Published: 13 January 2014 г.
At the end of last week, Deputy Chairman of the Management Board of Eurasian Development Bank (EDB) Sergey Shatalov arrived in Bishkek. In his capacity of the coordinator of the Bank’s activity in managing the resources of the EurAsEC Anti-Crisis Fund (ACF), the Deputy Chairman of the EDB Management Board met with a number of Kyrgyzstan’s senior officials. And right after the discussions, he talked to the K-News journalist. The editors are publishing the first part of the interview, in which Sergey Shatalov speaks about the projects that Kyrgyzstan plans to implement with credit resources of the Anti-Crisis Fund.
Mr. Shatalov, you have just come from a meeting with Prime Minister of Kyrgyzstan Jantoro Satybaldiev. What did you discuss?
The key topic of our discussion was the ACF’s strategy in Kyrgyzstan. It certainly covers specific investment projects important for improving the welfare of the people, developing the country’s exports, and raising the economy’s resilience to the crisis.
We have discussed two investment projects to be presented on December 10 to the ACF Council, which includes six Finance Ministers of the ACF member states. And we hope to get support from the Council for these projects, which are already fully prepared.
The first investment project, involving the financing of US $60 million, is related to the construction of segments of the Bishkek-Osh road. Under this project, the Fund will cooperate with Asian Development Bank. The second project envisages the supply of agricultural machinery to Kyrgyzstan to be leased out to its farmers. It is well known that the country’s agricultural machinery fleet is over 90 % amortised.
We also discussed the Fund’s medium-term strategy for Kyrgyzstan with the Prime Minister. It should determine priority areas for cooperation for several years to come, at least for three years.
As far as I know, four investment requests are currently under consideration for our republic. You have spoken only about two …
Speaking about investment cooperation of the Anti-Crisis Fund, the Fund’s procedures are such that an investment request goes through two stages. The requests I have mentioned are at the very advanced, second stage now, i.e. at the stage of final consideration by the ACF Council. The third request is at the stage of preliminary consideration, i.e. at an early stage. And that is not a request coming from the republic, it came from a private Russian company planning to create modern infrastructure for Kyrgyzstan to export its high quality fruits and vegetables to the markets of Russia and Kazakhstan.
And the fourth project?
It’s a very big project to modernise Toktogul HPP with engagement of Asian Development Bank. Participation of other international development institutions is under discussion. But it is actually not even a request yet, it is just an expression of interest––though significant interest––on the part of the line ministry – the Ministry of Energy of Kyrgyzstan. We have just started discussing the issue.
Toktogul HPP has four turbines, costing about US $120 million each. We believe that the modernization of Toktogul HPP is vital for the energy and environmental security of the country, for developing its power exports in any direction Kyrgyzstan chooses.
This project can have a significant integration effect, since Toktogul HPP uses Russian turbines, i.e. we’ll directly promote trade flows between the two countries. And experts from other international development banks find that hydropower technology solutions offered by Russian suppliers are among the most efficient. I think that the integration effect in this case would be sizable.
What I say does not mean that we will be inviting only Russian suppliers for cooperation. We will be guided by our procurement policies involving international tender procedures, not different from the procedures of other international banks.
Mr. Shatalov, going back to the “advanced” projects. Who will be building the road from the South to the North? Are these going to be specialists invited from abroad, or will there be jobs for our citizens as well?
Our idea is that the Fund-financed investment projects should create jobs for the citizens of the country where the project is implemented. Our key task is to utilise the amount of financing that we can allocate to a country most efficiently in order to resolve the task set by the customer. In this case, our customer is Kyrgyzstan, represented by its Government: if we talk about roads – it is the Ministry of Transport and Communications, if we talk about energy – it is the Ministry of Energy.
In the framework of our projects, we organise procurement of goods and services based on international tenders. Companies participating in such tenders will certainly attract local labour to make the most effective use of the funds allocated.
And as to supplies of agricultural machinery, what part of the country’s fleet it is planned to replace?
It is a very interesting project. I should start by saying that leasing as such is a very attractive mechanism. Even in rich countries, not to mention Kyrgyzstan, farmers cannot afford buying a harvester for US $50 thousand. It’s expensive.
Other development partners of Kyrgyzstan have already implemented several small leasing projects. In particular, in 2012, in the framework of a Turkish loan, the country received about US $5 million for machinery leasing. Our project is bigger: we are allocating US $20 million for 20 years to the Kyrgyz Republic. The Ministry of Finance will work through Aiyl Bank distributing this amount between farmers in the form of loans to be used to lease machinery.
Speaking about the country’s needs for various types of agricultural machinery, they are estimated at the level of dozens of thousands. It is obvious that we will not able to renew the whole fleet overnight; initially we expect only a small part of the machinery to be replaced using these US $20 million. But there is one very important aspect here: the country will be able to utilize these funds six times during the period of the loan repayment to the Anti-Crisis Fund.
What do you mean?
We are giving the Ministry of Finance a loan with 20 years maturity, to be disbursed within the first two years. Aiyl Bank will on-lend these funds for a shorter term as leased machinery starts paying off immediately. Our financial model shows that, owing to such refinancing scheme, the amount of US $20 million provided for 20 years will let farmers lease machinery for an amount of up to US $120 million.
Even more importantly, using the interest paid by farmers for the sub loans, the Ministry of Finance will create its own earmarked fund and will continue lending for leasing purposes using the resources of this fund. When the highly concessional loan of the Anti-Crisis Fund is repaid, there will be less need to continue borrowing abroad for this purpose. The Ministry of Finance will have its own earmarked fund. The beauty of the project is that we are creating a mechanism, with which we work ourselves out of this business. We will be needed no longer.
And is there any oversight of the ACF loan use?
Certainly. Monitoring and oversight will be very rigorous. As I have already mentioned, our procurement policies are very similar to those of older international institutions, and the latter have proven to be efficient. First of all, because these policies rely on competitive bidding and are fully transparent. These policies will allow us to carefully monitor project implementation. We will regularly publish information, exercise control, have independent auditors working, and, naturally, an independent audit will be undertaken once the project is completed.
Does the Fund have any instruments to influence countries that have borrowed, and are not repaying their loans?
Speaking about investment loans, they are expected to generate a significant multiplication effect and financial flows. It does not mean that, if we are building the road from Bishkek to Osh, it should be a toll road. No. But it will promote entrepreneurship and business. This route will develop not merely transportation services, but, say, small businesses and services will grow along it, farmers will have access to the transport artery enabling them to faster take their produce to the market – and not only to the national Kyrgyz market, but to export markets as well. In other words, significant additional economic opportunities will be generated. These new entrepreneurs will create a flow of tax revenues to the budget, so, in principle, any infrastructure project should generate income for the country to repay its debt under the loan. That is first.
Second, the terms of loans for Kyrgyzstan are highly concessional. We have standard terms, which are similar to those of Asian Development Bank and the World Bank. ACF provides no grants, as that was the decision of its founders – the six Ministers of Finance, and the Fund’s resources are not infinite, the Fund is not that large – just US $8.5 billion. But our loans are highly concessional. Any loan––when we provide it on below-market terms––can be divided into two parts: a grant and a commercial loan. The grant component for Kyrgyzstan is at least 35 % in our case, and we think that this share will be higher for some loans.
Additionally, our assessment of Kyrgyzstan’s debt position is currently as follows: the burden of the country’s debt is at quite a comfortable level. To a large extent, this is due to Russia’s decision to write off its claims on Kyrgyz Republic. The debt ratios for the Kyrgyz Republic are now lower than they used to be just several years ago. In this case, the most important instrument to prevent debt crises is responsible lending policies of the partner creditors, and responsible fiscal and macroeconomic policies on the part of the Government. Through this, you are creating financial flows that allow the country to repay its debt.
It is critical that one of the medium-term priorities of Kyrgyzstan’s authorities is to further reduce the budget deficit. This will shrink the country’s dependence on external debt and improve its creditworthiness.
It is important that Kyrgyzstan’s Government has formulated and is implementing such policies. If these policies continue, there will be no need of debt forgiveness. The country will be certainly able to repay its debt then. We discussed it with your Minister of Finance just today, and our positions fully coincide in this respect.
And the last, very important aspect: any country, which takes a responsible approach to its liabilities, has great advantages from the point of view of mobilising new investments. I have had a chance to work in several countries, which regularly default and refuse to repay their liabilities. These are the countries with the lowest foreign direct investments.
Only through responsible debt management policies, a country becomes a magnet for investments. It becomes interesting for investors, who see it as a reliable partner.