Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized

’ Report No: 5 1477-Kz

PROJECT APPRAISAL DOCUMENT

ON

A PROPOSED LOAN Public Disclosure Authorized

IN THE AMOUNT OF US$198.5 MILLION

TO

THE KAZAKHSTAN ELECTRICITY GRID OPERATING COMPANY

WITH THE GUARANTEE

OF

THE REPUBLIC OF KAZAKHSTAN Public Disclosure Authorized

FOR

AN ALMA ELECTRICITY TRANSMISSION PROJECT

November 17,2009

Sustainable Development Department Central Asia Country Unit Europe and Central Asia Region Public Disclosure Authorized 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. CURRENCY EQUIVALENTS (Exchange Rate Effective October 29, 2009) Currency Unit = Kazakh Tenge (KZT), 1 KZT = 100 tyin KZT 1.0 = US$0.0066 US$l.O = KZT 150.71

FISCAL YEAR January 1 - December 3 1

ABBREVIATIONS AND ACRONYMS

ARNM Agency for Regulation of Natural Monopolies kV Kilovolt (1,000 Volts) CAPS Central Asian Power System kWh Kilowatt Hour (1,000 Watt Hours);; DA Designated Account LA Loan Agreement DBK Development Bank of Kazakhstan LAP Land Acquisition Plan DP Development Plan LAPF Land Acquisition Policy Framework EA Environmental Assessment MES Regional Branch of KEGOC EBRD European Bank for Reconstruction and Development MHPP Moinak Hydroelectric Power Plant EIRR Economic Internal Rate of Return MVA Megavolt Ampere (1,000 KVA) EMP Environmental Management Plan MWh Megawatt Hour (1,000 kWh) ESO Energy Supply Organization NGO Non-Governmental Organization FIRR Financial Internal Rate of Return NPV Net Present Value FM Financial Management N/S North-South FY Fiscal Year OHTL Overhead Transmission Line GOK Government of Kazakhstan OSY Outdoor Switchyard GWh Gigawatt Hour (1,000,000 kWh); PIP Project Implementation Plan HPP Hydroelectric Power Plant PMD Project Management Department HV High Voltage PP Procurement Plan IBRD International Bank for Reconstruction and Development REK Regional Electricity Distribution Company ICB International Competitive Bidding ROK Republic of Kazakhstan IFR Interim Financial Report SOE Statement of Expenditures KEGOC Kazakhstan Electricity Grid Operating Company ss Substation KOREM Kazakhstan Operator of Spot Electricity Market TWh Terawatt hour (1,000,000,000 kWh) KZT Kazakh Tenge VAT Value Added Tax

Vice President: Philippe Le Houerou Country Director: Motoo Konishi Sector Manager: Ranjit Lamech Task Team Leader: Imtiaz Hizkil FOR OFFICIAL USE ONLY

KAZAKHSTAN Alma Electricity Transmission Project

CONTENTS

Page

A . STRATEGIC CONTEXT AND RATIONALE ...... -1 1. Country and sector issues ...... 1 2 . Rationale for Bank involvement ...... 6 3 . Higher level objectives to which the project contributes ...... 6 B. PROJECT DESCRIPTION...... 7 1. Lending instrument ...... -7 2 . Project development objective and key indicators ...... 7 3 . Project components ...... 8 4 . Lessons learned and reflected in the project design ...... 8 5 . Alternatives considered and reasons for rejection ...... -9 C . IMPLEMENTATION ...... 10 1. Institutional and implementation arrangements ...... 10 2 . Monitoring and evaluation of outcomes/results ...... 11 3 . Sustainability ...... 11 4 . Critical risks and possible controversial aspects ...... -12 5 . Loan conditions.. and covenants ...... 13 D. APPRAISAL SUMMARY ...... 14 1. Economic and financial analyses ...... 14 2 . Technical ...... 18 3 . Fiduciary ...... 18 4 . Social ...... 20 5. Environment ...... 21 6 . Policy Exceptions and Readiness ...... 23

Annex 1: Country and Sector Background...... 24 Annex 2: Major Related Projects Financed by the Bank and/or Other Agencies ...... 29 Annex 3: Results Framework and Monitoring ...... 30

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 4: Detailed Project Description ...... 32 Annex 5: Project Costs ...... 36 Annex 6: Implementation Arrangements...... 37 Annex 7: Financial Management and Disbursement Arrangements ...... 42 Annex 8: Procurement Arrangements...... 49 Annex 9: Economic and Financial Analysis ...... 54 Annex 10: Safeguard Policy Issues ...... 65 Annex 11: Project Preparation and Supervision ...... 67 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 37357 KAZAKHSTAN

ALMA ELECTRICITY TRANSMISSION PROJECT

PROJECT APPRAISAL DOCUMENT

EUROPE AND CENTRAL ASIA

ECSSD

Date: November 17, 2009 Team Leader: Imtiaz Hizkil Country Director: Motoo Konishi Sectors: Power (1 00 YO) Sector Director: Peter D. Thomson Themes: Infrastructure services for private sector Sector Manager: Ranjit Lamech development (P) Project ID: P116919 Environmental screening category: Partial assessment Lending Instrument: Specific Investment Loan Safeguard screening category: Limited impact (B)

[XI Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other:

Source Local Foreign Total BORROWER 24.90 0.00 24.90 INTERNATIONAL BANK FOR 0.00 198.50 198.50 RECONSTRUCTION AND DEVELOPMENT Total: 24.90 198.50 223.40

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: [email protected] Guarantor: Republic of Kazakhstan Responsible Agency: KEGOC JSC

"Y. "II*.I"."\YUUR I I I ""WU., _- , 2013 I 2014 I

Cumulative I 1.0 I 19 ] 81 I 143 I 198.5 I Project implementationperiod: Start: March 1,201 0 End: October 3 1, 20 14 Expected effectiveness date: February 15,201 0 Expected closing date: April 30, 201 5

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

Project development objective (Ref. PAD B.2, Technical Annex 3)

The objective is to improve the reliability and quality of electricity supply to consumers in the Almaty region in an environmentally responsible and financially sustainable manner. Project description Ref. PAD B.3, Technical Annex 4

The focal point of the proposed project is the construction of a new bulk supply point - the “Alma” substation (SS) - for the Almaty region. Other related components include reconstruction and extension of related SSs and construction of overhead transmission lines (OHTLs). Specifically, the main project components are described below:

Part 1: Construction of Transmission Lines

Provision of goods and works for: (a) construction of a 500 kV overhead transmission line (OHTL) from Alma substation to Almaty substation; (b) construction of a 220 kV OHTL from Alma substation to Kensai substation; (c) construction of incoming cross connection lines of the 220 kV OHTL from Almaty CHP-3 to Shelek substation for connection with Alma substation; (d) construction of the incoming cross connection lines of the 220 kV OHTL from Almaty CHP-3 to Robot substation for connection with Alma substation; and (e) construction of a 500 kV OHTL from Alma substation to YuKGRES substation.

Part 2: Construction, Extension and Modernization of Substations

Provision of goods and works for: (a) construction of a new 500 kV Alma substation and extension and modernization of the 500 kV Almaty substation; and (b) extension and modernization of YuKGRES substation.

Part 3: Consulting and Technical Services

Provision of: (a) consultants’ services for procurement and Project management, including preparation of bidding documents and technical specifications, site visits, quality control and monitoring of all executed work, and verification of contractor’s payments and reporting; and (b) technical services for the selection and approval of the overhead transmission line route including support for selection of the transmission routes, conduct of engineering surveys and engineering supervision of the turn-key contracts during construction.

Which safeguard policies are triggered, if any? Ref. PAD D.4, Technical Annex 10

Environmental Assessment (OP/BP 4.01): 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. Environment category: B. An Environmental Management Plan (EMF’) was prepared and disclosed at the Bank’s Infoshop on October 9, 2009 and at KEGOC’s website on October 2, 2009. An Environmental Assessment (EA), including an 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 (OP/BP 4.12): Land will need to be expropriated for the new Alma substation; 20 ha of land has already been allocated for construction by the Akimat of the Illi District of the Almaty Oblast. Land will also be acquired for the transmission towers, the number and location of which are yet to be determined. Furthermore, since the exact number of towers that will be built is unknown at this point in time and will follow from the detailed working designs for the power lines 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, a Land Acquisition Policy Framework (LAPF) has been prepared as a condition of appraisal and disclosed on October 10, 2009. Land Acquisition Plan (LAP) will be prepared for each component. Even though land acquisition will be necessary, it is clear that this will not result in the physical displacement of people. Land will be acquired by KEGOC through a special government fund with compensation to be provided to affected private owners; however most of the land is government-owned, .

Significant, non-standard conditions, if any, for: Ref. PAD C5 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 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. The Borrower shall: (a) prepare, prior to the commencement of any construction works requiring land acquisition 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, as necessary, 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 meet the following financial performance indicators: (i)for the calendar year 201 0, attain a Current Ratio of at least 0.8 and 1.O thereafter; (ii)attain a Self-financing Ratio equal to 10 percent of the three- year moving average investment program in 2010 and 20 percent thereafter; and (iii)refrain from incurring additional debt unless the Debt Service Ratio is at least 0.9 for 2010 and 1.2 thereafter.

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.

The Guarantor 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.

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

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

2. The world economic crisis has had negative repercussions in Kazakhstan. Even though high revenues from oil and other resource exports initially fueled demand, thereby resulting in vast expansion of commercial bank credits (financed through foreign borrowings) between 2005 through 2007, higher concentration of credits in non-tradables (finance and construction) created the so-called real estate bubble that eventually burst in 2007.

3. Sharp declines in commodity 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 slowed to 3.3 percent in 2008, and a GDP decline of 2.3 percent was registered in the first half of 2009. The Bank projects a GDP decline of 2-3 percent in 2009 and 1-2 percent growth in 2010. Medium-term prospects remain favorable with an expected significant expansion in oil production. Pressures for devaluation led to an 18 percent devaluation of the national currency (Tenge, KZT) in January 2009.

4. The overall financial position of Kazakhstan remains fairly strong, but could weaken somewhat in the near future. International monetary and National Oil Fund reserves now amount to over US$22 billion. The Government of Kazakhstan has also taken measures to mitigate the effects of this severe crisis by providing two stimulus packages totaling KZT 2.9 trillion (about US$20 billion).

5. 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 commodity prices along with the world economy, 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 undertaking large-scale sovereign borrowing from International Financial Institutions, particularly for infrastructure projects. For example, the World Bank recently approved a US$2.125 billion South-West Roads Project aimed at transport efficiency on the road sections between Aktobe/Kyzylorda Oblast border and Shymkent, and to improve road management and traffic safety in Kazakhstan

6. 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 might be offset by the more restricted access to commercial financing of generation and distribution investments. 7. Electricity Generation. There are 60 power generation plants in Kazakhstan with a total installed capacity of 18,992 MW, of which 14,558 MW is available for generation. In 2008, total generation was 80.1 TWh. Although 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 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 in the near future.

8. Electricity Consumption and Trade. In 2008, total generation and gross domestic consumption were 80.1 TWh and 80.6 TWh, respectively, with a small net import of 0.5 TWh.’ Kazakhstan exports power only to Russia. Imports are from Russia and the Central Asian republics. Imports from Central Asia are limited to and depend primarily on the water released for irrigation from the Toktogul reservoir in the Kyrgyz Republic and this as such does not coincide with the Kazakhstan’s peak demand in the month of January. However, there is considerable potential for construction of additional hydropower in the Kyrgyz Republic and Tajikistan which may be available in the future.*

9. As a result of the worldwide recession, electricity consumption in Kazakhstan is expected to fall about 2-3 percent in 2009 after a steady growth averaging over 5 percent a year since 2000. Growth in electricity consumption is expected to resume in 2010 increasing about 2 percent and then accelerate as the economy’s growth accelerates. Electricity demand in the Almaty Oblast, the area where the project will be implemented, should mimic the growth in national demand. However, demand growth in the Almaty Oblast had been growing faster than the national average for some years (7.6 percent per year) and this faster growth should continue given the diversified economic base and growth potential of this region. It should be noted that KEGOC’s transmission volumes dropped 20 percent in the first quarter as a result of cutbacks in heavy industries (located primarily in northern Kazakhstan), which are one of its major customer groups. The reduction in transmission volumes slowed to 14 percent in the second quarter and 7 percent in July as heavy industry began to normalize its production. KEGOC’s electricity transmission volume is forecast, rather conservatively, to fall by 18 percent in 2009. This assumption was also used in the Bank’s forecasts (prepared for the Moinak Project) for both the Moinak and Alma Projects.

10. Transmission. The total length of Kazakhstan’s transmission lines (ranging from 35 kV to 1,150 kV) is 23,569 Circuit-km. The 74 high voltage transmission substations with an aggregate 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 and most assets at the 220 KV level. KEGOC is responsible for dispatch control and operates international connections.

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

0 Northern grid connected to the Russian power system.

0 Southern grid connected to the Central Asian power system and the northern grid.

I For more details, see the national electricity balance table in Annex 1. See Regional Electricity Export Potential Study (2004) f’unded by the Bank. 2 Western grid comprising two subsystems which are largely isolated from the other systems and import power from Russia to supplement local generation.

12. Distribution and Supply. There are 21 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.

13. Power Sector Reforms. In the area of power sector reforms, Kazakhstan ranks among the most advanced countries in the former Soviet Union. The Government of Kazakhstan (GOK), with the encouragement of the Bank, began reforms in 1996 as part of a strategy primarily aimed at the introduction of private sector participation and establishment of a competitive power market. By 1997, the largest generation plants were separated from the former Kazakhstanenergo (an integrated monopoly). Concurrently, KEGOC was created to operate the high voltage transmission network and the REKs were established. A competitive retail market is being introduced.

14. Privatization. The majority 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. The REKs are mostly privatized.

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

16. Under the Bank-supported Electricity Transmission Rehabilitation Project (1999), the GOK in 2002 established a well-functioning “day-ahead” spot market (KOREM), accounting for about 15 percent of total wholesale turnover.

17. To complete the wholesale electricity market reforms, a real-time balancing market was established under the ongoing Bank-supported North-South (N/S) Electricity Transmission Project (2005). This balancing market is being operated by KEGOC in a simulation mode until KEGOC is sure that it is working properly.

18. 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.

19. 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 rate of return on the regulated asset base, thereby allowing KEGOC to operate profitably. 3

The latest tariff increase came in August 2009, which increased the transmission tariffs by 20.6 percent and the dispatch tariff by 3 1.7 percent. 3 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.

20. Growing Transmission System Constraints in Almaty Oblast - 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 5 percent per year between 2000 and 2007. Southern Kazakhstan and, especially the Almaty Oblast, have experienced especially rapid growth (at over 7 percent per year) in electricity demand. Generation facilities in the south are limited to small hydro, combined heat and power plants, and a high-cost gadoil-fired plant at Zhambyl. In 2008, the generation deficit in Almaty Oblast (difference between demand and local generation) was 792 MW at peak. At present, the deficit is met largely by transmitting power from the north and, in part, by imports. However, the deficit cannot be fully met in the winter period of maximum electric loads, if there are any unplanned outages, which often necessitates load shedding4 with an adverse impact on regional economic development.

2 1. Following the recovery from the economic slowdown in 2008-2009, electricity demand in southern Kazakhstan is expected to increase vigorously (nearly 6 percent per year till 2020 in the optimistic scenario) and the power deficit is expected to substantially increase by 2020 (from 865 MWpeak deficit in 2007 which has been supplemented by power “imports” from the north) unless major new investments are undertaken in a timely manner in the generation and transmission sectors. The deficit is predicted to be particularly severe in the Almaty Oblast. At present, energy and peak supply capacity is limited to 850 MW in winter and 553 MW in summer out of total installed capacity of 1290 MW, with most of the plants becoming obsolete. Investment costs in the south are expensive in comparison with the north both for rehabilitation of existing generation capacity and for new generation. Therefore, in the medium term, major investments are unlikely in the south, except for the Moinak HPP (MHPP) whose supply of peak power is critically needed also for frequency regulation. Net imports from Central Asia are not expected to increase substantially in the next few years as availability of power is primarily dependent on the water releases for irrigation (mainly in summer) from the Toktogul reservoir in Kyrgyz Republic. Longer term imports from Tajikistan and Kyrgyz Republic are uncertain at this time and depend crucially on the availability and costs of hydropower to be generated by plants already constructed or under construction (Sangtuda- 1 and -2 in Tajikistan) or envisaged (Rogun in Tajikistan and Kambarata-2 in Kyrgyz Republic). Within this context, the World Bank is currently undertaking preparation of a Regional Water-Energy Development Framework which focuses on building institutions that enhance analysis for more efficient development and utilization of water and energy related infrastructure projects in Central Asia.

22. 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.’ This plan includes establishment of a reliable transmission linkage between northern and southern

In the Almaty power region, during the 2008-09 winter, supply restrictions in southern Kazakhstan ranged from 230 MW to 360 MW (10% of peak demand).

’ Under the plan, additional generation capacity is envisaged including the construction of new power plants (Balkhas Power Plant, 2,640 MW; Moinak HPP, 300 MW, etc.) and expansion of existing generation facilities. 4 Kazakhstan, especially to Almaty Oblast, which is critical for security of supply to this region. The second N/S line co-financed by the IBRD is scheduled for completion in October 2009, which will increase the interconnector’s capacity from 650 MW to about 1,300 MW and thus provide increased power to Almaty Oblast, especially at the peak hours. The power from North Kazakhstan and the Kyrgyz Republic to the Almaty Oblast is essentially transmitted through the existing Almaty SS (2x500 MVA), which is significantly overloaded.

23. The proposed Alma Project will provide, inter alia, up to 1000 MVA incremental transmission capacity at the Alma substation to supply Almaty Oblast. It will help to prevent power shortages caused by the lack of capacity or operational problems at the existing Almaty SS. In addition, the project includes interconnection of Alma SS, being a new bulk supply point, with Almaty and YuKGRES SSs at 500 kV and other existing SSs at 220 kV level, thus providing increased operational flexibility in the transmission networks serving Almaty and Zhambyl regions.

24. In addition to linkage with the Bank co-financed N/S transmission project, the project is closely linked with Moinak Electricity Transmission Line Project (approved by the Board in September 2009). This project will provide up to 300 MW of additional peak capacity to be generated by MHPP to the 220 kV network in the Almaty Oblast. The proposed Alma Transmission Project as well as the Moinak Project are key parts of the overall strategy to minimize the power shortages and outages in southern Kazakhstan by 2015. The cumulative impact of the N/S, Moinak and Alma Projects will be to provide additional capacity as well as reliable supply in a major power deficit region of southern Kazakhstan.

25. Development Impact. The strengthening of the power transmission network is the highest priority investment project in the electricity sector due to significant congestions in the 500 / 220 kV network in the Almaty Oblast on the main north south transmission corridors connecting with north Kazakhstan, which has excesses of relatively cheap electricity, with the main load centers in the south, namely Almaty Oblast. Expanding and upgrading the transmission system in the south, especially Almaty Oblast, is urgently needed to forestall emergency situations and widespread supply cut-offs hurting the economy and the population. The Alma Project provides benefits in terms of system reliability and security apart from higher quality electricity supply. Furthermore, by improving the security, efficiency and reliability of the power grid, the Alma Project would help in meeting key requirements for technical harmonization and interconnection with the CAPS grid, which is critical if Kazakhstan is to achieve increasing electricity trade with the region.

26. In June 2009, Kazakhstan’s Parliament passed final amendments to a Law on the Use of Renewable Energy Sources, which establishes a full regulatory framework for development of renewable energy in the country. This legislative act will encourage development of renewable sources of energy, including wind power, which is currently underdeveloped6. Furthermore Kazakhstan has adopted a national program for transition to sustainable development which calls for increasing the share of renewable energy in the country’s energy mix to up to 5 percent by 2024. The project has a potential to contribute to this, as it will offer additional transmission capacity in delivering power to the consumers of one of the high-growth areas in the country, Almaty Oblast, from renewable energy sources.

According to the estimates, Kazakhstan’s wind power potential exceeds 1800 Terawatt-hours per annum. 5 2. Rationale for Bank involvement

27. The Bank has had a long and productive relationship with the ROK and KEGOC in the development of the electricity sector of Kazakhstan. Through policy dialogue and under two Bank-financed transmission operations (system rehabilitatiodmodernization and new North- South 500 kV line), the Bank is helping the country develop a modern, efficient and financially sound power system, with an effective Transmission System Operator (KEGOC) and a liquid spot market supplementing contractual arrangements between generators and customers. Other achievements include (i) commercialization of transmission and dispatch services, (ii) transmission tariff restructuring; and (iii)adoption of a modern electricity Grid Code.

28. The proposed project is consistent with the objectives of the Country Partnership Strategy, which are to support the development priorities of the GOK. These include one of the key pillars, namely, Pillar 3 - Building foundation for future competitiveness by investing in human capital and basic infrastructure. These development priorities have been highlighted in a more recent 2008 CPS Progress Report, where it has been stated that despite the current economic downturn there is a need to further develop the major segments of the country’s infrastructure, including the power transmission networks to meet the needs of a rapidly developing economy of Kazakhstan. Consequently, the proposed project would support this development priority by addressing growing constraints to reliable power supply in one of the high-growth regions of the country in Almaty Oblast.

29. Furthermore, this project is part of the development strategy of Kazakhstan’s national power grid for 2007-2015. This strategy includes a list of 7 projects aimed at reconstruction, reinforcement and modernization of the national power grid, which links not only regions within the country, but also energy grids of neighboring Central Asian countries. This project will further strengthen the institutional capacity of KEGOC and thus help improve the performance and service quality of the entity. In particular, since KEGOC is seen as one of the exemplary electricity transmission companies in the region, the Bank’s continuing role in increasing its capacity and performance is of significance.

3. Higher level objectives to which the project contributes

30. 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 in modernization and expansion of the power sector. From the broader development perspective, the project will enhance the well-being of the population in southern Kazakhstan by (i)providing relatively 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 of employment and income.

3 1. As mentioned earlier, the project being fully consistent with the objectives of the Bank’s Country Partnership Strategy for Kazakhstan will be supporting the development priorities of the

6 ROK for increasing competitiveness in the country. The project would support this development priority by addressing growing constraints to reliable power supply, which are becoming an impediment in achieving sustainable economic growth in the high-growth regions of the country. Likewise, the project is also in line with the national power grid development program of the ROK, which is more project-specific.

B, PROJECT DESCRIPTION

1. Lending instrument

32. A Specific Investment Loan (SIL) will be used. The Bank would extend an IBRD loan of US$198.5 million to KEGOC to finance the proposed project under the following terms: 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 to maturity. The loan will be guaranteed by the Republic of Kazakhstan. Total project cost (including contingencies, front-end fee and interest during construction) is US$223.4 million of which the Borrower will finance US$24.9 million from its own resources.

2. Project development objective and key indicators

33. The project development objective is to improve the reliability and quality of electricity supply to consumers in the Almaty Oblast in an environmentally reliable and financially sustainable manner. This objective will be achieved by expanding the capacity of the Almaty Oblast transmission network in order to provide additional capacity and redundancy in the system for uninterrupted supply of electricity.

34. Completion of the Alma project is expected to have the following outcomes:

0 Increase in the amount of power available to customers in the Almaty Oblast with a consequent reduction in load shedding; and

0 Improved quality and reliability of electricity supply.

35. The project monitoring indicators are as follows:

0 Increased reliability of supply measured by reduced outages in Almaty Oblast area;

0 Increased substation capacity to supply Almaty Oblast measured by capacity of 500 kV transformers which tie to the high-voltage network;

0 Increased substation capacity to supply Almaty Oblast measured by overloading of transformers at Almaty substation; and

0 Increased transmission line capacity for Almaty Oblast area

More details on these indicators are shown in Annex 3.

7 3. Project components

36. The focal point of the proposed project is the construction of a new bulk supply point - the Alma substation (SS) - for the Almaty Oblast. Other related components include reconstruction and extension of related SSs and construction of overhead transmission lines (OHTLs). Specifically, the main project sub-components are classified under three groups, as follows:

Part 1: Construction ofTransmission Lines ($105.4 1 Million)

Provision of goods and works for: (a) construction of a 500 kV overhead transmission line (OHTL) from Alma substation to Almaty substation; (b) construction of a 220 kV OHTL from Alma substation to Kensai substation; (c) construction of incoming cross connection lines of the 220 kV OHTL from Almaty CHP-3 to Shelek substation for connection with Alma substation; (d) construction of the incoming cross connection lines of the 220 kV OHTL from Almaty CHP-3 to Robot substation for connection with Alma substation; and (e) construction of a 500 kV OHTL from Alma substation to YuKGRES substation.

Part 2: Construction, Extension and Modernization of Substations ($80.07 Million)

Provision of goods and works for: (a) construction of a new 500 kV Alma substation and extension and modernization of the 500 kV Almaty substation; and (b) extension and modernization of YuKGRES substation.

Part 3: Consulting; and Technical Services

Provision of: (a) consultants’ services for procurement and Project management, including preparation of bidding documents and technical specifications, site visits, quality control and monitoring of all executed work, and verification of contractor’s payments and reporting; [$2.9 millionland (b) technical services for the selection and approval ofthe overhead transmission line route including support for selection of the transmission routes, conduct of engineering surveys and engineering supervision of the turn-key contracts during construction. This subcomponent is expected to be fully financed from KEGOC’s own funds.

4. Lessons learned and reflected in the project design

37. 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 of the proposed project, a significant amount of the necessary coordination has already been carried out by KEGOC, including obtaining the approval (permits, licenses and other forms of certification) and support of relevant GOK bodies with regard to the feasibility study, environmental and social impact assessment and project financing plans.

38. Prior experience in the implementation of transmission projects has also revealed some specific areas that require special attention, incIuding the need for thorough analyses so that 8 facilities are designed and routed to minimize environmental and 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 of transmission lines and rehabilitation of substations provide an efficient way of implementing projects in a cost-effective and implementation-efficientmanner.

5. Alternatives considered and reasons for rejection

39. Technical Alternatives. The scheme for 500 and 220 kV network expansion under this project was based on detailed studies undertaken by KEGOC’s consultants. In order to strengthen the 500 kV network in the Almaty Oblast and to address the system constraints (mainly the overloading of two autotransformers at Almaty SS); two variants were analyzed each with two phases. Under variant 1, a third auto-transformer would be installed in Almaty SS along with additional 220 kV OHTL’s that would be connected from this SS to other existing and new SSs. In the second phase, a new 500/220 kV (Alma SS) would be constructed with one set of auto-transformer (500 MVA) and 500 kV OHTL connections with YuKGRES and Almaty SSs and 220 kV OHTL connections to existing 220 kV network.

40. In the second variant, a new 5001220 kV SS (Alma) would be constructed with 2 auto- transformer (2x500 MVA) which will be connected to Almaty SS through a 500 kV OHTL, along with a 220 kV OHTL connection to the existing 220 kV network. In the second phase, Alma SS will be connected to YuKGRES SS through a 500 kV OHTL. The second alternative has been selected as it provides 1000 MVA of capacity nearer to the load center and is technically a more practical solution. The proposed technical solutions are based on well- established and proven standard technical concepts and technologies, which are being applied worldwide.

4 1. The selection of transmission line routing encompassed technical, economic, social and environmental considerations. Identification of routes was carried out using route surveys, aerial photos and topographic maps.

42. The proposed project, which aims to provide a second bulk supply point in the 500/220kV network in the Almaty Oblast, would remove the system constraints at 500/220 kV level by providing additional transformation capacity and more OHTL linkages at both 500 kV and 220 kV networks. One alternative might have been to have a bulk supply point at a different location; however, Alma SS is considered to be located in close proximity to the load centers.

43 * The selected alternative is considered to be most suitable since: (i)it provides immediate relief to the overloaded transmission system of the Almaty Oblast, (ii)helps stabilize the supply to the Almaty Oblast, and (iii)with growth in demand in the Almaty Oblast, it will enable effective transmission of low-cost electricity from generating sources within the country and neighboring countries, namely the Kyrgyz Republic or Tajikistan, depending on when and where new generating plants are constructed.

9 C. IMPLEMENTATION

1. Institutional and implementation arrangements

44. Borrower. The Borrower is the Kazakhstan Electricity Grid Operating Company JSC (KEGOC) that was established in 1996. KEGOC is fully state-owned. The state holding company Samruk-Kazyna National Welfare Fund (Samruk-Kazyna) 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 tariffs in the country including transmission and dispatch 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-2008 were valued at US$893 million, while operating revenue for the year totaled about US206 million.

45. The Borrower has performed satisfactorily under two Bank-financed operations: the Electricity Transmission Rehabilitation Project and the North-South Transmission Line Project.

46. 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 existing Bank-financed projects and will be responsible for the implementation of the Moinak and Alma 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 prepared a comprehensive Project Implementation Plan (PIP) which may be amended from time to time with the concurrence of the Bank.

47. 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).

48. Disbursement. Parts 1, 2 and 3(a) of the project will be financed by the Bank. The proceeds of the loan will be disbursed over a period of 4 years. The project will follow transaction-based disbursement procedures: payments through Designated Account, reimbursement, direct payments and special commitments (see Annex 7).

49. Procurement. The project components to be financed by the Bank loan are grouped into five packages: (i)construction of 2 transmission lines and 2 incoming cross connection lines (design, supply and construction); (ii)construction of the Alma SS and extension and partial reconstruction of the Almaty SS (design, supply and installation arrangement); (iii) extension and partial reconstruction of the YuKGRES SS (design, supply and installation arrangement);

10 and (iv) construction of the Alma- YuKGRES 500 KV transmission line (design, supply and construction); (v) consultant services for procurement and project management (QCBS procedures). Details on procurement arrangements and the project Procurement Plan are in Annex 8.

2. Monitoring and evaluation of outcomes/results

50. 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.

3. Sustainability

5 1. Over the longer term, the sustainability of the 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. Continued ROWSamruk-Kazyna 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.

52. The proposed project enjoys strong support from the ROK which is the ultimate owner of KEGOC (through Samruk-Kazyna). In August 2009, the ARNM approved an increase of 20.6 percent in the transmission tariff and 31.6 percent in the dispatch tariff. The company’s 2009- 2020 Development Plan envisions further increases in the transmission tariff and in the dispatch tariff almost every year. Samruk-Kazyna has stated in a letter dated February 6, 2008 that it will provide up to KZT20.8 billion (US$139 million) in additional equity over the 201 1-2017 period on as needed basis. Currently KEGOC is discussing with the Government making these funds available at the end of 2009 or the beginning of 20 10.

11 4. Critical risks and possible controversial aspects

Critical Risks

Risk Rating Risk (After Risk Mitigation Measure Mitigation)

(1) Inadequate S The regulator (ARNM) has consistently adhered to its transmission tariffs mandate to set tariffs at levels sufficient to fully jeopardize the financial recover prudently incurred operating costs plus a viability of KEGOC and return on investment. KEGOC has high strategic hence its ability to importance as the only transmission service provider properly maintain and for the entire power sector in the country. Financial operate the network. covenants in the Loan Agreement, together with a funds-adequacy provision in the Guarantee Agreement, will ensure that tariffs are maintained at levels sufficient to cover KEGOC's medium-to- longer term cash flow requirements. (2) Inadequate M Samruk-Kazyna has provided additional KZT 2.7 cash/equity injections billion in the form of equity financing in 2"d quarter from Samruk-Kazyna of 2009. It has also committed to provide up to KZT threaten KEGOC's ability 20.8 billion over the period 20 1 1-20 17, as required. to finance its large capital KEGOC embarked on a cost-cutting program aimed investments, service its at streamlining of the administrative costs. debt and ensure proper O&M of the network (3) Declining economic N Demand in the region already exceeds available peak growth reduces demand supply. Even without further vigorous growth in for electricity in the demand over the coming period, the additional Southern region of transmission capacity is an operational requirement Kazakhstan and Almaty and would be needed to avoid current peak period Oblast, in particular. load shedding and provide for adequate network redundancy. (4) According to the M KEGOC is a well-managed company with strong Transparency corporate governance arrangements and no incidences International's Corruption of corruption have been flagged during the Perception Index (CPI) of implementation of the two Bank-financed projects. 2008, there is a perception The company has submitted financial reports on time of high corruption in and has been audited regularly by reputable audit Kazakhstan, with the firms. No major issues have been raised either in the country occupying No. audit reports or management letters. The country risk 142 position (CPI score of is significant, but the residual FM risk after mitigation 2.2) in 2007. is assessed to be moderate.

12 Risk Rating Risk (After Risk Mitigation Measure Mitigation)

(1) Project implementation N Under ARNM regulation KEGOC is entitled to delays due to lack of local recover the capital costs incurred under GOK- financing approved projects. In addition, under a formal agreement, KEGOC can receive capital injection from its shareholder Samruk-Kazyna to cover projected funding shortfalls. However, given that KEGOC contribution is very low in this project, this risk is negligible. (2) Project implementation M KEGOC’s PMD will be further strengthened, with delays due to overloaded consultants to assist KEGOC in procurement and implementation capacity. project management. In addition, the Design, Supply & Install procurement method would prevent excessive delays resulting from problems of implementation coordination. The main on-going project, the second NortWSouth line, is winding down since it is completed although testing of the line is still required. This reduces the load on PMD staff. Finally, there is a limited overlap in the major project implementation activities of Alma project with the recently-approved Moinak Project, which is also being implemented in the southern regions of Kazakhstan. (3) Implementationrisks M The risks are considered to be moderate because: (a) associated with project the project costs include both physical and price cost overruns contingency and (b) the cost of transmission equipment has fallen substantially as a result of the global financial downturn (4) Implementationdelays N GOK approval of the project feasibility study was associated with delays in already obtained. GOK approval and ratification of obtaining the GOK legal agreements will be monitored by the Bank. approvals and permits Overall Risk Rating M Based on the risks and mitigation measures discussed above overall risk rating is “moderate”

Risk Rating - H (High Risk), S (Substantial Risk), M (Moderate Risk), N (Negligible or Low Risk)

5. Loan conditions and covenants

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

Guarantee Agreement

54. The Guarantor 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.

13 Loan Agreement

55. 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 ofthe EMP, PIP or the LAPF without prior approval ofthe Bank.

56. 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.

57. The Borrower shall:

(a) Prepare, prior to the commencement of any construction works requiring land acquisition 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 work ; and (c) not amend, suspend or abrogate any of the provisions of the LAP without the prior agreement ofthe Bank.

58. The Borrower shall:

(a) prepare, prior to the construction of OHTLs and substations, a detailed EA, including an updated EMP, as necessary, 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 ofthe Bank. 59. The Borrower shall meet the following financial performance indicators: (a) for the calendar year 2010, attain a current ratio of 0.8 and 1.0 thereafter; (b) attain a 10 percent self- financing ratio of the 3-year moving average investment program in 2010 and 20 percent thereafter; and (c) refrain from incurring additional debt in each year unless the debt-service ratio is at least 0.9 in 2010 and 1.2 thereafter.

60. 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.

D. APPRAISAL SUMMARY

1. Economic and financial analyses

61. Economic Analysis of Project. KEGOC proposes to build the new Alma 500 kV Substation with 1000 MVA capacity and OHTLs (including some upgrades/expansions at

14 remote-end substations) to provide additional capacity to supply Almaty Oblast. Once constructed and connected to adjacent substations, the Alma substation will provide a number of benefits. First, it will relieve the pressure on the Almaty substation and prevent a failure in one of its two transformers from causing power shortages in Almaty Oblast. Second, it will allow additional supply to Almaty Oblast, when the Almaty substation is operating at capacity in a few years. Third, it will allow additional imports of hydropower from the Kyrgyz Republic if they are available.

62. An analysis was undertaken of the economic benefits of the Alma Project, once completed, in providing security of supply to the Almaty Oblast. This analysis was done by assuming a yearly failure in one of the 500 KV transformers at the existing Almaty Substation and measuring the benefits, which the Alma substation would provide by offsetting this failure and allowing power to continue to flow. Four different scenarios were analyzed depending on when the failure occurred. These scenarios, which are described in Annex 9, show that the project has a real Economic Rate of Return (ERR) of 9-20 percent depending on the scenario and is economically attractive based purely on its role in providing security of supply.

63. Around the middle of the next decade the Almaty substation, even with both transformers operating at capacity, will be unable to supply sufficient power for the Almaty Oblast. Making a conservative assumption that this happens in 201 7 (and it is likely before then with recent demand growth), the new Alma substation will have to be in operation. Alma would then likely supply all of the additional electricity needed by the Almaty Oblast for the next 10 to 15 years, depending again on the rate of growth of demand. The service that the Alma substation provides is thus supplying the additional electricity required by the Almaty Oblast which cannot be supplied by the Almaty Substation. The net value of this supply service is estimated conservatively at around 0.7 cents/kWh, as explained in Annex 9, which produces a rate of return on the project from this supply function alone of about 12 percent real.

64. Combining the benefits of the Alma Substation providing backup transformers for the Almaty Oblast high voltage transmission system (fourth and lowest scenario) and providing additional capacity to supply Almaty Oblast with increased electricity, produces an ERR of 16 percent real for the project. In addition, there are the regional benefits of this project enabling transmission of additional inexpensive and clean hydropower from Kyrgyz Republic and helping stabilize the Central Asian Power System. However, these regional benefits were not quantified and were, therefore, not included in the calculations.

65. Financial Analysis of Project. The scope of the financial analysis was limited to the incremental costs and revenues incurred by KEGOC as a result of its investment in the Alma substation and transmission facilities. Specifically, financial costs include the capital and O&M costs associated with the new transmission facilities including land costs and VAT. Benefits include the incremental transmission and dispatch tariffs which would be received by KEGOC, based on the 2013 forecast tariff, as it met the incremental demand from the Almaty Oblast. Using these assumptions the project has a real rate of return of 14 percent pre-tax.

66. Financial Performance of the Borrower. KEGOC’s financial performance has shown steady improvement in recent years (up to 2008), with increasing profitability, positive cash flow and satisfactory liquidity. Equity injections of KZT 7.2 billion in 2008 (UT3 billion from the

15 national budget and KZT 4.2 billion from Samruk-Kazyna) helped to offset rising debt service and capital investment obligations.

67. The results for the year 2009 are expected to show a significantly high loss for the company primarily due to the devaluation of the KZT earlier in the year. This devaluation caused about a KZT 10 billion loss as the value of the company’s foreign exchange denominated debt jumped sharply, when expressed in UT. KEGOC expects, however, that this loss will be partially offset by capital gains of about KZT 3 billion on advance payments and other assets held in foreign currencies. The net impact will thus be a foreign exchange loss of about KZT 7 billion, most of which is not an immediate cash cost. Operating profits are likely to be about break-even or show a small loss due to a sharp drop in transmission volumes (although much less so in dispatch volumes) as a result of the recession. Cash flow from operations will be modest although positive. However, debt service obligations rise sharply while capital investments remain high. 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, Samruk-Kazyna has provided an additional KZT 2.7 billion of equity financing in 2009 in order to maintain the company’s liquidity and has indicated that further funds would be provided as necessary. A much larger equity injection (KZT 20.8 billion) is currently under consideration by Samruk-Kazyna which would provide the funds needed for the next several years. This equity injection is currently expected at the end of this year or the beginning of 20 10; however, it could come later or be less.

68. The table below presents the highlights of KEGOC’s recent financial performance, as well as the projected financial indicators.’ The pro ections take into account the medium term investment program including the proposed projectj Long term tariff estimates are taken from the company’s 2009-2020 Development Plans and are based on projections of sales volumes, operating costs and capital asset base in conformance with ARNM’s tariff setting procedures. These procedures, although not the actual tariffs, were discussed with ARNM and are similar to those of other regulators. The tariffs are designed by ARNM to cover costs and provide a reasonable rate of return on capital. Pro forma financial statements are provided in Annex 9.

’ The financial projections in the PAD have been made by the Bank‘s project team and are essentially the same for both the Moinak and Alma PADS.KEGOC’s own forecasts are similar but somewhat more optimistic. The capital investment plan includes the proposed Alma Project, the second phase of the Transmission Rehabilitation Project (US$360 million), reconstruction of the Ossakarovka transmission line (US$57 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. 16 KEGOC: Summary of Projected Financial Performance

I--____--- 2006 1-______- 2007 1______-______2008 2009 ] --____-_-______2010 I 2011 1______2012 __-_____.2013 (nominal KZT) Forecast Average Transmission Tariff (KTkWh)* ; 0 60 ; 0.59 I 0.67 0.87 1 07 : 1.23 ; 1.36 1.55 0.07 0.08 i 0.10 : 344 280 1 29.4 : 74.7 67.4 j 70.7 : 5.8 (7.6); 6.4 : 6.8 2.4 : 12.2 : 12.1 3.3 j 6.7

38.9 47.1 i 41 0 j 55.7 ; 76.3 j 73.1 (2.5) (9.6); (1 1.8); (11.8); (15.0): (13.0: (18.3) (28.9): (16.2): (31.5); (44.6): (1 5.9: 13.8% 18.4%: 8.7%; 15.6%; 19.1%; 57%

66 8% 3.9%; 14.5%: 34.0%; 31.0%: 66.0% 37.1% 44.5%; 39.6%; 41.9%: 44.2%: 41 3% 2.1 0.8 : 0.9 : 1.1 ; 1.2 j I5 4.1 0.4 ; 1.0 ; 16; 13: 17 88.6 1176 136.0 151.5 : 1802 i 1999 Return on Net Fixed Assets I 0.8%: 1.3%: 6.1% -5.6%: 3.5%: 6.1%: 5.2%: 5 9%

69. The financial projections indicate satisfactory performance in terms of profitability (apart from the projected loss in 2009). Cash flow from operations is good starting in 2010. However, the company has high debt repayments starting 2009, as grace periods expire on its loans, and because of a high level of investments. Thus, despite the healthy cash flow from operations the company will experience deficits in overall cash flow, which will have to be met by additional borrowing or additional equity injections from Samruk-Kazyna, the parent holding company. Samruk-Kazyna has indicated that it plans to make the necessary capital injections in the form of equity up to a total of KZT20.8 billion. As mentioned above this equity injection ma be available by the end of this year or the first part of 2010. The financial projections, however, assume that only about KZT18.4 billion in capital injections may be needed.

70. The financial projections indicate a need for careful monitoring of KEGOC’s ongoing financial performance; however, they do not suggest a need for remedial action at this time. The weaknesses in the company’s financial outlook are largely due to: (i)the current recession in the Kazakh economy, linked to the global recession, which in turn has resulted in a sharp drop in transmission volumes; (ii)the high level of debt repayments; and (iii)the high level of capital investments. Early indications are that the recession is easing and the GDP decline this year will be around 2-3 percent. Nevertheless the projections are on the conservative side.’

7 1. 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 as well as power wheeling to Russia, which is done over the under-utilized lines and which, based on existing power prices in Russia, would not be viable for Russia at the full transmission tariff. To ensure that any future discounts do not threaten KEGOC’s financial viability, a covenant in the Loan Agreement provides that The Borrower

9 These projections were made on the basis of KEGOC’s own projections which were also used in the Moinak Project, according to which KEGOC’s transmission volumes only recover to their 2008 levels in 2013. 17 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.

72. Financial Performance Covenants. The following financial performance covenants are included in the loan agreement: The Borrower shall meet the. following financial performance indicators: (i)for 2010, attain a Current Ratio of at least 0.8 and 1.0 thereafter; (ii)attain a Self- financing Ratio equal to 10 percent of the three-year moving average investment program in 2010 and 20 percent thereafter; and (iii)refrain from incurring additional debt unless the Debt Service Ratio is at least 0.9 for 201 0 and 1.2 thereafter.

2. Technical

73. Project design and technology is standard for high-voltage transmission lines and SS modernization and expansion. 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 turn-key contractors for the detailed design, supply and installation of the transmission lines. In addition, turnkey contractors will be engaged for the detailed design, supply and installation of the SS works at the new Alma SS and existing Almaty and YuKGRES SSs.

3. Fiduciary

74. 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 as well as the assessment of the Moinak Electricity Transmission Project. The FM arrangements include systems of budgeting, accounting, financial reporting, auditing and internal controls. The PMD of KEGOC relies on a corporate computerized accounting system to process project-related transactions. However, the accounting system still does not have the capacity to generate interim financial reports (IFRs) and under the ongoing projects these are prepared in Excel spreadsheet. KEGOC is testing to see if it can produce the IFRs from its corporate computerized accounting system. 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. Since the Electricity Transmission Rehabilitation Project closed in June 2009 and the North-South Electricity Transmission Project will be closing on December 3 1, 2009, the FM staff handling these projects will be available for the new Moinak and Alma Projects and it is expected that the new project will have dedicated accounting and disbursement staff. These aspects of fiduciary management are discussed more fully in Annex 7.

75. Fiduciary Risk at Project Level. FM arrangements of KEGOC have been reviewed periodically as part of project supervision of the ongoing Bank-financed operations. Based on the latest FM supervision in July 2009 it has been established that KEGOC has fully satisfactory FM arrangements in place, including (i)a sound project accounting system that is integrated with the corporate accounting system; (ii)an experienced and skilled project management team that includes FM staff; (iii)timely and regular submission of satisfactory reports; (iv) timely

18 submission of satisfactorily audited project and entity financial statements; and (v) effective internal control procedure that ensures completeness and accuracy of financial transactions.

76. 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 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.

77. 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 of the entity’s FM systems can be relied on to support project implementation.

78. Procurement. The latest Country Procurement Assessment Report is dated June 2000. In 2004 the GOK and the Bank conducted a Joint Public Expenditure and Institutional Review, which included, among other topics, a review of the efficiency of the public procurement system. Based on the results of this assessment, Kazakhstan was rated as a “High Risk” country from the public procurement point of view. On July 21, 2007 a new Law on Public Procurement of Goods, Works and Services was introduced to replace the previous law of May 16, 2002. The new law became effective on January 1, 2008, and since then has been amended once in November 2008 with some of its clauses coming into effect on January 1, 2010. While the Law includes many provisions that reflect international practices and Bank recommendations, it still needs further improvement and, thus, the Country’s procurement risk category remains the same.

79. With the amendment of the Public Procurement Law, KEGOC’s investment activities will now be subject to the procurement rules of its holding company (“Samruk-Kazyna’y), Such procurement rules are being elaborated and expected to be approved by the holding company’s Board in November 2009 and will include provisions that the procurement activities to be financed by the international financial institutions (such as the Bank) will be subject to the procurement procedures of the relevant financial institution.

80. KEGOC is an experienced Bank borrower with a proven ability to implement complex and large investment projects. Its procurement performance under the ongoing Bank-financed projects has been satisfactory.

8 1. Procurement under this Project will be managed by the Project Management Department (PMD) of KEGOC. Its capacity to handle international procurement has been affected with the departure of an experienced procurement division manager. KEGOC has already appointed a new manager for the procurement division (which will include a total of four full time staff). Furthermore, there are concerns that the PMD may have been stretched with several investment projects being financed by the Bank and EBRD. However, the major North-South Transmission Line Project is essentially finished now which will relieve some of the pressure. Moreover, to

19 mitigate the potential risk associated with the affected procurement capacity and the possible overload, (i)the procurement packages will be arranged on a design, supply and installation basis with prequalification and (ii)consultants with international experience will be hired by KEGOC to assist in project management and procurement.

82. The PMD has already prepared the project procurement plan, project implementation plan and the Terms of Reference for the procurement and project management consultants, which are planned to be financed from the Bank loan proceeds. Without the procurement and project management consultants, the PMD will not be able to proceed with the procurement process for all other packages under Parts 1 and 2. However, the PMD cannot hire the above- referenced consultants before the Bank funds are made available, because KEGOC is not authorized to use its own funds. Therefore, the procurement activities for the main packages are mainly envisaged to start in the second half of 20 10.

83. Based on the assessment of KEGOC’s capacity to handle procurement the overall project procurement risk is rated as moderate. All procurement activities under the proposed project will be carried out according to 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 I’ published in May 2004 and revised in October 2006, as well as the provisions stipulated in the LA. Additional details on procurement are provided in Annex 8.

4. Social

84. The main purpose of this project is to eliminate a transmission bottleneck in the Almaty Area which will be greatly exacerbated by the increasing demand in the area, if it is not addressed. Currently, the 500 kV SS outside Almaty is frequently overloaded, leading to outages and load shedding. The project will remove the bottleneck at the Almaty SS and on 220 kV lines on the northeast part of the city, providing reliable service throughout the area. The impact will be visible to households, industries and businesses that now suffer from unreliable electricity supply, particularly during the winter and summer months. The project will improve access to low-cost electricity in southern Kazakhstan that will both improve the well-being of the population and alleviate the competitive disadvantage that the region currently suffers because of unreliable electricity supply.

85. The sub-stations, with the exception of Alma substation, which will be a brand-new substation, will not require new land. The new Alma SS will be located on the northern periphery of the city distant from settlements. The Illi District, where the SS is to be located, has made land available for the facility. The restructuring of the Almaty SS will occur within the existing fence line. Restructuring of the YuKGRES SS will entail shifting the existing wall into the surrounding land set aside for expansion and owned by the facility.

86. Land acquisition for the OHTLs will be very limited. The 500 kV OHTLs going in and out of the Alma SS will traverse state property except for a small tract. The 220 kV OHTLs from Alma SS will run parallel in a narrow corridor to existing lines. The long 220 kV line will run parallel to existing lines through much of the alignment, as well. The precise alignments for the OHTLs are being designed, but the broadly identified corridors are located in areas that will have minimal impact on the population. The 500 kV OHTLs will traverse a largely uninhabited

20 steppe area, far from settlements. The 220 kV OHTLs will also be distant from settlements. Consequently no population displacement will result from the project. KEGOC will acquire land for the footprints for the towers, but not the right of way. As part of the final design, private landowners will be contacted to obtain their consent for the OHTL, and the Raion will issue a two-year land use agreement for the construction period, based on the consent of affected people. In case of refusal, the alignment will be revised to go around those who refuse. The exact number of towers and therefore the number of affected persons will not be known until the final designs are completed. KEGOC prepared a Land Acquisition Policy Framework, acceptable to the Bank, which will govern the land acquisition process and be subject to review by the Bank during supervision missions. The loss of the tiny parcels for tower footprints is not expected to materially affect the people who use the land, as it constitutes a tiny fraction of a holding. Right- of-way restrictions on the rest of the alignment will prevent construction and limit trees, but not affect current land uses, thus no negative impact is anticipated. This will be confirmed when KEGOC prepares and discloses site specific Land Acquisition Plans once the final designs are completed, and submits them to the Bank for review.

5. Environment

87. 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 approved by the Bank and disclosed on October 2, 2009 at KEGOC website and on October 9, 2009 at the Bank’s InfoShop. A public consultation was held on November 14, 2008 for both the Moinak and Alma projects. A second public consultation to discuss the EMP for Alma Project was held on October 15, 2009. 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. Detailed discussion of the environmental aspects and other safeguard issues is presented in Annex 10.

88. The new Alma substation and the OHTL lines are located in more remote areas on land of marginal agricultural value. Although designated as irrigated land, the land is not under active agricultural use, even for grazing. The Almaty SS reconstruction project will occur within existing plant fence lines; the YuKGRES SS extension will extend beyond current walls to land set aside for expansion when the facility was constructed. In June 2009, a local design company developed the preliminary line routing for the transmission lines (pre-final design stage). After formal approval of this preliminary 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. The detailed designs will, according to the EA law of ROK, 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.

21 89. 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.

90. Land Acquisition. No displacement of people will take place under the project. Civil works at the existing Almaty SS will be carried out within existing fence lines, not requiring new land acquisition. Land will need to be expropriated for the new Alma substation. A 20-ha plot has been allocated for construction by the Akimat of the Illi District of the Almaty Oblast through a 5-year lease. It will be transferred to KEGOC after construction. Land will also be required for the footprints of transmission towers, currently estimated at about 45 ha in total. The exact number of towers to be built is currently unknown, but will be determined from the detailed working designs for the power lines that will be completed during the first year of implementation (after selection of the turn-key contractor). Therefore, under the applicable Bank safeguard policy (OP/BP 4.12), LAPF was prepared, which was approved by the Bank. The LAPF was disclosed on October 10,2009. 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. Even though land acquisition will be necessary, it is clear that this will not result in the physical displacement of people, nor will it significantly disrupt current land use practices or livelihoods. Virtually all of this land is government owned already and none of it involves any resettlement.

9 1. Safeguard policies: Applicable? Safeguard Policy [ Y] Environmental Assessment (OP/BP 4.01) The site selected for the Alma SS is not near any buildings and is far from any residential areas. Although designated as irrigated land, it is not under active agricultural use, even for grazing. The Almaty SS reconstruction project will occur within existing plant fence lines; the YuKGRES SS extension projects will extend beyond current walls to land set aside for expansion when the facility was constructed. There are no significant environmental issues other than the normal issues of dust, noise and disposal of construction wastes, etc. During operation, the chief issues are noise, security and worker health and safety issues associated with high electromagnetic fields and the potential for contamination from leaking of transformer heat transfer fluids. No PCBs will be permitted for use in any transformer equipment to be purchased under the project for Alma, Almaty and YuKGRES SSs.

Likewise, for the OHTLs, during construction there are no significant environmental issues other than the normal issues of dust, noise and disposal of construction wastes, etc. The selected routes and rights-of-way do not cross any environmental protection areas, 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 lines routes cross rivers or streams and where worker construction camps are sited. The routes selected do not interfere with any migratory bird flight patterns and further adjustments will be made as necessary during the detailed design stage to avoid critical natural habitats. During operation, the chief issue is noise (corona discharge) and public health and safety from the high electromagnetic fields. A satisfactory EMP was prepared and disclosed the Bank’s Infoshop on October 9, 2009 and on KEGOC’s website on October 2,2009 and will be updated, as necessary,

22 Applicable? Safeguard Policy with detailed information reflecting the detailed designs when these are available. An additional public consultation was held on October 15, 2009. [N: Natural Habitats (OP/BP 4.04) [N: [Y: Involuntary Resettlement (OP/BP 4.12) Land will need to be acquired for the new Alma substation; 20 ha have already been allocated for construction by the Akimat of the Illi District of the Almaty Oblast. Land will also be acquired for the transmission towers, the number and location of which are yet to be determined. Since the exact number of towers that will be built is unknown at this point in time and will follow from the detailed working designs for the power lines during the first year of implementation (after selection of the turn-key contractor), the exact scope and incidence of land acquisition requirements cannot be precisely assessed now. Therefore, a Land Acquisition Policy Framework (LAPF) was prepared as a condition of appraisal and approved by the Bank. It was disclosed on October 10, 2009. Even though land acquisition will be necessary, it is clear that this will not result in the physical displacement of people or significant disruption of existing activities and livelihoods. Land will be acquired by KEGOC through a special government fund with compensation to be provided to the affected private owners; however, most of the land is government owned. Site specific LAP will be prepared by KEGOC, in accordance with the LAPF, prior to the commencement of construction works under the Project. :N] Indigenous Peoples (OD 4.20) :N] Forests (OP/BP 4.36) IN] Safety of Dams (OP/BP 4.37) Cultural Property (draft OP 4.11 - OPN 11.03) Although the project sites/Rights-of-Way have no known areas/structures of historical or cultural value, the EMP includes appropriate measures to address “chance find” occurrences. [N] Projects in Disputed Areas (OP/BP/GP 7.60)*

6. Policy Exceptions and Readiness

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

93. 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 four complex “design, supply and installation” packages (Parts A and B). However, the bulk of the work on these latter packages will only be done in 2010 after the consultants are hired. Nevertheless, the GOK wishes to have the Loan and Guarantee Agreements signed by December 31, 2009 in order to use the sovereign guarantee provided by Parliament which expires on December 3 1,2009.

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties’ claims on the disputed areas 23 Annex 1: Country and Sector Background KAZAKHSTAN: Alma Electricity Transmission Project

Country Background and Development Strategy

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

2. High revenues from oil and other resource exports fueled domestic demand. As a result, Kazakhstan commercial banks drawing on the abundant financing made available from foreign borrowing expanded credit at an enormous pace between 2005 through 2007. This caused high concentration of growth in non-tradables, especially finance and construction. The financial crisis erupted in late 2007 when the so-called bubble burst in the real estate sector.

3. This coupled with the on-going world economic crisis that started in late 2008, has had a negative impact on the Kazakh economy. Thus, rather sharp declines in commodities export prices hit the country with a major terms-of-trade shock, while tighter financial markets have prevented commercial banks from rolling over their sizeable debt repayment obligations. GDP growth slowed to 3.3 percent in 2008, and a GDP decline of 3.2 percent was registered in the first half of 2009. It is expected that the country will register a GDP decline of 2-3 percent in 2009 followed by a 1-2 percent growth in 2010. Pressures for devaluation led to an 18 percent devaluation of the national currency (Tenge, KZT) early in 2009. The devaluation has further complicated the situation in the banking sector as over 40 percent of loans are denominated in foreign currency and most revenue flows for Kazakhstan businesses are in UT. In light ofthese difficulties, the GOK nationalized the two most problematic large banks in February 2009 as part of a broader Anti-Crisis Program.

4. The overall financial position of Kazakhstan remains fairly strong. Medium-term prospects remain favorable with an expected significant expansion in oil production. International monetary and National Oil Fund reserves amount to over US$22 billion. Furthermore, GOK has taken the necessary steps to mitigate the effects of the financial and economic crisis with adopting of two stimulus packages totaling KZT 2.9 trillion (about US$20 billion). The latest Joint Action Plan calls for stabilization of the financial sector, resolution of “real estate market problems,” SME support, agro-industrial sector development and implementation of “innovation, industrial and infrastructure projects.” The table below depicts the status of implementation ofthe anti-crisis measures:

24 Anti-Crisis Action Plan (ACAP) Implementation Status (2007-2009) lo

(In billions of US$)

Total 14.45 I 21.5 I

5, 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 commodity prices along with the world economy, 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.

6. 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.

7. Electricity Generation. There are 60 power generation plants in Kazakhstan with a total installed capacity of 18,992 MW, of which 14,558 MW is available for generati0.g. In 2008, total generation was 80.1 TWh of which coal-fired power plants accounted for 86 percent, hydro- power plants (9 percent) and gas-fired power plants (5 percent) 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. 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 a 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.

~

loSource: Ministry of Economy and Budget Planning (figures as at Sept 1,2009) 25 8. Electricity Consumption and Trade. In 2008, total generation and gross domestic consumption were 80.1 TWh and 80.6 TWh, respectively, with small net imports of about 0.5 TWh. Domestic consumption has been growing at an average rate of 5-6 percent 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 the Kyrgyz Republic and as such do not coincide with the Kazakh peak demand in the month of January.

9. Transmission. The total length of Kazakhstan’s transmission lines (ranging from 35 kV to 1,150 kV) is 23,569 circuit- 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 as well as most assets at the 220 KV level. KEGOC is responsible for dispatch control and operates interconnections with neighboring countries, principally Russia, Kyrgyz Republic 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.

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

0 The Northern grid is connected to the Russian power system.

The Southern grid is connected to Central Asian power system (Kyrgyz Republic, Tajikistan and Uzbekistan) and the northern grid with a single circuit 500 kV tie line. (Although a second line will enter service shortly)

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

11. Distribution and Supply. There are 21 Regional Distribution Companies (REKs), which own smaller sized generation units (mostly combined heat and power), transmission at the 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 to retail customers. The generally poor condition of distribution equipment and installations causes comparatively high distribution losses.

12. Power Sector Reforms. In the area of power sector reforms, Kazakhstan ranks among the most advanced countries in the former Soviet Union. The GOK, with the encouragement of the Bank, began reforms in 1996, as part of a strategy primarily aimed at introducing private

26 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. A competitive retail market is being introduced.

13. 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.

14. Wholesale Market Structure. The wholesale electricity market is fully liberalized and operates mainly on the basis of bilateral contracts between generators and wholesale consumers or ESOs for direct sale of power. Provided that they acquire access to the KEGOC-operated transmission network, these large electricity consumers can enter the market and shop freely for power. There is strong competition in the bilateral contract market. Under the 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 percent 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 offinancial contracts and attraction of Central Asian market participants.

15. 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 simulation mode. Once it becomes fully operational, KEGOC will conclude market-based transactions on balancing bids submitted by generators under transparent market rules.

16. 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.

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) which reports to the Prime Minister. The Law ensures full recovery ofjustifiable costs, including the cost of new investments, for the regulated monopolies.’ I KEGOC’s transmission tariffs as well as dispatch and balancing tariffs are approved by the ARNM on a justifiable cost- plus basis. The existing tariffs are cost-reflective and provide for 10 percent 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.

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)original system designs focused on

I’ Unlike 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. 27 meeting broader regional rather than national power needs; and (iii)rising costs as a result of high capital investment, (iv) inefficiency in system operations and higher hydrocarbon prices, and (v) growing imbalances between North and South Kazakhstan and rising demand.

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 80.6 TWh in 2008 while generation increased from 5 1.4 TWh to 80.1 TWh. While Kazakhstan has sufficient capacity to meet domestic power demand, four-fifths of the country’s power generation comes from the north. 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. According to the National Dispatch Center figures, in 2008, in Almaty Oblast demand exceeded local supply by 792 MW at peak, and this deficit is likely to rise further in the coming years. The table below shows Kazakhstan’s electricity balance over the 2000-2008 period.

Peak Demand Domestic Generation

Hydropower-Plants TWh 1512 8 601 -8j:l ~ 7 830 I I Thermal Power Plants 63 805 , 68216

Exports to

lmports from - Russia- Kyrgyz Republic

0’1699_1 ~ -J 1 I00685 I 1 - __I ’ i - - __ - - - - I Turkmenistan I TWh 1 00349 1 I I TWh 29592 24482’ 34816 I 3 5183

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

Sector Issue Project Latest Supervisic I (ISR) Ratings (Bank-financec projects only) Implementation Development Progress (IP) Objective (DO) Bank-financed Transmission system Electricity Transmission S S modernization and competitive Rehabilitation Project (1999, power market development US$140 million)

Transmission network North-South Electricity S S expansion and completion of Transmission Project, Phase 2 electricity wholesale market (2005, US$lOO million) reforms

Transmission infrastructure to Moinak Electricity Transmission Project not yet Project not yet enable evacuation of power Project (2009, US$48 million) effective effective from newly-built 300 MW Moinak HPP

Other development agencies EBRD Electricity Transmission Rehabilitation Project (1999, 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 mil1 ion)

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

29 Annex 3: Results Framework and Monitoring KAZAKHSTAN: Alma Electricity Transmission Project

Results Framework

Project Development Objective Project Outcome Indicators Use of Project Outcome Information improve the reliability and quality of Increased reliability of supply Failure to achieve targeted electricity supply to consumers in especially during periods of peak incremental supply capacity may the Almaty region in an demand indicate weaknesses in other parts of environmentally responsible and the electrical system, suggesting the financially sustainable manner. Increased ability to meet growing need for additional investment in demand in the Almaty Oblast. rehabilitation and/or expansion. Raise issue as part of dialogue with GOK and KEGOC.

Intermediate Outcomes Intermediate Results Use of Intermediate Outcome Indicators Monitoring Transmission lines and Turn-key contracts awarded in Delays in contract award may substations: accordance with deadlines of the suggest additional assistance needed Turn-key contracts awarded and project Procurement Plan (PP). in preparation of tender documents. completed in accordance with original PP. 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.

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

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d Ym s0 0 s+ 2 2g Annex 4: Detailed Project Description KAZAKHSTAN: Alma 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 23,569 circuit 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 proposed operation is an integral part of GOK’s plan to address expected power shortages, remove transmission system bottlenecks and constraints in Almaty Oblast in southern Kazakhstan. The proposed transmission project will support construction of a new substation and its connection to the high voltage transmission network through construction of new transmission lines as well as modernization of related SS facilities. The focal point of the proposed project is the construction of a new bulk supply point - the “Alma” substation (SS) - for the Almaty Oblast. Other related components include reconstruction and extension of related SSs and construction of overhead transmission lines (OHTLs).

Project Components 3. The total estimated cost of the project, including contingencies and taxes, interest during construction and front-end fee, is US$223.4 Million. The cost of the project excluding interest during construction and front-end fee is US$212.9 million. The detailed cost table is in Annex 5.

4. The components of the project are as follows:

Part 1 - Construction of Transmission Lines (US$105.41 million), within the limits of Zhambyl and Almaty Oblasts. This comprises the following components:

Component l-A - Construction of Transmission Lines 1 (US$28.98 million) 5. Construction of a 500 kV OHTL from Alma SS to Almaty SS (63.2 km): This OHTL with 3x330 mm2 conductor will provide reliability to the 500 kV network in Almaty Oblast, essentially by providing an alternate connection to each of the substation.

6. Construction of a 220 kV OHTL from Alma SS to Kensai SS (47.3 km): This OHTL will provide 220 kV supply link to Kensai SS from Alma SS. Kensai SS is not part of the KEGOC’s network and will help electricity supply to new consumers.

7. Construction of incoming cross-connection lines of the 220 kV OHTL from Almaty CHP-3 SS to Shelek SS for connection with Alma SS (49.8 km): This looping will provide interconnection of Alma SS to CHP-3 and Shelek SS.

8. Construction of incoming cross-connection lines of the 220 kV OHTL from Almaty CHP-3 SS to Robot SS for connection with Alma SS (6.1 km): This looping will provide interconnection of Alma SS to CHP-3 and Robot SS.

Component l-B - Construction of Transmission Lines 2 (US76.43 million)

32 9. Construction of a 500 kV OHTL from Alma SS to YuKGRES SS (319 km): This OHTL will provide the main link to Alma SS to the N/S transmission line by connection through YuKGRES SS

10. The equipment and materials for the 500 kV transmission line from Alma SS to Almaty and YuKGRES SSs and the 220 kV lines connecting to Alma SS (described above) are listed in the table below:

Table 1 - List of Transmission Line Equipment and Materials

Part 2 - Construction, Extension and Modernization of Substations (US$S0.07 million). This comprises the following components:

Component 2-A - Construction of a new 500 kV “Alma” SS and extension and modernization of 500 kV Almaty SS (US$64.00 million).

1 1. A new 500/220/10 kV “Alma” SS will be built on about a 20 ha site, and is planned to be constructed in Illi District of Almaty Oblast. The SS will include an outdoor switchyard, control and instrument room buildings. The two groups of autotransformers will provide 500 MVA of transformation capacity (3x1 67) each. The substation will have a double bus configuration scheme and will be connected to YuKGRES and Almaty SSs through 500 kV OHTLs (325 and 70 km). The substation will essentially relieve the overloaded Almaty SS. The substation will be connected to Kensai, Robot, CHP-3 and Shelek SSs through 220 kV OHTLs.

33 12. Almaty SS (500/220/10 kV) is the main SS in the Almaty Oblast and is presently linked with YuKGRES and Sue SSs at 500 KV. With a transformation capacity of 1000 MVA (2x3~167)capacity, it is the only SS in Almaty Oblast linked to the 500 kV network. The SS meets the power requirement in the Almaty Oblast but is overloaded (over 70-80 percent). The existing outdoor switchyard will need extension and reconstruction for the 500 kV OHTL bay equipment

Component 2-B - Extension and modernization of YuKGRES (US$16.07 million) to increase its capacity. 13. YuKGRES SS (500/220/35/6 kV) is the major junction point (SS) in the southern section of the two N/S transmission lines. Reconstruction and extension of this SS is needed to provide interconnection of the OHTL to the new Alma SS. The YuKGRES - Alma 500 kV OHTL connection is necessary to meet the N- 1 transmission planning criteria and increase the reliability of the 500 and 220 kV networks in the Almaty Oblast. The equipment to be installed at YuKGRES SS will include 500 kV shunt reactors apart from one 500 kV feeder bay equipment. .

14. The equipment and materials for the Alma SS and extensions at Almaty and YuKGRES SSs are listed in the table below:

Table 2 - List of Substation-Related Equipment and Materials

34 Part 3 - Consulting and Technical Services (US3.2 million). This consists of the following sub-components : Component 3-A - Procurement and project management (US$2.9 million)

15. This sub-component consists ofprocurement and project management consulting services for the construction of the OHTLs, construction of the Alma SS, modernization of the Almaty and YuKGRES SS. Responsibilities of the consultant include: preparation of the bidding documents and technical specifications, site visits, quality control and monitoring of all executed work, verification ofcontractor’s payments and reporting to KEGOC and the Bank.

Component 3-B - Technical services (US0.3 million)

16. 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 contracts during construction works. It also includes field supervision and will be financed by KEGOC.

17. In addition, KEGOC will contribute US$14.1 million towards other costs associated with project activities- such as land, feasibility, survey etc.

18. There will be US$lO. 12 million set aside in unallocated funds for contingencies (financed by the Bank loan) and US$lO.O Million for interest during construction (financed by KEGOC).

35 Annex 5: Project Costs KAZAKHSTAN: Alma Electricity Transmission Project

Item Project Component Estimated Project Costs percent No. Local Foreign Total of bank (US$ million) (US$ million) (US$ million) loan 1 Transmission Lines 0.00 105.41 105.41 53 1-A Construction of 500 KV OHTL 0.00 28.98 28.98 15 Almaty-Alma, 220 KV OHTL Alma- Kensai, incoming cross connections lines of 220 KV OHTL CHPP 3- Robot SS and CHPP3- Shelek SS at Alma SS 1-B Construction of 500 KV OHTL Alma- 0.00 76.43 76.43 38 Y uKGRES 2 Substations 0.00 80.07 80.07 40 2-A Construction of 500 KV Alma SS, 0.00 64.00 64.00 32 extension and reconstruction of 500 KV Almaty SS 2-B Extension and reconstruction of 500 0.00 16.07 16.07 8 KV YuKGRES SS 3 Consultancy and Technical Services 0.30 2.9 3.20 2 3-A Procurement and Project Management 0.00 2.9 2.90 2 3-B Technical Services 0.30 0.0 0.30 0 4 Other Project Costs (Land, Feasibility, 14.10 0.0 14.10 0 Survey etc.) 5 Contingencies 0.00 10.12 10.12 5 Total Project Cost 14.40 i9a.s 212.90 Interest During Construction 10.00 0.0 10.0 Front-end fee 0.50 0.0 0.5 I Total Financing Required 24.90 I 198.5 I 223.4 I

36 Annex 6: Implementation Arrangements KAZAKHSTAN: Alma 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, TechnicaVEngineering, 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 of the OHTL routes, engineering surveys, and engineering supervision of the turn-key contracts during construction.

3. Below are the detailed organizational charts depicting the project implementation structure both from the entity and PMD perspectives:

37 00 F m

I i

Implementation Schedule

4. The project is expected to be implemented in about 4.5 years by October 31, 2014. The implementation schedule by project component is shown below:

40 :Ill I II I Annex 7: Financial Management and Disbursement Arrangements KAZAKHSTAN: Alma Electricity Transmission Project Background

1. Assessment of the financial management (FM) capacity of KEGOC’s PMD was conducted in July 2009 in conjunction with the FM supervision of the two IBRD-financed projects under implementation as well as the assessment of the Moinak Electricity Transmission Project. The aim of the 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 is 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 KEGOC continues to maintain a 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 ofthe designated accounts, including regular and timely reconciliation of the DA with bank statements; (iii)quarterly submission ofproject IFRs; (iv) audit of project 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 of the 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

42 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:

Rating of Risk Risk Mitigating Measures afler mitigation INHERENT RISKS

Country level Weak PFM institutions (additional information M Project to be implemented by a is included in country issues in the next section). company that has strong corporate governance structures and sound FM. Entity level Risk of political interference in entity’s M Company maintains strong management. corporate structure that may not succumb to political interference. Project level Project is a large size, but not complex and M Implementation arrangements that includes only large construction contracts. allow close monitoring of activities under the project are in olace. OVERALL INHERENT RISK M CONTROL RISKS

Budgeting L No additional mitigation Good budgeting system by the PMD for project measures required. activities. Accounting M No additional mitigation PMD has adequate accounting system, measures required. integrated with the company’s Oracle-based corporate MIS. Internal Controls M No additional mitigation Adequate internal control procedures are in measures required. place and subject to periodic review by internal audit department. Funds Flow M No additional mitigation Loan funds will flow through commercial bank measures required, except for Designated Accounts. No previous concerns extra caution in view of the with the banking system. current global financial crisis. Financial Reporting M No additional mitigation KEGOC has been submitting satisfactory FMRs measures required and no issues have been noted. Auditing M No additional mitigation Entity and project audits will be carried out by measures required except that 43 Rating of Risk I Risk Miiigaiing Measures I aBer mitigation I independent auditors acceptable to the Bank and I KEGOC will continue to ensure satisfactory audit reports submitted to the Bank timely contracting of the auditor on time. and submit audited financial

OVERALL CONTROL RISK

OVERALL FMRISK

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 of Bank-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 govern’ance 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 FMrisks. 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 administration of the DA and withdrawal applications for disbursements, and external audit arrangements.

44 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 to 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 a need to modify the accounting system to have the 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 ReportdInterim 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 two 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 head of the unit 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. Since the Electricity Transmission Rehabilitation Project closed in June 2009 and the North-South Electricity Transmission Project will be closing on December 3 1, 2009, the FM staff handling these projects will be available for the new Moinak and Alma Projects and no additional staff will be hired. The risk associated with staffing is assessed as moderate.

45 16. Information Systems. KEGOC uses an Oracle-based Management Information System for company accounting. The database is maintained on a network for both the project and 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’s 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 KZT. 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 (1FRs)-formerly 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 ofFunds: (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.

46 External Audit

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 of the 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 Enti& 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 of the project. Uses of Funds, Uses of Funds by Project Activity, SOE Withdrawal Schedule, DA Statement and Notes to the financial statements.

1 I I

21. Funds Flow and Disbursement Arrangements. The proceeds of the loan will be disbursed over a period of 4.5 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 DA, 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.

22. Project Funds flow from the Bank: (i)via a single Designated Account held by KEGOC, which will be documented on the basis of Summary Sheets and Statement of Expenditures (SOEs); (ii)Direct Payments from the Loan Account on the basis of withdrawal applications; and (iii) Applications for issuance of Special Commitments covering Letters of Credit. Withdrawals from the Loan Account will be requested in accordance with the guidance to be given in the Disbursement Letter. KEGOC, through its PMD, will be responsible for keeping the supporting documentation for all Project expenses, especially those reported through SOEs, and for making them available to World Bank supervision missions as well as to the auditors. The Minimum Application Size for direct payments and for issuance of Special Commitments will be

47 communicated to the Borrow in the Disbursement Letter. All withdrawal applications for direct payment or for issuance of special commitments will be supported by full documentation.

23.' The risk associated with funds flow and disbursement is moderate before and after mitigation measures

Supervision Plan

24. 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.

48 Annex 8: Procurement Arrangements KAZAKHSTAN: Alma Electricity Transmission Project

A. 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 of Consultants by World Bank Borrowers" published in May 2004 and revised in October 2006 (Consultant Guidelines) as well as the provisions stipulated in the LA. Various procurement actions under different expenditure categories are described in general below. For each contract to be financed under the LA, various procurement or consultant selection methods, need for pre- qualification, estimated costs, prior review requirements, and implementation schedule 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 will be published in November 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.

B. 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 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 during the project preparation and the assessment report is available in the Project File. KEGOC has gained, on an institutional level, substantial experience in international procurement during implementation of three projects financed by the Bank (two ofthem have been successfully completed). The approach of design, supply and installation with prequalification has proved to work successfully and will be adopted for the proposed project as well.

4. The PMD has already prepared the project procurement plan, project implementation plan and the Terms of Reference for the procurement and project management consultants, which are planned to be financed from the Bank loan proceeds. Without the procurement and project management consultants, the PMD will not be able to proceed with the procurement process for all other packages under Parts 1 and 2. However, the PMD cannot hire the above- referenced consultants before the Bank funds are made available, because KEGOC is not authorized to use its own funds. Therefore, the procurement activities for main packages are mainly envisaged to start in the second half of 201 0.

49 C. Procurement Risk Assessment 5. Based on the assessment of KEGOC’s capacity to implement project procurement the overall procurement risk (after mitigation) 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:

Table 1. Risk Assessment Summary

Description of Risk Rating of Mitigation Measures ’ Risk after mitigation Potential procurement delays may be M KEGOC has agreed to structure the caused by implementation overload as procurement on a design, supply and KEGOC’s PMD is already charged with installation basis with prequalification in order management of several large and to reduce the work load on the project team. complex investment projects. However, In addition, consultants with international this is partially offset by the completion experience will be hired to provide assistance of the North-SouthTransmission Line in procurement and project management. Project, which is constructed and undergoing testing leaving only two Bank KEGOC has appointed a new manager for the funded projects, Moinak and Alma. procurement division who was involved Moinak is fairly advanced so that much previously in the Bank-financedprojects. One of its procurement will precede Alma. of the procurement staff has attended a one- week procurement training seminar on Bank Furthermore, the departure of procurement. Further procurement training experienced procurement staff has was provided in September/October 2009 and affected KEGOC’s capacity to handle will be provided during the project international procurement. implementation.

The perceived level of corruption in the M The Bank’s good governance and country is high. Transparency anticorruption safeguards, particularly the International assigned a Corruption transparency and disclosure provisions of the Preconception Index of 2.2 to Kazakhstan Bank Guidelines, will be enforced. The Bank in 2008 (No. 145th in the world). will also pay close attention to implementation However, under the on-going Bank- supervision including physical inspections. financed projects (over a ten-year period) no corruption-related incident has been reported.

Average- M

D. Procurement Implementation and Arrangements 6. 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

50 from consultants. Domestic preference in accordance with clause 2.55 and Appendix 2 of the Bank’s Procurement Guidelines will not apply.

7. Procurement of Design, Supply and Installation. Design, Supply and Installation contracts to be procured under the project will include construction of OHTLs and SSs as well as SS modernization. There are a total of four procurement packages and prequalification will be required for all packages.

8. Procurement of Technical Services. Technical services under the project will include selection and approval of transmission line routes and engineering survey. These services will be fully financed from KEGOC’s own funds and will be subject to the procurement rules of KEGOC’s holding company (“Samruk-Kazyna”) which are being elaborated and expected to be approved in November 2009. This is in line with the Public Procurement Law amended in November 2008,

9. Selection of Consultants. Consulting services under the project will be required for procurement and project management. Such services will be financed by the Bank loan.

10. Bidding Documents and Evaluation Arrangements. Bidding documents (including technical specifications) and RFPs 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 (of 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.

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

E. 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 was agreed between KEGOC and the Bank at negotiations and will be available at KEGOC’s project database and website as well as 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.

F. Frequency of Procurement Supervision 13. All contracts to be financed by the Bank loan will be subject to the Bank’s 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.

G. 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:

51 In addition to the publication of procurement notices and contract award information on the Bank’s resources, as required by the Guidelines, through the Astana Country Office, all procurement notices and contract award information will also 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 of interest.

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

To bring to the Bank’s 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 the Bank staff, auditors.

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

I I I I

I A B CD J K L ’art Construction of OHTL ...... 1: Construction of 500 kV OHTL Almaty-Alma, 11 t I 220 kV OHTL Alma-Kensai, incoming cross- ICB Pr,or July 1 Oct 15 Dec 15, Mar 1, I1April Jan 30, l-A 28,98 I I connection lines of 220 kV OHTL CHPP3 - I ’ I 2010’ I 2010’ I 2010 2011 10,2011 2014 Robot SS and CHPP3 - Shelek SS at Alma SS Construction of 500 kV OHTL YuKGRES July 1, Apr 10, June 10, Sep I, Sep.30, July 30, - 76,43 Alma ICB1 Prior 1 2010 1 2011 I 2011 ’art 2: Construction, Extension and Modernization of hbstations Construction of 500 kV Alma SS, extension and Prior August Nov 20, Jan 20, U4pril IO, May 10, Jan 30, 2-A 64,00 IcB reconstruction of 500 kV Almaty SS 1,2010 2010 2011 J-z-L Extension and reconstruction of 500 kV/ 16,07 Prior August May 10, July 10, Oct 1, Oct 30, July 30, 2-B I ICB IYuKGRES ss 1 /1201012011 1 2011 2011 1 2011 1 2014 Total I 185.48 I

~ ...... ~egendii ...... :...... I...... / ...... i...... A ...... / ...... A ...... 1...... ICB=I ...... International ...... Competitive Bidding (in accordance,,,w,lth, ...... installation contracts. Prior Review1 ...... i...... ¶
...... Ò
I All the ICB contracts will be subject to Bank prior review, ...... PQI ...... ³
Pre-qualification will apply to all packages. Domestic, Will not apply. Preference]

52 (b) Consultants' Services

1 I I I

Estimated Selection byReview Bank Advertise-ment Expected Contract I Start Completion .Description ofAssignmentl Award Package No. Cost Method prior for EOI Submission Date Date Date Location (US%m) most Date I I

B I C lDlEl F IIJI 'rocurement and Project I 2.90 I QCBS I Prior 1 Dec I,2009 klar 15, 2010 May 15,2011 Jun 5,2010 July 30,2014 hanaaement Consultants =I= QCBS: 3ualitv and Cost-based Selection (in accordance with sections 2.1 - 2.28 of the Consultant's Guidelines) +I Prior Revie\ or firms All contracts equal to US$lOO,OOO or more

53 Annex 9: Economic and Financial Analysis Kazakhstan: Alma Electricity Transmission Project

Background

1. This project is an important component in KEGOC’s transmission plan which in turn is a key component of the Government and KEGOCS’s least cost plan to provide for growing power demand in the country. KEGOC’s transmission plan aims to modernize the grid and supply increasing amounts of power from low cost generation areas particularly North Kazakhstan to areas of the country with rapidly rising demand such as South Kazakhstan and, in particular, the Almaty Oblast. The Bank has supported this plan with three projects, the Electricity Transmission Rehabilitation Project (1 999), the North-South Electricity Transmission Project (2005) and the Moinak Electricity Transmission Project, which was approved by the Board in September 2009. The latter two projects help deliver power from low-cost generating sources to the Almaty Oblast.

2. The Almaty Oblast area has been growing very rapidly and has only limited generating capacity as well as limited natural resources from which to produce electricity. It is supplied with electricity from other parts of Kazakhstan which are better endowed. Transmission infrastructure in the Almaty Oblast has not kept up with the growth of consumption or the increase in the capacity of power lines designed to supply power to the city and surroundings. The key bottleneck is the Almaty 500 KV substation which has two three phase transformers with a capacity of 500 MVA each. Both of the North-South Lines end in this substation as does the main link to the Kyrgyz Transmission System. As a result this substation is now close to being overloaded and will become overloaded in the next few years. Currently if one of the two transformers at the substation has an unplanned outage in the middle of the winter, the Almaty Oblast would most likely face power rationing, Furthermore this situation will get worse as power demand increases so that somewhere in the middle of the next decade, the Almaty Substation could not supply peak power demand in the Oblast even with no unplanned transformer outages.

Economic Benefits of the Project

3. KEGOC proposes to build the new Alma 500 KV Substation with 1000 MVA capacity and connector lines (including some upgrades at connected substations) to improve reliability of supply and provide additional capacity to supply Almaty Oblast. Once constructed and connected to adjacent substations, the Alma substation will provide a number of benefits. First, the project will enhance reliability of the system (ensure fulfillment of “N-1” transmission planning criteria) by relieving the pressure on the Almaty substation, thereby preventing a failure in one of its two transformers from causing power shortages in the entire Almaty Oblast. Second, it will allow additional supply to Almaty Oblast when the Almaty substation is operating at capacity in a few years (overall transformation capacity at 500/220 kV level increases from 1000 MVA to 2000 MVA). Third, it will allow additional imports of hydropower both from Northern Kazakhstan as well as the Central Asian Power System. Fourth, stability of the Almaty Oblast transmission network will also stabilize the northern Kyrgyz network, which uses the Almaty transmission network for supply of its northern system. Finally, it will help stabilize part of the CAPS.

54 4. Supply Security Benefits. An analysis was undertaken of the economic benefits of the Alma Project, once completed, in providing security of supply to the Almaty Oblast. This analysis was done by assuming a yearly failure in one of the 500 KV transformers at the existing Almaty Substation and measuring the benefits which the Alma substation would provide by offsetting this failure and allowing power to continue to flow. Four different scenarios were analyzed. The first scenario was that the Alma substation, after construction was completed in 2014, offset a possible failure of a transformer each year at the winter demand peak when the Almaty substation is under greatest strain. The second scenario assumed the substation offsets a transformer failure each year at the much lower peak in the summer. The third scenario assumes it offset a failure at the average daily peak during the winter while the fourth scenario assumes it offsets a failure at the average daily peak in the summer (the lowest for the year). Each failure is assumed to last 92 hours, based on the analysis of KEGOC’s consultants.. For all of these scenarios the following factors were taken into account. First, the regional generating capacity to supply the Almaty Oblast with power without using the Almaty substation is limited and changes seasonally and over time. It is less in the summer (currently 532 MW) than the winter (868 MW) because of the unavailability of CHP plants in the summer. It increases over time because the Moinak Hydropower plant (300 MW) comes on line about 2013 and a new CHP plant (120 MW) comes on line two years later. Second, some power from Kyrgyz (100 MW) can be supplied through the 220 KV system although most of the Kyrgyz power has to go through the Almaty Substation in the 500 KV system. Third, around 500 MW can continue to be supplied by the Almaty Substation with one transformer out. Fourth the costs of operating the Alma substation are taken from the report of KEGOC’s consultant. Fifth, the marginal cost of unserved energy (electricity) to the public or alternatively the value of avoiding black outs resulting from a transformer failure was taken as $ 1.20/kWh based on studies done by KEGOC’s consultants and in agreement with KEGOC. Finally, the investment in the project, for the purposes of this analysis, excluded VAT and the cost of land since they are both transfers rather than real economic costs.

5. The results of this analysis are shown in the table below. The table shows the real economic rates of return for the Alma Project under each of the scenarios listed above. It also shows the Net Present Values of the Project in millions of dollars under each scenario discounted at 8 percent, the discount rate used for the Moinak Project and thought to be the social rate of return. The table shows that the Alma Project can be justified purely and solely on the basis that it provides increased security of supply for the Almaty Oblast.

Economic Rates of Return from Alma Project under Different Scenarios

Scenario ERR NPV $ Mil. 1. Transformer Outages occur at winter peaks 20% 209.1 2. Transformer Outages occur at summer peaks 14% 119.5 3, Transformer Outages occur at average daily 12% 86.7 winter peaks 4. Transformer Outages occur at average daily 9% 26.8 summer peaks

6. Supply Benefits. Around the middle of the next decade the Almaty substation, even with both transformers operating at capacity, will be unable to supply sufficient power for the Almaty Oblast. Making a conservative assumption that this happens in 2017 (and it is likely before then

55 with recent demand growth), the new Alma substation will have to be in operation. Alma would then supply most/all of the additional electricity needed by Almaty Oblast for the next 10 to 15 years, depending again on the rate of growth of demand.

7. The service that the Alma substation provides is thus supplying the additional electricity required by Almaty Oblast which cannot be supplied by the Almaty Substation. The net value of this supply (or transformation) function per kWh would be the price of providing this power from a power plant12 in the South (the proposed Balkash plant or a similar plant) compared with lower cost plants in the North or the Kyrgyz Republic plus an estimate of the cost per kWh of transmitting the electricity over the 500 KV system to the Alma Substation. The estimate of the cost of transmission was KEGOC’s forecast tariffs in 2014. The cost of electricity from a power plant in the North was estimated using a model based on the Bank’s study of “Technical and Economic Assessment of Off-Grid, Mini-Grid and Grid Electrification Technologies”. This results in a net value of the supply service performed by the Alma Substation of about 0.7 US cents per kWh- which is a very conservative value. The ERR for the project using only the benefits from this supply function is 12 percent real with a Net Present Value of US$83 Million.

8. Combined Benefits. Combining the benefits of the Alma Substation providing backup transformers for the Almaty Substation (fourth and lowest scenario) and providing additional capacity to supply Almaty Oblast with increased electricity, produces an ERR of 16 percent real for the project and an NPV of US$243 million, In addition of course there are the regional benefits of allowing additional imports from Kyrgyz Republic and helping stabilize the central Asian Grid. However, these benefits could not be quantified and were therefore not included in the calculations.

Switching Values

9. A switching value analysis was done on the combined benefits case above, which is probably the best estimate of the overall benefits of the project. The switching value is the change in an input variable that reduces the ERR in the combined benefits case to 8 percent. The analysis was done on two variables, the growth rate of demand in the Almaty Oblast and the cost of the project. From the table it is clear that the ERR is sensitive to the growth rate of demand in the Almaty Oblast and insensitive to the capital cost. However, it should be noted that the decline in the growth rate of demand is 40 percent in order to get an 8 percent ERR ,which is substantial, and the historical growth rate of demand in the Almaty Oblast (2002-2008) has been substantially higher than the forecast at 7.6 percent.

Input Variable Switching Value Growth Rate of demand in Almaty Oblast 3% (from 5%) Capital Costs +180%

Financial Rate of Return

10. The financial rate of return on this project may not have relevance as a decision making tool. The project is required to meet KEGOC’s obligation to serve. Without it KEGOC cannot continue to provide reliable power to the Almaty Oblast. Nevertheless the project is profitable

’’ KEGOC has indicated that the Government wants to use domestic fuels only. 56 financially. It has a real rate of return of 14 percent pre-tax. This is calculated taking into account the full cost of the project excluding contingencies but including land and VAT ($ 202 million) and assuming the additional power supplied through the Alma substation produces revenue for KEGOC based on the 2013 forecast tariff of a little over 1 cent/kWh including transmission, dispatch and balancing charges.

Financial Performance of KEGOC

11. Current Financial Performance. The IBRD loan will be provided directly to KEGOC, with a guarantee by the GOK. KEGOC’s financial performance has shown considerable 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$80 million thanks in large part to an equity injection of US$48 million from Samruk-Kazyna (the sole shareholder of KEGOC and government owned) and from the GOK budget. These large cash injections not only increased cash on hand but also helped fund the company’s high level of investments. KEGOC is and has consistently been in compliance with financial performance covenants under the two existing IBRD loans.

12. Projected Financial Perf~rmance.’~The Bank’s financial model for KEGOC was used in the late spring of 2009 to prepare projections of the company’s financial performance for the period through to 2013. These projections were then used for the Moinak Project which went to the Board in September 2009. The same projections were used for the Alma Project with one major exception and one minor exception which are discussed below. Key assumptions used are as follows:

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$68 million); (ii)new Alma SS (US$2 13 million) including contingencies; (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).

0 The financing plan for the capital investment projects assumes additional loans where these have been identified. Otherwise the financing is provided by KEGOC’s cash flow from operations and equity injections from Samruk-Kazyna and/or the Government. Samruk-Kazyna has indicated it can provide up to 20.8 Billion Tenge in capital injections over the next few years, however, only KZT18.4 billion in capital injections is assumed which is sufficient based on the projections. (The assumption of capital injections by Samruk-Kazyna is the major difference with the Moinak projections which do not identify the source of financing.)

0 Transmission and dispatch tariffs were assumed in the projections used for the Moinak Project to increase in accordance with the proposals given in the draft 2009-2020 Development Plan, The projections of tariffs used for the Alma project are very slightly higher than in the Moinak Project (about 0.5-1.O percent) reflecting KEGOC’s own l3 The financial projections have been made by the Bank’s project team and are similar but somewhat more pessimistic than those of KEGOC. 57 forecasts. While the tariffs have not yet been approved by ARNM, the tariff-setting rules have been consistently applied so far. Also ARNM has given assurances that it will provide tariffs which cover all justifiable costs and provide a reasonable return on equity.

0 Projected transmissioddispatch volumes through to 2020 were also taken from the Development Plan and are in KEGOC’s own forecasts.

Taxation rates were based on Kazakh regulations. Depreciation rates were based on KEGOCs approved accounting practices.

13. 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 which makes them readily comparable with KEGOC’s own financial statements. Since they are in nominal KZT they include projected local inflation which recent forecasts suggest may average 8 percent per annum over the period of analysis.

iummary of KEGOC Financial Performance

______2006 1 __.____. 2007 1__.______.__.__--_ 2008 2009 J-----.--- 2010 J ------.-2011 ------2012 1 ---.----- 2013 :nominal KZT) Forecast

Average Transmission Tariff (KTkWh)* i 0.60 j OS9 i 0.67 0.87 1.07 j 1.23 ~ 1.36 j 1.55 Average Dispatch Tariff (KTkWh) j 0.06 i 0.06 j 0.07 0.08 : 0.10 ; 0.12 ; 0.12 I 0.12 Transmission Volume (TWh) ; 31.6 j 32.5 ; 34.4 28.0 I 29.4 I 30.9 I 32.4 : 34. I Dispatch Volume (TWh) ; 68.0 : 72.0 : 74.7 67.4 I 70.7 I 74.3 I 78.0 81.9

Net Profits before Tax (billion UT) 1.8 I 2.6 I 5.8 (7.6): 6.4 : 12.9 I 13.3 I 15.4 Cash Flow (billion UT) 2.0 I 1.7 I 3.9 (8.8): 3.4 : 0.7 I 1.1 : 2.3 Cash on Hand at Year-end (billion UT) 6.2 : 7.1 : 12.1 3.3 I 6.7 i 7.4 j 8,4 ; 10.8

Long Term Debt (billion UT) 23.2 I 31.4 i 38.9 47.1 i 41.0 55.7 i 76.3 j 73.1 Debt Service (billion UT) (1.4); (1.8): (2.5) (9.6); (11.8)j (11.8); (I5.0)j (13.0) Gross Capital lnvestment (billion UT) (15.3)j (I5.0)j (18.3) (28.9) j (16.2); (31.5): (44.6); (15.9) Capital 1nvestmentiGross Fixed Assets 13.7%; 12.9%; 13.8% 18.4%: 8.7%; 15.6%: 19.1%; 5.7%

Self-Financing Ratio 15.3%; 26.9%; 66.8% 3.9%: 14.5%; 34.0%: 3 I.O%/ 66.0% Leverage (total liabilitiesitotal assets) 30.6%; 37.2%; 37.1% 44.5%; 39.6%; 41.9%; 44.2%; 4 I.3% Current Ratio 2.0 j 1.5 ; 2.1 0.8 j 0.9; 1,lj 1.2 j 1.5 Debt Service Ratio (year-on-year coverage) ; 3.9 j 3.6 i 4.1 0.4 j 1.0; 1.6: 1.3 j 1.7 Net Fixed Assets (billion UT) 76.9 j 77.3 j 88.6 117.6 j 136.0 j 151.5 j 180.2 j 199.9 Return on Net Fixed Assets 0.8%; 1.3%: 6.1% -5.6%; 3.5%; 6.1%; 5.2%; 5.9% I * net of discounts

14. The year 2009 will show a large loss for the company due mainly to the devaluation of the KZT earlier in the year. This devaluation caused about a KZT 10 billion loss as the value of the company’s foreign exchange denominated debt jumped sharply when expressed in UT. KEGOC expects, however, that this loss will be partially offset by capital gains of about KZT 3.0 billion on advanced payments and other assets held in foreign currencies. The net impact will thus be a foreign exchange loss of about 7 Billion most of which is not a cash cost. Operating profits are likely to be about break even or show a small loss due to a sharp drop in transmission

58 volumes (although much less so in dispatch volumes) as a result of the rece~sion’~.Cash flow from operations will be modest although positive. However, debt service obligations rise sharply while capital investments remain high. 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, Samruk-Kazyna has committed to provide an additional KZT 2.7 billion of equity financing in 2009 in order to maintain the company’s liquidity and has indicated that further funds would be provided as necessary.

15. Over the medium term, KEGOC’s financial outlook steadily improves. After a loss in 2009 it is profitable every year, cash flow improves as do most of the other financial indicators. However, in the period 2009- 13 KEGOC has major debt repayments due as grace periods expire on its loans and it also has a high level of capital investments. The result of this is that its cash flow is not adequate to handle these large payments. It therefore needs capital injections from Samruk-Kazyna or the Government of about KZT 18 billion ($120 Million) in the period 20 10- 13. Samruk-Kaznya has stated that these funds will be available. Furthermore an equity injection of 20.8 Billion KZT is under active consideration and could be available by the end of this year or early next year. If it occurs it should be sufficient to meet KEGOC’s financial needs over the period. However, the forecasts used in the PAD assume smaller equity injections spread over more years. If for some reason these equity injections are not provided on a timely basis, then KEGOC would have to appropriately cut its capital expenditures, reduce its cash balances and/or possibly borrow from the banking system. By 2013, KEGOC is expected to start to emerge from this period of tight finances as transmission revenues continue to rise and the investments for the development of transmission system fall sharply.

16. 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 viability, a covenant in the Loan Agreement provides that KEGOC 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.

l4 Transmission volume is forecast to decline by about 18% in 2009. However, this forecast which is the official KEGOC forecast, is probably too pessimistic. Transmission volumes declined by 20% in the first quarter but only 14% in the second quarter and 7% in July. Moreover the decline in dispatch volume was half that of transmission and total consumption in Kazakhstan is expected to drop only 3% from 80.6 TWh in 2008 to 78.5 TWh in 2009. 59 17. The following financial performance covenants, which are very similar to the Moinak Loan financial covenants (except for 2010), will be included in the Alma Loan Agreement. KEGOC shall: (i)attain a current ratio of 0.9 in 2010 and 1.0 thereafter; (ii)attain a self- financing ratio of 10 percent based on a three-year moving average of the investment program for 20 10 and 20 percent thereafter; and (iii)refrain from incurring additional debt unless the debt service ratio for that year, as measured by current net revenues and current debt service requirements, is at least 0.9 in 2010 and 1.2 thereafter. 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.

18. Sensitivity Tests. Sensitivity tests were done on the financial model of KEGOC. These tests were to ascertain the impact of increasing or decreasing tariffs by 10 percent and the impact of increasing or decreasing volumes of electricity transmitted by 10 percent.

19. Base Case. The base case (from which the sensitivity tests are measured) uses the transmission volume^'^ and tariffs which were used for the recently issued Moinak PAD and were agreed by KEGOC. With these transmission tariffs and volumes combined with the high level of capital investments by KEGOC and the beginning of debt repayments, the company runs cash flow deficits from 2009 to 2012. After which the cash flow turns positive. In this base case it is assumed that Samruk-Kazyna injects KZT18.4 billion (about US$120 million) into KEGOC over 4 years. This is significantly less than the 20.8 Billion Samruk-Kazyna has agreed to inject if needed and allows KEGOC to maintain a comfortable cash balance of slightly less than two months worth of revenues (15 percent of revenues). This base case cash injection could be reduced by KZT4.7 billion to KZT13.7 billion ($91.5 million) if KEGOC only kept one month’s revenues on hand. In addition it could be eliminated entirely if KEGOC’s large capital investments in 2010 and 201 1, which it plans to partially self finance, were limited to those investments financed through long term borrowing.

20. Changes in Tariffs. Two cases were run. These are a decrease in transmission tariffs of 10 percent and an increase in transmission tariffs of 10 percent. If tariffs are 10 percent lower an additional cash injection of KZT13.3 billion by Samruk-Kazyna would be necessary in order to maintain the same level of cash balances as in the base case. Total cash injections would then be KZT31.7 billion (18.4 billion +13.3 billion) which exceeds the KZT20.8 billion to which Samruk-Kazyna has agreed. However, by cutting the size of its cash balances to one month’s revenues and eliminating investments not financed by longer term borrowing, KEGOC could reduce its required cash injections to about KZT1O.O billion .

21. An increase in tariffs of 10 percent would largely eliminate the requirement for cash injections by Samruk-Kazyna. Total required cash injections by Samruk-Kazyna for KEGOC to maintain the same cash balances as in the base case would be KZT5.5 billion, but this requirement for cash injections could be eliminated by cutting KEGOC’s cash balances to one month’s revenue and making minor reductions in capital investments.

l5 Transmission volume assumptions are extremely conservative with transmission volumes not recovering their 2008 levels until 2013. 60 22. Changes in Volumes Transmitted. If the volume of electricity transmitted is 10 percent less than in the base case then capital injections by Samruk-Kazyna would have to increase by 7.3 Billion Tenge for KEGOC to maintain the same cash balances as in the base case. This would mean total capital injections of KZT25.7 billion - above the KZT20.8 billion agreed by Samruk-Kazyna. However, by cutting the size of its cash balances, KEGOC could reduce the total required capital injections to the KZT20.8 billion range.

23. It should be noted that lower volumes of electricity transmitted have less impact on cash flow than lower electricity tariffs because most of the costs, such as for example system losses, are assumed to be related to volumes transmitted and therefore decline as the amount of electricity transmitted declines.

24. If the volume of electricity transmitted is increased by 10 percent then to maintain the same cash balances as in the base case, total capital injections would only need to be KZT11.4 billion , This is less of an improvement than with a 10 percent tariff increase because again most of the costs are assumed to increase with volume transmitted.

Change in Needed16 Capital Injections 2010-2013 By Samruk-Kazyna Relative to t he Base Case

Change in Variable KZT Billion US$ Million 10% reduction in Transmission Tariffs +13.3 +89 10% increase in Transmission Tariffs -13.0 -86 10% decrease in Transmission Volumes +7.3 +49 10% increase in Transmission Volumes -7.0 -4 7

l6 As mentioned above, these capital injections can be substantially reduced by KEGOC if it chooses to have smaller cash balances, reduces its capital investments, does not pay taxes, builds up receivables etc. 61

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.-.I su Annex 10: Safeguard Policy Issues Kazakhstan: Alma 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 approved by the Bank and disclosed on KEGOC’s website on October 2, 2009. The EMP was also deposited in the Bank’s Infoshop on October 9, 2009. The feasibility study included a section on environmental protection. This was approved by Almaty Oblast Administration for State Sanitary and Epidemiologic Supervision (September 3, 2007) and Department of State Sanitary and EpidemiQlogic Supervision of Akimat of Zhambyl Oblast (September 10, 2007). A public consultation was held on November 14, 2008 in Almaty covering both the Alma and Moinak Projects with the participation of a wide range of stakeholders, including those in the vicinity of the project sites and NGOs. Another public consultation was held on October 15, 2009 specifically to discuss the draft EMP for the Alma project.

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 (IEC) standards. The transmission line routing does not interfere with any migratory bird patterns as supported by data provided by the Information and Analytic Center of Environmental Protection under the Ministry of Environment and inherent in the regional environmental authority approvals cited above.

3. The new substation 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 (JSC Kazakhstan Research and Design-Survey Institute Energia) has developed the preliminary line routing for the transmission lines. 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 start work in or around April 201 1). The detailed designs will have a section on EA, which is subject to the state environmental expertise. This will include an EMP reflecting specific mitigation and monitoring requirements based on information from the EA. 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 EMP, to verify that Bank safeguard requirements are satisfied. .

65 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.

Social Development Issues

6. The main purpose of this project is to eliminate a transmission bottleneck in the Almaty Area which will be greatly exacerbated by the Asiatic Games, to be held in 2013, if it is not addressed. Currently, the 500 kV SS outside Almaty is frequently overloaded, leading to outages and load shedding. The project will remove the bottleneck at the Almaty SS and on 220 kV lines on the northeast part of the city, providing reliable service throughout the area. The impact will be visible to households, industries and businesses that now suffer from unreliable electricity supply, particularly during the winter and summer months. The project will improve access to low-cost electricity in southern Kazakhstan that will both improve the well-being of the population and alleviate the competitive disadvantage that the region currently suffers because of unreliable electricity supply.

7. Land Acquisition. The sub-stations will not require new land. The new Alma SS will be located on the northern periphery of the city distant from settlements. The Raion has made land available for the facility. The restructuring of the Almaty SS will occur within the existing fence line. Restructuring of the YuKGRES SS will entail shifting the existing wall into the surrounding land set aside for expansion and owned by the facility.

8. Land acquisition for the OHTLs will be very limited. The 500 kV OHTLs going in and out of the Alma SS will traverse State property except for a small tract. The 220 kV OHTLs from Alma SS will run parallel in a narrow corridor to existing lines. The long 220 kV line will run parallel to existing lines through much of the alignment, as well. The precise alignments for the OHTLs are being designed, but the broadly identified corridors are located in areas that will have minimal impact on the population. The 500 kV OHTLs will traverse a largely uninhabited steppe area, far from settlements. The 220 kV OHTLs will also be distant from settlements. Consequently no population displacement will result from the project. KEGOC will acquire land for the footprints for the towers, but not the right of way. As part of the final design, private landowners will be contacted to obtain their consent for the OHTL, and the Raion will issue a two-year land use agreement for the construction period, based on the consent of affected people. In case of refusal, the alignment will be revised to go around those who refuse. The exact number of towers and therefore the number of affected persons will not be known until the final designs are completed. KEGOC prepared a Land Acquisition Policy Framework, acceptable to the Bank, which will govern the land acquisition process and be subject to review by the Bank during supervision missions. The loss of the tiny parcels for tower footprints is not expected to materially affect the people who use the land, as it constitutes a tiny fraction of a holding. Right- of-way restrictions on the rest of the alignment will prevent construction and limit trees, but not affect current land uses, thus no negative impact is anticipated. This will be confirmed when KEGOC prepares and discloses the site specific Land Acquisition Plan once the final designs are completed, and submits them to the Bank for review.

66 Annex 11: Project Preparation and Supervision KAZAKHSTAN: Alma Electricity Transmission Project - To be updated

Planned Actual PCN review Na 08/21/2009 Initial PID to PIC Na 09/03/2009 Initial ISDS to PIC 09/22/2009 09130/2009 Amraisal 1011612009 1 Of2912009 Negotiations 11/12/2009 11/12/2009 Board approval 1211 512009 Planned date of effectiveness 02/15/2010

1 Planned closing: date I 0413 0120 15 I I

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:

Leader

James Moose Consultant AFTEG (Economics and Finance)

Sodyk Khaitov Consultant ECSSD (Energy Sector)

Yuling Zhou Sr. Procurement Specialist ECSC2

Bernard Baratz Consultant ECAVP (Environmental Specialist)

Hannah M. Koilpillai Sr. Finance Officer CTRFC

Aliya Kim Financial Management ECSPS Specialist

Danielle Malek Counsel LEGEM

Stanley Peabody Consultant ECSSD (Social Development Specialist) Yukari Tsuchiya Program Assistant ECSSD

Aksulu Kushanova Team Assistant ECCKZ

67 Bank funds expended to date on project preparation:

1. Bank resources: us$loo,ooo 2. Trust funds: None 3. Total: uS$loo,ooo

Estimated Approval and Supervision costs:

1. Remaining costs to approval: US$50,000 2. Estimated annual supervision cost: us$loo,ooo

68 Annex 12: Documents in the Project File KAZAKHSTAN: Alma Electricity Transmission Project

“Annual Report 2008,” KEGOC, Astana, 2009.

“Annual Report 2007,” KEGOC, Astana 2008

“Feasibility Study for 500/220 kV Alma SS connected to Kazakhstan National Grid via 500, 220 kV lines” prepared by JSC KazNIPIITES “Energiya,” Almaty, 2007.

“Assessment of State Expertise on Feasibility Study for 500/220 kV Alma SS connected to Kazakhstan National Grid via 500,220 kV lines” RGP “Gosexpertiza” December, 2007

“Opinion of the Ministry of Economy and Budget Planning of the Republic of Kazakhstan on economic expert assessment of investment project nominated to the List of investment projects for financing out of the assets of non-governmental loans under sovereign guarantees of the Republic of Kazakhstan” July 2008

“Sectoral Opinion of Ministry of Energy and Mineral Resources on Feasibility Study of “Construction of 500/200 kV Alma SS Connected to Kazakhstan National Grid (NEG) via 500/220 kV Lines”, May 2008

“Opinion of State Environmental Expert Commission On materials of Environmental Impact Assessment of FS “Construction of 500/220 kV Alma SS, for section the runs through Moiynkum district, Zhambyl Oblast, length 83 km’’ October 2007

Expert Opinion of Kazakhstan Development Bank on Investment Project “Construction of 500/200 kV Alma SS Connected to Kazakhstan National Grid (NEG) via 500/220 kV Lines” Astana, Jun 2008

69 Annex 13: Statement of Loans and Credits KAZAKHSTAN: Alma 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. Fm. Rev’d P 101928 2008 HLTH SEC TECH (JERP) 117.70 0.00 0.00 0.00 0.00 1 17.20 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-KAMENOGORSK ENV REMED 24.29 0.00 , 0.00 0.00 0.00 24.29 0.00 0.00 PO95 I55 2006 N-S ELEC TRANSM 100.00 0.00 0.00 0.00 0.00 27.35 22.61 0.00 PO78301 2006 FORESTRY 30.00 0.00 0.00 0.00 0.00 27.92 1.30 0.00 PO58015 2005 AG POST PRIV ASSIST (APL #2) 35.00 0.00 0.00 0.00 0.00 34.26 21.83 0.00 PO4972 I 2005 AGRlC COMPETITIVENESS 24.00 0.00 0.00 0.00 0.00 15.36 11.46 0.00 PO59803 2003 NURA RIVER CLEAN-UP 40.39 0.00 0.00 0.00 0.00 10.66 9.25 0.00 PO46045 200 1 SYR DARYA CONTROL N. ARAL SEA 64.50 0.00 0.00 0.00 0.00 4.39 5.04 4.2 1 PO65414 2000 ELEC TRANS REHAB 140.00 0.00 0.00 0.00 0.00 0.00 10.35 1.46 Total: 607.78 0.00 0.00 0.00 0.00 293.33 81.84 5.67

KAZAKHSTAN STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions of US Dollars

Com mitted 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: Alma Electricity Transmission Project

Kazakhstan at c? glance 9/7m

Europe & Upper- POVERTY and SOCIAL Central middle- Kazakhstan Asia incoin$ Deveiopmant diamond' 2007 POpul&twn, mid-mitWafisj 15 5 445 822 GFll per cam (Anas mfW, US$) 5,060 6.052 6 sa7 GNI (Aties mewr US%Mhs) 78 3 2,694 5,750 Awrage annual growth, 200107 Populetton (%) 07 00 57 Latxvlarce WJ 13 05 13 Moet recent estimate (lotost par available, 200157) Poverty 1% of wpuirrhon belw nslionsl pow* tine} 15 Urtwn pqxtkatwn (% of total ppm'&tronl 5e w 7: Me ewclaneyat wrth lysani 66 69 71 $Ifant mrtaIi+/ IW $,oat(we brrthti 26 23 71 ChiM nwlnumhon @ of chumn under 5) Access to imoioved water source Access to an improved water source 4% of popclfsl,~J 96 95 95 Lneracf I% dpMebn a@e 15+) Y7 93 Gross pnmary Mvollrnent (?4 ofsch&age populst#n) 105 97 111 kie 105 9e 112 Female 1os I 105 KEY ECONOMN: RATIOS and LONG-TERM TRENDS

1957 1997 2006 2007 Economic ratio9 GDP (US5 bY114nsl 222 e1 o 103 8 Gross capttal fwmabor\lGDP 15 6 32 31 8 5 Trade Exports of goadn and swvlasH;DP 34.9 51 1 47 6 Gmdomsstx savm@GDP 13 1 43 5 403 T Grass natioMi sevmg&GB)P 12 0 30 5 28 4 Current accowIf bahce/GDP -3 6 -2 2 -3 0 $Itemst paymen#GDP 08 24 Tctel debVGDP 18 4 91 5 Total de-bt mcetewcfb $2 33 7 Prseent value of deWGDP 89 1 Present value of debt/ey.wts 187 4

1987-97 199757 2006 2007 2007-11 iaverege snnud wovrthl GDP -71 90 10 7 85 59 GDP per cap& -61 88 95 73 58 ExWof gcds and services -46 77 63 93 81

STRUCTURE of the ECONOMY 1967 1997 2006 2007 I Growth 01 capita4 and GDP (7%) (46 of GDPJ I Agriculture 12 0 59 66 hduslry 273 42 1 443 Msupufsmrhg 140 124 Servrces 607 520 491 Harsehold final consurnptlon expenditure 745 463 485 General gov't mal mnrumpmn expenditure 124 102 112 -0CF -0P hports of goods and services 374 404 383 I I

1987*97 lgg7-07 *Oo6 2007 Growth of exporh and lmporh (%I (owrcr~eannual groHnli Agriculture -9fi 46 60 50 201 I IO

0 HolrseMU final consumptlon expenditure -11 7 77 139 150 General govl %ai consumitron expenditure -80 73 82 100 Gross cadal ~C+TMWR 26 7 174 288 105 hwrts of goods wd services -172 6 1 12 1 96

Note 3307 data are preiiminory er&moiee Tho table was produced frmr the Development Emnumics LLX dalebee * The diamonds show four key idicatm in me cwntry (xn bold) cosnprcred wth its Income-group average if data are misslng. the dlnKlRd wI1 be incomplete

71 PRICES and GOVERNMENT FltJANCE 1987 2006 2007 1997 Inflation (96) Domesbc prices I 1% ChW) Consumer pnces 17 4 86 88 Implicit GDP deeata 16 1 21 6 24 8 Government finance (96 of GDP, fnciudes current grants) Cumnt reverwe 20 7 27 1 27 0 Current budpet balance -3 8 12 9 20 8 Overall surplusdeficit -7 1 7.6 47

TRADE 1987 1997 2000 2007 Export and import levels (US$ mbll.) (US$ rnlllonS) Jotai exports if&) 6.899 38.762 48,325 Fuel mdai products 2.216 26.279 30.303 6Gm T Fenaus metata 95 1 2.41 1 2,555 Manufactures 1.49 1 3.978 6,797 Jot& lmpons (ClR 7,176 24,120 30,289 Foad 474 1,174 1.374 Fuel and wgy 628 3.051 4 051 Capctal goods 1.462 10.722 14,222 ~t m a3 M as c6 07 Expect pnce Wx(2O(x1-1001 85 283 305 lmpm price index (2&30=100) 120 299 286 MEwn5 Dimporn Terms of trade p#O=-lOO) 71 113 1oe

BALAElCE d PAYMENTS 1987 1997 2006 2007 Currenl account balance io GDP 4%) {USsT?Mmansl Expwta of gdsand sewiceS 7,741 41.570 49 437 Impm of poo* ma services 8,300 32 840 39 731 I Resource balance -559 8 730 4 705 Net income -315 -9,317 -1 I 311 Net current transfers 75 .?.to7 -1,500 Current account balance -799 -? ,795 -3,117 F~nmcingttms (net) 1,279 12,869 3,l t7 Changesmnetr-es -480 .1 1,075 0 Memo: Reserves acluding gold (US$ nnfhs) 2,291 19,127 19,127 Conversion rate (OEC, bcaM1SS) 2 &E-3 75 4 126 1 122 6

WTERWAL DEBT and RESOURCE FLOWS 1987 1997 2006 2007 Composition of 2006 debt (US$ mill.) (Us% rnIh2Sl Totat debt outatanding and &sWursed 4.078 74.148 iBRD 648 502 427 IDA 0 0 0 483 14 532 34 161 172 0 0 0 Cmripasthon of net res01Ix.e flows official gmnts 54 51 mtciar creditors 444 -23 Pnvate creditws 777 25.768 Foreign dwect tnvestment (net inflaws) 1,321 6.143 POmD equity (ne! iMOwS) 0 2,797 World Bank prcgrem Cmnlitnrents 247 30 0 Daslwsemmts 202 29 67 Pnnerpa repapnents 0 130 143 Net fE0w 202 -101 -76 Interest payments 34 31 25 Net transfers 167 -132 -105

The Wodd Bank Group This table was prepared by country uns staff figures may Mer front other World Bank published data. h(24M8

72 Annex 15: Map KAZAKHSTAN: Alma Electricity Transmission Project

73

IBRD 37357 60° 70° 80° 90° KAZAKHSTAN RUSSIAN FEDERATION ALMA ELECTRICITY TRANSMISSION PROJECT To TUMEN FUTURE EXISTING SUBSTATIONS: PROJECT COMPONENTS: NATIONAL CAPITALS To KURGAN TAVRICHESKAYA KAZAKHSTAN 1150 kV 500 kV LINES INTERNATIONAL PETROPAVLOVSK (PP TETS-2) To KARASUK 220 KV LINES BOUNDARIES TR.GRES IRTYSHSKAYA 500 kV AURORA To BARNAUL ' 500 kV SUBSTATION Ob 220 kV FUTURE EXISTING To MAGNITOGORSK THERMAL POWER PLANTS TRANSMISSION LINES: KUSTANAISKAYA KOKCHETAVSKAYA To BARNAUL 1150 kV HYDRO POWER PLANTS 500 kV AKSU ES RUTSOVSK To MAGNITOGORSK PAVLODAR 220 kV SOKOL KEZ RUDNENSKAYA TETS MAKINSK To BAES To GOLOVNAYA To KINEL 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

r

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 Caspian (144,480,PVP) AITEKE-BI GTES KUMKOL (NOVOKAZALINSK) For detail, see inset below left GTES KALAMKAS BALKHASHSKAYA TETS KARAZHANBAS TALDYKORGANSKAYA SS Sea BEINEU Aral YUKGRES ZSCHA SS 50° Sea KERBULAKSKAYA Altyn-Emel HPP National Park AKTAUSKAYA SARYOZEK SS AES KZYL-ORDINSKAYA Lake ALMA KAPCHAGAISKAYA HPP Balkash CHINA GPP-1 SS SHELEK SS AKTAU SCHEMATIC. ROBOT SS Charyn National Park KOTETS-6 SHU-500 ZAPADNAYA KOGTETS ALMATY SWITCHYARD YUKGRES MOINAK HPP BALKHASHSKAYA TALDYKORGANSKAYA SS KENSAI SS UZEN S KENTAU ZHAMBYL ZHAMBYLSKAYA GRES TETS ZSCHA SS yr ERMENSAI SS -D BURNOYE ACHP-3 SS a r ya BISHKEK BISHKEK Lake Issyk-Kul CHINA SARYOZEK SS K-BALTY TETS TULKUBAS To KURPSAISKAYA HPP Altyn-Emel ryn KERBULAKSKAYA National SHYMKENT Na HPP AZERB. Park SHTETS-1,2,3 KYRGYZ 40° KAPCHAGAISKAYA HPP Charyn REPUBLIC 40° NO. 62 SS National ROBOT SS SHELEK SS Park TASHKENT SHU-500 SHARDARINSKAYA HPP TASH.GRES TURKMENISTANZAPADNAYA ALMATY UZBEKISTAN SWITCHYARD 0 100 200 300 ALMA SS 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 ACHP-3 SS 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 TAJIKISTAN70° any territory, or any endorsement or acceptance of such boundaries. NOVEMBER 2009