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In his interview to Tazabek, Jean-Michel Happi, World Bank Country Manager for the Kyrgyz Republic, told about the Bank-supported projects in the Kyrgyz Republic in such areas as energy, agriculture, and rural water supply. Mr. Happi also spoke about the World Bank experts’ projections for the country’s economic growth for 2015 and shared the organization’s near-term plans.
To read the interview in Russian, click here.
- It’s been one year since the beginning of your tenure in the Kyrgyz Republic. What could you tell about the results achieved in your work during this period?
- The World Bank has been a longstanding partner for the Kyrgyz Republic and I am very glad to note the successful continuation of our effective partnership that is reflected in the Country Partnership Strategy between the World Bank and the Kyrgyz Republic for 2014-2017. This strategy, which thematically focuses on governance, sets out both financial and non-financial support provided by the Bank for the country.
The World Bank’s twin goal – poverty reduction and ensuring shared prosperity – has been a corner stone of the support provided to the Kyrgyz Republic.
As for the results achieved over the past year, one of the notable successes that I would like to highlight is the introduction by the Kyrgyz government of the 480-hour pre-school preparation program, which will help 5-6-year-old children not attending kindergartens receive basic pre-school education. With the grant provided by the Global Partnership for Education (USD 12.7m) and mobilized by the World Bank, the Ministry of Education developed the requisite curriculum and methodology and provided trainings for teachers. These funds were also used to procure textbooks and furniture for pre-school classes in all schools and kindergartens.
In the healthcare sector, two Bank-supported projects were started after long internal agreement and ratification procedures were completed. These are the Results-Based Financing Project and Second Healthcare Sector-Wide Approach Project (SWAp-2) aimed at supporting the implementation of the Den Sooluk National Program. I would like to use this opportunity to congratulate the country on its important success – achievement of Millennium Development Goal 4 envisaging reduction of child mortality by 2015. This became possible through the country’s efforts undertaken in the past under the Manas Taalimi and Den Sooluk programs supported by development partners, including the World Bank. However, improvement of maternal health – the Millennium Development Goal 5 – is still the issue the resolution of which requires not only financial resources, but also political will and commitment on the part of the national authorities and authorities in the healthcare sector.
We have also achieved good progress in the sphere of key infrastructure. As you know, access to irrigation water is the critical factor of /for the productivity of farmers, and we increased our investments in this area. We have the Urban Infrastructure Project closing very soon, under which much has been done to improve water supply in Bishkek, Osh, Talas, Naryn, Batken, and Shopokov. Several weeks ago, the water intake systems were launched into operation in Bishkek (Bashkarasuu) and Isfana, providing regular water supply access for thousands of people. In addition, under this project and in cooperation with Bishkek city administration, a municipal property management information system was established. The objective of the system is to improve transparency of the process regarded as one of the most susceptible to risk of corruption.
In the transportation sector, the new regional Central Asia Road Links Project has started recently, for which the World Bank provided financing for the rehabilitation of the priority road sections connecting the Kyrgyz Republic and Tajikistan. In the Kyrgyz Republic it is the road section near the Kyrgyz-Tajik border connecting Isfana and Kairagach border checkpoint, and also the road section connecting Batken and Kyzyl Bel border checkpoint. In addition, under the recently closed National Road Rehabilitation Project also supported by the World Bank, the Ministry of Transportation and Communications launched the Road Assets Management System which will allow the Ministry to identify the priority road sections to be rehabilitated all over the country and automatically calculate cost estimates for such works.
Beyond the financial assistance program, the Bank provides a broad range of advisory and consulting services to government institutions. Here, the World Bank is expanding its support in such areas as governance and anti-corruption, since weak economic governance and high level of perceived corruption are the factors that impede private investments.
We are also providing assistance to the Kyrgyz government in the definition and implementation of higher standards of accountability in the public sector, strengthening budget implementation control, and effective public asset management. Besides, we are helping the government in drafting the legislation on conflict of interest.
Speaking of the achievements, I would also like to mention some challenges we have been facing. The World Bank project portfolio in the Kyrgyz Republic is currently worth over USD 200 million. The complex internal government procedures for signing international finance agreements for some of the projects – on pasture management or on improvement of power infrastructure – lasted for about a year and have decreased the speed of our assistance to the country in these areas. Delays with the project effectiveness cause delays in the process of bringing benefits of these projects to the Kyrgyz people, whose livelihoods we ultimately aim to improve through all our work in Kyrgyzstan. This issue raises our concern, and we are working with the Kyrgyz Government to accelerate the internal government procedures for project approval and effectiveness, and, consequently, accelerate the speed of the Bank’s assistance to the country.
- In the context of the World Bank’s 2014-2017 Country Partnership Strategy in the Kyrgyz Republic, how would you assess the results achieved over the past two years?
- This is a very important question because currently we are in the middle of the strategy implementation cycle and conducting our mid-term review. Over the past year, the Kyrgyz economy has experienced a number of external shocks, but despite the unfavorable external environment the country could retain its economic growth at 3.6% last year. This year, although there has been a significant decrease in remittances from other countries, the economic growth over the past eight months did not slow down – due to higher gold and agricultural outputs. Moreover, according to the Kyrgyz National Statistics Committee, the poverty level in the Kyrgyz Republic estimated in 2014 at 30.6% fell six percentage points compared to 2013.
By doing the mid-term review of our Country Partnership Strategy’s implementation, we want to check whether we will need to make any significant adjustments to the strategy are required. Over the next few months we will discuss with the government our intermediate findings and to see whether our partnership strategy is aligned with the government’s priorities. In this context, we have agreed with the government that the World Bank will provide USD 66 million of investments in 2015 to support the key areas in the forestry sector, continue improving access to rural sanitation and water supply services; to address urban development challenges, as well as support policy reforms that aim at improving governance and private sector competitiveness.
We would also like to help farmers to gain a better access to the markets of the Eurasian Economic Union by supporting the dairy supply chain. Our vision, which is probably the vision of many farmers and the Government, is that in a few years anyone could enter a shop in Kazakhstan or Russia and see good quality products from the Kyrgyz Republic marked as “bio products.” To achieve that, the Kyrgyz Republic will need to upgrade its food safety infrastructure and ensure compliance of its products with the EEU standards. It means that improvements should be implemented throughout the entire supply chain, starting from livestock breeding, milk collection, cooling, processing, packaging, and exporting. Both the World Bank Group and IFC are committed to support achievements of these goals.
- The World Bank previously mentioned its intention to provide USD 59 m over the next three years. Now you are speaking about USD 66m, has the amount been changed?
- Usually, country allocations of the International Development Association (IDA) are made based on a country’s performance, including the economic situation in the country. When such national allocation is provided at the beginning of an IDA three-year cycle, the figures are indicative, and the actual allocations are decided on a year-to-year basis. This year we, in fact, we’ve had a 10% increase in the IDA national allocation. This makes it possible to consider co-financing for the dairy supply chain development project if the Government confirms this choice.
- There was also an urban development project mentioned as one of the Bank’s activities, could you tell more about it?
- This project is being developed now and will be implemented in a number of municipalities, such as Sulyukta, Kerben, Balykchy, and Toktogul. In the first two municipalities, we are planning to provide assistance in rehabilitation of water supply systems, possibly, street lighting, and roads. Under the energy efficiency component, several schools will be rehabilitated in Balykchy and Toktogul. As for the institutional component, we would like to help municipal workers build their capacity in urban planning.
- The dairy development project in Issyk Kul oblast will require financing of USD 35-45 m over five years. What sources of financing do you envisage for it? Are there any technical feasibility studies at this stage? How long would the project implementation take?
- This program is currently being designed under the leadership of the Ministry of Agriculture and Land Improvement, and together with the Issyk Kul oblast administration and other development partners. The program is likely to be implemented in two phases that would match the momentum for resource mobilization. Today we are expecting that the IDA envelope for the country will be one of the financing sources for the program, and we are also mobilizing grant funding from some of our bi-lateral partners who expressed their support for this initiative.
- Would there be a pilot project that could be rolled out in other oblasts of the country?
- The pilot program that is being currently designed with our support will be physically focused on one oblast. We have an internal agreement with the Ministry of Agriculture that we would be working on the pilot project, and if it is successful, the program could be rolled out all over the country. However, implementation at the national level will require a considerable increase of the financing package.
- Earlier this year the Parliament discussed financing for the project to be implemented by SeverElectro in the amount of USD 25 m. Some MPs opposed this project saying it would be a waste of money, others said that a local private company could build substations without any loans. What would be your comment on that?
- Improving the performance of the energy sector is one of the important priorities of the country, and the World Bank shares the vision also expressed by the Kyrgyz President that the country should achieve its energy security. The Kyrgyz Republic has achieved considerable progress in raising its power generation capacity: strategically important power transmission lines and substations have been launched, hydropower stations and power and thermal energy stations are being upgraded. Kyrgyzstan joined the CASA-1000 project and in the future will become one of the central players on the regional power trade market. Moreover, the Government designed an ambitious program for improving governance in the energy sector, such measures include establishment of an independent regulator in the energy and fuel sector, and introduction of performance criteria for different actors in the sector.
To support the country’s efforts to improve the situation in the energy sector, the World Bank decided to provide financing for the Electricity Supply and Reliability Improvement Project. It was agreed upon with the Government, its financing amounts to USD 25 million, of which USD 11.25 million is a grant, and it has several specific goals: firstly, to strengthen SeverElectro’s distribution infrastructure through investments, and, secondly, to provide an effective information management system that would allow to effectively respond to interruptions in power supply and promptly react to consumers’ complaints. The project is also aimed at the reduction of the company’s technical and non-technical losses, improved financial performance and introduction of the general corporate management.
The investment plans of the project included construction of several substations in Severelectro’s service areas, but we should not forget that these plans were proposed at a certain point in time. Of course, we welcome opportunities arising in the energy sector for attracting private sector investment. The sector has significant financing needs, and, if the government decides that a private investor could build some substations, we could restructure this particular component of the project and channel funds to other needs. However, it does not mean that the project should be cancelled altogether. On the contrary, I am confident that we should create more opportunities for private sector financing that would complement the public investments. Attracting private investments into power generation or power distribution provides good opportunities for public private partnerships, and we believe that they could have a positive impact on the country’s economic development and the sector performance in the long run.
- Is this project only for SeverElectro? Is the Bank planning to implement projects for other energy companies?
- Energy is a priority sector for the development of the Kyrgyz Republic both from the viewpoint of expanding private investment and from the viewpoint of improving living standards for households, and the World Bank intends to expand its assistance in this area. In addition to the financing provided for improvement of SeverElectro’s operations, the Bank has supported implementation of key policy reforms in the sector through the budget support provided under the Development Policy Operation for the Energy Sector. Moreover, the Government requested our participation in a broader program for improving performance of the energy sector. More specifically, there are ongoing discussions of our potential assistance in district heating improvement.
- During last autumn-winter season, the Government requested donor support to resolve the situation with power deficits in the winter season. Has the Bank developed any measures for the upcoming autumn and winter 2015-2016 heating season?
- Yes, last year the country faced potentially serious power deficit risks, and the government prepared an ambitious program for financing the energy sector by introducing new power and heating tariffs. The objective of the program was to provide financing adequate for investment, operation, and maintenance of power grids. In addition, this program was also aimed at providing financing for procurement of fuel for stations generating power and thermal energy. Another important area of the program was to introduce and implement the power consumption management plan in case of potential rotating power cuts, so that this rationing would not affect the poorest regions. In order to support this program and help the country to overcome the challenges of the last winter, the Bank agreed to provide USD 24 million as budget support under the Development Policy Operation for the Energy Sector that I have mentioned earlier.
Regarding the upcoming autumn and winter season, we have been informed that the meteorological and weather conditions this year are more favorable compared to last year and the level of the water in the Toktogul water reserve is more or less adequate for ensuring the required power generation. Therefore, we do not anticipate any major energy crisis this winter. However, should such a crisis take place, the Bank stands ready to adjust its priorities for effective response to the crisis.
- We know that the construction works are planned to be started next year under the CASA-1000 Project with the support of the World Bank and other financial institutions. The construction period will last until 2020. The Kyrgyz Republic has recently launched Datka Kemin power line and has been negotiating construction of new power lines with China and Kazakhstan. Is it possible to implement all these projects together and in line with each other?
- Central Asia and Kyrgyzstan have a strategic geographical location for east-west and north-south trade cooperation, and the opportunities offered by CASA-1000 are only an entry point for regional integration, particularly if we speak about cooperation between Central and South Asia countries that have different needs in different seasons – due to the climatic characteristics in Central Asia in winter and those in South Asia in summer. The investment needs are huge. We are glad to note that with the support of international financial institutions these investment needs have been covered and that this integration of power grids in different countries, not only those participating in CASA-1000, but also other countries, such as China – in the east, and Russia – in the north, is possible in the long run.
- Improved drinking water supply is one of the country’s priorities. Is the World Bank planning to support this sector?
- The Second Rural Water Supply and Sanitation Project, which we provided USD 10 million for, closed last year. Thanks to its successful implementation and despite some difficulties, very impressive results were achieved: over 52,000 villagers in Issyk Kul, Naryn, and Talas oblasts gained better access to clean water, and over 20,000 rural school children were trained on personal hygiene as a result of the USD 1.33 million DFID grant provided under this project. The key to the Project success was close cooperation between all stakeholders – public institutions, NGOs, water users, – active involvement of local communities, and the government’s efforts that led to the breakthrough we have been seeing in the water supply sector over the past two years. A lot has been done during that time: the first State Water Supply and Sanitation Program, designed as a result of the debate -- sometimes quite heated -- between all the stakeholders, was adopted; the Department for Water Supply and Sanitation Development was established under the State Agency for Construction, Architecture, Communal and Housing Services, and it has been very active in implementation of the program; the rural water supply database was developed for the first time, containing information about the availability of water supply in each village; the current legislation is also undergoing certain revisions.
At the same time, we admit that a lot remains to be done in the water supply and sanitation sector. Besides, this sector was identified as one of the priorities for the National Sustainable Development Strategy. That is why we, even if the Third Rural Water Supply and Sanitation Project (RWSS-3) was not initially foreseen in the Country Partnership Strategy for 2014-2017, mobilized USD 13 million to continue activities in this sector. Currently, we are working with the government in order to identify villages for the new project implementation. Unfortunately, the financial resources allocated for the RWSS-3 projects are not enough to cover all the villages that lack access to clean drinking water, so the government has been working on strict criteria to select villages that will participate in the project.
- Will the project be focused on the north or on the south of the country?
- The RWSS-3 project is currently at the preparation stage, the identification process of the participating regions is underway, and it will take two-three more months before we could share any results. We are trying to keep the balance between the regions, on the one hand, and, on the other hand, we are trying to ensure rational distribution of funds in order to help a larger number of villages.
- Can we say that the project will start in 2016?
- We expect that the project will be approved by the Bank’s Board of Directors early next summer, and later, its financing agreement should be ratified by the Kyrgyz Parliament. So, most likely, the project will become fully effective in late 2016.
- If we continue the topic of the Taza Suu, the World Bank and ADB had some claims for the Ministry of Finance to reimburse some of the expenses which were not properly documented under the Rural Water Supply and Sanitation Project. The funds were reimbursed, however, the aftertaste still lingers. Were there any similar cases under other projects?
- No cases similar to those that took place under Taza Suu Project were reported.
- The World Bank forecasts the drop in the Kyrgyz GDP growth rate to 1.7% in 2015. Is this forecast still valid at this moment and what indicators were used for its calculations?
- Based on data for the first half of the year, we have revised our forecast slightly to 2 percent. This is essentially on account of two positive developments relative to our initial projections: stronger than anticipated growth in the agricultural sector – thanks to favorable weather conditions, and an improvement in the balance of trade. Indeed during the first seven months of the year agricultural output has grown at 4.5 percent vs. a decline over the same period in 2014, while the import bill -- in dollars terms -- has been significantly reduce, reflecting both price and volume developments. That said, manufacturing growth has slowed which is a cause for concern.
- Lately, one could see slackening of economic activity in the country. In your opinion, what factors could be attributed to this trend?
- In the Kyrgyz Republic overall growth is driven to a significant extent by gold production. In turn, much of the volatility in growth, which we observed in past years, has been reflective of year-on-year fluctuations in gold output. By contrast, the non-gold economy has grown at a much steadier rate.
That being said, the decline in non-gold output growth (in 2014 and 2015) can be attributed essentially to a deterioration in the external environment, which affected the Kyrgyz Republic via two principal channels: lower exports to Russia and Kazakhstan - two key markets for Kyrgyz goods - and lower remittance inflows, which depressed private consumption and investment.
Policy responses, we would argue should focus on leveraging EEU accession to boost exports – through swiftly harmonizing norms and regulations to EEU standards and upgrading verification and certification infrastructure, and deepening efforts to improve the investment climate.
Efforts to boost public infrastructure – in line with current government plans – can make a critical contribution to improving the conditions for business operations. The challenge will be to ensure that they remain consistent with fiscal discipline. Indeed public debt has been growing and that may call for greater efforts to improve revenue collection, limit recurrent spending growth and ensure that public resources are spent as efficiently and transparently as possible.
- Today, the country’s authorities are raising the issue regarding obtaining the country’s sovereign credit rating. In your opinion, how will it affect the country’s economic development and investment prospects?
- The move to obtain a sovereign credit rating is probably a good idea to the extent that it increases the country’s visibility to foreign investors and that it can serve a useful benchmarking purpose (e.g., allowing to monitor how well the country is doing relative to peers and over time).
However, one should probably not expect a substantial immediate impact given that the Kyrgyz Republic does not issue debt on international bond markets, and foreign direct investment flows remain very modest, especially if Kumtor is excluded, as a share of GDP.
- At one of the recent meetings with the Kyrgyz National Bank, the World Bank team told about its readiness, if it is required and at the National Bank’s request, to provide technical assistance in designing inflation curbing measures. In what form will this support be provided?
- Given the considerable pressure that Central Asian currencies are under, and the impact of foreign exchange developments on inflation, this is certainly an important and timely policy question. Both the World Bank and the International Monetary Fund can provide valuable advice. Typically, the IMF would be more competent to assist the Central Bank to adjust monetary policy, while the World Bank could help the authorities take measures to minimize the impact of inflation on the poor and vulnerable households, such as through improving social safety nets.
That being said, we do not anticipate, at this point a sharp upswing in inflation. On the one hand, exchange rate pressures may drive prices up. On the other hand, however, lower remittances and cheaper imports from CIS countries are expected to have a dampening effect.