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The World Bank East-West Roads Project (Almaty-Korgos Section): Western Europe - Western China International Transit Corridor (CAREC - 1b) (P128050) REPORT NO.: RES27637 Public Disclosure Authorized DOCUMENT OF THE WORLD BANK RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF Public Disclosure Authorized EAST‐WEST ROADS PROJECT (ALMATY‐KORGOS SECTION): WESTERN EUROPE ‐ WESTERN CHINA INTERNATIONAL TRANSIT CORRIDOR (CAREC ‐ 1B) APPROVED ON MAY 1, 2012 TO REPUBLIC OF KAZAKHSTAN TRANSPORT & ICT EUROPE AND CENTRAL ASIA Public Disclosure Authorized Regional Vice President: Cyril E Muller Country Director: Lilia Burunciuc Senior Global Practice Director: Jose Luis Irigoyen Practice Manager/Manager: Binyam Reja Public Disclosure Authorized Task Team Leader: Jacques Bure, Aliya Karakulova The World Bank East-West Roads Project (Almaty-Korgos Section): Western Europe - Western China International Transit Corridor (CAREC - 1b) (P128050) ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank IBRD International Bank for Reconstruction and Development CAREC Central Asia Regional Economic IFIs International Financial Institutions Cooperation comprising the World Bank Group, ADB, EBRD, IsDB CR Committee for Roads KAZ Kazavtozhol National Roads Operator JSC CS Center‐South Road Corridor KZT Kazakhstan Tenge EBRD European Bank for Reconstruction M&E Monitoring and Evaluation and Development EIRR Economic Internal Rate of Return MoID Ministry of Investments and Development ESMF Environment and Social Management O&M Operations and Maintenance Framework ESIA/ EIA Environmental and Social Impact PDO Project Development Objective Assessment/ Environmental Impact Assessment EWRP East‐West Roads Project PFA Partnership Framework Arrangement GDP Gross Domestic Product RPF Resettlement Policy Framework GHG Green House Gas SMEs Small and Medium Enterprises SWRP South‐West Roads Project GoK Government of Kazakhstan WBG World Bank Group GR Grievance Redress WE‐WCh Western Europe ‐Western China Corridor The World Bank East-West Roads Project (Almaty-Korgos Section): Western Europe - Western China International Transit Corridor (CAREC - 1b) (P128050) BASIC DATA Product Information Project ID Financing Instrument P128050 Specific Investment Loan Original EA Category Current EA Category Full Assessment (A) Full Assessment (A) Approval Date Current Closing Date 01‐May‐2012 30‐Jun‐2017 Organizations Borrower Responsible Agency Republic of Kazakhstan Ministry of Investments and Development Processing (this section will be automatically removed by the system before the paper is disclosed) Form Type Based on the proposed changes this Restructuring type is Full Restructuring Paper Level 1 Decision Authority RVP Decision Explanation of Exception to Decision Authority The loan closing date is extended by more than 2 years. Project Development Objective (PDO) Original PDO The project development objectives (PDOs) are to increase transport efficiency along the section of the Western Europe‐Western China Road Corridor within Almaty Oblast and to modernize highway management on sections of the Western Europe‐Western China Road Corridor. The World Bank East-West Roads Project (Almaty-Korgos Section): Western Europe - Western China International Transit Corridor (CAREC - 1b) (P128050) Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD‐81560 01‐May‐2012 10‐Oct‐2012 14‐Jun‐2013 30‐Jun‐2017 1068.00 544.23 523.77 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING 1. The East‐West Roads Project (EWRP, the Project) is providing US$1,068 million in lending to the Republic of Kazakhstan through an IBRD loan 8156‐KZ approved on May 1, 2012. The Project finances the upgrade to four lanes of an existing single carriageway between Almaty, the economic capital of Kazakhstan, and Khorgos at the border with China. The Project's progress towards the achievement of the PDO is satisfactory. Both PDO and IP ratings have been satisfactory since early stage of implementation in December 2013. Disbursements stand at 50% (US$ 537 million) as of early May 2017, and additional US$37 million are expected to be disbursed by the end of June 2017, the current project closing date. The Project is recording savings of US$487 million (the Bank’s share of financing). The original cost estimates at the time of project preparation were based on the market analysis in Kazakhstan. The savings accrued from two main sources: (i) the depreciation of the Kazakhstan tenge (KZT), which lost about 100% of its value against the US dollar between 2012 and 2016 whereas the majority of the construction inputs were locally sourced; and (ii) cost‐effective procurement and diligent contract management that ensured value‐for‐money and cost of construction below the estimates set at the appraisal. Full details for cost savings are provided in Annex 1. 2. Civil works under the original project are 95% (291 km of the total of 305 km) completed. The road agencies Committee for Roads (CR) and Kazautozhol (KAZ) ‐ in charge of the implementation of the Project ‐ plan to open the entire new four‐lane road in summer 2017. The overall rate of progress and quality of works are satisfactory. Safeguards compliance is rated moderately satisfactory because reclamation of some borrow pits is lagging behind schedule. Project is in full compliance with financial conditions of the Legal Agreement including timely submission of interim unaudited financial reports and annual audited financial statements. 3. The Project's institutional component was designed to support the modernization of highway management and tolling strategies along the 2,800km long Western Europe –Western China corridor crossing the entire country. A comprehensive tolling strategy for the Almaty‐Khorgos section has been developed, which expanded to other sections of the same corridor, including the Kyzylorda‐Shymkent section of the South‐West Roads Project (SWRP) also financed by the Bank. The World Bank East-West Roads Project (Almaty-Korgos Section): Western Europe - Western China International Transit Corridor (CAREC - 1b) (P128050) 4. Value added from the Bank. Since early days of partnership with the roads authorities in Kazakhstan, the Bank team aimed at combination of actions towards strengthening the capacity of staff, introducing new technology, and improving processes. Annex 4 summarizes how the capacity of staff has improved over the years, and how innovations like RAMS, PAT, Mappilary, and RoadLabPro are supporting the decision making today. Significant institutional changes have been implemented under SWRP and EWRP in coordination with other IFI partners (ADB, EBRD, IsDB). These include separation of operational functions from policy and planning, improvements in road safety, network management, and sustainability via revenue collection. The proposed restructurings of both SWRP and EWRP would leverage and build on these reforms and focus on promoting sustainable and diversified revenue sources for road maintenance, safe road operations, job creation and private sector participation. 5. Lessons learned from the Bank Engagement in Kazakhstan’s Road Sector: The Bank has had a productive engagement in the road sector for the last decade. The key lessons that emerge from this engagement include the following: . It is possible to build a good quality trunk road at a very reasonable price in Central Asia today. This is important given the desire of Central Asian countries to turn the region from a land‐locked to a land‐bridge region. It is possible to introduce innovation in the transport sector in Central Asia, but it takes time for those innovations to be fully mastered by local industry, workforce, and the administrations. First, by definition, the approach is about novelty and it requires more than the adoption of a software, the purchase of equipment, or the signing on a budget. The staff has to be trained, mentalities need to evolve, and investments need to be made by the private sector, with a view on the long‐term sustainability and with access to credit. Large infrastructure can be built in Central Asia in full compliance with best practice in terms of environment and social safeguards. Local populations are interested and supportive of transport infrastructure; and the administration is able to address concerns, mitigate negative impacts, and even adjust alignment and agree on additional investments (e.g., cattle underpasses). Administration such as the one in Kazakhstan is ready to embrace institutional reform based on a dialogue with the Bank on best practice in place elsewhere. The schedule of reforms needs to be carefully adjusted to the constraints and workload of counterparts to be successful. It takes also time to build confidence and to go further than the initial ideas and commitments. Projects such as the EWRP and SWRP, because of their transformational impact, their large cost, and high visibility are good vehicles for reforms. II. DESCRIPTION OF PROPOSED CHANGES 6. The request to restructure the Project comes as a result of the analysis of the economic situation by the Government of Kazakhstan (GoK). The current fiscal situation has affected the Partnership Framework Arrangement (PFA) signed in September 2014. GoK estimates that implementing the PFA as originally designed would lead to GoK reaching the 15% threshold of public debt to GDP by 2019. GoK has therefore decided to defer