The World Bank SOUTH-WEST ROADS: WESTERN EUROPE-WESTERN CHINA INTERNATIONAL TRANSIT CORRIDOR (CAREC 1B & 6B) (P099270) REPORT NO.: RES27035 Public Disclosure Authorized DOCUMENT OF THE WORLD BANK RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF SOUTH‐WEST ROADS: WESTERN EUROPE‐WESTERN CHINA INTERNATIONAL TRANSIT CORRIDOR (CAREC 1B & 6B) Public Disclosure Authorized APPROVED ON APRIL 30, 2009 TO REPUBLIC OF KAZAKHSTAN TRANSPORT & ICT EUROPE AND CENTRAL ASIA Public Disclosure Authorized Regional Vice President: Cyril E Muller Public Disclosure Authorized Country Director: Lilia Burunciuc Senior Global Practice Director: Jose Luis Irigoyen Practice Manager/Manager: Binyam Reja Task Team Leader: Jacques Bure, Aliya Karakulova The World Bank SOUTH-WEST ROADS: WESTERN EUROPE-WESTERN CHINA INTERNATIONAL TRANSIT CORRIDOR (CAREC 1B & 6B) (P099270) ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank IBRD International Bank for Reconstruction and Development CAREC Central Asia Regional Economic IFIs International Financial Institutions Cooperation comprising the World Bank Group, ADB, EBRD, IsDB CR Committee for Roads KAZ Kazavtozhol National Roads Operator JSC CS Center‐South Road Corridor KZT Kazakhstan Tenge EBRD European Bank for Reconstruction M&E Monitoring and Evaluation and Development EIRR Economic Internal Rate of Return MoID Ministry of Investments and Development ESMF Environment and Social Management O&M Operations and Maintenance Framework ESIA/ EIA Environmental and Social Impact PDO Project Development Objective Assessment/ Environmental Impact Assessment EWRP East‐West Roads Project PFA Partnership Framework Arrangement GDP Gross Domestic Product RPF Resettlement Policy Framework GHG Green House Gas SMEs Small and Medium Enterprises SWRP South‐West Roads Project GoK Government of Kazakhstan WBG World Bank Group GR Grievance Redress WE‐WCh Western Europe ‐Western China Corridor The World Bank SOUTH-WEST ROADS: WESTERN EUROPE-WESTERN CHINA INTERNATIONAL TRANSIT CORRIDOR (CAREC 1B & 6B) (P099270) BASIC DATA Product Information Project ID Financing Instrument P099270 Specific Investment Loan Original EA Category Current EA Category Full Assessment (A) Full Assessment (A) Approval Date Current Closing Date 30‐Apr‐2009 30‐Jun‐2018 Organizations Borrower Responsible Agency REPUBLIC OF KAZAKHSTAN Ministry of Investments and Development Processing (this section will be automatically removed by the system before the paper is disclosed) Form Type Based on the proposed changes this Restructuring type is Full Restructuring Paper Level 1 Decision Authority RVP Decision Explanation of Exception to Decision Authority The loan closing date is extended by more than 2 years. Project Development Objective (PDO) Original PDO The proposed Project aims to increase transport efficiency along the road sections between Aktobe/Kyzylorda Oblast border and Shymkent and to improve road management and traffic safety in Kazakhstan. Current PDO The objective of the Project is to improve transport efficiency along road sections in Kyzylorda, South Kazakhstan and Almaty Oblasts, improve road management and increase traffic safety in Kazakhstan. The World Bank SOUTH-WEST ROADS: WESTERN EUROPE-WESTERN CHINA INTERNATIONAL TRANSIT CORRIDOR (CAREC 1B & 6B) (P099270) Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD‐76810 30‐Apr‐2009 13‐Jun‐2009 09‐Dec‐2009 30‐Jun‐2018 2125.00 1775.57 349.43 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING 1. Project status. The South‐West Roads Project (SWRP/Project) is currently financing the construction of 1,150 km of highway between Aktobe and Zhambyl Oblasts, about half of the Western China – Western Europe road corridor (WE‐WCh). It also finances activities for road management enhancement and road safety along the newly constructed roads. Total disbursements have reached US$1.771 billion (83% of the total loan) as of May 2017 with undisbursed balance of US$353 million. Additional US$50 million are planned to be disbursed by June 30, 2018, which is the current closing date of the loan. The project has savings of about US$302 million under the current World Bank (Bank) loan. 2. Construction of 1,060 km out of the financed 1,150 km has been successfully completed and is open to traffic. The section that remains under construction was added to the original scope of the Project in 2012 under the first restructuring of SWRP. With the new road operational, the Project is providing improved living standards for residents, enhancing mobility and access to services, and providing commercial and employment opportunities. SWRP has also contributed to nation‐wide economic benefits and direct benefits for agglomerations such as Shymkent and Kyzylorda, where the Project is clearly perceived as enabling mechanism for economic development, creation of jobs (around 35,000 direct and 75,000 indirect jobs created to develop the corridor), and reduction of disparities between urban and rural communities. The progress on the institutional development component is also satisfactory. SWRP and a second large project approved by the Bank in 2012 ‐ East West Roads Project (EWRP) supported the creation of a national road operator KazAvtoZhol (KAZ), which has rationalized the overall institutional set up of the road sector and has funded activities to build local technical capacity. KAZ together with the Committee for Roads (CR) of the Ministry of Investments and Development (MoID) is implementing the institutional strengthening component under the Project (currently focusing on road asset management and road safety). SWRP implementation is rated satisfactory and is in compliance with Bank fiduciary and safeguards requirements. There are no overdue audits and no outstanding audit issues. 3. Rationale for Restructuring. The request to restructure the Project comes as a result of the analysis of the economic situation undertaken by the Government of Kazakhstan (GoK). The current fiscal situation has affected the Partnership Framework Arrangement (PFA) signed in September 2014. GoK estimated that implementing the PFA, as originally designed, would lead to GoK reaching the 15% threshold of public debt to GDP by 2019. GoK has therefore decided to defer about US$4 billion of new borrowing under the PFA to remain below the debt threshold. In parallel, on February 10, 2017, GoK has requested the Bank to restructure its current portfolio The World Bank SOUTH-WEST ROADS: WESTERN EUROPE-WESTERN CHINA INTERNATIONAL TRANSIT CORRIDOR (CAREC 1B & 6B) (P099270) including the SWRP and EWRP to reallocate accrued savings in order to continue supporting priority investments and reforms in the road sector. The original cost estimates at the time of project preparation were based on a market analysis with limited data available to reflect on such large program. Recent analysis (Annex 1) suggests that the estimates that were used to prepare the project may have been between 5% and 7% above the market rates when the project became effective. But overall most of the savings came from the use of an efficient procurement with cross discount allowed and an efficient supervision of the works that limited cost overrun and left provisional sums and unallocated amounts available. The depreciation of the Kazakh Tenge (KZT) from 147.5 to the US dollar in 2009 to 342.2 in 2016 also played a role, although limited, as a large portion of the works was already completed when the depreciation occured. 4. The objective of the proposed restructured projects is to continue supporting GoK policy toward upgrading main existing road corridors – WE‐WCh and Center‐South (CS), as prioritized in the current national strategic documents and to operationalize the sector reform activities to make KAZ a commercially‐oriented road operator. The Bank’s support would aim at procuring and implementing critical infrastructure at a low cost and improving the financial sustainability of KAZ through better business planning and operational efficiency. EBRD joins these efforts by providing a US$103m loan to co‐finance a section of the same CS corridor (respectively, the section Toguz‐Ak Suyek with a length of 81 km). 5. Value added from the Bank: since early days of partnership with the roads authorities in Kazakhstan, the Bank team aimed at combination of actions towards strengthening the capacity of staff, introducing new technology, and improving processes. Annex 4 summarizes how the capcacity of staff has improved over the years and how innovations like RAMS, PAT, Mappilary, and RoadLabPro are supporting the decision making today. Significant institutional changes have been implemented under SWRP and EWRP in coordination with other IFI partners (ADB, EBRD, IsDB). These include separation of operational functions from policy and planning, improvements in road safety, network management, and sustainability via revenue collection. The proposed restructurings of both SWRP and EWRP would leverage and build on these reforms and focus on promoting sustainable and diversified revenue sources for road maintenance, safe road operations, job creation and private sector participation. 6. Lessons learnt can be summarized as follows: o It is possible to build a good quality trunk road at a very reasonable price in Central Asia today. This statement is may be the most important given the appetite of Central Asian countries to turn the region from