The Asian Development Bank (ADB) is ready to support private projects, along with government ones, for the rehabilitation of energy distribution networks in Azerbaijan, Report informs, citing the bank.
“Azerbaijan’s objective of gradually liberalizing the electricity market is an indicator that the private sector will have an increasing role in the future. In addition to sovereign financing. ADB can play a significant role in Azerbaijan’s power distribution space—provided the government changes its current debt limitation policy and allows for external borrowings to help finance the modernization of the energy sector,” the bank says.
ADB says the rapid decrease in the ratio of public debt to GDP since 2020 suggests an increased likelihood that the government will revise its policy and allow sovereign guaranteed external borrowings for power system strengthening and modernization.
“A positive aspect is that this situation is accompanied by a significant reduction in the ratio of public debt to GDP—which, as per the Ministry of Finance, fell to 14.9% in 2021 and to 11.8% in 2022. At what stage the government will begin to allow further external borrowings in the energy sector is not clear as of June 2023, but it is noted that with the ASDP (Azerishiq Strategic Development Plan) 2023–2026, Azerishiq (electrical grid operator) is already preparing for a time when it will be allowed to raise additional financing from external sources,” reads the ADB report.
ADB can support Azerbaijan’s energy sector establishment (the Tariff Council, AERA, and Azerishiq) in working toward a system of periodic and regular tariff revisions (increases in the initial years), at least until such time as the energy market is liberalized. ADB can also support Azerishiq in implementing further reforms (e.g., unbundling of distribution and supply businesses) and adopting measures that are necessary for market liberalization (e.g., increasing grid flexibility to accommodate more variable renewables, or implementing an open access system).
“Such reforms will take several years to implement, and it is expected that Azerishiq will be open to such suggestions after the new Electricity Law becomes effective in January 2024 (as per the present timelines),” the bank says.
Although ADB support was limited to technical assistance for the FRP (financial recovery plan) and one tranche loan under the MFF, both of which were completed by 2019, ADB has remained in touch with Azerishiq and other energy sector agencies in the country.
“ADB has kept itself updated with the current thinking regarding the government objectives of modernizing the distribution system, improving its financial and operational performance, and adapting it to help meet the country’s climate change commitments. The Ministry of Energy, AERA, and Azerishiq have expressed their desire to continue engaging with ADB and to obtain ADB support in such manner as government rules permit,” reads the report.
The investment program was to contribute $750 million to finance selected priority investments in the distribution network and to rehabilitate networks that experienced frequent system outages and supply interruptions. However, only one tranche—with an ADB contribution of $250 million—was approved and implemented. The government did not make a periodic financing request for the other two tranches because of a 2018 policy to cap the ratio of debt to gross domestic product (GDP). But it did keep the MFF available as a standby till the end of the MFF term (7 years).
The tranche 1 project was estimated to cost $325 million at appraisal, covered by ADB’s share of $250 million and a government contribution of $75 million. The actual cost, however, was lower at $304.29 million, comprising $249.97 million from ADB and $54.32 million from the government. The overall cost difference of $20.71 million was largely the result of a massive reduction in taxes and duties—from the $69.9 million estimated at appraisal to $44.6 million.
Procurement from local vendors far exceeded the volume anticipated at appraisal, which substantially reduced the customs duty component. However, the procurement of meters, information technology and other equipment, and operational vehicles; as well as the costs of installing meters and constructing institutional facilities were more than anticipated at appraisal.