ADBI Working Paper Series MEASURING IMPACTS AND FINANCING INFRASTRUCTURE IN KAZAKHSTAN Bibigul Aidarkhanova No. 1159 June 2020 Asian Development Bank Institute Bibigul Aidarkhanova holds a PhD in economic science. The views expressed in this paper are the views of the author and do not necessarily reflect the views or policies of ADBI, ADB, its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms. Working papers are subject to formal revision and correction before they are finalized and considered published. The Working Paper series is a continuation of the formerly named Discussion Paper series; the numbering of the papers continued without interruption or change. ADBI’s working papers reflect initial ideas on a topic and are posted online for discussion. Some working papers may develop into other forms of publication. Suggested citation: Aidarkhanova, B. 2020. Measuring Impacts and Financing Infrastructure in Kazakhstan. ADBI Working Paper 1159. Tokyo: Asian Development Bank Institute. Available: https://www.adb.org/publications/measuring-impacts-financing-infrastructure-kazakhstan Please contact the authors for information about this paper. Email: [email protected] I would like to express my gratitude for the opportunity to participate in this research project, “Measuring Impact and Financing Infrastructure in CAREC Countries,” supported by the ADB in collaboration with research organizations, the ADB Institute, and the CAREC Institute. In particular, I would like to express my special gratitude to the former dean of the ADB Institute, Naoyuki Yoshino, as well as to research fellows Bihong Huang and Dina Azhgaliyeva, for their methodological guidance for this study. During the scientific research in the framework of this project, I gained valuable experience in conducting research work in accordance with international practice. Asian Development Bank Institute Kasumigaseki Building, 8th Floor 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan Tel: +81-3-3593-5500 Fax: +81-3-3593-5571 URL: www.adbi.org E-mail: [email protected] © 2020 Asian Development Bank Institute ADBI Working Paper 1159 B. Aidarkhanova Abstract This paper studies the impacts of the infrastructure project on economic development in Kazakhstan. We first overview the macroeconomic situation and the development of public–private partnerships in Kazakhstan. In the empirical part of this research, we use the “difference-in-difference” (DiD) approach to assess the economic impact of the “Khorgos–Zhetygen” railway construction. We further distinguish between effects for the short term (2009‒2012) and medium term (2013–2017). In the study we consider the impact of the railway construction at two levels: the subregional (rayon) level and the regional (oblast) level. Our study finds that the infrastructure project had a statistically significant and positive impact on economic sectors, such as construction, agriculture, and industry, in the subregions under study compared to the control group. Furthermore, the results of the regional model showed that the construction of the railway has a statistically significant and economically growing impact on the tax revenues and regional GDP of the considered region. We found a more statistically significant impact on the increase in regional GDP of the region under study in the medium term by 18% of the mean regional GDP due to the railway construction. We also found a statistically significant and economically growing impact on tax revenues, increasing by 24% of the average taxes in the short term and by 42% in the medium term. Our study finds that the influence of the railway on macroeconomic indicators of the region under study has increased since its construction and in recent years has achieved a greater effect. In general, our study shows that the spillover effects of the project are significantly important for the local economy and can stimulate economic activity at the subregional and regional levels. Keywords: public–private partnership, PPP, investment assessment, infrastructure project, econometric model, difference-in-difference method, DiD model, macroeconomic analysis JEL Classification: L33, E6, H54, O22, R42 ADBI Working Paper 1159 B. Aidarkhanova Contents 1. INTRODUCTION ............................................................................................................ 1 2. ECONOMIC BACKGROUND ........................................................................................ 2 2.1 Economic Growth of GDP.................................................................................. 2 2.2 Foreign Trade..................................................................................................... 3 2.3 Foreign Direct Investment.................................................................................. 5 2.4 Investment in Fixed Capital ............................................................................... 7 3. DEVELOPMENT OF PPPS IN KAZAKHSTAN ............................................................. 8 3.1 Legislative Framework ....................................................................................... 8 3.2 Institutional Forms .............................................................................................. 9 3.3 Government Agencies ....................................................................................... 9 3.4 Implementation Stages and Current State ...................................................... 10 3.5 Challenges and Opportunities ......................................................................... 11 4. METHODOLOGY, DATA, AND RESULTS ................................................................. 12 4.1 “Khorgos–Zhetygen” Railway .......................................................................... 12 4.2 Data .................................................................................................................. 13 4.3 Difference-in-Difference (DID) Approach ........................................................ 17 4.4 Empirical Results ............................................................................................. 20 5. DISCUSSION AND CONCLUSIONS .......................................................................... 26 6. POLICY IMPLICATIONS ............................................................................................. 28 REFERENCES ........................................................................................................................ 30 ADBI Working Paper 1159 B. Aidarkhanova 1. INTRODUCTION Current challenges in the global economy require new development models and mechanisms of interaction between the state and private investors. At present, new forms of cooperation between the state and the private sector, namely public-private partnerships (hereinafter PPPs), are becoming increasingly important. A public–private partnership (PPP) is positioned as one of the most favorable prospects for solving problems associated with the interaction between the state and the private sector. In particular, public-private partnership projects in various forms are actively gaining popularity in many countries as a tool for creating new infrastructure and providing public services. Indeed, the importance of PPPs is underlined in the newly developed institutional framework of CAREC 2030, which reinforces the strong participation of countries and development partners and enhances engagement with the private sector and civil society. Kazakhstan has also gained considerable experience in implementing PPP projects in various sectors, especially in the fields of infrastructure, transport, and services. In this study we will conduct a case study that will measure the impact of the PPP project in Kazakhstan in the case of railway construction on the country`s economic development by subregion and region. In conducting this study, we reviewed the literature of leading international and Kazakhstani scientists on the development of PPPs and methodologies for assessing the impact of the implementation of PPP projects on economic performances. The issues regarding public-private partnerships, the theory of finance in the investment process, financial analysis, and planning are studied in the works of international scientists such as (Delmon 2010; Cruz and Marques 2011; Encinas 2013; Kumar et al. 2018). The theoretical basis of issues relating to effective state-private partnership in Kazakhstan was formed by the works of Kazakhstani scientists (Mataev 2011; Toksanova et al. 2016). Summarizing the views of modern foreign and Kazakhstani scientists, we revealed that essential differences in approaches to the evaluation of public-private partnership projects stem from the basic principles that ensure the appropriateness, validity, and possibility of organizing a PPP. After analyzing different scientific literature regarding public-private relations, we concluded that they are based on different approaches related to the measuring impacts and financing infrastructure. As the scientist Dr. Yoshino said, in order to evaluate and outline the future impact of the proposed infrastructure project, the government needs to be prepared and have the necessary tools to assess the impact accurately (Yoshino et al. 2015). Additionally, the legal framework in Kazakhstan