The Cost of Privatising Power in Kyrgyzstan
The legal obstacles to inviting foreign investors to complete an ambitious hydroelectric scheme have been overcome, but plenty of questions remain about the politics and economics of privatisation.
The Cost of Privatising Power in Kyrgyzstan
The legal obstacles to inviting foreign investors to complete an ambitious hydroelectric scheme have been overcome, but plenty of questions remain about the politics and economics of privatisation.
With the way now open for a sell-off of major power stations in Kyrgyzstan, some politicians are alarmed at the prospect of ceding much of the country’s energy industry to foreign owners.
To complicate matters, the hydroelectric scheme which forms the centrepiece of the denationalisation process – two linked power stations called Kambarata-1 and -2 – is only half-built, and analysts say the immense investment needed to complete the work means it will be a long time before anyone earns a penny from it.
The breakthrough came on June 19, when the Kyrgyz parliament passed a bill sanctioning foreign investors to come in, take control and finish work on the Kambarata plants. Privatisation of the country’s largest conventional power station was also part of the package.
The scale and significance of the Kambarata project can be judged from its anticipated generating capacity, which at six billion kilowatt hours a year equals about half the country’s current total production of 13 billion kW/hours a year.
But Kyrgyzstan has no pressing need to generate such massive amounts of electricity for its own needs; its high mountains provide enough water to run hydropower plants that produce 80 per cent of the power generated in the country. The Kambarata scheme is instead designed to produce energy for export to neighbouring states, and once completed is expected to more than double the amount of power Kyrgyzstan currently sells abroad.
However attractive the project may look on paper, members of the Kyrgyz parliament have been very reluctant to give the final go-ahead. They have argued that the action taken on privatisation to date has been flawed, and voiced concerns that Kyrgyzstan might lose control over its major cost-free asset – water.
On May 28, faced with having to make a decision, parliament decided to hold off for a month and continue discussing the issue. After a no vote on June 15, President Kurmanbek Bakiev stepped in, appearing in parliament in person to urge members to change their mind.
Addressing members on June 19, he suggested that there was no option but to invest in the future, rather than depending on existing power stations.
“The hydroelectricity sector is our principal national resource, our main hope,” he said. “Nothing has been done to develop the sector. The [existing] Toktogul plants are our only energy asset, and we have exploited them without upgrading them or even repairing them.”
Bakiev pledged that the privatisation process would be transparent from now on, and said members of parliament would be invited to sit on the boards reviewing tenders.
To convince legislators that his government was serious, Bakiev said it would be working with United Energy Systems, UES, of Russia and Kazakstan’s KazKuat to prepare a feasibility study on Kambarata.
With some opposition members absent, parliament passed the legislation the same day.
HALTING PROGRESS ON PRIVATISATION
The vote may prove to have been the watershed moment in a long-drawn-out and controversial privatisation. The government launched a denationalisation programme for what was then a single, state-owned electricity network called Kyrgyzenergo as long ago as 1998, after the bulk of other state-owned industries had already passed into private hands.
As a first step, the firm was transformed into a joint-stock company, with the state retaining a 94 per cent stake. Kyrgyzenergo was subsequently broken up into several components, some earmarked for privatisation while others like the national grid company were destined to remain in government hands.
Outstanding questions for the final phase of privatisation involve how exactly the state will divest itself of the Kambarata and Bishkek plants – through an outright sale of stock in the companies (although the government will retain a share), or some kind of concession or lease arrangement.
MANY DEPUTIES REMAIN UNHAPPY
Opponents of privatisation fear a loss of control over water resources and electricity production. They see further scope for corruption in the privatisation process, and warn that domestic energy prices could skyrocket if the market is commercialised.
In an article published by the Jamestown Foundation, a United States-based think tank, Central Asia analyst Erica Marat said the hydroelectric industry was “plagued by large-scale corruption”, an issue which had become a matter for public debate after the March 2005 revolution.
“Due to elaborate pyramid schemes benefiting only a select few in the sector, Kyrgyzstan collects only 30 per cent of payments due for its hydropower generation, while rough estimates indicate that more than 40 million US dollars in profit is embezzled every year,” said Marat.
Legislators like Omurbek Tekebaev, a former speaker of parliament now in the opposition, say clear rules must be laid down now to avoid storing up problems for the future.
“Five years after this law is passed, Kyrgyzstan will probably reap some benefits, including new workplaces and industrial growth. However, in 10 or 15 years, the country could completely lose control over its water resources,” he said. “Without clearly stipulated mechanisms, we cannot allow foreign or even domestic investors to participate in the construction of such an important facility.”
During the debate, other deputies pointed to earlier energy privatisations of the early Nineties which led to prices rising and electricity being cut off to people who were unable to pay.
A group of deputies from the Union of Democratic Forces is to challenge the law in Kyrgyzstan’s Constitutional Court, on the grounds that they dispute that a quorum of 50 members was present in parliament the day the vote took place.
FLAWED ECONOMICS?
Even if privatisation goes smoothly, there are questions about the economic assumptions underlying the Kambarata project.
First, the projected investment sums are staggering – at around 2.5 billion US dollars, the cost is more than three times the country’s annual gross domestic product.
Despite this, some politicians such as Almanbet Matubraimov say Kyrgyzstan could raise the money itself. He proposes a share flotation scheme where the Kyrgyz public would become shareholders.
Given that the money required is more than Kyrgyzstan’s entire current external debt, the government clearly believes strategic investors, probably foreign, are the only likely funders.
A second issue is that assuming someone is willing to come up with the money and the two Kambarata plants are built, it will be a long time before investors get their money back – 30 years, according to some estimates.
Sapar Orozbakov, director of the Bishkek Center for Economic Analysis, says the estimated cost of generating electricity at the Kambarata scheme will be far higher than the regional market can sustain.
The World Bank has cited a figure of 8.5 or nine US cents per kilowatt-hour, a cost that compares very unfavourably with the 1.1 cent per kW/hour that Kyrgyzstan now charges its neighbours, he said.
The big hydroelectric schemes that neighbouring Tajikistan is planning on the river Vakhsh look a much safer bet, since the electricity they generate is expected to cost no more than two cents per kilowatt/hour.
“The Kambarata power stations work out as uncompetitive when compared with the Rogun plant in Tajikistan and others,” said Orozbakov.
The high cost of Kambarata electricity comes down to the major investment needed to get the plants working. “The construction costs are immense and it will take eight to ten years to complete the work – a very long time,” he said.
STRATEGIC LOCATION
Work on the Kambarata plants began in the Soviet period when such giant projects made sense because they benefited whole economic regions rather than individual republics. Like the existing Toktogul power plant and associated large reservoir, and also a number of smaller hydropower schemes, Kambarata is located on the river Naryn, a major tributary of the Syr Darya.
The Syr Darya is one of Central Asia’s two great rivers, running through Uzbekistan and Tajikistan to Kazakstan, and it is a major source of irrigation water for these three countries.
The way the Kyrgyz manage the Toktogul dam has been a major bone of contention with the Uzbeks and Kazaks, who need large amounts of water to flow downstream in spring and summer. By contrast, the Kyrgyz need to generate extra electricity over the cold winter months, requiring water to be dammed up over the summer and then released from the reservoir late in the year. This can cause winter flooding and summer water shortages for their neighbours .
This imbalance is in theory addressed by annual agreements under which the Uzbeks and Kazaks supply coal, oil and gas to fuel Kyrgyzstan’s conventional power stations in return for water being retained in the Toktogul reservoir.
But these arrangements are often troubled – for example, the deal for the forthcoming year was due to be signed on June 15, but it did not happen. Four days later, the monopoly power station company in Kyrgyzstan, Elektricheskie Stantsii, issued a warning that because of the need to build up reservoir levels to generate electricity, it might not be able to supply all the water that its neighbours will need next year.
There have been repeated calls for a long-term regional water and energy strategy to address the differences between electricity producers Kyrgyzstan and Tajikistan and water consumers Kazakstan, Uzbekistan and Turkmenistan, but this has yet to materialise.
Although the Kambarata power stations will add extra obstacles on the Naryn’s course, this will not necessarily change the current pattern of water flows to Uzbekistan and Kazakstan. The new plants will be located further up the river from Toktogul, so the water they release will first flow down into the reservoir, where it can be accumulated and regulated as is now the case.
REGIONAL STATES KEEN ON KYRGYZ ELECTRICITY – AND WATER
The costs may be off-putting to most commercial investors, but some regional governments may still be prepared to back the scheme for broader economic and political reasons.
“The cascade [of power plants] at Kambarata makes it possible to manage the flow of water in the region,” said Tajik political analyst Parviz Mullojanov. “Whoever owns them will control the whole Central Asian region.”
Kyrgyzstan already exports electricity to Russia and China as well as Kazakstan, Uzbekistan and Tajikistan.
China has a seemingly insatiable appetite for energy sources, as seen in its interest in Central Asia’s oil and gas.
Russia is also interested in cheap electricity, while the Kremlin has its own political reasons for seeking greater influence over strategic economic assets in Kyrgyzstan. The electricity giant UES is already involved in the feasibility study for Kambarata, while another Russian firm, Rinko Holding, submitted a proposal to the Kyrgyz government last month for a 3.2 billion dollar package that would include an aluminium plant and a power station to run it.
Finally, Kazakstan is not only keen on Kyrgyz electricity, but also on having some say over seasonal water levels in the Syr Darya.
According to Orozbakov, “Kazakhstan’s interest is quite obvious – it would like to have access to water flows control. Other countries, apparently, have purely geopolitical interests.”
Political analyst Turat Akimov says that once investors start lining up to bid for the project, there will inevitably be questions about whether existing electricity grids are reliable and powerful enough to allow increased exports – not to mention who would pay if new transmission lines had to be laid, for example to China or south to the Indian subcontinent.
“Investors will never come in where there might be risks,” added economic commentator Bazarbay Mambetov. “The risk here relates to where the electricity generated by Kambarata-1 and -2 will go.”
Although the deadlock over the privatisation law has now been broken, President Bakiev will struggle to balance broader geopolitical interests against continuing objections from his political opponents, especially in light of the uncertain projections for Kambarata as a revenue-earner,
For politician Matubraimov, who would prefer to see Kambarata backed by domestic funds, the key thing is to ensure Kyrgyzstan does not sell its vital interests along with its assets.
“Both the president and the government are in a difficult position, of course, since they are under pressure from neighbouring states which are economically more advanced. But we should pursue our own national interest on this matter.”
Jipara Abdrakhmanova is an independent journalist in Bishkek.
To complicate matters, the hydroelectric scheme which forms the centrepiece of the denationalisation process – two linked power stations called Kambarata-1 and -2 – is only half-built, and analysts say the immense investment needed to complete the work means it will be a long time before anyone earns a penny from it.
The breakthrough came on June 19, when the Kyrgyz parliament passed a bill sanctioning foreign investors to come in, take control and finish work on the Kambarata plants. Privatisation of the country’s largest conventional power station was also part of the package.
The scale and significance of the Kambarata project can be judged from its anticipated generating capacity, which at six billion kilowatt hours a year equals about half the country’s current total production of 13 billion kW/hours a year.
But Kyrgyzstan has no pressing need to generate such massive amounts of electricity for its own needs; its high mountains provide enough water to run hydropower plants that produce 80 per cent of the power generated in the country. The Kambarata scheme is instead designed to produce energy for export to neighbouring states, and once completed is expected to more than double the amount of power Kyrgyzstan currently sells abroad.
However attractive the project may look on paper, members of the Kyrgyz parliament have been very reluctant to give the final go-ahead. They have argued that the action taken on privatisation to date has been flawed, and voiced concerns that Kyrgyzstan might lose control over its major cost-free asset – water.
On May 28, faced with having to make a decision, parliament decided to hold off for a month and continue discussing the issue. After a no vote on June 15, President Kurmanbek Bakiev stepped in, appearing in parliament in person to urge members to change their mind.
Addressing members on June 19, he suggested that there was no option but to invest in the future, rather than depending on existing power stations.
“The hydroelectricity sector is our principal national resource, our main hope,” he said. “Nothing has been done to develop the sector. The [existing] Toktogul plants are our only energy asset, and we have exploited them without upgrading them or even repairing them.”
Bakiev pledged that the privatisation process would be transparent from now on, and said members of parliament would be invited to sit on the boards reviewing tenders.
To convince legislators that his government was serious, Bakiev said it would be working with United Energy Systems, UES, of Russia and Kazakstan’s KazKuat to prepare a feasibility study on Kambarata.
With some opposition members absent, parliament passed the legislation the same day.
HALTING PROGRESS ON PRIVATISATION
The vote may prove to have been the watershed moment in a long-drawn-out and controversial privatisation. The government launched a denationalisation programme for what was then a single, state-owned electricity network called Kyrgyzenergo as long ago as 1998, after the bulk of other state-owned industries had already passed into private hands.
As a first step, the firm was transformed into a joint-stock company, with the state retaining a 94 per cent stake. Kyrgyzenergo was subsequently broken up into several components, some earmarked for privatisation while others like the national grid company were destined to remain in government hands.
Outstanding questions for the final phase of privatisation involve how exactly the state will divest itself of the Kambarata and Bishkek plants – through an outright sale of stock in the companies (although the government will retain a share), or some kind of concession or lease arrangement.
MANY DEPUTIES REMAIN UNHAPPY
Opponents of privatisation fear a loss of control over water resources and electricity production. They see further scope for corruption in the privatisation process, and warn that domestic energy prices could skyrocket if the market is commercialised.
In an article published by the Jamestown Foundation, a United States-based think tank, Central Asia analyst Erica Marat said the hydroelectric industry was “plagued by large-scale corruption”, an issue which had become a matter for public debate after the March 2005 revolution.
“Due to elaborate pyramid schemes benefiting only a select few in the sector, Kyrgyzstan collects only 30 per cent of payments due for its hydropower generation, while rough estimates indicate that more than 40 million US dollars in profit is embezzled every year,” said Marat.
Legislators like Omurbek Tekebaev, a former speaker of parliament now in the opposition, say clear rules must be laid down now to avoid storing up problems for the future.
“Five years after this law is passed, Kyrgyzstan will probably reap some benefits, including new workplaces and industrial growth. However, in 10 or 15 years, the country could completely lose control over its water resources,” he said. “Without clearly stipulated mechanisms, we cannot allow foreign or even domestic investors to participate in the construction of such an important facility.”
During the debate, other deputies pointed to earlier energy privatisations of the early Nineties which led to prices rising and electricity being cut off to people who were unable to pay.
A group of deputies from the Union of Democratic Forces is to challenge the law in Kyrgyzstan’s Constitutional Court, on the grounds that they dispute that a quorum of 50 members was present in parliament the day the vote took place.
FLAWED ECONOMICS?
Even if privatisation goes smoothly, there are questions about the economic assumptions underlying the Kambarata project.
First, the projected investment sums are staggering – at around 2.5 billion US dollars, the cost is more than three times the country’s annual gross domestic product.
Despite this, some politicians such as Almanbet Matubraimov say Kyrgyzstan could raise the money itself. He proposes a share flotation scheme where the Kyrgyz public would become shareholders.
Given that the money required is more than Kyrgyzstan’s entire current external debt, the government clearly believes strategic investors, probably foreign, are the only likely funders.
A second issue is that assuming someone is willing to come up with the money and the two Kambarata plants are built, it will be a long time before investors get their money back – 30 years, according to some estimates.
Sapar Orozbakov, director of the Bishkek Center for Economic Analysis, says the estimated cost of generating electricity at the Kambarata scheme will be far higher than the regional market can sustain.
The World Bank has cited a figure of 8.5 or nine US cents per kilowatt-hour, a cost that compares very unfavourably with the 1.1 cent per kW/hour that Kyrgyzstan now charges its neighbours, he said.
The big hydroelectric schemes that neighbouring Tajikistan is planning on the river Vakhsh look a much safer bet, since the electricity they generate is expected to cost no more than two cents per kilowatt/hour.
“The Kambarata power stations work out as uncompetitive when compared with the Rogun plant in Tajikistan and others,” said Orozbakov.
The high cost of Kambarata electricity comes down to the major investment needed to get the plants working. “The construction costs are immense and it will take eight to ten years to complete the work – a very long time,” he said.
STRATEGIC LOCATION
Work on the Kambarata plants began in the Soviet period when such giant projects made sense because they benefited whole economic regions rather than individual republics. Like the existing Toktogul power plant and associated large reservoir, and also a number of smaller hydropower schemes, Kambarata is located on the river Naryn, a major tributary of the Syr Darya.
The Syr Darya is one of Central Asia’s two great rivers, running through Uzbekistan and Tajikistan to Kazakstan, and it is a major source of irrigation water for these three countries.
The way the Kyrgyz manage the Toktogul dam has been a major bone of contention with the Uzbeks and Kazaks, who need large amounts of water to flow downstream in spring and summer. By contrast, the Kyrgyz need to generate extra electricity over the cold winter months, requiring water to be dammed up over the summer and then released from the reservoir late in the year. This can cause winter flooding and summer water shortages for their neighbours .
This imbalance is in theory addressed by annual agreements under which the Uzbeks and Kazaks supply coal, oil and gas to fuel Kyrgyzstan’s conventional power stations in return for water being retained in the Toktogul reservoir.
But these arrangements are often troubled – for example, the deal for the forthcoming year was due to be signed on June 15, but it did not happen. Four days later, the monopoly power station company in Kyrgyzstan, Elektricheskie Stantsii, issued a warning that because of the need to build up reservoir levels to generate electricity, it might not be able to supply all the water that its neighbours will need next year.
There have been repeated calls for a long-term regional water and energy strategy to address the differences between electricity producers Kyrgyzstan and Tajikistan and water consumers Kazakstan, Uzbekistan and Turkmenistan, but this has yet to materialise.
Although the Kambarata power stations will add extra obstacles on the Naryn’s course, this will not necessarily change the current pattern of water flows to Uzbekistan and Kazakstan. The new plants will be located further up the river from Toktogul, so the water they release will first flow down into the reservoir, where it can be accumulated and regulated as is now the case.
REGIONAL STATES KEEN ON KYRGYZ ELECTRICITY – AND WATER
The costs may be off-putting to most commercial investors, but some regional governments may still be prepared to back the scheme for broader economic and political reasons.
“The cascade [of power plants] at Kambarata makes it possible to manage the flow of water in the region,” said Tajik political analyst Parviz Mullojanov. “Whoever owns them will control the whole Central Asian region.”
Kyrgyzstan already exports electricity to Russia and China as well as Kazakstan, Uzbekistan and Tajikistan.
China has a seemingly insatiable appetite for energy sources, as seen in its interest in Central Asia’s oil and gas.
Russia is also interested in cheap electricity, while the Kremlin has its own political reasons for seeking greater influence over strategic economic assets in Kyrgyzstan. The electricity giant UES is already involved in the feasibility study for Kambarata, while another Russian firm, Rinko Holding, submitted a proposal to the Kyrgyz government last month for a 3.2 billion dollar package that would include an aluminium plant and a power station to run it.
Finally, Kazakstan is not only keen on Kyrgyz electricity, but also on having some say over seasonal water levels in the Syr Darya.
According to Orozbakov, “Kazakhstan’s interest is quite obvious – it would like to have access to water flows control. Other countries, apparently, have purely geopolitical interests.”
Political analyst Turat Akimov says that once investors start lining up to bid for the project, there will inevitably be questions about whether existing electricity grids are reliable and powerful enough to allow increased exports – not to mention who would pay if new transmission lines had to be laid, for example to China or south to the Indian subcontinent.
“Investors will never come in where there might be risks,” added economic commentator Bazarbay Mambetov. “The risk here relates to where the electricity generated by Kambarata-1 and -2 will go.”
Although the deadlock over the privatisation law has now been broken, President Bakiev will struggle to balance broader geopolitical interests against continuing objections from his political opponents, especially in light of the uncertain projections for Kambarata as a revenue-earner,
For politician Matubraimov, who would prefer to see Kambarata backed by domestic funds, the key thing is to ensure Kyrgyzstan does not sell its vital interests along with its assets.
“Both the president and the government are in a difficult position, of course, since they are under pressure from neighbouring states which are economically more advanced. But we should pursue our own national interest on this matter.”
Jipara Abdrakhmanova is an independent journalist in Bishkek.
