Central Asia Regional Economic Cooperation Corridors 1 and 6 Connector Road (–) Reconstruction Project (RRP KAZ 52286)

KAZAKHSTAN ROAD SUBSECTOR STAKEHOLDER ASSESSMENT

I. MINISTRY OF INDUSTRY AND INFRASTRUCTURE DEVELOPMENT AND THE COMMITTEE OF ROADS

A. Ministry of Industry and Infrastructure Development

1. The Ministry of Industry and Infrastructure Development (MIID) was established in 2014 as the successor to the Ministry of Transport and Communications. MIID is responsible for improving the regulatory framework of the road sector and, through the COR, manages the roads of international and national importance (known as the republican road network). According to its organizational structure (see Figure 1), MIID includes 26 divisions – eight committees and 18 departments. The total number of staff is 2,202 including the head office (324), committees (618) and regional divisions (1,260).

B. Committee of Roads

2. The Committee of Roads (COR), a republican state institution, was created in 2006 as the successor to the Committee for Transport Infrastructure Development (CTID). It is responsible for managing the road sector and administering the MIID’s roads budget. It is responsible for implementing state policy, developing and ensuring compliance with regulations. It finances KazAvtoZhol, the national operator, and is responsible for quality control, and for introducing and operating toll roads. It also makes transfers to regional budgets and to the cities of Astana and for the development and repair of local roads. The COR has traditionally acted as implementing agency for road projects of international financing institutions.

3. COR has 60 employees, excluding employees of subordinate organizations, such as JSC KazdorNII, LLP Kazahavtodor and RSI Oblzholaboratoriya, the roads laboratories. 2

Figure 1: Roads Institutions

Ministry of Industry and Infrastructure Development (MIID)

Annual agreement JSC NC KazAvtoZhol Committee of Roads 14 regional branches (COR)

International financing institutions projects

Direct financing

RSE Oblzhollaboratoriya Contractors for the construction, (roads laboratories) reconstruction and repair of roads

Service providers for the Competitive bidding development of design estimates

Service providers for the Direct contracting development of a feasibility study LLP Kazahavtodor is to date the sole provider of routine maintenance Service providers for road services for republican roads diagnostics and improvement of regulatory and technical Direct contracting documentation Toll roads directorate

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II. KAZAVTOZHOL

A. Overview

4. KazAvtoZhol was created by government decree no. 79 in March 2013 as a joint stock company (JSC) with the Ministry of Investment and Development (MID) as its sole shareholder. In July 2013 it was given the status of a “national company” (NC), which enables it to attract and use all sources of funding not prohibited by law. In January 2015 it was transferred to Samruk– Kazyna.1 This remains the case in September 2018 but there are indications that it is due to change. In management terms KazAvtoZhol remains answerable to COR.

5. KazAvtoZhol is responsible for procurement and supervision of construction, reconstruction and repair (capital, medium and current), and also acts as the manager of the republican road network. It is the trust manager of toll roads. Contractors are selected by open tender except for routine maintenance, which is carried out by LLP Kazahavtodor (see below). Toll road maintenance is carried out by KazAvtoZhol.

6. At present (September 2018) KazAvtoZhol has a total of 673 employees, of whom 303 are in regional offices and 279 are in the toll road directorate. Total staffing has barely changed since December 2014, when there were 655 employees.2 The official maximum permissible number of staff was increased to 956 in December 2017.

B. Financial Position

7. Summary financial statements for KazAvtoZhol for 2014–2017 are shown below. Income amounts to transfers from government budgets; net incomes from the one existing toll road are included under other income. With the exception of the Astana–Schuchinsk toll road, assets are limited to advances related to current works and nominal property, plant and equipment. Up to 2016 the accounts show no debt-related liabilities. The large increase in liabilities in 2017 reflects loans with the Exim Bank of and with EBRD. Both are subject to sovereign guarantee. No net interest expense is charged against 2017 income, however, as under the loan agreements, the company receives reimbursement for all debt service related expenses.

Table 1: Summary of Kazavtozhol’s Financial Statements (KZT million) Income and expenditure 2014 2015 2016 2017 Income 145,415,347 214,459,088 187,196,327 183,910,840 Cost of goods sold 144,389,458 213,383,311 186,400,305 183,298,191 Gross profit 1,025,889 1,075,777 796,022 612,649 Administrative expenses 1,041,549 1,298,111 1,165,860 993,039 Other expenses 108,439 24,098 9,000 2,563,966 Other income 120,888 253,461 303,772 947,076 Operating profit (3,211) 7,029 (75,066) (1,997,280) Finance income 3,211 26,260 94,784 2,507,218

1 Samruk–Kazyna is officially known as the National Welfare Fund and is a sovereign wealth fund, constituted as a JSC. 2 World Bank. 2016. Review of KazAvtoZhol as a Sub-Sovereign Borrower for Centre South Project. Astana.

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Income and expenditure 2014 2015 2016 2017 Profit (loss) before tax 0 33,289 19,718 509,938 Tax 79,199 41,154 (7,454) (476,995) Net profit (79,199) (7,865) 27,172 32,943 Balance sheet: Total assets 15,288,984 24,420,323 25,646,905 350,597,952 Total liabilities 13,140,564 22,147,569 23,346,979 349,013,431 Equity 2,148,420 2,272,754 2,299,926 1,584,521 Note: Kazavtozhol’s reporting year ends on 31 December. Sources: ADB’s Financial Management Assessment in 2014–2016 and Kazavtozhol audited accounts for 2017.

C. Toll Road Activities

1. Tolling Policy

8. KazAvtoZhol’s toll road activities are important as increased tolling is the main basis for the company’s plans to increase its revenues and to commercialize its operations. There is no clear tolling policy, however, and consequently no clarity over the financial objectives of tolling.

9. Rules for charging tolls are to be found in MID order no. 1153 of December 2015. These rules set out exemptions for emergency service vehicles, for buses providing regular services to villages adjacent to the tolled road and for certain agricultural vehicles. Conspicuous by its absence is any requirement to provide an untolled alternative or to insist that a potential toll road should be improved before tolls are imposed.

2. Astana–Schuchinsk toll road

10. At present the Astana–Schuchinsk road is the only operational toll road in Kazakhstan.

11. The Astana–Schuchinsk toll road is 211 km long and has six lanes. The road was built in 2009 and has a concrete pavement. There are toll plazas at each end of the highway. The tolling system is hybrid, with tolls linked to vehicle class and to the number of zones traversed (there are five zones in all). License plate recognition is in use at the two toll plazas. Drivers may pay on exit at a toll plaza or within ten days of leaving at an intermediate exit (a variety of payment mechanisms is available). Small passenger vehicles registered in districts adjacent to the highway enjoy a 50% discount; an annual commuter fee arrangement is also available. Foreign registered vehicles pay a 20% premium. The toll road has no weigh stations. There are rest areas finished to a high standard.

12. Toll technology was provided by Grenobloise d'electronique et d'automatismes (GEA), a French Company.3 It appears to work well: there was no queuing at the Astana plaza during a weekday field visit.

13. Toll rates have remained at the nominal levels shown below since the start of toll collection in 2013.

3 GEA is a firm specializing in electronic and computerized toll collection systems.

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Table 2: Astana–Schuchinsk Toll Rates (KZT) Cars Small Medium Large buses Multi-axle Three axle buses & buses & and goods trucks, Local Transit trucks light goods goods (2 axles) 15+ tons 98 200 1,000 2,100 3,100 4,200 5,200 Note: Rates are for the entire toll road (211 km) and include value-added tax. Source: Kazavtozhol.

14. Table 3 shows the number of toll-paying vehicles, toll revenue and toll road expenses for 2014–2017. With the exception of 2014 (when budgetary support was needed), toll income has covered operating expenses (total expenses in the table include small amounts of capital expenditure). Assuming all vehicles travel the full 211 km, weighted average toll rates have risen from KZT1.8 per vehicle-kilometer (veh-km) in 2014 to KZT2.3 per veh-km in 2017. Review of the detailed traffic data suggests that the rise has been in large part attributable to increases in the volume of multi-axle trucks. By international standards, however, even KZT2.3 per veh-km (approximately $0.007, or 0.7¢) is extraordinarily low. Although revenue has so far covered maintenance expenses, it needs to be borne in mind that Astana-Schuchinsk is a relatively new road and has a concrete pavement – and would not normally require significant maintenance after only eight years. (Maintenance expenses to date have averaged approximately $10,000/km/year).

15. Toll system and administration expenses have accounted for an average of 30% of toll revenue over the 2014-17 period; the average cost per transaction is approximately $0.50. This may appear high, but is reasonable by international standards4, and would undoubtedly reduce once the scale of toll road operations increases.

16. The experience of Astana-Schuchinsk is that efficient, low cost tolling in Kazakhstan is feasible, but that toll rates need to rise substantially (and be indexed) if they are to make a worthwhile contribution to maintaining the republican road network.

Table 3: Astana–Schuchinsk Traffic, Income and Expenditure Item Unit 2014 2015 2016 2017 Vehicles Number 2,459,676 2,581,177 2,698,600 2,757,786 Toll revenue KZT million 960 1,020 1,118 1,355 Expenses KZT million 1,184 991 1,130 1,363 of which: maintenance KZT million 733 664 761 813 toll system KZT million 174 145 164 181 administration KZT million 118 153 182 318 Source: KazAvtoZhol.

3. Proposed Extension of Toll Road Network

17. KazAvtoZhol has ambitious plans to extend tolling to around 11,700 km by 2020. In the short term, three roads (471 km in all) are being upgraded and toll equipment installed: (i) Astana– (134 km), (ii) Almaty–Kapshagai (42 km) and (iii) Almaty–Khorgos (295 km).

4 See for example KPMG International, 2015: Toll Benchmarking Study: An Evolution of Tolling. Canada/

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The first of these is a section of the M36 road between Astana and . The second two are essentially part of the same road between Almaty and the border with China at Khorgos.

18. All three carry high volumes of heavy goods traffic and are in principle likely to be suitable for tolling. Financial projections have not been seen.

19. Two reports on a wider introduction of tolling have been prepared. The first was prepared in 2017 for the World Bank and considers options for tolling 7,524km.5 Three toll scenarios were investigated and financial projections over ten years prepared. It was concluded that a scenario between “average” and “high” rates would be needed if satisfactory financial performance were to be achieved. (“Average” rates were comparable to those currently in force on Astana–Schuchinsk, while “high” rates would, depending on fleet composition and the availability of alternative, untolled routes, yield 2–3 times that of Astana–Schuchinsk).

20. The second report, for KazAvtoZhol, was by Deloitte.6 The aim was to devise a PPP arrangement that generate sufficient revenue to cover all maintenance requirements. The report reviewed the scope for a PPP initially on 11,095 km of republican roads, with a possibility of extension to 15,000 km. Their proposals were technologically demanding, making use of RFID tags for all vehicles with a gross weight less than 10 tonnes and GNSS technology for larger trucks. Their toll proposals varied by road class. All vehicles would be tolled on class 1 roads, but small passenger vehicles would not be charged on class II or class III roads. They estimate a 12% financial internal rate of return on an investment of $338m in toll equipment.

4. Tolling: concluding remarks

21. With its sparse road network and long distances between centers, Kazakhstan is well suited to applying road user charges in the form of tolls. The experience of the Astana- Schuchinsk toll road suggests that efficient tolling is easily achievable. However, in the absence of a tolling policy, the financial objective of tolling remains unclear —hence the wide range of pricing alternatives suggested by Deloitte and others. If the objective were to secure increased funding for the road sector, then fuel taxes would be a more cost-effective vehicle (retail fuel prices are currently approximately the same as the world price of crude oil, i.e. below cost). If the aim were to tax transit traffic, this would be contrary to the spirit of CAREC and the letter of the Eurasian Economic Union.

5. Strategic Development Plan

22. As part of a collaborative effort with EBRD, McKinsey and Company have prepared a wide-ranging review of KazAvtoZhol’s operations, covering issues as diverse as pavement quality, corporate culture, human resources, procurement, media image as well as increasing its revenue generation both from tolling as well as from non-tolling activities.7

23. The report suggests that tolling 15,704 km (i.e. as proposed by Deloitte) would yield approximately KZT1 trillion over ten years (with toll indexation) or KZT740 billion without

5 IM Technologies Ltd for World Bank, 2017. Electronic Charging System for Fare on Toll Roads of the Republic of Kazakhstan. Contract PO 7182641. (Russian). London. 6 Deloitte. 2018. Business Plan for the Introduction of a National System for Tolling . (Russian). Astana. 7 McKinsey and Company. 2018. Generalized Report on the Project for New Ways of Financing the Motor Road Industry and Strengthening the Potential of NC KazAvtoZhol JSC. Astana.

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indexation. (No calculations support these conclusions, but they are in fact consistent with revenue from Astana–Schuchinsk. The McKinsey report does not examine whether revenue would meet operation and maintenance expenses). A striking recommendation is that the toll roads directorate should be disbanded in 2019 and its functions outsourced.

III. KAZAKHAVTODOR

24. Kazakhavtodor was created as a Republican State Enterprise (RSE) in 1998 by government decree no 1266. Initially designated as the agency responsible for highway management, in 2000 its remit was changed by decree no. 1527 to that of sole contractor for routine maintenance. In 2016 it was reported to have over 3,000 staff, with 14 oblast enterprises, 80 depots and 196 sub-depots. (A review of the depots in oblast in 2017 as part of TA-9134 found four main depots and nine sub-depots. There were 61 buildings, many of which were in need of repair. Of 201 items of plant, 37 were out of service or needed decommissioning).

25. Currently, Kazakhavtodor finds itself on the list of priority state enterprises scheduled for privatization, by virtue of the comprehensive privatization plan for 2016–2020 (approved by decree no 1141 dated 30 December 2015). Its change of legal form from RSE to limited liability partnership (LLP) (decree no 393 of June 2017) is part of this process.

26. Kazakhavtodor was privatized in mid-May 2019 with a grace period of three years in which it will be contracted with routine maintenance and emergency restoration activities.