EurAsEC Anti-Crisis Fund and EDB to Start Multimillion Projects in Kyrgyzstan
The financial organizations intend to press forward already this year.
The EurAsEC Anti-Crisis Fund (ACF) and the Eurasian Development Bank (EDB) are starting to finance major projects in Kyrgyzstan. This year, the ACF will develop projects supporting the Bishkek-Osh road upgrading, the procurement of agricultural machinery, and the construction of modern fruit-and-vegetable warehouses, while the EDB will work on projects to finance the power plant company Electricheskie Stantsii OJSC and the state-owned railway company Kyrgyz Temir Zholu. Sergey Shatalov, Deputy Chairman of the EDB Management Board responsible for the Bank’s management of the EurAsEC Anti-crisis Fund, told the VB about the activities of the financial institutions in the republic.
— The EDB is successfully implementing projects in Kazakhstan, Russia, Belarus, but is not very active in Kyrgyzstan. What are the reasons for that?
— There are in fact two anti-crisis institutions working under the roof of the Eurasian Development Bank. It is the Bank itself, which has operated for over 6 years already, and the EurAsEC Anti-Crisis Fund, whose resources are managed by the EDB.
Kyrgyzstan joined the EDB quite a short time ago. The relevant agreement was signed only at the end of 2011.
Once Kyrgyzstan became an EDB member, activities commenced and now representatives of the Eurasian Development Bank are working closely both with the ministries and agencies, and with development partners of Kyrgyzstan.
It is certainly difficult to accumulate a large pool of good investment proposals over one year of effective presence of the EDB in Bishkek. Besides, due to the size of Kyrgyzstan’s economy, there are not so many investment proposals that the EDB could finance.
The EurAsEC Anti-Crisis Fund (ACF) was established 3 years ago. The Bank and the Fund serve different clients. The EDB finances companies (including state-owned ones), while the Fund also provides credits to governments.
— What projects do you place priority on?
— Selecting investment proposals for their detailed analysis is hard and time-consuming work. Not all investment proposals received by banks are sensible and economically feasible. We have to prepare economic forecasts and to conduct due diligence procedures on the applicant’s business as there are all kinds of businesses in play. There are serious, transparent firms and fly-by-night companies, which strive to get an immediate effect. We do not work with the latter.
— Which project will be implemented first in the Kyrgyz Republic?
— It is a US$ 50 million project of Bishkek-Osh road upgrading.
The Asian Development Bank (ADB) has proposed to the
EDB as the ACF resource manager
In line with the rules of the two partner banks,
20 % of the project cost should be financed by the
Government of the Republic. International experience suggests that where a
project is 100 % financed by external donors, the government has
no incentives to ensure high quality of the project
implementation, targeted use of funds, and to control transparency. The
Government of Kyrgyzstan has extensive experience of working with
international development banks and fully supports this principle of
— On what terms will the EDB provide funds for the project?
— On highly concessionary terms. The grant component of this loan will be at least 35 %. We will do our best to maximize the grant component since road projects have long pay-back periods. We are not able to provide a pure grant as it is prohibited by the ACF Statute signed by all of its six founding members, including Kyrgyzstan.
By now, we have received a preliminary application for this project. It means that we will not see construction machinery on the road tomorrow.
The ADB offered the Eurasian Development Bank to participate in the project only a few months ago. We have received approval from the ACF Council and started project preparation. Together with the Asian Development Bank, we are already working on the project feasibility study.
— How long will it take?
— The work on the project documentation
is well under way and is expected to be completed by
Ahigh-quality, detailed feasibility study is the best guarantee of the most efficient use of funds.
The second ACF project currently under preparation is for the procurement of agricultural machinery. It has an integration dimension, since agricultural machinery will most likely be imported from EurAsEC countries, primarily from Belarus and Russia.
The preliminary estimate of the investment size is US$ 20 million. I am unable to speak about the precise financial terms and conditions as they have not yet been approved by the ACF Council, but they will be similar to the terms of the road loan.
Tentatively the terms could looks as follows. The loan will have a maturity of not less than 15 years. The grace period-when only interest on the loan is being paid-will be at least 5 years, and it may be longer. And the interest rate will be fixed at 1 %. It is not a market-based, but a highly concessional loan, similar to those offered by the International Development Association, ADB, and other international development institutions.
— Will the agricultural machinery be delivered by the time of the spring field work?
— This project has not yet been discussed by the EurAsEC Anti-Crisis Fund Council. We realize perfectly well that the agricultural machinery fleet in Kyrgyzstan is heavily run down, but a detailed project documentation is needed to get the Council’s approval.
To ensure efficient use of the loan proceeds, we need excellent technical documentation. Ministers of Finance-members of the ACF Council-will examine this documentation and support the project only if they are fully assured that the money is spent sensibly and to the benefit of agriculture modernization.
At the moment, the most important and hard work is under way — project documentation is being drafted. Detailed project documentation is expected to be presented by the next meeting of the ACF Council, which is scheduled for spring this year.
— Will the ACF finance the state-owned company Kyrgyz Temir Zholu and the open joint-stock company Electricheskie Stantsii?
— It is the EDB itself that is negotiating the projects and providing the funds. The Bank follows its own operational principles, but the procedures are similar to those used by the ACF. For instance, a detailed feasibility study is required.
The EDB works directly with the companies, and the Government is not directly involved in this work. In case of Kyrgyz Temir Zholu, the project is being prepared that will finance the purchase of electric locomotives. As to Electricheskie Stantsii, we are speaking about fuel procurement. All the corporate procedures followed by the Bank and the borrower have already been completed in relation to this project, and the loan documentation has already been cleared.
— Are there quotas for countries to get resources from the Anti-Crisis Fund?
— Indeed, the
It is also important that the ACF finances integration projects, which are of interest to several countries.
For instance, we have received a proposal from Kazakhstan to finance the construction of a segment of power transmission line Kemin-Almaty. A significant part of the power transmission line will run through the territory of Kyrgyzstan. The project cost is US$ 150 million.
But since the proposal has come from Kazakhstan, the project should be financed from Kazakhstan’s country limit, which is US$ 2 billion. In other words, this loan will not become part of Kyrgyzstan’s debt. Nevertheless, Kyrgyzstanwill benefit a lot from this project as the power transmission line will become a channel for electricity exports to Kazakhstan.
Another project beneficial to Kyrgyzstan is under consideration. It involves the development of a system for pre-export preparation of fruits and vegetables. This project aims at renovating Soviet-period fruit-and-vegetable warehouses based on modern approaches to provide facilities for storage, procurement, and packing of perishable products exported to the markets of Kazakhstan and Southern Siberia. It is currently at the evaluation stage.
This application was submitted by a Russian company, which has a subsidiary in Kyrgyzstan. If we decide to finance the project, we will do it against the access limit of Russia. Thus, Kyrgyzstan can actually use ACF resources on a much wider scale than the country’s own access limit permits.
— Does it mean that this project will be refined and is likely to be financed?
— We are working actively on it.
The Anti-Crisis Fund is not a charity organization. We must be convinced of the high quality of each project proposal and the ability of a borrower to repay the funds provided.
In principle, the Fund provides money only on condition of repayment, and its Statutes require that ACF loans are secured with a collateral.
— And what about the project to finance school textbooks, which implies allocation of a US$ 5 million grant?
— Indeed, we have received such a request from the Ministry of Education of Kyrgyzstan. This idea has been initiated by experts of the Fund and supported by the ACF Council.
When the six countries established the Anti-Crisis Fund, they decreed that the ACF would extend no grants. It was 3 years ago.
At the same time, it is clear that countries with low per capita incomes face challenges in maintaining high standards in education, healthcare, and social protection, and grants can be an important means to develop their human capital. And in the current environment, human capital is the main factor of a country’s competitiveness.
This kind of financing is not repaid immediately, but turns out to be very beneficial for both citizens of the country and for its economy.
According to the World Bank studies, investments in public
education have a profit margin
The ACF Council has instructed us to find some mechanism to extend grants for the most important social projects in low-income countries, whose own fiscal capacities are limited.
At the same time, the rules we will apply disbursing such grants will be as tough as those used for loan disbursements.
If the ACF Council approves our proposals, we will proceed with the review application of the Ministry of Education of Kyrgyzstan for textbook purchases.
— Could you tell us how you control the spending of allocated funds.
— The EDB will carefully monitor the progress of the road construction, the use of its loan allocated for the procurement of agricultural machinery and for all the other purposes stated above. Our procedures are similar to those of the World Bank and the Asian Development Bank.
The Loan Agreement between the Ministry of Finance and the EDB will specify that a special account will be opened to deposit loan proceeds. These proceeds will be used to pay suppliers and contractors as road upgrading or the procurement of machinery progress.
Our control procedures are similar to those of other leading international financial institutions and also involve independent verification and validation of project performance, to confirm that the money was spent for the purposes that were specified in the loan agreement and the project implementation met high quality standards.
We are fully accountable to the Ministry of Finance of the Republic and to its citizens for the use of loan proceeds in the most responsible and transparent fashion.