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PPP Strategy

The objective of this strategy is to outline a roadmap i.e. action plan for implementing Public Private Partnerships (PPP) in the Kyrgyz Republic. The strategy has been prepared by the Ministry of Economy, the authorized public agency for PPP as approved by Government Resolution No. 616 on September 14, 2012, with the support from the Investment Promotion Agency. The strategy has been prepared in accordance with the government’s Guidelines for preparing sustainable development strategies as approved by Government Resolution No. xxxx on xxx/2014.

GOALS AND OBJECTIVES

The quality of infrastructure in the Kyrgyz Republic is among the lowest in the world. According to World Economic Forum, the Kyrgyz Republic ranks 121 out of 149 countries reviewed with regard to the overall infrastructure quality. This poor quality is significantly endangering the country’s economic development potential essential for reducing poverty.

The National Strategy for Sustainable Development of the Kyrgyz Republic 2013 – 2017 approved by Presidential Decree on 21 January 2013 (hereafter NSSD), acknowledges the shortcomings in the quality of infrastructure and related public services and has identified PPP as a critical scheme to address these shortcomings given the budgetary constraints.

PPP is recognised worldwide as an alternative scheme to deliver infrastructure and related public services potentially more effectively and efficiently in comparison to conventional procurement. Successful implementation of PPP requires a conducive environment and adequately prepared projects.

The NSSD provides the following main goals of the implementation of the PPP mechanism:

  • To ensure economic growth through concentration of physical and financial resources of the public and private sector for the implementation of investment projects;
  • To reduce the burden on the state budget and re-distribute budgetary funds.
  • The NSSD furthermore provides the following objectives in relation to achieving these main goals:
  • To create adequate environment for effective and efficient collaboration between the state and the private sector;
  • To ensure efficient operation of the assets in state property through mobilization of off-budget sources of funding by means of attracting the private sector;
  • To ensure effective and efficient administration of and control over implementation of the PPP-based projects;
  • To institute approach whereby effectiveness of project implementation is assessed through the quality of services to the population;

For the purpose of this strategy the following target has been defined for the implementation of PPP:

By 2020, the government will have awarded not less than 20 PPP contracts to private partners with a total capital value of not les than 20 billion Soms (around US$ 400 million)

This target assumes for the period 2015 – 2020 an average investment by the private sector of the equivalent of 1% of GDP, which is above the 0.5% overall average achieved by developing countries and below the 2.5% benchmark of the leading PPP countries India and Brazil. It is also equivalent to approximately 10% of the average Public Investment Program, which is below the 40% benchmark of India, the leading PPP country worldwide.

CURRENT SITUATION AND ACHIEVEMENTS

To strengthen the enabling environment for PPP, the government represented by the Minister of Economy has agreed in 2012 a comprehensive Technical Assistance program with the Asian Development Bank (ADB), which is on-going ever since in different modalities.

To facilitate the implementation of PPP the government has adopted a PPP Law as approved by Parliament Resolution No. 7 on 24 February 2012. The PPP Law has been prepared with support from ADB and is considered to be largely in line with international practices albeit that since adoption areas for further improvement have been identified, which have yet to be operationalized.

To facilitate the implementation of PPP, the government has designed an institutional setting allocating different roles and responsibilities among the relevant public agencies (which is also reflected in the PPP Law), including:

  • Ministry of Economy as the authorised body for PPP responsible for coordination, capacity building, technical assistance, project review and policy monitoring;
  • Ministry of Finance as the Fiscal Risks Management unit responsible for managing fiscal risks;
  • Public Partner i.e. Line ministries and Local Authorities as Implementing agencies responsible for identifying, preparing, implementing and monitoring PPP projects

To support the development of PPP and the preparation and implementation of PPP projects (among others), the government has established in 2014 the Investment Promotion Agency (IPA) by Government resolution No. 158 on 18 March 2014. IPA has set up a dedicated team of specialists to support the public partners with the identification and preparation of PPP initiatives as well as the further promotion of PPP.

The government has engaged on a continuous process of capacity building in close cooperation with its development partners including ADB, GIZ, JICA and IFC. Capacity building is facilitated through a range of training activities and seminars including international training programs.

To financially support the preparations of PPP projects, the government in accordance with international best practices has established the Project Development Support Fund (PDSF) as approved by Government Resolution No. 147 on 17 March 2014. The government has allocated US$ 2 million to the PDSF for the fiscal year 2014 and has committed itself to allocate a further US$ 1 million in respectively 2015 and 2016.

As of November 2014, the different public partners have initiated some 26 projects. After initial evaluation, 14 projects are currently under preparation in different stages for implementation. One initiative has been approved for PDSF funding and a further 4 projects are preparing an application. For one project, the tender process has been launched and another project is scheduled for tender launch early 2015. See Annex II for an overview of the PPP program.

CHALLENGES

The main challenges hampering the effective development of PPP in the Kyrgyz Republic include the following:

Lack of sectoral strategic development plans for improving the quality of infrastructure and related public services. This has the following implications;

No clear vision and strategy for improving the quality of public services in a given sector;

No long-term (5-10 years) investment program and consequent appraisal of investment need;

No clear long-term financing plan in terms of necessary budget applications, necessary support from development partners and possibilities for private financing;

Projects are defined ad-hoc and not in a systematic and cohesive manner related to the overall objectives for the given sector. The risk of selecting ad-hoc projects is that resources are spend on preparing projects which may not be in the best interest of the Kyrgyz Republic;

Lack of capacity in developing and implementing PPP projects. This applies to the number of staff that is available for developing and implementing PPP as well as the competence and experience level of staff;

High-risk perception by the private sector with regard to implementing PPP in the Kyrgyz Republic, limiting the appetite from potential investors. This high risk perception is substantiated among others by:

Limited transparency in contract award and monitoring illustrated by the ranking of the Kyrgyz Republic in the Corruption Perception Index i.e. 150 out of 177 countries included in the index;

High sovereign credit risk illustrated by the ranking of the Kyrgyz Republic in the Country Credit Risk index i.e. 115 out of 147 countries included in the index;

Limited access to financial resources to prepare and implement projects. Investments through PPP arrangements are typically financed by equity contributions from investors and non-recourse long-term debt facilities from financial institutions. To date local financial institutions have limited experience in providing such long-term non-recourse debt facilities and international commercial financial institutions are limited in their ability to provide such facilities in the Kyrgyz Republic because of the perceived relatively high credit risk profile for the Kyrgyz Republic as indicated in combination with lending opportunities elsewhere;

Limited experience with PPP in the local business community i.e. the local business community is not accustomed to preparing substantive bids involving significant costs for necessary consulting services nor long-term arrangements where the income necessary to service debt obligations is typically related to an often uncertain demand for the respective service.

ACTIONS

In order to address the main challenges for achieving the identified target taking into account the achievements to date the following action areas have been defined by the government of the Kyrgyz Republic:

Improve government governance

Government capacity strengthening

Confidence building

Develop facilitating financial instruments

Private sector development

Government Governance

 

The government will develop and adopt regulations to ensure that for each sector development strategies are prepared that include an implementation and financing plan including where appropriate the option of applying PPP.

The government will improve the proceedings as included in the PPP Law for reviewing and approving PPP initiatives through the concept of gateway reviews with explicit approval authority for the authorised public agency for PPP i.e. Ministry of Economy and the Ministry of Finance.

The government will establish an executive council or use an existing mechanism alike to oversee and monitor the development of PPP. The council is to be chaired by the Prime Minister to reflect the government’s commitment to a successful implementation of the PPP strategy.

Capacity Strengthening

The government will allocate the necessary human resources to allow for effective coordination and development of PPP, including but not limited to:

6 officials with PPP specific Terms of Reference at the Ministry of Economy including the Investment Promotion Agency;

2 officials with PPP specific terms of Reference at the Ministry of Finance

2 officials with PPP specific Terms of Reference at the implementing Agencies i.e. Public Partners, including, but not limited to:

  • Ministry of Transport and Communication
  • Ministry of Health
  • Ministry of Energy
  • Ministry of Culture, Information and Sports
  • Bishkek City Development Agency

The government will develop and adopt guidelines for efficient and effective preparation and implementation of PPP projects through a PPP Manual in order to ensure a common understanding of the necessary proceedings and requirements.

The government will develop and implement a cohesive and constructive Training Program that is to culminate in the degree of Certified Kyrgyz PPP Expert subject to the following requirements:

Proven in-depth understanding of the PPP Manual supported by at least 10 government controlled training days.

Acquaintance of international best PPP practices through proven participation in at least 10 international PPP training days recognised as such by the government.

Proven participation in the preparation and implementation of PPP project in the Kyrgyz Republic including participation in the respective Tender Committee.

The government will facilitate and support the training of a sufficient number of government officials with the objective of having by 2020 not less than 20 government officials recognised as a Certified Kyrgyz PPP Expert.

The government will liaise with a government agency dedicated to PPP in a developed PPP country in order to share experiences and further strengthen its knowledge base. Such country preferably has similar characteristics as the Kyrgyz Republic in terms of size of the economy and political background.

Confidence Building

The government will continue to work with its development partners in improving the enabling environment to ensure that its PPP framework and projects are in line with international best practices taking into account the specifics of the Kyrgyz Republic.

The government will publish its commitments, regulations and proceedings as well as its PPP program through a dedicated website www.ppp.gov.kg in order to demonstrate to interested parties that its PPP framework and projects are in line with international best practices.

The government will seek support from recognised and renowned advisory firms for preparing and tendering PPP projects in order to ensure efficient and effective project development and demonstrate to interested parties that project preparations are in line with international best practices.

The government will continue to contribute budget resources to the Project Development Support Fund as well as seek financial support from its development partners for co-financing to ensure that sufficient financial resources are available for adequate project preparation.

The government will pro-actively communicate with stakeholders the progress with regard to the development of PPP including its pipeline of PPP projects in order to ensure full transparency and demonstrating its commitment to PPP.

Financial Instruments

The government will review the options to strengthen the viability and bankability of PPP projects in accordance with international best practices including but not limited to:

The establishment of a Kyrgyz Infrastructure Finance Fund providing long-term Som denominated debt facilities in view of the limited capacity of the domestic banking sector to provide such facilities. The government will take into consideration at least the following possible sources of finance and funding:

Budget resources

Development Finance Institutions

Pension Funds and Social Insurance Funds

Capital Market

The establishment of Guarantee Facilities in order to reduce the risk exposure for private finance providers enhancing as such the bankability of PPP projects. These guarantee facilities could relate among others to the following risks:

  • Exchange rate risks
  • Interest rate risks
  • Revenue risks
  • Political risks

The establishment of a Viability Gap Financing facility in order to co-finance through upfront or periodic grants PPP projects that are economically sound and attractive but not financially viable from user charges.

The government will obtain a credit rating in order to improve facilitating access to private capital by enabling private capital providers to price the country risk premium.

Private Sector Development

The government will facilitate where possible and where appropriate match-making between the domestic business community and recognised and renowned international service providers in the field of PPP in order to allow the domestic business sector to associate with such companies. This will enable the domestic business community to benefit from the experiences and resources from international service providers in the field of PPP.

The government will develop and implement PPP training programs specifically for the domestic private sector and it will facilitate knowledge sharing including among others the dissemination of relevant training materials as well as periodic workshops.