: / Strategies / National Poverty Reduction Strategy (2003-2005)

Kyrgyzstan Review, 10 years ago

ii. Development of industrial production

501. Over the past decade, the share of industry in GDP has more than halved and is now only about 21.3 percent of GDP. The average number of workers in industry has decreased during this period by more than half Notwithstanding the measures taken, the decline in production has not been overcome. In fact, the country has shifted its status from an industrial and agricultural economy to an essentially agricultural one.
The largest enterprises have been the ones most affected, including those manufacturing defense products, and products oriented to consumers within the former USSR. Industry, being the major sector of the economy, to a significant extent satisfied the need of the Republic for jobs, made a great contribution to maintenance of the social infrastructure, providing workers and their families with medical services, housing, pre-schooling, childrens establishments, and so on. A number of industry sectors used to apply the latest scientific and intense technologies that have become unused because of the lack of demand for the products they used to produce. Therefore, a decline in industrial output has seriously affected the living standards of the population, resulted in unemployment growth, migration of qualified workers and specialists.
The radical change in the situation has had a significant influence on economic and technical conditions of enterprises, entailed serious structural changes in the industry. The share of machine building and metal working, food industry and light industry has decreased. At the same time, the share of mining, metallurgy sectors and electricity generation has increased.
502. Many problems have accumulated in the manufacturing industry of the Republic, solution of which could significantly contribute to an increase in employment and personal incomes. The major problems are as follows:
Weakness in public administration units that are responsible for development and implementation of the industrial policy. It is impossible to conduct a unified state industrial policy because of the existing complexity of state structures that result in duplication of certain functions of ministries and departments, 
Presence of corruption and regular interference by the State in activities of business enterprises.
Insufficient professional capacity of the staff of government agencies, their inability to manage under market conditions.  
Lack of professional managers at production sites and persistence of thinking typical of a planned economy. Insistence on irrational production volumes, regardless of demand for the produce, still remains a key problem to be overcome by a majority of managers of large industrial enterprises. This leads to increasing stock levels of finished products due to their non-competitiveness and a lack working capital. Professional educational establishments educate specialists in fashionable areas (lawyers, economists, office-managers, bankers, etc.), leaving certain industrial sectors with a shortage of appropriately trained people. 
Staff of many enterprises lack sufficient skills in corporate management.  
Weak cooperation and association abilities of local enterprises.  
Insufficient development of bankruptcy procedures and practice.  
Insufficient competitive advantages of the Republic for ensuring the attractiveness of its investment climate.
A frequently changing taxation regime that does not stimulate industrial development. Heavy rates of major taxes have been preserved and impede active development of the industrial sector. The existing Customs Code is cumbersome and not effective for practical application. The corrupt nature of the system of tax and customs inspectorates.
Lack of a modern strategy on external economic policy of the Republic. Ineffective use of the nations potential in various regional agreements on free trade and investment. Weakness of the office of trade representatives. Lack of effective measures for support of export-oriented enterprises. The State, faced with the issues raised by the transition period, insufficiently resolves the problems of promotion of goods to external and internal markets.
Insufficient attention is paid to improvement of the system of standardization and certification of industrial products, effective application of the norms and rules of Kyrgyzstans membership in the WTO.
Continuous introduction of amendments to the regulatory and legal framework on special economic zones, that results in unsustainable work of FEZs and discourages potential investors from investing capital in the Republic.
Ineffectiveness of the existing system of financing of production. The banking system is still unable to finance local producers on acceptable terms and conditions. Ineffective servicing of attracted foreign investors, including those guaranteed by the Government.
503. The situation found in the manufacturing industry sector requires the development of a clear industrial policy, the goal of which should be stabilization and further step by step development of priority sectors of industry through aggressive promotion of local export and establishment of new industrial, competitive enterprises.
504. The priority sectors for industrial development are those industries that:
are the most competitive,
do not require large capital investments,
are base on the use of local raw-material, and
can create a branch network of local small enterprises.
They include:
The energy sector, that is a source of industrial development and has of strategic importance for ensuring economic independence of the Republic. The State should concentrate all its efforts on electricity generation, coal mining, development of non-traditional renewable energy sources.
The mining industry, particularly the refining sector, producing non-ferrous and precious metals, that contributes almost 60 percent to total exports and significantly replenishes foreign currency reserves of the country;
Light industry, which is gaining momentum gradually, ensuring a growth rate within the last two years by 105.4 percent and 110 percent, respectively;
The processing industry, which has huge growth potential and requires radical restructuring;
Production of construction materials, as a sector providing for quick return to invested capital and possessing a significant export potential. Proof of the effectiveness of such an approach is recommencement of production processes at the Tokmak Glass Factory, which has started production of export products.
505. In terms of ensuring import replacement and export growth, there are large mineral reserves to support development of the chemical sector (mineral fertilizers, salts, soda, etc.) and production of poly- and mono-crystal silicon for an electronic industry.
506. It is necessary to reorganize the state structure dealing with industry in the light of the outcome of a thorough functional review of the Ministry and the objectives on implementation of the new industrial policy of Kyrgyzstan. It is necessary to ensure institutional development of this Ministry, orienting it to modern methods of work, building up the staffing capacity of the Ministry of External Trade and Industry by attracting young trained specialists. It is necessary to strengthen the Ministry by granting it the status of an economic agency responsible for major production spheres of the economy.

1. Energy

507. Hydroelectric power is a natural monopoly in the energy sector of the Republic. This leads to distortion in the relations between energy consumers and producers as well as a distorted energy tariffs policy. Another issue is the high influence that energy policy has on state foreign economic policy. The policy regulates exports of Kyrgyzstans energy and hydro resources and imports of gas and coal. Barter transactions of these energy resources create cash flow problems in the sector. An important factor is the serious social impact of electric power tariffs on the living standards of the poor.
Electricity Sector
508. The electricity production sector is one of the basic sectors of the nations economy. The share of electric energy in the structure of industry has almost tripled since 1990, reflecting the increased share of hydroelectric power plants (HPP) in electricity production. KyrgyzEnergo has been restructured and replaced by seven independent joint stock companies that specialize in energy production, transmission, and distribution. The Tash-Kumyr HPP has reached its planned production capacity, construction of Shamaldy-Sai HPP continues and construction of new power transmission lines has begum. At the same time, due to the lack of funds, the construction of Kurpsai HPP -1 and HPP -2 remains incomplete.
A survey of the energy system in 2001 showed that the first stage of restructuring of the energy system has not improved the financial situation in energy companies. The growing debt of electric distribution companies to the Electric Stations Public Corporation has created large arrears of salaries as well as of payments to the state budget, halted planned reconstruction of electric stations and hindered procurement of spare parts and chemicals. At the same time, the collection rate on electricity and heat energy charges is 80-85 percent, of which only 20 percent is paid in cash, the balance being covered by barter transactions and offsets. Increase in domestic consumption of electric power and an unsustainable payment system have posed great problems for the sector.
The main internal issues in the sector include obsolete equipment, lack of sufficient financing to carry out repairs and rehabilitation of facilities (which leads to accidents and energy losses), and an unbalanced tariff policy.
Renewable Energy Resources
509. The hydroelectric potential of small rivers and canals estimated at 5 to 8 billion kilowatt-hours annually, is practically untapped. The present use of solar, wind, and geothermal energy sources is also insignificant. At the same time, Kyrgyzstan possesses almost unlimited renewable energy sources. Using agricultural waste products, biogas devices can generate over one billion cubic tons of biogas and more than two million tons of organic fertilizers. This volume of gas would be enough to fully satisfy the needs of rural population for ecologically clean domestic fuel for cooking and house heating. The annual consumable solar energy resources are 500 times greater than the energy produced by all electric stations of Kyrgyzstan. Another potential area for expansion of power production would be resuming the operation of small hydroelectric power plants that were closed after the launching of larger HPPs.
Energy Conservation
510. Significant dependence of the Republic on energy imports necessitates the development of an energy conservation policy along with improvement of economic efficiency in the energy sector. Conservation could become a significant factor in enhancing energy security of the Republic, improving competitiveness of domestic industry, and addressing environmental concerns. At present, energy losses in the household consumption sector amount to 55 percent, 45 percent in industry, and 50 percent in agriculture. According to some estimates, the overall potential for energy conservation ranges from 33 to 55 percent of the total energy consumption. Lack of coordination of the relevant measures and ineffective regulatory mechanisms are the key issues in this respect.
General Issues of the Energy Sector
511. In addition to these issues, there is the problem of hidden cross subsidies among various groups of energy consumers. These include subsidized supply of electric and heat energy to domestic consumers due to the state export of electric energy, as well as state subsidies to the consumers of natural gas, subsidizing of household and agricultural consumers by industrial consumers, and subsidizing of rural consumers by urban consumers.
The existing mechanisms of hidden cross subsidies, coupled with the practice of barter transactions and the system of offsets, distort the general situation in the sector and thus, consumers lose the incentive to save energy and reduce costs.
512. The main mission of the energy sector is to ensure stable, reliable, and reasonable supply of all types of fuel and energy.
513. The following priorities were identified as means of addressing this goal:
moving to the energy-saving way of economic development;
promoting rational user attitudes as a condition for further development of the energy sector and the economy at large;
reduction of technical and commercial losses in the system;
renovation of technical facilities and reforming the infrastructure;
ensuring manageability of energy resources;
streamlining the tariff system (with necessary consideration of social aspects); and
optimizing the legal framework.
These priorities defined the following areas of actions.
  • As regards economic stabilization, the effectiveness of the energy system mostly implies two directions of energy security. First, is security against internal factors (in relation to the energy system), such as technical, technological, and economic factors. Secondly, is security against the influence of external factors, prevention of possible accidents, protection from emergencies and various calamities.  
  • Ensuring security against technical and technological factors. Raising the efficiency of fuel and energy consumption should become one of the key areas for action. Having a considerable energy potential, Kyrgyzstan, at present, imports nearly 50 percent of consumed energy. Thus, transferring the economy to the energy-saving way of development will become the first important step. Main actions in this area will include equipping energy enterprises and consumers with modern metering devices; connecting the electricity meters installed in the households to the accounting systems of distribution companies. A database would be created to collect information on the availability of heating devices and equipment used in households for production purposes, as well as on the availability of electricity meters and their compliance with appropriate standards. 
  • Reduction of technical losses of electricity. Significant technical losses of energy due to obsolete equipment, coupled with the growing tariffs, lead to the higher production costs of goods produced by all energy consuming sectors, making Kyrgyz products uncompetitive on foreign and domestic markets. The reduction of technical losses would be achieved primarily through reconstruction of distribution networks and modernization of the equipment. Measures on prevention of energy losses will require accurate, complete, and timely information on energy flows and technical capacity of the system. This requires development of a system of monitoring and evaluation of technical capacities. The analysis of the technical condition of the system needs to be carried out in order to identify those parts of the network that need to be reconstructed or replaced. Another important activity is establishment of an independent dispatcher center that will work on optimization of electricity supplies, reduction in electricity blackouts, and reduction of technical and commercial losses.
  • Ensuring security against economic factors. Professional and efficient management of various segments and the energy system at large is the most important objective of the stabilization period. This provides for the development of a model of the optimal energy system and an effective energy management system that will ensure the best coordination of all segments for further development and profitability of the system. Under modern market conditions, management first of all requires well-educated managerial staff, and that necessitates the development of a system for training, retraining, and qualification upgrading of managerial and technical personnel. Secondly, better management requires a number of measures to improve financial flows and their transparency as well as timeliness and fullness of payments of salaries, energy bills, and payments to the state budget. Introduction of international accounting standards together, with modern information technologies, will become an important aspect of energy sector reforms.
  • Development of an optimal and flexible tariff policy. A well thought-out medium-term tariff strategy needs to be developed on which to base an energy policy that will stabilize financial condition of energy companies, encourage energy saving and reduction of costs. Under such a policy, provisions will be made to include in the tariffs all actual costs, eliminate cross subsidies, minimize commercial losses, and ensure timely payment of energy bills. In order to recover the real economic costs, the end-user tariff will be based on the actual cost of producing, transmitting, and distributing electricity and heat energy to the end user. The adjustment of the tariff policy should be carried out together with targeted social assistance by the state to the poorest groups of the population. Minimization and gradual liquidation of cross subsidies call for transparent and focused management mechanism under the tariff policy. Ways of optimizing the system of discounts, installments and benefits; development of the system of discounts for advance payments and for users participation in regulation of the load; as well as development of the system of extra charges for higher quality to some demanding consumers would become the most important areas of attention. A special commission to be created in the future would revise the actual cost of electricity coming from energy companies. As an additional factor for reduction of commercial losses, the system of payments by household consumers will be simplified and the practice of offsets and barter transactions will be abandoned.
  • Reduction of commercial losses. Up to now, the supply of electricity has been treated as a public service, making the responsibility for stealing electricity and non-payment for it a formality. It is necessary to change such practices through changes of the existing energy legislation, optimization of the legal framework of the energy sector and giving energy status of a commodity. It is necessary to provide comments on the legislation and develop methodological recommendations on application of legal measures for forced collection of energy payment debt.
514. Ensuring full independence of the country in the energy area is viewed as the main goal in the energy sector. This envisaged maximum use of domestic energy resources with decentralized supply of energy to the regions of the country, as well as stable and mutually beneficial energy export-import policy. The increased use of domestic energy resources provides for further development of hydropower capacity to cover energy needs of cities, large enterprises, and increased export. Better use should be made of small HPPs and renewable energy resources, together with simultaneous expansion of domestic coal, oil, and gas production. The use of small HPPs and renewable energy sources can significantly improve the situation with the supply of energy to remote areas, especially those that are far from power transmission lines. This could address many social and ecological problems. Bio-fertilizers and biogas produced in the course of processing agricultural wastes can fully satisfy agricultural needs in these resources. Solar water heaters used for seven months a year can replace all boiler houses working on conventional fuel (gas, coal, black oil, etc.) and temporarily replace boilers working on electricity, which will allow significantly reduced energy imports. An important aspect of using solar water heating devices is that they can be installed directly where they are needed, eliminating the need to construct heating systems and carry out expensive servicing. 
515. A mechanism needs to be developed to partially replace the import of gas and oil with increased domestic production. The increase in oil production would be accomplished through introduction of new technologies and attraction of direct investment for exploration of new oil fields.
516. Assessment of the necessary capital investment. According to some estimates, the capital investment needed for the reconstruction of power transmission lines and transformer substations amount to US$365,5 million, while reconstruction of thermal electric stations and heating lines of Bishkek city require an estimated US$60-70 million. It is estimated that rehabilitation of equipment of 0.4 - 10 kilowatt distribution lines will need nearly US$130 million, while replacement of obsolete facilities will require further US$90 million. All together, the capital investment needed in the electricity sector in 2003-2005 amounts to nearly US$220 million. In addition to that, investments into Kambarata HPP-1 and HPP-2 during 2005-2010 will require approximately US$304 mln. and about US$300 will be needed in the same period for the construction of 500 kV Toktogul-Kambarata-Kemin power transmission line.
2. Extractive industry
517. The mining industry is a strategic area for development of the real sector of the economy. Its share in the volume of industrial output, together with refinery output, is about 60 percent. In the last three years, tax receipts to the state budget from the mining sector increased 1.6 times and totaled 474.6 million soms.
518. The potential for development of the mining industry is based on the presence of various mineral resources, the development of which supports the construction and operations of mining and processing enterprises of non-ferrous metals, gold mining, coal, oil and gas, and the construction industry (see Box 2, next page).
519. Mining and refining are basic industries in the Republic, undertaking highly profitable export-oriented production. These sectors account for about 60 percent of the total industrial output of Kyrgyzstan and are based on mineral resources represented by large proven deposits of gold, tungsten, tin, antimony, mercury, rare earth metals and other minerals. Total gold reserves in 28 deposits amount to more than 560 tons.
Gold mining at the Kumtor deposit is very significant since it provides about 40 percent of the total exports of the Republic and growth of industry generally in recent years. The output of the mining and refining industries from 1996 to 2001 increased 25 times as only the result of putting into operation the Kumtor gold deposit and refinery by joint stock company, Kyrgyz Mining Industrial Complex. However, gradual depletion of reserves at this deposit requires intensifying exploration and development of other large and small deposits, involving small and medium businesses.
Kadamjai Antimony Plant that worked steadily until now, reduced its production in the first half of 2002. The major reason is the lack of working capital. Several measures that were undertaken to the moment have stabilized the situation and in 2002 the production at Kadamjai Antimony Plant and Khaidarkan Mercury Plant is expected to grow at the planned rate.
Box 2. Mineral Resources of the Kyrgyz Republic
There are more than 40 forms of mineral resources registered in the State Balance of Mineral Reserves.
Fuel and energy resources are represented by coal, oil and gas. Total explored reserves of coal exceed 1,345 million tons. Geological reserves of oil amount to 97.3 million tons, gas, about 7 billion m3.
Reserves of gold in the deposits under development, together with those intended for development in the near future, total approximately 400 tons, of which gold placer reserves are about 5.7 tons. The major gold mining deposits are Kumtor (164.3 tons according to the FS-95), Jerui (74.7 tons), Taldybulak Levoberezhnyi (80.4 tons). In the Makmal deposit, the reserves of explored gold for underground extraction amount to 11.7 tons.
Large reserves of tin and tungsten ores are concentrated in the deposits at Trudovoe, Uchkoshkon and Kensu. Reserves in the Trudovoe deposits now under development constitute 88.8 thousand tons of tin and 43.9 thousand tons of tungsten trioxide in the Tsentralnyi area and 26.6 thousand tons of tin and 13.5 thousand tons of tungsten trioxide the Lesistyi area. In the Uchkoshkon deposit, the reserves of prospected tin total 74.1 thousand tons. Reserves of tungsten trioxide in the Kensu deposit amount to 29.5 thousand tons.
Mercury reserves comprise mono-metal (mercury) and complex (mercury-and-antimony) ores in the deposits at Khaidarkan (11,996 tons) and Novoe (5,554 tons). Total reserves of mercury in the abandoned deposits at Chonkoi and Chauvai amount to 23.6 thousand tons.
Residual prospected reserves of antimony in developed deposits are 77.5 thousand tons at Kadamjai, 60.3 thousand tons at Khaidarkan, 49.1 thousand tons at Novoe and 23.6 thousand tons at Terekskoe. Geological reserves of antimony in prospected reserve deposits are 16.7 thousand tons at Severnyi Aktash, 39.1 thousand tons at Kassanskoe and 1.8 thousand tons at Abshir.
Significant reserves of rare earth metals of the yttric group are concentrated in the abandoned deposit at Kutessai II (51.5 thousand tons of ore with an average content of rare earth elements of 0.26 percent).
In a thoroughly proved complex containing gold and bismuth deposit at Mironovskoe, reserves of bismuth amount to 1,162 tons and that of gold, 1,095 kg. Further reserves can possibly be identified here.
Large reserves of beryllium ores are concentrated in deposits at Kalesai (in the vicinity of Aktyuz town) and Uzun-Tashty (Kumyshtag River basin). Ore reserves of the Kalesai deposit are 9,245 thousand tons, beryllium 11.7 thousand tons, the content of beryllium oxide in the ore is 0.127 percent. The deposit at Uzun-Tashty has 51.2 million tons of ores with an average content of beryllium oxide of 0.118 percent.
The raw material base of non-metal mineral resources is characterized by a great variety of minerals used for different production purposes. To satisfy the needs of the construction industry, various deposits have been identified in all regions of the country, including brick raw materials (reserves of clay and loam exceed 200 million m3), sand and gravel materials (470 million m3), construction stone (11 million m3), sand (3 million m3), gypsum (28 million tons), and expanded clay (112 million m3).
Cement production is secured by explored reserves of limestone and loam in the deposits at Karagaili-Bulak (limestone, 219 million tons) and Kurmenty (limestone, 53 million tons and loam, 6 million tons). There is a very large deposit in the vicinity of Kyzyl-Kiya City, Aksai; its limestone reserves amount to about 600 millions tons and those of loam, 3.7 million tons.
Basalt from the Sulu-Terek deposit can be used as a raw material for production of mineral wool, superfine fibers and various sanitary and technical products. These reserves amount to 1.4 million m3.
A group of large deposits of highly decorative cover stones (granite, marble, cement rock, syenite) have been prepared for industrial development. Their total reserves are more than 45 million m3. A large center for a stone processing industry can be established in the Talas oblast, based on deposits at Kaindy, Aral, Gulderek, Chaartash and Tashkoro.

520. It will be necessary to attract direct investments in order to ensure strengthening of the existing capacities of the mining and refining industrial complex and further development of enterprises by developing additional deposits.
In this connection, it is planned to provide coordinated state support to enterprises, such as the Russian-Kazakh-Kyrgyz joint venture on production of uranium oxides, Kyrgyz-English joint venture on production of molybdenum and the Kyrgyz-Russian joint venture Poluprovodnik (semi-conductors), as well as to resolve the problem of high dependence of the enterprises of this sector on imported raw materials and inventory, external sales markets and a possibility of restoring former links with CIS enterprises.
Development of the gold deposit Kuran-Jailoo will be resumed this year, and construction of the underground mine will be started at the Makmal deposit, that will allow to continued operations at the site for 10 more years. Projects on development of the deposits at Terekskoe and Ishtamberdi in the Jalal-Abad oblast have been studied. In the near future preparatory organizational and technical measures will be completed and practical development will be started at gold deposits at Taldy-Bulak Levoberezhnyi and Jerui.
Heading works and other types of works will be continued by the Tien-Shan-Olovo (Tien-Shan Tin) joint venture with the activation of a second concentrating mill. Construction of the factory for processing of uranium oxides by ground leaching at the Zarechnoe deposit will allow an increase in the volume of processing of uranium concentrates at the JSC KMIC. Implementation of the project to resume production of poly-crystal silicon by the joint stock company Crystal will ensure production of finished products in 2002 and further increase in poly-silicon production both for export and production of mono-silicon by the JSC Kyrgyz Chemical and Metallurgy Plant. A number of effective measures will be implemented on financial and economic rehabilitation and increase in production output at the Khaidarkan Mercury and Kadamjai Antimony Plants within the framework of specifically developed individual programs. Explored reserves of the tin-and-tungsten deposit at Trudovoe will fully provide for the operation of the concentration mill of the JV Tine-Shan-Olovo in the Enylchek village; as a result of the reconstruction work under way, its capacity will be increased to 140-150 thousand tons. 
Coal industry
521. In spite of significant reserves of all grades of coal in the territory of Kyrgyzstan, the volume of coal production remains insignificant with a declining trend. As a result, the Republic must import coal that, in turn, affects the nations financial and economic situation. At the same time, growing demand for energy resources, and the prospect of higher energy tariffs, necessitate the revival of domestic coal production by opening up the large Kara-Keche coalfield.
Reduced coal production reflects the general decline in industrial production in the Republic and the deteriorating financial status of enterprises that have led to reduced coal consumption in the real sector. Other serious problems are the movement of some consumers to other types of energy; reduced demand in the Central Asian market; high transportation costs that are up to three times the cost of mining coal; there has also been a considerable deterioration of equipment in coal mining enterprises.
A significant increase in the volume of coal production (up to 1,035,000 tons a year) can be attained in the near future due to:
Technical reequipping of the existing open-pit mine at the Kara-Keche deposit (reserves within the area of open-pit mining total 190 million tons).
Putting into operation the mine under construction at the Beshburkhan deposit (primary reserves amount to 2.6 million tons).
Reconstruction of the Jergalan mine.
In 2005, the volume of coal production by the Kara-Keche mine will amount to 550 thousand tons, the Jergalan mine up to 70 thousand tons and the Beshburkhan mine up to 35 thousand tons. Should the agreement on coal supply to the Xin Jian Uigur Autonomous Region of the Chinese Peoples Republic be concluded, the volume of production at the Kyzyl-Bulak deposit in the Alai rayon can be increased up to 200 thousand tons a year.
Oil and Gas Industry
522. The oil and gas industry is at present based on 15 explored oil and gas deposits.
Although there are domestic gas deposits, Kyrgyzstan is a net consumer of imported gas. Households are the largest consumer of natural gas in the Republic; their share in 2001 was 61.5 percent of the total gas consumption. Significant quantities of energy resources are supplied to the Republic on barter conditions or are paid for in hard currency, which affects the economic potential of the sector.
Domestic production of oil and gas products meets only 30 percent of the domestic requirements. However, studies on the possibility of exploring new oil and gas fields suggest that the use of modern production technologies and methods can significantly increase the output.
According to the Program of Development of the Oil and Gas Sector of the Kyrgyz Republic until 2010, as a result of prospecting for new oil and gas deposits using seismic exploration and well drilling in prospective areas, restoration of non-operating wells, resuming of drilling of additional operating wells at proven deposits, the volume of oil and gas production in 2005 can be increased up to 140-145 thousand tons and 50 million m3, respectively.
Problems of development of the mining industry
523. The major problems in the development of the mining industry are:
Lack of financial resources for development and rehabilitation of production processes.
A high capital-output ratio of mining projects.
Technical and technological backwardness of production processes, especially in the coal and oil-and-gas sectors.
Imperfect taxation system and regulatory and legal acts regulating the area of mineral resource use.
Weak development of private enterprise.
Insufficient preparation or lack of deposits for a mid-term and long-term development of oil and gas and gold mining sectors, as well as the need to prospect for deposits of new mineral resources and to organize production of competitive and science-intensive products.
Insufficient level and quality of management in the sector.
Lack of a national comprehensive strategy for development of the mining industry.
524. The above problems can and should be solved by intensifying the efforts of all concerned public administration bodies to attract foreign and domestic private investments into the mining industry and geological exploration sector. The tasks faced by the geological sector on prospecting and studying of new mineral deposits will be undertaken as part of the implementation of programs on socio-economic development of the regions, financed by the national budget. This will include examination of prospective unexplored and under explored sites, supported by the activities of interested foreign firms and companies, and local entrepreneurs. In addition, consultations with international financial and government organizations on possible allocation of a grant to establish the Kyrgyz Science and Production Center on Studying Minerals, will be continued in order to increase the quality and efficiency of laboratory and analytical research.
525. The most important condition for attracting investments to the mining and geological complex is the creation of a conducive legal and taxation climate. For this purpose, according to recommendations of the World Bank experts, it is planned to introduce amendments to the Law on Mineral Resources and the Tax Code related to the area of the use of mineral resources. On the whole, the planned work will be carried out pursuant to the Plan of Measures on the Reform of the Mining Sector approved by the Government.
526. Technologies of computer processing of geological materials will be introduced and improved for prompt provision of illustrative and objective geological information, development of economically substantiated and effective business-plans. Establishment of electronic data bases on various types of mineral resources and deposits will allow intensifying advertising and informational work through Internet, attracting investors interested in geological prospecting and development of mineral resources of Kyrgyzstan.
Local private structures will be widely involved in development of numerous small and medium-size deposits of various mineral resources. Each year 80-100 small deposits of gold, poly-metals, coal, construction materials, mineral waters can become the objects of interest of small and medium businesses.
In order to improve the living standards of the population in the remote areas, it is planned to create conditions for the development of individual free mining activities at non-industrial gold deposits. The legal base for this type of activity has been already established. Up to 2,000 people can be involved in individual mining activities each year.
3. Other industries
Light industry
527. Light industry in the Kyrgyz Republic is represented by more than 350 large, medium and small enterprises, as well as workshops and departments, possessing significant productive capacities for processing local raw materials. An important factor here is that these sectors use up to 90 percent of local natural raw materials. They include wool, cotton and silk, animal skins, non-metallic minerals, natural stones, herbs and mineral waste. There is sufficient capacity to process these raw materials and produce woolen and cotton fabrics, stockings and socks, knitted products, shoes, fabricating materials, cement, glass, medical preparations, etc. These sectors are the most flexible, mobile and socially important, as they provide the largest number of jobs for the population.
528. More than 80 percent of light industry comprises the textile sector. In a majority of cases outdated technology, very obsolete equipment and the seasonal nature of raw materials storage do not allow the products of this sector to fully compete in the market. Development of a number of leading sectors of the textile industry, primary wool processing and yarn and fabric production, is difficult because of unregulated export of wool from the Republic and a lack of raw materials. At the same time, lack of working capital in enterprises and inflexible procurement systems do not allow them to compete with buyers from China and Turkey. On the whole, a majority of the larger enterprises are faced with large accounts payable and receivable and unstable financial situations. In the last 10 years, the share of the sector in the total volume of industrial output decreased from one third to a little bit more than 5 percent. A similar situation has developed in leather and shoe production.
Growth in light industry will be assured by stable work of enterprises in the textile area, in particular, in cotton processing. Certain measures will be taken to stabilize production and economic activities of the joint stock companies Kyrgyz Woolen Worsted Factory and Tekstilschik, that will allow increased production of woolen and cotton fabrics by 40 and 30 percent, respectively. The joint stock companies, Edelveis, Baipak, Kasiet and Jyldyz-Shparta, will implement corresponding individual development programs. It is planned to resume production by joint stock companies of the Bishkek Sewing Factory named after the VLKSM.
Construction Materials
529. Production of construction materials has been developing rather steadily because it is the least capital intensive sector, based on small and medium businesses enterprises. On the whole, this industry provides the Republic with bricks, local matrix materials, reinforced concrete, joinery and other products, as well as developing some other types of construction materials that are new to the market of the Republic, paving blocks, roofing tiles, metal structures and furnishing materials.
Sales to private investors of a controlling interest in strategic enterprises such as the Tokmak Glass Factory and the Kant Cement and Slate Factory, the products of which have a significant share in the regional market, will ensure restructuring of the production process, that will have an impact on growth of production output and export volumes in the near future. However, the absence of the necessary direct investment has not allowed the exploitation of the capacities of large enterprises producing linoleum, construction earthenware products and basalt products, that could have made a significant contribution to development of the sector and have an impact on the structure of export and import.
However, promising production of wollastonite, porcelain clay, porcelain stone, rare deposits of which are located in the Republic, has not been properly developed. The work on attraction of private investments to the joint stock companies involved in such deposits will be continued. 
530. The major goal of industry development is creation of jobs, significant increase in the level and extent of processing of local raw materials, import replacement and increase in the share of local products in the domestic market, growth in the volume of export of finished products.
To implement this goal the priority directions of the work will be the following:
legal support aimed at promotion of free development of industry, including with the use of new technologies for production of competitive products;
assistance in attracting direct investments to the private sector;
promotion of local industrial products to markets, including with the use of mechanisms of concluding intergovernmental agreements on supply of goods and serves for export;
using the system of competitive state assignment for locally produced products;
promotion of association of local commodity producers, including on the basis of establishment of closer cooperation links of large enterprises with small and medium businesses.