Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 56065-KG

INTERNATIONAL DEVELOPMENT ASSOCIATION

EMERGENCY PROJECT PAPER

ON A PROPOSED CREDIT

IN THE AMOUNT OF SDR 25.30 MILLION (US$38.10 MILLION EQUIVALENT)

INCLUDING SDR 5.40 MILLION (US$8.10 EQUIVALENT) IN PILOT CRISIS RESPONSE WINDOW RESOURCES

AND A

PROPOSED GRANT

IN THE AMOUNT OF SDR 21.10 MILLION (US$31.90 MILLION EQUIVALENT)

INCLUDING SDR 5.00 MILLION (US$7.50 MILLION EQUIVALENT) IN PILOT CRISIS RESPONSE WINDOW RESOURCES

TO THE

KYRGYZ REPUBLIC

FOR AN

EMERGENCY RECOVERY PROJECT

September 16, 2010

Poverty Reduction and Economic Management Central Asia Country Unit Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective September 13, 2010

Currency Unit = Som 46.9000 = US$1

US$1.51525 = SDR 1

FISCAL YEAR January 1 = December 31

ABBREVIATIONS AND ACRONYMS

CHP Combined Heat and Power Plant EDB-ACF Anti-Crisis Fund of the Eurasian Development Bank ACTED Agency for Technical Cooperation and Development (an NGO) ADB Asian Development Bank AUB Asia Universal Bank CARO Central Asia Regional Office CAS Country Assistance Strategy CDS Country Development Strategy CHP Combined Heating and Power CHPP Combined Heat and Power Plant CRW Crisis Response Window DFID Department for International Development EC European Commission EEAP Energy Emergency Assistance Project EMP Environmental Management Plan ERP Emergency Recovery Project ERS Emergency Response Supplies ESSAF Environmental and Social Screening and Assessment Framework EU European Union FAO Food and Agricultural Organization FM Financial Management GDP Gross Domestic Product GPN General Procurement Notice GTAC Governance Technical Assistance Credit HPP Hydro Power Plant IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding ICRC International Committee of the Red Cross IDA International Development Association IDB Islamic Development Bank IDP Internally Displaced Person IFC International Finance Corporation IFR Interim Financial Report IMF International Monetary Fund IPSAS International Public Sector Accounting Standards ISDS Integrated Safeguard Data Sheet

JCSS The Joint Country Support Strategy JEA Joint Economic Assessment JEPIG Joint Energy Project Implementation Group KJKS KyrgyzJilCommunSouz, (Communal Services Enterprise) MSB MIS

Monthly Social Benefit Management Information Systems

MOE Ministry of Energy MOF Ministry of Finance NCB National Competitive Bidding NEG National Electricity Grid OHCHR Office of the High Commissioner for Human Rights OSCE Organization for Security and Co-operation in Europe PDO Project Development Objectives PFM Public Financial Management PIP Public Investment Program PIU Project Implementation Unit PP Procurement Plan QDC Quick Disbursing Component RVP Regional Vice President SDR Special Drawing Rights SPF SOE

State and Peace-Building Fund Statement of Expenditure

SP Social Policy SPN Specific Procurement Notices SSN Social Safety Net UN United Nations UNDB United Nations Development Business UNDP United Nations Development Program UNHCR UN High Commissioner for Refugees UNICEF UN Children’s Fund UNIFEM United Nations Development Fund for Women USAID United States Agency for International Development WASH Water And Sanitation for Health WB World Bank WFP World Food Program WHO World Health Organization

Vice President Philippe H. Le Houerou Country Director: Motoo Konishi Country Manager Alexander Kremer Sector Manager: Kazi M. Matin

Task Team Leader: Afsaneh Sedghi

KYRGYZ REPUBLIC Emergency Recovery Project

CONTENTS

Page

A.  Introduction ...................................................................................................................................... 1 

B.  Emergency Challenge: Country Context, Recovery Strategy and Rationale for Proposed Bank Emergency Project .................................................................................................................................... 2 

C.  IDA and Donor Response ................................................................................................................ 8 

D.  The Project ..................................................................................................................................... 13 

E.  Appraisal of Project Activities ....................................................................................................... 17 

F.  Implementation Arrangements and Financing Plan ....................................................................... 19 

G.  Project Risks and Mitigating Measures ......................................................................................... 21 

H.  Terms and Conditions for Project Financing ................................................................................. 25 

Annex 1: Detailed Description of Project Components ......................................................................... 26 

Annex 2: Results Framework and Monitoring ....................................................................................... 31 

Annex 3: Summary of Estimated Project Costs ..................................................................................... 32 

Annex 4: Financial Management and Disbursement Arrangements ...................................................... 33 

Annex 5: Procurement Arrangements .................................................................................................... 35 

Annex 6: Implementation and Monitoring Arrangements ..................................................................... 39 

Annex 7: Project Preparation and Appraisal Team Members ................................................................ 41 

Annex 8: Environmental and Social Safeguards .................................................................................... 42 

Annex 9. Operational Risk Assessment Framework (ORAF) ............................................................... 46 

Annex 10: Statement of Loans and Credits ............................................................................................ 49 

Annex 11: Country at a Glance .............................................................................................................. 51 

Annex 12: Maps ..................................................................................................................................... 53 

List of Tables

Table 1: Impact of the Crisis in 2010 .............................................................................................. 3 

Table 2: Donors’ Support Provided for the Kyrgyz Republic in Response to the April and June events in different areas ................................................................................................................. 12 

Table 3: Kyrgyz Republic: External Budget Support for 2010 (Grants and Loans) .................... 14 

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KYRGYZ REPUBLIC

EMERGENCY RECOVERY PROJECT

EMERGENCY PROJECT PAPER

EUROPE AND CENTRAL ASIA

Date: September 16, 2010 Team Leader: Afsaneh Sedghi Country Director: Motoo Konishi Sector Manager: Kazi Mahbub-Al Matin

Sectors: Oil and gas (50%); General economy (50%); Themes: Macroeconomic management (30%); Social risk mitigation (20%); Energy (50%)

Project ID: P123044 Environmental category: Category B Lending Instrument: Economic Recovery Loan

Joint IFC: Joint Level:

Project Financing Data [ ] Loan [X] Credit [ X ] Grant [ ] Guarantee [ ] Other: Credit /Grant: Total Bank financing: IDA Credit SDR 25.30 million (US$38.10 million)

IDA Grant SDR 21.10 million (US$31.90 million)

Proposed terms: Credit of 40 years to maturity including 10 years grace. Financing Plan ($m)

Source Local Foreign Total BORROWER/RECIPIENT 0.00 0.00 0.00 International Development Association (IDA) (of which US$15m is from CRW)

70.00. 0.00 70.00

Total: 70.00 0.00 70.00 Borrower: Kyrgyz Republic Responsible Agency: Ministry of Finance, Kyrgyz Republic

Estimated disbursements (Bank FY/$m)FY 2011 2012 Annual 50 20 Cumulative 50 70 Project implementation period: Start October 11, 2010 End: December, 2012

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Expected effectiveness date: October 9, 2010 Expected closing date: December 31, 2012

Does the project require any exceptions from Bank policies? Have these been approved by Bank management?

[ ]Yes [X] No [ ]Yes [ ] No

Does the project include any critical risks rated “substantial” or “high”? [X]Yes [ ] No

1. Project development objective: The objective of the Project is to assist the Recipient in: (a) strengthening the prospects for macroeconomic stability and the government’s fiscal resilience to meet the priority needs of its emergency recovery and reconstruction program; and (b) restoring and ensuring continuous provision of the basic energy (power/heat/gas) services with a focus on the affected areas so as to support economic output and provide adequate heating to population during the winter. Project description The project includes two components: (i) high priority expenditures pertaining to emergency recovery and reconstruction, and (ii) rehabilitation and repair of energy infrastructure and networks. Which safeguard policies are triggered, if any? Environmental Assessment

Safeguard and Exception to Policies Safeguard policies triggered: Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Projects on International Waters (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60)

[ x]Yes [ ] No [ ]Yes [ x] No [ ]Yes [ x] No [ ]Yes [ x] No [ ]Yes [ x] No [ ]Yes [ x] No [ ]Yes [ x] No [ ]Yes [ x] No [ ]Yes [ x] No [ ]Yes [ x] No

Does the project require any exceptions from Bank policies? Have these been approved by Bank management?

[ ]Yes [ x] No [ ]Yes [ ] No

Conditions and Legal Covenants: Financing Agreement

Reference Description of Condition/Covenant Date Due

Section I. A.2 (d), Schedule 2

The Recipient has entered into arrangements satisfactory to the Association with JSC PP, JSC OE, JSC KG, JSC SE, JSC VE, JSC JE, JSC BTS and KJKS for the transmission and proper maintenance of assets procured under energy component of the Project for the benefit of said JSC PP, JSC OE, JSC KG, JSC SE, JSC VE, JSC JE, JSC BTS and KJKS.

January 12, 2011

Section I. A.3, Schedule 2 The Recipient has ensured that the selection of Project sites for carrying out Component 2 (a) of the Project has been conducted in accordance with the procedures and selection methods and criteria set forth in the Project Operational Manual and agreed to with the Association.

December 31, 2012

iii

Section I. C.2, Schedule 2 The Recipient (i) prepared EMP satisfactory to the Association, (ii) disclosed EMP and conducted EMP consultations in accordance with the ESSAF, and (iii) not amended, suspended or abrogated any of the ESSAF provisions without the prior agreement of the Association.

Prior to the commencement of any works under the Project

Section I. C.3, Schedule 2 The Recipient has ensured that no land has been acquired and no activity involving resettlement and/or land acquisition has been undertaken.

December 31, 2012

Schedule 4 The Recipient has assured that only eligible essential goods and commodities are financed under the Project, including fuel, gas, office furniture and IT equipment for government entities that have been destroyed, school text books, supplies, furniture and equipment, trucks and their spare parts, telecommunications equipment; and critical medical equipment.

December 31, 2012

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INTERNATIONAL DEVELOPMENT ASSOCIATION EMERGENCY PROJECT PAPER

FOR A PROPOSED EMERGENCY RECOVERY PROJECT

TO

THE KYRGYZ REPUBLIC

A. INTRODUCTION

1. This Project Paper seeks the approval of the Executive Directors to provide an IDA Credit in the amount of SDR 25.30 million (US$38.10 million equivalent) and a Grant in the amount of SDR 21.10 (US$31.90 equivalent) to the Kyrgyz Republic for an Emergency Recovery Project (ERP) to address the impact of recent civil unrest and ethnic violence.

2. The proposed project will support implementation of the Recipient’s emergency program for social reconciliation, reconstruction and recovery. The project development objective is to assist the Kyrgyz Republic in: (a) strengthening the prospects for macroeconomic stability and the government’s fiscal resilience to meet the priority needs of its emergency recovery and reconstruction program; and (b) restoring and ensuring continuous provision of the basic energy (power/heat/gas) services with a focus on the affected areas so as to support economic output and provide adequate heating to population during the winter.

3. The proposed project seeks to achieve those objectives through the financing of: (i) high priority expenditures pertaining to emergency recovery and reconstruction, through purchases of essential goods and commodities for recovery, and (ii) rehabilitation and repair of energy infrastructure and networks to restore and ensure power, heat and gas services to affected areas. The latter comprises of procurement of fuel for thermal power plants and district heating systems and the urgent repairs of damaged networks for electricity, heating, and gas supply in the affected areas.

4. The latter comprises of procurement of fuel for thermal power plants and district heating systems and the rehabilitation and repair of power generation and distribution systems and the urgent repairs and rehabilitation of damaged infrastructure and networks for electricity, heating and gas supply in the affected areas.

5. Following a period of economic growth and falling poverty in the opening years of this century, the Kyrgyz Republic was hit hard successively by the rise in food and energy prices in 2007-08, the global financial crisis from 2008, the disruption in regional energy cooperation and the ensuing global economic recession in 2009. These external shocks have hampered exports, inflows of worker remittances from Kazakhstan and Russia and overall economic activity. The authorities responded rapidly with a relaxation of fiscal and monetary policies and with stepped-up external borrowing which resulted in a modest growth of 2¼ per cent in 2009. The expectation in 2010 of accelerating spending on infrastructure, principally energy, to create the basis for sustained medium term growth was shattered with the political turmoil and civil disorder in April 2010 that led to looting and damage to private property, local businesses, and

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infrastructure. The economy was hit by a collapse of confidence, the closure of borders with Kazakhstan and Uzbekistan resulting in shrinking trade, and a contraction of overall output, all during this year. The massive civil unrest in April and ethnic violence in June not only caused damage to infrastructure and the economy, but also threatened social cohesion, peace and stability in the country.

6. Successful social reconciliation is an overarching priority of the Government’s emergency program, and a well-developed strategy for reconciliation is under preparation. The Bank, together with other donors, is supporting the preparation through advisory and technical assistance, including the restructuring of an existing technical assistance project; in addition a new Bank project is planned to support Government’s social reconciliation strategy more directly. Meanwhile, this project is proceeding quickly to strengthen the Government’s fiscal resilience for implementing its emergency program and to restore much needed energy services in the country, especially in the south. To date, the UN agencies, the USAID, the European Union (EU), the International Committee of the red Cross (ICRC) and several others have been providing immediate humanitarian, housing and social assistance to meet the urgent needs of the affected areas.

B. EMERGENCY CHALLENGE: COUNTRY CONTEXT, RECOVERY STRATEGY AND RATIONALE FOR PROPOSED BANK EMERGENCY PROJECT

Political Background

7. Since independence in 1991, the Kyrgyz Republic has advanced towards the creation of a liberal market economy with the aim of promoting sustained economic growth and fighting poverty, and has sought international integration through trade and investment, notably by membership of the World Trade Organization. It has met with some success in fostering open institutions, but has struggled to embed lasting democracy and civic freedom. Organization for Security and Co-operation in Europe (OSCE) missions have criticized the electoral process over the past decade as having fallen short of good practice. Elections for parliament in 2007 and for the president in 2009 were found to be deficient: regulations were changed arbitrarily and procedures ignored, sometimes at the last minute, leading to widespread public dissatisfaction with the process and its results. Over the recent past, the president concentrated power in his own administrative apparatus, weakened the national assembly, and circumvented ministries. Thus, checks and balances were removed, consultation over policies and accountability greatly reduced, and governance standards fell.

8. In April 2010, anti-government demonstrations flared up in various cities of the Kyrgyz Republic. This was directed at centralization of power within the presidency and the economic decisions taken without public consultation. The protests culminated in riots in Bishkek and several other cities in Kyrgyz Republic on April 7-8 and violent crackdown by the government, the subsequent removal of the president from office, and the formation of an interim administration headed by a coalition of opposition political and civic leaders. The provisional government quickly dissolved parliament and disbanded the constitutional court, which had been seen as too compliant to both the previous presidents of the Kyrgyz Republic. Provisional Government Decree No.1 concentrated the functions of the parliament, president and government with the provisional government.

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9. In June 2010, violent inter-ethnic clashes took place over three days, particularly in the cities of Jalalabad and Osh. The two cities and some neighboring areas erupted in a spasm of ethnically-directed violence and targeted arson. The interim president estimated that over 2000 people died and, nearly 400,000 displaced.

10. The provisional government drafted a new constitution that shifted the balance of executive power from a presidential system to a parliamentary one. The drafting process involved public consultations and a nation-wide debate. The constitution was approved in a nation-wide referendum on June 27, with an overall turnout of 72 percent and an affirmative vote of 91 percent. The turnout in the south of the country was 65 percent. The referendum vested the powers of the presidency with the current interim president until the next presidential election in autumn 2011. International observers characterized the conduct of the referendum as substantially fair and proper, noting the conditions of large displacement of population in the south. Under the new constitution, parliamentary elections will be held in October 2010 and a new government would be formed thereafter, with the powers of the president being greatly reduced. The caretaker government has restored stability, but social tensions continue to run high in the south and peace remains fragile.

Economic Impact

11. The political disturbances in April 2010 and the outburst of ethnic conflict in June 2010 comprised a significant shock to the economy. The events led to loss of life and injuries to persons, damage to infrastructure, destruction of private and public property, and weakening of confidence within the private sector. This has affected investment, including foreign direct investment, adversely impacted trade and services stemming from lack of security and several key border closures, seriously disrupted economic activity, increased fiscal pressures, and resulted in a significant loss in income per head. The economy is expected to contract sharply in 2010 in contrast to the robust growth envisaged prior to the crisis.

Table 1: Impact of the Crisis in 2010

Pre-crisis†/ Post-crisis Growth in GDP (percent) 4.6 -3.5 Non-gold real GDP growth (percent) 4.3 -4.6 GDP per head (US$) 943 818 Inflation (percent; end of period) 13.0 7.5 Fiscal balance (percent of GDP) -8.1 -12.0 FDI (US$ million) 248 175 External current account (percent of GDP) ††/ -15.2 -5.4 Budget support needed (US$ million) 175 253 Source: World Bank and IMF Staff estimates. †/Projections prepared in March 2010. ††/Pre-crisis projection includes planned imports related to new energy sector projects which were to be financed by external borrowing.

12. The economy is projected to shrink by 3.5 percent in 2010 and the fiscal deficit to jump to 12 percent of GDP, resulting mainly from a large one-off rise in public spending of around 5 percent of GDP on refugees and IDPs resettlement, rehabilitation, internal security, social protection and elections, construction of housing in the south, and the restructuring needs of a systemically-important bank, Asia Universal Bank (AUB). Spending has been redirected for

4

reconciliation, reconstruction and recovery to address the impact of political and ethnic disturbance. There are also other expenditures such as preserving the increase in pensions, (about ¾ percent of GDP) originally introduced in 2009 to compensate for the electricity tariff increase that was reversed in April because the authorities are reluctant to go back on a prior government commitment on a social benefit at a time of economic stress and political difficulty.

13. Agricultural gross value is expected to decline sharply in 2010 due to late spring planting following the April events, the suspension of fertilizer imports due to closed borders following the June events and reduced irrigation due to poor availability of diesel. The fall off in crop trading due to insecurity in the South also resulted in a disruption in retail distribution and the supply chain for agriculture. Critical sectors such as energy remain vulnerable to breakdown as a result of destruction or disrepair. This could lead to winter energy shortages, which in turn threaten stability and peace. Inadequate electricity and heat in winter could cause reoccurrence of conflict, as was the case in 2007/08 winters. Thus, restoring energy and essential public services remains a major priority for the government.

14. Through some fiscal relaxation, the authorities intend to provide a stimulus to economic activity and employment. Similarly, outlays on essential repairs and rehabilitation to infrastructure and the capital stock are intended to strengthen the supply base of the economy and in particular improve the reliability in energy supplies that is vital to continued economic growth and maintenance of social peace.

15. Recovery and reconstruction activities are expected to extend well into next year, in the course of which the economy is expected to begin to recover, provided peace and stability is maintained. The fiscal deficit will expand significantly and would require external financing in the amount of US$253 million in 2010. A highly tentative estimate of a budget financing requirement of US$225 million for 2011 has been made. Additional non-governmental support would also be critical in the reconstruction, recovery and rehabilitation effort. The total financing needs for the recovery and reconstruction program over the next 30 months is estimated at $1 billion,1 and donors have pledged US$1.1 billion in support over this period. A continuation of an adverse security environment and political uncertainty following the October elections would add to downside risks for 2011-2012.

Social Impact

16. The violent conflict in the south created new and deep social tensions that left many people bewildered, shocked and frightened. Although the immediate causes of the conflict remain unclear, key messages are emerging. First, there is a need to promote social and political stability and security as a foundation for economic and social recovery. Second, a focus on equity is essential to avoid a perception of unequal attention being given to particular ethnic groups, regions or types of beneficiaries. Such perceptions could aggravate inter-group tensions and fuel future violence. Interventions need to be part of a broader nationwide reconciliation, recovery and development effort. Third, strengthening the legitimacy of the state and reestablishing an impartial security regime capable of protecting all citizens are critical.

1 See the Joint Economic Assessment for details.

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17. The extent of the poverty and social impacts of the April and June events are still emerging. However, it is clear that the impacts will be nationwide, and the effect on both the economy and the society will be profound and long term. The unrest and violence took its toll in terms of death, destruction, disruption, and a large number of displaced persons who have lost their homes and their livelihood now face considerable uncertainty about their security and their future.

18. The post-crisis social burden arises from the widespread displacement with an attendant need for shelter before the onset of winter, not to mention long term housing, livelihoods-restoration and social services programs. There was large-scale destruction of public and private property, especially housing and commercial enterprises. Up to 3,450 houses, 700 commercial establishments and 79 public buildings were damaged or destroyed in the cities of Jalalabad and Osh, with, among other things, consequences for provision of government services. Support for the vulnerable groups affected by earlier natural disasters is important as well for reasons of equity and social peace. The JEA estimated private housing costs related to the destruction and damage at US$105 million. For commercial and public property, the estimate is US$240 million. Other physical damage relates to destruction to electricity transmission and gas and heating distribution systems in the south. These items are estimated at US$145 million. Thus total physical damages amount to US$490 million or the equivalent of 13 percent of GDP. The associated need for housing, livelihood support, social reconciliation and peace-building will need to be addressed in the interests of social stability. Conditions in the south of the country remain fluid with a continuation of low intensity ethnic conflict, sporadic security coverage and deep scars left by the violence.

Government Recovery Strategy

19. The interim administration responded to the events of April and June, 2010 with efforts at institutional reform, the introduction of a parliamentary system of government, an emphasis on fiduciary safeguards as part of an anti-corruption program, efforts to address the needs of the conflict-affected, commitment to protect essential social expenditure while deferring capital investments, attempts to strengthen confidence in the private sector, and a continuation of previous efforts at ethnic reconciliation through a participatory approach.

20. Aiming at preserving the social and economic stability of the country, the government emergency program has defined the priority directions for spending of the budget resources for the remaining part of 2010 as (i) compliance with the state obligations to the population (pensions, allowances, wages of public sector workers, (ii) capital expenditures (rehabilitation and reconstruction of the affected areas, construction of the residential sector and other social infrastructure, (iii) preparation for the fall-winter period to ensure adequacy of energy supplies and strengthened energy security; (iv) support to the agro-industry sector (fuel, lubricants, seeds, fertilizers, and other material and technical resources), and (v) solving the problems of refugees and payment of compensation to the affected population.

21. Protecting essential social expenditure. In light of budgetary pressures, the government took prompt action to protect certain expenditure categories from fiscal cuts. This included means-tested monthly cash benefits (MSB) for children from the poorest families; monthly cash payments extended to individuals unable to work and otherwise not entitled to pensions; other unemployment benefits; social transfers to the disabled, the elderly, orphans and war veterans;

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pensions; continued investment in public health care; routine education expenditure; social services; social insurance; salaries of civil servants; and expenditure on utilities. As such, there was no accumulation of arrears in any categories of the protected expenditures. Capital investments on the other hand were to be undertaken only when resources permit.

22. Addressing the needs of the conflict-affected. The interim administration responded to the June events by establishing an inter-agency Commission for the Assessment of Damages to assess the extent of destruction to property, livelihood and economic activity in the south. To respond to the impact in the south, a newly established State Directorate for Rebuilding and Reconstruction of Osh and Jalalabad, headed by a vice-prime minister, was established to lead the government’s reconciliation, recovery and reconstruction efforts in the south. The program for recovery centers on the restoration of livelihoods and the reconstruction of housing and of commercial enterprises and markets which will provide critical support to the economy and create jobs.

23. The Directorate aims at ensuring that the central government, local administrations, the private sector, international organizations and civil society make concerted and coordinated efforts to help Osh and Jalalabad. The Directorate has been holding intensive discussion with the representatives of donor organizations to coordinate assistance.

24. The government announced the key principles to apply to restore peace and promote recovery in the south. These include an even-handed approach in dealing with the affected people and taking into account the interests of the affected families. The key priorities that the Directorate identified in rebuilding and reconstruction of Osh and Jalalabad are: housing construction for the affected families, repair of schools, public and municipal buildings, restoration of social and health services, and rehabilitation of utility infrastructure - water, electricity and gas distribution networks.

25. At the donor conference in end-July, the government announced its commitment to provide full choice to displaced individuals and families in the design of housing solutions for them and not to resort to involuntary resettlement of any affected individual or family. The interim administration has committed to provide transitional shelter with UNHCR assistance for all those displaced. The interim administration is re-issuing identity and property documentation. It has sought UNDP and IDA support to enhance the capacity of the Directorate. It has also requested an OSCE police advisory group to bolster the capacity of the local security force and to supervise them with the ultimate purpose of reducing harassment by armed local groups directed at particular ethnic communities.

26. Communication strategy. During the project preparation the interim government has committed to develop a strong communication strategy to inform all potential beneficiaries of the aid resources, including resources provided by the Bank, about objectives of the donors’ help and the implementation methods in order to seek the opinion of potential beneficiaries. This will help to build trust between communities and the government, improve transparency about selection criteria and priorities, ensure equity in restoring services and eliminate ethnic bias. The government is also developing a grievance mechanism to introduce a feed-back communication into the implementation of projects financed by international community to support country’s recovery program.

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27. Reconciliation. Social reconciliation efforts have been in place in the south since 2008, following an earlier bout of conflict. This has entailed the establishment of a National Steering Board at the center, Oblast Advisory Committees chaired by the deputy governor in each of the seven provinces and pilot Local Authority Advisory Committees in nine districts. The committees are comprised of legislators, ombudsmen, academics, community leaders and religious heads with due regard to gender equity and ethnic diversity. The interim government is committed to a strengthening of this participatory approach. A successful approach will require an overall strategy and institutions capable of implementation, and the assistance of donors will be crucial.

28. Reform of the Executive. The interim administration has committed to roll back the concentration of power in the presidency, introduce checks and balances, and ensure public accountability. The new constitution, approved in a national referendum in late-June, represents a shift from a presidential system of government to a cabinet system headed by a prime minister answerable to parliament. It is intended to revive elected local authorities and widen consultation and debate through parliamentary and cabinet committees. The new system is expected to provide the foundation for effective policy making and accountability over use of public resources.

29. Strengthened Governance. The interim administration has endeavored to strengthen fiduciary probity. It introduced reforms in public financial management and improvements in the treasury system. Policy and investment decisions revert to the individual ministries where decisions would be taken with due consultation and accountability. It reversed last year's non-transparent privatization of two electricity distribution companies and a telecommunications company on account of procedural irregularities. It nationalized a commercial bank that faced acute liquidity problems. It is redrafting the law on privatization to ensure procedural safeguards and strengthening the role of the Ministry of State Property2 to ensure proper fiduciary standards in transactions involving public assets.

30. To strengthen public financial management and accountability and transparency in the use of resources from the state budget and other sources, the government established the Special Fund for Rehabilitation and Development of Osh and Jalalabad. Furthermore, the government set up a Steering Committee consisting of government officials and representatives from donor organizations and non-government organizations to ensure control over the use of resources for Jalalabad and Osh. The Directorate also set up its own web-site to provide information to the public on rehabilitation projects in Jalalabad and Osh as well as the use of financial resources.

31. The over-arching need is to help the Kyrgyz Republic attain stability and social cohesion as a necessary foundation for its economic growth and social development. This would not only require addressing the immediate effects of the conflict on the economy, society and infrastructure, but undertaking a range of activities, including a reformed impartial security regime capable of protecting all citizens, that build reconciliation among communities and between these and the state. It also requires strengthening the capital base through public and donor-funded investments to provide a bridge to the period when full confidence returns and private investment flows are resumed.

2 Successor of the State Property Commission.

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C. IDA AND DONOR RESPONSE

Introduction

32. As noted, the authorities acted quickly in the wake of the April and June events to formulate a response that has involved the assistance of a range of donors in providing strategic advice and finance. The immediate requirements were humanitarian and were effectively handled by a partnership between the government and the UN system as well as local and international non-government organizations. This was followed by the early recovery period focusing on adequate winterized housing, restoration of livelihoods, and access to essential services. Critically central to this entire process are the needs for social support and for reconciliation which must be implemented in parallel. The phase of reconstruction of durable housing and sustained livelihoods will follow in the months to take and will be a two to three year effort (see JEA for details).

IDA’s strategy of emergency support

33. IDA’s response has been structured in alignment with the government’s overall strategy, taking into account the emergency nature of the needs as well as imperative for thorough project preparation in its areas of intervention. IDA acted rapidly to prepare the proposed project so as to inject urgently needed funds into the economy in the interests of maintaining essential public services and supporting employment. IDA is now carefully preparing its intervention in support of social reconciliation. This requires a dialogue with the authorities and the elaboration of a strategy to encompass housing, livelihoods and social reconciliation.

34. The Bank’s strategy of emergency support is built upon its traditional strengths: diagnosis of the impact of the crisis and an assessment of emergency needs; promotion of cooperation amongst donors to ensure adequate financing of the emergency needs; and its own financial and advisory contribution to support recovery and rehabilitation.

35. Even prior to the April events, the Bank was engaged in an intensive dialogue on fiscal reforms, public expenditure priorities, and policies to sustain medium term growth. Immediately after the April events the Bank provided the authorities with a diagnosis of the impact of the events and intensified its dialogue on the economic and social response. The June events were followed by a multi-agency mission, as described earlier, that led to a formal assessment of economic and social needs and the constitution of a donor conference, co-chaired by the Bank, to obtain adequate funding over a 30-month period. The Bank, with the assistance of the IMF, has taken the lead amongst donors to ensure adequate funding for the budget in 2010.

36. The Bank’s financial contribution for the emergency response is constrained by FY11 being the final year of IDA-15, which eliminates the possibility of any front loading of IDA funds. The remaining IDA envelope of US$65 million, together with access to the Crisis Response Window (CRW) of US$15 million, will be fully deployed to address emergency needs. Specifically, the current operation will provide US$70 million with significant frontloading – about 50 percent of the amount will be disbursed within three months of Board approval and about 75 percent in the first year. Proposed additional financing for the National Road Rehabilitation (Osh-Batken-Isfana) Project will provide US$10 million. Moreover, some reallocations within the existing project portfolio will be targeted towards addressing the needs of

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the population in the south. Importantly, technical assistance will be re-directed towards assisting the authorities with preparing a comprehensive strategy and implementation plan for social reconciliation.

37. The emergency recovery operation will forestall a large decline in public expenditures, especially social expenditures, at a time when the fiscal accounts are under severe stress. The fiscal developments are a direct result of the external economic crisis and the events of April and June 2010. Remittances have fallen and household incomes, especially for the poorest households and the internally displaced population, are under pressure. Since fiscal pressures originate in part from the earlier global financial crisis, the use of the CRW is justified. The operation will help ensure no decline in real terms in social spending and will protect the budget from any recourse to arrears in payment. In light of the needs for substantial recovery and continuous provision of the energy services, the operation will finance emergency repairs and rehabilitation; the reconstruction of damaged priority infrastructure as well as electricity generation and distribution, and district heating and purchase of essential fuels. Demand for electricity peaks in the winter, when thermal plants and the district heating systems of Bishkek, Osh and certain other cities are brought fully on stream. It is vital to ensure the security of supply not only for basic human needs but also to support recovery of economic activity and employment. The budget for urgent rehabilitation of equipment and fuel required to operate the district heating systems at Bishkek, Osh and other urban centers is insufficient. Adequate arrangements are to be put in place to ensure supply of critically needed fuel for the central heating plants and to undertake urgent repairs to these plants.

38. The additional financing for the National Road Rehabilitation (Osh-Batken-Isfana) Project is aimed at providing connectivity in the south of the country so as to assist with the resuscitation of livelihoods in agriculture and the rural economy as well as provide linkages with the cities. It will also create much needed employment in the short run in an impoverished area of the country.

39. To address urgent social needs, the State and Peace-building Fund (SPF) resources in the amount of US$5 million are expected to be allocated as a grant. Technical assistance through the Capacity Building for Economic Management Project will help design the medium-term strategy for reconciliation, recovery, and reconstruction and assist with its implementation.

40. The Bank will support the Kyrgyz Republic’s request for additional IDA funds in the current fiscal year at the IDA review at the end of 2010. Should additional resources become available, the Bank will rapidly initiate dialogue with the new authorities (following the general elections of October 2010) on economic measures to reinforce the recovery and to address medium term social needs within a broad reform framework that would be supported by IDA financing. Specifically, it would then become possible to prepare a development policy operation for Board presentation in spring 2011. Budgetary support will be needed critically in the early months of 2011. The IMF is also expected to respond in early 2011 with a medium term facility and other IFIs are also expected to participate. The additional IDA allocation in the current fiscal year will also enable the preparation of an emergency project to address social reconciliation and livelihood restoration needs in the south of the country to build upon the technical work that is planned.

41. The Kyrgyz Joint Country Support Strategy –covering 2007-2010 which was prepared by donors active in Kyrgyz Republic— will be followed by a new strategy document in 2011.

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Support from other donors

42. The Joint Economic Assessment prepared by the international financial institutions (which incorporates the United Nations Flash Appeal) in coordination with the government established a framework for international assistance to the Kyrgyz Republic which was presented at a Donors’ High Level Meeting3 on July 27, 2010, during which donors pledged a total of US$1.1 billion for the next 30 months in support of recovery and reconstruction in the Kyrgyz Republic. Of this amount about US$671 million is allocated for the remaining months of 2010.

43. The JEA identified three major areas for external support: essential public expenditures and services for the country; additional social needs including resettlement and integration of internally displaced and affected populations in the south; rehabilitation needs for critical infrastructure destroyed or damaged including energy, transport and public buildings, especially in the south. More than half of the money pledged at the Conference is required in the near term with significant requirement for budget support. The Bank’s three-pronged response comprises coordination of a multi-donor effort to assess impact (the JEA) and a conference of external partners; adjustment of the existing Bank portfolio to restructure and reallocate funds where possible; and initiation of new operations, including the proposed Emergency Recovery Project (ERP).

44. As highlighted by the JEA, the assistance from the donors will need to focus on three main areas:

Support to essential public expenditures and services. Donors will help by providing resources for the budget to support salaries of teachers, doctors, and other budget-funded workers, and for payments for fuel oil and mazut. Funds are also provided for quick public works to help generate employment throughout the country. The budget financing gap was initially estimated at US$335 million in 20104.

Support to social needs. The resettlement of the internally displaced, and the needs associated with other affected populations, has put an unsustainable burden on fiscal resources. Through support for housing, livelihoods, social protection, and other social programs, donors will make an important contribution to the economic and social recovery. Social sector needs were estimated at $334 million, of which $96 million corresponded to the UN Flash Appeal.

Support to critical investments. The needs associated with destroyed private, commercial, and public buildings are closely tied with recovery prospects. Moreover, financing critical needs in essential infrastructure, energy, and transport will make a large contribution to reconciliation and peace building. Donor financing for such investments remains essential as a bridge to the period when the private sector resumes investing. Such financing would also help to enhance the economic security of the

3 The meeting organized by the Government of the Kyrgyz Republic and the World Bank was attended by representatives from 14 countries and 15 international organizations. 4 The external financing needs has been revised in light of economic developments to $253 million compared to what was reported in the JEA. http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/KYRGYZEXTN/0,,contentMDK:22670373~menuPK:305766~pagePK:64027988~piPK:64027986~theSitePK:305761,00.html

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country by strengthening energy and transport. Infrastructure support requirement is estimated at US$350 million.

45. Urgent humanitarian aid has been provided or committed by various donors involved in the Kyrgyz Republic. The UN agencies, USAID, and the EU were among the first donors to provide support for emergency and humanitarian assistance in Southern Kyrgyzstan in the form of emergency medical relief, food, temporary shelters and protection. Most of the bilateral assistance is being implemented through UNHCR, UNICEF, ACTED, ICRC, and Mercy Corps.

46. Budget support has become critical in helping the authorities under the current social and economic development. The ADB intends to provide US$45 million this year as an emergency budget financing. Support to the budget is also expected by the Anti Crisis Fund of the Eurasian Development Bank in the amount of US$120 million; the final decision will be taken by the Eurasian Development Bank Anti-Crisis Fund (ACF) in October 2010. The ADB will provide a programmatic operation for housing in the south and an investment operation for water and sanitation sector in the south for a further US$55 million.

47. In response to crisis, donors have adopted a number of measures concerning stabilization and confidence building aimed at promoting social stability and the establishment of a democratic constitutional framework. The EU is developing measures under the Instrument for Stability for a total amount of €7 million. A first phase of immediate action for €2 million has been identified to support the organization of the elections and the preparation of the democratic transition. The other measures to be supported will include reforms on the rule of law and monitoring by civil society on conflict prevention. Political reforms in the country, including the Referendum, are also being supported by Swiss Government.

48. Peace building and reconciliation programs for the south have been considered a high priority by most donors. UNDP is working closely with the Directorate under its Peace and Development Program, currently conducting a household survey in Jalalabad and Osh to define needs and demands of the Kyrgyz and Uzbek communities. This survey aims to find out what people think about the current developments and their views on reconstruction of Osh and Jalalabad. Under this initiative UNDP also plans to hire consultants who will help with the reconstruction of Jalalabad and Osh.

49. In addition, the Joint DFID-UNDP Conflict Sensitivity Review project launched in late 2009 is being utilized to develop conflict resolution activities in the south in collaboration with other donors. The project targets to determine conflict sensitivity level in projects financed by DFID and UNDP. The JEA provided a strong platform for coordination of donor assistance on maintaining essential public spending and for urgent social needs for the vulnerable population.

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Table 2: Donors’ Support5 Provided for the Kyrgyz Republic in Response to the April and June events in different areas

Humanitarian Support

Social Inclusion

Economic Development Economic Management Governance Infrastructure

Cou

ntri

es

China ERS Environment Budget Support

Japan IDPs Social Sector Support Private Sector,

Agriculture, Food Housing, Transport

Kazakhstan Energy Budget Support Korea IDPs Russia IDPs Budget Support Turkey ERS Budget Support

Swiss Government Children and Women

Temporary Employment

Political Reforms

US Government

ERS, WASH, Shelters, Coordination and

Logistics, Food Security, Health, Sanitation

Small-Scale Community Improvement

Economic Recovery

Org

aniz

atio

ns

ADB Budget Support

Roads, Housing Water/Sanitation

EBRD Private/Financial Sector Transport, Urban

EU Education, SSN, SP Policy,

Food Security Irrigation, Agro-

processing, Veterinary Stabilization, Democracy

Rural

EurAsEC ACF Health Budget Support Energy IDB Agriculture, Food IMF Budget Support UN Organizations

UNDP Peace Building Governance OHCHR Human Rights UNIFEM Gender WFP Food Security FAO Agriculture UNICEF Education, SP, Health WHO Health, Health Emergency UNHCR Shelters, IDPs

World Bank (IDA) State and Peace Building

Fund Energy emergency,

Quick disbursing support via financing of goods

purchased out of a positive list of eligible goods.

Roads, Energy

5 Information is based on pledges made at the Donors’ meeting of July 27, 2010. As of September 16, 2010, US$320m has been negotiated and/or disbursed outside of the UN Flash Appeal.

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Complementary in IDA and other donor activities

50. The table above indicates the role played by IDA in joining a package of critical budget support for 2010 in partnership with other IFIs. It also shows the gap in energy investments and repairs and rehabilitation that IDA is filling through an emergency operation to help ensure energy security over the winter. The roads project will provide employment and connectivity in the conflict-raged south of the country. Moreover, IDA will provide the central support for economic management and development through the envisaged series of development policy credits over the medium term. It will importantly support the development of a comprehensive social strategy and begin to put it under implementation from 2011, as discussed above.

D. THE PROJECT

Project Development Objectives

51. The objective of the Project is to assist the Government in: (a) strengthening the prospects for macroeconomic stability and the government’s fiscal resilience to meet the priority needs of its emergency recovery and reconstruction program; and (b) restoring and ensuring continuous provision of the basic energy (power/heat/gas) services with a focus on the affected areas so as to support economic output and provide adequate heating to population during the winter.

52. Half of the proceeds of the operation are devoted to the first objective. Under the project, the government will be reimbursed for Eligible Expenditures made prior to the date of the Financing Agreement but on or after November 1, 2009, in an aggregate amount not to exceed: (a) SDR 8,400,000 out of the Grant; and (b) SDR 10,100,000 out of the Credit (up to a maximum of 40 percent of the project amount, i.e., US$28 million) in accordance with a positive list of Eligible Essential Goods and Commodities specified in the Financing Agreement. The remaining funds supporting this objective, i.e., US$7 million equivalent, will be devoted to the reimbursement of payments made for Eligible Expenditures made after the project effectiveness. The reimbursements of expenditures on goods will strengthen the government’s fiscal resilience to finance high priority expenditures for reconciliation, recovery and reconstruction in the remaining months of 2010, especially in the conflict-affected cities of Jalalabad and Osh in the south of the country.

53. Quick disbursing budget support is being provided by a number of other international financial organizations and donors: the Asian Development Bank, the Eurasian Development Bank (Anti-Crisis Fund), the European Commission and the International Monetary Fund. Support from the Rapid Crisis Facility of the IMF will help to underpin macroeconomic coherence. A firm macroeconomic base and adequate financing for essential public expenditures is fundamental to the success of the Emergency Recovery Operation as well as to wider donor support which has been structured in line with the JEA (July 2010).

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Table 3: Kyrgyz Republic: External Budget Support for 2010 (US$ million)

2010 WB* 35 IMF 34 ADB 40 EU 15 EurAsEC ACF ** 120 Bilateral partners 10 Total 253 Source: World Bank and IMF * Corresponds to quick disbursement support for expenditures on

eligible goods. ** EURASEC Anti-Crisis Fund managed by the Eurasian Development

Bank. The decision on support will be taken at a meeting of the ACF in October 2010.

54. The second objective will address a key weakness of the Kyrgyz economy and a major source of risk to social stability and possible renewed conflict. The energy needs are closely tied to the government’s emergency program for reconciliation, recovery and reconstruction; basic provision of energy needs is essential to maintaining political stability and social peace as the cold winter months approach. The conflict in the south, as well as the preceding decisions taken by the Interim government immediately after the April events, led to the destruction of electricity infrastructure and exposed key rehabilitation needs, which, if unaddressed, pose a severe risk to the reliability of electricity supplies to households and enterprises. Moreover, the internally displaced in the south, in particular, will need restoration of energy supplies and the immediate objective is to restore power and gas supplies to these affected regions in the south as urgently as possible. In addition, energy security for the country would be greatly enhanced by undertaking certain high priority rehabilitation and repair tasks, and there is an urgent need, under tightened fiscal circumstances, to replenish energy fuel stocks. A well performing energy supply system is considered to be essential for social peace. It will also help sustain economic activity and employment.

55. Demand for electricity peaks in the winter, when thermal plants and the district heating systems of Bishkek, Osh and certain other cities are brought fully on stream. It is important to ensure security of supply not only for basic human needs but also to support recovery of economic activity and employment. The budget for urgent rehabilitation of equipment and fuel required to operate the district heating systems at Bishkek, Osh and other urban centers is insufficient. Adequate arrangements are to be put in place to ensure supply of critically needed fuel for the central heating plants and to undertake urgent repairs to these plants.

Summary of Project Components

56. In the context of competing priorities, the activities to be financed under the project have been selected with the following criteria: addressing urgent needs of the government’s emergency

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program while complementing other partners; readiness for implementation and potential to achieve rapid results. The project includes two components6:

57. Component 1. High Priority Expenditures Pertaining to Emergency Recovery and Reconstruction (US$35 million). This quick disbursing component is prepared in accordance with OP 8.00, paragraph 7(e) and intended to support essential public spending. Under this component, the operation will finance provision of Eligible Essential Goods and Commodities, as set forth in an agreed positive list, to support government’s high priority expenditures and provide the necessary liquidity needed to contribute to the implementation of the government emergency recovery program. The positive list agreed upon (fuels including diesel, gas, mazut; office furniture and IT equipment for government entities that were destroyed during the April events, school textbooks, furniture, equipment and supplies; telecommunications equipments trucks and their spare parts, critical medical equipment) are essential goods and commodities that were required for the Kyrgyz Republic emergency recovery and reconciliation program; and procured following procedures that satisfy the requirements of economy and efficiency (normally the national emergency procurement procedures of the Recipient). This component would include a maximum of US$28 million for retroactive financing of expenditures incurred and payments made no earlier than 12 months prior to signing of the project agreement.

58. Component 2. Rehabilitation and Repair of Energy Infrastructure and Networks (US$35 million). The second component of the operation will restore the damaged electricity, heat, and gas distribution systems with focus on Jalalabad and Osh regions and will consist of the three main sub-components: (i) restoring power, heat and gas supply to affected areas through the urgent repair and rehabilitation of damaged infrastructure and networks for electricity, heating and gas supply, (ii) carrying out the procurement of fuel for thermal power plants and district heating systems, (iii) rehabilitation and repair of power generation and distribution systems, and (iv) completion of activities approved for financing under the Financing Agreement for the Energy Emergency Assistance Project (Credit No. 4524-KG and Grant No. H429-KG) relating to the rehabilitation of the electricity and heating systems of the State Power Plants Company.

59. The component will address urgent operational bottlenecks through provision of limited number of equipment to the main power generation facilities such as Toktogul Hydro Power Plant (HPP) and Bishkek Combined Heat and Power Plant (CHP) as well as two additional power distribution companies. In addition, this component would provide the balance of funds necessary for the completion of procurements taken under Energy Emergency Assistance Project (EEAP; Credit 4524-KH and Grant H429-KG) after its closing date of May 31, 2011.

Eligibility for Processing under OP/BP 8.0

60. The proposed project is an Emergency Recovery Project (ERP) that is being processed under OP 8.00 in order to address and mitigate in part the adverse economic and social impacts of the political and ethnic turmoil in the Kyrgyz Republic, especially in the south. In line with OP 8.00 the Bank proposes to provide financial assistance to support the Government’s emergency program of reconciliation, recovery and reconstruction, together with other multilateral

6 Some amounts would be assigned within each component for project management and monitoring progress (see Annex 3).

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institutions and donors. This attends to the needs of the affected population in the south, and to rehabilitate the damaged infrastructure as a step towards recovery and peace building, and justifies the processing under OP 8.00 which offers streamlined and simplified procedures, and supports specific objectives to be supported through emergency assistance, including preserving or restoring essential services when the resources of the national budget are adversely affected by the crisis.

Consistency with Country Strategy

61. The Joint Country Support Strategy (JCSS) to support implementation of the Country Development Strategy (CDS) covering FY07–10 was discussed by the Board on June 19, 2007. A Mid-Term Progress Report in October 2009 assessed the progress in implementation of the JCSS and reviewed the overall strategic direction for the remaining JCSS period of 2009–10 in light of the impact of the regional and global financial crisis. Despite the recent political crisis and the ousting of the government in April and inter-ethnic clashes in the southern regions in June 2010, the main strategic directions of the JCSS remain valid, but need to be overplayed by considerations of emergency assistance. The proposed project is fully consistent with the objectives of the JCSS, particularly in the area of urgent needs for rehabilitation of the energy sector to improve reliability in supply, as well as ensuring availability of sufficient stock of fuel to reduce vulnerability of the population to shortfalls in electricity and heat particularly during the winter.

Expected Outcomes

62. The key outcome under the first component is expected to ensure adequate budget financing, as measured in percent of GDP, of social expenditures (defined to be education, health and social allowances for the poor). The intermediate results are: (i) no emergence of arrears in budget spending on protected items, including teacher and doctor salaries, pensions and social allowances, and (ii) appropriate use of Bank financing confirmed by the semi-annual audits. The interim administration has shown strong commitment to protect essential social expenditures. This was demonstrated in April 2010 when the Treasury delayed financing of unprotected spending so that protected budget items could be financed at 100 percent. Payments against unprotected expenditures were resumed only after the Kyrgyz Republic received a Russian grant in the amount of US$20 million to cover its fiscal gap. Monitoring by the government will focus on the continued administrative effectiveness of the social protection payments mechanisms (including in the conflict-affected parts of the country) and on transfers to schools and hospitals as well as other points for social service delivery.

63. The key outcomes for the second component are: (i) restoring access to power supply to households in the Osh and Jalalabad regions that lost power access due to June 2010 events, which would be monitored through a number of connections made, and (ii) maintaining the heat supply availability in Osh in 2010/11 winter at the levels equivalent to corresponding periods in 2009 and to be measured as a percentage of available heat outputs. The progress to the achievement of the PDO will be also assessed based on the number of restored gas connections and supply of fuel for Osh CHP, which are defined as intermediate outcomes of the second component of the Project.

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E. APPRAISAL OF PROJECT ACTIVITIES

Appraisal of Project Activities

64. The financing of purchases of essential goods and commodities will provide liquidity and safeguard the Government’s fiscal ability to support high priority expenditures needed for the emergency program. The rehabilitation and repair of energy infrastructure is expected to restore and ensure continued provision of energy services, including the affected areas of the south; this will be critical for the revival of economic activity and peoples’ lives in the winter.

65. The appraisal of the two components of the project focused mainly on the need to design activities which can provide a rapid response to the impact of recent civil unrest and social conflict as well as complement appropriately the activities of the Government and other development partners, both ongoing and planned. Also, additional Bank support to address other emergency requirements that are likely to take longer to develop, are planned to follow the proposed project. As a result the following activities were agreed between the Government and the Bank during appraisal:

Component 1. High Priority Expenditures Pertaining to Emergency Recovery and Reconstruction (US$35 million). As detailed in Annex 1, a positive list of goods and commodities was finalized during project negotiation and agreed upon (fuels including diesel, gas, mazut; office furniture and IT equipment for government entities that were destroyed during the April events, school textbooks, furniture, equipment and supplies; telecommunications equipments trucks and their spare parts, critical medical equipment) as essential goods and commodities that were required for the Kyrgyz Republic emergency reconciliation, reconstruction and recovery program. Most of the items in the agreed positive list relate to those that were damaged or destroyed during the unrest and violence, especially in the south. In addition, this component would finance purchases of these goods both retroactively and prospectively; for the retroactive part they would have to have been procured following procedures that satisfy the requirements of economy and efficiency (normally the national emergency procurement procedures of the Recipient) and for the prospective part, they would have to follow Bank’s procedures and processes. A review and assessment of contracts from November 2009 was conducted during appraisal to identify past purchases that could potentially be financed retroactively, and was estimated to amount to $28 million (i.e. 40 percent of total project); these past purchase of essential goods were incurred and paid within the twelve months before the effectiveness of the operation. Documentation in support of the retroactive amount was collected to begin Bank’s due diligence process so as to facilitate the initial disbursement soon after project effectiveness.

Component 2. Rehabilitation and Repair of Energy Infrastructure and Networks (US$35 million). This component will consist of (a) restoring power, heat and gas supply to affected areas through the urgent repair and rehabilitation of damaged infrastructure and networks for electricity, heating and gas supply, (b) carrying out the procurement of fuel for thermal power plants and district heating

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systems, (c) rehabilitation and repair of power generation and distribution systems, and (d) completion of activities approved for financing under the Financing Agreement for the Energy Emergency Assistance Project (Credit No. 4524-KG and Grant No. H429-KG) relating to the rehabilitation of the electricity and heating systems of the Government’s Power Plants Company. A number of urgently needed investments have already been identified and include: supplies of transformers, poles, conductors, wires, and other needed materials and spare parts for power distribution companies to restore damaged power systems and pipes, valves, gas (stoves) and meters, and other equipment for KyrgyzGas (see Annex I for detail).

66. Implementing Arrangements. The Ministry of Finance (MOF) Project Implementation Unit (PIU) is fully functional with a proper complement of staff and operational information systems. The PIU has in place operational manuals which detail the segregation of duties and internal controls over transactions and payments. The current financial reporting framework used by the PIU is comprehensive and has been found to be sufficient to monitor the current active projects. In addition, for implementation of the second component of the Project, a separate Joint Energy Project Implementation Group (JEPIG) of the Ministry of Energy (MOE) has been set up using resources of existing energy PIUs and is staffed with experienced personnel. This operation will use these existing formats to comply with the requirement to produce interim financial reports (IFRs). Consistent with the current reporting scheme, the IFRs for the emergency operation will be produced on a quarterly basis and will be required to be submitted to the Bank within forty-five days after each quarter. The external audit will be contracted to a private firm, will have a semi-annual periodicity and will have a broader scope than a purely financial statement audit to also verify the delivery and distribution of critical goods procured under this project.

67. The environmental category for the proposed project is B. The proposed project activities financing of purchase of essential goods and commodities and the rehabilitation of the existing energy infrastructure, trigger only the Environmental Assessment safeguard policy.

Lessons Learned

68. The proposed Project draws on the key lessons from the recent Progress Report that assessed past emergency Bank operations:

The project design and project activities should be kept simple to ensure that the requirements for implementation are consistent with existing capacity on the ground, so that rapid results can be achieved under emergency conditions.

Experienced and tested implementation agencies have proven most useful for emergency operations to achieve quick results. Leveraging existing implementing structures which already meet Bank’s fiduciary standards and have good knowledge of Bank procedures (like MOF & JEPIG in this project) will be critical to achieving quick results; the proposed project builds on the existing structures such that the staff in charge of project implementation are fully operational upon project effectiveness.

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Substantial hands-on Bank involvement has also been important for effective implementation of emergency projects. The proposed project intends to have frequent supervision missions, frequent procurement post-reviews and close Bank country office staff involvement to help mitigate risks to its implementation.

More specifically, lessons learned from the Bank’s emergency energy operation in Kyrgyz Republic in 2008, and its follow-up additional financing in 2009, have been incorporated in the proposed project. A key lesson from those Kyrgyz projects is the usefulness of a design that accommodates the use of funds to jump-start implementation of the critical activities either from the Government’s own resources, or other sources, even before the project becomes effective; the proposed project thus incorporates retroactive financing. Experience with the procurement process and contracting for these earlier projects is built into the design of packages and contract terms for the proposed project; technical specifications and samples of bidding documents are being used here from earlier Bank projects. The formation of the PIU for this project, including identification of skill gaps to fill, have been based on Bank experience in those earlier projects in the Kyrgyz Republic and hence the setting up of the Joint Energy Project Implementation Group (JEPIG) as the PIU in the Ministry of Energy, using the most experienced staff from all the energy companies.

F. IMPLEMENTATION ARRANGEMENTS AND FINANCING PLAN

69. In view of the importance of rapid disbursements against the urgent emergency needs being faced by the country, the operation has been designed to make full use of the implementation arrangements that are already in place and which have been used under earlier Bank-financed projects. The MOF will be responsible for the implementation of the overall operation with some project management functions devoted to JEPIG of MOE for specific activities/components. Specifically, on the first component, the MOF will be responsible for procurement, i.e., the identification of expenditures against the positive list eligible for reimbursement with a retroactive amount up to 40 percent of the project, and for financial management.

70. Given the multi-faceted nature of the energy component (Component 2), a separate Joint Energy Project Implementation Group (JEPIG) has been set up at the Ministry of Energy (MOE) using resources of existing energy sector PIUs at the Joint Stock Company “National Electricity Grid” (NEG), which is staffed with experienced personnel. The JEPIG is headed by the Deputy Director General of NEG. These personnel have been involved in the implementation of various donor funded projects. The Ministry of Energy, through JEPIG, will be responsible for implementation of this Component (except Financial Management and Disbursement functions) including procurement, supervision, monitoring, and reporting. Reports will be submitted to MOF for further consolidation. JEPIG would be further strengthened with experienced project and technical officers/staff from existing PIUs and elsewhere to speed-up the implementation. In view of the limited preparation time and capacity in the JEPIG and the Ministry of Energy, it is planned to implement investments in phases. The initial phase would include activities/goods that are clearly defined and for which procurement can start immediately. In parallel, development of the subsequent activities would be undertaken to initiate the procurement process. In addition, proceeds of the ongoing EEAP would be used to enable early commencement of procurement under the Component 2 and to be used for consultancy services and advance payments.

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71. Financial Management Arrangements. The MOF PIU will be responsible for financial management for the whole operation and in particular, for executing all operational transactions. The PIU will coordinate with other implementing entities (e.g., MOE JEPIG) to ensure the receipt/delivery of goods prior to executing payments to vendors/suppliers. The MOF PIU will be responsible to report to the Bank on all project activities/components, including those activities managed or implemented by other government agencies. The MOF PIU will also be responsible for ensuring the timely completion of the semi-annual audits. More details on the project financial management arrangements are provided in Annex 4.

72. Disbursement Arrangements. The project will have retroactive financing which will finance up to US$28 million of goods and commodity purchases already incurred by the government in the 12 months preceding credit/grant signing. Disbursements will be made on the basis of full documentation for (i) contracts for goods costing more than the equivalent of US$500,000 each; (ii) contracts for works costing more than the equivalent of US$1million each; (iii) contracts for consulting firms costing more than the equivalent of US$100,000 and for individual consultants contracts costing US$50,000 equivalent or more. Disbursements below these thresholds would be made according to certified Statement of Expenditures (SOEs). For all expenditures financed under Statement of Expenditures (SOEs) full documentation in support of the SOEs will be retained in the PIU for at least two years after the project closing date of December 31, 2012. This information will be available for review by Bank missions during project supervision and by the projects auditors. SOEs will be audited in conjunction with the semi-annual audit of the project. Further instructions on the size of the Minimum Application and on how funds will be withdrawn from this Credit/Grant will be provided in the Disbursement Letter.

73. Procurement Arrangements. The procurement under Component 1 will be carried out by the existing MOF PIU that has acquired practical procurement experience through implementation of the on-going Bank financed projects. The procurement under Component 2 will be conducted by MOE JEPIG under the overall oversight of MOE. JEPIG personnel have implemented Bank financed projects (including emergency operations) and are familiar with the Bank procurement procedures. The procurement staff that has attended the Bank procurement training and managed Bank financed procurement will provide procurement support to JEPIG. In addition, in view of the heavy procurement workload under Component 2, at least two more experienced procurement consultants will be hired by JEPIG.

74. The Bank procurement procedures (including the “Guidelines for Procurement under IBRD Loans and IDA Credits” and “Guidelines for Selection and Employment of Consultants by World Bank Borrowers”, both published in May 2004, and revised in October 2006 and May 2010; as well as the “Streamlined Procurement Procedures” Guidance Note dated June 2009) will apply to the project-financed activities, except the expenditures already incurred (and to be reimbursed through retroactive financing arrangement) for which the national procurement rules have been followed and found acceptable by the Bank in view of the direct contracting arrangement under exclusive supply situation. More details on the procurement arrangements, including a simplified procurement plan, are provided in Annex 5.

75. World Bank supervision, monitoring and evaluation. Given limited personnel and technical capacity, poor governance environment, and the need for results, formal supervision will

21

be carried out during the period of implementation. To enhance the efficiency of the supervision, the core team will consist of Bishkek Country Office staff, Central Asia Regional Office (CARO) office staff (including economist, Financial Management (FM) specialist, and procurement specialist) and experienced task team leader and energy specialists from the World Bank headquarters. Speed, technical soundness and coordination will be particularly important to implement the second component of the project. Consequently, energy component implementation will be rigorously supervised at least during the first six months of implementation in order to jumpstart critical works before and during the winter season. As part of the Bank’s supervision efforts, additional efforts will be made to monitor the progress and the results of the project. Adequate provision will be made in the supervision budget. Consistent with OP/BP 8.00 operations, supervision funding for the emergency operations are often at levels above standard Regional budget allocations.

76. Implementation Support Plan. As this is an emergency operation with a significantly increased level of financing over previous operations, there is a need to have more frequent project visits and to provide more regular implementation support - at a minimum, financial management support and implementation support/supervision mission will be required every quarter (immediately after the retroactive disbursement is executed) for the first year of implementation and then converting to a semi-annual schedule in year 2 and beyond. In addition to the work of the auditors and apart from conducting regular transaction reviews, the Bank team will also need to examine the goods delivered, and to visit sites to ensure that the delivery of goods is reaching the intended population/areas of need throughout the country.

77. Monitoring efforts will include monitoring the performance of the energy sector and verification of the physical deliveries and inventories of the equipment and material procured under the two components of the project. A monitoring and reporting system will be set up in the PIU and JEPIG to track progress on the ground. Project progress will be monitored primarily through the use of intermediate results indicators that will be captured from administrative data that is tracked in the project’s management information systems (MIS) of implementing PIUs. Results of the project will be evaluated per the outcome indicators shown in the Results Framework (see Annex 2).

78. The activities financed under the Emergency Recovery Project are expected to be fully implemented by the end of 2012.

G. PROJECT RISKS AND MITIGATING MEASURES

79. The overall risk rating for the project during implementation is high. The project faces country level risks as well as risks specific to implementation of the project and achievements of its objectives, given the country’s fragile social, political and economic situation. There are various measures that are expected to be adopted that will mitigate risk, including those relating specifically to sub-components. However, not all risks can be mitigated.

80. On the other hand, the risks of an inadequately prompt response by the government and its development partners are also high. Social tensions in the south can be reduced significantly by protecting vulnerable populations, promoting social reconciliation, ensuring political legitimacy and stability, focusing on equity across ethnic groups in restoration and provision of public

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services, and reviving livelihoods and economic activity in affected areas. With the rising demands on public spending and public administration, strengthening fiscal resilience of the Government quickly to implement its emergency program will contribute to a more effective response; the restoration of damaged infrastructure and energy services and their favorable impact on economic activity and peoples’ lives are also expected to contribute to that end.

Country level risks and mitigation measures

81. There are several country level risks that are relevant for the project: political and social risks, governance risks, administrative control risks and of course economic risks stemming from both internal and external sources.

82. The political and social risk arises from the potential for recurrence or intensification of social strife in the south that occurred in mid-June and from possible dissatisfaction with the ongoing political process. Tensions and insecurity in the affected regions persist and the risk of future eruptions of violence and social strife remain, with a potential for aggravation during the upcoming parliamentary elections. A recurrence of social strife and/or political instability will worsen the climate for the efficient absorption of donor financial support. The Government and the development partners are conscious of these risks and are adopting mitigating measures. A well formulated political process that is under implementation will help in that regard. The redrafting of the constitution including the referendum endorsing the new constitution, the announcement of parliamentary elections in October this year, as well as broad-based international support as manifested in a successful donor conference have stabilized the political situation. Ensuring fair and inclusive elections will be important too, as will the effective functioning of the new parliament. Social reconciliation is an overarching priority for the Government and the development partners; a well developed strategy is under preparation and donors, including the Bank, are lined up to support its implementation as soon as it is completed. Meanwhile donor support with immediate humanitarian, housing and social assistance and improvement in security of vulnerable populations, have been contributing towards reducing social risks.

83. The risk of inadequate central government administrative control, especially over the southern parts of the country exists, and is relevant for the implementation of local activities. National-level institutions have been hollowed by years of centralized presidential rule, and the run-up to the elections could distract political attention and make this more problematic. Criminal activity, in part associated with the lucrative transport of illicit drugs through the south, and consequent struggle over rent-seeking activities complicate implementation of project activities. The President and her administration have improved central control considerably. The proposed project activities are being carried out by central entities and ministries that have considerable experience and expertise of implementing projects under difficult conditions with no direct role for local authorities. Nevertheless, a fuller mitigation of this risk is beyond the scope of the proposed operation.

84. There are governance risks, in terms of checks and balances as well as accountability in public finance area, with some of these higher due to unsettled conditions. The previous government had taken some actions that worsened transparency and accountability in government activities and provided opportunities for special interests to divert resources; the caretaker government has begun to take steps to reverse several of the earlier actions. Mitigating the public

23

financial management (PFM) risks will entail establishing, empowering and supporting the technical team from the MOF and the Treasury with the tools and techniques to effectively cope with additional expenditure management needs and to reduce the political pressure on the budget process. Particular attention should be paid to rigorous control, reporting and monitoring of expenditures mobilized for recovery and reconstruction in the south. It is also expected that the oversight institutions, the Parliament budget committees, and the chamber of accounts, will play a stronger role under the new government.

85. Economic risks arise from weaker economic growth and greater fiscal stress that threaten livelihoods and essential social expenditures. The economy is projected to shrink by 3½ percent in 2010 and recover modestly in 2011. Greater fiscal pressures due to further weakening of economic performance would affect government’s ability to pursue the recovery agenda and seriously impact the Project Development Objectives. These risks will be mitigated through a combination of external financing of the budget for 2010 and continued prudent fiscal management. Donors, including the ADB, the EC, the EDB-ACF, IDA, and the IMF have ensured adequate financing of the 2010 budget. The IFIs have been advising the government prioritizing expenditure items in the light of sharp fiscal pressures. The authorities have identified clear priorities in public spending and have successfully protected essential expenditures. Budget support in the amounts assessed by the JEA, particularly if provided rapidly, would go a long way towards implementation of the emergency program of reconciliation, recovery and reconstruction.

86. Some of the economic risks stem from external sources. There are at least three external sources of economic risk (i) continued border closure by Uzbekistan and the closing of some border crossing points with Kazakhstan; and (ii) the introduction and enforcement of the recent Customs Union in the region, and (iii) the weakening of integrated Central Asia regional power system. The border with Uzbekistan continues to be closed, imposing severe limitations on movements of goods. The Kazakhstan border closure is having a disruptive effect on production and trade, and lead to impoverishment of border communities. The coming into effect of the Belarus-Kazakhstan-Russia customs union will dampen Kyrgyz re-exports depending on how strictly it is enforced. Finally, the weakening of the Central Asia regional power system and absence of long-term power transit and summer export arrangements with neighboring countries means that longer term investments maybe needed before power supply is sufficiently secure. Keeping open the channels for trade flows as well as ensuring a smooth, uninterrupted operation of the common electricity grid that links these three countries are important contributors to stabilization.

Project level risks and mitigation measures

87. The project level risks relate to overall implementation and to implementation of specific sub-components. Overall implementation risks arise from institutional capacity, procurement, and fiduciary issues. In addition, there are risks specific to sub-components that need to be mitigated by project actions.

88. The proposed operation is expected to be implemented expeditiously though general weakness in the institutional and human capacity and large emergency demands poses a risk. To minimize the institutional capacity risks the operation has been designed to rely on existing management capacity in the MOF PIU to act as the central executing agency (e.g., management of funds), while coordinating with other agencies for their technical capacity to prepare bidding

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documents and oversee the import of critical goods. Moreover, Public Finance Management (PFM) reforms implemented over last decade have resulted in a gradual formation of a professional technical team in the MOF, Treasury and MOE. The first component, purchasing essential goods, with a large share of retroactive financing, helps to mitigate this risk. The second component on repair and rehabilitation of energy services, including the south, will face a higher risk in terms of their absorption capacity and speed of implementation. Fortunately, JEPIG has experienced capacity in implementing emergency projects.

89. Delays in the procurement of goods, materials and equipment due to demands on and capacity of implementing unit staff as well as limits on capacity of suppliers is an important risk for the project. This risk will be mitigated through a combination of advanced project preparation actions like early finalization of the procurement plan and bidding documents, early start of some procurement activities, use of simplified procurement procedures and close monitoring of the procurement progress. Sometimes, the limited capacity of suppliers to deal with Bank processes poses a risk, as has happened in earlier emergency energy projects, where potential suppliers are reluctant to accept the Bank bidding documents and requirements, such as Bank guarantees. It is planned to mitigate this risk by providing briefings early on to potential suppliers about World Bank bidding documents standard rules and requirements. Simplified bidding documents will be used to increase flexibility.

90. Experience with the past and on-going projects show frequent procurement delays and inadequate competition in procurement. Limited availability of competent procurement staff and lower-than-required quality of equipment result in inadequate contract management and delays in procurement. This procurement delay risk is expected to be mitigated through (i) careful procurement planning and realistic scheduling, (ii) advanced preparation of technical specifications, (iii) additional procurement training during project implementation; (iv) careful procurement packaging to foster competition with wide advertising and proactive search of potential suppliers, and (v) close Bank supervision and monitoring.

91. Fiduciary and financial management risk for the project remains substantial notwithstanding significant improvements in processes and practices of the implementing units for this project. The external and internal financial control systems, state procurement, budget and financial procedures, and government reporting systems are in place but they function imperfectly. The internal audit system is at an early stage and cannot provide assurance of the legality, effectiveness, and efficiency of the use of public funds. The fiduciary risks will be mitigated in part through (i) financial management and procurement safeguards and established procurement and financial management information system, (ii) enhanced supervision by the task team, including more rigorous on-the-ground supervision at least during the first six months, and (iii) mandatory biannual external auditing of the budget expenditures by and internationally recognized auditor.

92. The second component of the project relating to repair and rehabilitation of energy infrastructure, especially in the south, is the most exposed given the sensitivities in that region. It has three sub-components – provision of supplementary fuel for thermal plants; supply of some urgently needed equipment for power generation; and repair and restoration of access to energy services, especially in the south – and not all of them are equally risky. Activities under the first two sub-components are relatively low risk. On the other hand, the third component relating to repair and re-connection faces much higher risks due to destruction and rebuilding of housing and

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existing social and ethnic tensions. This risk arises from existing social tension from perceived inequity of access or connection, or even the timing of these connections by the project. This risk can be mitigated, probably only in part, through the use of official damage certification documents already prepared by utility companies and signed with all the stakeholders. Close coordination with other development partners, in particular, UNHCR is being ensured to prioritize project areas. Additionally, the resources provided under this sub-component are expected to amply cover the immediate needs of all the damaged areas, thus substantially reducing risks of areas remaining un-served. In addition, a proper communication system would be developed, and inserted into the Project Operations Manual, to inform about the available grievance/appeal procedures and scope of planned works. The Environmental and Social Screening and Assessment Framework (ESSAF) will be prepared by the client and agreed with the Bank specifying measures to mitigate identified potential environmental and social risks.

93. Institutional capacity of the involved sector-level institutions has diminished by the practice of politically-driven staff turnovers. To minimize the institutional capacity risks the operation has been designed to rely on existing management capacity in the MOF PIU to act as the central executing agency (e.g., management of funds), while coordinating with other agencies for their technical capacity to prepare bidding documents and oversee the import of critical goods. Moreover, PFM reforms implemented over last decade have resulted in a gradual formation of a professional technical team in the MOF, Treasury and MOE.

H. TERMS AND CONDITIONS FOR PROJECT FINANCING

94. The proposed Emergency Recovery Project would consist of an IDA credit of US$38.1 million and an IDA grant of US$31.9 million. An amount of US$15.6 million of the total project is funded from the Crisis Response Window (CRW). IDA credits to the Kyrgyz Republic are of 40 years maturity, 10 years grace.

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Annex 1: Detailed Description of Project Components

KYRGYZ REPUBLIC: Emergency Recovery Project

1. The objective of the Project is to assist the Kyrgyz Republic in: (a) strengthening the prospects for macroeconomic stability and the government’s fiscal resilience to meet the priority needs of its emergency recovery and reconstruction program; and (b) restoring and ensuring continuous provision of the basic energy (power/heat/gas) services with a focus on the affected areas so as to support economic output and provide adequate heating to population during the winter.

2. The Project consists of the following parts, subject to such modifications thereof as the Government and the Bank may agree upon from time to time to achieve said objective:

3. Component 1. High Priority Expenditures Pertaining to Emergency Recovery and Reconstruction (US$35 million). The component includes:

(a) Provision of Eligible Essential Goods and Commodities, as set forth in the Financing Agreement.

(b) Carrying out Project management activities in areas of implementation, audit, monitoring and evaluation as well as in the coordination of Project management activities.

4. This quick disbursing component is prepared in accordance with OP 8.00, paragraph 7(e) and intended to support essential public spending. Under this component, the operation will finance provision of Eligible Essential Goods and Commodities, as set forth in an agreed positive list, to support government’s high priority expenditures and provide the necessary liquidity needed to contribute to the implementation of the government emergency recovery program. The positive list agreed upon (fuels including diesel, gas, mazut; office furniture and IT equipment for government entities that were destroyed during the April events, school textbooks, furniture, equipment and supplies; telecommunications equipments, trucks and their spare parts, critical medical equipment) are essential goods and commodities that were required for the Kyrgyz Republic emergency recovery and reconciliation program; and procured following procedures that satisfy the requirements of economy and efficiency (normally the national emergency procurement procedures of the Recipient).

5. This component would include a maximum of US$28 million for retroactive financing of expenditures incurred and payments made no earlier than 12 months prior to signing of the project agreement. A review and assessment of contracts from November 2009 to August 1, 2010, was conducted to identify a retroactive financing of US$28 million acceptable to the Bank which could be provided to finance purchase of essential goods incurred and paid for within twelve months before signing of the operation. Documentation in support of the retroactive amount was collected to facilitate the initial disbursement soon after project effectiveness.

6. The remaining funds supporting this objective, i.e., US$7 million equivalent, will be devoted to the reimbursement of payments made for Eligible Expenditures made after the project effectiveness. The reimbursements of expenditures on goods will strengthen the government’s fiscal resilience to finance high priority expenditures for reconciliation, recovery and

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reconstruction in the remaining months of 2010, especially in the conflict-affected cities of Jalalabad and Osh in the South of the country.

7. Component 2. Rehabilitation and Repair of Energy Infrastructure and Networks (US$35 million). The development objective of the second Component would be to help the Kyrgyz Government to restore and ensure provision of the basic energy (power/heat/gas) services at the levels before the events with a special focus on the southern regions. This objective would be realized through: (i) provision of urgently needed goods, materials, and tools for repair and rehabilitation of power and gas systems in the southern regions, (ii) supplement fuel stocks for the thermal plants in the shortest possible timeframe, (iii) provision of goods and materials for rehabilitation of selected country power generation and distribution assets and district heating system so as to support economic activity and to keep the population warm in the severe winter months. The goods and materials would include transformers, poles, wires, meters for the power distribution companies; pipes, valves, gas stoves, meters for the gas distribution company, as well as critically needed equipment, such as circuit breakers, transformers, and pumps for the power generation and heat distribution companies. In addition, this component will provide the balance of funds necessary for the completion of procurements taken under Energy Emergency Assistance Project (EEAP; Credit 4524-KH and Grant H429-KG) after its closing date of May 31, 2011.

8. Component Description. This would consist of the following:

Restoring power, heat and gas supply to Affected Areas through the urgent repair and rehabilitation of damaged infrastructure and networks for electricity, heating and gas supply.

Carrying out the procurement of fuel for thermal power plants and district heating systems.

Rehabilitation and repair of power generation and distribution systems.

Completion of activities approved for financing under the Financing Agreement for the Energy Emergency Assistance Project (Credit No. 4524-KG and Grant No. H429-KG) relating to the rehabilitation of the electricity and heating systems of the State Power Plants Company.

Carrying out Project management activities in areas of implementation, audit,

monitoring and evaluation as well as in the coordination of Project management activities.

9. In view of the limited preparation time the above activities will be carried out in two phases. The initial phase would include activities/goods that are clearly defined and for which procurement can start immediately. In parallel, development of the subsequent activities would be undertaken to refine the balance activities and initiate the procurement process.

(a) Restoring power, heat and gas supply to Affected Areas through the urgent repair and rehabilitation of damaged infrastructure and networks for electricity, heating and gas supply.

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(i) OshElectro and JalalabadElectro will be supplied with necessary equipment and material, and erection support to restore the damaged electricity supply network in the regions of Osh and Jalalabad. The equipment and material would include distribution transformers, switchgears for protection and control, poles, cables, wires, meters, and other essentially needed materials, equipment, and spare parts. Supplies of construction machinery and equipment such as cranes, excavators, bulldozers will support their repair/rehabilitation efforts in speediest restoration of the services to the population.

(ii) Kyrgyz Gas will be supplied with urgently needed pipes, valves, meters, gas

appliances, and construction machineries. This will allow for speedy completion of gas supply system repair, beginning from the trunk pipelines to the end user. As a result, gas would be available for all purposes including for heating, cooking, and water heating.

(b) Carrying out the procurement of fuel for thermal power plants and district heating

systems. It is envisaged to cover supplemental fuel oil (mazut) and possibly gas to ensure heat supply for Osh Combined Heat and Power plant (Osh CHP) that generates and supplies Osh with heat and KyrgyzJilCommunSouz (KJKS) that runs the local boiler houses and local district heating systems in many smaller towns throughout the country.

(c) Rehabilitation and repair of power generation and distribution systems.

(i) Power generation. The Toktogul HPP station is the main generation plant in the

Kyrgyz Republic and mainstay of electricity generation. It has been in operation for 35 years and some of its switchyard equipment needs to be replaced urgently. Purchase of this equipment is proposed to be covered under this project. Bishkek CHP, the only supplier of heat services to majority of Bishkek residents, would be supplied with a 125 MVA transformer to balance and increase reliability of power outputs in winter seasons. It would supplement the efforts being made under the ongoing Energy Emergency Assistance Project (EEAP) that helps the Government to repair essential generation equipment such as boilers.

(ii) Power distribution. Two other distribution companies - SeverElectro and

VostokElectro - will be supplied with the most needed facilities and materials such as distribution transformer substations, materials for distribution lines repair and meters. The details would be worked during implementation.

(iii)Heat distribution. Equipment needed for urgent repair, such as pipes, hot tap water

meters, and substations, would be supplied to the district heating company in Bishkek.

(d) Completion of activities approved for financing under the Financing Agreement

for the Energy Emergency Assistance Project (Credit No. 4524-KG and Grant No. H429-KG) relating to the rehabilitation of the electricity and heating systems of

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the State Power Plants Company. In view of the importance of ensuring early response, the proceeds of the ongoing EEAP (up to US$0.5 million) would be used to enable early commencement of procurement under the Component 2 and to be used for consultancy services and advance payments. Accordingly, the equivalent funds would be provided under Component 2 to provide balance of funds necessary for the completion of activities under EEAP. Specifically, it would cover funds to complete supply of spare parts, materials, and works to repair and rehabilitate boilers and corresponding consultancy services.

10. Component Costs. The Component 2 would cost US$35 million and is summarized below.

Sub-Component Amount

(US$ million)7

Restoring power, heat and gas supply to Affected Areas 12.5

Procurement of fuel for thermal power plants and district heating systems

8.8

Rehabilitation and repair of power generation and distribution systems

9.7

Completion of activities approved for financing under the Financing Agreement for the Energy Emergency Assistance Project (Credit No. 4524-KG and Grant No. H429-KG)

0.5

Project Management 1.0Total Base Cost 32.5Contingencies (Price and Physical) 2.5TOTAL 35.0

11. Expected Outcomes and Monitoring. The benefits of this component would be primarily focused on Osh and Jalalabad as well as cover some other areas like Bishkek. Key performance indicators proposed are:

(i) Restore access to power supply in the cities of Jalalabad and Osh regions as measured by number of re-connected households.

(ii) Maintain the heat supply availability in Osh at 2010/11 winter levels at levels equivalent to corresponding periods in 2009 as measured percentage of available heat outputs.

(iii) Repair and rehabilitation of gas network (iv) Supply of fuel.

7 These are indicative costs and the allocation would be finalized during implementation and may change within the sub-components.

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12. As part of the Bank’s supervision efforts, additional efforts will be made to monitor the progress and the results of the project intensively. Adequate provisioning will be made in the Bank’s supervision budget for this. Monitoring efforts will include monitoring the performance of the energy sector and verification of the physical deliveries and inventories of the equipment and material procured under the component.

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Annex 2: Results Framework and Monitoring

KYRGYZ REPUBLIC: Emergency Recovery Project

Project Development Objective Project Outcome Indicators Baseline (2009)

2010 2011 2012 Source of

Information PDO is to assist the Kyrgyz Republic in: (a) Strengthening the prospects for macroeconomic stability and the government’s fiscal resilience to meet the priority needs of its emergency recovery and reconstruction program

(b) Restoring and ensuring continuous provision of the basic energy (power/heat/gas) services with a focus on the affected areas so as to support economic output and provide adequate heating to population during the winter 

PO – 1: Ensure adequate budget financing for education, health and social allowances for the poor8 9, measured as percent of GDP

10.3 11.2 8.4 7.0 MoF/IMF

PO – 2: Restore access to power supply in the cities of Jalalabad and Osh regions as measured by number of re-connected households

0 6,000 19,000 0 MOE JEPIG

PO – 3: Maintain the heat supply availability in Osh in 2010/11 and 2011/12 winters at levels equivalent to corresponding periods in 2009 as measured by percentage of available heat output

NA ≥100

percent

≥100 percent

≥100 percent

MOE/JEPIG

Intermediate Results Intermediate Results Indicators Baseline (2009)

2010 2011 2012 Source of

Information Component 1: Payments in teacher and doctor salaries, pensions, social allowances (UMB and MSB)

Arrears for teacher and doctor salaries, pensions, social allowances (UMB and MSB)

0 0 0 0

MoF

Component 1: The financing from the Bank used as intended

Total number of confirmed semi-annual audits completed by due date

0 1 2 2 MoF PIU

Component 2: Repair and rehabilitation of gas network

Number of restored gas connections 0 27 1197 0 JEPIG

Component 2: Supply of fuels for Osh CHP

Fuel supply (tons) 0 12,000 8,000 0.0 MOE/MOF/

JEPIG

8 Health and education expenditures are defined in accordance with the functional classification of budget expenditures, social allowances for poor consist of the Unified Monthly Benefit and Monthly Social Benefit 9 Health and education expenditures for 2009-2011 include one-off expenditures on repair and purchase of the equipment and furniture for schools and hospitals, which will not take place in 2012

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Annex 3: Summary of Estimated Project Costs

KYRGYZ REPUBLIC: Emergency Recovery Project

Activities Estimated

Cost (US$ mil)

Component 1. High Priority Expenditures Pertaining to Emergency Recovery and Reconstruction

35.0

Provision of Eligible Essential Goods and Commodities 34.0

Project Management 1.0

Component 2. Rehabilitation and Repair of Energy Infrastructure and Networks 35.0

Restoring power, heat and gas supply to Affected Areas 12.5

Procurement of fuel for thermal power plants and district heating systems 8.8

Rehabilitation and repair of power generation and distribution systems 9.7

Completion of activities approved for financing under the Financing Agreement for the Energy Emergency Assistance Project (Credit No. 4524-KG and Grant No. H429-KG) 0.5

Project Management 1.0

Contingencies (Price and Physical) 2.5

Total 70.0

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Annex 4: Financial Management and Disbursement Arrangements

KYRGYZ REPUBLIC: Emergency Recovery Project

1. Consistent with OP/BP 8.00, the financial management arrangements for this emergency operation rely on existing government capacity and will be the responsibility of the project implementation unit (PIU) of the Ministry of Finance10. The PIU is fully functional with a proper complement of staff and operational information systems.

2. The PIU has acceptable planning and budgeting capacity in place. Project budgets are submitted to and approved by the MOF and this information forms the basis of the project financial plan for the year. The cash basis of accounting is applied for both active projects’ accounting and the same basis will be used for the new project. Cash basis IPSAS is used by the PIU for reporting purposes. The PIU utilizes the 1-C Accounting System that is specially designed to meet the project needs, including the ability to generate interim financial reports, withdrawal applications, statement of expenditures (SOEs), monthly disbursement summaries, and annual financial statements. Generally, accounting transactions are posted into 1-C system promptly, within one or two days. The accounting software also incorporates the fixed asset register. The software also has a multi-currency and multi-user functionality.

3. The PIU has in place operational manuals which detail the segregation of duties and internal controls over transactions and payments. The manuals sufficiently detail the business processes (budget/planning, accounting and reporting, etc.) and would simply need to be updated with the specific components and different disbursement methods used for this emergency operation. The manual will also need to specify the controls to ensure that goods procured under this operation by other government implementing agencies will be subject to proper verification and checks.

4. The current financial reporting framework used by the PIU is comprehensive and has been found to be sufficient to monitor the current active projects. This operation will use these existing formats to comply with the requirement to produce interim financial reports (IFRs). Consistent with the current reporting scheme, the IFRs for the emergency operation will be produced on a quarterly basis and will be required to be submitted to the Bank within forty-five days after each quarter.

5. Despite the strong financial management capacity and performance of the PIU, the financial management risk for this operation is assessed as substantial. The mitigation measures aimed to reduce the risk, and taking into account OP/BP 8.00, are designed primarily around a comprehensive audit approach and implementation support plan.

6. Disbursements and Flow of Funds. The project will have retroactive financing which will finance up to US$28 million of goods and commodity purchases already incurred by the government in the 12 months preceding credit/grant signing. See Annex 5 for expenditure 10 The MOF PIU is currently managing the Agribusiness and Marketing, and the Governance Technical Assistance projects. The most recent supervision results (June 2010) noted satisfactory performance with regard to financial management for both projects – see project files for copies of the detailed supervision report.

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details. The Bank has conducted a review of transactions to verify actual payments and to examine the documentation to support these expenditures and found strong evidence of functioning treasury controls, evidence of contracts, invoices, payment orders and other relevant documentation to support these expenditures for financing under this operation. Once the project is declared effective, the government will immediately submit an application to the Bank requesting reimbursement for these eligible expenditures with appropriate documentation as stated in the Disbursement Letter. The retroactive disbursement application will draw from both the IDA Grant and IDA Credit to finance this initial rapid disbursement. 7. The project will also establish two Designated Accounts to facilitate payments and transactions for the investment component(s). It will be essential to ensure that the government has adequate liquidity in the account to avoid delays in payments to vendors/suppliers for the critical goods and services that will be contracted during the operation. As the current MOF PIU has experience in account management, actively conducts regular reconciliation and other control functions over project accounts, and in utilizing the flexibility of OP/BP 8.00, the Designated Account ceiling for the IDA Credit will be US$7 million and for the IDA Grant US$3 million, totaling an amount greater than the threshold for a typical investment operation. The Designated Account may be used to finance eligible expenditures and can be subsequently reported with full documentation against eligible expenditures for goods contracts above US$500,000, civil works contracts above US$1,000,000, consultant services contracts for firms above US$100,000 and US$50,000 and above for individual consultants (Statement of Expenditures - SOEs will be used for eligible expenditures below these limits). 8. External Audit. The external audit will be contracted to a private firm and the contract will be eligible to be financed under this operation. The audit will be semi-annual and will have a broader scope than a purely financial statement audit. Each audit report will be delivered to the Bank within four months after each semi-annual period. In each report, the auditors, in addition to providing an opinion on the project’s financial statements, will also review and verify that the expenditures incurred by the project and reported in the IFRs have occurred, are fairly stated and eligible, as defined in the Credit and Grant agreements signed between the World Bank and the Government of the Kyrgyz Republic. The purpose of this second objective, consistent with OP/BP 8.00, is to provide assurance that the goods and services procured under the emergency operation are delivered and distributed as envisioned in the bidding documents. The audit terms of reference have already been drafted, discussed and agreed with the government. The MOF has agreed that it will publish (posting on its website) the audit reports within one week of receipt of the report from the auditors.

9. Implementation Support Plan. As this is an emergency operation with a significantly increased level of financing over previous operations, there is need to have more frequent project visits and to provide more regular implementation support - at a minimum, a financial management support and implementation support/supervision mission will be required every quarter (immediately after the retroactive disbursement is executed) for the first year of implementation and then converted to a semi-annual schedule in year 2 and beyond. In addition to the work of the auditors and apart from conducting regular transaction reviews, the Bank team will also need to examine the goods delivered, and to visit sites to ensure that the delivery of goods is reaching the intended population/areas of need throughout the country.

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Annex 5: Procurement Arrangements

KYRGYZ REPUBLIC: Emergency Recovery Project

A. General

1. Procurement for the proposed emergency project will be carried out in accordance with the World Bank’s "Guidelines: Procurement under IBRD Loans and IDA Credits" published in May 2004, and revised in October 2006 and May 2010 (Procurement Guidelines); "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" published in May 2004, and revised in October 2006 and May 2010 (Consultant Guidelines); the “Streamlined Procurement Procedures” Guidance Note (June 2009); and the provisions stipulated in Financing Agreements. The various procurement actions under different expenditure categories are described in general below. For each contract to be financed, the various procurement or consultant selection methods, estimated costs, prior review requirements, and time frame have been agreed between the Borrower and the Bank in the Procurement Plan (PP). The PP will be updated at least annually or as required to reflect the actual project implementation needs. A General Procurement Notice (GPN) has been published in UNDB & dgMarket in September 2010 immediately following the negotiations on September 8, 2010. Specific Procurement Notices (SPN) will be published as required by the Procurement Guidelines. 

B. Assessment of the agency’s capacity to implement procurement

2. A quick procurement capacity assessment was conducted during the preparation/appraisal mission in August 2010 and found the procurement capacity acceptable. Two PIUs will be involved in procurement under the Project: (a) the existing MOF PIU will be responsible for procurement under the Component 1. This PIU has been implementing Bank financed projects for several years and is familiar with the Bank procurement procedures. The procurement specialist and the PIU director have also attended several Bank procurement workshops; and (b) for Component 2, a Joint Energy Project Implementation Group (JEPIG) established at the Ministry of Energy (MOE) will be responsible for procurement. The JEPIG was established by involving the resources from the existing PIUs in the energy sector: one in generation (JSC Power Plants), second is with Transmission Company (JSC NEG), and the third one is with the largest distribution company (JSC Severelectro) that serves all the other distribution companies. All three PIUs are currently implementing/preparing investment projects funded by various donors (the Bank, ADB, KfW). Nevertheless, the Bank “hand holding” will still be necessary. MOE has implemented Bank financed projects (including emergency operations) and is familiar with the Bank procurement procedures. The past procurement performance has been generally satisfactory albeit with delays. The existing procurement staff have attended the Bank procurement training and managed Bank financed procurement. Relevant technical experts are available to prepare technical specifications and assist in the procurement process. 

C. Procurement Risk Assessment

3. The overall procurement risk is rated “Substantial”. The main risks identified include procurement delays and low level of competition (particularly in view of the current political instability which is not conducive to attract foreign bidders). To mitigate such risks, procurement

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plans have been carefully prepared with a realistic schedule and will be updated as needed; bidding documents for urgent procurement packages have been prepared or are under preparation; and the PIUs will make efforts to identify potential suppliers including wide advertisement and direct approach to the relevant embassies. In the meantime, the Bank will continue to provide procurement training, monitor the procurement progress closely and provide assistance as needed.

D. Procurement Implementation and Arrangements

4. As indicated above, the procurement activities under component 1 will be conducted by the existing MOF PIU, while those under component 2 will be carried out by JEPIG within MOE which comprises representatives from various beneficiaries in the energy sector. Both the PIU and JEPIG will have access to other technical experts and will be responsible for preparation of technical specifications and bidding documents. Bid evaluation committees will also be set up. In view of the heavy procurement workload under component 2, it’s agreed that the JEPIG will hire at least two more experienced local procurement specialists.

5. Expenditures to be financed under the project will include:

(a) Essential goods already purchased (fuel oil, natural gas, and diesel) (Component 1): The procurement process has already been completed and contracts were awarded following the national procurement procedures (including “direct contracting”). In particular, a direct contract for an amount of about US$44 million was signed in December 2009 between the JSC Kyrgyzgas (a state owned enterprise in Kyrgyz Republic as the purchaser) and JSC Uztransgas (a company from Uzbekistan as the supplier) for the supply of natural gas in 2010. As there is no other source of natural gas supply available to the Kyrgyz Republic, the country had been procuring the same for many years through the one and only one gas pipeline that they have from Uzbekistan. The Bank will carry out a detailed review of the above contract. Given its large value the case will be submitted for the approval of the OPRC. If acceptable, this contract will be included among all others found acceptable by the Bank for the retroactive financing. A cut off date of November, 1 2009 has been determined for retroactive financing on the understanding that the Financing Agreement will be signed in October 2010. As such, all payments made under the project on or after November 1, 2009 will be eligible for retroactive financing such that the total amount will not exceed 40% of the total project amount.

(b) Other goods on the positive list: Such goods will include office furniture and IT equipment for government entities that have been destroyed, trucks and their spare parts, school textbooks, supplies, furniture and equipment, telecom equipment and critical medical equipment and will be procured applying the Bank Procurement Guidelines.

(c) Goods required under Component 2: Such goods will include fuel oil (mazut); and equipment and materials for urgent restoration of power and gas supply to the Osh and Jalalabad regions as well as for essential repair/rehabilitation of power generation and distribution facilities. The procurement will be carried out following the Bank Procurement Guidelines. 

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(d) Works: Some works under component 2 of the project can be financed under IDA financing.  

(e) Consultant Services: Such contracts will include project audit and individual consultants to support project management and implementation. 

(f) Operating Cost: The project will cover certain operating costs (such as office rent and maintenance, materials and supplies, communication costs, support for information systems, translation costs, bank charges, salaries of contractual PIU and JEPIG staff including Social Charges, and travel and per diem costs, as well as other reasonable expenditures directly associated with the implementation of the Project. Such costs would be financed by the project as per an annual budget approved by the Bank and incurred using the implementing agency’s administrative procedures that were reviewed and found acceptable to the Bank. Operating cost will not include salaries of civil servants.  

6. Advance Procurement: In view of the emergency nature of the project, all new procurement activities will be advanced as feasible as possible in line with the agreed procurement plan. 7. Retroactive Financing: Up to 40% of the total IDA financing (or US$28 million) will be disbursed through retroactive financing arrangement, covering the essential goods imported/purchased.

Procurement Plan

8. With the assistance of the Bank project team, the MOE/JEPIG has developed a Procurement Plan (PP) covering the initial procurement packages under component 2. The MOF PIU will develop a Procurement Plan for the remaining activities under component 1 of the Project (about US$7 million) in relation to the "Eligible Essential Goods and Commodities" defined in Schedule 4 to the Financing Agreement, and shall submit the same to the Bank shortly for prior review. The Procurement Plan will be updated by MOF PIU and MOE JEPIG for their respective components under the Project from time to time and all such updates will be subject to Bank prior review. The Procurement Plan (including further updates) will be published on the Bank's external web site. 9. In line with the “Streamlined Procurement Procedures” Guidance Note (June 2009), simplified ICB with 21 days bidding time and a higher Shopping threshold (up to US$500,000) will be adopted. The procurement thresholds are indicated in the table below.

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Expenditure Category

Contract Value (US$)

Procurement Method

Bank Prior Review

Goods >=500,000 ICB All the ICB contracts < 500,000 Shopping The 1st two Shopping contracts

NA DC All DC contracts

Works

>=500,000 NCB All contracts above US$1 million, plus the first NCB contract regardless of value

< 500,000 Shopping The first Shopping contract NA DC All DC contracts

Consultant Services

<200,000 CQS All contracts above US$100,000 NA SSS All SSS contracts NA IC All contracts above US$50,000

Note: ICB – International Competitive Bidding NCB – National Competitive Bidding DC – Direct Contracting CQS – Selection Based on Consultants’ Qualification SSS – Single Source Selection IC – Individual Consultant selection procedures

Frequency of Procurement Supervision 10. In view of the emergency nature of the project and the PIU’s previous and on-going experience with the Bank procurement, all the ICB and Direct Contracting will be subject to the Bank prior review, while all the shopping contracts (except the first two contracts for goods and the fist contract for works) will be subject to ex-post review on a sample basis (20%). Other prior review requirements are indicated in the table above. It is expected that a supervision mission in the field will be conducted every three to six months during which post reviews will be conducted. As a minimum two post review reports which will include physical inspection of sample contracts including those subject to prior review will be prepared each year. Not less than 10% of the contracts will be physically inspected.

Additional Provisions for National Competitive Bidding

11. NCB is not anticipated at the appraisal stage. Nevertheless, in view of the emergency nature of the project and to provide flexibility, NCB will be provided for in the Financing Agreement. The standard NCB provisions will also be included in the Financing Agreement.

Anti Corruption Measures

12. The Bank’s Anti-Corruption Guidelines, as well as the relevant provisions in the Procurement and Consultants Guidelines will be enforced.

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Annex 6: Implementation and Monitoring Arrangements

KYRGYZ REPUBLIC: Emergency Recovery Project 1. In view of the importance of rapid disbursements against the urgent emergency needs being faced by the country, the operation has been designed to make full use of the implementation arrangements that are already in place and which have been used under earlier Bank-financed projects. The proposed project will be implemented by two existing implementing agencies - one for each component - that are experienced in managing IDA resources. The ministry of finance will be responsible for the implementation of the overall operation.

Component 1 implementation arrangements

2. The quick disbursing component (QDC) will be implemented by the project management unit (PIU) in the MOF, which will be responsible for procurement, i.e., the identification of expenditures against the positive list eligible for reimbursement and for financial management. The MOF PIU will be also responsible for financial management and in particular, for executing all operational transactions. The PIU will coordinate with the other implementing entity (MOE) to ensure the receipt/delivery of goods prior to executing payments to vendors/suppliers. The MOF PIU will be responsible for reportingt to the Bank on all project activities/components, including those activities managed or implemented by MOE. The MOF PIU will also be responsible for ensuring the timely completion of the semi-annual audits.

Component 2 implementation arrangements

3. The energy component will be implemented by JEPIG within MOE that has been set up using resources of existing energy PIUs which is staffed with experienced personnel. However, functions of financial management and disbursement as well as function of consolidating and reporting to the Bank will be retained at MOF. 4. The MOE JEPIG is headed by Deputy Director General of NEG. The JEPIG personnel have been involved in the implementation of various donors funded projects and have built up skills. The MOE JEPIG would be further strengthened with experienced project and technical officers/staff from existing PIUs and elsewhere to quickly implement the large scope of works. In view of the limited preparation time and capacity within JEPIG and Ministry of Energy, it is planned to implement investments in phases. The initial phase would include activities/goods that are clearly defined and for which procurement can start immediately. In parallel development of the subsequent activities would be undertaken to refine the balance of activities and initiate the procurement process. World Bank supervision, monitoring and evaluation 5. Given limited personnel and technical capacity, poor governance environment, and the need for results, formal supervision will be carried out during the period of implementation. To enhance the efficiency of the supervision, the core team will consist of Bishkek Country Office staff, CARO office staff (including an economist, energy specialist, power engineers, FM specialist, and procurement specialist) and experienced task team leader and energy specialists

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from headquarters. Speed, technical soundness and coordination will be particularly important to implement the second component of the project. Consequently, energy component implementation will be more rigorously supervised at least during the first six months of implementation in order to jumpstart critical works before and during the winter season. As part of the Bank’s supervision efforts, additional efforts will be made to monitor the progress and the results of the project intensively. Adequate provisioning will therefore be made in the Bank’s supervision budget for this. Consistent with OP/BP 8.00 operations, supervision funding for the emergency operations are often at levels above standard regional budgets. 6. Monitoring efforts will include monitoring the performance of the energy sector and verification of the physical deliveries and inventories of the equipment and material procured under the two components of the project. A monitoring and reporting system will be set up in PIU to track progress on ground. Project progress will be monitored primarily through the use of intermediate results indicators (see Annex 2) that will be captured from administrative data that is tracked in the project’s management information systems (MIS) of implementing PIUs. Results of the Project will be evaluated per the outcome indicators shown in the Results Framework (see Annex 2).

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Annex 7: Project Preparation and Appraisal Team Members

KYRGYZ REPUBLIC: Emergency Recovery Project

Table 7.1: Project Processing Schedule

Planned Actual Concept/Appraisal July 28, 2010 RRC Review September 1, 2010 ISDS & PID to PIC September 1, 2010 Negotiations September 8, 2010 RVP approval August 6, 2010 Board approval September 30, 2010 Grant signature October 4, 2010 Effectiveness October 9, 2010 Mid-term review April 1, 2011 Closing date December 31, 2012

Table 7.2: Bank Staff and Consultants Who Worked On Project Preparation

Name Title Unit Afsaneh Sedghi Task Team Leader ECSP1 Saumya Mitra Consultant ECSP1 Sunil Kumar Khosla Senior Energy Specialist ECSS2 Hannah M. Koilpillai Senior Finance Officer CTRFC Rajeev K. Swami Senior Financial Management Specialist ECSO3 Yuling Zhou Senior Procurement Specialist ECSO2 Arman Vatyan Senior Financial Management Specialist ECSO3 Nurbek Kurmanaliev Procurement Specialist ECSO2 Mirlan Aldayarov Energy Specialist ECSS2 Bakyt Bubashov Economist ECSP1 Irina Goncharova Procurement Analyst ECSO2 Iuliia Mironova Consultant ECSPE Marcelo Jorge Fabre Senior Operations Officer OPCFC Naresha Duraiswamy Senior Operations Officer ECSSD Agi Kiss Lead Ecologist and Regional Safeguards Coordinator ECSOQ Daniel Gibson Lead Social Development Specialist ECSOQ Martha Jarosewich-Holder Consultant ECSP1 Dinara Djoldosheva Senior Country Officer ECCKG Fabrice Houdart Country Officer ECCU8 Marat Iskakov Consultant ECSSD Kenneth Mwenda Senior Counsel LEGEM Ghada Youness Senior Counsel LEGEM Ian Parker Consultant ECSP1 Sarah Nankya Babirye Program Assistant ECSPE Asel Almanbetova Team Assistant ECCKG Jyldyz Beknazarova Team Assistant ECCKG

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Annex 8: Environmental and Social Safeguards

KYRGYZ REPUBLIC: Emergency Recovery Project

I. Background

1. The Kyrgyz Republic experienced massive social unrest in April 2010 that led to the overthrow of the government and the assumption to power of a group of opposition and civic figures. In June, three days of violence in the south led to over 2,000 deaths. A fragile peace holds, but government control in the south is weak. The causes of conflict are debatable and there is likely to be an international inquiry. There is a serious risk that conflict might recur.

2. The Kyrgyz Government's post-crisis recovery program includes coordination of multi-donor efforts to help address the recovery needs, adjusting the existing project portfolio, and preparation of this proposed emergency recovery operation. The World Bank's emergency operation will support the government's recovery program. Emergency financial assistance in support of the government’s own efforts is needed to protect essential public service spending.

3. The operation’s agreed upon development objective is to assist the Kyrgyz authorities in: (a) strengthening the prospects for macroeconomic stability and the government’s fiscal resilience to meet the priority needs of its emergency recovery and reconstruction program; and (b) restoring and ensuring continuous provision of the basic energy (power/heat/gas) services with a focus on the affected areas so as to support economic output and provide adequate heating to population during the winter.

4. The Energy Component will focus on energy infrastructure rehabilitation, consisting of (a) fuel purchase; and (b) energy infrastructure rehabilitation. No new construction of energy infrastructure will be supported as part of the energy component. This approach paper addresses the emergency operations energy component. The quick disbursing activities have no safeguard implications.

5. The scope of assistance in the energy component will evolve during the next few months. In the meantime, based on the information available from a preliminary field assessment and discussions, this note outlines the approach that will be followed during project preparation to ensure compliance with environmental and social safeguard policy requirements in project design and implementation.

II. General Principles

6. Recognizing the emergency nature of the proposed support and rehabilitation operation, the need for providing immediate assistance, and at the same time to ensure due diligence, this note has been prepared with and agreed to by the Kyrgyz Government is based on the following principles:

(a) Considering the present security situation, uncertainties, and emergency nature of the proposed operations in Kyrgyz Republic, and because it is not possible to identify all project-related impacts prior to appraisal, the Bank and the Kyrgyz Government have

43

agreed to prepare an Environmental and Social Screening and Assessment Framework (ESSAF). This ESSAF will describe principles and procedures for application of relevant World Bank safeguard policies, including planning of mitigation measures for specific activities.

(a) Environmental Category "A" activities will be part of the “negative list” and will not be considered for project support.

(b) Any activities that would cause land acquisition or other resettlement-related impacts will not be supported by this project. No new construction will be supported, and all rehabilitation and repair activities will be situated within existing sites or right-of-way.

(c) Consultation and disclosure requirements will be simplified to meet the special needs of this operation. The ESSAF will be disclosed to the World Bank InfoShop and in the country, and will be discussed with the Kyrgyz Government in the country. If needed, waiver of normal disclosure requirements will be requested and provided from the Managing Director (on the advice of ESSD and ECA VPs) on grounds of urgency. In all cases where waivers are granted, they are time-bound.

III. Environmental and Social Screening and Assessment Framework (ESSAF)

7. Urgency and the uncertain security situation require flexibility in applying the safeguard policies. At the same time, it is important to ensure due diligence, to avoid causing environmental harm or exacerbating social tensions. The purpose of ESSAF is to assist the Kyrgyz Government’s implementing agencies in screening all project activities to identify their likely social and environmental impacts, and to document and mitigate as needed. The following considerations, specific to some of the key policies and based on experiences from other similar operations in the World Bank, will be useful in preparing such a framework. The proposed ESSAF currently under preparation will be subject to review and approval by the Bank. It is scheduled to be disclosed two months after the effectiveness date.

8. OP 4.01 Environmental Assessment. Proposed energy component activities focus on the repair, rehabilitation, reconstruction and upgrading (where necessary) of damaged energy infrastructure. This would include (a) power generation sites, (b) energy distribution, and (c) access to power. Considering the nature of the potential environmental impacts from relatively limited scale and magnitude of rehabilitation and reconstruction works, the proposed operations are likely low-risk and are classified as category ‘B’. An Environmental and Social Screening and Assessment Framework (ESSAF) is being prepared which will set out general standards and mitigation measures for general issues such as appropriate disposal of waste and volatiles, as well as criteria and procedures for preparing site-specific environmental management plans (EMP) for any activities which raise additional site-specific issues. The ESSAF will also set out procedures for screening and reviewing proposed activities for social acceptability and sustainability, and will identify budgetary requirements and institutional arrangements for implementing and monitoring implementation of these environmental and social protection measures. In the Financing Agreement the Kyrgyz Government will agree to implement the ESSAF including provision of the required financial and human resources. In accordance with OP 8.00, this ESSAF will not be completed and disclosed prior to project appraisal, but will be prior to commencement of any activities to which it applies.

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9. OP 4.12 Involuntary Resettlement. The activities will take place in existing right of ways, sites and facilities. No activities requiring land acquisition will be supported. All activities will be screened concerning applicability of the resettlement policy.

10. OD 4.20 Indigenous Peoples. The Bank has consistently held that ethnic groups in the Kyrgyz Republic country context do not meet the operational definition of “indigenous peoples,” thus OP 4.10 is not triggered. Nonetheless, ethnic relations are highly salient in the project area, with a substantial risk that conflict could recur in the very near term. If ethnic tensions remain high, there is a risk that some activities proposed under this project may be perceived by one or more groups as ethnically biased, or as supporting recovery or redevelopment priorities that are discriminatory. To minimize the risk that project-supported activities may contribute to ethnic tensions, the ESSAF will ensure that advance screening and design includes identification and consideration of local preferences and concerns.

11. OP 4.11 Physical / Cultural Property. The operations will pose little or no risks to cultural property, assuming that they will not include large-scale excavations, movement of earth or demolition. All activities will be taking place on existing right of ways and at existing facilities.

12. OP 4.37 Safety of Dams. The OP will not be triggered. The project will replace urgent equipment needs (circuit breakers) at the Toktogul Hydropower Plant. There will be no change in dam operations.

13. OP 7.50 Projects on International Waterways. The OP will not be triggered. The Toktogul HPP is on the Naryn River. As noted above, the HPP is currently operational and there will be no modifications or changes in existing operating practices and schedule.

IV. Responsibilities for Safeguard Screening and Mitigation

14. The Joint Energy Project Implementation Group (JEPIG) within the Ministry of Energy is the implementing agency for the proposed energy operations. The Ministry of Energy will be responsible for applying and supervising safeguard screening and mitigation for proposed activities. Within the MOE JEPIG, an environmental safeguards focal point will be identified with responsibility for overseeing the implementation of the ESSAF.

V. Capacity Building and Monitoring of Safeguard Framework Implementation

15. As part of the capacity building provided for implementation of the proposed emergency operation, the safeguards focal point and relevant staff of the concerned Ministries will be given training on the application of the ESSAF. During supervision of these activities, environmental and social specialists on the World Bank project team will assess the implementation of the ESSAF and will recommend additional capacity building or other measures, if required.

VI. Disclosure Requirements

16. Considering the emergency nature of the proposed operation and the proposed approach for safeguard policies mentioned above, the Kyrgyz Government will be requested to disclose the ESSAF in the respective sector ministries and other public places in Kyrgyz Republic and in

45

the World Bank InfoShop. The ESSAF is expected to be completed within two months after the effectiveness date, and is subject to Bank review and acceptance. If any activities require separate EMPs these will be prepared and disclosed prior to initiation of civil works.

VII. Implementation Arrangements

17. A World Bank safeguard team consisting of a senior environment specialist and social scientist will work closely with the project team and safeguard focal points in the Kyrgyz Government in developing and guiding the implementation of the proposed ESSAF.

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Annex 9. Operational Risk Assessment Framework (ORAF)

KYRGYZ REPUBLIC: Emergency Support Project

Project Development Objective(s)

The project development objective is to assist the Kyrgyz Republic in:

(a) strengthening the prospects for macroeconomic stability and the government’s fiscal resilience to meet the priority needs of its emergency recovery and reconstruction program; and

(b) restoring and ensuring continuous provision of the basic energy (power/heat/gas) services with a focus on the affected areas so as to support economic output and provide adequate heating to population during the winter.

 

PDO Level Results Indicators:

1. Ensure adequate budget financing for education, health, and social allowances for the poor, measured as share of GDP 2. Restore access to power supply in the cities of Jalalabad and Osh regions as measured by number of re-connected

households

3. Maintain the heat supply availability in Osh in 2010/11 and 2011/12 winters at levels equivalent to corresponding periods in 2009 as measured by percentage of available heat output

Risk Category

Risk Rating Risk Description Proposed Mitigation Measures

Stakeholder

Low

Newly elected Government. Even though the project addresses emergency needs in protecting social spending and ensuring energy supplies – objectives that enjoy a high degree of consensus, the newly elected government and stakeholders on the ground may not fully share the current reconstruction and reconciliation priorities.

The government and the Bank will inform the public on the project design and importance of ensuring delivery of the essential public services. The flexible design would permit the new elected administration to avail of funds in keeping with its priorities subject to the WB procurement and FM guidelines.

Capacity

Medium - I

Resources. Availability of competent staff, particularly skilled procurement specialists, is limited. Inadequate contract management and lower-than-required quality of equipment

The operation has been designed to rely on existing management capacity in the MOF PIU to act as the central executing agency (e.g., management of funds), while coordinating with other agencies for their technical capacity to prepare bidding documents and oversee the import of critical goods. Enhanced supervision by the task team. More emphasis and training on appropriate contract

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Processes and systems. Experience with the past and on-going projects show frequent procurement delays and inadequate competition in procurement.

management; regular physical inspections by PIU and Bank supervision mission. WB Capacity Building TA to the MoF in the area of PFM through a Multi-Donor Trust Fund. Careful procurement planning and realistic scheduling; advanced preparation of technical specifications.

Fraud & Corruption High

Fiduciary risks. The massive flows of aid and the urgency in funds disbursing increases the risks of corruption in public procurement.

Enforcement of the Bank procedures, including financial management and procurement guidelines, through established procurement and financial management information system.

Governance

Medium - I

Accountability and oversight. The internal audit system is at an early stage and cannot provide credible assurance of the legality, effectiveness, and efficiency of the use of public funds.

Requirement of comprehensive and transparent reporting. The external audit will be performed by an independent, private audit firm. In addition to an opinion on the financial statements, the audit scope is expanded to include a detailed review to verify the amount and quality of goods procured, and to verify distribution/location of goods. The audit periodicity will be six months, rather than annual.

Project Risks Design

Medium - I

Targeted outcomes. The project aims to ensure social payments but has no direct role in designing and disbursing against those payments; and the restoration of energy to households may be complicated by slow reconstruction of housing

The close involvement of many donors in the assurance of social spending (or the close joint monitoring by donors) and the transparency of social spending by the new government mitigate against diversion of funds. Close coordination with the donors and government agencies who are rebuilding housing would allow proper sequencing of energy reconnections.

Social and Environmental

Medium - I

Social risks. A delay of post-conflict recovery and reconstruction due to capacity constraints or non-availability of counterpart funds. Persisting ethnic tensions. Criminal group activities. The lack of complete control over the south of the country by the central government. Inequity in providing access to infrastructure.

The new government will enjoy legitimacy and will have representation from the south. Security will be bolstered. CIS TA in security is planned as in OSCE presence in the south. The United Nations has a strong field presence in the South to support victims of violence and alleviate ethnic tensions. Relevant here is the protection mandate of the United Nations

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Environmental risks. Environmental risks stem from the energy reconstruction works.

High Commission of Refugees and humanitarian initiatives by several other UN agencies. The commitment of the international community to inter-ethnic reconciliation and social stability is likely to help alleviate ethnic tensions. Majority of energy-related activities, such as supply of fuel for the thermal plants or supply of equipment to address operational bottlenecks at the power companies, are ethnic-neutral and would not raise equity concerns. Official damage certification documents would be used with exact damaged locations already identified. A proper communications strategy would be developed. Close coordination with other development partners, in particular, UNHCR will also be ensured in prioritizing project areas. The resources exceed the immediate needs thus substantially reducing risks of areas remaining un-served. Budget support by IFIs would lead to continued financing of social safety nets, thereby reinforcing conditions for social peace.

Program and Donors

Low

Donors’ coordination. There is a risk of overlapping support with bi-lateral Donors providing emergency assistance in the form of goods supply, particularly fuel.

The Bank will prepare a new Strategy in FY11 to align different operations with the priorities of the new administration and other donors.

Overall Risk Rating at Preparation

Overall Risk Rating During Implementation

Comments

Medium-I High

* Low: low impact on PDO and low likelihood of risk materializing; Medium-L: low impact on PDO and high likelihood of risk materializing; Medium-I: high impact on PDO and low likelihood of risk materializing; High: high impact on PDO and high likelihood of risk materializing.

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Annex 10: Statement of Loans and Credits

KYRGYZ REPUBLIC: Emergency Recovery Project

Original Amount in US$ Millions

Difference between expected and actual

disbursements

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

P107608 2010 NATL. ROAD REHAB (Osh-Batken-Isfana)

0.00 25.00 0.00 0.00 0.00 23.63 8.22 0.00

P101392 2009 EMERGENCY ENERGY ASSISTANCE 0.00 15.00 0.00 0.00 0.00 4.71 1.17 0.00

P108178 2009 SECOND LAND & REAL ESTATE REGISTRATION

0.00 5.85 0.00 0.00 0.00 4.47 0.97 0.00

P108525 2009 CAPACITY BLDG ECON MGT 0.00 3.00 0.00 0.00 0.00 2.49 1.36 0.00

P110267 2009 SECOND RURAL WATER SUPPLY & SANITATION

0.00 10.00 0.00 0.00 0.00 9.69 2.11 0.00

P104994 2008 BISHKEK AND OSH URBAN INFRASTRUCTURE

0.00 12.00 0.00 0.00 0.00 7.28 2.93 0.17

P096993 2008 AISP 0.00 13.00 0.00 0.00 0.00 4.97 -1.37 2.29

P098949 2007 VIP 2 0.00 23.00 0.00 0.00 0.00 8.65 -0.08 0.00

P096409 2007 OIP-2 0.00 16.00 0.00 0.00 0.00 9.94 1.81 0.00

P087811 2007 KG Redu Tech Barriers for Enterpr & Trad 0.00 5.00 0.00 0.00 0.00 3.48 2.94 0.95

P099453 2006 AVIAN FLU (AICHPPCP) 0.00 4.00 0.00 0.00 0.00 1.45 1.05 0.00

P088671 2006 WATER MGMT IMPRVMT 0.00 19.00 0.00 0.00 0.00 12.23 7.38 -0.56

P084977 2006 HEALTH & SOC PROT 0.00 21.00 0.00 0.00 0.00 4.24 -3.37 2.32

P049724 2005 AGRIBUSINESS & MARKETING 0.00 8.10 0.00 0.00 0.00 3.32 2.61 0.00

P078976 2005 RURAL EDUC 0.00 15.00 0.00 0.00 0.00 1.82 1.47 0.00

P083377 2005 SMALL TOWNS INFRA & CAP BLDG 0.00 19.00 0.00 0.00 0.00 2.44 -2.39 -0.96

P083235 2004 DISASTER HAZARD MITIGATION 0.00 6.90 0.00 0.00 0.00 3.66 3.46 -0.22

P074881 2004 KG Pymnt/Bank Syst Modernizatio 0.00 9.00 0.00 0.00 0.00 4.22 3.88 0.17

P071063 2003 GOV TA 0.00 7.78 0.00 0.00 0.00 5.73 4.65 4.38

Total: 0.00 237.63 0.00 0.00 0.00 118.42 38.80 8.54

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KYRGYZ REPUBLIC

STATEMENT OF IFC’s Held and Disbursed Portfolio

In Millions of US Dollars Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

2004 AKB Kyrgyzstan 1.50 0.00 0.00 0.00 1.50 0.00 0.00 0.00

2006 Bai Tushum 1.20 0.00 0.00 0.00 1.20 0.00 0.00 0.00

1996 Demirbank Kyrgyz 0.00 0.45 0.00 0.00 0.00 0.45 0.00 0.00

2003 Demirbank Kyrgyz 0.00 0.11 0.00 0.00 0.00 0.11 0.00 0.00

2001 FINCA 0.00 1.00 0.00 0.00 0.00 1.00 0.00 0.00

2004 Ineximbank 1.50 0.00 0.00 0.00 1.50 0.00 0.00 0.00

KKB Kyrgyzstan 2.00 0.00 0.00 0.00 1.60 0.00 0.00 0.00

2001 SEF Akun Ltd. 0.91 0.00 1.00 0.00 0.91 0.00 1.00 0.00

2005 SEF Altyn-Ajydar 1.00 0.00 0.40 0.00 0.30 0.00 0.40 0.00

2000 SEF KICB 0.00 1.40 0.00 0.00 0.00 1.40 0.00 0.00

2005 SEF KICB 2.50 0.00 0.00 0.00 1.00 0.00 0.00 0.00

Total portfolio: 10.61 2.96 1.40 0.00 8.01 2.96 1.40 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

2006 Bai Tushum 0.00 0.00 0.00 0.00

2006 GeoPark 0.02 0.00 0.00 0.00

Total pending commitment: 0.02 0.00 0.00 0.00

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Annex 11: Country at a Glance

KYRGYZ REPUBLIC: Emergency Recovery Project

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Annex 12: Map

KYRGYZ REPUBLIC: Emergency Recovery Project

Insert Map No.

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Jalal-AbadJalal-Abad

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Balykchi

Chaek

Cholpon-Ata

Barskaun

Kara-Say

Sary-Tash

Daraut-Korgan

Gul'cha

Toktogul

Tunuk

Tyup

Enilchek

Shyirak

Osh

Jalal-Abad

Batken

Naryn

TalasKarakol

BISHKEK

T A J I K I S T A N

UZBEKISTAN

C H I N A

K A Z A K H S T A N

Chatkal

Chu

Naryn

Aksay

Kyzyl Suu

Kurshab

Lake Issyk-Kul

ToktogulReservoir

Lake Sonkul

LakeCharyi-Kel'

To Panfilov

To UshtobeTo

Burylbaytal

To Shymkent

To Tashkent

To Bukhoro

To Murghab

To Hotan

T i a n S h a n

K u n g e y - A l a t a u M t s .

Peak Pobedy7439 m

72E 74E 76E 78E 80E

70E 72E 74E 76E

78E 80E

44N

42N42N

40N40N

KYRGYZREPUBLIC

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 25 50 75

0 25 50 75 Miles

100 Kilometers

IBRD 33430

SEPTEMBER 2004

KYRGYZ REPUBLICSELECTED CITIES AND TOWNS

OBLAST CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

OBLAST BOUNDARIES

INTERNATIONAL BOUNDARIES