Kyrgyzstan: Hydropower dilemmas

Kyrgyzstan's legislature and utility customers are rushing right into a dilemma that marks the plight of many transition states, and indeed, many developing states across the world.  The issue at large concerns the development of energy capacity in Kyrgyzstan, for both domestic use and for export.  The new energy developments show some of the pain that must be addressed for gain to occur in many countries that struggle to bring future capability from a system of past conventions.  These issues include the insecurity of privatization; the need for transparency; the role of outside investment, particularly foreign investment, in areas where domestic security are paramount.  Last of all, it's all complicated by the neighbors. 

Privatization:
As most readers know, in Soviet times the means of production was always owned, and controlled, by the state.  The work of privatization has been to reduce state control over such means, which is often inefficient.  In economically pure terms, what seems to happen (this includes subsidized Iran gas to Uzbekistan's cotton crops to Russian or Kyrgyz power generation) is that the costs of production do not always devolve onto the users fairly.  For instance, during the Russian Financial Crisis, for instance, it was noted that unattempted and incompleted privatization of energy sectors created massive non-payment into the system, especially by big power users such as plants, with electric lights on 24-hours a day and no work being completed during many of those hours, but also by myriad households with undocumented electrical use (off meter, for instance). 

It's easy to see a cycle of accommodation can be made informally, such as hooking one's house to a neighbor's meter–thereby paying nothing for service as opposed to no service at all.  Multiply this by a number of large companies with informal/corrupt arrangements and there is a large burden put on a utility company.  The reaction of utility officials thereby are two at once: a. throwing up its hands and gives up, and b. cashing in through illicit payments.  Because revenue is not collected, repairs and extensions of service are not made; nor are new technologies implemented.  In short, not everyone is served (even informally); the amount that customers pay does not correspond to usage; and the people who profit are not putting those profits into the utility system.  (To make this more complicated, some of those utility workers are not being adequately paid, either, and the bribe makes up part of the salary.)  But all in all, this is highly inefficient.  Those unserved pay through taxation, anyway; those highly served do not pay enough. 

Social welfare:
Throughout its dealings with Former Soviet States, the World Bank and International Money Fund have insisted that utilities be privatized.  However, that is easier said than done, especially in the absence of a social safety net or growth economy.  Many who are at least somewhat accommodated by the existing system and are unemployed or underemployed.  And this dilemma occurs in all countries of the world.  In the U.S., for instance, most of our utility power is privatized, and yet there are always calls for aid to poor families during the winter months or during utility rate hikes–surely this is also a somewhat inefficient system, but necessary–.  Since US GDP per capita is much higher than the GDP per capita of the Kyrgyz Republic, the dilemma between accommodating all and a strict market economy is not fraught with the same peril. 

However difficult to achieve, Kyrgyzstan's utilities must assign bills where costs are made.  In addition, in order to develop the infrastructure and extend power to all, costs are front-loaded.  In short, Kyrgyzstan's power infrastructure must attract investment.  And this is Kyrgyzstan's current position on the road to power. . .

Events:
The Kyrgyz legislature has recently privatized two major hydropower installations:

MW Kambarata-1 with a 1900 MW capacity;
Kambarata-2 hydropower plant with a 240 MW capacity. 

The two Kamabarata plants have annual generation capacities of 5,100 million kWh and 1,100 million kWh, respectively.  These two plants have the potential to control all of the Naryn River output, which makes them even more important in terms of flood control and a kind of lever against Uzbekistan.  In addition, a third plant, the Thermal Power Plant -1, in Bishkek, with a  MW capacity, is going to be privatized.

Unfortunately, privatization in all of the FSU states has been largely a non-transparent process, with special deals made.  The concerns are many: such lack of transparency can support an existing regime; the bribes attendant on non-transparent sales are another source of disinvestment in the utility system as a whole; and the culture of bribes can bring the system to total bankruptcy, thereby serving no one and leaving Kyrgystan, in this instance, with more instability and unrest. 

The second question has to deal with foreign investment.   First of all, the law has to allow foreign investment to come in.  In 2006, The Jamestown Foundation reported that Kyrgyzstan's legal structures and its legislature was not institutionally geared to attract foreign investment.  That same article linked utility corruption to both the present and former Kyrgyzstani presidents, Bakiev and Akaev .  The cash taken from utility investments goes outside of Kyrgyzstan, to the Baltic states, to be banked.  Furthermore, some legislators have a piece of the existing pie.   The existing situation tends to muddy the waters.  Going through the motivations:

One can be for new foreign direct investment for Kyrgyzstan's national competitiveness and economic growth; or
One can be for new foreign direct investment because it offers new frontiers for graft.
One can be against new foreign direct investment because it takes control of national resources from those who most legitimately care about them, i.e., the Kyrgyz people in the person of its legislature; or
One can be against new foreign direct investment because one will not be able to participate in the new opportunities for graft; or
One can be against foreign direct investment because it reduces the opportunity  for graft.

So, what are the solutions here?  Mr. Bakiev has assured the partly-hostile legislature that he will not be able to participate in any deals with the power plant enhancements because he will be out of office by then.  Yet Mr. Akaev apparently still has dealings with utility companies, though he lives in far off Russia, so this doesn't ring true.  Here is my suggestion:

1. Set up a privatization fund, so that the money of the sale is in a separate government fund that is audited twice a year by outside, Big-4 accountants.

2. Additional utility revenues to the state, such as water bills, etc, paid by foreign direct investment, goes into this fund to again be administered transparently.

This would be a program right out of the World Bank, which would gladly assist in setting it up.

3. IWPR reports that some representatives have boycotted the proceedings.  This is one important aspect of democracy that seems to be missing in many Central Asian legal feuds: Legislators, you must vote.  Boycotting votes means you kick up no effective barrier against wrongful laws.  Boycotts only work if you can kill a quorum; at any other time, they constitute permission for what you are against.  You must be there and cut up stiff, call upon journalists, make announcements, stall bills, et cetera, in the face of corruption.

Further reading:
Each of the links above covers the whole process–I encourage readers to check them all out: two at Jamestown Foundation and one at IWPR.

I’ll have more on this later–this is a start.