Report and Recommendation of the President to the Board of Directors Project Number: 52286-001 September 2019 Proposed Loan KazAvtoZhol National Joint Stock Company Central Asia Regional Economic Cooperation Corridors 1 and 6 Connector Road (Aktobe– Kandyagash) Reconstruction Project (Guaranteed by the Republic of Kazakhstan) Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB’s Access to Information Policy. CURRENCY EQUIVALENTS (as of 22 August 2019) Currency unit – tenge (T) T1.00 = 0.002589 $1.00 = T386.18 ABBREVIATIONS ADB – Asian Development Bank CAREC – Central Asia Regional Economic Cooperation EMP – environmental management plan GDP – gross domestic product IEE – initial environmental examination km – kilometer MIID – Ministry of Industry and Infrastructure Development PAM – project administration manual PRC – People’s Republic of China NOTE In this report, “$” refers to United States dollars. Vice-President Shixin Chen, Operations 1 Director General Werner Liepach, Central and West Asia Department (CWRD) Director Dong-Soo Pyo, Transport and Communications Division, CWRD Team leader Jiangbo Ning, Principal Transport Specialist, CWRD Team members Asem Chakenova, Project Officer, CWRD Michael De Los Reyes, Senior Treasury Specialist, Treasury Department Nurlan Djenchuraev, Senior Environment Specialist, CWRD Mirzo Iskandar Gulamov, Country Specialist, CWRD Didier Guynet, Senior Procurement Specialist, Procurement, Portfolio and Financial Management Department Rika Idei, Transport Specialist, CWRD Glenda Jurado, Associate Project Analyst, CWRD Peter Marro, Principal Financial Sector Specialist, CWRD Lyailya T. Nazarbekova, Principal Counsel, Office of the General Counsel Diep Pham, Senior Financial Management Specialist, CWRD Nathan Rive, Climate Change Specialist, CWRD Mary Alice Rosero, Social Development Specialist (Gender and Development), CWRD Aida Satylganova, Social Development Specialist (Resettlement), CWRD Krisanta Carissa Vila, Senior Operations Assistant, CWRD Peer reviewer Masahiro Nishimura, Senior Transport Specialist, East Asia Department In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area. CONTENTS Page PROJECT AT A GLANCE MAP I. THE PROPOSAL 1 II. THE PROJECT 1 A. Rationale 1 B. Project Description 5 C. Value Added by ADB 5 D. Summary Cost Estimates and Financing Plan 6 E. Implementation Arrangements 7 III. DUE DILIGENCE 7 A. Technical 7 B. Economic and Financial Viability 8 C. Sustainability 8 D. Governance 9 E. Poverty, Social, and Gender 9 F. Safeguards 10 G. Summary of Risk Assessment and Risk Management Plan 10 IV. ASSURANCES 11 V. RECOMMENDATION 11 APPENDIXES 1. Design and Monitoring Framework 12 2. List of Linked Documents 14 Project Classification Information Status: Complete PROJECT AT A GLANCE 1. Basic Data Project Number: 52286-001 Project Name Central Asia Regional Economic Cooperation Department CWRD/CWTC Corridors 1 and 6 Connector Road (Aktobe– /Division Kandyagash) Reconstruction Project Country Kazakhstan Executing Agency JSC "NC Borrower JSC "NC "KazAvtoZhol" "KazAvtoZhol" Country Economic https://www.adb.org/Documents/LinkedDocs/?id=5228 Indicators 6-001-CEI Portfolio at a Glance https://www.adb.org/Documents/LinkedDocs/?id=5228 6-001-PortAtaGlance 2. Sector Subsector(s) ADB Financing ($ million) Transport Road transport (non-urban) 167.02 Total 167.02 3. Operational Priorities Climate Change Information Addressing remaining poverty and reducing inequalities Climate Change impact on the Medium Project Accelerating progress in gender equality Tackling climate change, building climate and disaster resilience, and ADB Financing enhancing environmental sustainability Adaptation ($ million) 11.60 Strengthening governance and institutional capacity Fostering regional cooperation and integration Sustainable Development Goals Gender Equity and Mainstreaming SDG 9.1 Effective gender mainstreaming (EGM) SDG 13.a Poverty Targeting General Intervention on Poverty 4. Risk Categorization: Complex . 5. Safeguard Categorization Environment: B Involuntary Resettlement: C Indigenous Peoples: C . 6. Financing Modality and Sources Amount ($ million) ADB 167.02 Sovereign Project (Regular Loan): Ordinary capital resources 167.02 Cofinancing 0.00 None 0.00 Counterpart 62.33 Project Sponsor 62.33 Total 229.35 Currency of ADB Financing: Tenge Source: Asian Development Bank This document must only be generated in eOps. 04092019133309199266 Generated Date: 04-Sep-2019 13:33:18 PM o 55 00'E 75o 00'E KAZAKHSTAN CENTRAL ASIA REGIONAL ECONOMIC COOPERATION CORRIDORS 1 AND 6 CONNECTOR ROAD (AKTOBE–KANDYAGASH) RECONSTRUCTION PROJECT Petropavlovsk NORTH KAZAKHSTAN Kokshetau Siletiteniz Lake CAREC 1b, 6b, 6c Kostanai Makinsk Pavlodar to Europe Oral AKMOLA Ekibastuz Atbasar Aul PAVLODAR Oskemen KOSTANAI o NUR-SULTAN Semey o 50 00'N WEST Aktobe 50 00'N KAZAKHSTAN Arkalyk Temirtau Tengiz Lake Karaghandy Zaisan Lake Kandyagash EAST KAZAKHSTAN ATYRAU Ayakoz Akchatau to Europe Makat AKTOBE CAREC 6a, 6d Atyrau Aktogay Kul'sary Shalkar KARAGHANDY Alakol Lake Zhezkazghan Mointy Balkhash Aral Gulshad Balkhash Lake Dostyk ALMATY Say-Utes Saryshagan Fort Shevchenko Taldykorgan Baikonyr CAREC 6a, 6d TURKESTAN Khorgos Tazhen Saryozek CAREC 2a, 2c Aktau Aral Sea Kyzylorda ZHAMBYL C a s p i a n S e a MANGYSTAU KYZYL ORDA Shu Almaty Turkestan Taraz o Shymkent o 40 00'N 40 00'N Sarygash N National Capital Provincial Capital 0 100 200 300 City/Town Project Road (Aktobe–Kandyagash) Railway Kilometers CAREC Corridor 1 River 18-2997 19 KAZ AV 18-2997 19 KAZ CAREC Corridor 2 Provincial Boundary This map was produced by the cartography unit of the Asian Development Bank. The boundaries, colors, denominations, and any other information shown on this CAREC Corridor 3 International Boundary map do not imply, on the part of the Asian Development Bank, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries, CAREC = Central Asia Regional Economic Cooperation CAREC Corridor 6 colors, denominations, or information. Main Road Boundaries are not necessarily authoritative. 55o 00'E 75o 00'E I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed loan to KazAvtoZhol National Joint Stock Company (KazAvtoZhol), to be guaranteed by the Republic of Kazakhstan, for the Central Asia Regional Economic Cooperation Corridors 1 and 6 Connector Road (Aktobe–Kandyagash) Reconstruction Project.1 2. The proposed project will (i) reconstruct the 89-kilometer (km) highway connecting Aktobe and Kandyagash,2 and (ii) strengthen the institutional capacity of KazAvtoZhol. II. THE PROJECT A. Rationale 3. Country context. Situated in the heart of Eurasia, Kazakhstan is the world’s largest landlocked country and the ninth largest in the world, with a 2.7-million-square-kilometer land area that is equal to that of Western Europe. It is adjacent to the inland Caspian and Aral seas and bordered on the north and west by the Russian Federation; on the east by the People’s Republic of China (PRC); and on the south by the Kyrgyz Republic, Uzbekistan, and Turkmenistan. Strategically, Kazakhstan has huge potential to link the fast-growing markets of the PRC and East Asia to the Russian Federation and Western Europe by road and rail, and through ports on the Caspian Sea. The socioeconomic and geographic features of Kazakhstan pose significant transport challenges. With an estimated population of 18.2 million in 2018, it has one of the lowest population densities (seven per square kilometer) in the world. Kazakhstan has abundant but unevenly distributed natural resources. The uneven and dispersed spatial distribution of the population and natural resources makes the provision of road transport infrastructure critical and costly. Kazakhstan’s economy and development potential are hampered by high transport costs, which constitute a significant component of the logistics value chain. A study in 2016 estimated that the share of logistics cost in Kazakhstan was up to 25% of the cost of the final product, while the world average figure stands at 11%, PRC 14%, the EU 10–13%, the USA and Canada 10%, and Japan 14% of gross domestic product (GDP).3 4. Kazakhstan’s economy has a narrow base; in 2018, mining and manufacturing’s share of GDP was about 26.8%, compared with 4.2% for agriculture. Given the concentration of economic activity and investments in the hydrocarbon and mining industry (see exports in 2017),4 economic diversification is a high government priority. To accelerate economic diversification, the government’s strategic objectives include (i) fostering economic growth by ensuring the sustainability of the transport sector; and (ii) increasing the economy’s competitiveness through improved transport and trade logistics, especially in West and Central Kazakhstan, the country’s least market-accessible regions because of dispersed spatial development and very low population density. 5. Although it is the largest economy in Central Asia, Kazakhstan is relatively small in terms of population and domestic demand, and the country needs to integrate into the regional and 1 KazAvtoZhol is a national joint stock company,
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