works 15.25

4 Power and Related 17.08

5 Transport Access and Internal Roads 2.74

6 Water Supply, Sewerage and Heating 2.88

7 Other Improvements 3.17

Total Cost (2001 Prices) 104.35

Source: “The Reconstruction of Osh International Airport, Project Profile which was prepared by

Kazakh airport Consultants for Manas International Airport, Joint Stock Company55

.

The cost above was updated to $118m (2008) in the report noted above.

These costs do not include the following;

Price and Physical Contingency

Environmental impact mitigation costs

Resettlement costs

It is not clear if land acquisition costs are included.

7. Social and Environmental Impacts

This is a vital area of study and needs to be assessed as in projects where social, environmental and resettlement

issues have not been adequately considered from the outset, this has led to much subsequent delay, additional

costs and even cancellation of projects.

55 90% owned by the government with some public share ownership

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It seems that any international standard EIAs, Resettlement and other requisite social plans have not yet been

prepared but preliminary work can be undertaken on these issues arising from the project. Outline TORs for full

social and environmental studies will need to be prepared before progression to feasibility study.

Land acquisition is estimated at about 7ha by MIA-JSC but we do not yet know its likely social and environmental

impacts, although maintenance of the existing runway length may mean no greater noise footprint and modern

aircraft are quieter. Conversely, there will be increased aircraft movements. MTC have indicated that no or very

little resettlement is envisaged when these 7 hectares of land are acquired.

8. Economic Analysis

It appears that no economic analysis has yet been undertaken. However, undertaking an economic analysis of a

proposed PPP project is essential and ensures that a PPP project developed through the public sector is a

worthwhile project to the country.

Economic analysis measures the economic costs, economic benefits and economic net benefits of a project. Costs

are shadow priced to reflect the resource cost of inputs and tax is deducted as taxes are only transfers not the

use of real resources.

The economic costs of the project will include;

a. Airport and related Development and Construction costs

b. Annual operating and maintenance costs

c. Land acquisition costs

d. Environmental and mitigation costs

e. Social and resettlement costs

f. Other possible costs e.g. road linkages

The quantified economic benefits of the project would be to;

a. To provide cost and time savings thereby encouraging more passengers and more air freight

b. To expand tourism

c. To expand high value industries

Multiplier economic impacts including employment and expenditure generation would also be expected.

Other important benefits and impacts, but non quantified, would include the increase in the safety of the airport

users, impact on GDP, direct and indirect employment and an increase in higher added value products.

9. Preliminary Financial Analysis

The financial analysis in a PPP project assumes a critical position as it measures the financial viability and financial

soundness of the project and therefore its attractiveness to the private sector and suitability to attract project

finance. If the analysis shows the project is not viable, the analysis can also show how much public financial

support would be necessary to make the project viable/attractive to private sector investors.

Public financial support can be towards initial capital expenditure or on-going annual cost or revenue support.

The financial analysis can show the impact on viability of different levels and timing of support. Generally, the

private sector prefers capital support as it is ‘up front’ and conventionally maximum support is about 20% of

project cost, although some countries go as far as 40% for infrastructure projects.

The financial analysis estimates various financial indicators which include;

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a. FIRR on Project (Financial internal return on total project cost before any debt/equity structuring) b. FIRR on Equity (based on assumptions on debt equity ratios, interest, repayment of principal terms). c. FNPV (Financial Net present value of the project) d. Annual Debt Service Cover Ratios (Indicating the margin of revenue over debt each year) e. Other useful ratios.

This section provides a very preliminary assessment of the financial viability of the project (FIRR on Project). It

assumes private sector responsibility for all investment and all annual income and costs, whereas in practice the

airport operator may only operate most, but not all, of the airport facilities. In reality therefore, under the

concession contract, the private partner would have defined specific functions.

The FIRR is also estimated as preliminary because a PPP focused study has not yet been undertaken and in

particular;

(i) A well-defined project development cost has yet to be prepared. (ii) The project has not been structured, i.e. the responsibilities, liabilities and benefits of the private sector

partner have not been defined, and (iii) The bases of a proper financial analysis are not yet available. For example, if some parts of the airport

operation at Osh are excluded from the PPP concession, so would too the costs and revenues of those functions. Further, we have not obtained the demand and tariffs for all airport services that are likely to be operated by the private sector e.g. the terminals and land side operations, and considerable cargo could well be generated and the analysis is therefore somewhat speculative without an assessment of future volumes and types of cargoes. Further, existing annual costs are not usually very accurate as a basis for future costs where there is major development and maintenance is usually under resourced.

However, the assessment provides a reasonable preliminary indication56 of the possible range of financial viability

i.e. highly viable, viable, marginal or likely to need considerable government financial support, and whether

continued interest in this project as a PPP candidate is warranted.

Until about 2007, Osh airport, being a branch of MIA-JSC, was a drain on the financial resources of the MIA-JSC.

With the recent (but still limited) expansion of traffic, as noted in the traffic section, a surplus of income over

expenditure has been experienced with a surplus of Soms 101m in 2010 (or about US2.2 m). The following

summarises all income and expenditure in 2010.

Table 9.1 Income and Expenditure at Osh Airport, 2010

Item Amount (Soms) Amount US$m

US$ Per

Passenger

Income 259,000,000 5.76 12.48

Expenditure 158,000,000 3.51 7.61

Surplus 101,000,000 2.24 n/a

Source: MIA

We have made a number of simplistic assumptions for the financial assessment as follows:

56 Currently, at Osh airport 64% of income comes from passenger charges and „administrative fees‟ and 94% of airport income is passenger related, directly or indirectly. While this will likely change in future, relating income to passengers is considered to be sufficiently accurate at this stage and probably underestimating income.

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a. Project Cost of $130 million in 2008 prices including 10% contingency. Construction costs incurred over 3 years in 2014 - 2016 (inflated by 5% pa (US$) between 2008 and 2014).

b. Traffic: Passenger traffic which reached over 600,000 in 2011 to expand by 5% per year to 2030 (20 years) c. Average revenue per passenger based on 2010 accounts of $12.48 inflated by 5% per year to year values d. Other revenue (cargo, increased terminal revenues, parking etc.) assumed at 30% of passenger generated

revenue e. Average cost per passenger of $7.61 in 2010 inflated by 3.5% per year to year values f. Exchange rate: US$1.00=Soms45.0

Our very preliminary assessment indicates that the project could be financially viable, in financial terms, as it

generates approximately 16% FIRR on Project, which at this level of accuracy provides support for continued

project consideration. The analysis still needs very much more detailed financial modelling to obtain an accurate

indication of overall project financial viability, return on an equity investment and the possible extent of any

government subsidy/financial support57.

10. Risk Management

To ensure the objectives of the PPP project, adequate risk mitigation and fair risk sharing between the public and

private sectors are essential and these will be identified in the pre-F/S.

As stated under previous ICIP reports, a sound investment climate would be the best risk mitigation mechanism58.

What is necessary within the PB and/or the subsequent F/S is to identify the various types of risks under this

project, and to allocate them to the party that can best control them. There is no universal solution and the range

of possible solutions to risk management is wide. The important lesson is that the risk allocation should not be

cast in stone.

The Government is developing a risk management framework for the infrastructure sectors as an instrument for assessing the contingent liabilities that may arise59. When further details of Osh airport project are available, the risk management section will describe;

a. The types of risks to be borne by the Government (the so-called political risks such as changes in policy, delay of agreed tariff adjustments, and expropriation);

b. Those to be borne by the private sector (commercial risks such as construction cost overruns and delays, and failure to perform according to specifications);

c. Those to be assigned on a case-by-case basis such as force majeure, inability of government agencies to pay for infrastructure services (the so-called credit risk), and demand risk;

d. The main principles for the provision of government support including legality; e. Review and approval procedures for government support.

Risk management would also assess the quantitative and qualitative standards of the project report (pre F/S or F/S) as well as whether any request for government financial support met MOF-RMU criteria.

11. The Business Case and Project Structuring

57 This is more likely to come through structuring the project with the GOK/MIA (or possibly an IFI) funding some facilities such as safety, CIQ and some air side facilities. 58 ADB/ICIP is providing support to GOK for continuous and sustained policy reforms that lead to a stable macroeconomic environment, well-functioning judicial system, independent and technically sound regulation, full cost recovery (or a well-targeted output-based subsidy where the full cost recovery would make such services unaffordable), and open access in the infrastructure sectors. 59 To this end, a Risk Management Unit (RMU) has been established in MOF and is now (end 2011) formulating a risk management policy to ensure that risks of individual PPP projects are appropriately allocated between the public and private sector, and that the Government‟s overall exposure is well managed.

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The commercial opportunity to expand and rehabilitate the existing airport at Osh would seem to have potential

as a private sector venture under a PPP modality. Traffic levels at the airport are relatively high, growing and with

a significant proportion of regional international flights. Air cargo is an area of activity at Osh that almost does not

exist at present and there would seem to be good scope to develop this area, possibly into a major national

freight facility.

Worldwide, airport development under a PPP modality are seen as having good potential for the private sector

and as bringing much needed investment to improve safety and passenger standards. They also have the

potential to help generate significant economic benefits for government through tourism and stimulation of high

value cargoes.

A Special Purpose Vehicle (SPV) type entity is could be formed by a private sector consortium, possibly with

majority international ownership in association with Kyrgyz companies60, experienced across a range of financing,

construction and operating activities. A BOT61 type concession contract based on a ROOT

(Rehabilitate/own/operate/transfer type PPP modality could be envisaged.

Airport development can be developed as a complete facility but can also be structured if necessary for financial

and/or other reasons (e.g. safety/security) into component parts of the airport system and most usually into land

side activities which are normally more revenue oriented and commercial and air side activities which can be less

so.

Depending on both the policy of GOK towards private airport operations and analyses contained within the

feasibility study, scenarios for the most appropriate functional structures for the private partner can be

developed and assessed. Activities such as Air Traffic Control (ATC) and Customs, Immigration and Quarantine

(CIQ) will likely continue by GOK probably within the facilities/space provided within the land side facilities to be

provided and maintained by the private sector.

The remaining functions may all be undertaken by the private partner. However, the more functions the GOK

retains, the more its financial responsibilities (costs) will be and the lesser scope for new technology and

management innovation. The feasibility study will assess the costs, benefits and revenues of various public

private partnership arrangements.

12. Project Readiness

Project ‘readiness’ is one criterion62 for the progression of a project into and through the PPP project preparation

stage i.e. the GOK’s PPP planning, policy and preparation processes.

While this project is clearly not ready to proceed to feasibility study yet because further work is still needed to

finalize this PB, the project has some positive ‘readiness’ aspects;

a. Air safety issues have a high profile, especially following the recent air crash on the runway at Osh airport.

b. A report has been commissioned by Manas International Airport JS Company (MIA) which while is not an FS in the conventional sense, has relevant information on;

Need for, and Objectives of, the expansion project

Technical expansion details and layout plans

60 Depending on which is the majority investor 61 BOT is a generic term and covers a wide range of concession types. 62 Readiness is a criterion in the screening process being prepared under (this) TA7819 KGZ

100

Land acquisition requirements

Capital costs

Recent traffic trends and annual revenue and operating costs

c. MEAP, MTC and MIA have been supportive on the initial concept of PPP and are considering this project as a candidate for possible implementation under a PPP modality.

13. Project Issues

There are a number of project issues which will need clarification;

The institutional capacity and willingness to proceed with this project under a PPP modality needs further discussion and elaboration.

Preliminary analyses on technical assessment of the project and its cost including conformity to ICAO regulations and guidelines.

In the absence of an independent regulator, the contract for the development of a terminal at Osh will need to include an initial tariff schedule and an explicit description of the mechanism for adjusting tariffs, together with the agreement of the GOK/MTC to these provisions

For ADB support, the project must follow the new PPP Law and international best practice/ADB Guidelines for PPP project preparation

If the project needs financial support including guarantees, a number of specific criteria must be met based on risk management principles

Preliminary analyses of the risk management, social, resettlement, environmental, economic and financial aspects must be completed to a satisfactory level by independent analysts to finalize this PB.

A decision must be made on whether any further technical sub-studies (such as air traffic control) are needed to finalize this PB or a whether this PB can be finalized by MEAP/MTC. Either way, the conclusions of the final PB may or may not justify the expenditure that would be required for the preparation a feasibility study

In terms of structure, the MTC/MIA would normally be the contracting agency

14. Preliminary Conclusions

Given the priority of the project, the possible need for no or limited budget support, and the proven track record

of the PPP model for airports, this project would seem a good candidate for PPP and this PB should be continued

until a decision can be made either to progress this project further.

15. Next Stages

NB Appendix A1 following shows the complete step by step process for PPP project preparation.

a. The GOK needs to agree this project as a candidate for PPP and ring fence the project while preliminary studies are undertaken

b. Complete this PB as far as practical undertaking further sub analyses of the project if necessary.

c. Key Data needs include

i. Identification of any air traffic/technical issues.

ii. Confirm limited or no resettlement.

iii. Preparing/commission the basis for a fuller financial analysis including project development costs, annual costs, demand, tariffs and revenue.

101

d. Complete Final PPP Project Brief (including preparation and cost a TOR for the pre-feasibility study)

e. GOK to review and take decision to continue or not under PPP modality

f. Undertake market sounding and consultation

g. Proceed to pre F/S whose TOR will include resolution of all issues and provide the complete basis for proceeding to tender. The pre F/S will include the preparation of draft tender documents.

Outline Draft TOR for PPP Pre-Feasibility Study

16. Outline Draft TOR for PPP Pre-Feasibility Study

a. Background to this project

b. Legal Basis of PPP development in the Kyrgyz Republic

c. National Economic Development

d. Ministry of Transport & Communications: Background and Planning

e. National Transport Planning

1. Sector Transport Plans

2. Aviation Sector Planning

i. Background, objectives, scope and progress

ii. Air Transport policy

iii. National Air Navigation and the Regional System

iv. Transport and Air Traffic Issues

v. Airports in Kyrgyz

f. The Osh Region

1. Socio economic development

2. Potential development

g. Osh Airport

i. Organization

ii. Current activities and ICAO status

iii. Inventory (Dimensions/Capacity and Condition) of facilities/equipment63

i. Traffic Trends: Passengers, Cargo, Flights

ii. Current Tariffs

iii. Airport Finances

h. Experience of PPP in airport development in other countries

i. Description

ii. PPP Structures

iii. Success, issues and constraints

iv. Applicability to Osh airport

i. The Potential PPP Project

1. Defining Options and Scenarios for future development

2. Future Demand (by option/stages) 63 Including all existing facilities and including runway, taxi-ways, aprons, buildings, utility services, parking areas, access roads, offsite communications,

meteorological facilities and others as relevant. Also the nature and location of obstructions in the approach zones or any penetrations of the horizontal or conical surfaces together with a description of their nature and a description of the limitations on flight paths imposed by the surroundings;

102

i. Passengers

ii. Cargo

iii. Flights (Inc. size of aircraft)

3. Project Description

i. Air side Facilities

ii. Land side facilities

iii. Air navigation

iv. Constraints to be overcome

v. Development Staging

vi. Project Capital Costs by option/stages

4. Project Costs

i. Capital costs by year

ii. Annual operating and maintenance costs

5. Definition and Scope of a potential PPP Project

j. Social and Environmental Impacts

1. Land and Resettlement Issues

2. Social Impacts

3. Environmental Impacts

k. Economic Evaluation of the project

1. Development Context and socio economic benefits

2. Direct economic benefits

3. Costs

4. EIRR

l. Financial Analysis

1. Project Revenue

i. Tariff and fees

ii. Aeronautical Revenue by facilities

iii. Non Aeronautical revenues

2. Project capital and annual costs

3. The financing environment

i. Likely sourcing of finance

1. by the private partner

2. by public sector/donors including options for public sector support

ii. Indicative financing plans and terms

iii. Market sounding

4. FIRR on project, FIRR on equity, Loan cover ratios

5. Public sector support

m. Risk Management

1. Identification of risks

2. Allocation of risks

3. Mitigation of risks

4. Issues

5. The risk management plan

n. Business Plan and Project Structuring

o. Implementation Plan Programs

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1. Concept Plan

2. Tendering Phase

3. Development Phase

4. Monitoring plan during the operational Phase

p. Institutional Framework

1. The PPP network

2. The Executing agency and MTC PPP Unit

3. Links to other Government agencies

4. Recommendations for strengthening the institutions/institutional structure

q. Consultations

r. Conclusions and Recommendations

1. Conclusions

2. Recommendations

s. Draft (Model64) Contract Documents

1. Draft Request for Prequalification

2. Draft Request for Proposal

3. Draft Airport Contract

64 Draft documents can be model or airport specific depending on budget and scope

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Appendix A1 Steps in Project Preparation for a PPP Project

(Up to Tender Stage)

No. Step Action Comments

1 Identification of Needs for

a priority project

By Government and Public

Partner65 to prepare initial data

on project

2 Project Funding Review Public Partner examines

whether funding of project by

public procurement or if not

whether possibly by PPP

Usually if public sector does

not have funds then consider

PPP. If by PPP step 3.

3 For PPP:

PPP Project Brief (PB)-

Preliminary

Puts together available data on

the project in a PPP format

Usually complete data not

available, so preliminary PB

puts together what data and

information is available and

indicates critically needed

data, issues, opportunities,

constraints etc.

4 Review of PB Government PPP agencies

(Public Partner) review whether

project appears to have

sufficient potential to progress

further under PPP

If positive decision from

GOK, Public Partner obtains

and collects the required

data specified in Step 3

5 PPP Project Brief (PB)-Final PPP agencies review and decide

or not to go to Pre-Feasibility

Study (FS)

PB contains as much

information as necessary to

make a decision to continue

to FS. It includes TOR for

Feasibility Study including

approximate cost of study

6 Pre-Feasibility study By Consultants and managed by

Public Partner in consultation

with MEAP and MOF

Study is in 2 parts; If FS

positive in Part 1, Part 2

includes draft Tender

Documents

7 Review PPP agencies review If positive, project goes to

tender

8 Tender

NB: Article 7 of the Proposed PPP law states that the public agencies authorized for state regulation of PPP are:

- Government;

65

Under Kyrgyz PPP law there is designated a ‘Public Partner’. In other countries this might be called the line ministry or the executing agency

105

- authorized public agency (currently MEAP);

- public risk management unit (currently MOF);

- public partners (e.g. line ministries such as MTC)

Table A2 Other Detailed Airport Data

Services Income by Service in 2010

Per Passenger Indicator

A Aviation Operations Soms-000s US$ 000s Soms/Pax US$/Pax

airport services 53,174.00 1,182 115.25

2.56

apron 18,259.00 406

passengers 103,968.00 2,310 225.35

5.01

security 5,722.00 127

admin fee 63,102.00 1,402 136.77

3.04

-

Sub Total 244,225 5,427 529

11.76

-

B Non-Operating Income -

rentals 5,851.00 130

communications 1090 24

others 4703.9 105

-

Sub Total 11,644.90 259

-

C Other Income 3674 82

-

D Total Aviation Income 259,544 5,768 562.55

12.50

Source: MIA

NB: 461,367 Passengers in 2010. Exchange rate October 2011; US$1=Soms 45.0

-

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Table A.3 Selected Existing Tariffs at Manas International Airport

Item US$ Notes

Take-off or Landing Charge 14.29 Per ton; Over 200t+10%

Aircraft Parking Charge 2.14 Per ton per day after 3 hours free

Passenger Terminal Use 7.18 Children charged @50%

Passenger Services 10.36 Check in and boarding

Airport Fee 10.00 International departing pax (in $)

All except airport fee, charges converted at $1=45.0 Soms

Source: MIA Appendix A4 Defining Public Private Partnerships Public Private Partnership (PPP) means an arrangement between a government / statutory entity / government owned entity on one side and a private sector entity on the other, for the provision of public assets and/or public services, through investments being made and/or management being undertaken by the private sector entity, for a specified period of time, where there is well defined allocation of risk between the private sector and the public entity and the private entity receives performance linked payments that conform (or are benchmarked) to specified and pre-determined performance standards, measurable by the public entity or its representative. Further explanations of the definition above include:

a. Arrangement with private sector entity: The asset and/or service under the contractual arrangement will be provided by the Private Sector entity to the users. An entity that has a majority non-governmental ownership, i.e., 51 per cent or more, is construed as a Private Sector entity.

b. Public asset or service for public benefit: The facilities/ services being provided are traditionally provided by central or local government. Two key concepts are important:

Public Services are those services that the government is obligated to provide to its citizens or where the government has traditionally provided the services to its citizens.

Public Asset is that asset the use of which is linked to the delivery of a Public Service.

c. Investments being made by and/or management undertaken by the private sector entity:

The PPP arrangement could provide for financial investment and/or non-financial investment by the private sector;

The intent of the arrangement is to harness private sector efficiency in the delivery of quality services to the users.

The investment is normally paid back solely by user charges (passenger charge or tolls for example) but for some projects can be by user charges with government support

d. Operations or management for a specified period:

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The arrangement usually cannot be in perpetuity. The length of the contract period according to the PPP law may be up to 50 years but normally would be 20-30 years depending on the payback period and other factors. Normally, after a pre-determined time period, the arrangement with the private sector entity comes to closure but may be retendered.

e. Risk sharing with the private sector:

Simple outsourcing of services are not normally considered as PPPs.

f. Performance and Standards:

PPPs critically focus is on performance and as well as on provision of facilities or services.

The focus is on a strong element of service delivery aspect and compliance to pre-determined and measurable standards to be specified by the public partner.

The above definition describes the essential conditions for an arrangement to be designated as a Public

Private Partnership (PPP). In addition to these, some of the desirable conditions or good practices for a PPP

include the following:

a. Allocation of risks in a manner to the party best suited to manage and/or share the risks (See MOF

Risk Management Policy under preparation);

b. Private sector entity receives cash flows for their investments in and/or management of the PPP

through user charges from the consumers of the service provided and/or through a performance linked fee

payment structure from a government entity;

c. Generally a PPP involves a long term arrangement between the parties but it can be shorter term

dependent for instance on the sector, focus of PPP or payback;

d. A PPP should include penalty based structures in the arrangement and may include incentives so as to

ensure the required service delivery standards in the contract;

e. Outcomes of the PPP are normally pre-defined as output or service delivery parameters rather than

technical specifications for assets to be built, though minimum technical specifications would also normally

be identified. However, such contract structures are expected to leave room for innovation and technology

transfer in project execution / implementation by the private sector entity.

The models where ownership of the underlying asset remains with the private entity during the contract

period and project is transferred back to the public entity after the termination contract are the preferred

forms of Public Private Partnership models. The final decision on the form and structure of the PPP is

determined by the Government after due consideration of its own feasibility study.

Some of the commonly adopted forms of PPPs include management contracts, build-operate-transfer (BOT)

and it’s very many variants including rehabilitate-operate-transfer (ROT) and design-build-lease (DBL). There

are other forms.

Service contracts, Engineering-Procurement-Construction (EPC) contracts and divestiture of assets are not

normally recognized as forms of PPP. The build-own-operate (BOO) model is normally not a common form of

PPP, as there is no transfer back to government, but it can be useful as an interim step instead of immediate

privatization, for some projects.

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The following provides a note on how the private partner can be repaid for its investment under a PPP

contract.

A5 A Note on How the Private Partner Is Repaid For Its Investment

A Note on How the Private Partner Is Repaid For Its Investment

PPP Cost Recovery is achieved in one of two ways:

A. User or Consumer Pays (or mainly pays with limited support from government)

Medium to large scale PPPs have been awarded mainly in the energy and transport sub-sectors (roads, ports

and airports), where the user pays the cost of the service provided. Although there are variations in

approaches, over the years the PPP model has been veering towards competitively bid concessions where

costs are recovered mainly through user charges (in some cases with financial support from the

government).

B. Government (Taxpayer) Pays (or mainly pays with some support from user charges)

These are called Availability or Annuity Based BOT type models involving payment for a facility being

‘available’ for use, with regular or ‘annuity’ payments to the private partner. In these cases, the government

repays the investment over the contract period from its budget with some contribution from users.

In sectors/projects not amenable for adequate cost recovery through user charges, owing to socio-political-

affordability considerations, such as in rural, urban, health and education sectors, the government harnesses

private sector efficiencies through contracts based on availability / performance payments.

Implementing the annuity model will require necessary framework conditions, such as payment guarantee

mechanism by means of making available multi-year budgetary support, a dedicated fund, letter of credit

etc.

Government may consider setting-up a separate window of assistance for encouraging annuity-based PPP

projects. A variant of this approach could be to make a larger up-front payment from its contracted stream of

future payments-say 40% of project cost) during the construction period.

================================================================

Performance Based Management/ Maintenance contracts

In an environment of constrained economic resources, PPP models such as performance based

management/maintenance contracts are beneficial. Sectors amenable for such models include municipal

services, water supply, sanitation, solid waste management, road maintenance etc.

Modified Design-Build (Turnkey) Contracts: In traditional Design-Build (DB) contract, the private contractor is

engaged for a fixed-fee payment on completion. These projects could be offered to private sector through

operation-maintenance-(user charge) concessions after construction under DB.

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A6 The PPP Project Cycle-Kyrgyz Republic

DRAFT

* Key Steps are required under Project Preparation. Both may require full approvals: First the decision to proceed with an FS (requires funding). Second to Proceed to Bidding

after the FS is completed

** Approvals by Government to be detailed within 'PPP Procedures' to be drafted after PPP Law adopted

*** As draft law stands currently, only for projects requiring financial support from GOK

**** Can be an PPP Project Brief, which should also include a draft TOR and budget for Feasibility Study

PPP Agencies under the

PPP Law

GOVERNMENT

PPP AUTHORITY/MEAP

MOF/RMU

LINE MINISTRY

LOCAL GOVERNMENT

Project Preparation Stage* Project Transaction/Execution Stage

Review or Approval**

Review Review

Review***

Project Identification

FeasibilityStudy (FS)

Consultation Pre

Qual

Bidding Bid

Evaluation

Contract Finalization and Signing

Construction and monitoring

Review*

Review

Approval of Contract Award

Information Memo (DataAnalysis)

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DRAFT

2. PPP Project Brief for Bishkek Car Parking Project

Prepared for the Municipality of Bishkek and the Ministry of

Economy and Anti-Monopoly Policy (MEAP)

Under ADB TA 7819 KGZ

By Robert Brown, PPP Consultant

February 21, 2012

(Updated 25th May 2012)

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DRAFT

PPP Project Brief for the Bishkek Car Parking Project

1. Introduction to the PPP Project Brief (PB)

The function of this PB66 is to provide a first step67 in the project preparation process for implementation of

this project under a PPP modality68. The project is the development of off-street car parking in Bishkek.

The PB reviews the limited data available, and considers in particular a possible demand scenario, the

preliminary project capital costs and undertakes a very preliminary financial analysis. The PB summarizes

outstanding issues, provides preliminary conclusions commensurate with the level of data and

recommends the next steps including where appropriate the filling of information gaps and subsequently

the progression to feasibility studies and tendering required under the PPP law.

The objective of the PB is, therefore, to bring together all available information in a form which can help

accelerate the implementation of this project through providing the basis for an essential independent

feasibility study and also provide a basis for a preliminary market sounding.

The PB contains the following sections;

2. Legal Framework 3. Recent background to Infrastructure Development and PPP 4. Economic Background 5. Project Background 6. The Potential PPP Project 7. Project Costs 8. Demand and Tariffs 9. Social and Environmental Impacts 10. Economic Evaluation and Financial Analysis 11. Risk Management 12. Business Plan and Project Structuring 13. Project Stages 14. Agencies and Institutions 15. Consultation 16. Preliminary Conclusions

i. Legal Framework

The PB confirms that the project will be implemented according to the PPP Law and international best

practice.

If the project needs fiscal support, the implementation of the project will be assessed by the Budget office

of the Municipality in conjunction with the MOF/Risk Management Unit according to the Order of the

Ministry of Finance from the 10 June 2010 #257 and the Risk Management Policy (to be) adopted by MOF.

66 This PB is prepared under ADB TA 7819 KGZ Identification of PPP Projects and Capacity Building in the Kyrgyz Republic, undertaken by Robert Brown, International PPP Expert. This TA is part of the ICIP (Investment Climate Improvement Program) Sub Program 2 whose purpose is to improve the investment climate for the private sector, a critical cornerstone of the Government‟s economic policies. Actions needed for full compliance with objective 2, PPP Project Pipeline developed, is for MEAP to submit project PBs for 7 potential PPP projects. This PB constitutes one of the requisite seven. 67 See Appendix A1 which describes the steps needed up to the tender stage 68Appendix A2 describes the definition and characteristics of Public Private Partnerships

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Given that this is a Municipal project, it is assumed that this project conforms to Municipal laws and regulations but this will need to be reaffirmed.

Current regulations are based on the Resolution of the Bishkek city council on December 29, 2009 № 135 "On Approval of Regulations", “On the procedure of calculation and payment of the fee for garbage collection from the city of Bishkek” and “On procedure of calculation and payment of fees for parking of vehicles on the territory of Bishkek city”.

The relationship between the municipality and the private partner will be based on the principles enshrined in the PPP Law.

ii. Recent Background to Infrastructure and PPP Development in Kyrgyz Republic69

3.1 Infrastructure Development

The past decade has witnessed an extended transitional period in the country and there have been major

political, institutional and governance reforms and fundamental changes to life, governance and business.

This has impacted the provision of infrastructure services and all other areas of the economy.

As in the other countries participating in the Central Asia Regional Economic Cooperation (CAREC),70 the

infrastructure situation in the Kyrgyz Republic is not significantly different from most other developing

regions of the world. Kyrgyz needs to expand its infrastructure systems and facilities in order to cope with

the rising demand and to increase and improve access to infrastructure services.

The problem has also been to find resources for rehabilitation, maintenance and operation of these existing

assets, as well as construction of new assets71. Another problem has been the fact that most of the Soviet

era assets were designed to serve regional needs and not just the Kyrgyz Republic. Finally, many of the

infrastructure facilities were not designed to modern standards and with efficiency of use in mind.

Low investment levels have been inadequate to ensure proper maintenance and rehabilitation of the

existing infrastructure systems and facilities have sharply deteriorated and all sectors, except

telecommunications, are facing a technical and financial crisis.

There is a close correlation between infrastructure spending and economic growth. If the former is not kept

at the required level, economic growth becomes constrained by power outages, traffic congestion, high

transport costs, and other infrastructure bottlenecks. In its Country Development Strategy (CDS), GDP is

projected to increase at 8-9% per annum, or twice as high as the average annual growth rate of 4.2%

recorded during the period 1996-2006. To achieve and sustain such growth, annual infrastructure spending

should be increased to at least 6% of GDP. It is clear that the investment needs cannot be met from the

government (central and local) budget and external aid alone, and that private sector financing, both

domestic and foreign, has to be mobilized.

3.2 Private Sector Investment and PPP Development

The high investment needs underline the need for prioritization of public sector resources and financing

from the multilateral and bilateral development partners used for basic infrastructure and/or to leverage

private sector investment. Development partners will also play an important role in helping the

69

This draws from the earlier ICIP reports prepared by Vlad Bohun under TA 7067 KGZ which remain valid 70

Afghanistan, Azerbaijan, People’s Republic of China (PRC), Kazakhstan, Kyrgyz Republic, Tajikistan, and Uzbekistan. 71

It is clear that major rehabilitation often involves creation of new assets

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Government create a conducive environment for strong private sector investment that is crucial for

meeting the high investment requirements, including through Public Private Partnerships (PPPs). The

Investment Climate Improvement Program (ICIP) is providing significant support in this endeavour.

The PPP concept is new in the Kyrgyz Republic and the first step in this direction took the form of an inter-

ministerial PPP workshop on 19 June 2008. This has culminated with significant assistance from ADB in a

new PPP law signed by the President of the Republic in January 2012 alongside creation of a PPP units in

MEAP, in the Ministry of Finance (PPP Risk Management Unit) and within the Bishkek Municipality (within

the CDA). This is combined with significant interest from the private sector including through the various

private sector associations. With the final completion of the planning framework for PPPs later in 2012, the

emphasis is now moving to developing PPP projects (as noted in Section 1 and amplified in footnote 1

above). The Municipality of Bishkek has been in the forefront of PPP framework development and project

initiatives with a number of potential PPP projects under consideration.

iii. Economic Background

a. National Economic Background72

After modest growth of 2.9% in 2009, the country was recovering well from the global economic crisis as

GDP growth bounded to 16.4% in the first quarter of 2010. But the closure of international borders

following the April and June events stopped imports and exports at times, intensifying the impact of the

internal disruptions on the economy. For all 2010, GDP dropped by 1.4%

The economy is expected to pick up with GDP growing at around 5% in 2011 and 2012. The forecasts rest

on expectations of a normal security environment, continued reconstruction works, full resumption of

trade and services flows, and improved investor confidence. They also rely heavily on construction growing

by about 40%, mainly due to large scale reconstruction works in the south. Services and industry are seen

growing by 6% and 4%, respectively.

b. Bishkek City Context

The City of Bishkek has doubled in size in two decades to 1.2 million residents, out of which approximately one quarter live on the City outskirts in newly constructed and largely unofficial settlements. The population growth together with generally rising living standards has led to a rapid increase in the production of solid waste material. The total number of official residents is as shown in the following table;

Age Group Resident population in the following age

groups, thousand people:

Year 2008 2009

Under working age 192.3 208.6

Working age 544.7 554.2

Above working age/retirees

86.8 83.7

Total number of residents

823.8 846.5

72 This largely was written by Nurbek Jenish, consultant of the Kyrgyz Resident Mission as part of the 2011 update of the ADB Kyrgyz Country Report. A fuller summary is provided in Appendix C.

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(18 years and above)

608,2 609,1

Source: Municipality of Bishkek

According to municipal data, the population of Bishkek increased by 8% in 2010.

Total official levels of employment are as follows;

Total Employment

Year thousand people

2005 333

2006 363

2007 380

2008 388

2009 370

Official unemployment was stated to be about 13,000 people.

The aaverage nominal wage of employees of enterprises and organizations between January – June 2010 amounted to 9,487 Soms per month in Bishkek (or $211).

There are 192 health facilities in the city and 311 educational establishments (children and adults).

There are some 48,000 companies, organizations and associations registered in the city of which some 30,000 are limited liability companies.

For the first quarter of 2010 foreign direct investments (FDI) of US$70.5 m were attracted to Bishkek city, however only just about half of the 2009 amount. The reduction in direct FDI is connected, as in the whole world, with halting of investment resources caused by the crisis. Bishkek attracted 40% of the total volume of FDI of the Republic. Higher-priority types of economic activity for foreign investors are financial activity (45.2 % of total investment volume), processing industry (24.6 %), real estate operations (12.2 %), transport and telecommunication (8.2 %).

The share of direct foreign investments arrived from the CIS countries made 38% of the total investments volume with Kazakhstan and Russia the leading investment sources. Investments were also attracted from the People’s Republic of China (the PRC) and the USA but relatively small amounts.

iv. Project Background

a. Current Situation

The basis of the transport system of any urban area, including Bishkek, is the road network. The rapid growth of the number of vehicles in private use of citizens in the last 5-10 years has led to the problem of parking in the city of Bishkek. The number of private cars in Bishkek over the past few years has increased more than 3-fold (from 40,000 in 2007 to 146,000 in 2010), respectively, the intensity of traffic on the main trunk streets has increased an average of 4 times.

The problem of lack of space for parking and general convenience leads to the fact that motorists are forced to park their cars along both sides of many streets and near junctions, which in turn makes it difficult for movement, leads to congestion and accidents.

The Municipal authority carrying out the maintenance and operation of municipal parking lots and parking in the city of Bishkek is the Directorate of Municipal Markets, Car parks and Parking lots.

Presently the Directorate manage 47 street parking areas (no any facilities) and charge 10 soms per one visit) and 15 fenced and guarded parking for which the charge is an average of 25 soms per day. There are

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also 87 guest parking areas near cafes, buildings, etc. which are paid by their owners according to contract, with payment of 10 Soms per car per day.

The actual income of the Directorate in the city budget for 2011 related to parking73 amounted to 24.7436 million Soms ($ 537 904.4), including:

Street Parking – 14.85 million Soms ($ 322,821)

Other Public Parking (including night guarded areas) 3.62 million Soms ($ 78,774)

Guest parking - 2.11 million Soms ($ 45,898)

In the city, there is only one multi-level private car park but quite a few ground level private car parks.

b. Data on Current Car parking

JICA is supporting a Municipal study on “Improvement of Urban Transportation in Bishkek City”. Following

the Consultant’s discussions with the Municipality, the JICA study has extended its survey programme to

include more research into car parking.

Information from their studies includes a significant amount on urban transportation travel including

traffic, traffic speeds and parking. Interestingly, average travel speed on the main 8 routes within the city is

reported as under 33kph (un-weighted by distance).

Parking information74 included the following:

The objective of the parking survey is to identify the demand for parking space near the central business

centres of the city. Five locations were surveyed and once during a weekday and once on a weekend,

however, only on street parking was surveyed. The parking fee is 10 Soms irrespective of duration of stay.

Of the total locations surveyed during the weekday, there were 1,043 legal parkers who stayed an average

of 20 minutes, and 1148 illegal parkers who stayed an average of 16 minutes. At the weekend, there were

1160 parkers who stayed an average of 26 minutes and 1,287 illegal parkers who stayed 19 minutes.

While this data needs more clarification, and amplification of off street parking, there is high demand for

short stay parking and a large amount of illegal parking.

c. Purpose

The building of new parking areas will reduce congestion in the central streets in the morning and

afternoon, and provide parking facilities in commercial and residential areas at various times of the day and

night.

The implementation of this project proposal is designed to;

Solve the problem of parking for visitors and residents of Osh market surrounding areas;

Reduce congestion on the streets adjacent to the Osh market;

Improve transport traffic at the entrance to the town in the Osh market.

The project is expected to;

Reduce the congestion on city streets by increasing the efficiency of traffic flow

Increased convenience for residents of Bishkek

Increase the attractiveness of the centre as car parking and traffic conditions become more difficult

73 Market/Bazaar area rents - 4.16 million Soms ($ 90,389) 74 Draft Progress Report, December 2011

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Provide safe parking areas

v. The Potential PPP Project

a. Location

The project proposal is to develop design and construction documents and construction of multi-level car

parking in an area of 0.29 ha, located at the intersection of Kuliev and Toktogul streets (Osh market), as

well as access roads to the main streets. The plot is defined in accordance with the approved General

Development Plan, Bishkek 2025.

b. Development of the Project under PPP Modality

The Municipality of Bishkek City, Kyrgyz Republic is presently carrying out preparatory works to develop

various municipal projects. One of the priority projects is the construction of off street car parking.

The project which is in early stages of preparation will conform to Kyrgyz standards and be developed and

operated by a private partner under a PPP modality and which will be undertaken according to the PPP law

of 2012. That is, it will be prepared with due diligence, including an international standard feasibility study,

and be implemented under and within a competitive and transparent framework.

It should be noted that the project has been considered for PPP because public funding for the project is

unlikely in the near future but the development is urgently needed.

c. The Project

The project involves the development of one or more multi-storey car parks at key locations in and around the centre of the city, with one initial project planned as described above.

The proposed multi-storey car park will have a total floor area of approximately 10,000 m² with ramps to the upper levels. There will be a vehicle control center at the entrance with video surveillance cameras at every level, automatic barriers to entry and exit and a pedestrian elevator The multi storey parking facility will provide for the following demand;

Hourly parking space visitors Osh market

Short term car parking nearby residents

Temporary parking of cars for sale

Possibly other additional services could also be offered such as car wash, auto repair, tyres etc. Technical standards that apply to buildings and specifically to car parks will need to be explicitly stated, as this document is progressively detailed.

Additional possible locations identified by the Municipality include:

Kulieyev Street (Osh market)

Kiev Street (City Hall)

Shopokova Street

Other locations may well be considered.

vi. Project Costs

Estimated cost of construction and equipment of a 5-storey car park (10,000 square meters) is estimated as follows:

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Item $million

a. The cost of building a multi storey car park of 10,000 square meters will be about $ 4.0 million (400 $ for 1m ².)

4.00

b. Set-passenger lift (capacity 4 people) on a 5-storey facility - about $ 10,000

0.01

c. Installing 40 video cameras and hard drive power supply - $ 5,000

0.00

d. -Two automatic gates at the entrance and exit $ 2,000

0.00

4.01

Installation Costs 0.10

Access Roads 0.10

Landscaping 0.10

Sub total 4.31

Contingency 0.43

Total Cost 4.75

Land 0.29

There will be no need to acquire land, as the site planned for the construction of the land is public property. However, the approximate cost of land in the area of Kuliev / Toktogul streets is $10,000 per 0.01 hectare. The total site area is 0.29 ha and so the land value would be approximately $290,000.

The value of the land or its lease value should be included in the cost of the project.

Operating expenses will include

a. Charges for electricity; b. Charges for water supply; c. Fee for garbage collection; d. Taxes; e. Staff salaries and payments to the Social Fund (20 employees); f. The cost of maintenance of access roads. g. Land lease cost

Parking Spaces Provided

Initial estimates suggest each space would require 25 m2 (the footprint of the car, plus ramps, plus circulation, plus operational requirements and wasted space)75.

Therefore the total number of spaces would be 10,000/25=400 spaces

vii. Demand and Tariffs

There is little information so far on the number of off street and on street parking spaces, nor how much

private operators charge although it is believed to be 50-70 Soms per visit off street. On street charges are

understood to be semi formal at about 10 Soms per visit.

viii. Social and environmental Impacts

75 It should be noted that international experience suggests possibly as much as 30-35 m2 per car space but the Municipality have advised 20-25 m2 and this will need verifying later.

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The level of impact of harmful emissions into the atmosphere will not exceed the current level may decrease the harmful effects

Social benefits of this project proposal relate to creating new jobs (20 employees), increased comfort for the residents including the easing of the problems of congestion, safety and lack of parking.

However, while initial consideration may indicate no major social or environmental impacts, there should be an adequate social and environmental assessment.

ix. Economic and Financial Evaluation

a. Economic Evaluation

Population, car ownership and usage, urban development and standards of living are increasing and traffic in the city is increasing as a result. Bishkek city is already experiencing peak hour congestion and on street parking on major city routes will be under pressure to be reduced. On street parking both reduces city road space and cars manoeuvring to park impede traffic flow.

The project to develop more off street parking would therefore have economic benefits such as;

Investment avoided by Municipality

Ease of finding parking space

Safe parking

Traffic benefits

However, disbenefits (costs) would include;

Project cost

Charging for parking

Traffic cannot park on street

Possibly additional time to park in a car park

No economic evaluation has been undertaken but economic benefits would be generated from both net vehicle operating cost and time savings.

b. Financial Evaluation

The likely basis, structure and affordable levels of the tariff have yet to be evaluated and decided by the

Municipality. Tariffs may relate to use, length of stay, time of day and frequency of use for example. Tariffs

cannot be finally determined until the project is better defined, consultation takes place, affordability and

sustainability are determined and a detailed financial analysis is completed.

According to the Bishkek City Council Resolution of 28.05.2009 № 74, the approved rate for parking of vehicles in the city of Bishkek is 10 Soms (unlimited period). Municipal off street, ground level parking, is 25 Soms

On the basis of international practice and taking into account the greater need for parking spaces at the planned site, suggests a significantly higher level of tariffs for multi-level parking, although it is suggested that it would still be affordable for car owners.

The financial benefits of the project proposal will be formed by charging for car parking (hourly, daily, monthly payment), as well as by providing additional services (car wash, auto repair, tyre services etc). Information on Existing Municipal Parking suggests that demand for secure overnight parking is very substantial, and this demand would add to the normal daily usage. Ground level spaces can also be leased on an annual or monthly basis at a premium.

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No proper financial evaluation has been undertaken yet. Given the uncertainties about tariffs, turnover and occupancy rates, the Consultant, based on the project cost, developed a financial scenario that would generate an FIRR on project of around 20%.

Scenario: The preliminary analysis made a limited number of assumptions as follows;

i. 400 Parking spaces provided;

ii. Average Daytime Tariff76 per visit of 60 Soms ($1.33) (Consultant estimate-in 2011 values). 3 visits per day at 70% occupancy (reached in year 4)

iii. Average night time tariff of 100 Soms. 1 visit per night at 90% occupancy

iv. Other revenue assumed to be 5% of parking revenue

v. Project cost of $4.75 m (CDA and Consultant) in 2011 (inflated by 5% pa to construction years)

vi. Annual (O&M) costs (Consultant estimates) including land lease of $65,000 per year

vii. Inflation of annual costs and revenues by 5% per year (Consultants)

This is a very simplistic model and some of these assumptions may be well be either over or under estimates, and especially the volumes of car users willing to pay to use a new facility, but overall the preliminary estimates indicate that the tariffs may be in an acceptable range for proceeding to more detailed project assessments.

x. Risks

At this stage, it is not known if the project has any significant risks beyond those normally experienced. Significant variations in demand, project costs, negative social and environmental impacts and traffic from the above estimates would have a commensurate impact on the success of the project and studies related to these need to be undertaken in detail within the proposed feasibility study.

xi. Business Plan and Project Structuring

The opportunity exists to build and operate car parking within the city of Bishkek. Traffic is growing and volumes are high with a considerable amount of through heavy traffic year round.

The project can be developed as a BOT type concession, possibly Build Own Operate Transfer (BOOT), over a period to be determined following the completion of the financial analyses.

A project company (or Special Purpose Vehicle-SPV) would be formed, probably a consortium of private sector companies comprising technical, financial and other expertise.

The concession contract with the winning bidder of the tender procedures under the PPP law would obligate the SPV to finance, build, own, operate and maintain the car park(s) according to the technical and financial specifications set out in the contract. The SPV would operate the car park(s), collect the revenues based on tariffs (and tariff escalation in future years) according to the contract.

Data and information on the project would be provided to the Government by the SPV and monitored by the executing agency (CDA).

Details related to management, investment structuring and financial performance have yet to be prepared.

76

The tariff should be based on time of day and length of stay, plus other inducements and discounts e.g. reserved spaces, monthly/yearly usage etc, so this assumption is very simplistic.

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xii. Project Stages

The project is expected to start operation possibly in 2016/2017 allowing 2 years for construction in 2015/2016 following preparation and tendering in 2012 and 2013. Public financing could well be impossible to find for a project of this nature given the many social demands on the Municipal budget. The following approximate staging of implementation could be anticipated.

2012 Completion of PPP Project Brief, draft TOR and agreement to proceed to Feasibility Study

2013 Completion of Feasibility study and Tender Documents drafted. Tendering started

2014 Tendering Completed; Final design and EIA Completed. Licenses issued and Financial Close

2015-2016

Project Construction

2017 Operational Stage

Source: Consultants estimate

xiii. Agencies and Institutions

The Municipality of Bishkek would be the executing agency but will work closely with MEAP and MOF, and other agencies as necessary.

xiv. Consultation

It is understood that consultation with the public (existing users, potential users and affected people) and the private sector (potential investors) will take place when the project is better defined. This may need to be undertaken on several occasions.

xv. Preliminary Conclusions (Updated 25th May)77

a. Readiness

The project is not yet ready to proceed to pre FS and further preliminary work to complete this PB is needed before a Pre-Feasibility Study is being progressed with assistance of JICA.

From the information collected so far and the analyses undertaken, the project has potential to be considered for implementation under a PPP modality

b. Issues and Risks

Issues and risks relate to project costs, demand levels at affordable tariffs and environmental/social impacts. This is a new project and preliminary studies are on-going.

While the parking along the existing main roads is quite common in Bishkek, diversion to the proposed car parks following the new facilities which must be paid for may not generate the sufficient revenue from users of the new car park(s) to justify the investment.

Traffic measures and traffic regulations are already under study and may be needed anyway but may also be necessary in conjunction with the implementation of new parking facilities. Until a properly planned study is undertaken these issues remain as unknowns and a proper business plan cannot be prepared as a basis for the invitation to tender.

77 The Consultant updated the PPP Project Brief during his last visit following a meeting with JICA

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c. Next Steps

The next steps involve progressing this PB to complete the key missing information. The Consultant

suggests the Municipality undertake parking surveys which should also be coordinated with the current

transport plan (supported by JICA funding) under preparation and as described under issues.

The immediate requirements are;

1. Survey of the number of private off street car parks in the central area (with say more than 20 spaces)

a. Number of car parking spaces provided b. Tariff: Structure (i.e. per visit, per hour etc. and price for usage c. Turnover of cars per 24 hours i.e. how many cars use

2. Survey of on street parking

a. Location b. Numbers of metres of road used c. Usage

3. Detailed parking survey in area(s) of project

a. Public and private car parking spaces (on and off street) b. Tariffs where applicable c. Daily/Hourly variations in local parking d. Parking Duration

4. Preliminary Information from JICA Transport Study

a. Proposals for elimination of on street parking i. By enforcement of existing regulations

ii. For traffic flow improvement A formal or informal survey of businesses in the central area of parking issues would also be useful to

understand the views of beneficiaries or otherwise of the new parking provision and the support or

otherwise for the removal or reduction of on street parking

d. Update on the above

Following meetings with JICA in March, JICA informed the CDA on 15th May 2012 that the scope of their parking component in the Bishkek City Transport Study had been expanded. This was to include the need for additional information required to consider further car parking development under a PPP modality.

JICA consultants prepared a report on Technical Specifications for Parking Survey under the Study on Urban Transport in Bishkek City, April 2012.

This study includes;

i. On and Off Street Parking inventory ii. Parking Conditions Survey (city centre area)

iii. Detailed parking survey (selected areas of centre iv. Interview survey)

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After this survey is completed78, the analysis of data on volume, turnover of spaces, tariffs and location can be input to the feasibility study. Furthermore, the Municipality through the Study Team will prepare transport policy proposals within which car parking policy and plans will be developed and within which the proposals for car parking provision under PPP modality can be planned and implemented.

The final PB will include a draft TOR for the pre-feasibility study an initial draft of which follows in Section 17.

78 JICA indicated that the analysis of the parking data would be completed by the end of August 2012 and draft transport policy proposals thereafter by September

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17. Draft Outline TOR for Car Parking Feasibility Study

a. Background to this project and PPPs in the Kyrgyz Republic

b. Legal Basis of Parking Provision and PPP

c. National Development

d. Municipal Background and Planning

e. City Traffic and City Transport Planning

1. The City Transport Master Plan Study

i. Background, objectives, scope and progress

ii. Transport policy

1. Urban Planning

2. Public Transport

3. Traffic and Traffic Management

iii. Transport and Traffic Issues

iv. Impact of proposed sustainable transport policies on parking policy

v. Parking Issues

2. Parking in the City (Defined for both on street and off street parking)

i. City Centre Parking locations

ii. Parking capacities

iii. Current parking turnover

iv. Current tariffs

3. Municipal Public Investment Plans and Private Sector Opportunities

f. Parking Development Worldwide

1. Types of Parking Systems

i. Costs and efficiencies

2. Experience of PPP in parking development in other countries

i. Description

ii. Success and issues

g. The Potential PPP Project

1. Parking Demand and Parking Tariffs

2. Project Description

3. Project location (s)

i. Optimum location(s)

ii. Land availability

4. Project Costs

5. Definition and Scope of the PPP Car Parking Project

h. Social and Environmental Impacts

1. Land and Location Issues

2. Social Impacts

3. Environmental Impacts

i. Economic Evaluation of the project

1. Benefits

2. Costs

3. EIRR

j. Financial Analysis

1. Project Revenue

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i. Parking tariff and fees

ii. Other revenue (Advertising, ancillary commercial space, services etc)

2. Project capital and annual costs

3. The financing environment

i. Likely sourcing of finance by the private partner

ii. Indicative financing plans and terms

4. FIRR on project, FIRR on equity, Loan cover ratios

5. Need for public sector support

k. Risk Management

1. Identification of risks

2. Allocation of risks

3. Mitigation of risks

4. Issues

5. The risk management plan

l. Business Plan and Project Structuring

m. Implementation Programs

1. Tendering Phase

2. Development Phase

3. Monitoring plan during the operational Phase

n. Institutional Framework

1. The PPP network

2. The Executing agency/CDA and PPP Unit

3. Links to other Municipal and Government agencies

4. Recommendations for strengthening the institutions/institutional structure

o. Consultations

p. Conclusions and Recommendations

1. Conclusions

2. Recommendations

q. Draft Contract Documents

1. Draft Request for Prequalification

2. Draft Request for Proposal

3. Draft Car Parking Contract

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DRAFT

3. PPP Project Brief for Bishkek Kara Balta By-Pass Road

Prepared for the Ministry of Economy and Anti-Monopoly

Policy (MEAP)

under ADB TA 7819 KGZ

By Robert Brown, PPP Consultant

January 31, 2012

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DRAFT

PPP Project Brief for Bishkek Kara Balta By-Pass Road

1. Introduction to the PPP Project Brief (PB)

The function of this PB79 is to provide a first step80 in the project preparation process for implementation of this project under a PPP modality81. The project is the development of a toll road which could be up to 100 km in length. It comprises two sections i.e. the section of the road from 0 to 60th kilometer which is an incomplete section of a larger CAREC 3 Bishkek-Osh Transport Corridor and an extension in the Western direction to Chaldovar almost at the border with Kazakhstan. MTC has developed 4 options/alignments, two Bishkek to Kara Balta and 2 Bishkek to beyond Kara Balta to Chaldovar

The PB reviews the limited data available, and considers in particular a possible traffic demand scenario, the preliminary project capital costs and undertakes a very preliminary financial analysis. The PB summarizes outstanding issues, provides preliminary conclusions commensurate with the level of data and recommends the next steps including where appropriate the filling of information gaps and subsequently the progression to feasibility studies and tendering required under the PPP law.

The objective of the PB is, therefore, to bring together all available information in a form which can help accelerate the implementation of this project through providing the basis for an essential independent feasibility study and also provide a basis for a preliminary market sounding.

The PB contains the following sections;

2. Legal Framework 3. Recent background to Infrastructure Development and PPP 4. The Potential PPP Project 5. National and Transport Sector Background 6. Project Costs 7. Traffic 8. Social and Environmental Impacts 9. Economic Evaluation and Financial Analysis 10. Risk Management 11. Business Plan and Project Structuring 12. Project Stages 13. Agencies and Institutions 14. Consultation 15. Preliminary Conclusions

79 This PB is prepared under TA 7819 KGZ Identification of PPP Projects and Capacity Building in the Kyrgyz Republic, undertaken by Robert Brown, International PPP Expert. This TA is part of the ICIP (Investment Climate Improvement Program) Sub Program 2 whose purpose is to improve the investment climate for the private sector, a critical cornerstone of the Government‟s economic policies. Actions needed for full compliance with objective 2, PPP Project Pipeline developed, is for MEAP to submit project PBs for 7 potential PPP projects. This PB constitutes one of the requisite seven. 80 Appendix A1 shows the sequence of steps for PPP project preparation 81 Appendix A2 describes the definition and characteristics of Public Private Partnerships

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2. Legal Framework

The PB confirms that the project will be implemented according to the PPP Law and international best practice.

If the project needs fiscal support, the implementation of the project will be assessed by the MOF/RMU according to the Order of the Ministry of Finance from the 10 June 2010 #257 and the Risk Management Policy (to be) adopted by MOF.

This project conforms to the (draft) toll road law. This Act, if adopted, will define the purpose and procedure for the levying and use of funds from tolls of vehicles on toll roads and which applies to all users of toll road. The purpose of this Act is to accelerate the development of roads, improve the environment and enhancing road safety, attraction of investments in roads. The act will regulate civil and administrative legal relations that arise during the construction, renovation and operation of toll roads in the Republic. This law defines the legal basis for the creation of toll roads, establishes the organization of new construction and transfer of existing roads on a fee basis, the procedure for levying tolls vehicles on toll roads in the territory of the Kyrgyz Republic. Other relevant legislation of the Republic of Kyrgyz also consists of the Law "On Roads," and "On the Road Fund,”

3. Recent Background to Infrastructure and PPP Development in Kyrgyz Republic82

3.1 Infrastructure Development

The past decade has witnessed an extended transitional period in the country and there have been major political, institutional and governance reforms and fundamental changes to life, governance and business. This has impacted the provision of infrastructure services and all other areas of the economy.

As in the other countries participating in the Central Asia Regional Economic Cooperation (CAREC),83 the infrastructure situation in the Kyrgyz Republic is not significantly different from most other developing regions of the world. Kyrgyz needs to expand its infrastructure systems and facilities in order to cope with the rising demand and to increase and improve access to infrastructure services.

The problem has also been to find resources for rehabilitation, maintenance and operation of these existing assets, as well as construction of new assets84. Another problem has been the fact that most of the Soviet era assets were designed to serve regional needs and not just the Kyrgyz Republic. A revival of regional cooperation is needed to maximize their use. Finally, many of the infrastructure facilities were not designed to modern standards and with efficiency of use in mind.

Low investment levels have been inadequate to ensure proper maintenance and rehabilitation of the existing infrastructure systems and facilities have sharply deteriorated and all sectors, except telecommunications, are facing a technical and financial crisis.

There is a close correlation between infrastructure spending and economic growth. If the former is not kept at the required level, economic growth becomes constrained by power outages, traffic congestion, high transport costs, and other infrastructure bottlenecks. In its

82 This draws from the earlier ICIP reports prepared by Vlad Bohun under TA 7067 KGZ which remain valid 83 Afghanistan, Azerbaijan, People‟s Republic of China (PRC), Kazakhstan, Kyrgyz Republic, Tajikistan, and Uzbekistan. 84 It is clear that major rehabilitation often involves creation of new assets

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Country Development Strategy (CDS), GDP is projected to increase at 8-9% per annum, or twice as high as the average annual growth rate of 4.2% recorded during the period 1996-2006. To achieve and sustain such growth, annual infrastructure spending should be increased to at least 6% of GDP. It is clear that the investment needs cannot be met from the government budget and external aid alone, and that private sector financing, both domestic and foreign, has to be mobilized.

3.2 Private Sector Investment and PPP Development

The high investment needs underline the need for prioritization of public sector resources and financing from the multilateral and bilateral development partners used for basic infrastructure and/or to leverage private sector investment. Development partners will also play an important role in helping the Government create a conducive environment for strong private sector investment that is crucial for meeting the high investment requirements, including through Public Private Partnerships (PPPs). The Investment Climate Improvement Program (ICIP) is providing significant support in this endeavour.

The Currently available road network in Kyrgyzstan does not meet the requirements of road transport or the objectives of reforming the country's economy. Moreover, taking into account the state of strategic roads and increasing volumes of road transport, the current quality of roads in Kyrgyzstan may be a significant impediment to economic development and international trade.

In today's road sector, funding from the state budget is limited and there is an urgent need to attract private capital to build and maintain toll roads.

The adoption of the draft Toll Road law will help preserve the existing core network of roads, to improve their condition and provide funding to improve the technical condition of roads.

The PPP concept is new in the Kyrgyz Republic and the first step in this direction took the form of an inter-ministerial PPP workshop on 19 June 2008. This has culminated with significant assistance from ADB in a new PPP law signed by the President of the Republic in January 2012 alongside creation of a PPP units in MEAP, in the Ministry of Finance (PPP Risk Management Unit) and within the Bishkek Municipality (within the CDA). This is combined with significant interest from the private sector including through the various private sector associations. With the final completion of the planning framework for PPPs later in 2012, the emphasis is now moving to developing PPP projects (as noted in Section 1 and amplified in footnote 1 above).

4. The Potential PPP Project

a. Development of the Project under PPP Modality

The Ministry of Transport and Communications (MTC) of the Kyrgyz Republic is presently carrying out preparatory works to develop various major highway projects. One of the priority projects is the construction of the Bishkek-Kara Balta Bypass Road.

Bishkek Kara Balta toll road project has been designated as a potential project for PPP development in the Kyrgyz Republic (KR). The project will a limited access high standard road to Kyrgyz standards and be developed and operated by a private partner under a PPP modality and which will be undertaken according to the PPP law of 2012. That is, it will be prepared with due diligence, including an international standard feasibility study, and be implemented under and within a competitive and transparent framework.

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It should be noted that the project has been considered for PPP because public funding for the project is unlikely in the near future but the development is urgently needed.

b. The Project

The project is the development of a 4 lane toll road of up to 100 km in length depending on the selected option. It comprises two sections i.e. the section of the road from 0 to 60th kilometer which is an incomplete section of a larger CAREC 3 Bishkek-Osh Transport Corridor and its extension in the Western direction ending at the border with Kazakhstan. Appendix 1A shows the location of the project options.

The project options are:

1. Option 1: Bishkek - Kara-Balta: Alignment is along the Big Chui Channel (the BCC). Approximate distance will be 60 km

2. Option 2: Bishkek - Kara-Balta along the railway. Approximate distance of 60 km 3. Option 3: Bishkek – Chaldovar (village) along the BCC. Approximate distance will be

90 km 4. Option 4: Bishkek – Chaldovar along the railway. Approximate distance will be 100

km

Further study will determine which of these options is the most viable and which would be the optimum to evaluate further.

The project will be built to the SNiP 32-01:2004/А category standards of Kyrgyzstan with limited access. Toll road exits and entrances will need to be carefully planned and designed to maximize traffic and convenience to users both of the toll road and the existing road.

The present traffic level at Bishkek-Kara Balta road can be as high as 35 00085 vehicles a day. The road crosses densely populated areas and many markets, rural schools and other public facilities are located alongside it. This negatively impacts traffic safety and the number of road accidents is growing. Nearly 70% of such road accidents are between vehicles and pedestrians.

It is assumed that the new road will attract much of the existing traffic, especially trucks and through traffic, from the existing Bishkek – Kara Balta road to be able to recover the cost of investment. Traffic management and traffic regulations may further encourage diversion. At the same time a principle of an alternative road will be ensured for the Bishkek – Osh route, since the existing Bishkek – Kara Balta road will still be available.

The project is expected to start operation possibly in 2017 or 2018 allowing several years for construction following preparation and tendering in 2012 and 2013. Time will need to be allowed for obtaining licences, legal requirements and financial close86. Given that funding for the feasibility study and any decision on this project as a PPP project, this schedule could well slip by one or more years. Public financing could well involve a much longer time schedule.

The land required for the new road has been assessed by MTC with some land already acquired. Normally, the Government will acquire the land but at the cost to the concessionaire, assuming that the project is financially viable and does not need any financial support. If the project needs financial support, support in both acquiring the land and

85 See section 7 for analysis of one traffic count from 2011 86 After winning the tender, the winning bidder is allowed 120 days to access finance, and this is known as financial close.

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bearing its cost by Government, is a recommended approach. It is also not known if the project costs include land acquisition costs and which party will pay for the land needed to be acquired.

5. National and Transport Sector Background

a. National Economic Background87

After modest growth of 2.9% in 2009, the country was recovering well from the global economic crisis as GDP growth bounded to 16.4% in the first quarter of 2010. But the closure of international borders following the April and June events stopped imports and exports at times, intensifying the impact of the internal disruptions on the economy. For all 2010, GDP dropped by 1.4%

The economy is expected to pick up with GDP growing at around 5% in 2011 and 2012. The forecasts rest on expectations of a normal security environment, continued reconstruction works, full resumption of trade and services flows, and improved investor confidence. They also rely heavily on construction growing by about 40%, mainly due to large scale reconstruction works in the south. Services and industry are seen growing by 6% and 4%, respectively.

Economic expansion of the Russian Federation and Kazakhstan will also contribute to growth through increased demand for the Kyrgyz Republic’s exports

b. International/CAREC Context

External financing to rehabilitate about 3,000 km of the 6,000-km north–south road corridor between Kazakhstan and the Middle East has been raised. The improved section runs from Almaty in Kazakhstan through Bishkek and Osh in the Kyrgyz Republic, Dushanbe in Tajikistan, Termez in Uzbekistan, and Hairatan to Islam Qila in Afghanistan. The five governments along this corridor and development partners, including the Asian Development Bank (ADB), Islamic Development Bank (IsDB), and Japan International Cooperation Agency (JICA), provided financial and technical support. ADB, IsDB, and JICA provided a total of about $310 million to improve the north– south corridor in the Kyrgyz Republic.

c. National Context

The project is consistent with national strategies for Kyrgyz republic which as a landlocked country emphasizes the importance of promoting regional cooperation and improving national and international transport links to increase development and trade. It is also aligned with the government strategy of focusing on transport improvement as a critical means of bolstering economic growth and reducing poverty. The government’s transport strategy is articulated in the Transport and Road Sector Policy Statement and the Roads Subsector Strategy. The latter aims to contribute to sustainable economic growth by ensuring low-cost quality access of goods, labour, and social services to regional and local markets. The strategy focuses on improvement and maintenance of 5,400 km of the core road network including Bishkek –Osh a major transport artery.

The project was first envisaged in ADB’s country strategy and program for 2004–2006 and remains consistent with ADB’s country partnership strategy, as presented in the joint country support strategy, which is in line with the Country Development Strategy for 2007–2010.

87 This largely was written by Nurbek Jenish, consultant of the Kyrgyz Resident Mission as part of the 2011 update of the ADB Kyrgyz Country Report. A fuller summary is provided in Appendix C.

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Improvements in the road network, including its maintenance and safety standards, are a top priority.

6. Project Costs

MTC developed some preliminary options for this road alignment, as discussed above. Preliminary costs from MTC indicate capital costs of between $180m-$500m as follows;

Table 1 Estimates of Project Costs

Toll Road Option Capital Cost

1. Option 1: Bishkek - Kara-Balta: Alignment along the Big Chui Channel (the

BCC). Approximate distance will be about 60 km $338m

2. Option 2: Bishkek - Kara-Balta along the railway. Approximate distance of

about 60 km $180m

3. Option 3: Bishkek – Chaldovar (village) along the BCC. Approximate distance

will be about 90 km $500m

4. Option 4: Bishkek – Chaldovar along the railway. Approximate distance will

be about 100 km $270m

Source: MTC

It should be noted that the highest costs involve traversing the Big Chui channel but more work is needed on preliminary alignments and up to date project costs. MTC indicate that the costs above include land acquisition costs, shown in Table 3.

The costs should include construction costs, land, project preparation and toll plazas and toll equipment.

MTC has acquired some land under some of the options and Table 3 shows the land remaining to be acquired under each option.

7. Traffic

Recent estimates of traffic flows at some points along this route indicate traffic flows of over 35,000 vehicles per day. MTC believe that some 20 000 vehicles a day could be diverted to the toll road, especially trucks and other through/transit traffic.

Table 2 shows a breakdown of a traffic count taken on October 14/15 2011 at a location on

the existing route.

Vehicle Type Vehicles per Day (both directions) %

Cars 25,293 Cars

25,293 71%

Minibus 8,174

Bus 497 All Buses

8,671 25%

2 Axle Truck 814

3 Axle Truck 388

4 Axle Truck 88

Truck trailer 126 All Trucks

1,416 4%

Other 15 Other

15 0%

Totals 35,395

35,395 100%

Source: Consultants based on MTC data

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Traffic is understood to be growing strongly but past traffic data needs to be obtained and analyzed.

8. Social and environmental Impacts

According to MTC the original alignments were based on by-passing residential areas to minimise social and environmental impacts. The alignments need updating/confirming and re-assessing as to their social and environmental impacts.

Table 3 Land Acquisition

Toll Road Option Land remaining

to be acquired (Hectares)

1. Option 1: Bishkek - Kara-Balta: Alignment is along the Big Chui Channel (the BCC). Approximate distance will be about 60 km

252

2. Option 2: Bishkek - Kara-Balta along the railway. Approximate distance of about 60 km

359

3. Option 3: Bishkek – Chaldovar (village) along the BCC. Approximate distance will be about 90 km

431

4. Option 4: Bishkek – Chaldovar along the railway. Approximate distance will be about 100 km

538

Source: MTC

9. Economic and Financial Evaluation

a. Economic Evaluation

Currently the existing route is congested with relatively low average speeds, based on some very slow sections of route and some faster sections. The overall low average speed, and stop-starting, generates high costs especially for trucks and their cargoes. Road users, volume of traffic and the road condition are also reported to generate many serious accidents and especially vehicle pedestrian conflicts.

No economic evaluation has been undertaken but considerable economic benefits88 would be generated from both vehicle operating cost savings and time savings with the new route in place as well as reduced accident costs.

b. Financial Evaluation

The likely basis, structure and affordable levels of the tariff have yet to be evaluated and decided by the MTC. Tariffs may relate to use, kilometres travelled, type of vehicle, time of day and frequency of use for example. Tariffs cannot be finally determined until the project is better defined, consultation takes place, affordability and sustainability are determined and a detailed financial analysis is completed.

No proper financial evaluation has been undertaken yet. A very preliminary analysis was undertaken by the TA 7819 consultant in January 2012 which made a limited number of assumptions as follows;

viii. Base year traffic of 35,300 vpd on the existing road (2011 survey) increasing by 5% per year (to 2032), of which 60% uses the toll road

ix. 95% light; 5% heavy vehicles (2011 survey data)

x. Tariff of $2.5/light and $5/heavy vehicles (Consultant’s input to model)

88 MTC has estimated that up to 20 minutes per vehicle and 2 litres of fuel could be saved per vehicle (no explanatory data to that yet)

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xi. Two project cost scenarios based on Table 1 were assumed; (i) $180m and (ii) $338m (See table 1 - MTC data) in 2010 (inflated by 5% pa to construction years)

xii. Annual (O&M) costs (MTC/consultants data) of $5m/year

xiii. Inflation of annual costs and revenues by 5% per year (Consultants)

This is a very simplistic model and some of these assumptions may be well be either over or under estimates, and especially traffic diverted to the new road, but overall the preliminary estimates indicate that the FIRR of about;

(i) 16% on total project assuming a capital cost of $180m

(ii) 11% on total project assuming a capital cost of $338m

These data at this stage are sufficiently favourable (only based on financial viability) to proceeding to more detailed project assessments.

10. Risk Management

At this stage, it is not known if the project has any significant risks beyond those normally experienced in toll road projects. Significant variations in project costs, negative social and environmental impacts and traffic significantly below the above estimates would have a commensurate impact on the success of the project and studies related to these need to be undertaken in detail either before89 or within the proposed pre-feasibility study.

11. Business Plan and Project Structuring

The opportunity exists to build and operate a toll road in the corridor identified by MTC. Traffic volumes are high and growing with a considerable amount of through heavy traffic year round. The existing road runs through a considerable amount of urban/suburban development and speeds are low in parts and accidents high. Economic benefits are also likely to be high. Toll road development is a popular and profitable form of PPP in transport in many countries worldwide.

The project can be developed as a BOT type concession, possibly Build Own Operate Transfer (BOOT), over a period to be determined following the completion of the financial analyses.

A project company (or Special Purpose Vehicle-SPV) would be formed, probably a consortium of private sector companies comprising technical, financial and other expertise.

The concession contract with the winning bidder of the tender procedures under the PPP law would obligate the SPV to finance, build, own, operate and maintain the toll road according to the technical and financial specifications set out in the contract. The SPV will ensure all the requisite licences are obtained as well as finalise the engineering design of the road. The SPV would operate the toll plazas, collect the revenues based on tariffs (and tariff escalation in future years) according to the contract.

Data and information on the project would be provided to the Government and monitored by the executing agency (MTC).

Details related to management, investment structuring and financial performance have yet to be prepared.

12. Project Stages

The following approximate staging of implementation may be anticipated.

89 It is recommended that a preliminary assessment of the likely social and environmental impacts is undertaken as soon as possible.

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2012 Completion of PPP Project Brief, draft TOR and agreement to proceed to Feasibility Study

2013 Completion of Feasibility study and Tender Documents drafted. Tendering started

2014 Tendering Completed; Final design and EIA Completed. Licenses issued and Financial Close, Land acquisition,

2015-2017

Project Construction

2018 Operational Stage of Road

Source: Consultants estimate

13. Agencies and Institutions

The MTC is proposed as the executing agency but will work closely with MEAP and MOF, and other agencies as necessary.

14. Consultation

It is understood that consultation with the public (existing users, potential users and affected people) and the private sector (potential investors) will take place when the project is better defined. This may need to be undertaken on several occasions.

15. Preliminary Conclusions

a. Readiness

The project is not yet ready to proceed to pre FS and further preliminary work is needed before a Pre-Feasibility Study is contemplated. However, from the information collected so far and the analyses undertaken, the project has potential to be implemented under a PPP modality

b. Issues and Risks

Issues and risks relate to project costs, alignment, social impacts and tariffs/traffic using the new road. Alignment options apparently exist from old studies but may or may not still be broadly acceptable given population and development in Bishkek and its environs. Alignments need confirmation as well as verification of construction costs.

While the traffic on the existing road is very high and growing, diversion to the toll road following introduction of a tariff may not generate the volume of estimated traffic as MTC anticipates. Traffic measures and traffic regulations on the existing road may also be necessary. Until a study is undertaken these issues remain as areas of uncertainty and a proper business plan cannot be prepared as a basis for the invitation to tender.

c. Next Steps

The next steps involve progressing this PB to complete the key missing information.

The key data needed are:

I. Preparing more detail on the alignment (or alignment options) including possible junction interchanges with the strategic road network

II. The likely extent of any resettlement required (bearing in mind that alignments should minimise impact with housing areas)

III. Verification of project costs (within +-20%) IV. Any further traffic count data

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The PB will include drafting TOR for the pre-feasibility study.

The feasibility study (FS) will include the preparation of draft tender documents.

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DRAFT

4. PPP Project Brief for Bishkek Street Lighting Project

Prepared for the Municipality of Bishkek and the Ministry of

Economy and Anti-Monopoly Policy (MEAP)

Under ADB TA 7819 KGZ

By Robert Brown, PPP Consultant

May, 2012

137

DRAFT PPP Project Brief for Bishkek City Lighting Project

1. Introduction to the PPP Project Brief

2. Legal Framework

3. Recent Background to Infrastructure and PPP Development in Kyrgyz Republic

4. The Current Situation

a. Bishkek City Context

b. Background to City Lighting

5. The Potential PPP Project

a. Development of the Project under PPP Modality

b. The Project

c. Its Objectives

d. Project Timing

6. Estimated Project Costs

a. Capital Costs

b. Annual Operating And Maintenance Costs

7. Demand

8. Social and Environmental Impacts

9. Economic and Financial Evaluation

a. Economic Evaluation

b. Financial Evaluation

10. Risk Management

11. The Business Case and Project Structuring

12. Agencies and institutions

13. Project Issue

14. Preliminary Conclusions

a. Readiness

b. Next Stages

Appendices

A1 Steps in the Preparation of a PPP Project (up to Tender)

A2 Types of PPP Arrangements (Modalities)

A3 Defining PPPs

A4 How the Private Partner Is Repaid For Its Investment

A5 PPP Project Cycle

138

DRAFT

PPP Project Brief for the Bishkek Street Lighting Improvement Project

1. Introduction to the PPP Project Brief (PB)

Bishkek City Lighting Project has been designated as a project that may have potential for Public Private Partnership (PPP) development in the Kyrgyz Republic (KR) and which, if found appropriate, will be undertaken according to the PPP law of 2012. The function of this PB90 is to provide a first step in the project preparation process for implementation of this project under a PPP modality91. The project is the development of a project concerned with improving the standard of street lighting in Bishkek city.

The PB summarizes the current situation and recommends the next steps including where appropriate the filling of information gaps and subsequently the progression to feasibility studies and tendering required under the PPP law. As a potential PPP project prepared by the government, it will be prepared with due diligence, including an international standard pre or full feasibility study92, and be implemented under and within a competitive and transparent tender framework. and also provide a basis for a preliminary market sounding The objective of the PB is, therefore, to bring together all available information in a form which can help accelerate the implementation of this project through providing the basis for an essential independent feasibility study and also for a preliminary market sounding. The PB provides a first step93 in the PPP project preparation process. The PPP PB reviews available data from relevant studies, considers in particular a possible demand scenario, preliminary project capital costs and considers the financial implications at a very preliminary level. It should be noted that the project has been considered for PPP within the ADB TA because public funding for the project is unlikely in the near future but the development is urgently needed. It should also be noted that a PPP PB is not a feasibility or prefeasibility study and is an initial part of the project preparation process that leads to such studies. The PPP PB summarizes outstanding issues, provides conclusions and recommends the next steps including filling of information gaps. Progression to the further study and tendering will depend on the outcome of the subsequent data analyses and the decisions of Government.

2. Legal Framework

a. General

90 This PB is prepared under TA 7819 KGZ Identification of PPP Projects and Capacity Building in the Kyrgyz Republic, undertaken by Robert Brown, International PPP Expert. This TA is part of the ICIP (Investment Climate Improvement Program) Sub Program 2 whose purpose is to improve the investment climate for the private sector, a critical cornerstone of the Government‟s economic policies. Actions needed for full compliance with objective 2, PPP Project Pipeline developed, is for MEAP to submit project IMs for 7 potential PPP projects. This PB constitutes one of the requisite seven. 91 Appendix A2 describes the definition and characteristics of Public Private Partnerships 92 F/S or pre F/S. The main difference between a full F/S and pre F/S is that the engineering design and costs are developed more fully. The pre F/S will develop a preliminary design. Final design is undertaken by the winning private partner. 93 Appendix A1 shows the step by step process

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The PB confirms that the project will be implemented according to the PPP Law and international best practice.

If the project needs fiscal support, the implementation of the project will be assessed by the Budget office of the Municipality in conjunction with the MOF/Risk Management Unit according to the Order of the Ministry of Finance from the 10 June 2010 #257 and the Risk Management Policy (to be) adopted by MOF.

Given that this is a Municipal project, this project will conform to Municipal laws and regulations but this will need to be reaffirmed.

b. Specific Regulations covering power and lighting

Law of KR on January 28, 1997 № 8 "On Power" Law of KR on February 26, 2003 № 43, December 6, 2004 № 187, December 28, 2006 № 207, August 10, 2007 № 146, May 16, 2008 № 85, January 23, 2009 № 14, June 10 2011 number 35, June 13, 2011 № 43, July 26, 2011 № 146

3. Recent Background to Infrastructure and PPP Development in Kyrgyz Republic94

a. National Economic Background95

After modest growth of 2.9% in 2009, the country was recovering well from the global economic

crisis as GDP growth bounded to 16.4% in the first quarter of 2010. But the closure of international

borders following the April and June events stopped imports and exports at times, intensifying the

impact of the internal disruptions on the economy. For all 2010, GDP dropped by 1.4%

The economy is expected to pick up with GDP growing at around 5% in 2011 and 2012. The forecasts

rest on expectations of a normal security environment, continued reconstruction works, full

resumption of trade and services flows, and improved investor confidence. They also rely heavily on

construction growing by about 40%, mainly due to large scale reconstruction works in the south.

Services and industry are seen growing by 6% and 4%, respectively.

b. Infrastructure Development

The past decade has witnessed an extended transitional period in the country and there have been major political, institutional and governance reforms and fundamental changes to life, governance and business. This has impacted the provision of infrastructure services and all other areas of the economy.

As in the other countries participating in the Central Asia Regional Economic Cooperation (CAREC),96 the infrastructure situation in the Kyrgyz Republic is not significantly different from most other

94 This draws from the earlier ICIP reports prepared by Vlad Bohun under TA 7067 KGZ which remain valid 95

This largely was written by Nurbek Jenish, consultant of the Kyrgyz Resident Mission as part of the 2011 update of the ADB Kyrgyz Country Report. A fuller summary is provided in Appendix C. 96 Afghanistan, Azerbaijan, People‟s Republic of China (PRC), Kazakhstan, Kyrgyz Republic, Tajikistan, and Uzbekistan.

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developing regions of the world. Kyrgyz needs to expand its infrastructure systems and facilities in order to cope with the rising demand and to increase and improve access to infrastructure services.

The problem has also been to find resources for rehabilitation, maintenance and operation of these existing assets, as well as construction of new assets97. Another problem has been the fact that most of the Soviet era assets were designed to serve regional needs and not just the Kyrgyz Republic. A revival of regional cooperation is needed to maximize their use. Finally, many of the infrastructure facilities were not designed to modern standards and with efficiency of use in mind.

Low investment levels have been inadequate to ensure proper maintenance and rehabilitation of the existing infrastructure systems and facilities have sharply deteriorated and all sectors, except telecommunications, are facing a technical and financial crisis.

There is a close correlation between infrastructure spending and economic growth. If the former is not kept at the required level, economic growth becomes constrained by power outages, traffic congestion, high transport costs, and other infrastructure bottlenecks. In its Country Development Strategy (CDS), GDP is projected to increase at 8-9% per annum, or twice as high as the average annual growth rate of 4.2% recorded during the period 1996-2006. To achieve and sustain such growth, annual infrastructure spending should be increased to at least 6% of GDP. It is clear that the investment needs cannot be met from the government budget and external aid alone, and that private sector financing, both domestic and foreign, has to be mobilized.

c. Private Sector Investment and PPP Development

The high investment needs underline the need for prioritization of public sector resources and financing from the multilateral and bilateral development partners used for basic infrastructure and/or to leverage private sector investment. Development partners will also play an important role in helping the Government create a conducive environment for strong private sector investment that is crucial for meeting the high investment requirements, including through Public Private Partnerships (PPPs). The Investment Climate Improvement Program (ICIP) is providing significant support in this endeavour.

The PPP concept is new in the Kyrgyz Republic and the first step in this direction took the form of an inter-ministerial PPP workshop on 19 June 2008. This has culminated with significant assistance from ADB in a new PPP law signed by the President of the Republic in February 2012 alongside creation of a PPP units in MEAP, in the Ministry of Finance (PPP Risk Management Unit) and within the Bishkek Municipality (within the CDA). This is combined with significant interest from the private sector including through the various private sector associations. With the final completion of the planning framework for PPPs later in 2012, the emphasis is now moving to developing PPP projects (as noted in Section 1 and amplified in footnote 1 above). The Municipality of Bishkek has been in the forefront of PPP framework development and project initiatives with a number of potential PPP projects under consideration.

4. The Current Situation

a. Bishkek City Context

The City of Bishkek has doubled in size in two decades to 1.2 million residents, out of which approximately one quarter live on the City outskirts in newly constructed and largely unofficial settlements. The population growth together with generally rising living standards has led to a rapid increase in the demand for more and better municipal services.

97 It is clear that major rehabilitation often involves creation of new assets

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The total number of official residents is as shown in the following table;

Age Group Resident population in the following age groups,

thousand people:

Year 2008 2009

Under working age 192.3 208.6

Working age 544.7 554.2

Above working age/retirees

86.8 83.7

Total number of residents 823.8 846.5

(18 years and above) 608,2 609,1

Source: Municipality of Bishkek

According to municipal data, the population of Bishkek increased by 8% in 2010. Total official levels of employment are as follows;

Total Employment

Year thousand people

2005 333

2006 363

2007 380

2008 388

2009 370

Official unemployment was stated to be about 13,000 people.

The average nominal wage of employees of enterprises and organizations between January – June 2010 amounted to 9,487 Soms per month in Bishkek (or $211).

There are 192 health facilities in the city and 311 educational establishments (children and adults).

There are some 48,000 companies, organizations and associations registered in the city of which some 30,000 are limited liability companies.

For the first quarter of 2010 foreign direct investments (FDI) of US$70.5 m were attracted to Bishkek city, however only just about half of the 2009 amount. The reduction in direct FDI is connected, as in the whole world, with halting of investment resources caused by the crisis. Bishkek attracted 40% of the total volume of FDI of the Republic. Higher-priority types of economic activity for foreign investors are financial activity (45.2 % of total investment volume), processing industry (24.6 %), real estate operations (12.2 %), transport and telecommunication (8.2 %).

The share of direct foreign investments arrived from the CIS countries made 38% of the total investments volume with Kazakhstan and Russia the leading investment sources. Investments were also attracted from the People’s Republic of China (the PRC) and the USA but relatively small amounts.

b. Background to City Lighting

The authorized body on lighting is municipal enterprise "Bishkeksvet." Its staff comprises 100 people, with an annual budget of 56.450 million Soms ($ 1.2 million). Its responsibility includes:

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30,073 light sources in total

23,356 functioning light sources

Requiring repair – 6,717 light sources

According to the Municipality, the cost of electricity for street lighting is 29.795 million Soms (or US$ 440,000) per year. The approximate amount of repair work needed is currently about 20.0 million Soms or US($ 660,000).

5. The Potential PPP Project

a. Development of the Project under PPP Modality

The Municipality of Bishkek City, Kyrgyz Republic is presently carrying out preparatory works to develop various municipal projects. One of the priority projects is to much improve the provision and management of street lighting in the city.

The project which is in early stages of preparation will conform to Kyrgyz standards and be developed and operated by a private partner under a PPP modality and which will be undertaken according to the PPP law of 2012. That is, it will be prepared with due diligence, including an international standard feasibility study, and be implemented under and within a competitive and transparent framework.

It should be noted that the project has been considered for PPP because public funding for the project is unlikely in the near future but the development is urgently needed.

b. The Project

The project involves a partial, and in the future, a complete replacement of the city light sources (lamp posts), fed by a centralized electricity to modern LED lighting based on a solar (photovoltaic) system. An autonomous power supply system based on the solar module allows a solution to the problem of lighting areas that are not connected to the centralized power system. The principle of operation of the system is simple and reliable. During daylight hours the photoelectric element charges the battery through solar energy. By nightfall, the lighting turns on automatically and provides coverage until the morning. The batteries do not need direct sunlight to recharge them as the solar battery is able to capture solar energy even on cloudy days and winter nights. A photovoltaic lighting system includes:

• Photovoltaic module, which converts sunlight into electricity. • The battery-energy storage. We use sealed, maintenance-free batteries, the life of an average of 5 to 15 years, depending on the model. • The controller - optimizer charging / discharging the battery, helping extend the operational period of the battery. The controller automatically turns lights on and off at dawn and dusk, and also comes with a timer to set the mode on / off at specified time. • Inverter, which is used to convert direct current into alternating current (220 V).

• Lighting units, including the ceiling and the lamp.

The controller and the battery is placed in the top or bottom of the column, it is also possible in a

location underground. All electronic devices are part of the photovoltaic system is protected against

short circuit, overheating and overload. This ensures system reliability and efficient support to its

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work.

Technical parameters:

Using high-performance LED lamps, power 18W ~ 100W.

Fully automatic control of the work.

Vertical ground light level can reach 10 ~ 30 Lx

Height: 5 ~ 10 m

Operating temperature -30 ℃ ~ +40 ℃

c. Objectives

The modernization of the existing lighting system.

Providing comprehensive coverage in areas that do not have centralized power.

Reduce the financial cost of electricity.

Reduced labour costs for the maintenance of lighting systems.

d. Project Timing

The Municipality expects that the project will include the following steps and be implemented as follows:

Development of a feasibility study - 6 months.

Development of project documentation and tendering - 6 months.

Installation of new lighting systems - 6 months The total project period is anticipated to be 18 months, although experience suggests that time must be added for internal discussions, consultations and decision making at each step. Consequently 2-3 years may be more realistic.

6. Estimated Project Costs

a. Capital Costs98

The cost of a PV system ranges from $ 1,000 to $ 2,000 per unit (depending on the power of lamps and batteries). The estimated project cost to replace 6,717 light sources is $ 8.0 million (360.0 million Soms).

Estimated project cost for the replacement of 30,073 lights is $ 36.09 million (1.624 billion Soms)

The total cost would be of the order of $44 million, possibly over a 5 or 10 year implementation period.

b. Annual Operating And Maintenance Costs

The annual operating and maintenance costs have been estimated as follows;

Solar module - the life of more than 15 years

Battery cells - life is more than 2 years

The controller board - life is more than 10 years

According to the Municipality, the cost of electricity for street lighting is 29.795 million Soms (or US$ 440,000) per year. The approximate amount of repair work needed is currently about 20.0 million Soms or (US$ 660,000).

98

Exchange rate of US$1.0=45 Soms

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7. Demand

Demand for the services is assumed by the Municipality as noted above. Additional facilities may be

required as the city expands. Demand to be met by the project will depend on the cost of the

services, the budget available from the Municipality and the revenue generated from the

beneficiaries.

8. Social and environmental Impacts

The environmental impacts have not been assessed but solar power should be more environmentally friendly. The social impacts include reducing crime and accidents but both environmental and social impacts need to be assessed systematically in the feasibility study.

9. Economic and Financial Evaluation

a. Economic Evaluation

No economic evaluation of the project has been undertaken.

Project benefits are assumed to include;

Generating electrical power from sunlight

Reducing the cost of the technical content of the lighting system

Improving the quality and availability of lighting

Significant cost savings on electricity

Does not require installation of power lines

Project disbenefits are assumed to include;

The initial investment and annual costs

Possible damage due to acts of vandalism and theft of property

Loss of employment

b. Financial Evaluation

No comprehensive financial evaluation has been undertaken at this stage. Further discussions are needed to establish the sources and amount of revenue available from the Municipality and beneficiaries. Further, if beneficiaries are to pay directly, the tariff and how to apply the tariff will need to be established.

The project costs and the facilities to be provided could be phased over a 5 or 10 year program.

Revenue earned by the private sector company would likely all come via the Municipality but would likely be a mix of Municipal financial support to the project and revenue derived either specifically from local taxes (i.e. a specific local tax for the lighting services provided) or generally from local taxes (i.e. a levy from the local tax).

An initial review of the financial implications of a capital expenditure of $44million over a 5 year implementation period suggests that considerable project analyses need to be undertaken to develop and select the optimal financial outcome.

10. Risk Management

To ensure the objectives of the PPP project, adequate risk mitigation and fair risk sharing between the public and private sectors are essential and these will be identified in the pre-F/S. As stated

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under previous ICIP reports, a sound investment climate would be the best risk mitigation mechanism99.

It is necessary within the PPP PB and/or the subsequent F/S to identify the various types of risks under this project, and to allocate them to the party that can best control them. There is no universal solution and the range of possible solutions to risk management is wide. The important lesson is that the risk allocation should not be cast in stone. The Government is developing a risk management framework for the infrastructure sectors as an instrument for assessing the contingent liabilities that may arise100.

When further details of this project are available, the risk management section will describe;

f. The types of risks to be borne by the Government (the so-called political risks such as changes in policy, delay of agreed tariff adjustments, and expropriation);

g. Those to be borne by the private sector (commercial risks such as construction cost overruns and delays, and failure to perform according to specifications);

h. Those to be assigned on a case-by-case basis such as force majeure, inability of government agencies to pay for infrastructure services (the so-called credit risk), and demand risk;

i. The main principles for the provision of government support including legality; j. Review and approval procedures for government support.

Risk management would also assess the quantitative and qualitative standards of the project report (pre F/S or F/S) as well as whether any request for government financial support met MOF-RMU criteria.

At this stage, it is not known if the project has any significant risks beyond those normally experienced in PPP project implementation. The private sector would need to ensure that payments from the Municipality will be paid in full and on time.

11. The Business Case and Project Structuring

The PPP Project brief has not been able to provide the business case because there is insufficient information on a project implementation program. This would indicate when capital costs would be incurred. Further, revenue streams to fund the cost of the project have not clearly been established.

In principle, financial analyses can show the optimum way to plan and structure and viable PPP program, but the issue would devolve to affordability by both the Municipality and the beneficiaries.

However, the opportunity exists to improve municipal services. This project has been identified as one possible project which is urgently needed to improve lighting and safety on the streets of Bishkek but which is unlikely to be implemented from municipal funds alone.

The project can be developed as a PPP. Initially designed as a simple service contract, the Municipality has also identified an opportunity to generate more extensive investment in the lighting system. To achieve the latter, the Consultant considers this project could be implemented under a rehabilitate own operate transfer (ROOT) or a rehabilitate operate transfer (ROT) type PPP.

99

ADB/ICIP is providing support to GOK for continuous and sustained policy reforms that lead to a stable macroeconomic environment, well-functioning judicial system, independent and technically sound regulation, full cost recovery (or a well-targeted output-based subsidy where the full cost recovery would make such services unaffordable), and open access in the infrastructure sectors. 100

To this end, a Risk Management Unit (RMU) has been established in MOF and is now (end 2011) formulating a risk management policy to ensure that risks of individual PPP projects are appropriately allocated between the public and private sector, and that the Government’s overall exposure is well managed.

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The feasibility study should consider various types of PPP including service contracts, management contracts and BOT/ROT type modalities101 and the decision on the type of modality would be based partly on detailed financial analyses.

A project company (or Special Purpose Vehicle-SPV) would be formed, probably a consortium of private sector companies comprising technical, financial and other expertise.

The financial and technical specifications would be set out in the contract including rate of investment per year and quality standards (e.g. lighting to be 99% operationally effective). The SPV would invest, operate and maintain the system and be paid by the Municipality (and escalation in future years) according to the service standards specified in the contract.

At this stage it is not known if there would or could be any direct payment for the facilities and services provided from users.

Data and information on the project once implemented would be provided to the Government and monitored by the executing agency (the Municipality) or an independent monitoring sub agency102.

Details related to the proposed management, investment structuring and financial performance have yet to be prepared.

12. Agencies and Institutions

The Municipality will be the executing agency but will work closely with MEAP and MOF, and other agencies as necessary.

13. Consultation

It is understood that consultation with the public (existing users, potential users and affected people) and the private sector (potential investors) will take place when the project is better defined. This may need to be undertaken on several occasions.

This project also involves changes to a publicly owned utility and therefore extensive consultation with the existing staff of Bishkeksvet can be anticipated.

14. Preliminary Conclusions

a. Readiness

The project does not appear to be difficult to implement in technical terms but there are issues related to the existing lighting utility and also whether the cost of the system will be affordable to both the municipality and beneficiaries.

The project is therefore not yet ready to proceed to pre FS and further preliminary work is needed before a Pre-Feasibility Study is contemplated. However, from the information collected so far, the project may have potential to be implemented under a PPP modality.

b. Next Steps

The next steps involve progressing this PB to its proper conclusion and especially undertaking;

Discussions with staff of the existing institutions involved

Financial scenario modelling and understanding the sources and volumes of revenues (including local taxes/tariffs if applicable) and annual costs of operation and maintenance.

101

Appendix A2 describes the various types of PPP and Private Sector Participation (PSP) modalities commonly used worldwide. It should be noted that simple outsourcing and some service contracts are, related to the extent of risk transferred, PSP rather than PPPs. 102

The methodology and institutional structures to monitor PPP projects has yet to be developed and formalised in the Kyrgyz Republic

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DRAFT

5. PPP Project Brief for a Solid Waste Management Project

in Bishkek

Prepared for the Municipality of Bishkek and the Ministry of

Economy and Anti-Monopoly Policy (MEAP)

under ADB TA 7819 KGZ

by Robert Brown, PPP Consultant

February 1, 2012

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DRAFT

PPP Project Brief for the Bishkek Solid Waste Management (SWM) Project103

1. Introduction to the PPP Project Brief (PB)

The function of this PB104 is to provide a first step105 in the project preparation process for implementation of this project under a PPP modality. The project is the development of a solid waste facility with improved management of the solid waste disposal system. The Municipality of Bishkek is presently carrying out preparatory works to implement this project under financing from EBRD but have asked ADB to help consider its implementation under a Public-Private Partnership modality. The function of the PB is to support the EBRD project but to suggest a stronger PPP focus from the outset.

The PB includes a review of the EBRD TOR and the limited data available.

The objective of the PB is, therefore, to bring together all available information in a form which can

help accelerate the implementation of this project under a PPP modality.

The PB contains the following sections;

2. Legal Framework 3. Recent background to Infrastructure Development and PPP 4. Municipal Background 5. The PPP Project 6. Project Costs 7. Social and Environmental Impacts 8. Economic Evaluation and Financial Analysis 9. Risk Management 10. Project Structuring 11. Project Cycle 12. Agencies Involved 13. Preliminary Conclusions

2. Legal Framework

The PB confirms that the project, if determined as appropriate for PPP, will be implemented according to the PPP Law and international best practice.

103 Much of the material has been sourced from the TOR for a project under EBRD Bishkek for solid waste management in the Kyrgyz Republic between the Bishkek Municipality and EBRD. This PB only amplifies the PPP component of that project to be undertaken by these parties. 104 This PB is prepared under TA 7819 KGZ Identification of PPP Projects and Capacity Building in the Kyrgyz Republic, undertaken by Robert Brown, International PPP Expert. This TA is part of the ICIP (Investment Climate Improvement Program) Sub Program 2 whose purpose is to improve the investment climate for the private sector, a critical cornerstone of the Government‟s economic policies. Actions needed for full compliance with objective 2, PPP Project Pipeline developed, is for MEAP to submit project PBs for 7 potential PPP projects. This PB constitutes one of the requisite seven. 105 See Appendix A1 for the sequence of steps in project preparation up to tender stage

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If the project needs fiscal support, the implementation of the project will be assessed by the MOF/RMU according to the Order of the Ministry of Finance from the 10 June 2010 #257 and the Risk Management Policy (to be) adopted by MOF.

Given that this is a Municipal project, it is assumed that this project conforms to municipal laws but this will need confirmation. Several national and municipal statutes apply to this project;

a. Government Decision of the Republic of October 16, 2007 № 469 "On approval of the Concept of Environmental Safety KR"

b. Methods of determining the payment for environmental pollution in the Kyrgyz Republic, approved by Government Decision of the Republic of September 19, 2011 N559

c. Sanitary-epidemiological rules and regulations, approved by Resolution of the Chief Medical Officer of Kyrgyz from October 29, 2003 N45

d. Resolution of the Bishkek city council on December 29, 2009 N136 «On approval of rules of accumulation (education) and the procedure of calculation of the volume of solid waste for businesses, institutions and organizations in the city of Bishkek"

e. Regulation "On the order of assessment and collection of payments for services to export and disposal of solid waste in the city of Bishkek (Annex to the Resolution of Bishkek city council on May 27, 2010 N187)

f. Rules for Improvement of Bishkek city (Annex to the Resolution of the Bishkek City Kenesh deputies from June 30, 2009 N77)

3. Background

a. National Economic Background

After modest growth of 2.9% in 2009, the country was recovering well from the global economic

crisis as GDP growth bounded to 16.4% in the first quarter of 2010. But the closure of international

borders following the April and June events stopped imports and exports at times, intensifying the

impact of the internal disruptions on the economy. For all 2010, GDP dropped by 1.4%

The economy is expected to pick up with GDP growing at around 5% in 2011 and 2012. The forecasts

rest on expectations of a normal security environment, continued reconstruction works, full

resumption of trade and services flows, and improved investor confidence. They also rely heavily on

construction growing by about 40%, mainly due to large scale reconstruction works in the south.

Services and industry are seen growing by 6% and 4%, respectively.

b. Bishkek City Context

The City of Bishkek has doubled in size in two decades to 1.2 million residents, out of which approximately one quarter live on the City outskirts in newly constructed and largely unofficial settlements. The population growth together with generally rising living standards has led to a rapid increase in the production of solid waste material. The total number of official residents is as shown in the following table;

Age Group Resident population in the following age groups,

thousand people:

Year 2008 2009

Under working age 192.3 208.6

Working age 544.7 554.2

Above working age/retirees

86.8 83.7

Total number of residents 823.8 846.5

(18 years and above) 608,2 609,1

Source: Municipality of Bishkek

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According to the municipal data, the population of Bishkek increased by 8% in 2010.

Total official levels of employment are as follows;

Total Employment

Year thousand people

2005 333

2006 363

2007 380

2008 388

2009 370

Official unemployment was stated to be about 13,000 people.

The aaverage nominal wage of employees of enterprises and organizations between January – June 2010 amounted to 9,487 soms per month in Bishkek (or $211).

There are 192 health facilities in the city and 311 educational establishments (children and adults).

There are some 48,000 companies, organizations and associations registered in the city of which some 30,000 are limited liability companies.

For the first quarter of 2010 foreign direct investments (FDI) of US$70.5 m were attracted to Bishkek city, however only just about half of the 2009 amount. The reduction in direct FDI is connected, as in the whole world, with halting of investment resources caused by the crisis. Bishkek attracted 40% of the total volume of FDI of the Republic. Higher-priority types of economic activity for foreign investors are financial activity (45.2 % of total investment volume), processing industry (24.6 %), real estate operations (12.2 %), transport and telecommunication (8.2 %).

The share of direct foreign investments arrived from the CIS countries made 38% of the total investments volume with Kazakhstan and Russia the leading investment sources. Investments were also attracted from the People’s Republic of China (the PRC) and the USA but relatively small amounts.

4. Recent Background to Infrastructure and PPP Development in Kyrgyz Republic106

3.1 Infrastructure Development

The past decade has witnessed an extended transitional period in the country and there have been major political, institutional and governance reforms and fundamental changes to life, governance and business. This has impacted the provision of infrastructure services and all other areas of the economy.

As in the other countries participating in the Central Asia Regional Economic Cooperation (CAREC),107 the infrastructure situation in the Kyrgyz Republic is not significantly different from most other developing regions of the world. Kyrgyz needs to expand its infrastructure systems and facilities in order to cope with the rising demand and to increase and improve access to infrastructure services.

106 This draws from the earlier ICIP reports prepared by Vlad Bohun under TA 7067 KGZ which remain valid 107 Afghanistan, Azerbaijan, People‟s Republic of China (PRC), Kazakhstan, Kyrgyz Republic, Tajikistan, and Uzbekistan.

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The problem has also been to find resources for rehabilitation, maintenance and operation of these existing assets, as well as construction of new assets108. Finally, many of the infrastructure facilities were not designed to modern standards and with efficiency of use in mind.

Low investment levels have been inadequate to ensure proper maintenance and rehabilitation of the existing infrastructure systems and facilities have sharply deteriorated and all sectors, except telecommunications, are facing a technical and financial crisis.

There is a close correlation between infrastructure spending and economic growth. If the former is not kept at the required level, economic growth becomes constrained by power outages, traffic congestion, high transport costs, and other infrastructure bottlenecks. In its Country Development Strategy (CDS), GDP is projected to increase at 8-9% per annum, or twice as high as the average annual growth rate of 4.2% recorded during the period 1996-2006. To achieve and sustain such growth, annual infrastructure spending should be increased to at least 6% of GDP. It is clear that the investment needs cannot be met from the government budget and external aid alone, and that private sector financing, both domestic and foreign, has to be mobilized.

3.2 Private Sector Investment and PPP Development

The high investment needs underline the need for prioritization of public sector resources and financing from the multilateral and bilateral development partners used for basic infrastructure and/or to leverage private sector investment. Development partners will also play an important role in helping government create a conducive environment for strong private sector investment that is crucial for meeting the high investment requirements, including through Public Private Partnerships (PPPs). The Investment Climate Improvement Program (ICIP) is providing significant support in this endeavour.

The PPP concept is new109 in the Kyrgyz Republic and the first step in this direction took the form of an inter-ministerial PPP workshop on 19 June 2008. This has culminated with significant assistance from ADB in a new PPP law signed by the President of the Republic in January 2012 alongside creation of a PPP units in MEAP, in the Ministry of Finance (PPP Risk Management Unit) and within the Bishkek Municipality (within the CDA). This is combined with significant interest from the private sector including through the various private sector associations. With the final completion of the planning framework for PPPs later in 2012, the emphasis is now moving to developing PPP projects (as noted in Section 1 and amplified in footnote 1 above).

5. Present Situation

The current system of cleaning the city of municipal solid waste is limited to the collection of solid waste in bins and removal to a single authorized landfill site (BGSS). This situation has led to an enormous accumulation of debris on BGSS which is the reason for the spontaneous combustion of toxic substances residues of which then enter the atmosphere, rivers and reservoirs.

The BGSS is located in the city of Bishkek, 1.5 km. from the bypass and 15 km. from the city centre (see Location Map A1). The area of the landfill is about 29 Ha. and has been operation since 1973. The solid waste is being filled from 5 to 10 m high. The western part is bordered by residential development, north-western part by the ‘copse’, and to the northern and north-east and south rolling hills and a wide ravine.

Water supply, sewerage and telephone communications are not available on site. is absent. Power supply is through a transformer substation. There is road access from the by-pass.

108 It is clear that major rehabilitation often involves creation of new assets 109 There have been initiatives prior to this but mainly under private sector participation rather than PPP

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State of the roads before the BGSS access road is satisfactory but the road conditions on the access road are poor require patching. There is no proper office at the landfill but there is a "wagon house" in poor condition used as a control room.

The BGSS is equipped with 15 tonne mechanical scales that do not meet today's requirements. But new 60 tonne electronic scales are being installed.

The BGSS operates 24 hours per day and the 2009 volume of MSW amounted to 1.89 million m3 per year or 5,170 m3/day. The 2011 volume was 2.2 million m ³ of solid waste. The total amount of waste in the landfill today is more than 6 million tonnes.

Breakdown of Solid Waste:

Per 100 000 population the following is buried every year:

2,000 tonnes of metal;

10,000 tonnes of paper and paperboard;

3,000 tonne of plastic;

1,500 tonnes of glass;

1,500 tonnes of textiles/cloth.

The BGSS is operated by a municipal enterprise "Tazalyk" – a structural unit of the Municipality of Bishkek, which performs the public services of sanitation and the removal and disposal of solid waste in Bishkek. It has 1,366 staff.

The movement of solid waste involves 127 "Tazalyk" vehicles from a special unit (MP) including garbage trucks, dump trucks, loaders, cranes etc. On an average day there are about 247 trips to the landfill site.

The annual cost of MP’s operations including the BGSS in 2011, for the removal and disposal of solid waste according to preliminary data amounted to 10, 361.3 million soms, including:

Cost Item Cost Soms

(m)

Cost US$000s

Wages 3.5 77.0

Human Services 0.6 13.3

POL 2.6 58.2

App. Part 2.2 48.3

Materials 0.5 11.0

Business expenditure 0.1 1.7

Taxes 0.9 20.8

10.4 230.2

Source: CDA

There are 24 employees at the BGSS.

The MPs' Tazalyk generates an annual loss, as fees for solid waste removal have not yet been fully implemented yet.

The Centre for Utilities (NBI) was established in March 2009 (previously the department subscriber MP "Tazalyk"). Funding for the centre comes from the fees of removal of solid waste (MSW) of the

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population of Bishkek. Maintenance costs of the centre amount to 17.52 million soms per year ($390,000).

The objectives of the project are the;

a. Isolation of mineral fractions of MSW (briquetted recycled)

b. Preparation of thermal energy (hot water)

c. Production of combustible pyrolysis gas

d. Production of ecological fuel ( balance)

e. Ability to organize the production of marketable products from recycled materials

f. Ability to organize the production of compost (organic fertilizer) from the organic part of solid waste

g. Construction of a new modern landfill is not part of recyclable solid waste

h. Closure and reclamation of existing BGSS

6. The Potential PPP Project

a. Organization and the Present System

The organisation of solid waste management (SWM) has been elaborated in a previous study110. This should be a basis for future work concerning development of future organisational arrangements.

Information will be needed on different areas of the current solid waste system as a baseline for development of an important municipal activity; Physical Aspects of the system

Solid Waste Generation

Source Separation

Hazardous Waste and other Special Waste

Recycling

Solid Waste Collection and Transportation

Solid Waste Treatment and Existing Dumpsite Environmental Aspects

Biogas Emissions and Utilisation

Environmental impacts of the current waste system Financial Aspects

Paying for and Financing of Waste Management

Financial Due Diligence on the Solid Waste Sector in Bishkek Management Aspects

Current Quality and Efficiency of Waste Management in Bishkek

b. The Proposed SWM System

The project proposal is to develop a construction waste recycling plant with a capacity of about

50,000 tonnes per year based on the disposal of solid waste BGSS (processing of waste exported

110 A pre-feasibility study has been completed constituting the first phase of the preparatory work. The project definition has been made, as well as preliminary location considerations of a new landfill as well as closure of the existing dumpsite. The pre-feasibility study of the project was presented in March 2010. This has yet to be made available to ADB.

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from the city and processing available in a landfill of municipal solid waste) and the production of

briquetted recycled materials, as well as production of pyrolysis fuel gas, hot water and remaining

by-products111.

The proposed processing of MSW is as follows;

a. Solid waste delivered to the plant and sent to the point of radiation control. Then the initial selection of useful components (up to 30% of the initial volume of solid waste), their compaction and briquetting.

b. On the sorting line are selected (by hand on a conveyor belt) inorganic and organic constituents.

c. Two mills produce solid waste division, respectively, for each of the two chambers of disposal: oxidation (for inorganics) Pyrolysis (for organics).

d. Pre-storage tank crushed waste sent to the heating chamber (chamber or drying), where the water used in the future in the process.

e. From the heating chamber material is sent to the waste hopper for loading. f. From the hopper, loading wastes are sent to the furnaces. The furnaces work continuously. g. Pyrolysis gas from the reactor is supplied to the consumer through the pipeline, can be

burned to heat a boiler or packaged in bottles of 50 litters. Pyrolysis gas servicing work on the complex waste treatment plants - used by about 15-20% of the gas.

h. "Driven off" water is fed into the unit for cleaning. Prior to this, water passes through a heat exchanger associated with the heating and drying chamber for heating and drying of MSW. Remaining by-products are sent to the collector and on for further use (or modification).

c. Development of the Project under PPP Modality

The Municipality of Bishkek is presently carrying out preparatory works to investigate the potential to develop various city projects under a PPP modality. One of the priority projects is the construction of a waste management project. A municipal programme on implementation of the solid waste law was approved in 2006 by the City. The main goal of the programme was to enhance the proportion of waste which is properly collected, sorted and disposed. In addition, the Draft General Layout Plan of Bishkek seeks to establish waste recycling stations in each district, thus helping to reduce waste going to landfill and increase recycling. To date however this has not been implemented. The initial project concept as defined under EBRD consists of an investment112 for the closure of the existing dumpsite, a new waste management system including a suitable waste collection and sorting system, waste treatment, and disposal; and associated facilities such as access roads. Assessment of the risks associated with the use of the existing landfill and assessment of alternatives will need to be clarified as a first step to clear the situation on the landfill location.

Based on previous discussions and agreements with the Municipality, the EBRD is contemplating in supporting this potential project, to provide finance of Euro 22 million for a priority investment in improvement or closing the existing dumpsite and implementing a waste management system including waste collection, treatment and disposal.

The need for an improved waste management system is urgent. Methane, a strong climate gas, regularly burns on the landfill polluting the atmosphere, and leaching water is only provisory captured. Furthermore, the collection equipment is often more than 20 years old and replacement

111 Useful for fertiliser 112 Mainly public investment via lending from EBRD with the possibility of some private sector participation or PPP.

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investment is urgently needed. EBRD has offered to assist the City to improve collection of waste through regulated private sector involvement and through City financed investments in new collection vehicles. The objectives of the EBRD project include the ‘Review the potential for private sector participation (PSP) in waste collection and disposal (e.g. design-build-operate for any part of the proposed project, privatisation of collection in part of the city, operation of the landfill, etc.)’. However, as the project has been designated as a potential project for PPP development in the Kyrgyz Republic (KR), review of the PSP/PPP component will need to be considerably widened. This PB assumes that project has the potential to be developed and operated by a private partner under a PPP modality and which will be undertaken according to the PPP law of 2012. That is, it will be prepared with due diligence, including an international standard feasibility study, and be implemented under and within a competitive and transparent framework.

It should be noted that the project has been considered for PPP because although some public funding for the project may be available, the financing scope for a comprehensive project is in doubt. Therefore, as the development is urgently needed, the Municipality has decided that private finance is an appropriate potential option. Further, private finance can be expected to introduce efficiencies into the solid waste disposal system through better management and technology.

d. Details of the Proposed SWM Plant

As a platform for creating high-tech lines for disposal of solid waste expected to select a site BGSS the territory of which can take up to 2 ha (min 0.4 ha).

In this area the plant will be built with a capacity of processing 50 tonnes of solid waste per year, consisting of five modules (sets), working independently. The construction of the modules can be phased.

Within the fenced area will be located the following production facilities:

- Administrative and household premises - (may be modular to ensure all standards of sanitary and domestic services staff)

- A cold hangar

- Storage of finished products

- A platform for unloading and storage of solid waste will the rest of the territory BGSS.

The final output of the plant:

- Briquetted recyclables (paper, polymer, metal, etc.)

- A high-pyrolysis gas - fuel.

- The hot steam, hot water

- Uglepodobny product - the material for the construction industry (or fertilizer).

The physical and investment project have yet to be fully defined, and that is the purpose and output of the feasibility study which will have the following components;

Baseline Study – Existing Situation (commented above)

Project Proposal for Solid Waste Management including alternatives/designs/costs

Environmental and Social Appraisal

Institutional Changes

Financial aspects including tariffs and private sector involvement

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Support and advice to the Municipality for project implementation including training

Design capacity - 50 tonnes per year. The designed capacity may be gradual due to the modular principle of the enterprise. The modular scheme is convenient for the fact that it attracts investment gradually consumed, some of them are starting to pay off in the process of manufacturing output at full capacity.

e. Project Development Schedule: The project includes the following main stages with time allowed based on the EBRD report;

Completion of the PB

Development of feasibility studies, business plan, including the study of market products resulting from solid waste processing - 6 months.

Development of tender documentation for the private partner for the project and the tender - 6 months

Site preparation for construction and assembly production line - 3 months.

Construction work and production start-10-12 months.

Output of the production at full capacity - 6 months.

The total duration of the project about 3 years

7. Project Costs

The EBRD is contemplating a potential transaction, consisting of a loan of EUR 14 million and a grant of EUR 8 million, to finance a priority investment in improvement or closing the existing dumpsite and implementing a waste management system including waste collection, treatment and disposal. A preliminary figure of $30m was indicated so this cost is used tentatively for the investment cost. No basis for this has been seen or the likely cost over the project lifetime of a complete system. This will be the outcome of the study and as such is awaited. There will be no need to buy or lease land, since the construction of the plant is assumed to be located at the current municipal BGSS.

8. Demand

It is contemplated that waste will be sourced from;

Inner city and flats;

Private houses;

Waste from Street cleaning as total and separated into street bins and sweeping waste; and

Waste from private companies However, the catchment area of the project and the total potential sources and potential volumes have yet to be accurately determined.

9. Social and environmental Impacts

Based on modern technology, the new system will provide the sorting of solid waste, and reduction of waste and reduction of the negative impacts of solid waste on the environment. The recycling process allows the extraction of valuable components from solid and long-term solves the problem of solid waste, creating a streamlined production infrastructure for industrial waste treatment, as well as the organization of production for commercial products recycling: building construction and finishing; paving, packaging, environmentally friendly insulation, compost, etc. The current system of

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solid waste processing eliminates the process of burning garbage, hence no harmful emissions enter into the atmosphere.

Social benefits of this project proposal are obvious. This increase in the level of employment and provision of nearby residential areas with gas, heat, and ecological fuel. For the construction of the plant does not require relocation of residents, as the plant will be built in the BGSS.

Also, this project will solve the problem of disposing of solid waste for almost the entire city.

Social benefits of this project proposal are related to increased employment and the provision of nearby residential areas with gas, heat, and ecological fuel. The construction of the plant does not require any resttlement, as the plant will be built in the BGSS.

Also, this project will solve the problem of disposing of solid waste for almost the entire city.

10. Economic and Financial Evaluation

a. Economic Evaluation

The benefits from implementation of this project proposal will achieve be to:

a. Improve the health of the city and the ecological environment; b. Lower the costs for disposal of municipal solid waste (cost to date - 10 361.3 million soms); c. Slow down the expansion of land under the landfill (currently the area of 40-45 ha BGSS and

annual increases of 0.5 ha); d. Produce useful products processing solid waste (pyrolysis fuel gas, hot water and remainder

for human consumption, and briquetted raw material for secondary production); e. Receive real profits from the sale of products of processing of MSW.

The costs or disbenefits of the project include;

a. Capital and annual costs b. The payback period can be long c. Negative reaction of the population to a possible increase in tariffs for the carrying away of

domestic solid waste

b. Financial Evaluation

Worldwide experience shows that the operation of these plants is profitable. In addition to the recycled materials derived from the recycling of solid waste, there is a real opportunity to develop natural gas, thermal energy and ecological fuel, which will also generate additional income.

Revenue can be generated from households, businesses and from the sale of waste products. Current Tariff113:

For individuals; 15 KGS per month

For retirees - four KGS per month

For commercial/legal entities- 150 soms per 1 m³ Based on existing users accounts, the total number of contributors amount to;

User accounts; 193,328

individuals 461,774

entities 6,802

113

(BGK decree № 136 of 29.12.2009).

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retired 68,143

government organizations 375 Total: 730, 422

The cost of 1 tonne of recycled material on the market in Bishkek:

• Waste paper - up to 2000 KGS

• Polymer - up to 12 000 soms;

• Aluminium cans - 20 000 soms.

The likely basis, structure and affordable levels of the tariff have yet to be evaluated and decided by the Municipality. Tariffs may relate to use, but cannot be finally determined until the project is better defined, consultation takes place, affordability and sustainability are determined and a detailed financial analysis is completed.

11. Risks

At this stage, it is not known if the project has any significant risks beyond those normally experienced in PPP projects.

The future interaction of the private sector project with on-going existing/remaining public sector functions is a risk if it is not clear.

12. Business Plan and Project Structuring

The opportunity exists to build and operate a new solid waste facility in Bishkek.

The project can be developed as a BOT type concession, possibly Build Own Operate Transfer (BOOT), over a period to be determined following the completion of the financial analyses.

A project company (or Special Purpose Vehicle-SPV) would be formed, probably a consortium of private sector companies comprising technical, financial and other expertise.

The concession contract with the winning bidder of the tender procedures under the PPP law would obligate the SPV to finance, build, own, operate and maintain the plant and related operations according to the technical and financial specifications set out in the contract.

Data and information on the project would be provided to the Government and monitored by the executing agency (MTC).

Details related to management, investment structuring and financial performance have yet to be prepared.

13. Project Stages

The following approximate staging of implementation may be anticipated.

2012 Completion of PPP Project Brief, draft TOR and agreement to proceed to Feasibility Study

2013 Completion of Feasibility study and Tender Documents drafted. Tendering started

2014 Tendering Completed; Final design and EIA Completed. Licenses issued and Financial Close

2015-2016 Project Construction

2017 Operational Stage

Source: Consultants estimate

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14. Agencies and Institutions

The Municipality is proposed as the executing agency but will work closely with MEAP and MOF, and other agencies as necessary.

15. Consultation

It is understood that consultation with the public (existing users, potential users and affected people) and the private sector (potential investors) will take place when the project is better defined. This may need to be undertaken on several occasions.

16. Preliminary Conclusions

a. Readiness

The project is ready to proceed to a conventional FS but further preliminary work is suggested on the EBRD TOR to strengthen the PPP component. It would appear that the project may have potential to be implemented under a PPP modality, but possibly with financial support.

b. Issues and Risks

Issues and risks relate to appropriately specifying the ‘project’, project costs, tariffs, demand and the volume of value of recycled products..

c. Next Steps

The next steps involve giving more consideration to the PPP modality within the proposed EBRD

TOR. The preliminary study needs to be made available and further discussions including with EBRD

to progress this PB to its completion and development of the TOR for the project to be considered

for implementation under a PPP modality.

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DRAFT

6. PPP Project Brief for Bazar Korgon – Kyzyl Unkur – Sargata Road

Prepared for the Ministry of Economy and Anti-Monopoly

Policy (MEAP)

under ADB TA 7819 KGZ

by Robert Brown, PPP Consultant

February 1, 2012

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DRAFT

PPP Project Brief for Bazar Korgon – Kyzyl Unkur – Sargata Road

1. Introduction to the PPP Project Brief (PB)

The function of this PB114 is to provide a first step115 in the project preparation process for implementation of this project under a PPP modality116. The project is the development of a toll road of some 120 km in length. It comprises six sections: 1) Bazar Korgon – Charvak; 2) Charvak – Kyzyl Unkur; 3) Kyzyl Unkur – Kenkol; 4) Kenkol – Shaldyrak; 5) Shaldyrak – Kargysh; 6) Kargysh – 325th km of the road. It will comprise a major section of the road link between Bishkek and Osh, the two largest cities in the Republic. The Ministry of Transport and Communication of the Kyrgyz Republic is presently carrying out preparatory works to consider implementing this road under a Public-Private Partnership modality. The PB reviews the limited data available, and considers in particular a possible traffic demand

scenario, the preliminary project capital costs and undertakes a very preliminary financial analysis.

The PB summarizes outstanding issues, provides preliminary conclusions commensurate with the

level of data and recommends the next steps including where appropriate the filling of information

gaps and subsequently the progression to feasibility studies and tendering required under the PPP

law.

The objective of the PB is, therefore, to bring together all available information in a form which can

help accelerate the implementation of this project through providing the basis for an essential and

subsequent independent feasibility study and also provide a basis for a preliminary market sounding.

The PB contains the following sections;

2. Legal Framework 3. Recent background to Infrastructure Development and PPP 4. National and Transport Sector Background 5. The PPP Project 6. Project Costs 7. Traffic 8. Social and Environmental Impacts 9. Economic Evaluation and Financial Analysis 10. Risk Management 11. Business Plan and Project Structuring 12. Project Stages 13. Agencies and Institutions 14. Consultation 15. Preliminary Conclusions

114 This PB is prepared under TA 7819 KGZ Identification of PPP Projects and Capacity Building in the Kyrgyz Republic, undertaken by Robert Brown, International PPP Expert. This TA is part of the ICIP (Investment Climate Improvement Program) Sub Program 2 whose purpose is to improve the investment climate for the private sector, a critical cornerstone of the Government‟s economic policies. Actions needed for full compliance with objective 2, PPP Project Pipeline developed, is for MEAP to submit project PBs for 7 potential PPP projects. This PB constitutes one of the requisite seven. 115 See Appendix A1 for the sequence of steps for PPP project preparation 116 Appendix A3 describes the definition and characteristics of Public Private Partnerships

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2. Legal Framework

The PB confirms that the project will be implemented according to the PPP Law and international

best practice.

If the project needs fiscal support, the implementation of the project will be assessed by the

MOF/RMU according to the Order of the Ministry of Finance from the 10 June 2010 #257 and the

Risk Management Policy (to be) adopted by MOF.

This project conforms to the (draft) toll road law. The purpose of this Act, if adopted, is to accelerate

the development of roads, improve the environment and enhancing road safety, attraction of

investments in roads. The act will regulate civil and administrative legal relations that arise during

the construction, renovation and operation of toll roads in the Republic.

This law defines the legal basis for the creation of toll roads, establishes the organization of new

construction and transfer of existing roads on a fee basis, the procedure for levying tolls vehicles on

toll roads in the territory of the Kyrgyz Republic. The Act will also define the purpose and procedure

for the levying and use of funds from tolls of vehicles on toll roads and which applies to all users of

toll road.

3. Recent Background to Infrastructure and PPP Development in Kyrgyz Republic117

3.1 Infrastructure Development

The past decade has witnessed an extended transitional period in the country and there have been

major political, institutional and governance reforms and fundamental changes to life, governance

and business. This has impacted the provision of infrastructure services and all other areas of the

economy.

As in the other countries participating in the Central Asia Regional Economic Cooperation (CAREC),118

the infrastructure situation in the Kyrgyz Republic is not significantly different from most other

developing regions of the world. Kyrgyz needs to expand its infrastructure systems and facilities in

order to cope with the rising demand and to increase and improve access to infrastructure services.

The problem has also been to find resources for rehabilitation, maintenance and operation of these

existing assets, as well as construction of new assets119. Another problem has been the fact that

most of the Soviet era assets were designed to serve regional needs and not just the Kyrgyz

Republic. A revival of regional cooperation is needed to maximize their use. Finally, many of the

infrastructure facilities were not designed to modern standards and with efficiency of use in mind.

Low investment levels have been inadequate to ensure proper maintenance and rehabilitation of

the existing infrastructure systems and facilities have sharply deteriorated and all sectors, except

telecommunications, are facing a technical and financial crisis.

There is a close correlation between infrastructure spending and economic growth. If the former is

not kept at the required level, economic growth becomes constrained by power outages, traffic

117 This draws from the earlier ICIP reports prepared by Vlad Bohun under TA 7067 KGZ which remain valid 118 Afghanistan, Azerbaijan, People‟s Republic of China (PRC), Kazakhstan, Kyrgyz Republic, Tajikistan, and Uzbekistan. 119 It is clear that major rehabilitation often involves creation of new assets

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congestion, high transport costs, and other infrastructure bottlenecks. In its Country Development

Strategy (CDS), GDP is projected to increase at 8-9% per annum, or twice as high as the average

annual growth rate of 4.2% recorded during the period 1996-2006. To achieve and sustain such

growth, annual infrastructure spending should be increased to at least 6% of GDP. It is clear that the

investment needs cannot be met from the government budget and external aid alone, and that

private sector financing, both domestic and foreign, has to be mobilized.

3.2 Private Sector Investment and PPP Development

The high investment needs underline the need for prioritization of public sector resources and

financing from the multilateral and bilateral development partners used for basic infrastructure

and/or to leverage private sector investment. Development partners will also play an important role

in helping the Government create a conducive environment for strong private sector investment

that is crucial for meeting the high investment requirements, including through Public Private

Partnerships (PPPs). The Investment Climate Improvement Program (ICIP) under MEAP and ADB is

providing significant support in this endeavour.

The PPP concept is new120 in the Kyrgyz Republic and the first step in this direction took the form of

an inter-ministerial PPP workshop on 19 June 2008. This has culminated with significant assistance

from ADB in a new PPP law signed by the President of the Republic in January 2012 alongside

creation of a PPP units in MEAP, in the Ministry of Finance (PPP Risk Management Unit) and within

the Bishkek Municipality (within the CDA). This is combined with significant interest from the private

sector including through the various private sector associations. With the final completion of the

planning framework for PPPs later in 2012, the emphasis is now moving to developing PPP projects

(as noted in Section 1 and amplified in footnote 1 above).

4. National and Transport Sector Background

a. National Economic Background121

After modest growth of 2.9% in 2009, the country was recovering well from the global economic

crisis as GDP growth bounded to 16.4% in the first quarter of 2010. But the closure of international

borders following the April and June events stopped imports and exports at times, intensifying the

impact of the internal disruptions on the economy. For all 2010, GDP dropped by 1.4%

The economy is expected to pick up with GDP growing at around 5% in 2011 and 2012. The forecasts

rest on expectations of a normal security environment, continued reconstruction works, full

resumption of trade and services flows, and improved investor confidence. They also rely heavily on

construction growing by about 40%, mainly due to large scale reconstruction works in the south.

Services and industry are seen growing by 6% and 4%, respectively.

Economic expansion of the Russian Federation and Kazakhstan will also contribute to growth

through increased demand for the Kyrgyz Republic’s exports

b. International/CAREC Context

120 There has been some private sector participation (PSP) in infrastructure and a concession law prior to 2008 but the framework was not effective. PPP, as such, is much newer. 121 This largely was written by Nurbek Jenish, consultant of the Kyrgyz Resident Mission as part of the 2011 update of the ADB Kyrgyz Country Report. A fuller summary is provided in Appendix C.

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External financing to rehabilitate about 3,000 km of the 6,000-km north–south road corridor

between Kazakhstan and the Middle East has been raised. The improved section runs from Almaty in

Kazakhstan through Bishkek and Osh in the Kyrgyz Republic, Dushanbe in Tajikistan, Termez in

Uzbekistan, and Hairatan to Islam Qila in Afghanistan. The five governments along this corridor and

development partners, including the Asian Development Bank (ADB), Islamic Development Bank

(IsDB), and Japan International Cooperation Agency (JICA), provided financial and technical support.

ADB, IsDB, and JICA provided a total of about $310 million to improve the north– south corridor in

the Kyrgyz Republic.

c. National Context

The project is consistent with national strategies for Kyrgyz republic which as a landlocked country

emphasizes the importance of promoting regional cooperation and improving national and

international transport links to increase development and trade. It is also aligned with the

government strategy of focusing on transport improvement as a critical means of bolstering

economic growth and reducing poverty. The government’s transport strategy is articulated in the

Transport and Road Sector Policy Statement and the Roads Subsector Strategy. The latter aims to

contribute to sustainable economic growth by ensuring low-cost quality access of goods, labour, and

social services to regional and local markets. The strategy focuses on improvement and maintenance

of 5,400 km of the core road network including Bishkek – Osh a major transport artery.

The project was first envisaged in ADB’s country strategy and program for 2004–2006 and remains

consistent with ADB’s country partnership strategy, as presented in the joint country support

strategy, which is in line with the Country Development Strategy for 2007–2010. Improvements in

the road network, including its maintenance and safety standards, are a top priority.

5. The PPP Project

a. Development of the Project under PPP Modality

The Ministry of Transport and Communications (MTC) of the Kyrgyz Republic is presently carrying out preparatory works to develop various major highway projects. One of the projects under review is the construction of the Bazar Korgon – Kyzyl Unkur – Sargata road (to bypass the Bishkek Osh road section from 325 to 528 km.). Appendix A2 shows a location map.

This road project has been designated as a potential project for PPP development in the Kyrgyz

Republic (KR). The project will a limited access high standard road to Kyrgyz standards and be

developed and operated by a private partner under a PPP modality and which will be undertaken

according to the PPP law of 2012. That is, it will be prepared with due diligence, including an

international standard feasibility study, and be implemented under and within a competitive and

transparent framework.

It should be noted that the project has been considered for PPP because public funding for the

project is unlikely in the near future but the development is urgently needed.

b. The Project

The project is the development of a toll road of some 120 km in length. It comprises six sections: 1)

Bazar Korgon – Charvak; 2) Charvak – Kyzyl Unkur; 3) Kyzyl Unkur – Kenkol; 4) Kenkol – Shaldyrak; 5)

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Shaldyrak – Kargysh; 6) Kargysh – 325th km of the road. It would bypass the Bishkek Osh road section

from 325 to 528 km.)

It would form part of the strategic national and international Bishkek-Osh Road but would shorten it by some 83 km with the existing road providing an alternative road for vehicles at that section. The present traffic level along the road is quite modest and according to some recent but limited

traffic counts is currently at about 3,600 vehicles a day, but with trucks and large buses amounting

to over 25% of the total.

It is assumed that the new road will attract most of the existing through traffic, especially trucks.

The road would be mainly 2 lane and the Kyrgyz technical standards that apply are SNiP 32-

01:2004/А.

The project is expected to start operation possibly in 2016 or 2017 allowing 2 years for construction

in 2014 and 2015/2016 following preparation and tendering in 2012 and 2013. Given that funding

for the feasibility study and any decision on this project as a PPP project, this schedule could well slip

by one or more years. Public financing could well involve a much longer time schedule.

The total land required for the new route will be needed has been assessed by MTC as a total of 420

hectares with some 109 hectares already acquired. It is not known if any social and environmental

impacts assessment has been undertaken. Normally, the Government will acquire the land but at the

cost to the concessionaire, assuming that the project is financially viable and does not need any

financial support. If the project needs financial support, support in acquiring the land and bearing its

cost by Government could be a recommended approach. The project costs include land acquisition

costs.

6. Project Costs

No data has been made available on alignments and detailed costs of the road.

However, we understand that the MTC developed, some considerable time ago, preliminary options for this road alignment which indicated a length of 120 km and a more recent updated cost of $80m-$90m million. More work is therefore needed on preliminary alignments and up to date project costs.

The total project costs should include construction costs, project preparation and toll plazas and toll equipment, as well as contingency.

7. Traffic

Recent estimates of traffic flows at some points along this route indicate traffic flows of over 3,600

vehicles per day. It is believed that some 2,400 vehicles a day could be diverted to the toll road,

especially trucks and other through/transit traffic. Table 1 shows a breakdown of a traffic count

taken on the existing road on October 14/15 2011.

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Table 1Traffic Count October 2011

Traffic Count October 2011

Vehicles per Day (both

directions) %

Cars 2,272 Cars 2,272 62%

Minibus 298

Bus 94 Bus 392 11%

mini truck

145 2 Axle Truck 266

3 Axle Truck 237

4 Axle Truck 56

Truck trailer 206 Trucks 910 25%

Other 82 Other 82 2%

3,656 3,656 100%

Source: Consultants based on MTC data

8. Social and environmental Impacts

No information has been provided on alignments and therefore, no information is yet available on social and environmental impacts. However, it is understood there are sensitive environmental areas that may be crossed and this would need careful planning and evaluation to avoid or mitigate.

There could be some loss of economic activities to shops and businesses alongside the existing road.

The project would however improve the environment of those settlements (and for Tortugal lake visitors) alongside the existing road that would be by-passed, especially by heavy traffic.

9. Economic and Financial Evaluation

c. Economic Evaluation

The major benefit of the route would be that the new road would reduce the current route by over 80 kms. No systematic economic evaluation has been undertaken but considerable economic benefits would be generated from both vehicle operating cost and time savings with the new route in place as well as reduced accident costs. However, a preliminary estimate122 by the Consultant has indicated that the net economic operating costs savings would be about $19 to light vehicles and about $31 to heavy vehicles assuming vehicles traversed the whole length of the toll road.

Accident rates for the existing section of road are not known nor the physical geometry of this road, i.e. it is not known if the existing section (that would be bypassed) crosses difficult terrain.

d. Financial Evaluation

The likely basis, structure and affordable levels of the tariff have yet to be evaluated and decided by

the MTC. Tariffs may relate to use, kilometres travelled, type of vehicle, time of day and frequency

of use, for example. Tariffs cannot be finally determined until the project is better defined,

consultation takes place, affordability and sustainability are determined and a detailed financial

analysis is completed.

122 Based on the Kyrgyz Republic: Southern Transport Corridor Road Rehabilitation Project study, ADB Project Number: 36257, Loan Number: 2106 (SF)

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No proper financial evaluation has been undertaken yet. A very preliminary analysis was undertaken by the TA 7819 consultant in January 2012 which made a limited number of assumptions as follows;

xiv. 60% of Base year Traffic from the 2011 survey (about 2,400 v.p.d.) used the new road, increasing by 5% per year (to 2032)

xv. 65% light; 35% heavy vehicles (based on 2011 survey data)

xvi. Tariff of $5/light and $8/heavy vehicles (Consultant input to model)

xvii. Project cost of $90m (MTC) in 2010 (inflated by 5% pa to construction years)

xviii. Annual (O&M) costs (Consultant estimates from MTC data) of $3.5m/year

xix. Inflation of annual costs and revenues by 5% per year

The model used is simplistic model and some of these assumptions may be well be either over or under estimates, and especially project costs and traffic diverted to the new road, but overall the preliminary estimates indicate that the FIRR of some 15% on total project is sufficiently favourable to proceed to consider some of the more serious issues which need to be resolved.

10. Risk Management

At this stage, it is not known if the project has any significant risks beyond those normally experienced in projects of this nature, although potential environmental impacts were mentioned in section 8. Significant variations in project costs, negative social and such environmental impacts and traffic from the above estimates would have a commensurate impact on the success of the project and studies related to these need to be undertaken in detail within the proposed feasibility study.

11. Business Plan and Project Structuring

The opportunity exists to build and operate a toll road in the major Bishkek Osh corridor identified by MTC. Traffic volumes are not high but they are growing and there is a very considerable proportion of through heavy traffic. The vehicle operating costs savings, by reducing the distance travelled by over 80 kms, would be very substantial per vehicle, thus attracting users if the tariff is acceptable. Economic benefits are also likely to be high. Toll road development is a popular and profitable form of PPP in transport in many countries worldwide.

The project can be developed as a BOT type concession, possibly Build Own Operate Transfer (BOOT), over a period to be determined following the completion of the financial analyses.

A project company (or Special Purpose Vehicle-SPV) would be formed, probably a consortium of private sector companies comprising technical, financial and other expertise.

The concession contract with the winning bidder of the tender procedures under the PPP law would obligate the SPV to finance, build, own, operate and maintain the toll road according to the technical and financial specifications set out in the contract. The SPV would operate the toll plazas, collect the revenues based on tariffs (and tariff escalation in future years) according to the contract.

Data and information on the project would be provided to the Government and monitored by the executing agency (MTC).

Details related to management, investment structuring and financial performance have yet to be prepared.

12. Project Stages

The following approximate staging of implementation may be anticipated.

2012 Completion of PPP Project Brief, draft TOR and agreement to proceed to Feasibility Study

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2013 Completion of Feasibility study and Tender Documents drafted. Tendering started

2014 Tendering Completed; Final design and EIA Completed. Licenses issued and Financial Close123

2015-2016 Project Construction

2017 Operational Stage of Road

Source: Consultants estimate

13. Agencies and Institutions

The MTC is proposed as the executing agency but will work closely with MEAP and MOF, and other agencies as necessary.

14. Consultation

It is understood that consultation with the public (existing users, potential users and affected people) and the private sector (potential investors) will take place when the project is better defined. This may need to be undertaken on several occasions.

15. Preliminary Conclusions

e. Readiness

The project is not yet ready to proceed to pre FS and further preliminary work is needed before a Pre-Feasibility Study is contemplated. However, from the information collected so far and the analyses undertaken, the project has potential to be implemented under a PPP modality.

f. Issues and Risks

Issues and risks relate to environment, project costs, alignment, tariffs and traffic diverted to the new road. The initial issue is that there is no preliminary alignment nor an up to date project cost. Some alignment options apparently may exist but they are yet to be made available.

While the traffic on the existing road is not high, the cost savings from using the road should attract a high proportion of through traffic if the tariff is affordable and if it compares well to the cost savings. Until a study is undertaken these issues remain as uncertainties and until then a proper business plan cannot be prepared as the core basis within the pre-F/S which itself is a vital precursor to the tender stage.

g. Next Steps

The next steps involve progressing this PPP Project Brief to complete the key missing information.

The key data needed are:

V. Preparing a corridor alignment (or alignment options) including possible junctions VI. Broadly assessing environmental and social impacts

VII. Estimation of approximate project costs (within +-20%) VIII. Updating existing traffic and trends, and

IX. Assessing potential diversion to the new road

The PB will include drafting TOR for the pre-feasibility study.

The feasibility study (FS) will include the preparation of draft tender documents.

123 Time must be allowed between award of contract to the winning bidder and mobilization of its funding sources. The new PPP law allows 120 days for ‟financial close‟.

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DRAFT

7. PPP Project Brief for the Issyk-Kul Airport Development Project

Prepared for the Ministry of Economy and Anti-Monopoly Policy

(MEAP)

Under ADB TA 7819 KGZ

by Robert Brown, PPP Consultant

May, 2012

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7. DRAFT PPP Project Brief for Issyk-Kul Airport

1. Introduction and Objectives of the PPP Project Brief

2. Legal Framework

3. Economic Background

4. The Air Transport Sector and Air Traffic Aspects

5. The Project

a. Its Objectives

b. Location

c. Airport Traffic Data

d. The Airport-Technical Aspects

6. Estimated Project Costs

7. Social and Environmental Impacts

8. Economic Analysis

9. Preliminary Financial Analysis

10. Risk Management

11. The Business Case and Project Structuring

12. Project Readiness

13. Project Issues

14. Preliminary Conclusions

15. Next Stages

Appendices

A1 Further Information about flights to Tamchy and Karakol airports

A2 Current Airport Tariffs at Manas International Airport

A3 Tourism Development

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1. Introduction and Objectives of the PPP Project Brief

Issyk-Kul Airport Development Project, has been designated as a project that may have potential for

PPP124 development in the Kyrgyz Republic (KR) and which, if found appropriate, will be undertaken

according to the PPP law of 2012. Issyk-Kul airport is located at Tamchy and has also previously been

referred to as Tamchy airport. It should be noted that tourism to the Issyk-kul lake region is also

served directly by Karakol airport which is considered in this Project Brief (PB) 125.

As a potential PPP project prepared by the government, it will be prepared with due diligence,

including an international standard pre or full feasibility study126, and be implemented under and

within a competitive and transparent tender framework.

It should be noted that the project has been considered for PPP within the ADB TA because public

funding for the project is unlikely in the near future but the development is urgently needed. It has

also been considered for PPP under this TA because a brief and initial report on the future of the

airport127 concluded that based on the level of investment needed, that it be developed under a PPP

modality, and possibly under Build Own Operate Transfer (BOOT).

The function of this PPP Project Brief is to provide a first step128 in the PPP project preparation

process. The PPP PB reviews available data from relevant studies, considers in particular a possible

traffic demand scenario, preliminary project capital costs and undertakes a very preliminary financial

analysis.

It should be noted that a PPP PB is not a feasibility or prefeasibility study and is an initial part of the

project preparation process that leads to such studies.

The PPP PB summarizes outstanding issues, provides conclusions and recommends the next steps

including filling of information gaps. Progression to the further study and tendering will depend on

the outcome of the data gathered and the decisions of Government.

The objective of the PPP PB is, therefore, to bring together all available information in a form which

can help accelerate the implementation of this project through providing the basis for an essential

independent feasibility study and also provide a basis for a preliminary market sounding.

Recent traffic and project and operating costs and data are based on the 2011129 report entitled “The

Reconstruction of Issyk-Kul International Airport, Project Profile which was prepared by Kazakh

airport Consultants for Manas International Airport - Joint Stock Company130 MIA-JSC.

124 Appendix A2 describes the definition and characteristics of Public Private Partnerships 125 This PPP PB is prepared under TA 7819 KGZ Identification of PPP Projects and Capacity Building in the Kyrgyz Republic, undertaken by Robert Brown, International PPP Expert. This TA is part of the ICIP (Investment Climate Improvement Program) Sub Program 2 whose purpose is to improve the investment climate for the private sector, a critical cornerstone of the Government‟s economic policies. Actions needed for full compliance with objective 2, “PPP Project Pipeline developed”, is for MEAP to submit project IMs/PPP PB for 7 potential PPP projects. This PPP PB constitutes one of the requisite seven. 126 F/S or pre F/S. The main difference between a full F/S and pre F/S is that the engineering design and costs are developed more fully. The pre F/S will develop a preliminary design. Final design is undertaken by the winning private partner. 127 The Reconstruction of Issyk-kul International Airport, 2011 by Manas International Airport JSC 128 Appendix A1 shows the step by step process 129 Data contained within this report maybe significantly earlier than 2011, however 130 90% owned by the government with some public share ownership

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2. Legal Framework

The PPP PB confirms that the project will be implemented according to the PPP Law and

international best practice.

If the project needs fiscal support, the implementation of the project will be assessed by the

MOF/RMU according to the Order of the Ministry of Finance from the 10 June 2010 #257 and the

Risk Management Policy (to be) adopted by MOF.

3. Economic Background

Economic performance

After modest growth of 2.9% in 2009, the country was recovering well from the global economic

crisis as GDP growth bounded to 16.4% in the first quarter of 2010. But the closure of international

borders following the April and June events stopped imports and exports at times, intensifying the

impact of the internal disruptions on the economy. For all 2010, GDP dropped by 1.4%

Economic prospects

The economy is expected to pick up with GDP growing at around 5% in 2011 and 2012. The forecasts

rest on expectations of a normal security environment, continued reconstruction works, full

resumption of trade and services flows, and improved investor confidence. They also rely heavily on

construction growing by about 40%, mainly due to large scale reconstruction works in the south.

Services and industry are seen growing by 6% and 4%, respectively.

Economic expansion of the Russian Federation and Kazakhstan will also contribute to growth

through increased demand for the Kyrgyz Republic’s exports.

There are also considerable tourism resources in the country and the Issyk-kul region is the major

tourism resource of the country providing opportunities for both summer and winter tourism

activities.

Tourism Sector

Various development planning studies have been produced for the Issyk-Kul Lake region. In terms of

tourism, the draft Issyk-Kul Lake Tourism Development Strategy was produced in 2007 by the Aga

Khan Foundation. It is not clear as to its status but it was recognized131 as a useful document in the

process towards developing a tourism development plan that would be a major driver in developing

the Issyk-Kul lake regional development process. The Strategy would help transform the lake region

into a powerful generator of jobs, investment and economic growth with a sharp focus on the

environment and long term sustainability.

It should be noted that the first 100 day program of the Government included the formation of

priorities for development of tourism industry through the development of a medium term program

of action (master plan) for development of tourism. This is proposed to provide for the

131 ADB reviewed the draft report and supported in principle the Governments initiative. ADB made a number of comments including both support to the basis of the strategy and where additional focus might be made such as assessing investment requirements. ADB is currently implementing TA 7228-KGZ: Issyk-Kul Sustainable Development Project whose core objective is the environmental sustainability of the lake region

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comprehensive development of the tourism industry based on implementation of priority directions

that give the multiplier effect to development of the tourism industry.

Appendix A5 describes the tourism sector in more detail.

4. Air Transport Sector and Air Traffic Aspects

Air transport plays a vital role in country. There are 11 public airports operated by the joint stock company Manas International Airport (subsequently designated MIA-JSC in this report) including Bishkek airport which also provides the Headquarters of the company. There are two branch offices in Issyk-Kul and Karakol. There are four airports licensed for international flights i.e. Bishkek, Osh, Issyk-Kul (Tamchy) and Karakol132. Air links, the most important precondition for substantially expanding international tourism in the Issyk-Kul Region, are very limited. “Manas” international airport in Bishek serves only three scheduled airlines and these airlines (Russian, Turkish and British airlines) do not fit the demand profile required for generating substantial tourism traffic.

The existing visa regime for incoming tourists creates even more obstacles. There is also a lack of developed infrastructure to support more flights and an increased size of aircraft. The modernization of Issyk-Kul airport and its sustainable development is therefore a priority for MIA-JSC.

5. The Project

a. Project Objectives

The project is designed to help drive and support socio economic development in the Issyk-Kul lake

region through the development of the existing Issyk-Kul airport. A Business Plan has been prepared

for Manas International Airport JSC by a Kazakh Consulting Company for the Reconstruction of Issyk-

Kul International Airport. This Business Plan report is dated 2011 but data within the report refers to

previous dates possibly as early as 2004, so the information is of uncertain dates.

b. Location

The location of the airport is on the northern shore of Lake Issyk-Kul and as such is well located to

serve the substantial movement of people and goods to the lake, especially tourists in summer. The

temperature is warm and temperate ranging from between about zero in winter to +20c in summer.

This is very temperate by Bishkek standards for example where very extreme climatic extremes are

experienced between summer highs and winter lows. The lake does not freeze.

Recent expansion of demand has been seen from Russia and Kazakhstan. Beach tourism itself is not

seen as interesting for Western visitors although the lake makes an important part of the overall

tremendous scenic resource.

The development of the lake area for tourism is one of the country’s strategic priorities and the

development of air transport to serve the tourism zone around the lake critical to achieving tourism

development targets both in terms of numbers and socio economic impacts.

c. Airport Traffic Data

i. Recent Traffic

The report cited above provides airport traffic data from 2004 to 2006 as follows;

132 USAID has been aiding the development of tourism in the Issyk-kul region by supporting tour operators and charter flights, especially from Almaty/Kazakhstan and a note on their recent activities and developments is shown in Appendix A2.

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Year 2004 2005 2006

Type Flights Passengers Flights Passengers Flights Passengers

International 47 371 31 151 50 422

Domestic 28 331 9 166 14 140

Total 75 702 40 317 64 562

In the first three months of 2011 passenger traffic had increased to 1,305. This has been largely due

to marketing and promotion of new flights especially with the assistance of USAID programmes.

In 2011 the airport handled about 5000 passengers and very limited cargo. The current demand is

currently suppressed due to poor airport infrastructure but passenger. Cargo traffic is limited with

very few facilities.

Selected Information about flights to Tamchy and Karakol airports (developed under the USAID

programme) is shown in Appendix A2

ii. Traffic Forecasts

Overall, air traffic demand is driven by a number of forces though mainly GDP and fuel prices133.

Although specific locations or sub regions may have other accelerating or decelerating factors,

worldwide air transport demand has been shown134 to be growing by over 5% per year and is likely

to continue to do so for the next 15 years. It should be noted that the two main drivers are opposing

forces and it seems likely that the relentless demand for travel would have been significantly higher

if fuel prices had not risen so dramatically over recent past years.

Air traffic from region comprising Russia and the CIS countries grew by nearly 12% per year in the

same period. Forecasts for the period from 2008 to 2025 for Russia and the CIS countries show a

demand forecast of almost 5% per year, slightly higher than the world average.

Air traffic demand into any specific airport in the Kyrgyz republic will also reflect the specific

attractions and the demand generated within and by its catchment area.

There are no traffic forecasts for Issyk-kul airport.

Various forecasts of visitor numbers to the region have been made in the past which indicate the

possibility135 of a total 3.4 million international visitors to the country. The possibility to generate a

proportion of this total to Issyk-kul would seem to have good potential but at the same time bearing

in mind the total projection includes all visitors whether for tourism or other purposes.

For the purposes of the financial analysis, we have initially assumed growth rates per year that

would support the investment i.e. the extent to which traffic would need to increase for the project

133 Forecasting world and regional air traffic in the mid-term (2025): An econometric analysis of air traffic determinants using dynamic

panel-data models_Benoît Chèze†‡, Julien Chevallier§, and Pascal Gastineau¶ January 31, 2011

134 ICAO statistics 2007. (The ICAO is a body from the United Nations created in 1947 to standardize international security and navigation rules in the air transport sector. 135 See the following section

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to be financially viable without government financial support. Ultimately, the traffic forecasts

prepared with a pre-feasibility study will need to take into account;

Passenger demand: New services136, routes and operators as well as the trend to increased air travel both domestic and international.

Increased tourism related demand both inward and outward will be important.

Cargo demand: Traffic generated by the new airport facilities.

d. The Airport-Technical Aspects

i. The Existing Airport

Originally, the lake region was served with air services through Cholpon Ata airport which is some 30

kms east of Tamchy. This airport was substandard and exceeded ICAO norms in a number of areas

including runway incline and a runway oriented at 90 degrees to the lake and mountains.

Development work was started on Tamchy airport in the 1980’s but it was only officially137 opened in

2003 when it was renamed Issyk-Kul airport and given international status.

Currently, there are only day time flights and aircraft that can use the airport are of the Yak-40, An-

24 and An-26 types. Direct international flights are possible from nearby airports in Kazakhstan and

Uzbekistan and these have been increasing, albeit still remaining small in number.

The runway is 2,000 m in length and 45 m wide, with a 1,000m x 22.5m taxiway and an apron of 295

x 75 m sufficient for 4 aircraft of the types above. The runway is parallel to the lake and mountains

and the report indicates that safe landings are possible in both directions. There are no airport

lighting or navigation facilities. The airport is in an area of possible mud flows and some counter

measures have been installed in the most critical areas

The concrete runway built in 1981 but the civil works were not completed until 1992-1995 when

further work was implemented. Cholpon Ata airport was closed in 2003 and activity transferred to

Tamchy/Issyk-Kul.

ii. The Proposed Project

The project is designed to receive aircraft of up to 150 tonnes MTOW and provide international

standard air transport facilities. The project includes;

Extension of the runway (report states 3920 x 300 metres)

Construction of a taxiway

Apron expansion

Airport terminal to cater for 200 passengers per hour

All proposals would be in compliance with ICAO standards.

The main objective is to develop a modern airport that is safe, caters for demand and supports the

national and local economy. The task is to expand the airport in line with ICAO standards, allowing

more and heavier aircraft to use the airport therefore expanding safety and traffic in line with

economic and financial benefits.

136

Including suppressed demand 137

The collapse of the Soviet Union made the continuation of the project impossible for many years

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iii. Other Development

A comprehensive project could also provide:

Economic Free Zone; The report notes that 400 Ha of land near Karakol could be granted to the Issyk-Kul airport concessionaire

Other land areas for approved development activities. The report notes that the airport includes adjoining land along the shore of Issyk-Kul lake

iv. Specific Requirements:

It should also be noted that Issyk-Kul airport has had some improvements/upgrades which cost

some $18.4m as follows;

Extension of runway (now 2000 x 45 metres)

Fencing of airport

Some repairs to the terminal and its electrical system

These were not fully completed and a further $8.2m was budgeted but not spent.

6. Estimated Project Costs

Construction cost estimates have been prepared by a Kazakh Consulting company for an expanded

airport consistent with the facilities broadly indicated above.

It should be noted that the Consultant considers these costs as indicative only, and which not only

need reviewing for accuracy and updating to 2012 values, but also dependent on a future review of

both the appropriate physical dimensions of the future airport and the timing of facilities.

Table 6.1 Project Cost Breakdown

No. Item Cost

US$ millions

Remaining Expenditure-Phase I

1 Project works and Inspections $0.18

2 Runway extension completion $0.43

3 Fencing $7.35

4 Existing Terminal works $0.28

Total of remaining $8.24

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New Expenditure Phase I

New Expenditure Phase I

1 Reconstruction of part of the existing runway $14.60

2 Power Supply Equipment $3.00

3 Apron Lighting $1.20

4 Cat. 1 ICAO Lighting $5.00

5 Radio Navigation equipment $7.00

6 Search and Rescue (SAR) station $0.55

7 Fire and SAR Equipment $1.15

8 Fuel storage $1.40

9 Ground based Equipment $5.40

Total Cost $39.30

Grand Total Phase I $47.54

Expenditure Phase II

1 Passenger Terminal with 200 p/hour $14.00

2 Access road $1.30

3 Service base $1.00

4 Equipment $1.10

5 Engineering Structures (water, sewage etc.) $3.00

6 Freight Terminal $1.00

Total Cost Phase II $21.40

TOTAL ESTIMATED COST $68.94million

7. Social and Environmental Impacts

This is a vital area of study and needs to be assessed as in projects where social, environmental and

resettlement issues have not been adequately considered from the outset, this has led to much

subsequent delay, additional costs and even cancellation of projects.

It seems that any international standard EIAs, Resettlement and other requisite social plans have not

yet been prepared but preliminary work can be undertaken on these issues arising from the project.

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Outline TORs for full social and environmental studies will need to be prepared before progression

to feasibility study.

As there is no information on these impacts including possible land acquisition, we do not yet know

the social and environmental impacts of expanding the airport.

8. Economic Analysis

It appears that no economic analysis has yet been undertaken. However, undertaking an economic

analysis of a proposed PPP project is essential and ensures that a PPP project developed through the

public sector is a worthwhile project to the country.

Economic analysis measures the economic costs, economic benefits and economic net benefits of a

project. Costs are shadow priced to reflect the resource cost of inputs and tax is deducted as taxes

are only transfers not the use of real resources.

The economic costs of the project will include;

g. Airport and related Development and Construction costs

h. Annual operating and maintenance costs

i. Land acquisition costs

j. Environmental and mitigation costs

k. Social and resettlement costs

l. Other possible costs e.g. road linkages

The quantified economic benefits of the project would be to;

d. To provide cost and time savings thereby encouraging more passengers and more air freight

e. To expand tourism

f. To expand related industries

Multiplier economic impacts including employment and expenditure generation would also be

expected.

Other important benefits and impacts, but non quantified, would include the increase in the safety

of the airport users, impact on GDP, direct and indirect employment and an increase in higher added

value products.

9. Preliminary Financial Analysis

The financial analysis in a PPP project assumes a critical position as it measures the financial viability

and financial soundness of the project and therefore its attractiveness to the private sector and

suitability to attract project finance. If the financial analysis shows the project is not viable, the

analysis can also show how much public financial support would be necessary to make the project

viable/attractive to private sector investors.

Public financial support can be towards initial capital expenditure or on-going annual cost or revenue

support. The financial analysis can show the impact on viability of different levels and timing of

support. Generally, the private sector prefers capital support as it is ‘up front’ and conventionally

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maximum support is about 20% of project cost, although some countries go as far as 40% for

infrastructure projects.

The financial analysis, which will need to carried out subsequently, estimates various financial

indicators which include;

f. FIRR on Project (Financial internal return on total project cost before any debt/equity structuring)

g. FIRR on Equity (based on assumptions on debt equity ratios, interest, repayment of principal terms).

h. FNPV (Financial Net present value of the project) i. Annual Debt Service Cover Ratios (Indicating the margin of revenue over debt each year) j. Other useful financial ratios.

This section provides a very preliminary assessment of the financial viability of the project (FIRR on

Project and on Equity). It assumes private sector responsibility for all investment and all annual

income and costs, whereas in practice the airport operator may only operate most, but not all, of

the airport facilities. In reality therefore, under the concession contract, the private partner would

have defined specific functions and financial liabilities which would be assessed in the feasibility

study and subsequently agreed within a contract.

The FIRR is also estimated as preliminary because a PPP focused study has not yet been undertaken

and in particular;

(i) A well-defined project and its capital and operating cost have yet to be prepared.

(ii) The project has not been structured, i.e. the responsibilities, liabilities and benefits of the private sector partner have not been defined, and

(iii) The bases of a proper financial analysis are not yet available. For example, if some parts of the airport operation at Issyk-Kul are excluded from the PPP concession, so would too the costs and revenues of those functions. Further, we have not obtained the demand and tariffs for all airport services that are likely to be operated by the private sector e.g. the terminals and land side operations, and considerable cargo could well be generated and the analysis is therefore somewhat speculative without an assessment of future volumes and types of cargoes. Further, existing annual costs are not usually very accurate as a basis for future costs where there is major development and maintenance is usually under resourced.

However, the assessment herewith provides a reasonable preliminary indication of the financial

viability of the project and the need for government financial support, and whether continued

interest in this project as a PPP candidate is warranted.

Income per passenger was based on Osh airport PPP Project Brief but enhanced from about $17 to

$20 reflecting the need for financial sustainability and the higher income international passengers

using the airport (ability to pay).

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The estimated costs per passenger are based on the average per passenger in 2010 at Osh138 airport

from data provided by Manas JSC. While Issyk-kul airport is significantly smaller than Osh airport the

financial data from Osh airport is considered reasonably accurate for the costs related to operations

at the future Issyk-kul facility. It was assume costs per passenger would be related to the volume of

passengers until the projected level in 2021.

Table 9.1 Indicative Income and Expenditure at Issyk-Kul Airport (used in the model)

Item US$ Per Passenger in 2017 values

Income 20.0

Expenditure (by 2021) 9.35

Source: MIA JSC (Osh airport); Consultant

We have made a number of further simplistic assumptions for the financial assessment as follows:

a. Passenger demand to reach 500,000 / year by 2021 (NB: not a demand forecast but only for the model). Traffic thereby expanding by on average 13% per year from 2017 to 2027 i.e. the first 10 years of operation139

b. Project Cost of $76 million in 2008 prices including an added 10% for contingency. Construction costs incurred over 3 years in 2014 - 2016 (inflated by 2.5% pa (US$) between 2008 and 2014).

c. Average revenue per passenger based on 2010 accounts of inflated by 5% per year to year values

d. Other revenue (rentals, parking etc.) assumed at 20% of passenger generated revenue e. Cargo revenue assumed at 12.5% of revenue f. Average cost per passenger in 2010 inflated by 3.5% per year to year values g. Exchange rate: US$1.00=Soms 45.0

Our very preliminary assessment indicates that the project could be at least marginal, in financial

terms, as it generates 13% FIRR on Project, which at this level of accuracy provides support for

continued project consideration.

If, as assumed, there would be financial support for the project either in kind, tax holidays or direct

cash support, the project would start to look financially attractive (in terms of FIRR on Equity140) with

a total financial injection of $25.0 million towards the capital costs. Alternatively, annual financial

support of $5.0 million per year for the first 10 years would have the same impact on financial

viability. The Government could also evaluate a mix of capital and annual financial support in its PPP

feasibility study.

138

Currently, at Osh airport 64% of income comes from passenger charges and ‘administrative fees’ and 94% of airport income is passenger related, directly or indirectly. While this will likely change in future, relating income to passengers is considered to be sufficiently accurate at this stage and probably underestimating income. 139

Obviously the first 5 years would need to experience a much faster growth rate 140

Assuming 25% equity, 12% interest and 8 years repayment)

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The analysis still needs very much more detailed financial modelling to obtain an accurate indication

of overall project financial viability, return on an equity investment and the possible extent of any

government subsidy/financial support141.

10. Risk Management

To ensure the objectives of the PPP project, adequate risk mitigation and fair risk sharing between

the public and private sectors are essential and these will be identified in the pre-F/S.

As stated under previous ICIP reports, a sound investment climate would be the best risk mitigation

mechanism142.

What is necessary within the PPP PB and/or the subsequent F/S is to identify the various types of

risks under this project, and to allocate them to the party that can best control them. There is no

universal solution and the range of possible solutions to risk management is wide. The important

lesson is that the risk allocation should not be cast in stone.

The Government is developing a risk management framework for the infrastructure sectors as an instrument for assessing the contingent liabilities that may arise143. When further details of Issyk-Kul airport project are available, the risk management section will describe;

k. The types of risks to be borne by the Government (the so-called political risks such as changes in policy, delay of agreed tariff adjustments, and expropriation);

l. Those to be borne by the private sector (commercial risks such as construction cost overruns and delays, and failure to perform according to specifications);

m. Those to be assigned on a case-by-case basis such as force majeure, inability of government agencies to pay for infrastructure services (the so-called credit risk), and demand risk;

n. The main principles for the provision of government support including legality; o. Review and approval procedures for government support.

Risk management would also assess the quantitative and qualitative standards of the project report (pre F/S or F/S) as well as whether any request for government financial support met MOF-RMU criteria. In practical terms, traffic risk is considerable in this project and considerable resources should be expended in the pre-feasibility study on both developing reliable forecasts/forecast scenarios and mitigating the effects of slower than forecast demand.

11. The Business Case and Project Structuring

The commercial opportunity to expand and rehabilitate the existing airport at Issyk-Kul would seem

to have potential as a private sector venture under a PPP modality. Traffic levels at the airport are

141 This is more likely to come through structuring the project with the GOK/MIA funding some facilities such as safety, CIQ and some air side facilities. 142 ADB/ICIP is providing support to GOK for continuous and sustained policy reforms that lead to a stable macroeconomic environment, well-functioning judicial system, independent and technically sound regulation, full cost recovery (or a well-targeted output-based subsidy where the full cost recovery would make such services unaffordable), and open access in the infrastructure sectors. 143 To this end, a Risk Management Unit (RMU) has been established in MOF and is now (end 2011) formulating a risk management policy to ensure that risks of individual PPP projects are appropriately allocated between the public and private sector, and that the Government‟s overall exposure is well managed.

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currently very low but the economic importance of the project to the Government would suggest

that its support in various forms such as regional and tourism planning, related infrastructure and in

various types of support144 should be readily forthcoming.

Worldwide, airport development under a PPP modality are seen as having good potential for the

private sector and as bringing much needed investment to improve safety and passenger standards.

They also have the potential to help generate significant economic benefits for government through

tourism and stimulation of high value cargoes.

A Special Purpose Vehicle (SPV) type entity is could be formed by a private sector consortium,

possibly with majority international ownership in association with Kyrgyz companies145, experienced

across a range of financing, construction and operating activities. A BOT146 type concession contract

based on a ROOT (Rehabilitate/own/operate/transfer type PPP modality could be envisaged.

Airport development can be developed as a complete facility but can also be structured if necessary

for financial and/or other reasons (e.g. safety/security) into component parts of the airport system

and most usually into land side activities which are normally more revenue oriented and commercial

and air side activities which may be less so.

Depending on both the policy of GOK towards private airport operations and analyses contained

within the feasibility study, scenarios for the most appropriate functional structures for the private

partner can be developed and assessed. Activities such as Air Traffic Control (ATC) and Customs,

Immigration and Quarantine (CIQ) will likely continue by GOK probably within the facilities/space

provided within the land side facilities to be provided and maintained by the private sector.

The remaining functions may all be undertaken by the private partner. However, the more functions

the GOK retains, the more its financial responsibilities (costs) will be and the lesser scope for new

technology and management innovation. The feasibility study will assess the costs, benefits and

revenues of both the various types of public private partnership modalities and the detailed

arrangements within the selected modality.

12. Project Readiness

Project ‘readiness’ is one criterion147 for the progression of a project into and through the PPP

project preparation stages i.e. the GOK’s PPP planning, policy and preparation processes.

While this project is clearly not ready to proceed to feasibility study yet because further work is still

needed to finalize this PPP PB, the project has some positive ‘readiness’ aspects;

d. A report has been commissioned by Manas International Airport JS Company (MIA) which while it is not an FS, has some, albeit limited, information on;

Need for, and Objectives of, the expansion project

Technical expansion details and layout plans

Capital costs

Recent traffic trends

144

See the PPP Law of 2012 which allows many types of financial and economic support for PPP projects 145

Depending on which is the majority investor 146

BOT is a generic term and covers a wide range of concession types. 147

Readiness is a criterion in the screening process being prepared under (this) TA7819 KGZ

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e. MEAP, MTC and MIA have been supportive on the initial concept of PPP and are considering this project as a candidate for possible implementation under a PPP modality.

f. There is pressure within Government and the private sector to expand tourism and to develop in economic terms the Issyk-kul region.

13. Project Issues

There are a number of project issues which will need clarification;

The institutional capacity and willingness to proceed with this project under a PPP modality needs further discussion and elaboration.

Preliminary analyses on technical assessment of the project and its cost including conformity to ICAO regulations and guidelines.

In the absence of an independent regulator, the contract for the development of a terminal at Issyk-Kul will need to include an initial tariff schedule and an explicit description of the mechanism for adjusting tariffs, together with the agreement of the GOK/MTC to these provisions

For ADB support, the project must follow the new PPP Law and international best practice/ADB Guidelines for PPP project preparation

If the project needs financial support including guarantees, a number of specific criteria must be met based on risk management principles

Preliminary analyses of the risk management, social, resettlement, environmental, economic and financial aspects must be completed to a satisfactory level by independent analysts to finalize this PPP PB.

A decision must be made on whether any further technical sub-studies (such as air traffic control) are needed to finalize this PPP PB or a whether this PPP PB can be finalized by MEAP/MTC. Either way, the conclusions of the final PPP PB may or may not justify the expenditure that would be required for the preparation a feasibility study

In terms of structure, the MTC/MIA would normally be the contracting agency

14. Preliminary Conclusions

The development of tourism and of the Issyk-kul region has high national priority and this project

has good potential to support both objectives.

The project is unlikely to be financially viable without support, although airport development could

be phased in line with demand thus lessening the initial capital costs.

However, the need for much more information allied with the possible/likely need for major budget

support, would suggest that far more technical, economic and financial assessments is needed in

order to develop this project under a PPP modality, or indeed even under public procurement.

Work on this PPP PB should be continued until a decision can be made either to progress this project

further or discontinue interest under the PPP modality.

As a Government priority project, the airport development at Tamchy needs to be considered within

the context of (i) Regional Development, (ii) Tourism Development, (iii) transport needs to and at the

Lake region, including the future development of Karakol airport, and (iv) other supporting and

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complementary investments in other infrastructure and private sector superstructure including

hotels and tourism facilities.

15. Next Stages

The Consultant recommends that the priority next stages include;

1. The GOK needs to agree this project as a candidate for PPP and ring fence the project while preliminary studies are undertaken

2. Complete this PPP PB as far as practical undertaking further important studies and further information and data needed includes;

i. Update of the Tourism Development Strategy but including the identification and likely financing sources of priority investments

ii. Identification of any air traffic/airport technical issues.

iii. Assess social and environmental impacts including any resettlement.

iv. Preparing/commission the basis for a fuller financial analysis including project development costs, annual costs, demand, tariffs and revenue.

3. Complete Final PPP Project Brief (including preparation and cost a TOR for the pre-feasibility study)

4. GOK to review and take decision to continue or not under PPP modality

5. Undertake market sounding and consultation

6. Prepare the TOR for the pre-feasibility study

7. Proceed to pre F/S whose TOR will include the need for resolution of all issues and provide the complete basis for proceeding to tender. The pre F/S will include the preparation of draft tender documents.

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Appendix A1 Further Information about flights to Tamchy and Karakol airports

(Sourced from the current USAID project)

1. Almaty-Tamchy-Almaty:

Number of passengers: 1309

Occupancy: 75%

Number of flights: 18

Period of flights: 30.08.2011-28.08.2011

Project: Successful.

Problems: No

Note: In 2009 Tamchy airport served 156 foreign air planes, in 2010 – 20, in 2011 – about 150.

2. Almaty-Karakol-Almaty:

Number of passengers: 408

Occupancy: 40%

Number of flights: 13

Period of flights: 02.12.11-13.02.12

Project: Completed successfully.

Problems: High price of air ticket; to make it more beneficial, it is necessary to make the tickets

cheaper.

Suggested decision: Opening of a new air route through pass Ozernyi and installing new air

navigation equipment.

Note: In February’2012 SCAT Air Company could not fly to Karakol due to technical problems

with the air plane, and about 150 air tickets were refunded to tourists from Almaty.

Information about Karakol Airport: Karakol Aiport is a branch of Manas International Airport and is

responsible for operating two other airports – Balykchy and Tamga. Karakol Airport occupies 145 ha

and can service small planes (below 35 tons): AN 26, YAK 40 and AN 24, and helicopters.

Karakol Airport can service aircrafts every day without preliminary preparation, but only in the

daytime, as it does not have lighting facilities to handle aviation traffic at night.

In 2009-2010, the airport had patching repair for its landing strip, where new 4-centimeter-thick

concrete pavement was laid on the apron and taxi track.

In 2010, Karakol airport serviced 10 airplanes, including 2 air medical service planes, and 16

helicopters (military helicopters and helicopters of the Ministry of Emergency Situations). The cost of

handling take-off and landing of one ton of an airplane is 643 som, or 7,000-8,000 som for a small

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airplane. This cost includes free 3 parking hours, and the parking cost of additional time from one

hour to one day is only 15 per cent of the take-off and landing costs.

Until January 14, 2011, military and rescue helicopters were serviced free of charge. From January

14, 2011, the airport started charging 7,500 soms for military helicopters and 50 per cent of that

price - 3,750 soms – for rescue helicopters.

In 2010, the airport’s losses amounted to 3 million soms.

The airport employs 16 people.

In 2011 as part of the project on introduction of flights from Almaty air terminal was fully

reconstructed as in-kind contribution of Manas airport to the project. In November’2011 Karakol in

order to be able to receive crafts from Almaty Karakol airport received international status from the

Kyrgyz Government and since that time can service air planes from foreign countries.

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Appendix A2 Current Tariffs at Manas International Airport

Item US$ Notes

Take-off or Landing Charge 14.29 Per ton; Over 200t+10%

Aircraft Parking Charge 2.14 Per ton per day after 3 hours free

Passenger Terminal Use 7.18 Children charged @50%

Passenger Services 10.36 Check in and boarding

Airport Fee 10.00 International departing pax (in $)

All except airport fee, charges converted at $1=45.0 Soms

Source: MIA

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Appendix A3 Tourism Development

Issyk-Kul Lake: A note on the ADB TA 7228-KGZ: Issyk-Kul Sustainable Development Project

Issyk-Kul in north-eastern Kyrgyzstan is the world’s second largest saline lake and is internationally

important for biodiversity, as well as being a major economic driver in the region, attracting well

over one million tourists annually. Escalating tourism and development of resorts along the northern

shores have increased pressure on already malfunctioning infrastructure and the lake environment.

The Issyk-Kul Sustainable Development Project funded by ADB and the GOK is the first phase in a

long-term initiative by ADB to improve environmental management and urban service delivery in the

Issyk-Kul basin. The aims are to: improve infrastructure and urban services, foster tourism growth

and protect the environment of the lake and basin; and stimulate institutional, legal and financial

reforms to encourage further investment.

This first project will improve water supply, sewerage/sanitation and solid waste management in the

three main cities of Balykchy, Cholpon- Ata and Karakol and strengthen local government institutions

to improve service delivery.

An earlier study by the Japan International Cooperation Agency (JICA 2004) produced a plan to

foster sustainable development in the Issyk-Kul basin, whilst protecting the environment,

demonstrating decentralisation of government administration and promoting social and economic

activities. This recommended 78 projects, of which 49 were proposed for immediate implementation

because of their sustainability, social impact and effect on poverty reduction.

One of the priority projects recommended “formulation and implementation of an environmental

management plan for sustainable conservation of the Lake Issyk-Kul ecosystem” focusing on

improving water quality via institutional and regulatory reforms, pollution control and monitoring.

ADB decided to implement a similar study within this project, adopting a more strategic approach as

environmental problems in the lake are mainly caused by inadequate management of activities in

the basin. This study therefore examines environmental and social issues in the basin as a whole and

develops a Strategic Environmental Management Plan (SEMP), containing individual strategies and

specific actions to address the main problems.

a. Tourism Development The name Issyk-kul refers both to the lake and the oblast (region) containing the lake. The region is

centred on the Issyk-Kul lake, which is the second largest alpine lake in the world. It is partially

bordered by the massive snow-capped Tian Shan mountains that lie between 3,000 and 4,000

meters high with some individual peaks considerably higher.

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The tourism sector, linked as it is to holidays, entertainment, health treatments and improving people’s emotional wellbeing is directly dependent on social and political stability. The recent frequent confrontations and forms of expressing discontent have created an image of a poor environment for tourism that needs to be overcome. The existing organization of tourism activities and the tourism product centered on and around Issyk-Kul Lake is extremely lowly rated in world tourists’ rating of countries. As regards the degree of tourism attractiveness, Kyrgyzstan with its rich tourist resources takes 102nd. place out of 124 countries under a recent survey148. Kyrgyzstan was expected149 to attract 2,127,000 international tourist (overnight visitor) arrivals in 2011, generating KGS29.1bn in foreign visitor spending, including spending on transportation.

By 2021, international tourist arrivals are forecast to amount to over 3.4 million per year, an increase

of 4.9% pa generating expenditure of KGS 50.4bn.

Travel & Tourism is also expected to attract capital investment of KGS 3.8bn in 2011 rising by 1.3%

pa to KGS 4.3bn in 2021.

The economic Impact of Tourism is estimated to break down as follows:

Direct 33.4% (Direct expenditure by tourists, travel related companies, government, other)

Indirect150 51.9%

Induced150 14.7% Leisure travel spending is expected to total KGS16.3bn in 2011, rising to KGS26.3bn in 2021. Business

travel spending is expected to total KGS15.0bn in 2011, rising to KGS27.4bn in 2021.

Domestic travel spending is expected to generate 6.9% of direct Travel & Tourism GDP in 2011

compared with 93.1% for visitor exports. (i.e. foreign visitor spending or international tourism

receipts).

Tourism Issues to be resolved include;

a. Issyk-Kul Lake’s tourism has been developing unsystematically under almost unrestricted market forces with no due consideration of the need to sustain the value of tourism resources and without any real state direction or planning;

b. The growth in the number of tourists and the lack of clear regulatory practices regarding the use of land and natural resources has resulted in the degradation and destruction of unique natural facilities adjoining the Lake’s water zone;

c. Kyrgyzstan is not well known in the world as having huge tourism resources and in many respects this is due to the state’s limited participation in promoting Issyk-Kul

148 Rating includes data of survey of the International Association of Air Transport (IATA), the World Tourist Organization (UNWTO), and the World Travel and Tourist Council (WTTC). The government policy in the area of tourism and capability of governments to ensure safety, sanitary norms, cost of recreation, transport infrastructure development, national color, availability of comfortable hotels, ecology, staff, etc, was evaluated Rating of the РБК Agency and the World Travel and Tourism Council, 2007. 149 Travel & Tourism in Kyrgyzstan: The Economic Impact in 2011. By the World Travel and Tourism Council

150 Indirect contribution includes: Capital investment, Government collective spending and Supply-chain effects. Induced contribution

includes the broader contribution to GDP and employment of spending by those who are directly or indirectly employed by Travel &

Tourism.

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Lake as a unique holiday area for developing international tourism. d. The region’s economy and infrastructure do not have the capacity and features

needed to create the preconditions for significantly increasing tourist numbers and developing international tourism on Issyk-Kul Lake.

e. The Issyk-Kul Region has only small airports with weak international air links. Only Issyk-Kul and Karakol airports directly serve the Lake region and both were only built to accept limited numbers of small aircraft and cannot accommodate larger and modern aircraft.

f. Development of the Issyk-Kul tourism sector to compete with other relevant tourism destinations

g. State, business community, and civil sector need to develop the tourism industry together if the region’s invaluable ecological systems are not to be severely damaged. Possibly under PPP modalities.

h. Tourism development on the Lake must benefit the whole Kyrgyz economy and not specific interests

i. Accessibility for tourism for everybody taking holidays on the lakeshore need to be ensured

Tourism resources of the Issyk-Kul region

Issyk-Kul Region’s tourism resources are mainly of three types, (i) natural and climatic, (ii) historical

and cultural, and (iii) health/beauty treatments. There are also aesthetic and specific resources.

Together, they make up the uniqueness of this mountain resort and Issyk-Kul’s status, as a

biosphere, emphasizes the high quality of the region’s tourism resources.

a. Natural and climatic resources.

It is one of the largest mountain lakes in the world with a total length of beaches of almost 320 km.

On the southern lakeshore, mountains climb to 5,200 metres or 3,600 metres higher than the level

of the lake. There are six climatic zones in the Issyk-Kul basin.

Because of the protection offered by the mountain ridges, it has a soft mountain maritime climate

with moderate temperatures. The basin’s western edge is windswept and rain is rare

(approximately, 100 mm annually). Due to the warmth accumulated during summer the Lake never

freezes.

Visibility underwater is close to that in the oceans and 30-35 metres on open parts. Issyk-Kul is

drastically different from other lakes of the arid zones physically, geographically, climatically and

hydrologically. There are 28 inlets and bays on the Lake and it is classified as warm temperate and

some of the inlets are classified as tropical. Over 80 rivers flow into the Lake

Fauna of Issyk-kul includes 50 kinds of mammals, 285 birds, 11 crawlers, 31 fish, and 4 amphibians.

Issyk-Kul basin has more sunny days annually (260-280) than Southern Crimea (220-240). The total

hours of sunshine are almost 3,000 per year and this fact puts Issyk-Kul in a unique category in world

tourism markets, as a so-called “natural solarium”.

Ecologically pure food products are one of the key tourism resources given the natural and climatic

conditions and pure drinking water. Issyk-Kul is known for its apples, pears, apricots, strawberries,

cherries, and currants that are grown for holidaymakers.

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b. Historical and Cultural resources.

The region’s historical and cultural monuments are of undoubted interest for cultural and scientific

tourism and provide an image of the multi-faceted development of the Issyk-Kul Region. The Issyk-

Kul Basin lay along the way of powerful migration flows (The Great Silk Road) that have influenced

the language, culture, customs and religion for the local population. These events produced

historical and cultural monuments from various periods and epochs. Biosphere area of the Issyk-Kul

Region registered in a preliminary list of UNESCO World Natural and Cultural Heritage)

320 cultural and historical monuments are under the guardianship of the state; there were registered 1500 monuments of the Stone, the Bronze and Iron Ages, stone sculptures, writings of ancient Turkomen, sites of ancient settlements and settlements of the Middle Ages. The geographical peculiarity of Issyk-kul human settlements structure, where representatives of various ethnic groups lived with their specific traditions and faiths, formed a specific way of living in this length of the Great Silk Road: history does not mention any mass enmity or military invasions between them. Various cultures of nomadic tribes, replacing each other over a period of centuries, left their monuments here: sites of Neanderthal people, ancient burial mounds of Karakhanids epoch, gravestones in a form of Tibet chortens, artifacts of Buddhism and Zoroastrianism cultures, caves of Christians Nestorians, mysterious statues, ruins of sites of ancient settlements, hidden at the bottom of lake, functioning mosques and churches, and many others. Tourists visit certain spiritual places connected with various cultures and religions and are enriched with new knowledge, as they help change their relationship to their own holy places of world significance. The markets for these tourism products are similar for tourists from both CIS and other foreign countries. The life of the nomadic people, the Kyrgyz, is a living history book. On the jailoo (high mountain summer pastures) there are Kumys (horse’s milk), horse games (Ulak Tartysh, At-Chabysh), strength competitions, (Kurezh), table games (Toguz-Korgool), traditions and ceremonies, stories and legends, people’s creative work – all of which represents a unique tourism resource. The population’s multi-ethnic composition has significantly expanded and enriched this resource due to the culture, traditions, and customs of other peoples and ethnic groups that live on the lakeshore

c. Spa resources: By chemical composition, the Lake’s water is between oceanic and waters from continental Lakes

with a high oxygen content. The water’s overall mineralization is 5.968 mg/l, with an alkaline

reaction (рН 8.0-8.6). Mineral, thermal, and radon sources and healing mud can promote the

development of the resort and health improving tourism, as they are a valuable recreational tourism

resource. There are 53 known mineral water sources with various chemical compositions in the

Lake’s water basin.

The Lake’s clear well aerated water is good for people’s bodies when they go bathing and the clear mountain sea air is beneficial for the upper respiratory tract. The benefits of applying radon and hydrogen-sulphide mud, deposits of which can also be found in the Issyk-Kul Region are internationally recognized.

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Aesthetic and specific resources The clarity of the water and bright sunshine change the Lake water’s

colour from light to dark blue, bluer than the oceans and milk-white to sapphire-blue during the first

half of the day to various tints of purple, red and pale pink at sunset.

The pure air of the water basin often gives visibility of 100 and more kilometers and often unusual

atmospheric events can be seen in fantastic variously painted cloud formations. Rainbows during

thunderstorms in the mountains look spectacular when viewed from sun-drenched beaches.

d. Unused tourism resources. During years of independence Kyrgyzstan has practically lost its attractiveness as the health resort and place for health resort treatment and rehabilitation. In tourism developing the high quality of valuable natural resources accordance did not gain attention in the proper way, as for the natural resources – they are not used in the proper way too. Tourism that is ecologically acceptable and income generating for the local population, such as

photo safaris for wild animals (mountain goats, snow leopards, bears and cane cats) and picturesque

and specific cinema and photography locations have hardly been developed at all. The specific

climatic and geographical conditions make it possible to produce natural and atmospheric shots that

are unique in their beauty and scope and can only be seen in Issyk-Kul.

Geological, historical and ethnographic tours, religious tourism, tourism linked to legends and holy

places do not exist. In the Lake’s basin, there are over 1,000 holy places.

Rehabilitation for professional sportsmen and people involved in intensive mental work should also

be offered and the region’s spa/treatment facilities and natural resources form an ideal base for

sportsmen and national teams from various countries and clubs to train in medium mountain

conditions. Developing sport tourism will help prolong the tourism season in the region and create

an image of an ecologically clean place on the planet.

The lack of open air, sheltered stages on the lakeshore prevents the holding of large festivals,

concerts and shows, for example, chess tournaments, mobile exhibitions and so on.

Tourism should be used not only as a means of attracting the maximum number of tourists but also

new knowledge, experiences, and technologies and creating a positive international image that

would enable various high-level scientific seminars and conferences to be held in the Issyk-Kul

Region.

Strengths and Weaknesses

The strong point of tourism at the Issyk-Kul: (i) unique natural places, (ii) the fully formed reputation of health resort region, (iii) fine weather with 300 sunny days per year, (iv) functioning main infrastructure, (v) Availability of tourist places in neighboring countries for diversification of tour products.

The disadvantages of tourism at the Issyk-Kul:

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(i) weakly-diversified tourist products, (ii) a singular developed health resort, but they were not developed by any collectives, (iii) bad tourist service and lack of benevolence, (iv) decreasing of competitiveness, (v) limited transport services, and (restricted accessibility for foreign tourists).

Demand

The number of tourists who visit Issyk-Kul Lake is steadily increasing. According to data, there were a

total of 1.5 million tourist-days generated by 444,000 tourists in the tourist season of 2006151,

including 148,000 tourists in the organized sector and 296,000 tourists in the unorganized sector152.

According to the results of first half of 2007 the export of tourist service (income received from

foreign citizens) is equal to $103.2 m i.e. twice than in 2006 ($49.3 m)

The most utilized rest area has become Bulan-Sogotu, Sary-Oy, Chok-Tal, Kosh-Kol, Tamchy,Bostery,

Ananyevo, Kara-Oi villages, and Cholpon-Ata. The less utilized areas are Balykchy and Korumdy

village. The cost of holidays there is directly linked to the quality of the facilities, service levels and

popularity of the holiday area. Tourism facilities are fullest in summer153. An estimate of the level of

occupancy in the organized sector is June-July - 50%, July – August - 100%154, and in the unorganized

sector – 75%. Mainstream visitors tend to stay 6-12 days for various health, beach and touring

vacations including multi destination Silk Route tours.

Almost 80% of foreign tourists arriving for rest, recreation and leisure activity are from the CIS countries. In general, tourists from Kazakhstan (60%), Russia (15%) and Uzbekistan (3%). Almost 20% of tourists are citizens of Kyrgyzstan. The tourists from the foreign countries make up about 2%.155 The official statistical data demonstrate perfectly another picture: 66% are the tourists from Kyrgyzstan, 32% - the CIS countries, and about 2% beyond the CIS.156 However, there is no true statistical data because of problems in fiscal policy ie the existence of the shadow economy.

151 Taking into account the potential of the ecological system and pollution of the lake with oil products as the most limiting factor, we cannot receive more than 24,000 people per day, which makes 1.8 to 2.2 million people ???. Estimation takes into account even distribution of persons on vacation around the entire Lake. 152 Учитывая отсутствие строго учета данные оценки следует считать примерными. 153 According to experts‟ estimates, the Lake‟s pollution with oil products is the most serious limiting factor, as it cannot handle more than 24,000 people a day or 1.8-2.2 million people annually. The even distribution of holidaymakers around the entire lakeshore was taken into consideration when making calculations. 154 According to the calculation method used by the National Statistics Committee, the average stay of tourists in the official sector is five days or six changeovers per month (30 days /5 = 6 changeovers) 155 Rapid information for 8 months 2006. It was presented to Mr. Usenov, State Agency for tourism and Sports. 156 Data of the State Committee for Statistics, Tourism in 2006.

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195

APPENDIX D: Framework for the PPP Working Group (WG)

MEAP, MOF and all Line Ministries should attend, chaired (and secretariat function) by MEAP. Also

to be invited donor representatives and private sector

Meeting at least every month.

Objectives:

1. Coordination of PPP Activities

2. Support to PPP Development

3. Help to resolution of PPP Issues

4. Status of PPP Project Implementation

5. Other

Proposed Activities:

1. Coordination of PPP Activities

a. Reporting of progress with PPP

b. Distribution and Information on PPP

c. Future Plans, Proposals and Initiatives

2. Support to PPP Development Needs

a. Identification and selection of PPP projects

b. Law and Regulation Matters

c. Institutional development

d. Capacity Building

e. Guideline Preparation

f. Donor interaction

3. Resolution of PPP Issues

a. Ad hoc

b. Refer to next VPM meeting where necessary

4. Status of PPP Project Implementation

a. Reports on PPP progress with projects

5. Presentation of a PPP topic at each meeting (30 minutes)

6. Other

Coordinated with High Level meeting chaired by VPM which could meet say every 2-3 months (plus

urgent ad hoc meetings) to report progress from WG and seek guidance on major issues.

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APPENDIX E: People and Organizations Met

Name Organization

Mirdin Enshenaliev , Rie Hiraoka Cholpon Mambetova, Gulkayr Tentieva, Aisuluu Nurzhan Dzhumabaev

ADB KYRM Land and resettlement specialist

J Liston, Roka Sanda, Baurzhan Konsybayev ADB Manila

Sanjar Mukanbetov,Almaz Sazbakov, Nurbek Matsutov MER/MEAP

Noor Allidina, Manager and Bohdan Krawchenko,AnnaVorobeva

Program Manager, Aga Khan Development Network

Mr Soronkylov Deputy Minister, Ministry of Education

Bermet Sydgalieva, Sergey Shevchuk (USAID) M of Health/ Head of Licencing and Strategic Planning, Ministry of Health

Almaz Aibalaev RSK Bank

M Ismailov (First Vice Mayor), Tilek Jembaev (Director CDA) Aibek Sharshenbaev

Municipality/CDA

Nicola Rogatchev, Gulnara Djuzenova IFC/Kyrgyz Country Manager, IFC

Edilbek Bogombaev Project Manager UNDP-GEF-Small Hydro Power Projects

Nurlan Musuraliev, Elmira Bataeva Executives, Chamber Of Commerce

Aalaibek Cholponkulov Director, Agency for Vocational Training

Talaibek Koichumanov, Azamat Akeneev Director, Investment Council

Mamaev/Sanjar Ibraimov/ Bakyt Zhamalidinov, Marina Asankulova

MOTC, State Secretary Director/ Deputy/ Head Strategic development

M Halitov Private Sector

Babur Abdilov Institute of Strategic Studies

A. Termechikova, M Toktonalieva MOF/RMU

Janyl Tumenbaeva World Bank

Yerlan Aliaskarov Eurasian Development Bank

Nurzhan Dzhumabaev Land Acquisition and Resettlement Consultant

Gunara Kalikova, Tolkun Shakeev, Albina Rakhmidinova, Nurbek Sabirov, Murat Madykov

Partner and staff, Kalikova & Associates

Mishima Kenji (Representitve), Imai Seiju, A Svetlana, Mishima Ai, Aida Bayalieva

Toshinoro TODA, Yoshiro Kunimasa, Ken Nishino, Gaku Ohashi,

Ichiro Kumakiri

JICA/ Transport Study and Road Sector Advisor Head, PPP/Investment Promotion Centre (JICA funded)

Larisa Manastirli, Jyldyz Galieva , Talay Asylbekov, Gulnara Yessentayeva,

EBRD, Head/ Deputy Head

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Abdimalik Busurmankulov Manas Airport Company, VP Operations and Infrastructure

Aktilek Tungatarov IBC

Almaz Asipjanov, Aibarcha Bekova, Chynara Arapova USAID

Karen Westergaard USAID/Deloitte

Maruoka Kenji, Alistair Knox, Koike Isamu, M Miyakoshi

CTI Engineering International

Alex Horwath CEMI

Bakytbek Satybekov Regional Environment Centre for Central Asia

Erkin Abdykalykov Bishkek Terploset

Aibek Tolubaev Kyrgyz Stock Exchange

Caspar Lambrechtsen, Richard Snowden Consultants: ADB Issyk-kul Sustainable Development project

Almaz Aibalaev First Vice Chairman, RSK Bank

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APPENDIX F: Reports

Main Source Name Funded By Date

ADB ICIP Reports ADB 2008/9

ADB Country Strategy Report ADB

Bishkek City Government

Study on Improvement of Urban Transportation in Bishkek city. Inception Report and Parking Survey

JICA July 2011/ April 2012

WTTC Winter Tourism WTTC 2010

Private Sector Ski resort project

Aga Khan Background Reports on AG activities AKF

MoE/EBRD Reports on 4 Small Scale Hydro projects EU 2011

MoE 8 Energy Projects (in Russian) MoE

MOT Projects and Presentations (Russian and English) MTC

Manas The Reconstruction of Osh International Airport Manas Airport JSC

2011

Manas The Reconstruction of Issyk-kul Airport Manas Airport JSC

2011

Private Investment Proposal-Housing Private 2012

National Statistical Council

Women and Men of the Kyrgyz Republic GOK 2010

MOE Education Development Strategy EU/UNICEF 2011

GEF Study of Social and Gender impacts of small and micro HPPP on Local Communities in Kyrgyz

UNDP 2011

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APPENDIX G: Draft Government (MEAP) PPP Work Program (December 2011)

PROGRAM157 OF THE REPUBLIC OF PPP IN KYRGYZ FOR THE PERIOD FROM 2012 TO 2015

DRAFT- December 30, 2011

(Received from MEAP February 2012. Format unchanged)

1. Legislation

1.1. Development and adoption of legal base for PPPs

1.1.1. Develop and adopt a new law on PPPs

Responsible: Ministry of Economics and Antitrust Policy (MEAP)

February 2011

1.1.2. Amendments to the Law in connection with the adoption of a new law on PPPs (Appendix

1) MEAP/Government

1.1.3. Development and adoption of the Government regulations and the adoption of the

authorized state body on PPP practice guidelines in the field of PPP (see Appendix 2)

The Government

The authorized state body on PPP

2. Implementation

2.1. Preparation and pilot projects

2.2. Create a list of potential projects in all (7) regions of the CD and in the cities of Bishkek and

Osh

MEAP

Mayor of Bishkek

Mayor of Osh

Regional state administration in Batken, Osh, Naryn, Jalal-Abad, Talas, Issyk-Kul and Chui regions

2.3. Identification of pilot projects in all (7) regions of the CD and the city of Bishkek and Osh

MEAP

The authorized state body on PPP

No more than 1-2 pilot projects

2.4. Preparation of pilot / implementation of pilot projects

MEAP

The authorized state body on PPP

2.5. Creating a database of participants of PPP projects (public partners, private partners,

international and local consultants (financial, technical, legal), financial institutions)

MEAP

The authorized state body on PPP

2.6. Creating and maintaining a register of PPP projects

The authorized state body on PPP

3. Education, Training, Knowledge Dissemination 3.1. TRAINING FOR THE PPP

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Broad Summary of Russian Version of Action Plan/Program

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3.1.1. Develop and implement training programs for civil servants and employees of the executive bodies of local self-government on PPPs (see Appendix 4) The authorized state body on PPP 3.2. Cooperation With Other Centres PPP, The authorized state body on PPP PPP institutions (and international organizations, advocates of PPP) 3.2.1. Search and contact, the signing of bilateral agreements / memoranda of understanding and cooperation with foreign centers of PPP (Kazakhstan, Russia, Netherlands), the authorized state bodies for the PPP and the international institutions (IFC, the Advisory Committee on State and private infrastructure projects (PPIAF)) with respect to (i) promotion and development of PPP in the CR; (ii) the exchange of experience and information on PPP; (iii) organization of training, and (iv) other matters. The authorized state body on PPP 3.3. Awareness of the Private Sector Regarding PPP 3.3.1. Publication of articles on PPPs The authorized state body on PPP 3.3.2. International conferences - at least 1 year The authorized state body on PPP 3.3.3. Conduct workshops / roundtables / trainings for a wide range of entities (state agencies, local governments, the private sector, civil society, NGOs) to raise public awareness of the usefulness and necessity of the development of PPP in Kyrgyzstan - at least 2 events per year The authorized state body on PPP 3.3.4. Creating and maintaining a website on PPP The authorized state body on PPP ------------------------------------------------------------------------------------------------------ Appendix 1 Amendments to the Laws of the Republic in connection with the adoption of a new law on PPPs • Law "On Local Self-Government and local state administration" • Law "On privatization of state property" • Law "On public procurements" • Law "On the municipal ownership of the property" • Law "On Concessions and concession facilities" • Law "On State Property Monopoly Deed" • Law "On status of the capital" • Law "On Urban Planning and Architecture" • The Land Code • Law "On Republican Budget" (adopted annually) • Law "On Competition" • Tax Code • The Customs Code

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Development of sub-legal acts aimed at the implementation of the Law on PPP: • A list of infrastructure projects and infrastructure services that are excluded from the scope of public-private partnership (Part 2 of Art. 3 of the Act) • Regulations and general guidelines about the definition and allocation of risks between the public partner and private partner to be taken by the authorized state body (Part 2 of Art. 5 of the Act) • Instructions for use of forms of participation of the private partner in PPP projects (or PPP models) made by the authorized state body (Article 6 of the Act) • Resolution of the Government on the establishment of the authorized state body in the field of PPP and approval of it (Article 8 of the Act); • Resolution of the Government on the definition of public agency risk management and approval of the provision for him (or changes in the position of the Ministry of Finance, be given responsibility for risk management) (Article 8 of the Act); • Resolution of the Government on the establishment of special funds, accumulating financial resources to guarantee the fulfillment of state obligations to partners, the PPP Agreement (Article 8 of the Act) • Resolution of the Government approval procedure for the formation and activities of the Tender Committee (Part 3. 19); • Resolution of the Government to approve the rules of procedures for preparing the tender and tender documents (Part 9 of Art. 20 of the Act) • Resolution of the Government approval of the order of monitoring and evaluation of PPP projects (Part 3. 32 of the Act); • Resolution of the Government to approve the rules of keeping the register of PPP projects (Part 3. Law 33). Appendix 3 List of donors: • The World Bank / International Finance Corporation • European Bank for Reconstruction and Development • The Asian Development Bank • The European Investment Bank • Organization for Economic Cooperation and Development • Aga Khan Foundation • Department for International Development (DFID) • German Society for International Cooperation (GIZ) • The Shanghai Cooperation Organization • USAID • The German Development Bank (KfW) • Private Participation in Infrastructure Advisory Facility (PPIAF) Appendix 4 Training program sfor civil servants and employees of the executive bodies of local self-government on PPPs Regular training seminars and workshops, including the involvement of international experts Kyrgyzs Republic for at least 2 per year authorized state body on PPP Internships in public institutions of other countries involved in the PPP:

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Russia, Kazakhstan, Netherlands, Czech Republic, Japan Passage of distance learning Higher School of Economics, JICA at least two groups of professionals authorized state body on PPP