Investment in the Water and Energy Complex of Central Asia

Reports and working papers focus on current economic issues in EDB member states in the light of both regional and global economic developments.

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29 July 2021

The report analyses Central Asia’s water and energy complex after 30 years of independence of the five Central Asian countries (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan) and assesses their cooperation in the water and energy complex. The analysts have also identified the key challenges facing the Central Asian countries in addressing water and energy issues and conducted an in-depth study of the ongoing and prospective investment projects in Central Asia’s water and energy complex, including an analysis of the key players’ investment strategies and government programmes. Based on this analysis, the report preliminarily estimates the need for capital investment in the energy and water infrastructure until 2030.

The report argues that the lack of cooperation among the Central Asian countries in the water and energy complex and, consequently, the implementing technical and economic solutions result in significant economic losses.

  • According to the reported data, annual economic damage and unrealised economic benefits are estimated at as high as US $4.5 billion, which is 1.5% of the regional GDP. Losses in agriculture and the energy sector are estimated at 0.6% and 0.9% of Central Asia’s GDP, respectively.
  • The EDB preliminarily estimates that remedying inefficiencies in the water and energy complex might add 7% (US $22 billion) to the region’s GDP over a five-year horizon. The region’s economies will grow by an additional 1.5 p.p. in five years (compared with the business-as-usual scenario).
  • In the longer term perspective (up to 2050), according to the World Bank estimates,   the difference between the costs of the business-as-usual scenario and the benefits of the scenario envisaging stronger cooperation in Central Asia’s water and energy complex might reach 20% of GDP.

The drastic weakening of cooperation in Central Asia’s water and energy complex in the 2000s coincided with a significant growth of the load on the energy sector. Net electricity consumption soared by 71.1% from a post-Soviet low of 108.1 TWh in 1999 to 184.9 TWh in 2020. This occurred in the context of accelerated growth in the energy-intensive industries as well as high population growth. With a significant decline in mutual average annual power flows, the Central Asian countries have been actively building new and upgrading existing generating capacities. This has made it possible to meet the increasing demand with in-country generation. In fact, the countries’ energy systems have become self-sufficient over the past two decades.

The energy sector in Central Asia developed in the context of government programmes implemented in the region. Given the ownership structure and specific nature of water and energy investment projects, the governments play a key role in the development of the water and energy complex. The governments and state-owned companies are actively involved in formulating and implementing development concepts for the complex; setting tariff policies; searching for sources of finance; and implementing projects, among other activities. In 2020, the leaders in water and energy investments were Kazakhstan (US $2.783 billion, or 1.6% of GDP) and Uzbekistan (US $1.377 billion, or 2.4% of GDP). In Tajikistan and Kyrgyzstan, capital investments in the water and energy complex amounted to US $507 million (6.3% of GDP) and US $89 million (1.2% of GDP), respectively. Budgetary constraints in Tajikistan have not precluded the government from implementing an active public investment policy with external borrowings. The low levels of water and energy investments in Kyrgyzstan were due to limited government revenues as well as low tariffs that do not cover the cost of electricity generation.

As in most Central Asian countries the water and energy complex is insufficiently attractive for private and foreign investors, an important source of finance for public initiatives are multilateral development banks (MDBs). So far, 104 projects worth US $10.2 billion are in progress. The leading financier is the EBRD with a portfolio of US $3.3 billion, or 32.7% of total MDB financing in Central Asia. It is followed by the World Bank with US $3.0 billion (29.6%) and the ADB with US $2.6 billion (26.2%). The EDB and EFSD, the EIB, and the AIIB together account for US $1.2 billion (11.5%). Despite struggling with the aftermath of the COVID-19 pandemic, MDBs continued to finance Central Asia’s water and energy complex. In 2020, they approved financing for 24 water and energy projects to the tune of US $1.8 billion.

In the longer term, EDB analysts expect GDP growth to remain relatively high in Central Asia. This will be associated with significant population growth (based on the UN forecast, the median growth of the Central Asia’s population will increase from the current 74.4 million to 90.0 million in 2050) and with the development of manufacturing, services, and agriculture. As a result, the region is expected to boost electricity consumption, adding loads on the existing generation facilities and grids with already high rates of wear and tear. On the other hand, given the region’s geographical isolation and the respective closedness of its transboundary river basins, as well as growing climate change, greater water consumption is becoming the main factor determining inter-state water uses and, therefore, inter-state relations in the region.

The identified total investment proposals in the energy segment of Central Asia’s water and energy complex are currently estimated at US $52.8 billion. Of these, generation accounts for US $45.4 billion (86.0%) and grids US $7.4 billion (14.0%). The key project objectives are to secure power supplies through the diversification of energy sources and the expansion of conventional generation facilities, access new electricity markets, and strengthen in-country electricity connections.

The Bank’s analysts conclude that the achievement of Central Asia’s sustainable socio-economic development goals will be largely dependent on the state of water resources. “The challenges to the sustainability of the energy segment of Central Asia’s water and energy complex are numerous, and each country in the region is looking for its own solution to counter them,” said Evgeny Vinokurov, EDB and EFSD Chief Economist. “However, the key challenges in Central Asia’s water and energy complex will be associated with the growing scarcity of water resources. Water use in Central Asia is growing rapidly, driven both by demographic factors and by the development of manufacturing and agriculture, primarily increased irrigation.”

In this context, reaching a consensus on inter-state water allocations in transboundary river basins is a key task that requires political will and a comprehensive solution, considering both socio-economic and environmental changes and the political situation in the countries bordering the region. The objective to converge positions on the shared use of transboundary water resources cannot be seen outside each country’s economic development model and economic cooperation in the region as a whole. Strengthening trade and economic ties among the region’s countries and their close cooperation, in which water policy is a valid factor of economic integration, will contribute to solving the problem of shared transboundary water resources.

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2021