Report and Recommendation of the President to the Board of Directors

Project Number: 49240-002 March 2019

Proposed Loan, Grant, and Administration of Loan Kyrgyz Republic: Uch-Kurgan Hydropower Plant Modernization Project Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB's Access to Information Policy after excluding information that is subject to exceptions to disclosure set forth in the policy.

CURRENCY EQUIVALENTS (as of 31 January 2019)

Currency unit – som (Som)

Som1.00 = $0.01431 $1.00 = Som69.85

ABBREVIATIONS

ADB – Asian Development Bank CAREC – Central Asia Regional Economic Cooperation EDB – Eurasian Development Bank EMP – environmental management plan EPP – (open joint-stock company) Electric Power Plants HEM – hydroelectro mechanical HPP – hydroelectric power plant HSS – hydraulic steel structures km – kilometer MTTP – medium-term tariff plan MW – megawatt O&M – operation and maintenance PAM – project administration manual

NOTE

In this report, “$” refers to United States dollars. Vice-President Shixin Chen, Operations 1 Director General Werner Liepach, Central and West Asia Department (CWRD) Director Ashok Bhargava, Energy Division, CWRD Team leader Sohail Hasnie, Principal Energy Specialist, CWRD Team members Aileen Aguilar, Operations Analyst, CWRD Ana Paula Araujo, Environment Specialist, CWRD Raymond De Vera, Senior Operations Assistant, CWRD

Mirdin Eshenaliev, Senior Project Officer, Kyrgyz Resident Mission, CWRD

Daisy Garcia, Senior Project Officer, CWRD Emerlinda Macalintal, Associate Project Analyst, CWRD Kazuto Muraguchi, Finance Specialist (Energy), CWRD Diep Pham, Senior Financial Management Specialist, CWRD Aysha Qadir, Principal Counsel, Office of the General Counsel Catherine Santiago, Senior Portfolio Management Specialist, CWRD

Yukihiro Shibuya, Social Development Specialist (Safeguards), CWRD Peer reviewer David Elzinga, Senior Energy Specialist, Energy Sector Group,

Sustainable Development and Climate Change Department In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

PROJECT AT A GLANCE

MAP

I. THE PROPOSAL 1

II. THE PROJECT 1

A. Rationale 1 B. Impact and Outcome 3 C. Outputs 4 D. Summary Cost Estimates and Financing Plan 4 E. Implementation Arrangements 5

III. DUE DILIGENCE 6

A. Technical 6 B. Economic and Financial 7 C. Governance 8 D. Poverty, Social, and Gender 8 E. Safeguards 8 F. Summary of Risk Assessment and Risk Management Plan 9

IV. ASSURANCES 10

V. RECOMMENDATION 10

APPENDIXES

1. Design and Monitoring Framework 11

2. List of Linked Documents 13

Project Classification Information Status: Complete

PROJECT AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 12022019180043013718 Generated Date: 01-Mar-2019 17:36:53 PM

1. Basic Data Project Number: 49240-002Project Name Uch-Kurgan Hydropower Plant

Modernization Project (formerly EnergySector Project)

Department/Division

CWRD/CWEN

Country Kyrgyz Republic Executing Agency OJSC Electric Power Plants, State Committee for Industry, Energy and Subsoil Use of theKyrgyz Republic

Borrower Kyrgyz Republic

2. Sector Subsector(s) ADB Financing ($ million)Energy Energy efficiency and conservation 13.50

Energy sector development and institutional reform 0.50

Large hydropower generation 86.00

Total 100.00

3. Strategic Agenda Subcomponents Climate Change Information Inclusive economic growth (IEG)

Pillar 1: Economic opportunities, including jobs, created and expanded

Environmentally sustainable growth (ESG)

Eco-efficiencyGlobal and regional transboundary environmental concernsNatural resources conservation

Regional integration (RCI) Pillar 1: Cross-border infrastructurePillar 4: Other regional public goods

CO2 reduction (tons per annum) 11,000Climate Change impact on the Project

Medium

ADB Financing

Adaptation ($ million) 10.00

Mitigation ($ million) 85.00

Cofinancing

Mitigation ($ million) 40.00

4. Drivers of Change Components Gender Equity and MainstreamingGovernance and capacity development (GCD)

Institutional developmentOrganizational development

Knowledge solutions (KNS) Application and use of new knowledge solutions in key operational areasKnowledge sharing activitiesPilot-testing innovation and learning

Partnerships (PAR) ImplementationInternational finance institutions (IFI)Official cofinancingSouth-South partner

Some gender elements (SGE)

5. Poverty and SDG Targeting Location ImpactGeographic TargetingHousehold TargetingSDG Targeting

NoNoYes

Nation-wide High

SDG Goals SDG7, SDG9

6. Risk Categorization: Low.

7. Safeguard Categorization Environment: B Involuntary Resettlement: C Indigenous Peoples: C.

8. Financing

Modality and Sources Amount ($ million)

ADB 100.00

Sovereign Project grant: Asian Development Fund 40.00

Sovereign Project (Concessional Loan): Ordinary capital resources 60.00

Cofinancing 45.00

Eurasian Development Bank - Project loan (Partial ADB Administration) 45.00

Counterpart 15.00

Government 15.00

Total 160.00

Currency of ADB Financing: USD

Uch-KurganMW

Shamaldy-SayMW

Tash-KomurMW

KurpsaiMW

ToktogulMW

Kambarata MW

Uch-KurganMW

Shamaldy-SayMW

Tash-KomurMW

KurpsaiMW

ToktogulMW

Kambarata MW

K y r g y z R e p u b l i c

U z b e k i s t a n

Toktogul Reservoir

Nar

yn R

iver

Naryn R

iver

Nar

yn R

iver

Nar

yn R

iver

Naryn River

KYRGYZ REPUBLIC

UCH-KURGAN HYDROPOWER PLANT MODERNIZATION PROJECT

Station

River

MegawattMW

72 95'Eo

41 80'No 41 80'N

o

41 40'No

72 23'Eo

72 23'Eo

41 40'No

18-2209b AV

0 5 15

Kilometers

10 20

N

This map was produced by the cartography unit of the Asian Development Bank. The boundaries, colors, denominations, and any other information shown on this map do not imply, on the part of the Asian Development Bank, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries, colors, denominations, or information.

KYRGYZ

REPUBLIC

I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a (i) proposed loan and (ii) a proposed grant, both to the Kyrgyz Republic for the Uch-Kurgan Hydropower Plant Modernization Project. The report also describes the proposed administration of a loan to be provided by the Eurasian Development Bank (EDB) for the Uch-Kurgan Hydropower Plant Modernization Project, and if the Board approves the proposed loan and grant, I, acting under the authority delegated to me by the Board, approve the administration of the EDB loan. 2. The proposed project will replace ageing electrical and mechanical equipment for power generation and transmission at the Uch-Kurgan hydropower plant (HPP) in the Naryn River cascade and undertake silt and sedimentation removal which hinders the proper operation of hydromechanical equipment of the HPP. This will (i) increase the availability of clean hydropower for domestic use and potential export to Uzbekistan and Kazakhstan, (ii) enhance the integrity of hydromechanical structures and, ensure safe and optimal reservoir operation, and (iii) contribute to multiyear water supply management from the Naryn River cascade, which is essential for downstream agriculture mainly in Uzbekistan.

II. THE PROJECT A. Rationale 3. The Kyrgyz Republic is rich in hydropower resources, which potentially can generate about 150 terra watt-hour (TWh) electricity per year of which only 10% has been exploited so far. For 2018, about 80% of its 3,920-megawatt (MW) electricity generation capacity is from hydropower, and the rest comes from two combined heat and power plants in Bishkek and Osh. Most of the country’s hydropower generation comes from the Naryn River cascade, with total installed capacity of 2,870 MW. 4. Covering 150 kilometers (km), the Naryn River cascade is the powerhouse of the Kyrgyz Republic; its six HPPs produce 92% of the country’s hydropower supply. The Toktogul HPP built in 1975 is the largest of the six plants with 1,200 MW of generation capacity, and the Uch-Kurgan HPP built in the early 1960s is the oldest; the other four plants are relatively new. Uch-Kurgan is 271 km southwest of Bishkek, near the Uzbekistan border. It was the first installation and is used as a baseload plant. 5. The Uch-Kurgan HPP has an earth fill dam1 and a concrete dam with an outdoor powerhouse of 180 MW equipped with four vertical Kaplan turbines—suitable for low head and high flow rates—of 45 MW each. Since its commercial operations in 1962, no major improvement has ever been undertaken. The HPP is in poor condition, is well past its useful economic and functional life, and needs immediate major rehabilitation and replacement. Replacing ageing equipment and modernizing is urgently needed to maintain the integrity of the power system in the cascade. 6. Toktogul reservoir, as a multiyear water storage, is crucial in supporting downstream agriculture by storing water in wet years and releasing stored water in dry years. However, water from upstream reservoir could only flow effectively if the downstream HPP is able to fully discharge. Uch-Kurgan’s reservoir has reduced capacity and operates as a run-of-river2 plant, three of the eight bottom outlet gates are not operational because of sediments. If upstream HPPs

1 Earth fill dam is built by compacting successive layers of earth. 2

Hydropower is generated by harnessing the energy of falling water or fast running water. Run-of-river hydroelectric generation plants use the energy of running water and need little or no water storage.

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spill water it may be unable to pass it on safely to the downstream river, which may cause the earth-fill dam to fail and potentially cause damage to the downstream populations in the Kyrgyz Republic and Uzbekistan. 7. In 2001, Kyrgyzenergo, the then-state owned, vertically integrated utility was unbundled into seven distinct companies: a generation company, a transmission company, four electricity distribution companies, and a district heating company. In 2010, as part of government’s privatization initiative, some hydropower assets were sold to Chakan GES (being the Russian name for Chakan HPP), which was later nationalized. In 2018, the power sector consists of two generation companies (Open Joint-Stock Companies Electric Power Plants [EPP] and Chakan GES); a transmission company; four electricity distribution companies; and a district heating company. EPP owns and operates both Uch Kurgan and Toktogul HPPs. 8. About 45% of the installed generation capacity in the Kyrgyz Republic is reaching end of its useful life. Most generation assets were commissioned in the 1970s and 1980s, and lack of investment in maintenance and repair has resulted in poor service reliability and quality. This is especially critical in winter, when the country faces an increasing gap between available generation capacity (especially in low-hydrology periods) and growing demand. Rehabilitating the Uch-Kurgan HPP is the logical next step to maintaining the integrity of the Naryn River cascade after upgrading the Toktogul HPP.3 9. Replacing ageing equipment and modernization of power plant will provide potentially up to 20% of additional capacity and it is the least-cost option to add new capacity. Supply reliability (measured by frequency and duration of outages) and service quality (fluctuations in voltage, frequency, or harmonics that can damage equipment) are likely to worsen without new investments and are key concerns for the business community. 10. With access to adequate reliable power, export and profitability will increase. Kyrgyz hydropower plays a critical role in regional energy security. As Central Asia’s clean energy hub, the Kyrgyz Republic supplies 90% of the region’s hydropower. In 1995, the Kyrgyz Republic exported more than 2,000 gigawatt-hours to Kazakhstan, Tajikistan, and Uzbekistan which have since declined to less than half that. As more energy becomes available, Kyrgyz power exports are expected to grow. Export of hydropower and corresponding dollar-denominated export revenues are crucial to improve financial situation of the sector and offset similar payments for import of power from Kazakhstan and Uzbekistan during winter months. 11. The government’s strategy is to rehabilitate existing power plants and invest in long-term export opportunities such as CASA-1000.4 The project, developed on the principle of exporting excess hydropower in the summer from the Kyrgyz Republic and Tajikistan, relies heavily on the timely rehabilitation of the Kyrgyz HPPs. The hydropower export will become even more relevant as Central Asia will need more clean energy to reduce its overall carbon footprint to meet commitments under the 2015 Paris Agreement on climate change.5 12. The project is consistent with ADB’s Strategy 2030, which highlights infrastructure development and regional cooperation and integration as major value additions and comparative

3 ADB. Kyrgyz Republic: Loan 8434-KGZ: Toktogul Rehabilitation Project Phase 2 and Loan 0419/3212/8306-KGZ:

Toktogul Rehabilitation Phase 2 Project. 4 CASA-1000. Under the CASA-1000 project, a 1,200 km power transmission line will connect hydropower-rich Kyrgyz

Republic and Tajikistan to Afghanistan and Pakistan. 5 United Nations Framework Convention for Climate Change. The Paris Agreement.

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advantages.6 The 2030 strategic framework of the Central Asia Regional Economic Cooperation (CAREC) program supports the use of clean energy technologies, regional cooperation, power trade, and further integration of energy markets.7 The project is also consistent with ADB’s Energy Policy objectives of supporting (i) energy efficiency and renewable energy; (ii) maximized access to energy for all; (iii) effective regional cooperation in the energy sector; and (iv) energy sector investments complying with ADB safeguard policies on the environment, involuntary resettlement, and indigenous peoples.8 13. ADB’s country partnership strategy, 2018–2022 for the Kyrgyz Republic supports growth and economic diversification, improve access to public and social services, and leverage regional cooperation.9 It is aligned with the country’s medium-term development program and ADB’s Strategy 2030.10 To achieve broad-based growth, ADB is committed to continuing catalytic energy investments to raise the efficiency and improve the overall performance of the sector. 14. Value Added by ADB Assistance. Since 1996, ADB has led multiple power and district heating rehabilitation projects.11 ADB is leading the Naryn cascade rehabilitation through its ongoing work in Toktogul hydropower rehabilitation where ADB has demonstrated its value in attracting quality bids at highly competitive prices. Lessons from previous and ongoing projects show EPP’s competency in implementing projects. However frequent changes in key people, project knowledge confined to few technical staff, and language issues are the main causes of project delays. In this project, ADB value addition includes (i) use of high technology underwater scanning of hydromechanical structure to better assess its status; (ii) higher quality due diligence in all aspects of project design and standards of environmental safeguard that will mitigate any serious risks; (iii) leverage co-financing from EDB; (iv) integrate some gender element in the project design by creating a special program for 10 women engineers to work in the operations and maintenance of the plant for two years; (v) ADB is supporting introduction of enterprise resource planning across all energy companies and the asset valuation activities are ongoing; and (vi) about $95 million (mitigation: $85 million, adaptation: $10 million) of these investments will be attributed to climate financing. In addition, dredging and dam reinforcements will contribute to climate resilience. B. Impact and Outcome 15. The project is aligned with the following impact: operational performance of the Kyrgyz Republic power sector improved, consistent with the state policy on energy security.12 The project will have the following outcome: hydropower generation from the Naryn River cascade improved.13

6 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific.

Manila. 7 ADB. 2017. CAREC 2030: Connecting the Region for Shared and Sustainable Development. Manila. 8 ADB. 2009. Energy Policy. Manila. 9 ADB. 2018. Country Partnership Strategy: Kyrgyz Republic, 2018–2022—Supporting Sustainable Growth, Inclusion,

and Regional Cooperation. Manila. 10 Government of the Kyrgyz Republic. 2018. Development Program of Kyrgyz Republic for the Period 2018–2022:

“Unity, Trust, Creation.” Bishkek. 11 Power and District Heating Rehabilitation Project (approved in 1996), Power Sector Improvement Project (2010),

Power Sector Rehabilitation Project (2012), Toktogul Rehabilitation Phase 2 Project (2014), and Toktogul Rehabilitation Phase 3 Project (2016).

12 Government of the Kyrgyz Republic. 2016. Concept for Development of Energy Sector of The Kyrgyz Republic Till 2030. Bishkek.

13 The design and monitoring framework is in Appendix 1.

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C. Outputs 16. Output 1: Uch-Kurgan HPP facility modernized. Output 1 will be achieved by (i) restoring the full operation of all four generating units with total capacity of 216 MW (old capacity 180 MW), (ii) reinforcing the hydraulic steel structure, (iii) reinforcing the dam infrastructure, and (iv) making all eight bottom outlet gates operational. The project will deliver additional 36 MW capacity (9 MW from each of the 4 units) from increased efficiency of the new generating units. 17. Output 2: EPP’s commitment to operational sustainability and diversity reinforced. This will be achieved by Electric Power Plants (EPP) close engagement in formulating and implementing the proposed project. The project will help (i) strengthen EPP’s capacity to implement externally funded projects; (ii) design EPP’s project implementation and engineering accreditation program; (iii) train EPP personnel on project implementation (safeguards monitoring, procurement, financial management); (iv) improve EPP’s capacity for planning and implementing sector reform; (v) establish EPP engineers’ accreditation program; and (vi) recruit 10 women engineers for 2 years under the project to create a culture of best practice and modern business processes. D. Summary Cost Estimates and Financing Plan 18. The project is estimated to cost $160,000,000 (Table 1).

Table 1: Summary Cost Estimates ($ million)

Item Amounta

A. Base Costb

Output 1:

1. Electromechanical equipment and steel structures 124.5

2. Dredging equipment 3.3

Output 2:

3. Sustainable development and diversity at EPP 1.4

4. Support for sector reform 0.5

5. Project implementation consultant 3.9

6. Environment mitigation 0.1

7. External audit 0.2

Subtotal (A) 133.9

B. Contigenciesc 22.2

C. Financial Charges During Implementation 3.9

Total (A+B+C) 160.0 Note: Numbers may not sum precisely because of rounding. a Includes taxes and duties to be financed by the government. b In mid-2018 prices. c Physical contingencies computed at 10%. Price contingencies computed at 1.5% on foreign exchange costs

and 5.0% on local currency costs; includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate.

Source: Asian Development Bank estimates.

19. The government has requested a concessional loan of $60,000,000 from ADB’s ordinary capital resources to help finance the project. The loan will have a 32-year term, including a grace

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period of 8 years; an interest rate of 1.0% per year during the grace period and 1.5% per year thereafter; and such other terms and conditions set forth in the draft loan and project agreements. The government also requested a grant not exceeding $40,000,000 from ADB’s Special Funds resources (Asian Development Fund) to help finance the project. The government will relend the loan to EPP under a subsidiary financing agreement for a 24-year term, including a grace period of 8 years, and an interest rate of 1.5% per year. EPP will bear the foreign exchange risk. The government will provide the full grant amount as its equity contribution to EPP. 20. The government also requested EDB to provide a loan of $45,000,000 equivalent as joint cofinancing from the Eurasian Fund for Stabilization and Development. The government will relend the loan to EPP on terms and conditions satisfactory to EDB. The EDB loan will be partially administered by ADB, including procurement review and disbursement procedure. 21. The government will provide $15,000,000 for (i) taxes and duties, and (ii) financing charges during implementation for the EDB loan.14 ADB financing will be front-loaded and EDB cofinancing will be used for the turnkey contract. The summary financing plan is in Table 2.

Table 2: Summary of Financing Plan Source Amount

($ million) Share of Total

(%) Asian Development Bank

Special Funds resources (ADF grant) 40.0 25

Concessional Ordinary Capital Resources Loan 60.0 38

Eurasian Development Bank (loan) 45.0 28

Government 15.0 9

Total 160.0 100

ADF=Asian Development Fund. Source: Asian Development Bank estimates.

22. Climate mitigation is estimated to cost $125.0 million and climate adaptation is estimated to cost $10.0 million. ADB will finance 68.0% of mitigation costs and 100.0% of adaptation costs. E. Implementation Arrangements 23. EPP is the executing agency for the project, except for the output 2 (iv) improve the EPP’s capacity for planning and implementing sector reform. The State Committee of Industry, Energy, and Subsoil Use will be the executing agency for output 2 (iv). Its full-time project implementation unit for Toktogul hydropower projects will carry out bid evaluation, contract award, construction supervision, contract management, and reporting for this project. 24. ADB will partially administer the EDB loan and ADB’s universal procurement rule will apply to all goods, works, and services under the project. The implementation arrangements are summarized in Table 3 and described in detail in the project administration manual (PAM).15

14 The government will make sure that (i) no taxes, duties, or other mandatory payments are levied on the project

expenditure within its territory; or (ii) sufficient budget allocations are provided to EPP to cover the cost of such taxes, duties, or other mandatory payments.

15 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

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Table 3: Implementation Arrangements Aspects Arrangements Implementation period June 2019–December 2024 Estimated completion date 31 December 2024 Estimated loan and grant closing date 30 June 2025 Management (i) Executing agencies EPP, SCIESU (for Output 2(iv)) (ii) Project implementation unit EPP Procurement (i) HPP electromechanical generation equipment

and hydraulic steel structures (ii) Dredging equipment and related services

Method Contracts Amount ($) ICB (Turnkey) 1 contract

113.00 million

ICB (Goods) 1 contract 3.00 million

Consulting services Method Person-months Amount ($) (i) Project implementation consultant QCBS FTP 3.50 million (ii) Sustainable development and diversity at EPP ICS 75 person-months 1.15 million (iii) Environment mitigation ICS 5 person-months 0.10 million (iv) External audit LCS STP 0.20 million (v) Support for sector reform ICS 30 person-months 0.50 million Advance contracting Advance contracting for goods, works, and consulting services Disbursement The loan and grant proceeds will be disbursed following ADB's

Loan Disbursement Handbook (2017, as amended from time to time) and detailed arrangements agreed between the government and ADB.

ADB = Asian Development Bank; EPP = Electric Power Plants; FTP = Full Technical Proposal; HPP = hydropower plant; ICB = international competitive bidding; ICS = individual consultant selection; LCS = least-cost selection; QCBS = quality- and cost-based selection; SCIESU = State Committee of Industry, Energy, and Subsoil Use; STP = Simplified Technical Proposal. Source: ADB estimates.

III. DUE DILIGENCE A. Technical 25. ADB, the government, and EPP conducted in-depth technical due diligence to minimize the risk of cost overruns. Site assessment work included inspection of the four units, of which three have been dewatered; operation testing of an intake gate, the downstream stoplog, a bottom outlet service gate, the spillway gate, unit synchronization, and gantry cranes; and inspection of the main transformers, high-voltage switchyard, electrical equipment, mechanical auxiliary systems, and control and communication systems. 26. Due diligence also assessed the condition of the civil structures and dam stability. It found that the structures satisfy HPP operational requirements and that no significant deterioration or movement occurred between 1962-2018, confirming the foundation’s sufficient global strength to take the dam loads. However, the foundation’s hydrogeological condition needs to be improved because of possible internal erosion caused by underground water pressure. The concrete dam sections are stable for all load cases—including seismic load case but excluding the right-bank block, which needs reinforcement—and stability checking calculation has shown that the dam is stable. 27. The project will replace the four turbine-generator units and all associated equipment, including main transformers; replace or repair the hydromechanical equipment; reinforce the concrete and earth-fill dams’ civil structures; and make all eight bottom outlet gates operational. This will increase unit power output from 45 MW to 54 MW and generating unit rated efficiency from 88.5% to 93.4%. The plant will continue to operate as a run-of-river hydropower system, and the economic life of the rehabilitated units will be 40 years.

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28. EPP and the consulting team have prepared technical specifications for the design, manufacture, installation, and commissioning of the new turbine-generator. Companies qualified to perform the turnkey contracts are available in the international market. The contractors will provide training for EPP staff on operation and maintenance (O&M). 29. Preliminary climate risk assessment indicates that potential impacts of climate change on the project include (i) inflow decrease, potentially influencing hydropower generation late in project design lifetime, and (ii) change in flood regime, potentially affecting spillways and embankments. Overall climate risk classification is medium. Proposed adaptation measures include reinforcement of the hydraulic steel structure and spillway, and dredging of sediments. Adaptation costs are estimated as $10 million, equivalent to 10% of proposed ADB finance. 30. The quality of the cost estimates, cost structures, appropriateness of the technology, and the execution plan confirmed the project readiness level as high, and the proposed technical solutions to be more cost-effective than the alternatives. EPP’s O&M staff is familiar with the proposed design concepts. The technical proposals do not represent a shift from existing practices, except for the digital control system, which will require specialist training of local staff. B. Economic and Financial 31. The economic internal rate of return is calculated at 12.8%, which compares favorably with the 9.0% discount rate. The project’s economic viability takes into account cost-and-benefit streams resulting from the modernization of the Uch-Kurgan HPP and its operation over the project’s life. Without the project, the performance of the existing units will continue to deteriorate, and they will eventually cease to operate. The project will rehabilitate the power station and increase its generation capacity. Project benefits come from incremental electricity generation, which will be consumed domestically and exported to neighboring countries; and saved O&M costs. Sensitivity analysis on key issues—e.g., an increase in capital costs, decrease in incremental generation, and delay in completion—confirms the project’s economic viability. 32. The financial internal rate of return is calculated at 5.6%, which is more than the weighted average cost of capital of 2.3%. The financial viability was gauged by comparing the revenue and cost streams of scenarios with and without the project. Sensitivity analysis confirms that the project’s financial viability is robust even under unfavorable circumstances. The financial internal rate of return is based on the government’s draft medium-term tariff plan (MTTP), 2019–2023. 33. Substantial institutional reforms in the energy sector since 2014 have resulted in the establishment of an independent regulator in 2014; the creation of a settlement center in 2015; the formation of a national energy holding company to improve the management and effective performance of the industry; and the foundation of the State Committee on Industry, Energy, and Subsoil Use to handle policy making. Substantial tariff reforms took place with the implementation of the MTTP, 2014–2017, which improved EPP’s revenues: its net income turned from a loss in 2015 to a profit of Som2.2 billion in 2016, and Som3.9 billion in 2017. The sales revenue is sufficient to cover direct costs—cost of sales such as wages, maintenance, depreciation of assets, operations, and current investment. Government assurance to implement the MTTP, 2019–2023 is essential to help not only EPP but also the sector in closing the cost-recovery gap.

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C. Governance 34. A financial management assessment was conducted in July 2018 following ADB guidelines. While the country’s public financial management is progressing slowly and is still considered weak, EPP is an autonomous corporate enterprise with strong financial management, accounting, and reporting systems. However, while EPP’s financial management ability is better than it was in the previous assessment in 2015, it still needs further strengthening. EPP has been implementing phases 1–3 of the Toktogul project since 2012 and has submitted its audited financial statements (prepared in line with International Financial Reporting Standards) and audited project financial statements on time and with unqualified opinions. Consequently, the financial management arrangements in place are considered acceptable for this project. Building up financial management capability and effective internal control and auditing, and strengthening procurement capacity and procedures, is critical to improve corporate performance. These steps were taken under the business operations assessment and EPP management modernization component of phases 2–3 of the Toktogul project, whose implementation is ongoing.16 35. A procurement risk assessment concluded that the project risk is medium. To mitigate the risk, a procurement risk management plan was proposed.17 36. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and EPP. The specific policy requirements and supplementary measures are described in the PAM (footnote 15). D. Poverty, Social, and Gender 37. The project will benefit Kyrgyz Republic through more reliable energy supply. The energy sector is the main driver of economic growth, and sufficient and stable electricity supply will help develop small and medium-sized enterprises and create jobs. A reliable and affordable supply of electricity has the potential to be particularly beneficial to poor households, which are forced to use expensive alternative fuels in times of electricity shortage during winter. 38. The project is classified some gender elements because it will directly benefit women beyond the general benefits of directly improving women's access to reliable electricity and new economic opportunities. The project includes the following elements to enhance benefits to women: (i) EPP will recruit 10 women engineers for two years under the project; (ii) the women engineer team will be trained to support a new enterprise resource planning system to be installed; and (iii) the project will create a mentoring scheme to create secondment opportunities for female staff in international organizations. To monitor this initiative, the human resources department will publish sex-disaggregated employment data at all levels of the organization in EPP’s website. E. Safeguards 39. In compliance with ADB’s Safeguard Policy Statement (2009), the project’s safeguard categories are as follows.18

16 The creation of the Kyrgyz Electricity Settlement Center, which is to take control of the distribution of sector revenues,

was funded under phase 1 and is ongoing. The inventory and asset revaluation of the energy sector was funded under phase 2 and is ongoing. These steps are expected to be completed in 2019.

17 Procurement Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

18 ADB. Safeguard Categories.

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40. Environment (category B). EPP has prepared an initial environmental examination with an environmental management plan (EMP) in line with the Safeguard Policy Statement. Records of related public consultation undertaken in August 2018 are included in the initial environmental examination. The report, endorsed by EPP, was posted on the ADB website on 27 September 2018. 41. The following potential environmental impacts may be associated with output 1: (i) safety and health issues during construction; (ii) increased truck movements during construction in the inhabited areas; (iii) transportation of heavy equipment, construction materials, and waste; (iv) disposal of iron, steel, asbestos, and other waste, including obsolete equipment; (v) construction waste from civil works and some domestic waste generated by workers; (vi) water and soil contamination risks; and (vii) management and disposal of about 500,000 cubic meters of sediments to be dredged. The EMP specifies adequate mitigation measures and monitoring plans to cover these impacts, including management and disposal of uncontaminated sediments. Oils and scrap metals will be kept safe in the on-site storage area, which will be improved with financing under the project. EPP will make sure that licensed companies, under the monitoring and supervision of the project management consultants and the project management unit, recycle and dispose oils and scrap metals. 42. Because of uncertainty over sediment contamination, EPP will collect samples at various depths before any dredging activity starts, to check for contaminants in deeper layers, in line with a sediments sampling and analysis plan to be agreed with ADB. In case sediment contamination is found, the Project shall be assessed by ADB for recategorization in accordance with the ADB’s Safeguard Policy Statement (2009). The Borrower shall, through EPP, update and submit to ADB for clearance the necessary safeguard documents. 43. The project management unit will handle the EMP’s implementation with help from the project implementation consultants and EPP’s Reliability and Safety Service Department staff. A specific line item is added in the cost table for social and environmental mitigation. Monitoring results will be included in the project quarterly progress reports and semi-annual environmental reports. The cost of the EMP mitigation measures will be included in the turnkey contract, and the cost for environmental monitoring will be included in the consulting services contract of the project implementation consultants. 44. Involuntary resettlement and indigenous peoples (category C). During the project preparation stage, it was confirmed that (i) all civil works will be implemented within the confines of the existing Uch-Kurgan HPP, where no land acquisition or livelihood impacts will occur; and (ii) all land used for sediment disposal sites is public land. It was also confirmed that the project is not expected to affect indigenous peoples as defined under the Safeguard Policy Statement. Public consultation was conducted in August 2018. A grievance redress mechanism was prepared and will be functional when the project is approved. F. Summary of Risk Assessment and Risk Management Plan 45. Significant risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.19

19 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

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Table 4: Summary of Risks and Mitigating Measures Risks Mitigation Measures

Changes in transboundary water-sharing arrangements altering downstream release requirements

Coordinate with regional government agencies on water management

EPP’s financial sustainability after project completion could be jeopardized if tariffs are not increased.

Implement the medium-term tariff plan, 2019–2023

Unknown dam foundation conditions may affect dam reinforcement.

Conduct optimum design and option analysis; select qualified technical team

Contaminants in sediments may delay implementation.

Surface sampling found no contaminants; complete sampling before dredging starts.

Unknown condition of embedded equipment and equipment currently covered by sediment

Use new gates and an underwater, remotely operated vehicle, if needed

EPP = Electric Power Plants. Source: Asian Development Bank.

IV. ASSURANCES 46. The government and EPP have assured ADB that implementation of the project shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and loan documents. The government and EPP have agreed with ADB on certain covenants for the project, which are set forth in the draft loan, grant, and project agreements.

V. RECOMMENDATION 47. I am satisfied that the proposed loan and grant would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve

(i) the loan of $60,000,000 to the Kyrgyz Republic for the Uch-Kurgan Hydropower Plant Modernization Project, from ADB’s ordinary capital resources, in concessional terms, with an interest charge at the rate of 1.0% per year during the grace period and 1.5% per year thereafter; for a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan and project agreements presented to the Board; and

(ii) the grant not exceeding $40,000,000 to the Kyrgyz Republic, from ADB’s Special Funds resources (Asian Development Fund), for the Uch-Kurgan Hydropower Plant Modernization Project, on terms and conditions that are substantially in accordance with those set forth in the draft grant and project agreements presented to the Board.

Takehiko Nakao President

5 March 2019

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DESIGN AND MONITORING FRAMEWORK Impact the Project is Aligned with Operational performance of the Kyrgyz Republic power sector improved (Concept for Development of Energy Sector of The Kyrgyz Republic 2030)a

Results Chain Performance Indicators with

Targets and Baselines Data Sources or

Reporting Mechanisms Risks Outcome Hydropower generation from Naryn River cascade improved

By 2025: Uch-Kurgan HPP annual electricity generation increased to 1,064 GWh (2017 baseline: 980 GWh)

EPP annual reports; Uch-Kurgan HPP annual operations reports

Reduced water volume from prolonged drought reducing total power generated

Outputs 1. Uch-Kurgan HPP facility modernized

By 2024: 1a. Uch-Kurgan HPP installed capacity increased to 216 MW with at least 40 years of economic life (2017 baseline: 180 MW approaching end of life) 1b. All 4 generating units fully operational (2017 baseline: 3 units operating at 100% capacity, 1 unit operating at 80% capacity) 1c. Hydraulic steel structure reinforced (2017 baseline: not applicable) 1d. Dam civil structural support established (2017 baseline: not applicable) 1e. All 8 bottom outlet gates operational (2017 baseline: 4 operational)

1a–b. EPP annual report; Uch-Kurgan HPP annual operations report; commissioning and operational acceptance certificates 1c. Commissioning and operational acceptance certificates 1d. Commissioning and operational acceptance certificates; Uch-Kurgan dam stability annual reports 1e. Commissioning and operational acceptance certificates

Changes in transboundary water-sharing arrangements altering downstream release requirements Seismic activities, landslides, and other force majeure conditions limiting rehabilitation works

2. EPP’s commitment to operational sustainability and diversity reinforced

2a. At least 10 newly graduated women engineers engaged in HPP operations and maintenance (2017 baseline: none) 2b. EPP engineers’ accreditation program established (2017 baseline: not applicable)

2a–b. EPP annual reports on personnel and human resources

Low participation because of limited awareness

Key Activities with Milestones Output 1: Uch-Kurgan HPP facility modernized 1.1 Prepare bidding documents (Q4 2018) 1.2 Bid and award turnkey contracts (Q2–Q4 2019)

Appendix 1

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1.3 Award EPC and supply contracts (Q4 2019 for HEM, HSS, and dam stability; Q4 2019 for dredging equipment)

1.4 Dredge sediment (Q2 2020–Q4 2024) 1.5 Rehabilitate civil and dam structure (Q4 2020–Q1 2022) 1.6 Refurbish hydraulic steel structure (Q4 2020–Q1 2022) 1.7 Replace electromechanical generation equipment (Q4 2022–Q1 2024) 1.8 Test and commission (Q1 2025–Q2 2025) Output 2: EPP’s commitment to operational sustainability and diversity reinforced 2.1 Coordinate with technical universities on the selection of newly graduated women engineers for the

EPP program (Q2 2019) 2.2 Engage, under 2-year contract, selected women engineers for the program (Q3 2019) 2.3 Monitor performance of women engineers under the program (Q1 2020–Q4 2022) 2.4 Assess EPP’s capacity gap in implementing externally funded projects and maintaining the same

after completion (Q3 2019) 2.5 Design EPP’s project implementation and engineering accreditation program (Q4 2019) 2.6 Train EPP personnel on project implementation (safeguards monitoring, procurement, financial

management) as well as project operation and maintenance (Q1 2020–Q4 2023) Project Implementation Activities Engage project implementation consultant (Q1–Q3 2019) Hold kick-off meeting with executing agency (Q3–Q4 2019) Undertake procurement activities (Q1–Q4 2019) Supervise project implementation (Q3 2019–Q4 2024) Finalize reports (Q3–Q4 2024) Inputs Asian Development Bank Ordinary capital resources: $60.0 million (concessional loan) Special Funds resources: $40.0 million (Asian Development Fund grant) Eurasian Development Bank (Loan): $45.0 million (joint cofinancing) Government: $15.0 million Assumptions for Partner Financing NA EPC = engineering, procurement, and construction; EPP = Electric Power Plants; GWh = gigawatt-hour; HEM = hydroelectro mechanical; HPP = hydropower plant; HSS = hydraulic steel structures; MW = megawatt; Q = quarter. a Government of the Kyrgyz Republic. 2016. Concept for Development of Energy Sector of The Kyrgyz Republic 2030.

Bishkek. Source: Asian Development Bank.

Appendix 1

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LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=49240-002-3

1. Loan Agreement

2. Grant Agreement

3. Project Agreement

4. Sector Assessment (Summary): Energy

5. Project Administration Manual

6. Contribution to the ADB Results Framework

7. Development Coordination

8. Financial Analysis

9. Economic Analysis

10. Country Economic Indicators

11. Summary Poverty Reduction and Social Strategy

12. Risk Assessment and Risk Management Plan

13. Initial Environmental Examination

14. Climate Change Assessment

Supplementary Documents

15. Financial Management Assessment

16. Procurement Risk Assessment and Risk Management Plan

17. Project Technical Description

Appendix 2