World Bank Document

Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 46662-KZ Public Disclosure Authorized

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN Public Disclosure Authorized IN THE AMOUNT OF US$48.0 MILLION

TO THE

KAZAKHSTAN ELECTRICITY GRID OPERATING COMPANY

WITH THE GUARANTEE OF

THE REPUBLIC OF KAZAKHSTAN

FOR A

Public Disclosure Authorized MOINAK ELECTRICITY TRANSMISSION PROJECT

August 7,2009

Sustainable Development Department 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. Public Disclosure Authorized CURRENCY EQUIVALENTS (Exchange Rate Effective June 23,2009) Currency Unit = Kazakh Tenge (KZT), 1 KZT = 100 tyin KZT 1.0 = US$0.0066493 US$l.O = KZT 150.39

FISCAL YEAR January 1 - December31

ABBREVIATIONS AND ACRONYMS

ARNM Agency for Regulation of Natural Monopolies DA Designated Account DBK Development Bank of Kazakhstan DP Development Plan EA Environmental Assessment EBRD European Bank for Reconstruction and Development EIRR Economic Internal Rate of Return EMP Environmental Management Plan ESO Energy Supply Organization FIRR Financial Internal Rate of Return FM Financial Management FY Fiscal Year GHG Greenhouse Gas GOK Government of Kazakhstan GWh Gigawatt Hour (1,000,000 kWh) HPP Hydroelectric Power Plant HV High Voltage IBRD InternationalBank for Reconstruction and Development ICB InternationalCompetitive Bidding IFR Interim Financial Report KEGOC Kazakhstan Electricity Grid Operating Company KOREM Kazakhstan Operator of Spot Electricity Market KZT Kazakh Tenge kV Kilovolt (1,000 Volts) kWh Kilowatt Hour (1,000 Watt Hours) LA Loan Agreement LAP Land Acquisition Plan LAPF Land Acquisition Policy Framework MES Regional Branch of KEGOC MHPP Moinak Hydroelectric Power Plant MWh Megawatt Hour (1,000 kWh)) NGO Non-Governmental Organization NPV Net Present Value NIS North-South OHTL Overhead Transmission Line OSY Outdoor Switchyard PIP Project Implementation Plan PMD Project Management Department PP Procurement Plan REK Regional Electricity Distribution Company ROK Republic of Kazakhstan SOE Statement of Expenditures ss Substation TWh Terawatt hour (1,000,000,000 kWh) - Vice President: Shigeo Katsu Country Director: Motoo Konishi Sector Manager: Ranjit Lamech Task Team Leader: Istvan Dobozi FOR OFFICIAL USE ONLY KAZAKHSTAN Moinak Electricity Transmission Project

CONTENTS

Page A . STRATEGIC CONTEXT AND RATIONALE ...... 1 1. Country and sector issues ...... 1 2 . Rationale for Bank involvement ...... 5 3 . Higher level objectives to which the project contributes ...... 5 B. PROJECT DESCRIPTION...... 6 1. Lending instrument...... 6 2 . Project development objective and key indicators ...... 6 3 . Project components...... 6 4 . Lessons learned and reflected in the project design ...... 8 5 . Alternatives considered and reasons for rejection ...... 8 C . IMPLEMENTATION...... 9 1. Partnership arrangements ...... 9 2 . Institutional and implementation arrangements ...... 9 3 . Monitoring and evaluation ofoutcomes/results ...... 10 4 . Sustainability ...... 10 5 . Critical risks and possible controversial aspects ...... 11 6 . Loan conditions and covenants...... 12 D . APPRAISAL SUMMARY ...... 13 1. Economic and financial analysis ...... 13 2 . Technical ...... 16 3 . Fiduciary ...... 16 4 . Social ...... 18 5 . Environment ...... 18 6 . Safeguard policies...... -19 7 . Policy Exceptions and Readiness ...... 21 Annex 1: Country and Sector Background ...... 22 Annex 2: Major Related Projects Financed by the Bank and/or Other Agencies ...... 27 Annex 3: Results Framework and Monitoring...... 28 Annex 4: Detailed Project Description ...... 31

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization . Annex 5: Project Costs ...... 38 Annex 6: ImplementationArrangements ...... 39 Annex 7: Financial Management and Disbursement Arrangements ...... 43 Annex 8: Procurement Arrangements ...... 50 Annex 9: Economic and Financial Analysis ...... 55 Annex 10: Safeguard Policy Issues...... 66 Annex 11: Project Preparation and Supervision ...... 68 Annex 12: Documents in the Project File ...... 69 Annex 13: Statement of Loans and Credits ...... 70 Annex 14: Country at a Glance ...... 71 Annex 15: Map ...... 73

MAP IBRD 36700 KAZAKHSTAN

MOINAK ELECTRICITY TRANSMISSION PROJECT

PROJECT APPRAISAL DOCUMENT

EUROPE AND CENTRAL ASIA

ECSSD

Date: August 7, 2009 Team Leader: Istvan Dobozi Country Director: Motoo Konishi Sectors: power (100%) Sector Manager: Ranjit Lamech Themes: Infrastructure services for private sector Sector Director: Peter D. Thomson development (P) Project ID: P114766 Environmental screening category: Partial assessment Lending Instrument: Specific Investment Loan Safeguard screening category: Limited impact (B)

Source Local Foreign Total BORROWER 5.272 20.089 25.361 INTERNATIONAL BANK FOR 0.000 48.000 48.000 RECONSTRUCTION AND DEVELOPMENT Total: 5.272 68.089 73.361

Borrower: Kazakhstan Electricity Grid Operating Company (KEGOC) 37 Beibitshilik, Astana 010000, Republic of Kazakhstan Tel: +7 (7172) 97 01 59 Fax: +7 (7172) 97 04 55 E-mail: keaoc@,kepoc.kz Guarantor: Republic of Kazakhstan Responsible Agency: KEGOC JSC

Does the project depart from the CAS in content or other significant respects? Ref; PAD [ No A.3 Does the project require any exceptions from Bank policies? Ref; PAD 0.7 [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [ IN0 Is approval for any policy exception sought from the Board? [ ]Yes [ ]No Does the project include any critical risks rated “substantial” or “high”? [ ]Yes [XINO Re$ PAD C.5 Does the project meet the regional criteria for readiness for implementation? Re$ PAD [XIYes [ ]No D. 7 Project development objective Ref. PAD B.2, Technical Annex 3

The primary project objective is to increase and improve the supply of electricity to business enterprises and households in southern Kazakhstan in an economically and environmentally sustainable manner.

Project description Ref. PAD B.3.a, Technical Annex 4

Construction of 220 kV overhead transmission lines (OHTLs) between Moinak HPP and Shelek Substation (SS) and between Moinak HPP and Robot SS.

Modernization Shelek SS and Robot SS.

Construction of outdoor switchyard at the Moinak HPP to evacuate power to Shelek SS and Robot SS.

Consulting and technical services.

Which safeguard policies are triggered, if any? Ref. PAD D.6, Technical Annex 10

Environmental Assessment .(OP/BP/GP 4.0 1). The project presents well-defined and well-understood environmental issues of narrow scope. The expected environmental issues are minor, of limited duration, influence a relatively small area and occur primarily during the construction phase. Environmental category: B. An Environmental Management Plan (EMP) was prepared and disclosed in Kazakhstan and the Bank's InfoShop. An Environmental Assessment (EA), including updated EMP for the detailed alignment and working designs of the OHTLs will be prepared during implementation when these are available, and will be subject to review and approval by the Bank and by the competent authorities as required under the EA procedures of the Republic of Kazakhstan (ROK).

Involuntary Resettlement (OPBP 4.12). Relatively limited amount of land will need to be expropriated for the Moinak HPP switchyard (4 hectares) and the OHTL towers (8.1 hectares). Therefore, a Land Acquisition Policy Framework (LAPF) was prepared by the Borrower as a condition of appraisal. No physical displacement of people will take place under the project. A specific Land Acquisition Plan (LAP) will be prepared by the Borrower prior to the commencement of any construction works.

Safety of Dams (OPBP 4.37). The project is linked to the construction of the 300 MW Moinak HPP which includes an upstream dam. A Bank-appointed dam safety specialist reviewed the design and construction practices employed and concluded that the dam was designed, constructed and will be operated in a manner consistent with Bank policy.

Significant, non-standard conditions, if any, for: Ref. PAD (2.7 Board presentation: None

Loan effectiveness: None

Covenants applicable to project implementation: The Borrower, through the Project Management Department (PMD), shall carry out the project in accordance with the requirements, criteria, organizational arrangements and operational procedures set forth in the EMP, the Project Implementation Plan (PIP) and the LAPF, and shall not assign, amend, abrogate or waive any provisions of the EMP, the PIP or the LAPF without prior approval of the Bank. At all times during the implementationof the project, the Borrower shall maintain the PMD and shall entrust it with such functions and powers, and provide such funds, facilities and resources, including qualified and experienced staff in adequate numbers, as may be deemed necessary by the Bank. The Borrower shall: (a) prepare, prior to the commencement of any construction works under the project, a LAP, satisfactory to the Bank, in accordance with the LAPF; (b) implement the LAP, including, unless otherwise agreed with the Bank, payment in full compensation to all affected people prior to commencing of any related works; and (c) not amend, suspend or abrogate any of the provisions of the LAP without the prior agreement of the Bank. The Borrower shall: (a) prepare, prior to the construction of OHTLs, a detailed EA, including updated EMP, satisfactory to the Bank; (b) carry out the project in accordance with the EA and EMP; and (c) not amend, suspend or abrogate any of the provisions of the EA or EMP without the prior agreement of the Bank. The Borrower shall ensure that the OHTLs will not encroach upon any part ofthe Charyn and Altyn-Emel Specially Protected Natural Areas.

The ROK shall ensure that KEGOC’s tariffs are maintained at levels sufficient to fully cover the company’s prudently incurred operating costs as well as a regulated rate of return on fixed assets employed.

The Borrower shall not grant new tariff discounts on transmission services except for those that are based on commercial considerations of the company. In no case shall discounts be granted for transmission volumes which would either displace higher-revenuevolumes or require new investments in transmission capacity.

The Borrower shall meet the following financial performance indicators: (i)maintain a current ratio of at least 1 .O; (ii)maintain a self-financing ratio equal to 20% of the three-year moving average investment program; and (iii)refrain from incurring additional debt unless the debt-service ratio (as measured by current net revenues and maximum future debt service requirements) is at least 1.2.

STRATEGIC CONTEXT AND RATIONALE

Country and sector issues

1. Country Context. Kazakhstan enjoyed strong economic performance between 2000 and 2007, with average real GDP growth of 10%. However, the economy is highly resource- dependent, with minerals, oil and gas accounting for 73% of exports and 39% of GDP. Consequently, the Republic of Kazakhstan (ROK) has made diversification of the economy a development priority.

3. The overall financial position of Kazakhstan remains fairly strong, but could weaken somewhat in the near future. International monetary and National Oil Fund reserves still amount to over US$45 billion. A decision to defend the current exchange rate of 150 UTto the US$ could lead to the further depletion of reserves.

4. Kazakhstan continues to attract substantial foreign direct investment in connection with the large off-shore Kashagan oil project, which will allow the country virtually to double oil production in 10-15 years. This fact, together with the probable recovery of commodities prices along with the world economy in a few years, implies that the medium and longer term growth picture for Kazakhstan looks promising. In the context of tighter conditions for Kazakhstan on international financial markets, the government is considering large-scale sovereign borrowing from International Financial Institutions, particularly for infrastructure.

5. Sector Context. The ongoing financial crisis is expected to impact the electricity sector in two important ways. The slowdown of the economy will somewhat ease the current and projected power deficits in the ,country. However, this impact can be offset by the more restricted access to commercial financing of generation and distribution investments.

6. Electricity Generation. There are 60 power generation plants in Kazakhstan with a total installed capacity of 18,931 MW, of which 14,788 MW is available for generation. In 2007, total generation was 76.365 TWh, of which coal-fired plants accounted for 84.3%, hydro power plants (10.6%) and gas-fired plants (5.1%) providing the balance. While Kazakhstan has sufficient generation capacity to meet domestic power demand, four-fifths of power generation comes from the northern part of the country, predominantly from power plants located in the coal-producing regions and to a lesser extent from hydroelectric facilities. Generation facilities in the south are limited to small hydro, combined heat and power plants, and a high cost gadoil- fired power plant. Most of the large-sized thermal generation assets were privatized. The poor condition of the main equipment in many power plants will require decommissioning of a significant amount of installed capacity i.n the near future. 7. Electricity Consumption and Trade. In 2007, total generation and gross domestic consumption were 76.365 TWh and 76.440 TWh, respectively, with a small net import of 0.08 TWh.’ Kazakhstan exports power only to Russia. Imports are from Russia and Central Asia. Imports from Central Asia are limited and depend primarily on the water released for irrigation from the Toktogul reservoir in Kyrgyzstan and as such do not coincide with the Kazakh peak demand in the month of January.

8. Transmission. The total length of Kazakhstan’s transmission lines (ranging from 35 kV to 1,150 kV) is 23,281 km. The 74 high voltage transmission substations with a total capacity of 33,697 MVA are located in nine regional power networks. KEGOC owns and operates all transmission assets at the 1,150 kV and 500 kV levels. KEGOC is responsible for dispatch control and operates international connections.

9. KEGOC’s transmission system consists of three regional power grids:

0 Northern grid connected to the Russian power system.

0 Southern grid connected to Central Asian power system and the northern grid with a single circuit 500 kV tie line.

0 Western grid comprising of two subsystems which are largely isolated from the other systems and import power from Russia to supplement local generation.

10. Distribution and Supply. There are 2 1 Regional Distribution Companies (REKs), which own smaller sized generation units, transmission at 110 kV level and electricity and heat distribution networks. The total capacity of the regional level generating plants accounts for nearly half of the installed capacity in the country.

12. Privatization. Most of the large-sized thermal generation assets have been privatized to foreign and local strategic investors. The large hydropower plants have been given on a concession basis to private investors. Most of the REKs were privatized.

13. Wholesale Market Structure. The wholesale electricity market is fully liberalized and operates mainly on the basis of bilateral contracts between generators and large consumers or ESOs for direct sale of power.

For more details, see the national electricity balance table in Annex 1.

2 14. Under the ongoing Bank-supported electricity transmission rehabilitation project, the GOK established a well-functioning liquid spot market (KOREM), accounting for about 20% of total wholesale turnover.

15. To complete the wholesale electricity market reforms, a real-time balancing market was established under the ongoing Bank-supported North-South (NE) Electricity Transmission Project. Since January 2008, the balancing market has been operated by KEGOC on a trial basis.

16. Sector Regulation. The Ministry of Energy and Mineral Resources is in charge of licensing activities. Under the transmission rehabilitation project, a Grid Code was adopted which established a set of transparent rules governing non-discriminatory third-party access to the transmission network.

17. Under the Law on Natural Monopolies, the natural monopoly parts of the power sector (KEGOC and REKs) are regulated by the Agency for Regulation of Natural Monopolies (ARNM). The Law ensures full recovery of justifiable costs, including the cost of new investments, for the regulated monopolies. KEGOC’s transmission tariffs are approved by the ARNM on a justifiable cost-plus basis. The existing tariffs are cost-reflective and provide for a 10% rate of return on the regulated asset base, thereby allowing KEGOC to operate profitably. Under the N/S project, zonal tariffs were introduced to foster greater competition among generators and provide market-based signals to deal with congested transmission capacity.

18. Growing Electricity Deficit in Southern Kazakhstan - Key Project Rationale. Vigorous economic growth and increasing diversification of the economic base have led to a sharp upswing in electricity demand in Kazakhstan. Demand growth has averaged over 6% per year between 2000 and 2007. The southern regions have experienced especially rapid growth (at about 8% per year).2 While Kazakhstan has sufficient generation capacity to meet domestic power demand, four-fifths of power generation comes from the northern part of the country. Generation facilities in the south are limited to small hydro, combined heat and power plants, and a high-cost gadoil-fired plant at Zhambyl.

19. The existing N/S electricity transmission lines via which low-cost electricity is transmitted from the north to the south have a limited capacity of 650 MW. This is grossly insufficient to meet demand in the south. In 2007, power deficit in the south (difference between demand and local generation) was 865 MW (or half of regional consumption). At present, the deficit is met largely by transmitting power from the north and in part by imports. During winter, the costly Zhambyl plant is operated. However, the deficit cannot be fully met in the winter period of maximum electric loads, which necessitates restrictions on consumption (load ~hedding)~with an adverse impact on regional economic development.

2 For the purpose of this project, Southern Kazakhstan comprises the following oblasts: Almaty, Zhambyl, South- Kazakhstan and Kyzylorda. For example, in the Almaty power region, consumption restrictions ranged from 50 MW to 80 MW during the 2005-2006 and 2006-2007 winter periods. During the 2008-2009 winter, supply restrictions in southern Kazakhstan were in the range of 230-360 MW.

3 20. Looking ahead, following the recovery from the economic slowdown in 2008-2009, electricity demand in southern Kazakhstan is expected to increase vigorously (nearly 6% per year till 2020) and the power deficit is expected to quadruple by 2020 (from 865 MW in 2007 to 3,400 MW) unless major new investments are undertaken in the generation and transmission sectors. The deficit is predicted to be particularly severe in the Almaty region. At present, energy and peak supply capacity in the south is limited to 3,000 MW of total installed capacity (of which only 2,300 MW is operational) with most of the plants obsolete. Investment costs in the south are prohibitive in comparison with the north both for rehabilitation of existing capacity and for new generation. Therefore, major investments are unlikely in the south in the medium term except for the Moinak HPP (MHPP) under completion whose supply of valuable peak power is critically needed also for frequency regulation. Net imports from Central Asia are not expected to increase substantially in the foreseeable future as availability is primarily dependent on the water released for irrigation from the Toktogul reservoir in Kyrgyzstan. Longer term imports from Tajikistan and Kyrgyzstan are uncertain at this time and depend crucially on the availability and costs of hydropower to be generated by plants currently under construction (Sangtuda in Tajikistan) or envisaged (Rogun in Tajikistan and Kambarata in Kyrgystan).

21. In order to address the growing supply constraints in the southern region, in May 2007 the GOK approved an ambitious plan for the expansion and further modernization of the electricity industry, focusing on substantial increase of generation capacity as well as extension and modernization of the high voltage transmission network during the period 2007-201 5.4

22. On the transmission side, the second N/S line is currently under advanced construction with IBRD co-financing and, upon completion in 2010, it will increase the interconnector’s capacity from 650 MW to 1,350 MWV5However, the supply deficit in the south cannot be eliminated even when the first unit of the new Balkhash coal-fired power plant comes on stream around 201 5. The shortage will remain particularly acute for peak power.

23. Therefore, the proposed Moinak transmission investments, in conjunction with the MHPP, are a key part of the overall strategy to minimize the power shortage in the south by 2015. Among the priority new generation projects is the MHPP, a 300 MW facility on the Charyn River under advanced construction to be completed in 2012. (For more details, see Annex 4). The plant will generate much-needed incremental regulating power. The proposed project will support connection of the MHPP to the high voltage transmission network through construction of new transmission lines as well as modernization of related SS facilities.

24. Another key transmission project is the construction of a new bulk supply point for Almaty Oblast (“Alma” SS) including upgrading of transmission links between “Alma” and existing as well as prospective power sources (Balkhash, MHPP, etc.). Existing high voltage substations in the south are overloaded and lack the capacity to handle rapidly rising loads, which causes power restrictions and weakens reliability of supply.

Under the plan, 8,164 MW additional generation capacity is envisaged totaling US$12.9 billion, including the construction ofnew power plants (Balkhash Power Plant, 2,640 MW; Moinak HPP, 300 MW, etc.) and expansion of existing generation facilities (Ekibastuz GRES-2, 1,050 MW; Astana TETs-2, 240 MW, etc.). ’ However, that second N/S line cannot be fully utilized until substantial additional coal-based generation capacity is created, which is not expected before 2015. Even when fully operational in 2010, transfers to the south will be constrained by the current lack of surplus capacity available for power generation.

4 25. Development Impact. Expanding and upgrading the transmission system in the south is urgently needed to forestall emergency situations and widespread supply cut-offs hurting the economy and the population. The project also offers benefits in terms of system reliabilityhecurity and higher quality electricity supply. The extended transmission system (Moinak facility together with the proposed “Alma” SS project) will strengthen the reliability of the parallel operation ofthe power systems ofKazakhstan and other countries in Central Asia.

Rationale for Bank involvement

26. The Bank has had a long and productive relationship with both the Republic of Kazakhstan and KEGOC in the development of the electricity sector of Kazakhstan. Under two ongoing Bank-financed transmission operations, the country has developed one of the most modern and efficient power systems in the Former Soviet Union, with an effective Independent System Operator and a liquid, electronic spot market supplementing contractual arrangements between generators and customers.

27. The Bank’s involvement in the proposed project would allow continued policy dialogue with the GOK and continued implementation monitoring of important sector reforms initiated under the two transmission operations. Moreover, the financial savings to KEGOC associated with Bank participation are substantial and would allow more moderate increases in transmission tariffs than would otherwise be required, benefiting all electricity consumers.

28. The proposed project is consistent with the objectives of the Country Partnership Strategy6, which are to support the development priorities of the GOK. These include as one of the key pillars “investing in human capital and infrastructure” given that major segments of infrastructure (e.g., roads and power transmission networks) do not meet the needs of a rapidly expanding economy. The proposed project would support this development priority by addressing growing constraints to reliable power supply.

Higher level objectives to which the project contributes

29. Kazakhstan’s current development focus is on achieving international standards for public services and enterprises and increasing the competitiveness of its tradable non-oil sectors. This in turn involves (i)improving public institutions and policies; (ii)fostering competitiveness and facilitating business; (iii)investing in human capital and infrastructure; and (iv) safeguarding the environment. Reliable and cost-effective electricity supply is fundamental to both social and economic development. To this end, the GOK has chosen to invest significant efforts in support of the modernization and expansion of the power sector. From the broader development perspective, the project will enhance the well-being ofthe population in southern Kazakhstan by (i)providing low-cost and higher quality energy; (ii)removing a binding energy supply constraint to continued economic growth in the region; and (iii)increasing the region’s competitiveness in terms of industrial and commercial development with related benefits in terms ofemployment and income.

The Country Partnership Strategy for Kazakhstan was presented to the Bank’s Board of Executive Directors on September 8, 2004 and updated in a Progress Report No. 43393-KZ dated May 1, 2008 covering years through 2010.

5 PROJECT DESCRIPTION

Lending instrument

30. Specific Investment Loan (SIL) would be used. The Bank would extend an IBRD loan of US$48.0 million to KEGOC to finance the proposed project under terms agreed during project preparation. The Borrower has elected to take a US Dollar Flexible Loan at 6 month LIBOR plus fixed spread, commitment-linked, level repayment of principal with 5 years grace period and 25 years maturity. The loan will be guaranteed by the Republic of Kazakhstan. The total project cost is US$68.6 million. Total financing required (including interest during construction and front-end fee for the IBRD loan) is US$73.4 million ofwhich the Borrower will finance US$25.4 million from its own resources.

Project development objective and key indicators

31. The primary project objective is to increase and improve the supply of electricity to business enterprises and households in southern Kazakhstan in an economically and environmentally sustainable manner. This objective will be achieved by increasing the capacity of the power transmission network to allow the evacuation of clean electricity generated by the MHPP to the south.

32. Completion of the integrated project (HPP and transmission) is expected to have the following o~tcomes:~

0 Increase in the amount of power available to customers in the southern region with a consequent reduction in load shedding. Improved quality and reliability of electricity supply. 0 Lower average cost of generation owing to the introduction of additional hydroelectric power into the system. 0 Reduced GHG emissions as a result of displacement of coal/oil-based thermal generation.

33. The project monitoring indicators are as follows:

0 On completion of the project, available peak capacity in the southern region will be increased by an average of 250 MW. 0 On completion of the project, the need for peak period load shedding in the southern region will decline. On average, once the HPP is operational, in excess of 1,000 GWh ofhydroelectricity will be available to electricity consumers in the southern region. About 1.2 million tons of COz emissions will be avoided annually.

Project components

7 The outcomes can be assessed in a meaningful way only for the integrated project (HPP and transmission) as a whole.

6 34. The project comprises the construction of two 220 kV single-circuit alternate current OHTLs, with a combined length of about 322 km, to evacuate power from the MHPP to the existing 220 kV Shelek SS and Robot SS; the modernization of the above SSs; and construction of an outdoor switchyard (OSY) at MHPP. Specifically, the project will be undertaken under the following major components:*

Component A - Construction of Transmission Lines. It consists of the following sub- components: A1 - Construction of OHTL from MHPP to Shelek SS. This involves the construction of about 97 km long 220 kV single-circuit OHTL. The design includes aluminium conductor steel reinforced (ACSR), horizontal phase arrangement, anchor angle steel towers, ground wire lightning protection, and high frequency carrier communication.

A2 - Construction of OHTL from MHPP to Robot SS. This involves the construction of about 225 km long 220 kV single-circuit OHTL. The design includes ACSR, horizontal phase arrangement, anchor angle steel towers, ground wire lightning protection, and high frequency carrier communication.

Component B - Modernization of Substations. It consists ofthe following sub-components: B1 - Construction of 220/110 kV OSY at MHPP. The works include the construction with a configuration consisting of double main busbars and transfer bus and installation of circuit breakers, disconnect switches, current and voltage transformers, and lightning overvoltage and relay protection systems.

B2 - Modernization of 220 kV Robot SS. The works include the reconstruction ofthe existing 220 kV switching topology and installation of circuit breakers, disconnectors, current and voltage transformers, and lightning overvoltage and relay protection systems.

B3 - Modernization of 220 kV Shelek SS. The works include the reconstruction ofthe existing 220 kV switching topology and installation of circuit breakers, disconnectors, current and voltage transformers, and lightning overvoltage and relay protection systems.

Component C - Consulting and Technical Services. It consists of the following sub- components: C1 - Procurement and project management. This comprises consulting services for procurement and project management, including: the preparation of bidding documents, assistance in bid evaluation and implementation supervision. C2 - Technical services. These include support for selection ofthe transmission routes, conduct of engineering surveys and engineering supervision of the turn-key contracts during construction.

8 In order not to compromise the competitiveness of the procurement process, the cost estimates for the individual project components were excluded in this version of the PAD which the Bank releases to interested parties after the Board of Executive Directors approves the project. This was done at the Borrower’s explicit request during loan negotiations.

7 Lessons learned and reflected in the project design

35. With respect to lessons to be drawn from prior work in the region and sector, Bank experience has shown that (i)the need to coordinate among key GOK agencies can present challenges that should be taken into account in both the project processing plan and in the ultimate scope and design of the project; and (ii)competent and efficient national project management staff are invaluable in ensuring the viability and sustainability of the project and should be brought on at an early stage. In the case ofthe proposed project, a significant amount of the necessary coordination has already been carried out by KEGOC, including obtaining the approval of the State Expertise, and obtaining support of GOK ministries with regard to the feasibility study, environmental impact assessment and project financing plans.

36. Prior experience in the implementation of transmission projects has also revealed some specific areas that require special attention, including the need for thorough analyses so that facilities are designed and routed to minimize social impact. Also, commitment by provincial governments and public participation are key factors to successful environmental management. All of these issues are addressed in the proposed project as part of the detailed route selection and environmental impact assessment. Finally, previous projects with KEGOC have shown that turn-key contracts for the construction oftransmission lines and rehabilitation of substations provide an efficient way of implementing projects in a cost-effective manner without over-burdening the company’s project management capabilities.

Alternatives considered and reasons for rejection

37. Technical Alternatives. The approach adopted by KEGOC to transmission line routing encompassed economic, technical, social and environmental considerations. Identification ofthe routes was carried out using aerial photos and topographic maps.

38. According to the feasibility study, the preferred routes for the two OHTLs were chosen after a thorough evaluation of potential route alternatives. The following main alternatives were considered:

One double-circuit OHTL to Shelek SS. One double-circuit OHTL to Saryozek SS. Two single-circuit OHTLs to Shelek SS (on the same route). Two single-circuit OHTLs to Saryozek SS (on the same route). One single-circuit OHTL to Shelek SS and a single-circuit OHTL to Saryozek SS passing through Tashkarasu SS and Aidarly SS. One single-circuit OHTL to Shelek SS and a single-circuit OHTL to Saryozek SS. One single-circuit OHTL to Shelek SS and a single-circuit OHTL to Robot SS.

Although option (a) was perceived to be potentially a simpler and cheaper option, purely on the basis that it ensures that the capital costs of the transmission line are minimized, this alternative was considered unreliable from the power system operation standpoint. Power system security of supply requires sufficient and reliable availability of transmission capacity to link production with generation andor consumption. Options (a) through (d) accommodate such reliability and security concerns. Double-circuit transmission lines are vulnerable in that both

8 circuits are assembled on the same mounting and therefore subject to the same atmospheric risks. The same applies to transmission lines sharing the same route, although the likelihood of suffering the same impact is reduced by the fact that the lines are mounted on different pylons. In addition, these options presented problems regarding insufficient existing capacity at the receiving SSs. Consequently, further expansion investment was needed. Options (e) and (0 were dropped for environmental reasons (OHTL crossing the Charyn and Altyn-Emel “Specially Protected Natural Areas”). In the face of the legal obstacles, the focus of the analysis has shifted to option (g) which minimizes overall project costs, maximizes the reliability and security of supply criteria, and complies with relevant environmental protection requirements of the ROK.

40. Electricity Imports into Southern Kazakhstan. As an alternative to domestic generation, consideration was given to the possibility of increased imports of electricity from Kyrgyzstan and Tajikistan, both of which have low-cost hydroelectric power. However, the hydropower plants also supply water for irrigation, and are dispatched so as to ensure adequate water supply to the agriculture sector. As a result, surplus electricity from these countries is available mainly on a seasonal basis and could not be relied on to cover growing winter peak demand in southern Kazakhstan. In addition, the available hydro-power export capacity in Kyrgyzstan and Tajikistan is seriously limited in relation to Kazakhstan’s needs. Possible new generating facilities in Kyrgyzstan and Tajikistan would increase the export potential, but most of these are still at the conceptual planning stage.

IMPLEMENTATION

Partnership arrangements

None.

Institutional and implementation arrangements

41. Borrower. The Borrower is the Kazakhstan Electricity Grid Operating Company ’ JSC (KEGOC) which was established in 1996. KEGOC is fully state-owned. The state holding company SamrukKazyna National Welfare Fund is its sole shareholder. KEGOC provides electricity transmission services and centralized operating and dispatching management of the integrated national power system. The company is responsible for ensuring stability and reliability of the high voltage Unified Power System of Kazakhstan as well as equal access to its network for both electricity producers and consumers. It is also responsible for negotiating and managing international trade and transit arrangements. KEGOC is regulated by ARNM, which is responsible for setting transmission tariffs. Company property consists primarily of power transmission lines, 74 high voltage SSs, the National Dispatch Center and nine Regional Dispatch Centers. Total fixed assets as of.end-2007 were valued at US$900 million, while operating revenue for the year totaled about US$200 million.

42. The Borrower has performed satisfactorily under the ongoing Bank-financed operations: the Electricity Transmission Rehabilitation Project and the N/S Transmission Line Project.

9 43. Project Executing Agency. The executing agency responsible for project management and implementation of the project will be KEGOC. The company has an established Project Management Department (PMD) which has been responsible for the implementation of the two ongoing Bank-financed projects. The PMD is staffed by specialists in technical, financial, environmental, and procurement matters. The PMD will carry out the day- to-day implementation activities of the proposed project, including procurement, project accounting and financial reporting, disbursement of funds, administration of the Designated Account (DA), withdrawal applications for disbursements and external audit arrangements. The detailed organizational scheme for implementation of the project is in Annex 6. The PMD prepares a comprehensive Project Implementation Plan (PIP) which may be amended from time to time with the concurrence of the Bank.

44. Financial Management. The PMD will handle all financial management aspects of the projects under implementation and has established satisfactory financial management arrangements (see details in Annex 7).

45. Disbursement. Components A, B and C1 of the project will be co-financed by the Bank. The proceeds of the loan will be disbursed over a period of 3.5 years. The project will follow transaction-based disbursement procedures: payments through DAYreimbursement, direct payments and special commitments (see Annex 7).

46. Procurement. The project components to be financed by the Bank loan are grouped into three packages: (i)construction of transmission lines (design, supply and installation arrangement); (ii)substation modernization (design, supply and installation arrangement); and (iii)consultant services for procurement and project management (QCBS procedures). Details on procurement arrangements and the project Procurement Plan are in Annex 8.

Monitoring and evaluation of outcomes/results

47. The PMD, with the assistance of KEGOC management and the relevant ROK agencies, will monitor progress against agreed performance indicators specified in section B.2 and Annex 3. The PMD will provide, on a quarterly basis, 45 days after the end of each quarter, consolidated reports on project implementation progress in the Bank’s Interim Financial Report (IFR) format.

Sustainability

48. The proposed project enjoys strong support from the ROK which is the majority investor/owner in the associated MHPP. KEGOC has already invested approximately US$0.5 million in preliminary feasibility and design work. In June 2008, the ARNM approved an increase of approximately 10% in the transmission tariff and 20% in the dispatch tariff. The company’s 2009-2020 Development Plan envisions further increases of 16% in the transmission tariff and 10% in the dispatch tariff in 2009. The ROK has also committed to provide up to KZT 9 billion (US$75 million) in additional equity over the 2008-2010 period of which KZT 4.23 billion (US$35.2 million) was provided in 2008 and further equity injections of up to KZT 20.8 billion (US$173 million) over the 201 1-2017 period to ensure the company’s liquidity.

10 49. Over the longer term, the sustainability ofthe project will depend on:

Preserving the financial viability of KEGOC through timely adjustment of the transmission tariffs in accordance with the approved regulatory principles of cost recovery and return on transmission assets. 0 Continued ROK support for ensuring that the company has sufficient cash flow to fund ongoing capital investment programs and service its debts. Continued growth in the power market.

Critical risks and possible controversial aspects

Critical Risks

Risk Risk Rating Risk Mitigation Measure (After Mitigation)

From Outputs to Objective Inadequate transmission tariffs jeopardize M ARNM has consistently adhered to its mandate the financial viability of KEGOC and to set tariffs at levels sufficient to fully recover hence its ability to properly maintain and prudently incurred operating costs plus a return operate the network. on investment. Financial covenants in the Loan Agreement, together with a tariff-adequacy provision in the Guarantee Agreement, will ensure that tariffs are maintained at levels sufficient to cover KEGOC’s longer term cash flow requirements. Tariff discounts on transmission services M Restriction of discounts to those that can be weaken KEGOC’s revenue base and fully justified on the basis of commercial financial viability. considerations will be covenanted in the Loan Agreement. M Construction of the MHPP has been largely on delayed benefits and hence in reduced schedule to date and is expected to be returns on transmission investment. completed without significant delay given its high priority in GOK sector strategy (and high attention given to the project) and contractual arrangements in place. Declining economic growth reduces N Electricity demand in the region already demand for electricity in the southern exceeds available peak supply. Even without region of Kazakhstan. further vigorous growth in demand over the coming period, the bulk of MHPP capacity would be needed to avoid peak period load shedding.

M Preliminary project designs were developed by competent agencies and thoroughly reviewed under GOK State Expertise. Detailed working designs will be developed by the international turn-key contractor to be selected

11 Risk Risk Rating Risk Mitigation Measure (After Mitigation)

competitively. The project.. will use standard technologies. Project implementation delays due to lack M Under ARNM regulation KEGOC is entitled to of local financing. recover the capital costs incurred under GOK- approved projects. In addition, under a formal agreement, KEGOC can receive capital injection from its shareholder SamrukKazyna to cover projected funding shortfalls. Project implementation delays due to M An international consultant will assist KEGOC weak project management or overloaded in procurement and project management. The implementation capacity. turnkey procurement should prevent excessive delays resulting from problems of implementation coordination. KEGOC’s PMD will be strengthened. Overall Risk Rating M

50. According to the Transparency International’s Corruption Perception Index (CPI) of 2007 and 2008, there is a perception of high corruption in Kazakhstan, with the country occupying No. 150 position (CPI score of 2.1) in 2007. However, KEGOC is a well-managed company with strong corporate governance arrangements and no incidences of corruption have been flagged during the implementation of the two Bank-financed projects. The company has submitted financial reports on time and has been audited regularly by reputable audit firms. No major issues have been raised either in the audit reports or management letters. The country risk is significant, but the residual FM risk after mitigation is assessed to be moderate.

Possible ControversialAspects: None

Loan conditions and covenants

51. The non-standard covenants included in the legal agreements are as shown below.

Guarantee Agreement

52. The ROK shall ensure that KEGOC’s tariffs are maintained at levels sufficient to fully cover the company’s prudently incurred operating costs as well as a regulated rate of return on fixed assets employed.

Loan Agreement

53. The Borrower, through the PMD, shall carry out the project in accordance with the requirements, criteria, organizational arrangements and operational procedures set forth in the EMP, PIP and LAPF, and shall not assign, amend, abrogate or waive any provisions of the EMP, PIP or the LAPF without prior approval of the Bank.

12 54. At all times during the implementation of the project, the Borrower shall maintain the PMD and shall entrust it with such functions and powers, and provide such funds, facilities and resources, including qualified and experienced staff in adequate numbers, as may be deemed necessary by the Bank.

55. The Borrower shall:

(a) prepare, prior to the commencement of any construction works under the project, a LAP, satisfactory to the Bank, in accordance with the LAPF; (b) implement the LAP, including, unless otherwise agreed with the Bank, payment in full of compensation to all affected people prior to commencing of any related works; and (c) not amend, suspend or abrogate any of the provisions of the LAP without the prior agreement of the Bank. 56. . The Borrower shall:

(a) prepare, prior to the construction of OHTLs, a detailed EA, including updated EMP, satisfactory to the Bank; (b) carry out the project in accordance with the EA and EMP; and (c) not amend, suspend or abrogate any of the provisions of the EA or EMP without the prior agreement of the Bank. 57: The Borrower shall ensure that the OHTLs will not encroach upon any part of the Charyn and Altyn-Emel Specially Protected Natural Areas.

58. The Borrower shall not grant new tariff discounts on transmission services except for those that are based on commercial considerations of the company. In no case shall discounts be granted for transmission volumes which would either displace higher-revenue volumes or require new investments in transmission capacity.

59. The Borrower shall meet the following financial performance indicators: (a) maintain a current ratio of 1.0; (b) maintain a 20% self-financing ratio of the 3-year moving average investment program; and (c) refrain from incurring additional debt unless the debt-service ratio is at least 1.2.

APPRAISAL SUMMARY

Economic and financial analyses

Economic Internal Rate of Return (EIRR): 17.1YO Financial Internal Rate of Return (FIRR): 13.3%

60. Economic Internal Rate of Return. For purposes of the economic analysis, the project was assessed in the context of the overall scheme for providing incremental power supply from MHPP to customers in the southern region of Kazakhstan. Economic costs of the project (net of VAT) were assumed to include, on the capital side, the cost of the new Moinak OHTLs, switchyard at MHPP, modernization of Shelek and Robot SSs as well as the undisbursed capital

13 costs of the MHPP. Annual operating costs included (i)operation and maintenance (O&M) of the HPP; (ii)O&M of the transmission network; (iii)estimated fully allocated cost of distribution; and (iv) transmission and distribution losses.

61. Project benefits evaluated in the analysis fall into four categories: (i)customer willingness to pay (WTP) for power supply; (ii)avoided incremental costs of self-generation to compensate for load shedding; (iii)a premium customer WTP for peak power provided by the HPP; and (iv) benefits from reduced CO;? emissions as a result of avoideddisplaced thermal generation. Details of the assumptions and values used are in Annex 9. The analysis yielded an estimated EIRR of 17.1% and a Net Present Value (NPV) of US$29 1 million.

62. The economic analysis took a conservative stance with respect to customer WTP, limiting it to the marginal tariff for electricity supply. This approach ignores the consumer surplus benefits of incremental electricity supply which are inherent in the downward sloping nature of the demand curve. While there are no comprehensive surveys of Kazakh consumers on which to base a consumer demand curve, a curve might have been postulated using data from other countries. This would have involved a measure of speculation, however, regarding the applicability of other countries’ experience to the Kazakh situation. Since the project displays a high EIRR without the inclusion of consumer surplus, this benefit was omitted.

63. Financial Internal Rate of Return. The scope of the FIRR analysis was limited to the incremental costs and revenues incurred by KEGOC as a result of its investment in the transmission facilities. Specifically, financial costs include the capital and O&M costs associated with the new transmission facilities. Benefits include the incremental transmission and dispatch tariffs received by KEGOC as well as savings in the cost of compensating transmission losses owing to access to low-cost hydroelectricity from MHPP. In estimating the future revenue stream, anticipated real increases in KEGOC’s transmission and dispatch tariffs were taken into account. The estimated FIRR of the project is 13.3% (real), with NPV of US$38.8 million based on KEGOC’s weighted average cost of capital.

64. Financial Performance of Borrower. KEGOC’ s financial performance has shown steady improvement in recent years, with increasing profitability, positive cash flow and satisfactory liquidity. Equity injections of KZT 7.2 billion in 2008 (UT 3 billion from the national budget and KZT 4.2 billion from SamrukKazyna) helped to offset rising debt service and capital investment obligations.’

65. 2009 is expected to be more difficult. During the first quarter, transmission volumes fell by 20% on a year-over-year basis, as major industrial customers severely curtailed their outputs due to the economic downturn, while dispatch volumes were down by 9%. KEGOC has applied for tariff increases of 30% and 45% in transmission and dispatch tariffs, respectively, anticipating that the Regulator might only award increases of 18%-20%. The probability that the situation will improve significantly during the balance of the year is small as the global recession and low oil prices are expected to persist well into 2010.

In June 2008, SamrukKazyna, the shareholder of KEGOC, agreed to increase the company’s equity by KZT 9.35 billion, to be disbursed over the 2008-2010 period, and to provide an additional KZT 20.8 billion over the 201 1- 2017 period to ensure KEGOC’s ongoing liquidity.

14 66. The table below presents the highlights ofKEGOC's recent financial performance, as well as mission estimates of projected financial indicators. loThe projections take into account the medium term investment program including the proposed project.' ' Long term tariff estimates are taken from the company's 2009-2020 Development Plan and are based on projections of sales volumes, operating costs and capital asset base in conformance with ARNM's tariff setting procedures. Pro forma financial statements are provided in Annex 9.

KEGOC: Summary of Projected Financial Performance

I r I I

* net of discounts

67. The financial projections indicate satisfactory performance in terms of profitability (apart from the projected loss in 2009 and leverage). Except for 2009, year-on-year debt service coverage is also satisfactory. However, cash flow deficits are anticipated in 4 ofthe next 5 years owing to rising capital investments and debt service obligations. This in turn draws the self- financing ratio below the covenanted level of 25% in 2009 and 2010 (and possibly also in 2012).

10 The financial projections in the PAD have been made by the Bank's project team and do not imply KEGOC's endorsement. The projections include a number of assumptions which are subject to change. Therefore, the projections will be revised by the Bank's project supervision team on an annual basis based on updated information and assumptions. 11 The capital investment plan includes the proposed Alma SS (US250 million), the second phase of the Transmission Rehabilitation Project (US$360 million), reconstruction of the Ossakarovka transmission line (US57 million) and general rehabilitation and upgrading of depreciated equipment (US$145 million). It does not, however, include projects which are still at the concept stage (interconnection with the Western regional power system, transmission linkages to proposed new generating stations).

15 While accumulated cash together with planned equity injections are sufficient to maintain the company’s liquidity through 2009, forecasts indicate a risk that cash balances will fall below zero in 2010, and the current ratio will drop to unacceptably low levels. If these cash shortfalls materialize, KEGOC will need to draw on the parent company’s commitment to provide additional equity in order to maintain liquidity and/or adjust its capital investment program to accommodate cash flow constraints.

68. The financial projections indicate a need for careful monitoring of KEGOC’s ongoing financial performance; however, they do not yet suggest an urgent need for remedial action. The weaknesses in the company’s financial outlook are largely due to the current slow-down in the Kazakh economy, which in turn is linked to the global recession and decline in commodity prices. At present, there are no clear signs as to the timing of an international recovery, and the projections have therefore taken a conservative position, where KEGOC’s transmission volumes only recover to their 2008 levels in 2013. This may be unduly pessimistic, but in the event that it proves to be true and liquidity is jeopardized, remedies are available in the form of either drawing on parent company commitments for additional equity or delaying capital investments.

69. The financial projections assume that transmission tariff discounts on transmission services will not affect the financial viability of KEGOC. At present, discounts are granted primarily for electricity exports and international transit to Russia, which are transmitted over under-utilized lines and which, based on existing power prices in Russia, would not be viable at the full transmission tariff. To ensure that any future discounts do not threaten KEGOC’s financial viability, a covenant in the Loan Agreement (LA) provides that KEGOC shall not grant tariff discounts on transmission services except for those that are based on commercial considerations of the company. In no case shall discounts be granted for transmission volumes which would either displace higher-revenue volumes or require new investments in transmission capacity.

70. Financial Performance Covenants. The following financial performance covenants will be included in the LA: (i)maintain a current ratio of 1.0; (ii)maintain a self-financing ratio of 20% based on a three-year moving average of the investment program; and (iii)refrain from incurring additional debt unless the debt service ratio, as measured by current net revenues and maximum future debt service requirements, is at least 1.2.

Technical

71. Project design and technology is standard for high-voltage transmission lines and SS modernization. The technical design meets all reliability, environmental and economic standards of the industry. Equipment specifications are consistent with the design and structure of the existing network. The GOK has approved the design outlined in the feasibility study. KEGOC will engage a turn-key contractor for the detailed design, supply and installation of the transmission lines. Another turnkey contractor will be engaged for the detailed design, supply and installation of the SS works.

Fiduciary

16 72. Financial Management. Assessment of the financial management (FM) arrangements for the proposed project was undertaken in July 2009, in conjunction with the FM supervision of the ongoing projects currently being implemented by KEGOC. The FM arrangements include systems ofbudgeting, accounting, financial reporting, auditing and internal controls. The PMD of KEGOC relies on corporate computerized accounting system to process project-related transactions. However, the accounting system still does not have capacity to generate interim financial reports and FMRs under the ongoing projects are prepared in Excel spreadsheet. The PMD has a full complement of FM staff, consisting of a chief manager (FM), assisted by a manager, accountant and disbursement specialist for each of the projects. It is expected that the new project will have dedicated accounting and disbursement staff.

73. Fiduciary Risk at Project Level. FM arrangements ofKEGOC have been reviewed periodically as part of project supervision of the ongoing Bank-financed operations. Based on latest FM supervision in July 2009 it has been established that KEGOC has fully satisfactory FM arrangements in place, including (i)sound project accounting system that is integrated with the corporate accounting system; (ii)experienced and skilled project management team that includes FM staff; (iii)timely and regular submission of satisfactory interim financial reports; (iv) timely submission of satisfactorily audited project and entity financial statements; and (v) effective internal control procedure that ensures completeness and accuracy offinancial transactions.

74. The overall FM risk for the project is moderate. However, the project will be implemented in an environment where corruption can be perceived as an important issue and, therefore, adequate mitigation measures have been put in place to ensure that the residual project risk is acceptable, including (i)regular review of compliance with the internal control framework; (ii)regular monitoring of activities of the designated accounts, including regular and timely reconciliation of the designated accounts with bank statements; (iii)quarterly submission of project Interim Financial Reports; (iv) audit of project financial statements by independent auditors on terms acceptable to the Bank; and (v) regular FM supervision and procurement reviews will be conducted.

75. Fiduciary Risk at Country Level. Based on Country Financial Accountability Assessment of 2002, the fiduciary risk is assessed as significant at the country level. There has been no fiduciary assessment at the country level since then, but the fiduciary environment has not changed much. However, fiduciary risk at the entity level is assessed as moderate and all the elements ofthe entity’s FM systems can be relied on to support project implementation.

76. Procurement. The latest Country Procurement Assessment Report is dated June 2000. A Law on Public Procurement of Goods, Works and Services was passed in May 2002. The GOK and the Bank conducted a Joint Public Expenditure and Institutional Review in 2004, which included a review of the efficiency of public procurement. This assessment led to Kazakhstan being ranked as a High Risk country from the public procurement point of view. A new Public Procurement Law took effect on January 1,2008. While the new Law includes many provisions that reflect international practices and Bank recommendations, it remains in need of further improvement and, therefore, the country’s procurement risk category remains unchanged.

17 77. KEGOC is an experienced Bank borrower with a proven ability to implement large and complex investment projects. The company's procurement performance under the ongoing Bank-financed projects has been satisfactory.

78. The PMD administers procurement. Since it is already charged with the management of several investment projects, its implementation capacity is being tested. To mitigate the potential risk of work and coordination overload, KEGOC will structure much of the procurement on a turn-key basis with prequalification. In addition, international consultants will be financed to provide assistance in procurement and project management.

79. Based on the assessment of KEGOC's capacity to implement procurement, the overall project procurement risk is rated as moderate. Procurement for the proposed project will be carried out in accordance with the Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" published in May 2004 and revised in October 2006, and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers'' published in May 2004 and revised in October 2006, as well as the provisions stipulated in the LA. More details on procurement arrangements are in Annex 8.

Social

80. No significant social impact was identified at or in the vicinity of the project sites. No resettlement is required under the project. A relatively limited amount of land (about 12.1 hectares) needs to be acquired for the project in accordance with the Land Acquisition Policy Framework (LAPF). Improved access to low-cost electricity in southern Kazakhstan will both improve the well-being of the population and alleviate the competitive disadvantage that the region currently suffers because ofcostly and unreliable electricity supply.

Environment

81. Environmental Management. The project is in full compliance with environmental assessment regulations of the ROK and World Bank safeguard policies for Environmental Assessment (OP 4.01). Because of the limited nature, extent and duration of any potential environmental impacts, the project has been assigned Category B under OP 4.01. Consistent with this rating, KEGOC prepared an Environmental Management Plan (EMP) which was disclosed on its website on December 29, 2008. The EMP was also deposited in the Bank's InfoShop on January 16, 2009. A revised EMP was disclosed on KEGOC's website and in InfoShop on June 26, 2009. A public consultation was held on November 14, 2008. Key environmental issues under the project include the normal construction issues associated with the movement of men, machines and materials, dust, noise, engine exhausts, disposal of solid (non- hazardous) wastes mostly from packaging and land preparation. (A more detailed discussion of the environmental aspects and other safeguard issues is presented in Annex 10).

82. The two project substations and the OHTL routes are located in remote areas on land of marginal agricultural value used mostly for cattle grazing. In June 2009, a local design company developed the preliminary line routing for the two transmission lines (pre-final design stage). After formal approval of this line routing, the survey, geological and hydrological works will be performed by a company to be engaged by KEGOC. Results of this work will be

18 input into the detailed working designs for the OHTLs. The detailed designs should have a section on EA, which is subject to the state environmental expertise. The detailed design stage includes the requirement of holding another public consultation for the project. The Bank will thoroughly examine the detailed designs to verify that Bank safeguard requirements are satisfied. Furthermore, under the Loan Agreement the Borrower shall ensure that the OHTLs will not encroach upon any part ofthe Charyn and Altyn-Emel Specially Protected Natural Areas.

83. KEGOC’s institutional capacity for implementing requirements specified in the EMP is satisfactory. Under the two ongoing transmission projects, KEGOC’s environmental management performance has been found to be highly satisfactory.

84. Land Acquisition. No physical displacement of people will take place under the project. Civil works at the existing Shelek SS and Robot SS will be carried out within existing fence lines, not requiring new land acquisition. However, land will need to be expropriated for the Moinak HPP switchyard (about 4 hectares or 8.7 acres) and for the OHTL towers (about 8.1 hectares or 17.6 acres). Since the exact number of towers that will be built and the exact final location of the OSY at the MHPP are unknown at this time and will follow from the detailed working designs during the first year of implementation, the exact scope and incidence of all land acquisition requirements cannot be precisely assessed now. Therefore, under the applicable Bank safeguard policy (OP/BP 4-12), a LAPF was prepared, which was approved by the Bank. The LAPF was disclosed on KEGOC’s website and in InfoShop. Once the final working designs are accepted, KEGOC will prepare a specific Land Acquisition Plan (LAP) and submit it to the Bank for approval before proceeding with construction.

85. Dam Safety. The Moinak HPP is not part of the proposed transmission investment. Nonetheless, it is considered to be a “connected” project in the sense that performance of the HPP would directly influence performance ofthe Bank-supported transmission investment.

86. The dam is located on the Charyn River. Because the dam is considered a “connected” project under Bank safeguard policies, the Bank engaged an independent dam safety expert to perform a due diligence assessment of the Moinak dam’s compliance with OP/BP 4.37. The assessment concluded that the dam was designed by qualified engineers and an experienced firm. The drawings are ofhigh quality with sufficient details and quantitative calculations. The independent dam safety expert verified that the dam design, construction and proposed operation are consistent with the OP/BP 4.37.

Safeguard policies

Applicable? Safeguard Policy [YI Environmental Assessment (OPBP 4.01) The site of the switchyard at MHPP is in a remote rugged area near the Charyn River. There are no significant environmental issues during construction other than the normal issues of dust, noise and disposal of construction wastes as well as protection of the Charyn River water quality. Reconstruction works at the Shelek and Robot SSs will be confined to the boundaries of existing fence lines. During construction of the OHTLs, there are no significant environmental issues other than the

19 normal issues of dust, noise and disposal of construction wastes. The selected routes and rights-of-way do not cross any known structures or sites of cultural significance or areas of proven mineral reserves. For the most part, the land use along these routes is for grazing or agricultural production. In addition, to protect surface water quality, special attention must be paid where transmission line routes cross rivers or streams and where worker construction camps are sited. The routes selected do not interfere with any migratory bird flight patterns. During operation, the chief issue is noise and public health and safety from the high electric field strength. A satisfactory EMP was prepared and disclosed in the Bank’s InfoShop and on KEGOC’s website, and will be updated with detailed information reflecting the detailed designs when these are available. > Involuntary Resettlement (OP/BP 4.12) Civil works at the Shelek and Robot SSs will be carried out within existing fence lines, thus not requiring land acquisition. There are no current occupants and users of these areas. Land will need to be expropriated for the OSY at the MHPP switchyard and the OHTL towers. The exact number of towers to be built is unknown at this time, but will follow from the detailed working designs for the power lines during the first year of implementation. Since the exact scope and incidence of all land acquisition requirements cannot be precisely assessed now, a LAPF acceptable to the Bank was prepared by KEGOC as a condition of appraisal. Once the final working designs for the OSY and the OHTLs are completed, KEGOC will prepare a specific LAP and submit it to the Bank for approval before proceeding with construction. No physical displacement of people will take place under the project. Land will be acquired through a government land fund with compensation to the affected mivate ownershsers. 1 Safety of Dams (OPBP 4.37) The project will evacuate power from the MHPP that is currently under construction. Since the transmission lines and the outdoor switchgear are linked to the integrity of the MHPP, this policy is triggered as it represents a potential reputational risk to the Bank. The Bank engaged an independent dam safety expert to perform a due diligence assessment of MHPP dam’s compliance with OP/BP 4.37. The assessment concluded that the dam was designed by qualified engineers and an experienced firm. The drawings are ofhigh quality with sufficient detail and the quantitative calculations were done in an appropriate manner. Several issues were raised as part of the due diligence assessment for which the Bank received satisfactory clarifications from the project sponsor (JSC KazKuat). Cultural Property (draft OP 4.11 - OPN 11.03) Although the project sitesmghts-of-Way have no known areashtructures

20 of historical or cultural value, the EMP includes appropriate measures to address “chance find” occurrences. I I [N] I Projects in Disputed Areas (OP/BP/GP 7.60)- I

Policy Exceptions and Readiness

87. The project complies with all applicable Bank policies, requires no policy exceptions and is ready for implementation.

88. The Procurement Plan was agreed upon. Procurement work is at an advanced stage for Part C (consulting and technical services) of the project. Preparation has started for the two more complex “design, supply and installation” packages (Parts A and B).

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties’ claims on the disputed areas

21 Annex 1: Country and Sector Background KAZAKHSTAN: Moinak Electricity Transmission Project

Country Background and Development Strategy

1. Country Context. Kazakhstan enjoyed strong economic performance between 2000 to 2007, with average real GDP growth of 10%. However, the economy is highly mineral resource- dependent, with minerals, oil and gas accounting for 73% of exports and 39% of GDP. Consequently, the Government of Kazakhstan has made diversification of the economy a development priority. The rapid economic growth up to 2008 facilitated a sharp increase in income per capita, which reached US$6,200 in 2008.

2. The recent deepening of the world economic crisis has had very negative repercussions in Kazakhstan. Sharp declines in commodities export prices since late 2008 hit the country with a major terms-of-trade shock and tighter financial markets have prevented commercial banks from rolling over their sizeable debt repayment obligations. GDP growth is expected to slow to 1% in 2009. Pressures for devaluation led to an 18% devaluation of the national currency (Tenge, UT). The devaluation has further complicated the situation in the banking sector as over 40% of loans are denominated in foreign currency and most revenue flows for Kazakhstan businesses are in KZT. In light of these difficulties, the GOK nationalized the two most problematic large banks in February 2009 as part of a broader Anti-Crisis Program.

3. The overall financial position of Kazakhstan remains fairly strong, but should weaken somewhat in the near future. International monetary and National Oil Fund reserves still amount to over US$45 billion. But claims on Republic of Kazakhstan resources may grow substantially in 2009. A decision to defend the current exchange rate of 150 KZT to the US$ could lead to the further depletion of reserves.

4. Kazakhstan continues to attract substantial foreign direct investment in connection with the large off-shore Kashagan oil project, which will allow the country virtually to double oil production in 10- 15 years. This fact, together with the probable recovery of commodities prices along with the world economy in a few years, implies that the medium and longer term growth picture for Kazakhstan looks promising. The challenge will be getting through the current difficult period with minimal damage to living standards, infrastructure, and the National Oil Fund fiscal reserves. In the context of tighter conditions for Kazakhstan on international financial markets, the GOK is considering large-scale sovereign borrowing from International Financial Institutions, particularly for infrastructure.

5. Sector Context. The ongoing financial crisis is expected to impact on the electricity sector in two important ways. The slowdown of the economy will somewhat ease the current and projected power deficits in the country. However, this impact can be offset by the more restricted access to commercial financing of generation and distribution investments.

6. Electricity Generation. There are 60 power generation plants in Kazakhstan with a total installed capacity of 18,931 MW, of which 14,788 MW is available for generation. In 2007,

22 total generation was 76.365 TWh, of which coal-fired plants accounted for 84.3%, hydro power plants (10.6%) and gas-fired plants (5.1%) providing the balance. While Kazakhstan has sufficient generation capacity to meet domestic power demand, four-fifths of power generation comes from the northern part of the country, predominantly from power plants located in the coal-producing regions (especially, Ekibastuz and Karaganda) and to a lesser extent from hydroelectric facilities located primarily along the Irtysh River. Generation facilities in the south are limited to small hydro, combined heat and power plants, and a high cost gadoil-fired power plant at Zhambyl which is operated (with government subsidies to cover high fuel costs) to meet winter peak demand. Most of the large-sized thermal generation assets have been privatized to foreign and local investors. The large hydropower plants have been given on concession basis to private investors. The poor condition of the main equipment in many power plants will require decommissioning of a significant amount of installed capacity in the near future. A number of major generators (along with the transmission system operator and several major industrial consumers) operate a Capacity Reserve Pool to manage occasional emergency breakdowns of generating units in a market-based manner.

7. Electricity Consumption and Trade. In 2007, total generation and gross domestic consumption were 73.365 TWh and 76.440 TWh, respectively, with a small net imports of 0.08 TWh.’* Domestic consumption, which was declining from 1990 to 1999, has since been growing at an average rate of 6% per year. Consumption growth has been especially strong in the booming southern zone of the country. Kazakhstan exports power only to Russia. Imports are from Russia (to serve the western regions) and Central Asia. Imports from Central Asia are limited (1.2 TWh in 2007) and depend primarily on the water released for irrigation from the Toktogul reservoir in Kyrgyzstan and as such do not coincide with the Kazakh peak demand in the month of January.

8. Transmission. The total length of Kazakhstan’s transmission lines (ranging from 35 kV to 1,150 kV) is 23,281 km. The 74 high voltage transmission substations with a total capacity of 33,697 MVA are located in nine regional power networks. The state-owned Kazakhstan Electricity Grid Operating Company (KEGOC) owns and operates all transmission assets at the 1,150 kV and 500 kV levels. KEGOC is responsible for dispatch control and operates international connections, principally with Russia, Kyrgyzstan and Uzbekistan. The central dispatch arrangements are best characterized as self-dispatch by generators against contracts with the distribution companies and large consumers directly connected to the transmission system.

9. KEGOC’s transmission system consists of three regional power grids:

0 Northern grid connected to the Russian power system.

0 Southern grid connected to Central Asian power system (Kyrgyzstan and Uzbekistan) and the northern grid with a single circuit 500 kV tie line.

0 Western grid comprising of two subsystems which are currently isolated from the other systems and import power from Russia (2.2 TWh in 2007) to supplement local

l2For more details, see the national electricity balance table in Annex 1.

23 generation. In 2009, the just-completed 500 kV North-West transmission line will connect the northern grid with Aktyubinsk in the west, thereby reducing the western regions’ dependence on electricity imports from Russia.

10. Distribution and Supply. There are 21 Regional Distribution Companies (REKs), which own smaller sized generation units (mostly combined heat and power), transmission at 110 kV level and electricity and heat distribution networks. The total capacity of the regional level generating plants accounts for nearly half of the installed capacity in the country. Not all of the REKs have been unbundled and some continue to retain the status of vertically integrated utilities. Energy Supply Organizations (ESOs), most of them subsidiaries within REKs, and private traders purchase electricity from generators to sell for retail customers. The generally poor condition of distribution equipment and installations causes comparatively high distribution losses.

11. Power Sector Reforms. In the area of power sector reforms, Kazakhstan ranks among the most advanced countries in the former Soviet Union. The GOK began reforms in 1996, with a view to introducing private participation and establishing a competitive power market. By 1997, the large “national level” electricity generation plants were separated from the former Kazakhstanenergo (an integrated monopoly), KEGOC was formed to operate the high voltage transmission network and the REKs were established. In addition, the single buyer model, under which the REKs purchased power from the generators and resold it to local customers, is being replaced by a competitive retail market under which customers purchase energy from Energy Supply Organizations (ESOs), which in turn pay KEGOC and the REKs for the costs associated with transmission, dispatch and distribution.

12. Privatization. Most of the large-sized thermal generation assets have been privatized to foreign and local strategic investors. The large hydropower plants have been given on concession basis to private investors. Most of the REKs have also been privatized, a number of them under concession contracts.

13, Wholesale Market Structure. The wholesale electricity market is fully liberalized and operates mainly on the basis of bilateral contracts between generators and large consumers or ESOs for direct sale of power. Provided that they acquire access to the KEGOC-operated transmission network, large electricity consumers can enter the market and shop freely for power. There is strong competition in the bilateral contract market. .Under the ongoing Bank- supported electricity transmission rehabilitation project, the GOK established a well-functioning spot market (KOREM). In 2008, electricity trade under KOREM was 7.6 TWh (about 15% of total wholesale turnover), reflecting high liquidity in international comparison. There are about 100 registered market participants. KOREM is making preparations for the future introduction of financial contracts and attraction of Central Asian market participants.

14. To complete the wholesale electricity market reforms, a real time balancing market was established under the ongoing Bank-supported N/S Transmission Line Project. Since January 2008, the balancing market has been operated by KEGOC on a trial basis. Once becoming fully operational, KEGOC will conclude market-based transactions on balancing bids submitted by generators under transparent market rules.

24 15. Sector Regulation. The Ministry of Energy and Mineral Resources is in charge of licensing activities. Under the transmission rehabilitation project, a modern Electricity Grid Code was adopted (and updated from time to time to reflect changing sector conditions) which established a set of transparent rules governing non-discriminatory third-party access to the transmission network and the services the grid operator is obliged to provide.

16. Under the Law on Natural Monopolies, the natural monopoly parts of the power sector (KEGOC and REKs) are regulated by the Agency for Regulation of Natural Monopolies (ARNM) which reports to the Prime Minister. The Law ensures full recovery ofjustifiable costs, including the cost of new investments, for the regulated monopolies. l3 KEGOC’s transmission tariffs are approved by the ARNM on a justifiable cost-plus basis. The existing tariffs are cost- reflective and provide for 10% rate of return on the regulated asset base, thereby allowing KEGOC to operate profitably. Under the N/S project, zonal tariffs were introduced to foster greater competition among generators.

17. Kazakhstan began reforming the power sector in 1996, with a view to introducing private participation and establishing a competitive power market. By 1997, the electricity generation plants were separated from the former Kazakhstanenergo (an integrated monopoly) and largely privatized. KEGOC was formed to operate the high voltage transmission network. REKs were established to take over the functions of regional electricity supply.

18. The key issues facing the power sector at the present juncture include: (i)outdated plant and equipment in the generation and distribution sectors; (ii)system designs focused on meeting broader regional rather than national power needs; and (iii)rising costs as a result of high capital investment, inefficiency in system operations and higher hydrocarbon prices. Growing regional imbalances in terms of access to electricity supply are a key outcome of these factors.

19. Strong economic growth and increasing diversification of the economic base have led to a sharp upswing in electricity demand in Kazakhstan in recent years. Total consumption grew from 54.0 TWh in 2000 to 76.4 TWh in 2007 while generation increased from 5 1.4 TWh to 76.4 TWh. While Kazakhstan has sufficient capacity to meet domestic power demand, four-fifths of the country’s power generation come from the north from power plants located in the coal producing regions. Generation .facilities in the south are limited to small hydro, combined heat and power plants, and a high cost oil-fired power plant at Zhambyl which is operated to meet winter peak demand. Currently, demand exceeds supply in the south by approximately 865 MW (approximately 30% of peak demand) and the deficit is expected rise to 1,200 MWby 201 1. At present, the deficit is met in part by supplies from the north (620 MW) and in part by imports from Central Asia (240 MW). The table below shows Kazakhstan’s electricity balance over the 2000-2007 period.

l3Unlike in the case of KEGOC, this provision has not been consistently carried out by REKs. Regulatory problems resulted in few notable cases of disinvestment by international private investors from the distribution business and the relatively weak (but recently improving) financial condition of REKs.

25 I Kazakhstan: Generation, Consumption and Trade of Electricity ,

Tajikistan 1TWh 1 0 1699 1 1 00685 1-1 Turkmenistan j TWh 1 00349 1 i 1 1 I 1 Imports,total 1 TWh 1 2.9592 1 2.4482' 1 34816 1 3.5183 I 3.9551 ---A 3.3831 1 NetSupplytoDomesticMarket/ TWh ! 543801 1 61.982 648072 1 68.1290 I 71 7714 1 76.4396 1

20. In the south, the supply deficit is expected to double by 2015, as shown in the table below.

Power Balance - Southern Region (MW) - Low Growth Scenario Description I 2007 I 2008 I 2009 I 2010 I 2011 I 2015 I 2020 reported Demand 1, Maximum load (combined) 2,805 2,990 3,140 3,280 3,420 3,980 4,62C Coverage from Existing Plants 1, Available capacity of existing power plants 2,304 2,242 2,315 2,469 2,469 2,646 2,716 Incl. Zhambyl GRES 1,006 983 983 1,094 - 1,094 1,094 2. Working capacity of existing power plants. 1,940 1,918 1,991 2,145 2,145 2,272 2,312 Incl. Zhambyl GRES 817 833 833 944 944 894 894 Deficit (865) (1,072) (1,149) (1,135) (1,275) (1,708) (2,308 Additional sources of coverage 1, Technical upgrading and gaps elimination 2. Commissioning of new capacities at existing power plants 170 29C

26 Annex 2: Major Related Projects Financed by the Bank and/or Other Agencies KAZAKHSTAN: Moinak Electricity Transmission Project

.’ Project Latest Supewi! on (Form 590) Rat 1gs - (Bank-financec projects oh) Implementation Development Progress (I€’)Objective (DO) Bank-financed rransmission system Electricity Transmission S S nodernization and competitive Rehabilitation Project (1999, 3ower market development US$140 million)

rransmission network North-South Electricity S S :xpansion and completion of rransmission Project, Phase 2 :lectricity wholesale market c2005, US$lOO million) reforms

Other development agencies EBRD Electricity Transmission Rehabilitation Project (1 999, US$45 million)

EBRD North-South Electricity Transmission Project, Phases I and I11 (2004-2005, US$147.8 million)

Development Bank of North-South Electricity Kazakhstan Transmission Project, Phases I and I11 (2004-2005, US$73.0 million)

EBRD Electricity Transmission Rehabilitation Project, Stage I1 (2008, US$360 million)

27 Annex 3: Results Framework and Monitoring KAZAKHSTAN: Moinak Electricity Transmission Project

Results Framework

Project Development Use of Project Outcome Objective Information Increase and improve the supply of Failure to achieve targeted electricity to business enterprises capacity available to markets in incremental capacity may indicate and households in southern southern region during periods of weaknesses in other parts of the Kazakhstan in an economic and peak demand transmission system, suggesting the environmentally sustainable manner. need for additional investment in Reduction in load shedding during rehabilitation and/or expansion. peak demand periods. Raise issue as part of dialogue with GOK and KEGOC. Reduction in average cost of electricity generated to serve Failure to realize savings in average markets in southern Kazakhstan cost of power could mean that there through access to incremental is insufficient competition in the hydroelectric power. supply of energy and that additional investment in generation and/or Avoided GHG emissions through transmission is needed. displacement of thermal generation. Alternatively, there may be an unanticipated problem with the working of the wholesale power market, including the spot market (KOREM). Raise issue as part of dialogue with GOK, KEGOC and KOREM.

Transmission lines and Turn-key contracts awarded in Delays in contract award may substations: accordance with deadlines ofthe suggest additional assistance needed Turn-key contracts awarded and project Procurement Plan (PP). in preparation of tender documents. completed in accordance with original project schedule. Manufacturing and delivery of Delays in line construction and SS equipment in accordance with PP. upgrades may suggest inadequate resources devoted to project Installation and commissioning management, requiring remedial proceeds according to PP schedule. action by the Borrower.

rechnical Assistance: Draft tender documents for OHTL Tender documents completed in Possible additional and/or ongoing :onstruction and SS modernization accordance with PP. technical support required if delays :ompleted in a timely manner. are excessive.

0 m Annex 4: Detailed Project Description KAZAKHSTAN: Moinak Electricity Transmission Project

Background 1. KEGOC operates the high voltage (1,150 kV, 500 kV, 220 kV, and 35 kV) SSs and networks, with a total of 23,281 km of lines and 74 SSs of 33.7 GW of total capacity. The network consists of three separate parts: (i)the western grid interconnected with Russia but isolated from the rest of the Kazakh power system; (ii)the northern grid also interconnected with Russia; and (iii)the southern grid connected with the northern grid and Central Asia.

2. The southern regions of Kazakhstan experience an acute shortage of electricity while low-cost coal-fired power plants in the north have surplus capacity. The existing N/S transmission line via which low-cost electricity is transmitted from the northern power stations to the south has a limited transmission capacity of approximately 650 MW. This is insufficient to meet demand in the rapidly growing southern part of the country, especially in the industrial belt between Almaty and Shymkent. In 2007, power deficit in the south (Le., the difference between demand and local generation) averaged over 865 MW (about half of the region’s consumption). While transmission from northern plants and imports from Central Asia help to alleviate the shortfall, the deficit cannot be fully met in the winter period of maximum electric loads, which necessitates restrictions on consumption (load shedding) l4with an adverse impact on regional economic development. Commissioning of the new N/S line, scheduled for 2010, will add approximately 700 MWto the capacity to transfer power from the north. However, this will still be insufficient to meet peak winter loads in the Southern region. Looking ahead, following recovery from the 2009 recession, electricity demand in southern Kazakhstan is expected to increase substantially (nearly 6% per year till 2020) and the power deficit is expected to double by 2015 (from 865 MW in 2007 to 1,700 MW) unless major new investments are undertaken in the generation and transmission sectors. The deficit is predicted to be particularly severe in the Almaty region.

3. The proposed operation is an integral part of GOK’s plan to address expected power shortages. Priority generation projects include the Moinak HPP, a 300 MW facility on the Charyn River currently under construction and expected to be completed by 20 13, The plant will generate much-needed incremental regulating power for the south. The proposed transmission project will support connection of the MHPP to the high voltage transmission network through construction of new transmission lines as well as modernization of related SS facilities.

Project Components 4. The total estimated cost of the project, including contingencies and taxes, is US$68.6 million. The detailed cost table is in Annex 5.

5. The components of the project are as follows:’’

l4 For example, in the Almaty power region, consumption restrictions ranged from 50 MW to 80 MW during the 2005-2006 and 2006-2007 winter periods. In order not to compromise the competitiveness of the procurement process, the cost estimates for the individual project components were excluded in this version of the PAD which the Bank releases to interested parties after the 31 Component A - Construction of Transmission Lines. This comprises the following sub- components:

A1 - Construction of single-circuit OHTL from MHPP to Shelek SS 6. The OHTL will exit the switchyard at MHPP and will head north to the Shelek SS going across the Yenbekshykazakhskiy territory in the region of Almaty. The 220 kV OHTL will have an length of about 97 km. The design contemplates aluminum conductor steel reinforced (ACSR), with cross-sectional areas of 394 mm2 of aluminum and 51.1 mm2 of steel. The conductor type has been selected according to the Russian Standard GOST 839-80 and is the AC400/5 1 type. The polymer insulators will vary between the LK70/220-3 and LK160/220-3 types to PS70E, PS120B and PS160D types depending on anticipated mechanical loads and tower types.

7. The line will be constructed using anchor angle and suspension steel towers. The conductors will be attached using HAC-450-1 and PGK-5-3 clamps. The ground wire has been selected in accordance with the Russian Standard GOST 3063-80 and will be the TK-1l-G-I- ZH-N-1370 (140) type for the anchor angle steel towers and the TK-11 for the suspension towers. The arrangement of the phase wires is horizontal. The OHTL will be lightning- protected by means of an overhead ground wire along the entire transmission line.

8. The table below summarizes the equipment included under this sub-component:

5 Equipment: Insulators LK160/220 piece 72 Insulators LK70/220 tiece 838

A2 - Construction of single-circuit OHTL from MHPP to Robot SS

Board of Executive Directors approves the project. This was done at the Borrower’s explicit request during loan negotiations.

32 9. The OHTL will exit the switchyard at MHPP and will head north up to Shelek SS and proceeding to Robot SS across the Yenbekshykazakhskiy, Ilisky and Talgarsky territory in the region of Almaty. The 220 kV OHTL will have a length of about 225 km. The design contemplates ACSR with cross-sectional areas of 394 mm2 of aluminum and 51.1 mm2 of steel. The conductor type has been selected according to the Russian Standard GOST 839-80 and is the AC400/51 type. The polymer insulators will vary between the LK70/220-3 and LK160/220-3 types to PS70E, PS 120B and PS 160D types depending on anticipated mechanical loads and tower types.

10. The line will be constructed using anchor angle and suspension steel towers. The conductors will be attached using HAC-450-1 and PGK-5-3 clamps. The ground wire has been selected in accordance with the Russian Standard GOST 3063-80 and will be the TK-11-G-I- ZH-N-1370 (140). For the anchor angle steel towers and the suspension towers, the ground wire type TK-11 has been selected in combination with the PS70E and PS120B insulators, respectively. The arrangement of the phase wires is horizontal. The OHTL will be lightning- protected by means of an overhead ground wire along the entire transmission line.

11. The table below summarizes the equipment included under this project sub-component.

No. Equipment description Unit measure Quantity 1 OHTL, length km ‘225 2 Conductor AC400/5 1 ton 992.63 3 Ground wire of TK-11 type ton 147.6 4 Quantity of towers: - suspension towerkm 2.7 - anchor tower/km 0.13 5 Eguiument:

I ~ 1 Insulators LK160/220 I piece I 167 I I I Insulators LK70/220 I piece I 1,848 I I I Insulators PS70E I piece I 652 I I I Insulators PS 120B I piece I 77 I I I Insulators PS 160D I piece I 308 I 6 Towers, total, including: piece 637 - steel anchor-angle piece 30 - steel suspension piece 605 7 Foundations m3 5,434.4 8 Grounding d=l2 mm ton 75.5

Component B - Modernization of Substations. This comprises the following sub- components:

B1- Construction of 220/110 kV outdoor switchyard at MHPP 12. An outdoor switchyard with a configuration consisting of double main busbars and transfer bus with single circuit breakers will be built at the MHPP. The arrangement includes:

33 SF6 circuit breakers, disconnect switches, current and voltage transformers, and lightning and relay protection systems.

13. The table below specifies the main high-voltage equipment to be installed:

Item Description Unit Quantity No. I measure I I 1 I220 kVlive tankSF6 1 set I 6 I 2 220 kV three-pole disconnector with two earthing switches set 9 3 220 kV three-pole disconnector with one earthing switch set 9 4 220 kV single-pole disconnector with two earthing switches set 1 5 I 220 kV single-pole disconnector with one earthing switches 1 set I 4 I 6 I 220 kV current transformer I piece I 18 I 7 220 kV voltage transformer piece 7 8 220 kV surge arrester piece 6 9 220 kV bus support piece 8

B2 - Modernization of Robot SS 14. This sub-component involves the installation of new high voltage equipment in the reserve bay for the 220 kV OHTL MHPP - Robot SS and replacement of the high voltage equipment: circuit breakers, disconnect switches, current and voltage transformers, surge arresters as well as control and protection equipment.

15. The table below specifies the main high-voltage equipment for the Robot SS:

Item Description Unit Quantity No. 1 SF6 circuit breakers set 9 I 2 I 220 kV disconnectors I set I 29 I 3 Current transformers piece 27 4 Coupling capacitors piece 2 5 Voltage transformers piece 7 6 Surge arresters piece 6

B3 - Modernization of Shelek SS 16. This subcomponent involves the revamp of the existing 220 kV, 110 kV, and 35 kV switching arrangements. The following switching configurations were selected:

At 220 kV level: double main busbars and transfer bus with single circuit breaker.

0 At 1 10 kV level: one main busbar sectionalized by circuit-breaker and bypass busbar.

0 At 35 kV level: one main busbar sectionalized by circuit-breaker.

0 At 10 kV level: one single busbar sectionalized by circuit-breaker.

34 17. The project includes the replacement of main switching equipment including: circuit breakers, disconnect switches, busbars, current and voltage transformers, and control and protection equipment.

18. ,The table below specifies the main high-voltage equipment for the Shelek SS:

Item Description Unit Quantity No. measure 220 kV live tank SF6 three-pole circuit breaker, 1250 A, 25 kA, 1 with operating mechanism set 3 2 220 kV single-phase current transformer, accuracy class 0,5/1 OP/1 OP/1 OP, transformation ratio 600/5 A piece 12 3 220 kV three-pole disconnector, 1000 A with two sets of earthing switches and operating mechanisms set 8 4 220 kV three-pole disconnector, 1000 A with one set of earthing switch and operating mechanisms set 2 5 220 kV single-phase voltage transformer, transformation ratio 20000: 4 3/100: 4 3/100 V piece 6 6 220 kV surge arrester piece 6

Component C - Consulting and Technical Services. This consists of the following sub- components: C1- Procurement and project management

19. This sub-component consists ofprocurement and project management consulting services for the construction of the 'OHTLs, construction of the OSY at MHPP, modernization of the Robot SS and Shelek SS. Responsibilities of the consultant include: preparation ofthe bidding documents and technical specifications, site visits, quality control and monitoring of all executed work, verification of contractor's payments and reporting to KEGOC and the Bank. The selection of the consultant will be carried out in accordance with IBRD Guidelines for selection and employment ofconsultants.

C2 - Technical services

20. This sub-component comprises technical services during the implementation phase for the selection and approval of the OHTL route, engineering surveys, and engineering supervision ofthe turn-key contracts during construction works. The selection ofthe consultant will be carried out in accordance with the state procurement procedures ofKazakhstan.

Moinak Hydroelectric Power Plant

21. The Moinak Hydroelectric Power Plant (MHHP) is not part of the proposed Moinak transmission project and KEGOC is not involved in its construction or financing. However, the two projects are technically closely connected. The transmission project is needed to evacuate power from the MHPP to KEGOC's high voltage network through two new 220 kV single-

35 circuit OHTLs with a combined length of about 322 km, connecting the switchyard to be built at MHPP to the Shelek SS and Robot SS. In addition, KEGOC signed an agreement with Moinak GES JSC (project company/operator) on electricity and reserve capacity purchase.

22. MHPP, currently under construction, is being developed by Moinak GES JSC, which is owned by the state-owned KazKuat JSC (51% of shares) and the private Birlik JSC (49%). The project is located on the Charyn River in the Almaty Oblast. The construction of the plant was started in the mid-l980s, but the collapse of the former Soviet Union and the consequent financing shortage led to its deferral. Considering recent shortages in power supply resulting from the growing demand for electricity, in 2005 the GOK made the completion of MHPP a priority. Total cost of the project is US$447.34 million. The bulk of the financing has been secured from credits by the Chinese Development Bank and the Development Bank of Kazakhstan.

Project Participants 23. In 2005, Moinak GES JSC was established. In April 2008, the China International Water & Electric Corporation (CWE) was selected for design, turnkey construction and commissioning of the main MHPP facilities. According to the terms of the Contract Agreement, construction is to be conducted by Chinese (20%) and Kazakhstani (80%) entities. Main equipment (turbine and generator) is to be supplied by the consortium of two companies, Harbin Electric Machinery Co. Ltd and Andritz, Austria (former VA Tech). The SCADA system to control and operate the plant is part of the main equipment package. The main project participants are shown below:

Project Role Participants

Owner KazKuat JSC and Birlik JSC Developer Moinak GES JSC EPC Contractor China International Water & Electric Corp. (CWE) Civil Contractor To be selected by general contractor (CWE) E&M Contractor Consortium of Harbin Electric Machinery Co. Ltd and Andritz, Austria Penstocks and Gates Consortium of Harbin Electric Machinery Co. Contractor Ltd and Andritz, Austria

Design 24. The project design contemplates a Reservoir Hydroelectric Power Plant comprising a rock-filled embankment dam. The project parameters of the scheme, on the basis of which detailed design and construction is being executed, are shown below:

DescriDtion MHPP Intakehailwater level (m.a.s.1) Normal water level 1,770.00; highest water level 1,772.18

36 Maximum head (m) 494 Minimum head (m) 464 Design nominal head (m) 473 Length of tunnel (m) 9,300 Number of units 2 Turbine type Pelton, 6 jets Turbine nominal capacity for design 153 head (MW) Flow for nominal capacity (m3/s) 37 Total installed capacity (MW) 300

Operating Regime 25. The increasing demand for electricity requires adequate flexibility of generation to avoid large deviation in system frequency. MHPP will be partially operated as a peak-load management plant to protect the power system during periods of high demand. The proposed intake reservoir will assist in managing daily operations but will have no real effect on seasonal and annual variation.

Implementation Schedule 26. Construction of the MHPP resumed in 2006. The Bank’s project preparation team visited the site in December 2008. The following points were noted during the visit:

0 Dam construction was nearing completion. Tunnel intake works were advanced. The most critical activity is the diversion tunnel excavation for a length of 9,300 meters.

0 EPC contractor has already mobilized his team at site and their site office is up and running with adequate facilities.

0 Temporary access roads have more or less been completed.

0 Construction works, including the power plant, are expected to be completed by 2013.

37 Annex 5: Project Costs KAZAKHSTAN: Moinak Electricity Transmission Project

Bank- Project Costs (million US%) I financed

Substations i B 1. Construction of overhead switchyard at Moinak HPP

B2. Modernization of Robot SS

B3. Modernization of Shelek SS

I i' .T Consulting and technical * services C 1. Procurement and project 1 management I I I I I I

C2. Technical services

TOTAL PROJECT COST 68.089 0.513 68.602 100.0 48.000 100.0

Interest during construction 4.589

Front-end fee 0.170

TOTAL FINANCING 68.089 5.272 73.361 REQUIRED

38 Annex 6: Implementation Arrangements KAZAKHSTAN: Moinak Electricity Transmission Project

Implementing Agency

1. The executing agency responsible for project management and implementation of the project will be the Borrower (KEGOC). KEGOC has an established Project Management Department (PMD) which has been responsible for the implementation of the two ongoing Bank-financed transmission projects. The unit is staffed by specialists in technical, financial, environmental and procurement matters. The PMD liaises with other major departments of the company including Finance, TechnicalEngineering, Legal and Planning. The PMD will carry out the day-to-day implementation activities of the proposed project, including procurement, project accounting and financial reporting, disbursement of funds, administration of the Designated Account, withdrawal applications for disbursements and external audit arrangements.

2. KEGOC management will ensure that sufficient personnel are in place to efficiently carry out the project. A competitively selected consulting firm will provide KEGOC with advisory services in procurement and project management, including the preparation of bidding documents and technical specifications, site visits, quality control and monitoring of all executed work, and verification of contractor’s payments. KEGOC will also engage consultants to provide technical services during the implementation phase for the selection and approval ofthe OHTL routes, engineering surveys, and engineering supervision of the turn-key contracts during construction.

3. Below is the detailed organizational scheme for project implementation.

39 I/

0 d 71 Implementation Schedule

4. The project is expected to be implemented in about 3.5 years by June 30, 2012. The implementation schedule by project component is shown below:

41 7

......

...... E...... Annex 7: Financial Management and Disbursement Arrangements KAZAKHSTAN: Moinak Electricity Transmission Project Background

1. Assessment of the financial management (FM) capacity of KEGOC’s PMD was conducted in October 2008 and July 2009 in conjunction with the FM supervision of the two IBRD-financed projects under implementation. The aim ofthe assessment was to determine the capacity of the PMD to provide satisfactory FM support for the proposed project. The assessment focused on arrangements for budgeting, accounting, internal control, financial reporting and auditing.

2. Past FM supervision of the two projects, including the latest one in July 2009, have shown that the FM and disbursement functions are well done, with no significant weaknesses noted. KEGOC has been submitting satisfactory financial monitoring reports for the two projects regularly and on time. Past audit reports have been satisfactory, with no major issues raised in the Management Letters. FM staff of the PMD are experienced and very familiar with the Bank’s FM and disbursement procedures. The PMD uses the corporate accounting system for project financial transactions. However, reporting to the Bank is still done in Excel spreadsheet as the accounting system has not been customized to automatically generate project financial reports.

3. Fiduciary Risk at Project Level. Based on past FM supervision of the Electricity Transmission Rehabilitation Project (closed on June 15, 2009) and the ongoing North-South Electricity transmission Project, it was established that the KEGOC continues to maintain sound FM system that fully meets the Bank’s requirements. The overall FM risk for the project is moderate. However, the project will be implemented in an environment of perceived corruption and, therefore, adequate mitigation measures have been put in place to ensure that the residual project risk is acceptable, including (i)regular review of compliance with the internal control framework; (ii)regular monitoring of activities of the designated accounts, including regular and timely reconciliation of the DA with bank statements; (iii)quarterly submission ofproject IFRs; (iv) audit ofproject financial statements by independent auditors on terms acceptable to the Bank; and (v) regular FM supervision and procurement reviews.

4. Fiduciary Risk at Country Level. There has been no recent fiduciary assessment at the country level, the last one having been conducted in 2002. However, this project is not subject to the country’s public FM framework and the fiduciary risk at the entity level is assessed as moderate and all the elements ofthe entity’s FM systems can be relied on to support project implementation.

Conclusion

5. Based on the assessment and past FM supervision of the two projects implemented by KEGOC, the project FM system established by KEGOC is capable of accurately recording project financial transactions and support timely preparation of IFRs. The FM arrangements are, therefore, satisfactory to the Bank. These arrangements include (i) sound project accounting system that is integrated with the corporate accounting system; (ii)experienced and skilled project management team that includes FM staff; (iii)timely and regular submission of

43 satisfactory IFRs; (iv) timely submission of satisfactorily audited project and entity financial statements; and (v) effective internal control procedure that ensures completeness and accuracy of financial transactions and monitored periodically by the company’ internal audit department.

Risk Assessment and Mitigation

6. The overall FM risk for the project is moderate and only a few additional measures are proposed to mitigate the fiduciary risk and strengthen capacity. Although the project will be implemented in an environment of high perceived corruption, adequate mitigation measures are already in place to ensure that the residual risk is acceptable. The table below summarizes the FM assessment and risk ratings of this project:

FM Risk Mitigating Measures Residual Risk Risk INHERENT RISKS

Country level Weak PFM institutions (additional information S I is included in country issues in the next section). that has strong corporate governance

Entity level Risk of political interference in entity’s M Company maintains strong corporate M management. structure that may not succumb to political interference. Project level Project is a large size, but not complex with only M Implementation arrangements that allow M two main components. close monitoring of activities under the project are in place. OVERALL INHERENT RISK M M CONTROL RISKS

Budgeting L Good budgeting system by the PMD for project required. activities. Accounting M PMD has adequate accounting system, required. integrated with the company’s Oracle-based corporate MIS. Internal Controls M No additional mitigation measures M Adequate internal control procedures are in required. place and subject to periodic review by internal audit department. Funds Flow M No additional mitigation measures M Loan funds will flow through commercial bank required, except for extra caution in view Designated Accounts. No previous concerns of the current global fmancial crisis. with the banking system. Financial Reporting M No additional mitigation measures M KEGOC has been submitting satisfactory FMRs required and no issues have been noted. Auditing M No additional mitigation M Entity and project audits will be carried out by reauired exceDt that KEGOC will I 44 FM Risk Mitigating Measures Residual Risk Risk independent auditors acceptable to the Bank and continue to ensure timely contracting of satisfactory audit reports submitted to the Bank the auditor and submit audited financial on time. statements to the Bank on time. OVERALL CONTROL RISK M M

OVERALL FMRISK M M .* ~. H - High S - Substantial M -Moderate L - Low

Country FM Issues

7. The A&A ROSC for the country conducted in 2007 shows that capacity of the accounting profession is still low and there is no critical mass of professionally qualified accountants, particularly in the public sector. Knowledge of internationally recognized accounting and auditing standards, such as IFRS, IPSAS, International Standards on Auditing (ISA), is limited due to the lack of adequate capacity both in the public and private sectors. Most project implementing entities use the cash basis of accounting, which is not in accordance with IFRS, but is allowed under IPSAS, and in many cases sufficient for proper project accounting. Internal audit function exists only in very few institutions and external audit is practiced by individuals and a small number of local audit firms. Most audits required by international donors have traditionally been performed by the large international firms belonging to the “Big Four” networks. The Bank has conducted a review of local audit firms to determine their acceptability to audit Bank-financed projects. At present, only two Kazakhstan- based firms are eligible to conduct audits ofBank-financed projects.

8. Corruption is widely acknowledged as a major issue in the country, as indicated in the TI CPI for 2007 (No. 150 with CPI of 2.1) and 2008 (No. 147 with CPI of 2.2). The project will thus be implemented in an environment of high perceived corruption. However, the company that will implement the project has maintained strong governance structures that ensure compliance with corporate rules and policies as well as strong FM arrangements. Fiduciary risk of the projects implemented by KEGOC is considered moderate. There are adequate procedures developed by the company to secure proper financial accountability of all projects and to minimize project FM risks. No additional FM arrangements or specific risk mitigation measures are envisaged for the project, except those intended to mitigate the country fiduciary risks and build capacity. There have been no issues with the banking arrangements, but with the current global financial crisis there is need for caution in determining the amount of advances to the DA.

Implementation Arrangements 9. The Borrower is JSC KEGOC which will be responsible for project management and implementation. The company has a functioning PMD which is headed by a Managing Director who reports to the company’s Vice-president for Development. The PMD liaises closely with other major departments of the company, including Finance, Engineering and Planning. The PMD will carry out the day-to-day activities of the project, including procurement, project accounting and financial reporting, disbursement of funds, including

45 administration of the DA and withdrawal applications for disbursements, and external audit arrangements.

10. The PMD will be responsible for ensuring that project activities are implemented according to the legal documents, Procurement Plan, reporting on project progress to the company and the Bank, ensuring that procurement of goods and services is done in a timely manner and in accordance with Bank guidelines, managing project funds, maintaining accounts, getting the accounts audited, ensuring adequate budget provisions for the project, facilitating the work of consultants, and reviewing consultant outputs.

11. The residual risk associated with KEGOC is moderate with low probability of external intervention to modify the structure and staff of the organization. The same structure and arrangements for the implementation of the existing Bank-financed projects will be maintained, including the PMD.

Strengths

. 12. The significant strengths that provide a basis for reliance on the project FM include: (i) FM arrangements similar those established for the ongoing operations being implemented by KEGOC are adequate; (ii)highly experienced and skilled PMD staff who are familiar with Bank procedures and requirements; (iii)timely and regular submission of satisfactory interim financial reports; (iv) timely submission of audited entity and project financial statements with no significant issues in the Management Letters; and (v) effective internal control, including periodic review by internal audit.

13. There are no major weaknesses at KEGOC. However, there is need to modify the accounting system to have capacity to generate IFRs as part of upgrading the system.

14. Budgeting and Planning. Two departments of KEGOC closely involved in project implementation are the PMD and Department for Capital Construction. Budget execution is monitored during the year in the Financial Monitoring Reports/Interim Financial Reports (FMWIFR). The risk associated with planning and budgeting is assessed as low.

15. Accounting Staffing. The FM function is the responsibility of the Financial Support Unit, including Head of the Unit, two financial managers, two accountants and three credit . specialists. Each of the two projects implemented by KEGOC has its dedicated accountant, financial manager and credit specialist (disbursement). However, they all are knowledgeable of the other projects and can back up their colleagues if needed. Appropriate segregation of duties between financial staff is in place. The chief financial manager is responsible for all aspects of FM and accounting, including managing the DA. The financial manager is assisted by two managers responsible for accounting and disbursements, assisted by an accountant and a disbursement specialist. The financial manager will be responsible for budget preparation for the project and have primary responsibility for the quarterly IFRs and preparation of annual financial statements for audit. The financial manager will also manage an effective system of internal control, ensuring adherence to established financial procedures and safeguarding the resources and assets of the project. The risk associated with staffing is assessed as moderate.

16. Information Systems. KEGOC uses Oracle-based Management Information System for company accounting. The database is maintained on a network for both the project and 46 corporate entity. The Chart of Accounts is common to both as Oracle includes sub-accounts that are project-specific. Project accounting is integrated into the company’s system. While the project-related transactions are generated by the Project Accountant within PMD, they are constantly reviewed and posted to the general ledger accounts by KEGOC main accounting department staff. All transactions are based on appropriate source documents, such as invoices, bank statements, contracts, notes of acceptance, etc. Trial balances with project account balances are printed out on a monthly basis and reviewed by the financial manager for accuracy and completeness. The accounting is maintained in UT. Revaluation to US$ is made every last day ofthe month. The risk associated with information systems is moderate.

17. Accounting Policies and Procedures. The PMD will maintain appropriate financial records and accounts in accordance with procedures established by the accounting policy and normative documents of the company. These accounts and records will reflect the progress of the project and identify its resources, operations and expenditures. Project accounts will reflect all financial transactions during the project period separately for the IBRD loan and other resources, where applicable, by project component and by expenditure categories. KEGOC’s financial reporting is based on International Financial Reporting Standards and the company uses accrual basis of accounting. However, the company uses modified cash basis for reporting project activities. The current chart of accounts will be adapted to meet the new project’s requirements and project accounts will reflect all financial transactions during the project for the IBRD loan, counterpart financing and funds from other financiers, by project component and by expenditure categories. The risk associated with accounting policies and procedures is considered as moderate.

18. Internal Controls and Internal Audit. The PMD has to follow KEGOC accounting policies and procedures. Internal control procedures under the project are adequate. There is an Internal Audit Division that is accountable to President of KEGOC and to the Management Board. As part of the continuous review of internal control and accounting systems activities, the project will be subject to periodic review by the internal audit division ofthe company. The risk associated with internal controls is considered moderate.

19. Financial Reporting. FMRs for the ongoing Bank-supported projects are prepared in Excel spreadsheets using data from accounting system. The same reports are submitted to company management, who use them to monitor the project progress on a quarterly basis. These reports have been submitted to the Bank regularly and on time under the ongoing operations. For the new project, Interim Un-audited Financial Reports (IFRsfiformerly FMRs- will be prepared and submitted to the Bank by the due dates. KEGOC will produce a full set of IFRs every calendar quarter throughout the life of the loan. The format of IFRs will be agreed with KEGOC during negotiations and will include: (i)Project Sources and Uses of Funds: (ii) Uses of Funds by Project Activity; (iii)Project Balance Sheet; (iv) Designated Account (DA) Statements; and (v) Statement of Expenditures (SOE) Withdrawal Schedule. These financial reports will be submitted to the Bank within 45 days of the end of each quarter. The first quarterly IFRs will be submitted after the end of the first full quarter following the initial disbursement. The risk associated with financial reporting is moderate.

External Audit

47 20. The audit of the proposed project, like the other projects implemented by KEGOC, will be conducted (i)by independent private auditors acceptable to the Bank on terms of reference acceptable to the Bank; and (ii)according to the ISA issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants. KEGOC has been submitting satisfactory audited entity and project financial statements, with no major issues in the management letters. Audit of the subject project will include the project financial statements, SOEs and DA Statement. The annual audited project financial statements will be submitted to the Bank within six months ofthe end of each fiscal year and also at the closing of the project. The cost of the audit will be financed from the company’s own funds. The risk associated with external audit is considered moderate. The following table identifies the audit reports that will be required to be submitted by the KEGOC together with the due date of submission:

Audit Report Due Date Continuing Entihr financial statements Within six months after the end of the fiscal Entity financial statements, including Balance Sheet, year. Income Statements, Statement of Changes in Shareholders Equity, Cash Flow Statement and Notes to the financial statements. Project-financial statements (PFSs). Within six months of the end of each fiscal year The PFSs include Project Balance Sheet, Sources and and also at the closing ofthe project. Uses of Funds, Uses of Funds by Project Activity, SOE Withdrawal Schedule, DA Statement and Notes to the financial statements.

21, Funds Flow and Disbursement Arrangements. The proceeds ofthe loan will be disbursed over a period of 3.5 years or for such longer period as will be agreed with the Bank. Loan funds will flow to the project via disbursements to the DA maintained by KEGOC. The project will follow transaction-based disbursement procedures (payments through the DAY reimbursement, direct payments and special commitments). Withdrawals from the Loan Account will be requested in accordance with the guidance to be given in the Disbursement Letter. Withdrawal applications will be signed by two persons: (i)an authorized representative ofthe Borrower; and (ii)another designated person as authorized by written delegated authority from the Borrower.

22. Designated Account. To facilitate timely disbursements for eligible expenditures on works, goods and services, the Borrower will open and operate, under terms and conditions acceptable to the Bank, a DA in US$ in a commercial bank acceptable to the Bank. KEGOC will be responsible for the appropriate accounting of the funds deposited into this account, for reporting on the use of these funds and for ensuring that they are included in the audits of the financial statements. Ceiling of the DA will be US$lO.O million. The Minimum Application size for Direct Payment or Special Commitment will be US$2.0 million.

23. Applications documenting the advance of the DA will be made on a quarterly basis. Expenditures against contracts for (i)works estimated to cost greater than US$3,000,000 equivalent; and (ii)goods estimated to cost greater than US$500,000 equivalent each; (iii)

48 consultant services for consulting firms estimated to cost greater than US$1 00,000 equivalent each; and (iv) individual consultant services estimated to cost greater than US$50,000 equivalent each. Expenditures against contracts below these limits will use SOEs. Documentation supporting expenditures claimed against SOEs will be retained by the PMD and will be available for review when requested by Bank supervision missions and project auditors.

24. Detailed instructions on withdrawal of IBRD loan proceeds will be provided in the Disbursement Letter. The risk associated with funds flow and disbursement is considered low.

Supervision Plan

25. As part of the project supervision missions, risk-based FM supervisions will be conducted at appropriate intervals, depending on the level of assessed risk. These will pay particular attention to: (i)project accounting and internal control systems; (ii)budgeting and financial planning arrangements; (iii)review of IFRs; (iv) review of audit reports, including financial statements, and remedial actions recommended in the auditor’s Management Letter; and (v) disbursement management and financial flows, and counterpart funds, as applicable. FM supervision will pay particular attention to any incidences of corrupt practices involving project resources, including resources provided by the Borrower for project implementation.

49 Annex 8: Procurement Arrangements KAZAKHSTAN: Moinak Electricity Transmission Project

General 1. Procurement for the proposed project will be carried out in accordance with the Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" published in May 2004 and revised in October 2006 (Procurement Guidelines) and "Guidelines: Selection and Employment ofConsultants by World Bank Borrowers'' published in May 2004 and revised in October 2006 (Consultant Guidelines) as well as the provisions stipulated in the Loan Agreement (LA). The various procurement actions under different expenditure categories are described in general below. For each contract to be financed under the LA, the various procurement or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame have been agreed between the Borrower and the Bank under 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 was published in May 2009 in UNDB on-line and in printed version as well as in dgMarket online. Specific Procurement Notices will be published for all ICB (international competitive bidding) procurement and consulting contracts as required under the Guidelines.

Assessment of KEGOC's Capacity to Implement Procurement 2. The latest Country Procurement Assessment Report is dated June 2000. A new Public Procurement Law took effect in Kazakhstan on January 1, 2008. While the new Law includes many provisions that reflect international practices and the Bank's recommendations, it remains in need of further improvement and the country's high procurement risk category remains unchanged.

3. The project implementing agency is KEGOC. An assessment of KEGOC's capacity to implement project procurement was carried out by the Bank in December 2008 and the assessment report is available in the Project File. KEGOC has gained substantial experience in international procurement through the on-going projects financed by the Bank. The procurement work under both projects has been successfully completed. The supply and installation arrangement together with prequalification approach have been successful and will be adopted for the proposed project as well.

Procurement Risk Assessment 4. Based on the assessment of KEGOC's capacity to implement project procurement the overall procurement risk under the proposed project is rated as moderate. The risks associated with procurement and the mitigation measures were identified in the procurement capacity assessment and are summarized in Table 1 below:

50 Table 1. Risk Assessment Summary

Rating Rating of Description of Risk of Mitigation Measures Residual Risk Risk Potential procurement delays M KEGOC has agreed to structure L may be caused by much ofthe procurement on a implementation overload as turn-key basis with KEGOC’s PMD is already prequalification in order to reduce charged with management of the work load on the project team. several large and complex In addition, international investment projects. consultants will be hired to provide assistance in procurement and project management. The perceived level of M The Bank’s good governance and M corruption in the country is anticorruption safeguards, high. Transparency particularly the transparency and International assigned a disclosure provisions ofthe Bank Corruption Preconception Guidelines, will be enforced. The Index of 2.2 to Kazakhstan in Bank will also pay close attention 2008 (No. 145 in the world). to implementation supervision However, under the two on- including physical inspections. going Bank-financed projects (over a ten-year period) no corruption-related incident has been reported. Average M M H: High; S: Substantial; M: Moderate L: Low

Procurement Implementation and Arrangements 5. Procurement activities will be carried out by the Procurement Division of KEGOC’s PMD, with the assistance from other divisions and departments within the company as well as from international consultants. Domestic preference in accordance with clause 2.55 and Appendix 2 ofthe Bank’s Procurement Guidelines will not apply.

6. Procurement of Design, Supply and Installation. Design, Supply and Installation contracts to be procured under the project will include construction of OHTLs and modernization of SSs. There are a total oftwo procurement packages and prequalification will be required for both.

7. Procurement of Technical Services. Technical services to be procured under the project will include selection and approval of transmission line routes, engineering survey and supervision. These services will be fully financed from KEGOC’s own funds and are subject to state procurement rules. 51 8. Selection of Consultants. Consultants’ services to be procured under the project include procurement and project management consulting services.

9. Advance Procurement. Selection of procurement and project management consultants will be conducted in advance.

10. Bidding Documents and Evaluation Arrangements. The bidding documents, including technical specifications, will be prepared by the PMD with assistance from the procurement and project management consultants. Bid or proposal evaluation will be carried out by an evaluation team (comprising 4-5 technical specialists). A separate tender committee (including 6-7 members) will be established by KEGOC to approve procurement decisions including contract award. The procurement and project management consultants will provide assistance in the prequalification process and bid evaluation.

1 1. Filing and Records Keeping. KEGOC will use its existing system (which has been used satisfactorily under the on-going projects) to maintain procurement files.

Procurement Plan 12. KEGOC has developed a PP for the entire project scope consistent with the implementation plan, which provides information on procurement packages, procurement methods, milestones and Bank review requirements (see Table 2 below). The PP will be agreed between KEGOC and the Bank at negotiations and will be available at KEGOC’s project database and website as well as on the Bank’s external website. The PP will be updated in agreement with the Bank project team annually or as required to reflect actual project implementation needs.

Procurement Supervision 13. All contracts to be financed by the Bank loan will be subject to Bank prior review. No ex-post review contracts are anticipated. It is expected that two field supervision missions per year will be carried out including procurement supervision and on-site physical inspections. Physical inspection will be conducted on at least 10% ofall contracts.

Anti-Corruption Measures 14. The Bank’s Anticorruption Guidelines (dated October 15,2006) and the transparency and disclosure provisions of the Bank Procurement and Consultant Guidelines will be enforced. Among others, the following specific actions will be taken:

0 In addition to the publication of procurement notices and contract award information as required by the Guidelines, all procurement notices and contract award information will be published in the country’s public procurement bulletin and on KEGOC’s website.

Require each staff involved in procurement, including each member of the tender or evaluation committee, to confirm that his or her involvement does not create any conflict ofinterest.

Put in place the necessary mechanisms to ensure that contractors or consultants are paid according to their contract terms without any delays.

52 To bring to the Bank notice each and every complaint received from any supplier or consultant relating to the procurement process, and to record and dispose of these complaints promptly and diligently.

To maintain up-to-date procurement records and to make these available to Bank staff and the auditors.

53 Table 2. Procurement Plan (a) Design, Supply and Installation Contracts

Description/ Location Package No.

AI B IC K Construction of OHTL Moinak HPP - Robot SS, 1. Moinak HPP - Shelek SS (design, supply and ICB Prior 04/06/10 06/06/10 08/10/10 09/05/1C 36/30/12 installation contract) Construction of OSY at Moinak HPP and Modernization of Robot SS and Shelek SS (design, cccc1 I ICB I Prior 104/06/101 06/06/10 08/10/10 09/05/1C 36/30/12 Total for Goods I I /InternationalCompetitive Bidding (in accordance with section 2 of the Guidelines) ICB=I For all design, supply and installation contracts. ! I ...... ~ ~ " Prior Review1 t " ~ ...." " " ~ IAll the ICB contracts will be subject to Bank prior review. PQIPre-qualificationwill apply to all (two) packages.

(b) Consultants' Services

Contract Award Date

H 11/22/09 11/24/09 06/30/12

_" QCBS=j Quality and Cost-based Selection (in accordance with sections 2.1 - 2.28 of the Consultant's Guidelines) =I Prior Review/ I /For firms: All contracts equal to US%lOO,OOO or more. I

54 Annex 9: Economic and Financial Analysis KAZAKHSTAN: Moinak Electricity Transmission Project

Economic Rate of Return

EIRR: 17.I %, NPV: US$291 million

1. General Approach. The economic benefits of the proposed project have to be assessed in the context of the overall scheme of delivering power from the Moinak HPP (MHPP) to customers in the southern Region. The scope of costs to be considered therefore extends beyond those directly associated with the construction and operation ofthe new transmission facilities to include any other capital and operating expenditures required to provide electricity service to the end user. Benefits must also be viewed from the perspective of the end-user. These benefits include the value which the customers attribute to incremental electricity supply which can be measured in terms of their observed willingness to pay for electricity. Normally, this would be measured as the combination of actual payments (the tariff) and also the consumer surplus associated with savings in the use of substitutes for basic energy needs (kerosene, batteries, self- generation, etc) and the convenience of access to services that can only be economically provided with electricity (television, air conditioning, etc.). The methodology usually entails deriving a demand curve for electricity based on a comparison of the energy use of electrified and non-electrified households. In the case of southern Kazakhstan, where virtually all households and businesses have access to grid-based electricity supply, this approach was not feasible. Consequently the measurement ofwillingness to pay took into account the basic tariff, as well as the costs to customers associated with current and expected future load shedding. In addition, while the tariff currently makes no distinction between peak and off-peak power, it was assumed that the peak power provided by MHPP would have an added value to consumers beyond that indicated by the tariff. The sections below provide details ofthe major assumptions used with respect to the measurement ofproject costs and benefits.

2. Annual Output. Estimated annual output of the MHPP was provided by the developer, KazKuat JSC. Total annual energy is estimated to be 1,027 GWh, of which 48% will be peak power and the remainder base load. Transmission losses are compensated by KEGOC, so the same amount of energy was assumed to be delivered to the distribution networks. Distribution losses were assumed to be 10%.

3. Project Costs. Following are the assumptions regarding the project costs:

Capital Costs:

0 MHPP: Total estimated cost of the MHPP is US$340 million, of which US$20 million has been spent to date, leaving 94% ofthe costs undisbursed. The capital expenditures to completion of the project were assumed to be spread over the 2009-2012 period at levels of20%, 40%, 20%, and 14% oftotal cost, respectively.

55 0 Transmission System: Total estimated cost of the Moinak transmission facilities is US$68.6 million, of which US$7.8 million is VAT which was excluded from the economic costs.

Operations and Maintenance.

0 MHPP: The annual O&M costs of MHPP were assumed to be 1.5% of capital costs, equivalent to KZT 0.74 per kWh. This is typical of experience with hydropower projects of similar size.

Transmission System: The feasibility study estimates the annual operating cost for the transmission facilities at KZT 4.1 million per year for the first 10 years, rising to KZT 10.8 million per year after year 10 to cover line overhaul. These estimates were revised to include the effect of the devaluation of the KZT, on the presumption that the full amount of materials and line overhaul would be affected by the change in exchange rates, while labor costs would be unaffected.

0 Distribution: The long-run marginal costs of the distribution networks that will transmit the electricity to the end users will vary depending on location, loads and the current level of surplus capacity. For purposes of estimation, it was decided to use the current regulated distribution margin for Almaty Oblast, which was calculated as the difference between the customer tariff and the tariffs for generation and transmission. In 2008, this was KZT 2.8kWh. This figure was also adjusted for the change in exchange rates. The resultant unit cost of distribution was KZT 3.6kWh.

4. Project Benefits. Benefits to electricity consumers were measured as the sum of three factors: (i)the end user tariff; (ii)the avoided cost of measures taken to deal with load shedding; and (iii)a premium for additional availability of peak power. A fourth category of benefit was also estimated, the avoided CO;! emissions from displacing thermal generation with hydro.

0 Tariff: The end-user tariff in the southern Region is KZT 9.45 per kWh. This is the observed minimum willingness of all customers to pay for electricity supply.

0 Compensation for Load Shedding: In the Almaty power region, consumption restrictions ranged from 50 MW to 80 MW during the 2005-2006 and 2006-2007 winter periods. During the 2008-2009 winter, supply restrictions in southern Kazakhstan were as high as 230-360 MW. The feasibility study estimated the level and duration of the load shed at 70 MW for 90 hours per year. The capacity shortfall was expected to rise to over 300 MW by the time the MHPP comes on line, which would definitely increase the level of load shedding and also possibly the duration. While recent events suggest a contraction in economic growth, the high level of load shed experienced during the past winter suggests that the forecast in the feasibility study is reasonable. To estimate the benefits of MHPP generation capacity, it was assumed that the plant would eliminate 300 MWof load shedding. The benefit to customers of avoided load shedding was estimated to be equivalent to the variable cost (primarily fuel) of diesel generation. This measure was selected based on the fact that heavy industry (including transport) represents half of the consumption in the southern region, and that these customers are likely to have backup

56 generation when grid supply is unreliable. With diesel priced at KZT 1204 and consumables assumed to be 5% of fuel cost, the cost to consumers is KZT 43.3kWh.

0 Premium for Peak Power: At present, there is a single price in the Southern Region for all electricity supply, regardless of whether it is peak or off-peak. There is, however, a distinction at the generation level between the two. Peak power from the MHPP will be priced at a premium of 54%. While there is no empirical evidence that customers would be willing to pay a premium for peak power, it is the norm in many utilities to charge a higher price during peak seasonshours, and customers accept the added cost. It was therefore assumed that willingness to pay for the peak power supplied by MHPP would carry the same percentage premium over the tariff as that applied to generation.

Reduction in C02 Emissions: In the absence of the MHPP, the least-cost method of meeting the region’s energy needs would be the construction and operation of additional thermal plants, including both base load and peaking facilities. The fuel which would be consumed to match the output of MHPP is estimated to yield in the order of 1.0-1.3 million tons per year of C02 emissions. Avoided C02 emissions were valued based on the recent average price of carbon credits under the Clean Development Mechanism, US$13.50 per ton.

5. Base Case EIRR. Using the inputs and assumptions discussed above, the EIRR of the overall project to deliver power from MHPP to customers in the Southern Region (including the transmission investments to be financed under the current loan), is estimated at 17.19%. The NPV ofthe project is US$291 million, at a social discount rate of8%.

6. Risk Assessment. The planned scheme for power delivery from MHPP is subject to all of the standard risks applicable to large capital investments. These include (i)risks of capital cost over-runs on the construction of the power plant and/or the transmission links; (ii)risks of delays in completion; and (iii)risks that future demand, and hence future benefits, are over- estimated. An added risk inherent in hydropower projects relates to the variability of inflows into the reservoir. Extended periods of low flows can significantly reduce both the capacity and energy output ofthe hydropower plant.

7. A switching value assessment was carried out with respect to capital cost over-runs and completion delays, as well as with respect to the reductions in the total energy output of the hydropower plant. The results, expressed as the amount of change that could be accommodated without reducing the project’s EIRR below 8%, are summarized in the table below.

I Catital Cost I +86% I

I Output from MHPP 57% (annual output 442 GWh)

8. The switching analysis indicates that the EIRR is fairly robust in terms of sensitivity to the primary risk factors.

Financial Rate of Return

57 FIRR: 13.3%, NPV: US38.8 million

9. General Approach. The FIRR analysis was carried out from the perspective of KEGOC and limited, therefore, to the incremental costs and revenues associated with the proposed transmission investments. Capital expenditures and operating and maintenance costs are described in the section on economic costs, although the costs used in the financial analysis included VAT. KEGOC will also incur additional costs to compensate for transmission losses on the volumes of energy transferred. Loss compensation is discussed in greater detail below.

10. Incremental Revenues. Financial benefits of the project include revenues for incremental transmission services as well as incremental dispatch. Annual transmission/ dispatch volumes are based on the MHPP output assumptions given above. The tariffs to be paid to KEGOC are from the 2009-2020 Development Plan (DP), converted to real 2008 price levels using the projected local inflation rate. The DP anticipates real increases in tariffs over the next 3 years. Beyond 201 1, the analysis assumed that tariffs would remain constant in real terms.

11. Cost Savings for Loss Compensation. KEGOC will also benefit financially from access to low-cost hydroelectric energy. It is KEGOC’s practice to cover the cost of transmission losses on deliveries of electricity from suppliers to consumers. If a contract calls for the delivery of 100 MWh to a customer and transmission losses are 5%, KEGOC will purchase 5 MWh from generators and deliver the full contracted supply to the end-user. KEGOC has agreed with the MHPP developer to purchase approximately 350 GWh of energy per year from the HPP which it will use for loss compensation. The MHPP tariff for this energy is approximately 25% lower than the current wholesale market price, which is expected to yield future net savings of US$l.9 million per year.

12. Base-Case FIRR. Based on the above assumptions, the estimated FIRR of the Moinak Transmission Project is 13.3%. The NPV is US$38.8 million, at a discount rate of 6.7%, which approximates KEGOC’s real average weighted cost of capital.

Financial Performance of Borrower

13. Current Financial Performance. The IBRD loan will be provided directly to KEGOC, with a guarantee by the GOK. KEGOC’s financial performance has shown steady improvement over the past 5 years. Pre-tax profits in 2008 totaled US$48 million on total sales of US$257 million. Cash on hand at the end of 2008 totaled US$lOO million thanks in part to an equity injection of US$35 million from SamrukKazyna (the sole shareholder of KEGOC) and a further US$25 million equity injection from the GOK budget. KEGOC is, and has consistently been in compliance with financial performance covenants under the two existing IBRD loans.

14. Projected Financial Performance.16 The Bank’s financial model for KEGOC was used to prepare projections of the company’s financial performance for the period through to 2013. Key assumptions used in the model are as follows:

l6 The financial projections have been made by the Bank’s project team and do not imply KEGOC’s endorsement. The projections include a number of assumptions which are subject to change. Therefore, the projections will be revised by the Bank’s project supervision team on an annual basis based on updated information and assumptions. 58 0 KEGOC’s capital investment program is based on KEGOC’s draft Development Plan (DP) for 2009-2020. In addition to completion of the first Rehabilitation Project and the N/S line, major projects include (i)Moinak transmission (US$69 million); (ii)new Alma SS (US$250 million); (iii)second transmission rehabilitation (US$360 million); (iv) Ossakarovka OHTL reconstruction (US$57 million), and (v) rehabilitation and reconstruction of depreciated equipment (US$145 million).

The financing plan for the capital investment projects is based on arrangements already in place or contemplated (loan financing for the Alma substation).

0 Transmission and dispatch tariffs were assumed to increase in accordance with the proposals given in the draft 2009-2020 DP. While the tariffs have not yet been approved by ARNM, the tariff-setting rules have been consistently applied so far. Projected transmissioddispatch volumes through to 2020 were also taken from the DP.

0 Taxation rates were based on Kazakh regulations. Depreciation rates were based on KEGOCs approved accounting practices. Deferred income tax was estimated based on the difference between depreciation rates allowed for income tax and those used in the corporate accounts.

15. The resulting financial projections are summarized in table below. Pro forma financial statements are included at the end of this Annex. Note that all projections of financial performance are expressed in nominal KZT and hence include projected local inflation. Recent forecasts suggest that this will average 8% per annum over the period of analysis.

KEGOC: Summary of Financial Performance

59 i Debt Service Ratio (year-on-year coverage) 7.2 5.7 3.8 J (0.6) 1.2 1.8 1 1.3 ’ 2. t Net Ihed t25sets (billion t2r) 769 77.3 886 1176 I360 1515 1802 19YY Return on Net Fixed Assets 08%, 13% 6.1% 1 -7.8% 3.4% 5.7% 4.8% 5.4% * net of discounts Notes: (i)self-financing ratio reflects the company’s ability to self-finance capital investments through internal cash generation and equity investments; it does not reflect actual self financing which would be a function of the availability and use of debt; and (ii)negative figures (debt service and capital investment) reflect the fact that these are cash outflows.

16. 2009 is expected to present some financial challenges for the company, as the company’s debt service obligations as well as planned capital investments rise sharply, while profits are expected to be negative. Debt service is expected to increase from KZT 2.5 billion in 2008 to KZT 9.6 billion in 2009, owing to the revaluation of the KZT and also the expiration of the grace period on earlier loans. Capital investments are projected to increase from KZT 18.3 billion to KZT 28.9 billion, of which KZT 15.1 billion is to be funded from internal resources. However, the company started the year with cash on hand of approximately KZT 12 billion, which, when combined with projected operating cash flow, and new borrowings provides a sufficient reserve to cover expected obligations. In addition, SamrukKazyna has committed to provide an additional KZT 2.7 billion of equity financing in order to maintain the company’s liquidity.

17. Over the medium term, KEGOC’s financial outlook is satisfactory in terms of profitability (apart from the projected loss in 2009), self-financing and leverage. Except for 2009, year-on-year debt service coverage is also satisfactory. However, cash flow deficits are anticipated in 4 of the next 5 years owing to rising capital investments and debt service obligations. While accumulated cash together with planned equity injections are sufficient to maintain the company’s liquidity through 2009, forecasts indicate a risk that cash balances will fall below zero in 2010, and the current ratio will drop to unacceptably low levels. If these cash shortfalls materialize, KEGOC will need to draw on the parent company’s commitment to provide additional equity in order to maintain liquidity and/or adjust its capital investment program to accommodate cash flow constraints.

18. While the financial projections indicate a need for careful monitoring of KEGOC’s ongoing financial performance, they do not yet suggest an urgent need for remedial action. The weaknesses in the company’s financial outlook are closely tied to the current slow-down in the Kazakh economy, which in turn is linked to the global recession and decline in commodity prices. At present, there are no clear signs as to the timing of a recovery, and the projections have therefore taken a conservative position, with KEGOC’s transmission volumes only recovering to their 2008 levels in 2013. This may be unduly pessimistic, but in the event that it proves to be true and liquidity is jeopardized, remedies are available in the form of either drawing on commitments for additional equity or delaying capital investments.

19. Financial Covenants. The financial projections assume that tariff discounts on transmission services will not affect the financial viability of KEGOC. At present, discounts are granted primarily for electricity exports and international transit to Russia, which are transmitted over under-utilized lines and which, based on existing power prices in Russia, would not be viable at the full transmission tariff. These exports are expected to decrease once the new N/S interconnector is completed, as surplus generation capacity in the north is transferred to markets in southern Kazakhstan. To ensure that any future discounts do not threaten KEGOC’s financial

60 viability, a covenant in the LA will provide that KEGOC shall not grant tariff discounts on transmission services except for those that are based on commercial considerations of the company. In no case shall discounts be granted for transmission volumes which would either displace higher-revenue volumes or require new investments in transmission capacity.

20. The following financial performance covenants will be included in the LA: (i)maintain a current ratio of 1.0; (ii)maintain a self-financing ratio of 20% based on a three-year moving average of the investment program; and (iii)refrain from incurring additional debt unless the debt service ratio, as measured by current net revenues and maximum future debt service requirements, is at least 1.2. In addition, in the Guarantee Agreement the ROK shall ensure that KEGOC’s tariffs are maintained at levels sufficient to fully cover the company’s prudently incurred operating costs, as well as a regulated rate of return on fixed assets employed.

Annex 10: Safeguard Policy Issues KAZAKHSTAN: Moinak Electricity Transmission Project

1. Environmental Management. The project is in full compliance with environmental assessment (EA) regulations of the ROK and World Bank safeguard policies for Environmental Assessment (OP 4.01). Because of the limited nature, extent and duration of any potential environmental impacts, the project has been assigned Category B under OP 4.01. Consistent with this rating, KEGOC prepared an Environmental Management Plan (EMP) which was disclosed on its website on December 29, 2008. The EMP was also deposited in the Bank’s InfoShop on January 16, 2009. A revised EMP was disclosed on KEGOC’s website and in the Bank’s InfoShop on June 26, 2009. The feasibility study included a section on environmental protection. This was approved by the competent environmental authorities of the GOK. A public consultation was held on November 14, 2008, in Almaty with the participation of a wide range of stakeholders, including those in the vicinity of the project sites and NGOs.

2. Key environmental issues under the project include the normal construction issues associated with the movement of men, machines and materials, dust, noise, engine exhausts, disposal of solid (non-hazardous) wastes mostly from packaging and land preparation. In addition, there will be issues associated with location and operation of worker camps (wastewater, sewage, etc.), crossing of rivers by OHTLs and land clearing. During operation, the chief issues are public health and safety associated with exposure to electromagnetic fields. Land clearing and vegetative removal will be performed by mechanical or manual means; no pesticides will be used. Substation exclusion areas and OHTL right-of-ways (ROWS) will be designed so that the maximum electridmagnetic field strengths at the plant fence or at the edge of the ROW are within internationally accepted standards.

3. The two project substations and the OHTL routes are located in remote areas on land of marginal agricultural value or used for cattle grazing. There are no sites or locations of cultural value. Furthermore, routing of the OHTLs will not intersect flight routes of migratory birds. In June 2009, a local design company (Energostroyproyekt) has developed the preliminary line routing for the two transmission lines (pre-final design stage) as shown on the map (Annex 15). After formal approval of this line routing, the survey, geological and hydrological works will be performed by a company to be engaged by KEGOC. Results of this work will be input into the detailed working designs for the OHTLs (developed by the turnkey contractor to be selected in or around July 2010). The detailed designs will have a section on EA, which is subject to the state environmental expertise. This will include an updated version of the EMP reflecting specific mitigation and monitoring requirements based on information from the EA. The detailed design stage includes the requirement of holding another public consultation for the project. Once the detailed final designs are approved, the Ministry of Industry and Trade issues the permit for construction.

4. The Bank will thoroughly examine the detailed designs, including the EA and updated EMP, to verify that Bank safeguard requirements are satisfied. Furthermore, under the Loan Agreement the Borrower shall ensure that the OHTLs will not encroach upon any part of the Charyn and Altyn-Emel Specially Protected Natural Areas.

5. KEGOC’s institutional capacity for implementing requirements specified in the EMP is satisfactory. Under the two Bank-supported transmission projects, KEGOC’s environmental management performance has been found to be highly satisfactory.

66 6. Land Acquisition. Nophysical displacement of people will take place under the project. Civil works at the existing Shelek SS and Robot SS will be carried out within existing fence lines, not requiring new land acquisition. However, land will need to be expropriated for the Moinak HPP switchyard (about 4 hectares or 8.7 acres) and for the OHTL towers (about 8.1 hectares or 17.6 acres). Land is to be acquired by KEGOC through a special government land fund with compensation to the affected ownershsers. Since the exact number oftowers that will be built and the exact final location of the OSY at the MHPP are unknown at this point in time and will follow from the detailed working designs during the first year of implementation (after selection of the turn-key contractor), the exact scope and incidence of all land acquisition requirements cannot be precisely assessed now. Therefore, under the applicable Bank safeguard policy (OP/BP 4.12), a LAPF was prepared, which was approved by the Bank. Once the final working designs are accepted, KEGOC will prepare a specific Land Acquisition Plan (LAP) and submit it to the Bank for approval before proceeding with construction. An LAP will be prepared by the Borrower prior to the commencement of any construction works under the project.

7. Dam Safety. The Moinak HPP is not part of the proposed transmission investment. Nonetheless, it is considered to be a “connected” project in the sense that performance of the HPP would directly influence performance of the Bank-supported transmission investment. In this context, dam safety is ofparticular importance.

8. The dam is located on the Charyn River.17 Dam design was subject to Soviet EA procedures and received Soviet Ecological Expertise approval in 1985. Construction started in 1986 but stopped in 1992 because of lack of funds. Funds were secured in 2005. In the interim, Kazakhstan had developed EA regulations and the Ministry of Environment approved the updated environmental section ofthe dam feasibility study in 2006. The detailed design was sent to the Ministry of Environment for review. A public consultation was held on July 17, 2008 on the HPP and dam complex. The dam project has complied with all GOK EA regulations.

9. Because the dam is considered a “connected” project under Bank safeguard policies, the Bank engaged an independent dam safety expert to perform a due diligence assessment of the Moinak dam’s compliance with OPBP 4.37. The assessment concluded that the dam was designed by qualified engineers and an experienced firm. The drawings are of high quality with sufficient details and quantitative calculations. The independent dam safety expert verified that the dam design, construction and proposed operation are consistent with the OP/BP 4.37.

” The dam complex includes a small downstream “compensating reservoir” (“counter-dam”) component to assure adequate water flow to protect a stand of ash trees downstream on the Charyn River. 67 Annex 11: Project Preparation and Supervision KAZAKHSTAN: Moinak Electricity Transmission Project

Planned Actual PCN review 11/10/2008 11/10/2008 Initial PID to PIC 11/14/2008 11/14/2008 Initial ISDS to PIC 10/27/2008 10/27/2008 Appraisal 05/13/2009 05/13/2009 Negotiations 07/15/2009 07/15/2009 Board approval 09/15/2009 Planned date of effectiveness 03/15/20 10 Planned date of mid-term review 06/30/2011 Planned closing date 12/31/2012

Key institutions responsible for preparation of the project:

Kazakhstan Electricity Grid Operating Company JSC (KEGOC), Astana, Kazakhstan

Bank staff and consultants who worked on the project:

Name Title Unit Istvan Dobozi Lead Energy ECS SD/ET WES Economist/Task Team Leader Sergio August0 Gonzales Sr. Power Engineer ECSSD Imtiaz Hizkil Sr. Power Engineer ECSSD

Margaret A. Wilson Financial Analyst Consultant Yuling Zhou Sr. Procurement Specialist ECSPS Bernard Baratz Environmental Specialist Consultant Hannah M. Koilpillai Sr. Finance Officer LOAFC John Otieno Ogallo Sr. Financial Management ECSPS Specialist Danielle Malek Counsel LEGEM Janna Ryssakova Social Development ECSSD Specialist

Josephine Kida Program Assistant ECSSD

Bank funds expended to date on project preparation:

1. Bank resources: US$80,000 2. Trust funds: None 3. Total: US$80,000

a Annex 12: Documents in the Project File KAZAKHSTAN: Moinak Electricity Transmission Project

“Annual Report 2007,” KEGOC, Astana, 2008.

“Due Diligence Evaluation of Dam Safety of the Moinak Hydropower Plant,” by Karen Grigoryan, January 2009.

“Feasibility Study for Power Delivery from Moinak HPP Project,’’ prepared by JSC KazNIPIITES “Energiya,” Almaty, 2006.

“KazKuat Report,” Almaty, September 2008.

“Presentation of Project “Construction of Moinak HPP on River Charyn,” Almaty, October 2008 (in Russian).

“Sbornik normativnykh pravovykh aktov PO elektroenergetike” (Collection of Normative Legal Acts for Electricity Sector), by KEGOC, Astana, 2004.

“Energetyka Kazakhstana” (Energy System of Kazakhstan), by Kenzhemurat Dukenbaev, Almaty, 2004.

69 Annex 13: Statement of Loans and Credits KAZAKHSTAN: Kazakhstan Moinak Electricity Transmission Project

~ ~~~~ ~~ ~ Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d P101928 2008 HLTH SEC TECH (JERP) 117.70 0.00 0.00 0.00 0.00 117.70 0.00 0.00 PO96998 2008 CUSTOMS DEVT (JERP) 18.50 0.00 0.00 0.00 0.00 18.50 0.00 0.00 PO90695 2008 TECHNOLOGY 13.40 0.00 0.00 0.00 0.00 13.40 0.00 0.00 COMMERCIALIZATION PROJECT PO78342 2007 UST-KAh4ENOGORSK ENV REMED 24.29 0.00 0.00 0.00 0.00 24.29 0.00 0.00 PO95155 2006 N-S ELEC TRANSM 100.00 0.00 0.00 0.00 0.00 43.61 22.61 0.00 PO78301 2006 FORESTRY 30.00 0.00 0.00 0.00 0.00 28.50 1.30 0.00 PO58015 2005 AG POST PRIV ASSIST (APL #2) 35.00 0.00 0.00 0.00 0.00 34.83 21.83 0.00 PO49721 2005 AGRIC COMPETITIVENESS 24.00 0.00 0.00 0.00 0.00 20.82 11.46 0.00 PO59803 2003 NURA RIVER CLEAN-UP 40.39 0.00 0.00 0.00 0.00 19.61 9.25 0.00 PO46045 2001 SYR DARYA CONTROL N. ARAL SEA 64.50 0.00 0.00 0.00 0.00 5.04 5.04 4.21 PO65414 2000 ELEC TRANS REHAB 140.00 0.00 0.00 0.00 0.00 10.35 10.35 1.46 Total: 607.78 0.00 0.00 0.00 0.00 336.65 81.84 5.67

KAZAKHSTAN 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.

Total portfolio: 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. 2001 Kazkommertsbk 2 0.02 0.00 0.00 0.00 Total pending commitment: 0.02 0.00 0.00 0.00

70 Annex 14: Country at a Glance KAZAKHSTAN: Moinak Electricity Transmission Project

Kazakhstan at a glance W244ea

823 15.5 945 We expeetsncy 5,060 6,052 8,987 78.3 2.w 5,750

Economic ratios'

Trea

f%versgeBfifwl gmwlh) M)P -7% 9.0 10.7 8.5 59 GDP pso Eapns 4.f 6.6 9.5 7.3 5.6 Exports OrpODds and rn/lCen -4.6 77 6.9 9.3 81

1987 1997 2006 2007 0- of capitai and GDP pi) I 60 12 0 59 66 273 421 443 4a 140 124 20 607 520 491 0 745 463 485 m 03 w 05 Q a7 124 102 112 VCF -t)P 374 404 303 I I

198797 $39707 2006 2007

-96 46 60 50 108 134 100 10 84 79 70 90 109 100 9 -117 77 138 100 -00 73 62 IO0 .m a7 174 288 $00 -172 61 12 1 46

Note 3?57 data are pre(hnary errtrnates l?us table was produced fmn tht Development Economics LDB database 'Tk diaflroods show four key nrdaeatws in the counfty (m bid) fanpared wth Its irpcwne-prwp werage if data are missxng, the dt&mmd ml4 be incmpfete.

71 ~ ~ ~

PRKES and GOVERNMENT FINANCE 1967 1997 200s 2007 Inflation (%) I 17 4 0.6 8.8 16 1 21.8 14 8

207 27.1 270 -3 8 12.9 10.8 -7 1 7.6 47

TRADE 1967 1997 2006

6.899 38.762 2.216 26,279 95 1 2,411 1.491 3,978 7,176 24,120 474 1.174 628 3,051 1,462 10,722 05 203 120 249 71 113 108 I

BALANCE of PAYMEHTS 1987 1997 20% Current account balance to GOP (96)

7,741 41,570 49.437 2-r 8,300 32,840 39,731 -559 8,730 9,705 Not incame -315 -9,317 -11,324 -2 Net ament banafers 75 -1,207 -1,500 J current account belance -799 -1,795 -3.117 -6 l”279 12,869 3,117 -480 .11,075 0 a1

2,291 19,127 2.4OE-3 75.4 126.1 $226

EXTERNAL DEBT and RESOURCE FLOWS 1987 1997 2006 Compdtion of 2006 debt (US$ ma.) 4,078 74,148 2ou7 I 648 502 427 A;= a.321 0 0 I TDEai debt service 403 14.532 l3RD 34 161 IDA 0 0

54 51 444 -23 177 25,768 1,321 6,143 0 2,797 World Bank program COmmitmente 247 30 Dtabursements 202 29 Plineipal repaynaents 0 130 Net wm 202 -101 Interest payments 34 31 Nei transfers 167 -132

The World Bsnk Group Th!s taWt was prepared by cwrptry una! stan; figures may Merfrm, other W&d Bank published data. 9/24/08

72 Annex 15: Map KAZAKHSTAN: Moinak Electricity Transmission Project

IBRD 36700 60° 70° 80° 90° KAZAKHSTAN RUSSIAN FEDERATION MOINAK ELECTRICITY TRANSMISSION PROJECT To TUMEN PROJECT COMPONENTS: FUTURE EXISTING SUBSTATIONS: NATIONAL CAPITALS To KURGAN 220 kV LINE TAVRICHESKAYA PETROPAVLOVSK KAZAKHSTAN 1150 kV SWITCHYARD INTERNATIONAL (PP TETS-2) To KARASUK BOUNDARIES IRTYSHSKAYA 220 kV SUBSTATIONS TR.GRES 500 kV AURORA To BARNAUL b' FUTURE EXISTING O 220 kV TRANSMISSION LINES: To MAGNITOGORSK THERMAL POWER PLANTS 1150 kV KUSTANAISKAYA KOKCHETAVSKAYA To BARNAUL 500 kV HYDRO POWER PLANTS 220 kV AKSU ES RUTSOVSK To MAGNITOGORSK PAVLODAR To GOLOVNAYA To KINEL SOKOL KEZ RUDNENSKAYA TETS MAKINSK To BAES Ir 50° EKIBASTUZSKAYA ty LISAKOVSKAYA sh EGRES-1,2

Ura 50° l IR.GRES ZHITIKARA ALTYNSARINO AGPP OSKEMEN UZLOVAYA N.TROITSK ESSIL STEPNAYA GTES KPK ORSK BULAKSKAYA HPP ASTANA URALSKAYA TETS AKMTETS-1 PRAVOBEREZHNAYA ULKE SS-18 SHHPP Zh GTS AKTURBO KIMPERSAI BATYS U-LHPP

a ATETS i AKMTETS-3 y k CHERBAKOVSKAYA DOSTYK NURA SHYGYS (

U GTES SNSP “AKTOBEMUNAIGAS” OSAKAROVKA

a ZPMK

l )

KANDYAGASHSKAYA GTES ZHARYK CHILISAI VOSTOCHNAYA KAR.GRES-2 Lake INDER ZHANAZHOLSKAYA GTES KAR.TETS-4 Zaisan

MAKAT V AYAGUZ ol ga KAZAKHSTAN AKTOGAI ATETS GTES AGIP KCO AGADYR BALKHASH ATYRAU SS

GTES KASHAGAN ZHEZKAZGAN KARAZHAL MOINTY BALKHASHSKAYA BALKHASHSKAYA TETS KULSARY ZHEZKAZGANSKAYA TETS TENGIZ ARALSKAYA Lake Balkash TALDYKORGANSKAYA TETS GTES TSHO KUMKOL SARY-SHAGAN (144,480,PVP) AITEKE-BI GTES KUMKOL (NOVOKAZALINSK) For detail, see inset below left GTES KALAMKAS BALKHASHSKAYA TETS KARAZHANBAS TALDYKORGANSKAYA SS BEINEU Aral YUKGRES ZSCHA SS Sea Altyn-Emel National Park AKTAUSKAYA SARYOZEK SS AES KZYL-ORDINSKAYA KERBULAKSKAYA HPP KAPCHAGAISKAYA HPP 220kV TRANSMISSION LINES CHINA GPP-1 SHELEK SS AKTAU ROBOT SS Charyn National Park KOTETS-6 SHU-500 ALMATY KOGTETS SWITCHYARD ATETS-3 SS MOINAK HPP TALDYKORGANSKAYA SS ZAPADNAYA KENSAI SS UZEN S KENTAU ZHAMBYL ZHAMBYLSKAYA GRES ZSCHA SS yr ERMENSAI SS -D BURNOYE a r ya BISHKEK BISHKEK Lake Issyk-Kul CHINA SARYOZEK SS K-BALTY TETS Caspian TULKUBAS To KURPSAISKAYA HPP Altyn-Emel ryn KERBULAKSKAYA National SHYMKENT Na HPP AZERBAIJAN Park SHTETS-1,2,3 KYRGYZ 40° Sea KAPCHAGAISKAYA HPP BAKU Charyn REPUBLIC 40° NO. 62 SS SHELEK National 220kV TRANSMISSION SS Park TASHKENT ROBOT LINES TASH.GRES TURKMENISTAN SS SHARDARINSKAYA HPP

ATETs-3 SS UZBEKISTAN SWITCHYARD 0 100 200 300 PROJECT AREA FERUZ KENSAI SS KILOMETERS MOINAK HPP TASHKENT

ERMENSAI SS This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other KYRGYZ REP. information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of 50° TAJIKISTAN70° any territory, or any endorsement or acceptance of such boundaries. JULY 2009