A study commissioned by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) Infrastructure Financing in Kyrgyzstan Prepared by: Jannat Salimova-Tekay 2021-03-12 DRAFT 3 Table of Contents I. Introduction ............................................................................................................................. 6 II. Infrastructure Financing Needs ............................................................................................... 7 A. Power .................................................................................................................................. 8 B. Transportation ................................................................................................................... 11 C. ICT .................................................................................................................................... 14 D. Water and Irrigation Investment Needs ............................................................................ 14 III. Infrastructure Financing Sources .......................................................................................... 16 A. Public Financing ............................................................................................................... 16 1. IFI Sovereign Borrowing .............................................................................................. 16 B. Private Financing .............................................................................................................. 23 1. Foreign Direct Investment ............................................................................................ 23 2. Banks............................................................................................................................. 25 3. Capital Markets ............................................................................................................. 26 C. Public-Private Partnerships ............................................................................................... 27 D. China FDI and BRI ........................................................................................................... 29 IV. Infrastructure Financing Challenges ..................................................................................... 32 A. Public Financing ............................................................................................................... 32 1. Fiscal Space .................................................................................................................. 32 2. The Current Account..................................................................................................... 34 3. Utility Subsidies ............................................................................................................ 37 4. Strategic Planning ......................................................................................................... 37 B. Private Financing .............................................................................................................. 38 1. Doing Business ............................................................................................................. 38 2. Financial Sector ............................................................................................................ 39 C. PPP Financing ................................................................................................................... 40 V. Infrastructure Financing: Recommendations, Opportunities and Modalities ....................... 41 A. Policy Recommendations.................................................................................................. 41 1. Fiscal Discipline............................................................................................................ 41 2. Tariff Reform ................................................................................................................ 42 3. Sector Planning ............................................................................................................. 42 4. PPP Institutional Capacity ............................................................................................ 43 B. Additional Financing Modalities ...................................................................................... 43 1. Offshore Bond Issues .................................................................................................... 43 2. Climate Finance ............................................................................................................ 44 3. Islamic Finance ............................................................................................................. 44 VI. Conclusions and Recommendations ..................................................................................... 45 VII. Reference Materials .............................................................................................................. 46 Page 2 of 48 List of Figures Figure 1: Quality of Infrastructure in Kyrgyzstan (2019) ............................................................... 7 Figure 2: Infrastructure financing needs in Asian LLDCs .............................................................. 8 Figure 3: Total investment by Infrastructure (USD billion, % of total, 2000-2018) .................... 10 Figure 4: Total Investment in Energy by Infrastructure Type (% of total, 2000-2018) ............... 10 Figure 5: Transport Investment, Planned and Under Construction (USD million, %, 2019) ....... 13 Figure 6: Water Investments, Planned and Under Construction, (USD million, %, 2019) .......... 15 Figure 7: Top Sectors Receiving Investment as of 2018 (USD billion) ....................................... 18 Figure 8: ADB Cumulative Lending, Grant and TA (in USD million, 2019) .............................. 20 Figure 9: World Bank Commitments by Sector (2018-2020, USD million) ................................ 22 Figure 10: EBRD Portfolio Composition (% of total, as of October 31, 2020) ........................... 22 Figure 11: Kyrgyzstan’s Net FDI and GDP, 2008-2019 .............................................................. 25 Figure 12: FDI – Inflow in Kyrgyzstan by sectors, 2018 ............................................................. 25 Figure 13: Domestic Credit to Private Sector (% of GDP, 2019) ................................................. 26 Figure 14: China's FDI and Exim Bank's disbursements (USD million, 2014-19) ...................... 29 Figure 15: China's FDI by Sector (USD million, 2017-18) .......................................................... 29 Figure 16: Fiscal Balance for Kyrgyz Republic, (% of GDP, Annual) ........................................ 32 Figure 20: General Government Expenditure for Kyrgyz Republic, (% of GDP, Annual).......... 33 Figure 19: Government Debt for Kyrgyz Republic, (% of GDP, Annual) ................................... 34 Figure 17: Current Account Balance for Kyrgyz Republic, (% of GDP, Annual) ....................... 36 Figure 18: Trade Highlights of the Kyrgyz Republic (% of total, 2017) ...................................... 36 Figure 21: Generation and Transmission Actual vs Cost-Recovery Tariffs (KGS/kWh) ............ 37 Figure 22: World Economic Forum 2017 Executive Opinion Survey ......................................... 38 Figure 23: Use of Financial Services in the Kyrgyz Republic, 2019 ............................................ 39 Figure 24: PPP Index Scores for Kyrgyz Republic (2018) ........................................................... 40 List of Tables Table 1: Infrastructure Financing Needs in Kyrgyzstan, (% of GDP, 2018) .................................. 8 Table 2: Sectoral breakdown of commercial bank loans (in KGS billion, December 2019) ....... 26 Table 3: KSE listings 2019 ........................................................................................................... 27 Table 4: Dollarization of Banking in Kyrgyzstan (% of total) ..................................................... 40 List of Boxes Box 1: Dialysis Centers PPP Project ............................................................................................ 28 Box 2: The Belt and Road Initiative in Kyrgyzstan ...................................................................... 31 Page 3 of 48 List of Acronyms ADB - Asian Development Bank AIFC - Astana International Financial Center AIIB - Asian Infrastructure Investment Bank BRI - Belt and Road Initiative CAREC - Central Asia Regional Economic Cooperation COVID-19 - Coronavirus disease of 2019 СIS - Commonwealth of Independent States СPI - Corruption Perception Index CPS - Country Partnership Framework CTF - Clean Technology Fund EBRD - European Bank for Reconstruction and Development EDB - Eurasian Development Bank EEU - Eurasian Economic Union EFSD - Eurasian Fund for Stabilization and Development ESCAP - Economic and Social Commission for Asia and the Pacific FDI - Foreign direct investment GCF - Green Climate Fund GDP - Gross Domestic Product GEF - Global Environment Facility HPP - Hydropower plant ICT - Information and communication technologies IFC - International Finance Corporation IFI - International financial institution IMF - International Monetary Fund IsDB - Islamic Development Bank JSC - Joint-stock company KSE - Kyrgyz Stock Exchange KGS - Kyrgyz Som kWh - Kilowatt hour LLDC - Landlocked Development Country LLC - Limited liability company