The World Bank North Aral Sea Development and Revitalization Project (P170187) Public Disclosure Authorized Public Disclosure Authorized Project Information Document (PID) Concept Stage | Date Prepared/Updated: 04-Dec-2019 | Report No: PIDC26485 Public Disclosure Authorized Public Disclosure Authorized November 23, 2019 Page 1 of 14 The World Bank North Aral Sea Development and Revitalization Project (P170187) BASIC INFORMATION A. Basic Project Data OPS TABLE Country Project ID Parent Project ID (if any) Project Name Kazakhstan P170187 North Aral Sea Development and Revitalization Project (P170187) Region Estimated Appraisal Date Estimated Board Date Practice Area (Lead) EUROPE AND CENTRAL ASIA Dec 07, 2020 Mar 01, 2021 Water Financing Instrument Borrower(s) Implementing Agency Investment Project Financing Ministry of Finance Ministry of Ecology, Geology and Natural Resources (Committee of Water Resources) Proposed Development Objective(s) The Project Development Objective (PDO) is to improve water resources management in NAS-Syr Darya basin and promote sustainable natural resources based economic activities in Kyzylorda region. PROJECT FINANCING DATA (US$, Millions) SUMMARY-NewFin1 Total Project Cost 190.00 Total Financing 190.00 of which IBRD/IDA 161.50 Financing Gap 0.00 DETAILS-NewFinEnh1 World Bank Group Financing International Bank for Reconstruction and Development (IBRD) 161.50 Non-World Bank Group Financing Counterpart Funding 28.50 Borrower/Recipient 28.50 November 23, 2019 Page 2 of 14 The World Bank North Aral Sea Development and Revitalization Project (P170187) Environmental and Social Risk Classification Concept Review Decision High Track II-The review did authorize the preparation to continue Other Decision (as needed) B. Introduction and Context A. Country Context 1. Kazakhstan suffered a major economic downturn in 2015-16, coincident with a precipitous fall in global oil prices, deep recession in Russia and slowdown of the Chinese economy. Annual GDP growth slowed to just above 1 percent in each of 2015 and 2016, from an average of about 6 percent between 2010 and 2014. A major devaluation of the Kazakhstan Tenge helped stabilize the economy but also lowered incomes and increased poverty. The economic downturn spilled over to the financial sector in 2017, requiring significant intervention. Also, credit to the economy has been stagnant since 2015, reflecting long-standing legacy issues in the banking sector which have not been addressed adequately. 2. Significant government interventions were able to ward off a full-blown economic crisis and maintain social stability. The government stepped in and provided substantial support to systemically important domestic firms to maintain employment and income of most vulnerable people. Since then the state’s footprint in the economy has expanded, hindering a genuine private sector growth. The long-term growth rate has started to slow down. Although real GDP growth recovered to over 4 percent in 2017 and 2018 - due to rising oil prices and production from a new Kashagan oil field, in the medium-term the economy risks being trapped in 3.5 – 4.5 percent p.a. growth environment. This is well below the economy’s past growth performance and government’s long-term growth target. The “lower for longer” prospect would risk delaying the country’s long-term aspiration to be among the most developed economies. 3. Kazakhstan has achieved large reductions in poverty over the past two decades. The poverty rate, measured in internationally comparable terms (US$5.5-a-day in 2011 purchasing power parity terms, a definition recently introduced by the World Bank for middle-income countries like Kazakhstan), fell from about 36 percent of the population in 2006 to 6 percent in 2013, driven primarily by rising income from wage employment. Growth over the decade to 2015 was pro-poor with the poorest 40 percent of the population benefiting more from consumption growth than people in the top income quintiles. 4. Nevertheless, the progress achieved in poverty reduction remains fragile and has fluctuated recently. The share of the population in poverty doubled from 5.8 percent in 2013 to a peak of 12.2 percent in 2016, corresponding to an increase of about 1.2 million people. The economic downturn in 2015 was particularly hard on the most vulnerable households. Consumption fell for the bottom 40 percent by more than the top 60 percent, leading to slightly worse inequality in 2015 and 2016. The recent increase in poverty highlights both the risks of a growth strategy that relies too strongly on oil exports and the extent to which a lack of economic diversification leaves all November 23, 2019 Page 3 of 14 The World Bank North Aral Sea Development and Revitalization Project (P170187) regions vulnerable, regardless of their economic structure. Poverty reduction resumed in 2017, falling to around 8.5 percent due to renewed economic growth. 5. The main challenge from inclusion perspective are the persistent regional and rural-urban disparities. Both non- monetary and monetary measures of poverty are higher in rural areas and specific regions, where access to basic services is substantially lower. Predominantly rural regions have lower educational attainment, lower average incomes, poorer access to clean water and sanitation, substandard heating, poor local roads, and higher poverty rates. These regions also tended to suffer larger increases in poverty in 2015-16. In rural areas, the poverty rate rose from about 9 percent in 2013 to 17 percent in 2016, corresponding to an increase of about 646,000 more poor people. 6. The most vulnerable regions in Kazakhstan, such as Kyzylorda, experienced more than tripling in poverty rates between 2013 and 2016. The main economic activities of Kyzylorda region include agriculture, mining (oil), and urban-based businesses. At least 794,000 people inhabit this area and they are primarily engaged in agriculture, the vital role of which in delivering growth and reducing rural poverty has recently been underlined by the Kazakhstan Government. Main agricultural activities include irrigated rice production, cattle growing, and fisheries. Together with forestry and woodlots, tourism and recreational activities they form the foundation for potential economic growth of the region. 7. The Government has identified regional development and urbanization as a key policy to pursue in the coming decades. This was demonstrated through the Kazakhstan Strategic Plan 2025 listing “Strong Regions and Urbanization” as one of the key pillars of the Strategy. One of the main goals of the reform is to increase the country’s GDP through economic growth of the regions and effective use of local potential. The focus of the program is to increase competitiveness, urbanization and connectivity, as well as to improve basic standards of living in all the 14 regions of Kazakhstan. Focus on regional priorities is also reflected in the Kyzylorda Regional Development Program 2016-2020, which is closely linked country-wide program, currently under implementation. A new Kyzylorda Regional Development Strategy 2025 is being developed and expected to be finalized by end of 2019. The program will reflect a new approach to territorial development and aims at raising the quality of life in the cities and remote areas, as well as stimulating the development of the regional economy. 8. The increasing vulnerability of Kazakhstan to climate change, combined with the depletion of fossil fuel resources and the future needs for growth impel diversification of the economy. The average annual temperatures across the region have increased since the mid-20th century by 0.5°C in the south to 1.6°C in the north. In Central Asia, impacts range from melting glaciers in upland areas to droughts and floods in the lowlands. The increasing unpredictability of climate will impede prosperous development of different sectors of the economy in Kazakhstan and put at higher risk local populations. This is a critical aspect for Kyzylorda region which produces 90 percent of Kazakhstan’s rice, a water-intensive crop sensitive to temperature fluctuations. The challenge, therefore, is to enhance preparedness to deal with the impacts of climate change and other region- specific environmental vulnerabilities, especially those affecting the poor. B. Sectoral and Institutional Context 9. The Aral Sea drains the water from a large, climatically diverse watershed and is a powerful reminder of the importance of sustainable water resources management. The Aral Sea basin occupies parts of Afghanistan and Kazakhstan, and most of the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. The basin ranges from vast desert plains in the west, to the glacier-dominated Pamir and Tien Shan mountains in the east. The high mountain areas are humid and account for the high volume of runoff in the Amu Darya and Syr Darya which run November 23, 2019 Page 4 of 14 The World Bank North Aral Sea Development and Revitalization Project (P170187) from the mountains through the desert to the Aral Sea. The Syr Darya rises in two catchments in the Tian Shan Mountains in Kyrgyzstan and eastern Uzbekistan—the Naryn River and the Kara Darya, which converge in the Uzbek part of the Fergana Valley, then flows for some 2,212 km west and north-west through Uzbekistan and southern Kazakhstan to the remains of the Aral Sea. The Syr Darya drains a catchment area of over 800,000 square kilometers, but not more than 200,000 km2 contribute significant flow to the river.