Document of the World Bank FOR OFFICIAL USE ONLY Report No. 67876-KZ INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL FINANCE CORPORATION COUNTRY PARTNERSHIP STRATEGY FOR THE REPUBLIC OF KAZAKHSTAN FOR THE PERIOD FY12-FY17 March 30, 2012 Central Asia Country Management Unit Europe and Central Asia Region International Finance Corporation Europe and Central Asia Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank‘s Policy on Access to Information. CURRENCY EQUIVALENTS (as of March 5, 2012) US$1 = 147.93 KZT GOVERNMENT FISCAL YEAR (January 1 to December 31) WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS AAA Advisory and Analytical Services IPSAS International Public Sector Accounting ADB Asian Development Bank Standards AML/CFTAnti-Money Laundering and Combating JERP Joint Economic Research Program Financing of Terrorism JPMT Joint Portfolio Monitoring Team BEEPS Business Environment and Enterprise KEGOC Kazakhstan Electricity Grid Operating Performance Survey Company BTA Bank Turan Alem KZT Kazakhstan Tenge CAREC Central Asia Regional Economic MDGs Millennium Development Goals Cooperation MICs Middle Income Countries CPA Competition Protection Agency MIGA Multilateral Investment Guarantee Agency CPI Consumer Price Index MoU Memorandum of Understanding CPIA Country Policy and Institutional Assessment MSME Micro and Small/medium Enterprises CPPR Country Portfolio Performance Review NBK National Bank of Kazakhstan CPS Country Partnership Strategy NF National Fund of the Republic of CPS CR Country Partnership Strategy Completion Kazakhstan Report NPL Non-performing loans CSO Civil society organizations OECD Organization for Economic Co-operation DAF-2 Second Distressed Asset Fund and Development DeMPA Debt Management Performance Assessment OSCE Organization for Security and Co-operation DPL Development Policy Loan in Europe EBRD European Bank for Reconstruction and PAYG Pay-As-You-Go pension system Development PCBs Polychlorbiphenyls EC European Commission PEFA Public Expenditure and Financial ECA Europe and Central Asia Responsibility Framework ECD Early childhood development PFM Public Finance Management EE Energy Efficiency PISA Program for International Student EITI Extractive Industries Transparency Initiative Assessment EU European Union POPs Persistent Organic Pollutants FDI Foreign direct investment PPP Public Private Partnership FSA Financial Supervision Agency RK Republic of Kazakhstan FY Financial Year ROSC Report on Observance of Standards and GDP Gross Domestic Product Codes GGFR Global Gas Flaring Reduction Partnership SAFE Strengthening Accountability and the GIZ German Development Agency Fiduciary Environment GOK Government of Kazakhstan SME Small and Medium Enterprise IBRD International Bank for Reconstruction and SOE State Owned Enterprises Development SPV special purpose vehicles IDA International Development Agency SYNAS II Syr Darya Control and Northern Aral Sea IDF Institutional Development Fund Project – Phase II IDIP II Irrigation and Drainage Improvement TSA Targeted Social Assistance Project – Phase II UN United Nations IDR Issuer Default Rating UNDP United Nations Development Program IEG Independent Evaluation Group US United States of America IFC International Finance Corporation USAID United States Agency for International IFI International Financial Institution Development IFRS International Financial Reporting Standards WB World Bank ILO International Labor Organization WBG World Bank Group IMF International Monetary Fund WHO World Health organization WTO World Trade Organization IBRD IFC Vice President: Philippe Le Houerou Dimitris Tsitsiragos Country Director: Saroj Kumar Jha Tomasz Telma Task Team Leader: Sebnem Akkaya Oksana Nagayets ACKNOWLEDGEMENTS The World Bank Group greatly appreciates its sustained close collaboration with the Government of Kazakhstan in shaping development of this World Bank Group Country Partnership Strategy. The document benefited from thoughtful discussions with government representatives and was enriched by feedback from representatives of development partners, members of civil society organizations, academics and representatives of the private sector—all of whom should be warmly thanked. This Country Partnership Strategy (CPS) was prepared by a team lead by Sebnem Akkaya, Country Manager for the World Bank in Kazakhstan and TTL of this CPS, with overall direction from the former Country Director Motoo Konishi and ECA senior management. The core team included Sebnem Akkaya, Saumya Mitra, Ilyas Sarsenov, Oksana Nagayets and Irina Galimova. The preparation of this CPS involved a large number of contributors from the extended Kazakhstan country team. Although it is impossible to name them all, they are all to be thanked and congratulated for their excellent collaboration and teamwork. The following members made especially important contributions: Andrei Busuioc, Aliya Mukay, Ahmed Shawky, Bakhtiyar Karimaov, Baktybek Zhumadil, Bakyt Arystanov, Dingyong Hou, Ekaterine Vashakmadze, Elena Glinskaya, Emanuel Salinas, Fabrice Houdart, Frank Van Woerden, Ignacio Jauregui, Imtiaz Hizkil, Ivor Beazley, Isak Froumin, Istvan Dobozi, Jacques Bure, John Otieno Ogallo, Katelijn Van den Berg, Klaudijo Stroligo, Lars Jessen, Luis Sanchez, Malcolm Childress, Mark Thomas, Michael Carroll, Munawer Khwaja, Mustafa Dinc, Natasha Kapil, Nedim Jaganjac, Nurbek Kurmanaliev, Peter Goodman, Rakhymzhan Assangaziev, Salamat Kusainova, Sandra Broka, Sarosh Sattar, Serdar Jepbarov, Shynar Jetissova, Steen Byskov, Sunil Kumar Khosla, Talimjan Urazov, Tatiana Sedova, Tatyana Li, William Dillinger, Yearly Beksultan and Yerlan Akishev. REPUBLIC OF KAZAKHSTAN COUNTRY PARTNERSHIP STRATEGY FOR THE PERIOD FY12-17 TABLE OF CONTENTS EXECUTIVE SUMMARY ......................................................................................................... i I. INTRODUCTION ............................................................................................................... 1 II. COUNTRY CONTEXT ................................................................................................... 1 A. Political Context ........................................................................................................... 1 B. Recent Economic Developments .................................................................................. 2 C. Poverty, Social and Gender Indicators ......................................................................... 5 D. Economic Prospects ...................................................................................................... 8 III. DEVELOPMENT CHALLENGES AND GOVERNMENT AGENDA......................... 9 A. Development Challenges .............................................................................................. 9 B. The Government‘s Medium Term Strategy................................................................ 13 IV. WORLD BANK GROUP PARTNERSHIP STRATEGY............................................. 15 A. Lessons Learned from Previous CPS and Stakeholder Feedback .............................. 15 B. Proposed World Bank Group Partnership Strategy .................................................... 16 V. IMPLEMENTING THE STRATEGY ........................................................................... 26 A. Managing Program Implementation ........................................................................... 26 B. Measuring Performance .............................................................................................. 28 C. Deepening Engagement with Civil Society and Development Partners .................... 28 VI. RISKS............................................................................................................................. 29 VII. ANNEXES ..................................................................................................................... 31 Annex 1. FY05-11 Country Partnership Completion Report ............................................... 31 Annex 2. Country Partnership Strategy, FY12-17; Results Framework Ongoing and Confirmed Program ......................................................................................... 51 Annex 3. Anti-Crisis Response ............................................................................................. 56 Annex 4. Government‘s Road Map Program (2009-10) and Road Map for Business 2020 59 Annex 5. Country Partnership Strategy – CSO Consultations ............................................ 60 Annex A2: Country at a Glance ............................................................................................ 62 Annex B2: Selected Indicators of Bank Portfolio Performance and Management .............. 65 Annex B3: IFC Investment Operations Program .................................................................. 66 Annex B5: Key Social Indicators ......................................................................................... 67 Annex B6: Key Economic Indicators ................................................................................... 68 Annex B7: Key Exposure Indicators .................................................................................... 69 Annex B8: Operations Portfolio (IBRD/IDA and Grants) ................................................... 70 Annex B8(b): IFC Committed and Outstanding Investment Portfolio ................................. 71 EXECUTIVE SUMMARY 1. This Country Partnership Strategy builds on the successful experience of the prior World Bank Group Strategy in Kazakhstan. Over the past decade, Kazakhstan built a record of strong macroeconomic management and a rules-driven fiscal framework, strengthened public management and the business climate, and shifted resources towards social services and critical infrastructure. The Bank Group supported this process primarily by transferring cutting-edge knowledge. A flexible Country Partnership Strategy (CPS) approach allowed adjustments to the program in response to changing government priorities and country circumstances, thereby, ensuring strong government ownership of the program. Through Joint Economic Research program (JERP), the Bank assisted with answers to the ―what and why,‖ providing policy analysis, strategic planning expertise, and good practice options. Questions about ―how‖ were addressed through selective investment and budget support loans in high- impact areas, and by brokering access to a global network of experts and building implementation capacity. Both the Bank and IFC provided timely and effective mitigation support during the financial crisis. 2. The crisis shifted the emphasis in the government’s development strategy towards growth from non-oil sources. Balanced growth would reduce vulnerability to volatility in commodity prices. The strategy is based on diversification, innovation, investment in human capital, and international trade integration for job creation. Increasing emphasis is being put on strengthening governance, the business enabling environment, and private enterprise. An improvement in the quality of public services and measures to address skill shortages of the workforce, in particular to generate employment in the local economy through the promotion of small and medium enterprises, were key policy initiatives. 3. Successful implementation of Kazakhstan’s development agenda requires addressing key challenges. In the near to medium term economic prospects depend on a continuation of stability- oriented macroeconomic policies. Continued adherence to the rules-driven framework for resource earnings and strengthened monitoring of borrowing by state owned enterprises would assist macro- stability. Improved access to finance is essential for non-oil sector growth. Although bank liquidity is ample, non-performing loans (NPLs) remain high and constrain banks‘ ability to provide fresh credit to the non-oil sector, calling for timely implementation of the new insolvency regime and the government‘s 2011 strategy to complete NPL work-out. Enhancing medium-to long term prospects require raising non- oil productivity in a competitive environment. Central to sustained improvements in productivity are the strengthening of the business climate, quality of education and skills creation; greater room for private sector expansion in an environment of neutral incentives; progress on governance; and building infrastructure connectivity. 4. The objective of this CPS is to design a high impact program to help the government implement development priorities. The CPS concentrates on the key priorities of competitiveness and jobs; strengthened governance in public administration and service delivery; and safeguarding the environment. In contrast to earlier CPSs, the proposed CPS is programmatic by inter-linking knowledge interventions through sequenced products in a multi-year framework to maximize impact. The CPS targets key areas of lagging performance as revealed by country development strategies or the Bank‘s assessment tools, including international comparative analysis. 5. The main IBRD instrument will be knowledge activities through the JERP, complemented by selective investment projects in strategic high-impact areas. The CPS will continue the well-tested tradition of a flexible architecture that responds to the client‘s development agenda, retaining focus on interventions where the Bank has a comparative advantage, drawing on its pool of knowledge from the frontiers of development research and experience. Knowledge transfer and capacity enhancement will be the dominant drivers in the choice of lending projects. The CPS mainstreams governance in knowledge i and lending activities as a cross-cutting theme together with specific interventions, in such areas as public finance management, civil service reform, deregulation, custom and tax administration and social assistance targeting. It also recognizes the role Kazakhstan can play as a provider of experience, expertise, and assistance in the Central Asia region and in a broader regional context. The results focus of the CPS will be enhanced under the programmatic JERP structure, and through measures to facilitate timely implementation as well as joint monitoring and evaluation of the portfolio result indicators. Greater emphasis will be placed on simplicity of project design, given capacity constraints, and ensuring project readiness at entry to minimize delays in implementation. 6. The CPS encompasses the Bank Group in a thoroughly integrated manner. IFC will promote the development of private sector through investment and advisory operations in support of economic diversification. IFC‘s strategy in Kazakhstan is fully consistent with its regional approach focusing on access to infrastructure, strengthening the financial sector, and supporting diversification and competitiveness. The Corporation will maintain its current focus on strengthening the financial sector in the short term, with medium term efforts targeting infrastructure. It will also promote SME development particularly in agribusiness, manufacturing, and services. The establishment of best practices in international banking, corporate governance and the regulatory environment will be targeted through IFC advisory work and investment projects with strong demonstration effect. IFC also aims at supporting the energy efficiency agenda as a cross-cutting theme in its activities. MIGA will continue to support financial and manufacturing sectors. 7. Close collaboration with the civil society and development partners will continue. The Bank‘s current program benefits from constructive relations with civil society organizations (CSOs), a valuable partner in identification of development needs as well as in design and M&E of project implementation. The Bank Group will continue its close cooperation with other active development partners—the ADB, EBRD, EC, GIZ, the UN agencies and USAID. 8. The proposed strategy faces implementation risks but also offers rich rewards. The CPS is predicated on stability in the relationship with the Bank Group and government results-oriented reforms. It aims to foster a faster pace in governance reforms and a re-thinking of the role of the state to permit greater room for private sector-driven diversification. The government‘s emphasis on diversification provides opportunities for collaboration and dialogue. Success will depend on the quality of the knowledge products and the skill with which the dialogue is conducted, but also on the willingness of the Kazakh partners to continue drawing from international experience. The proposed deepening of the work on governance in all three proposed areas of engagement will forearm the Bank Group to deal with emerging risks to the program and the portfolio. Moreover, greater attention to address implementation constraints and a sharper results focus will help improve the impact of knowledge and lending activities. ii I. INTRODUCTION 1. Two decades ago, emerging from the break-up of the Soviet Union, the Kazakh economy was half of its size today. Isolated from the world economy it faced the immense challenge of economic transformation. Over the past decade, the country has made impressive policy strides, absorbed large resource-based earnings responsibly, progressed towards developing a rules-driven fiscal framework, strengthened public management and the business climate, and allocated resources for improved social services and critical infrastructure to sustain growth. GDP per capita rose, in terms of constant 2011 dollars, from US$5,982 in 2000 to US$11,245 in 2011 and poverty incidence fell from 46.7 percent to 6.5 percent over the same period. 2. Kazakhstan is now poised to attain a high-income status over the CPS period. The development of balanced economy with reduced vulnerability will, however, require the role of the state to be redefined to permit a vigorous private sector to develop, governance to be strengthened to allow greater accountability to civil society, tough second generation structural reforms to be embedded, and public investments to be made in high pay-off areas: human capital and infrastructure. This Country Partnership Strategy (CPS) describes how the World Bank Group will contribute to this endeavor. 3. The previous CPS provided a flexible architecture permitting the Bank Group to respond swiftly to emerging demands. The partnership, anchored on knowledge products, contained a large program of co-financed advisory work, with selective lending aimed at introducing new ideas and building capacity. A CPS Progress Report in 2008 recommended maintaining the approach. Over 2010- 11, the authorities developed a set of post-crisis medium term development strategies. The proposed CPS realigns the Bank‘s assistance to government priorities by providing knowledge products and selected lending. II. COUNTRY CONTEXT A. Political Context 4. Kazakhstan is a presidential republic. President Nazarbayev has served since independence and most recently was re-elected in 2011 with a large majority; his term runs to 2016. Parliamentary elections in January 2012 resulted in a multi-party chamber, with some opposition representation. There are signs of growing activism and debate in parliament and emergence of a civil society demanding accountability. 5. The country development strategy focuses on modernization and a shift towards growth from non-oil sources. It is based on diversification, innovation, investment in human capital, and international trade integration for job creation. Increasing emphasis is also being put on strengthening governance (modernizing the judiciary and civil service), the business enabling environment and private sector enterprise. Following the Parliamentary elections of January 2012, the President outlined the key government priorities within this overall strategy. An improvement in the quality of public services, and in skill levels of the workforce are key goals. Greater efforts on raising standards in education, including vocational education and pension reforms would add to skills and the quality of life. Finally renewed emphasis would be placed on regional development and diversification in one-industry towns. 6. Kazakhstan carries increasing global weight. It is the ninth largest country in the world with a land area equal to that of Western Europe, but with one of the lowest population densities in the world. Strategically, it links the huge and fast growing markets of China and South Asia with Russia and Western Europe by road, rail and ports on an internal sea, the Caspian. Oil reserves (proven) are the ninth largest in the world; hydrocarbon output is the equivalent of nearly a quarter of GDP and accounts for 1 over two-thirds of exports. Kazakhstan is increasingly conscious of its regional potential in energy and trade transit and its strategic responsibilities. Large cross-regional energy and transport investments are envisaged. Kazakhstan has formed a customs union with Belarus and Russia in 2010. Global integration is pursued through membership of the WTO. Kazakhstan became an IDA donor in 2010. B. Recent Economic Developments 7. Kazakhstan grew rapidly during 2000-07. GDP growth averaged 10 percent and average real incomes more than doubled as the economy reaped efficiency gains from increasing market orientation, and hydrocarbon output expanded amidst rising price. The country attracted large foreign direct investment, privatized small and medium enterprises and housing, retained a liberal trade regime, and adopted modern public resource management institutions. Expenditure restraint held the non-oil fiscal deficit at 3 percent of GDP with large saving transfers into a stabilization fund (Figure 1). These policies helped sterilize excessive inflow of oil revenues and prevent excessive real appreciation of the tenge. Figure 1: Oil Revenue and Budget Deficit (% of GDP) 15 12 Oil Revenue (total) 9 6 Oil Revenue 3 (spent by 0 budget) -3 Tax reform Non-oil Deficit -6 (budget and -9 Crisis off-budget) -12 Non-oil Deficit -15 (average benchmark) 2000 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011 2012 2014 2015 2006 2013 Source: Ministry of Finance; World Bank staff estimates. 8. Economic diversification proved elusive in the face of booming oil prices. The tradables sector—agriculture and manufacturing—was squeezed, while non-tradable construction expanded markedly (Figure 2). Growth remained concentrated in natural resource sectors, construction, and real estate. By 2007 construction and real estate made up more than a quarter of value added at factor cost in the economy. At the same time, productivity levels in agriculture and in manufacturing industry stagnated and their shares in economic activity declined. Economic concentration led to the maintenance of a high state share in economic activity—the state investment holding company Samruk-Kazyna annually invests 7-10 percent of GDP (versus government fixed capital investment of 5-6 percent of GDP, net of transfers to state-owned enterprises). 9. Tightening liquidity in international financial markets in 2007 hit Kazakhstan’s financial sector. Domestic banks had relied extensively on foreign funding to finance rapid credit growth in particular to real estate projects. The rapid growth in the banking system in the years prior to the crisis was built high exposure to international bond and syndicated loans markets. Access to international wholesale markets ceased in mid-2007 triggering a liquidity crisis and speculative runs, which the Central Bank successfully managed helped by large reserves. The prices of residential and commercial property fell sharply, leading to large losses for the banks. The second shock arose from the global financial crisis in 2008 and the associated sharp decline in commodity prices in 2009, which led to an economic slowdown and hence a deterioration in the quality of banks‘ assets. 2 Figure 2: Evolution of Economic Structure (% of value added) 70 60 Oil & Gas and 50 Mining 40 Construction 30 and Real Estate 20 Agriculture 10 Manufacturing 0 and Utilities 2000 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014 2001 2008 2015 Source: Statistical Agency of Kazakhstan; World Bank staff estimates. 10. Kazakhstan weathered the global financial crisis well through a dexterous response combining fiscal relaxation with bank stabilization measures. The authorities supported output with stimulus programs directed at agriculture, small business, infrastructure and construction; an exceptional drawdown from the ample holdings in the oil fund permitted the relaxation to be financed by off-budget operations. The three major problem banks were recapitalized and, through negotiation, their external debt was reduced by more than US$10 billion. Total official fiscal and banking support amounted to US$17 billion. Meanwhile, the central bank extended liquidity support, and deposit insurance was greatly bolstered resulting in renewed confidence in banks (see Annex 3). 11. The decisive approach to macroeconomic and financial sector management contributed to a quick recovery in output. Kazakhstan‘s economy grew by 7.3 percent in 2010 and by 7.5 percent in 2011, compared with 1.2 percent growth in 2009 (Table 1). This performance reflects a demand-driven recovery in capacity utilization from the low levels of the crisis in addition to an expansion of the oil industry in response to price increases. The economic expectation has become broad-based with a revival in agriculture and construction. 12. Kazakhstan’s external position has improved as commodity prices have strengthened. The terms of trade gains have led to a strengthened external position; the current account surplus is estimated at 7.3 percent of GDP in 2011 and gross international monetary and fiscal reserves stood at US$73 billion (40 percent of GDP) at end- 2011. The authorities were building up international reserves (predominantly in the National Fund) to sterilize excessive inflow of oil revenues and, thus, to limit excessive upward pressure on the tenge. The central bank, nevertheless, allowed a 5.7 percent real appreciation of the tenge against the US dollar in 2011, while the real effective exchange rate (against a basket of 24 currencies) was kept almost flat. 13. Inflationary pressures resulting from commodity price shocks and an accommodating fiscal stance have been contained by the end of 2011. By December 2011, CPI inflation decelerated to 7.4 percent year-on-year (from 9 percent registered in the middle of the year), below the 8 percent target. In January 2012, CPI inflation decelerated further to 5.9 percent—the lowest over the last two years. The monetary regime of a crawling exchange rate peg to the dollar and inflation targets will exert counter- inflation pressures. Temporary direct administration of prices introduced in 2011 to smooth the food price hikes remain in place; if not removed, could lead to excessive food imports, crowding out domestic agriculture supply. 3 Table 1. Kazakhstan – Key Economic Indicators and Projections Actual Estim. Projected 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 National Accounts and Prices (Percent change, year-on-year) Real GDP 9.6 9.7 10.7 8.9 3.3 1.2 7.3 7.5 6.0 5.8 5.8 5.9 Oil sector contribution to growth 1.7 1.4 1.9 1.3 2.0 1.8 2.9 1.2 1.3 1.3 1.3 1.2 Non-oil sector growth contribution 7.9 8.3 8.8 7.6 1.3 -0.6 4.4 5.9 4.8 4.5 4.5 4.7 CPI, eop 6.9 7.4 8.4 18.8 9.5 6.2 7.8 7.4 6.0 6.0 6.4 6.4 External Accounts (In billions of US dollars, unless otherwise indicated) Current account (percent of GDP) 0.8 -1.8 -2.5 -7.9 4.7 -3.5 2.0 7.3 3.8 3.2 3.0 2.8 Net trade in goods and services 6.8 10.3 14.6 15.1 33.5 15.0 28.9 46.8 38.1 39.1 41.3 43.2 Exports of goods and services 20.6 28.3 38.8 48.4 72.0 43.9 60.8 88.9 76.4 79.8 83.4 86.9 Imports of goods and services 13.8 18.0 24.1 33.3 38.5 29.0 32.0 42.1 38.4 40.6 42.2 43.6 Net foreign direct investments 5.4 2.1 6.7 8.0 13.1 10.1 2.9 8.8 11.6 11.4 10.0 8.6 Net banks' borrowing 2.4 2.5 15.5 12.2 -2.7 -10.0 -12.5 -0.4 0.0 0.3 0.6 1.0 (In percent of GDP) Gross official FX reserves (stock) 33.4 26.5 41.0 36.8 35.5 41.2 40.0 39.2 44.2 47.5 49.4 50.2 Gross external debt (stock) 75.8 76.0 91.4 92.4 80.9 97.8 79.8 67.1 65.8 64.0 61.2 58.0 Public sector 7.3 3.8 3.9 2.0 1.6 3.2 3.5 3.4 3.8 3.8 3.6 3.3 Private sector 68.5 72.2 87.5 90.4 79.3 94.6 76.4 63.6 61.9 60.1 57.6 54.7 Fiscal Accounts (In percent of GDP) Non-oil revenue 17.7 18.3 17.8 20.5 16.8 14.1 14.1 13.5 13.5 13.5 13.5 13.5 Expenditures and net lending 22.1 22.3 20.3 24.2 27.2 23.5 22.1 21.8 21.7 20.5 20.4 20.0 Non-oil deficit -4.3 -4.0 -2.5 -3.7 -10.5 -9.4 -8.0 -8.3 -8.2 -7.0 -7.0 -6.6 Oil revenue 6.5 9.7 10.5 8.7 12.9 8.6 10.9 14.5 12.4 12.2 11.8 11.2 Budget oil revenue 4.0 4.6 3.3 2.0 8.4 6.5 5.6 6.2 5.6 5.5 5.5 5.1 National Fund revenue 2.5 5.0 7.1 6.7 4.6 2.1 5.3 8.3 6.8 6.7 6.3 6.1 Consolidated budget balance 2.2 5.6 7.9 5.0 2.5 -0.8 2.9 6.3 4.2 5.2 4.8 4.6 External debt and guarantees (stock) 6.9 3.7 2.5 1.9 1.6 2.4 2.8 2.9 3.3 3.4 3.2 2.9 Domestic debt (stock) 3.9 3.9 3.7 4.0 5.1 7.6 7.7 7.6 8.7 9.1 9.6 10.2 Memorandum items: Nominal GDP (billions of US$) 43.2 57.1 81.0 104.8 133.4 115.3 148.1 186.2 205.4 226.8 251.7 279.5 Official FX reserves (US$ billion) 14.4 15.1 33.2 38.6 47.4 47.5 59.3 73.0 90.8 107.6 124.2 140.3 Oil production (millions of tons) 59.4 61.5 65.0 67.1 70.7 76.4 79.5 80.1 82.1 86.7 91.9 97.1 World oil price (US$ per barrel) 37.7 53.4 64.3 71.1 97.0 61.8 79.0 104.0 98.2 97.1 96.0 94.7 Source: Official statistics and World Bank staff estimates. 14. The fiscal position has improved significantly since the crisis. The non-oil deficit improved from over 10 percent of GDP1 in 2008-09 to about 8 percent of GDP in 2011. The state budget deficit (determining the net government borrowing) improved notably2 and is estimated at 2.1 percent of GDP in 2011. Fiscal policy is intended to be supportive of the anti-inflationary stance with the goal of bringing the non-oil deficit down to pre-crisis levels over the coming period. The government has already increased excise rates and reintroduced customs duty on oil exports. This is complemented with cuts in 1 Increase in the deficit reflects partly the 2008 tax reform which aimed at lowering the tax burden on the non-resource sectors of the economy while increasing the tax burden on the extractive industries: the statutory rate of corporate income tax was cut from 30 percent to 20 percent for all sectors; in parallel, additional tax levies (i.e. severance tax and customs duty on oil exports) were introduced for the extractive industries, resulting in an estimated 30 percent increase in the tax burden on extractive industries compared to the levels before the tax reform. 2 The ―state budget deficit‖ is defined as that part of the total non-oil deficit not covered by oil revenue and is therefore equal to net government borrowing. 4 non-priority spending and the removal of crisis spending (such as reduction in subsidies to SOEs and a 15-percent downsizing of the public administration), with budget outlays down to pre-crisis levels at around 22 percent of GDP (from 27 percent of GDP during 2008-09). (See Annex 4) 15. Conditions in the banking sector constrain credit flows to productive non-oil activities.3 Although bank liquidity is ample, non-performing loans (NPLs) remain at about 33 percent of all loans. Unresolved NPLs constrain investments and operations of affected firms, the majority of which are in the non-oil sector. The government is improving the insolvency regime and developed a strategy in 2011 to reduce the burden of the NPL on the banking system.4 However, full implementation is pending. Meanwhile, solvency problems constrain banks‘ ability to provide fresh credit 5 and pose risks to public finances.6 The BTA bank (formerly the county‘s biggest bank) defaulted again in January, 2012.7 The bank had performed poorly in part due to its inability to realize income on the two thirds of its loan portfolio classified as non-performing and to still-high cost of funding. Tax code amendments to facilitate debt write offs for loans to qualified borrowers are helpful and efforts are underway to facilitate debt workouts. In addition, the authorities strengthened the regulatory framework through measures to discourage foreign currency lending and to increase the minimum capital requirement. C. Poverty, Social and Gender Indicators 16. The past decade has seen a significant reduction of the poverty headcount in Kazakhstan. Sustained growth has translated into the improvement of living standards and poverty reduction. Poverty officially declined from 46.7 percent in 2001 to an estimated 6.5 percent in 2011, although the poverty line (currently set at $2.25) is low for an upper-middle income country. The poverty rate is twice as high in rural as compared to urban areas. Female-headed households that represent over 30 percent of all households in the country have poverty rates similar to that of the male-headed households. Over a quarter of the population living in households receives some form of social assistance, reducing disparities. The level and coverage of social assistance programs require continuing reforms to protect the most vulnerable which is among government‘s priorities. The downward trend in the unemployment rate remained unabated during the crisis, with the unemployment rate at 5.5 percent today being less than half of its level in early 2000. Unemployment rates are higher among the youth, women, those with less education and those living in the south of the country. 17. Emphasis on improving social services over the past decade gained a new impetus during the crisis, but outcomes lag Kazakhstan’s level of income. The share of the budgetary expenses allocated 3 NPLs amount to 32.6 percent of total loans (11 percent of GDP) and the ratio of credits in areas more than 90 days is 23.8 percent (8 percent of GDP). The official NPLs appear well provisioned with an amount equal to 31.9 percent of the credit portfolio set aside to cover the losses. NPLs are concentrated with 25 large borrowers accounting for about one third; the construction sector accounts for one-third of the NPLs. 4 The Council for Financial Stability has approved a strategy to improve the quality of banks assets, aiming to remove NPLs with an approximate face value of $6 billion (about 37 percent of the total) from banks‘ main balance sheets in order to facilitate a resumption of lending, while limiting costs and mitigating moral hazard. If successful, the plan would be expanded, drawing the participation of both domestic and foreign investors. The strategy proposes the creation of a national asset management company (the Second Distressed Asset Fund or DAF-2) and private (bank specific) asset management companies that would operate as special purpose vehicles (SPV) through which banks would separate the non-performing assets. 5 The financial sector is closely intertwined with the domestically oriented non-resource Kazakh economy, whereas the resource sector is funded from abroad and traded internationally. Oil accounts for about 70 percent of exports, 70 percent of FDI, and 25 percent of GDP, but for less than 3 percent of bank lending. 6 Fiscal risks stem in particular from the intervened banks in which Samruk-Kazyna holds large stakes through both equity and non-equity instruments. Insured deposits and bank deposits from state enterprises are important sources of finance for the banks, which pose further fiscal risks. In addition, state guaranteed minimum returns on the third pillar pensions pose risks given the poor performance of the pension funds during the crisis. 7 BTA Bank was nationalized in February 2009, and it underwent a court supervised restructuring that was completed in September 2010 using a legal framework introduced in the summer of 2009. The legal framework and the restructuring were supported by the World Bank‘s Development Policy Loan in 2010. 5 to social sectors reached all time highs at about 60 percent in 2010-11. Despite progress in the UNDP‘s human development index (improved from 80th in 2005 to 68th in 2011), life expectancy, at 68.6 years, is at the level of the EU-15 in 1950 and lower than other countries of similar income. This is driven by slow progress in male life expectancy—female advantage in life expectancy in Kazakhstan is 10 years, while the world average is four years and ECA countries is seven years. Maternal and child health continue to face challenges: infant mortality and under-five mortality rates are 26 and 29 per 1,000 live births, respectively. Significant efforts will be required to achieve the related MDGs by 2015. Kazakhstan has achieved near universal primary education (99 percent) and adult literacy (99.6 percent), extended schooling to a 12-year compulsory cycle, and introduced a Unified National Test for those entering tertiary education. Today there are various choices available to students who pass this test and a voucher system that helps the best students pursue their course of study. Yet challenges remain to make access more equitable and improve quality. The government also recognizes the need to confront skills shortages by modernizing technical and vocational training. 18. High expectations for returns under the funded pension system did not materialize during the decade following the initial reform. The pension system was transformed from a pay-as-you-go (PAYG) scheme to a contribution-based, fully-funded accounts scheme in 1998. Real returns under the system were low given risk aversion of the funds. Current pensioners continue to rely almost exclusively on state pensions while lump sum distributions from individual accounts remain small. In response to the decreasing purchasing power of pensions, a basic pension was introduced in 2005 and pensions continue to be augmented each year at a rate exceeding inflation. The government is now considering further reform options with assistance from the Bank. 19. Gender equality policies are paying off. Kazakhstan ranks 41st in the world on gender equality8 and does particularly well on economic participation, education, and health (in the top 25 place for all these indicators). In female entrepreneurship, Kazakhstan stands out in ECA for high rates of female participation in ownership and in top management: around 25 percent of firms in Kazakhstan are managed by women, the 8th highest percentage in the region.9 (See Box 1). Nevertheless, there are gender gaps which remain to be addressed; particularly as part of social policy objectives (see para 36). 8 World Economic Forum, Global Gender Gap report 2010: http://www.weforum.org/reports/global-gender-gap-report-2010. This report measures gender inequality in four areas: economic participation and opportunity (salaries, participation levels and access to high-skilled employment); educational attainment (access to basic and higher education); health and survival (life expectancy and sex ratio); and political empowerment (representation in decision-making structures). 9 Ibid. 6 Box 1: Gender in Kazakhstan The 2012 World Development Report (WDR) on Gender Equality and Development focuses on three areas: i) endowments (health, education, land and other assets); ii) access to economic opportunities (how endowments generate income); and iii) agency (the ability to make choices and take actions related to oneself). Applying this framework to Kazakhstan shows that: Endowments: There is considerable female advantage in life expectancy in Kazakhstan--women outlive men by 10 years (the world average female advantage is 4 years). Encouraging fertility is an explicit policy of the government, and after stagnating in the 1990s, it increased to 2.65 in the late 2000s. About 40 percent of women in reproductive age use contraceptives. Maternal mortality has been declining, and is now about 37 per 100,000 life births. The average age at marriage for women is 24, while for men it is 27. Tuberculosis (TB) rates are higher among men (122 versus 90) per 100,000 persons. Iodine deficiency is considerably higher among women, especially in urban areas. Among those registered with HIV/AIDS, 67 percent are men. There is no male advantage in primary school completion rates, and no male advantage in enrollment in secondary or tertiary education. While women represent 50 percent of all students in the basic and secondary education, in tertiary they represent 58 percent. Among those who are currently studying, men are slightly overrepresented in Technical and Vocational Education and Training (TVET) institutions, while women are overrepresented among Masters and Ph.D. students (making up about 60 percent for each). Among post-doctoral students, 42 percent are women. In terms of the field of study, women are overrepresented in medicine, education, and economics, while men are overrepresented in transport, communications and sports. There is gender parity in such fields of study as industry, construction, agriculture, arts and law. Access to economic opportunities: Women make up close to half of the labor force, and women‘s labor force participation rate is around 78 percent. Unemployment rate is higher among women (7.5 percent) as compared to men (5.6 percent). Unemployed women are less likely to find work through public education service, although they are more likely to participate in public works. Men and women are equally represented among self-employed workers, with the rate of self-employment being about 32-35 percent. The unadjusted gender wage gap in Kazakhstan is just under 35 percent. The gender wage gap is the highest in industry and such service sectors as financial and hotels, and the lowest in transport and communications, education and health. Work-related accidents are considerably higher among men, representing over 80 percent of all cases. In terms of the outcomes in the area of female entrepreneurship Kazakhstan is doing very well and it stands out in the entire Eastern Europe and Central Asia region in its high rates of female participation in ownership and in top management. Around 25 percent of firms in Kazakhstan are managed by women, resulting in 8th highest percentage of female top managers in the region. Female participation in ownership and in top management is more common in retail firms and in smaller firms. Female ownership is beneficial for women workers overall: in firms run by women 62 percent of the workforce is female while in male-run firms only 35 percent of the workforce is female. Lack of availability of child care facilities is identified as a major impediment for female labor force participation, both for high and low skilled women. Only 16 percent of children aged 1-6 attend early childhood development (ECD) centers. Among children 5-6 years of age, 60 percent are in ECD centers. For both of these groups of children, there are no gender differences in ECD attendance. Agency: Only 2 out of 47 Senators in Kazakhstan are women, and 26 out of 107 members of parliament are women. Women represent 21 percent of locally elected officials (update). The Gender Equality Strategy of the Republic of Kazakhstan 2006-2016, which came into effect in December 2005 targets women representation to increase to 30 percent. Women represent 58 percent of all civil servants in the country. The Kazakh Family Code states the rights of women in marital matters and gives equal rights to women and men. The Constitution and laws of Kazakhstan also give equal rights. In late 2009 the President of Kazakhstan signed a new gender equality law that prohibits discrimination based on gender. The President also signed a new law on domestic violence that outlines the responsibilities of local and national governments and NGOs in providing support to domestic violence victims, and sets a maximum sentence for spousal assault. (In Kazakhstan, as elsewhere in the region, domestic violence is often seen as a private family matter.) There were 25 crisis centers in the country providing assistance to women; six centers also provided shelter. The government has also adopted a national plan to combat trafficking, which the above mentioned law also prohibits. Source: Kazakhstan annual gender report "Men and Women in Kazakhstan" (2011); and World Bank report ―Opportunities for Men and Women: Emerging Europe and Central Asia" (2011). 7 D. Economic Prospects 20. Kazakhstan’s near to medium term economic prospects depend on a continuation of stability- oriented macroeconomic policies. The present rule of a fixed nominal dollar transfer from resource earnings to the budget will reduce the dangers of a resource-fed overheated economy.10 A complementary rule limits the interest cost of the public debt to 4.5 percent of the oil fund balance—although under present fiscal and debt conditions this ceiling is not a binding constraint on borrowing. 11 The fiscal rule could be refined to link the fiscal deficit to variations in the oil price from its long-run equilibrium, thereby strengthening the counter-cyclicality of policies. The current practice of keeping all transfers to public spending from the National Fund on-budget should be maintained with strong commitment. The pace of reduction in the non-oil deficit could be accelerated with the elimination of socially inefficient spending, and subsidies and transfers as remaining crisis-mitigation programs are phased out. Finally, a rules-driven framework for external borrowing by state owned enterprises and the Samruk-Kazyna as well as close monitoring of such borrowing would assist macro-stability.12 Current efforts to strengthen the oversight over the SOEs with a tightening of informational requirements to monitor debt and quasi- fiscal activities are, therefore, timely. 21. A well functioning financial sector and improved access to finance remains an important element of the growth and diversification agenda. A new legal framework governing bankruptcy and insolvency is being developed to address problems of highly indebted firms—an essential foundation for resolution of NPLs. Efforts are needed to ensure proper loan valuation and provisioning, decisive actions to reduce bad loans and to replenish bank capital where needed. An important challenge is further development of the credit infrastructure—pledge and real estate registries, microfinance, factoring, leasing and venture capital—and the deepening of local currency bond markets so that multiple sources of financing for the private sector at competitive prices can be developed. 22. Medium-to long term prospects depend on raising non-oil productivity. Absent productivity revival in the non-oil sector, Kazakhstan faces moderate economic growth in the medium term. Real annual growth rates are forecast to slow to 6 percent for the CPS period (Table 1), with the oil-sector growing in the range of 4-6 percent and the rest of the economy at 6-8 percent (below pre-crisis highs of 9-11 percent). Central to sustained improvements in productivity are the strengthening of the business climate, greater room for private sector expansion in an environment of neutral incentives, and progress on the governance agenda. The external current account is expected to remain comfortably in surplus during the CPS period. The sovereign balance sheet continues to be recognized strong as reflected by an increase in the sovereign rating by credit rating agencies in November, 2011.13 23. The fiscal consolidation program is a keystone to stability. Current spending is expected to remain constant at 14.5-15 percent of GDP for the CPS period. A gradual fiscal adjustment is expected to be achieved mainly through a declining share of total capital spending from about 7 percent of GDP in 2010 to 5.5 percent of GDP by 2015 and partly by elimination of on-budget crisis-spending programs. Non-oil revenue is assumed to remain constant at 13.5 percent of GDP while oil-related government revenue declines as a share of GDP from 14.5 percent in 2011 to about 11.0 percent by 2015, reflecting a 10 Introduced in 2010, this rule sets the annual transfer from the oil fund to the budget at US$8 billion in nominal terms (as a share of GDP, the transfer will fall from 4.4 percent in 2011 to 3.0 percent in 2015). 11 The rule applies only to central government debt, not debt taken on by SOEs. 12 The build-up of external debt within state-owned enterprises as part of inward investment agreements has been large and constitutes a potential fiscal risk while reducing fiscal transparency and increasing distortions in resource allocation. 13 On November 7, 2011 Standard & Poor's raised its long- and short-term foreign currency sovereign credit ratings for Kazakhstan to 'BBB+/A-2' from 'BBB/A-3' with a stable outlook, and on November 21, 2011 Fitch Ratings upgraded Kazakhstan's long-term foreign and local currency Issuer Default Ratings (IDR) to 'BBB' from 'BBB-' and 'BBB+' from 'BBB', respectively, and put the outlooks on the ratings as ‗positive‘. 8 projected decline in oil prices. Achieving greater budget efficiency requires streamlining transfers and subsidy payments to state enterprises, abolition of interest rate subsidy schemes, and range of tax expenditures that support industrial policy together with selected revenue measures, especially to promote energy efficiency, and to move towards cost recovery in municipal services. Fiscal adjustment will benefit from thorough analysis of consolidated on- and off-budget capital spending to ensure that investments with high development impact are adequately funded and can be monitored on-budget. 24. Kazakhstan’s public and external debt burdens are sustainable even under stress scenarios. Under base case assumptions total government debt remains around 12-13 percent of GDP over the medium term. Net worth14 increases, however, as transfers to the reserves held in the oil fund rise to exceed 30 percent of GDP by 2016. Moreover, external public debt will constitute less than 3.5 per cent of GDP. A severe slowdown in the core Eurozone economies, particularly if accompanied by dampened Russian growth and falling oil prices,15 would reduce Kazakh growth to the range of 4-5 percent. However, government debt rises only fractionally to 17 percent of GDP by 2016 under this scenario. 25. Trade integration policies will affect prospects. The establishment of a customs union with Belarus and Russia in 2010 entailed a doubling of the weighted average tariff and an increase in tariff dispersal. The rise in protection will have efficiency costs in a resource-exporting country, where diversification is reliant on international integration.16 However, the impact of greater protection will be offset by improvements in trade facilitation and reductions in non-tariff barriers.17 Doing Business 2011 ranks Kazakhstan near the bottom of the list of countries in the ease of cross-border trading because of severe customs service inefficiencies. The development of infrastructure to position the country as a regional transit hub, the development of Caspian Sea ports and railroads, and the development of aviation, will further assist productivity growth outside oil. Accession to the World Trade Organization would deliver significant additional benefits.18 III. DEVELOPMENT CHALLENGES AND GOVERNMENT AGENDA 26. The overarching national strategy is based on improved competitiveness, productivity and economic diversification. Its success will depend on measures to strengthen governance (especially in the judicial sector and civil service), improve human capital through education and pension system reforms, raise the quality of public services—housing, labor force training—and stimulate growth in the regions through diversification and promotion of small and medium enterprises. A. Development Challenges 27. Sharpening competitiveness and fostering job creation. Critical to this challenge is promoting output diversification. Significant legislative changes—easing business entry and exist conditions, payment of taxes and protection of investors‘ rights through strengthened corporate disclosure requirements—improved the business climate, as did improvements in insolvency procedures, concessions and competition legal frameworks as well as the licensing and inspection requirements. Currently, the emphasis is on improving areas that create formidable obstacles further—e.g. construction 14 Net worth = reserves in the National Fund – government debt and guarantees 15 Assumed to decline to U$50 per barrel under a stress scenario. 16 A recent study ―Kazakhstan: Assessment of Cost and Benefits of the Customs Union‖ (JERP Policy Note, June 2011) estimates that the static effect of the customs union could lead to a loss in real income of 0.3 percent of consumption. 17 Ibid. 18 Expected conclusion of negotiations with WTO Working Party members by the end of 2012 is work-in-progress. According to Kazakhstani authorities, most of the bilateral negotiations have been completed and bilateral market access agreements signed with the Working Party members (including USA in September 2011). The ongoing negotiations with EU focus on application of recently introduced customs duty on oil exports. 9 permits, access to financing, cross-border procedures, and licensing19 and permits—and strengthening enforcement. These reforms will particularly benefit women as evidence shows that women-entrepreneurs are at additional disadvantage when dealing with inspectors, or when trying to secure access to credit, and obtain licenses and permits. Wide-ranging government support programs for local enterprises (import substitution, local content requirements, and government support schemes) would benefit from rationalization and consolidation, especially as they create distortions and opportunities for rent-seeking behavior, repress productivity performance,20 and impose a heavy burden of coordination on a range of ministries. The dominance over the economy by large state companies has squeezed the SME sector (which generates only 30 percent of GDP). Kazakhstan is under-exporting related to its potential: only 5 percent of Kazakh firms export (versus 29 percent in ECA), and this ratio has declined over 2005-09. 28. Strengthening governance. Kazakhstan‘s rating in international lists of corruption is poor.21 Dominant state power with weak civil society bodies leads to limited scrutiny over the executive. External accountability institutions such as the Accounts Committee (external audit), ombudsmen, and parliamentary oversight bodies need further strengthening. The judiciary is perceived as weak, particularly in areas of judicial integrity, independence, and dispute settling. Thus, addressing these weaknesses along with improvements in global integrity remains vital. Governance strengthening has been based on steady improvements in public financial management (PFM), a well developed Treasury system, high budget credibility with estimates being adhered to, and a budget that is increasingly linked to policy priorities. Further reforms on external and internal audits and on performance and results monitoring are being addressed, but the approach to PFM reforms would benefit from a coherent framework. The country scores well on e-governance. Measures to contain petty corruption have been effective such as through the reductions in number of licenses required or inspections conducted, and improvements in tax administration, but there remains an unfinished agenda in these areas. Moreover, civil service reform to increase transparency in public sector operations, and comprehensive judicial sector reforms will strengthen governance. Building on impressive progress made to date with implementing Extractive Industries Transparency Initiative (EITI) 22 by becoming EITI compliant in 2013 will be an important step in consolidating efforts to increase transparency in the oil, gas and mining sectors. 29. Boosting employment and value added in agriculture. Kazakhstan enjoys the advantage of a flexible labor market in the non-oil sector. Ownership of land is private, and urban land markets are active, but land use planning and approval is cumbersome and non-transparent. Implementation of the land code is slow in rural areas and agricultural land markets function poorly. The state dominates the provision of services and finance for agriculture. Important reforms such as the strengthening of farmer organizations, agricultural SME development, rural credit and agricultural insurance, veterinary and advisory service, and improved irrigation infrastructure are needed to unlock the rich potential of agriculture. 19 The ongoing efforts cover streamlining of the licensing and permits framework—over 30 percent of the licenses and permits (originally estimated around 1200) were eliminated to date and a further 30 percent is expected to be eliminated in 2012. 20 Growth over the past decade has been highly capital-driven; a steady decline in total factor productivity has subtracted 1.5 percentage points per annum from growth with declines being most marked in mining, construction and processing industries. Labor productivity is two-thirds of that in Russia and one-fifth that of the US. 21 The Transparency International latest (2011) Corruption Perceptions Index (CPI) placed Kazakhstan at 120th rank (out of 183 countries) with a CPI score of 2.7; democracy index (Economic Intelligence Unit) 137 out of 167 and Global Integrity Index 76 out of 100. 22 Currently, 136 companies are included in EITI reporting, of which 81 are oil and gas companies and 55 are mining companies. This number by far exceeds EITI reporting in any other EITI implementing country across the globe (there are currently 35). The EITI MoU has been signed by the largest players. 10 30. Bolstering human capital. Although large investments in education have led to improvements, secondary school results indicate a need to improve quality: Program for International Student Assessment (PISA) 2009 results show that over half of the students scored below the basic competency levels in each of the subjects, mathematics, reading, and sciences. Through a transition to a 12-year model with per caput financing, improved teacher incentives and decentralization, standards would be raised. Recent membership of the Bologna Process, improved governance in management, and independent national accreditation in line with international norms will help improve tertiary education. The mismatch in skills in the labor force necessitates reforms in the Technical and Vocational Education and Training system. 31. Building road connectivity, lowering costs. Large capital investments to upgrade the major east- west and north-south road and rail corridors linking China, Central Asia and Russia with Western Europe have been the highest priority in transport, recognizing that diversified growth requires reduction in economic distances and greatly improved connectivity between cities. A strengthened institutional structure in the management of growing road network, complemented with a shift in expenditures towards road operation and maintenance would raise efficiency in spending and provide the road users with a better level of service. This would also help reduce the high costs of road transport. A focus on improved facilitation, smooth functioning of border crossing points to reduce costs of business and improved institutional framework for better asset management is necessary if the country is to realize its potential as a regional logistics hub. Border crossing points are characterized by high corruption, multiple checks, fragmented controls, low-quality services, and obsolete equipment, making them amongst the least efficient in the world. 32. Extending power sector reforms. Kazakhstan has advanced greatly in power sector reforms: the vertically integrated monopolistic sector was unbundled, most of the generation plants and regional distribution companies were privatized, and a competitive wholesale market developed, with a modern grid code. With efficient tariffs, the transmission sector is technologically advanced. Although regulation has improved, heavy-handed government intervention is still present. Retail tariff-setting is politicized and retail tariffs do not cover justifiable expenses, including the cost of modernization. As a result, much of the distribution sector is mired in technological obsolescence—the chief cause of inadequate reliability of supply, especially in winter, against the background of a sharp upswing in electricity demand. Much needed foreign investment in generation has been slow given weaknesses in regulation, the framework for public-private partnerships (PPPs), and poor tariff-setting policies. 33. Developing a comprehensive reform strategy for housing and communal services. Despite reforms towards a greater role for the private sector, tariff differentiation, greater use of commercial principles in company operations, the water sector suffers from large backlogs in maintenance and investments, poor metering and inefficient management. Two major sets of reforms are necessary: first, institutional development of municipal finance; and second a conducive environment for public-private partnerships, clear policies on fiscal and financial support for PPPs, and improved concessions and related laws. Similarly, deteriorating conditions in the housing sector (mostly addressed through grant financing today) need a comprehensive approach, including development of effective system of financing and resource-saving mechanisms. 34. Restructuring health care system. Despite recent improvements in resource use, maternal and under-five mortality rates, burden of infectious diseases, access to health services and pharmaceuticals, and improved financial protection, health indicators are significantly worse than in comparable countries, and greater efforts such as a doubling of the pace of improvement in maternal and child mortality rates will be needed to attain MDGs by 2015. The adult mortality rate, among the worst in the ECA region or in middle-income countries, is explained by high incidence of non-communicable diseases— cardiovascular, cancer, and other tobacco—and alcohol-related diseases and injuries. A major 11 management reform in health systems is underway to address outdated norms and practices, and oversized network of publicly-owned facilities, while establishing regulatory framework and incentive mechanisms for achieving greater efficiency and quality. 35. Consolidating social protection reforms. The social protection system has been reformed with the introduction of the means-tested programs, Targeted Social Assistance (TSA) and housing assistance in 2002, as well as allowances for dependent children under 18 in 2006. Benefits and subsidies (formerly known as ―privileges‖), have been monetized. Yet, the system remains over-reliant on categorical transfers, hampering addressing vulnerability and social needs. The existing means tested targeted programs need to increase coverage, reduce leakages, and incorporate incentives to help beneficiaries to graduate from social assistance. To this end, the introduction of conditionality in current means tested programs to require work from able recipients (activation) is envisaged; this would help low-skilled workers, the unemployed, youth, and social assistance beneficiaries access jobs and graduate from reliance on safety nets. 36. Advancing gender equality and development. The gender agenda—pursued integrally through economic and social policies—has been mainstreamed into education, health, social protection, and labor market policies (Box 1). Key issues are the political empowerment of women; making the business climate friendlier to women, and addressing unmet demand for child care facilities. The coverage of pre- school education is low and full coverage by 2020 is an official objective. In addition gender gaps in three areas require attention: low male life expectancy, lagging male tertiary enrollment, and the gender wage gap. The male-female gap in life expectancy at 10 years exceeds the world average of six years. The gender gap in tertiary education is large (32 percent vs. 45 percent) raising concerns about sustaining productivity gains into the future. Finally, the gender wage gap in Kazakhstan of 35 percent is above the regional average of 29 percent and could reflect factors such as occupation segregation, hours worked and years of experience. 37. Safeguarding the environment. The government has completed the clean-up of massive mercury pollution along its Nura River, thereby removing a serious threat to health. Substantial progress in modernization of regulatory and institutional framework for environmental management has been achieved. Extreme inefficiency in energy use, high carbon dioxide intensity, and the legacy of pollution and health burden of industries remain to be addressed. Present policy instruments provide insufficient incentives for industries to apply the best available cost-minimizing modern technologies. Continued reduction in the flaring of gas associated with hydrocarbon operations remains of high environmental importance. 38. Embracing a regional role. Kazakhstan has taken impressive steps towards regional integration through membership of the Eurasian Economic Community and by becoming a contributor to a regional development instrument, the Anti-Crisis Fund. It pursues dialogue on regional cooperation through bodies such as CAREC and the Shanghai Cooperation Organization. It is making sound progress towards membership of the World Trade Organization and chaired the OSCE in 2010. It became a donor to IDA in 2010. Apart from investments through regional institutions, Kazakhstan provides bilateral investment assistance through the Samruk-Kazyna in Georgia, the Kyrgyz Republic and Tajikistan. Strengthening institutional structures and the analytical and technical expertise to play an enhanced regional leadership role will be important. This also applies to capacity in formulating policies and investments in energy and transport that have a strong regional dimension. 12 B. The Government’s Medium Term Strategy 39. The government’s Strategic Plan for Development 2020 outlines a set of priorities intended to achieve a competitive, diversified economy with macro-stability. These priorities, reinforced by the President after the January 2012 parliamentary elections, focus on five themes:  Consolidating the progress towards economic recovery from the global crisis through business environment reforms, and improving legal and financial systems;  Diversifying the economy through industrialization, with emphasis on enterprise modernization, agro-industrial complex and infrastructure by a combination of state-led investments and FDI;  Sustaining growth through building the human resource base by increasing the quality of human resources;  Ensuring that people have the basic social, housing and utility services, with emphasis on creating employment opportunities for youth, and on modernization of municipal housing as well as water supply network;  Advancing public sector reforms to increase efficiency, transparency and accountability by streamlining government agencies, establishing the basis for performance-based public management system, accelerating civil service reforms, and increasing the quality of government services. 40. Macro-financial framework. The government places high priority on macro-stability, underpinned by a strong banking sector that provides adequate credit to the non-oil sector, and strengthened public resource management as pre-requisites for diversification. The absorption of resource earnings as reflected in the fiscal stance (the non-oil deficit) is intended to be consistent with sharpened competitiveness. The government is undertaking reform of the corporate insolvency system, plans to privatize the intervened banks, and gradually develop capital markets. 41. Competitiveness and employment. The Strategic Plan is complemented by two other major policy initiatives: the program on accelerated industrialization and a program to raise productivity that runs to 2020.23 These initiatives combine crisis-mitigation programs and enterprise modernization and innovation promotion schemes. In addition, measures are planned to improve the investment climate, especially for agriculture and small and medium size enterprises. These include relaxation of restrictions on private investors and businesses, and incentive schemes for non-resource sectors through expansion of industrial zones. Public spending on roads and rail, as well as rural infrastructure, including drainage and irrigation, is planned to promote growth in manufacturing and agriculture. Home-grown innovation will be promoted through increases in R&D spending, investments in knowledge and excellence in tertiary education. 42. Infrastructure. The large investment program in transport and energy will be supplemented by policies developed to encourage private sector participation through PPPs and other ways of private financing of municipal infrastructure. Road investments will continue to focus on the major corridors, but greater attention is expected to be paid to operation and maintenance needs and to the level of service expected by road users. The government has adopted an ambitious program for expanding electricity generation largely with private sector involvement—to be successful, reforms in the business 23 The industrialization and innovation program declares four priorities for the efforts of the state: (i) traditional: natural gas and oil, mining and metallurgy, atomic and chemical energy; (ii) machine building, pharmaceuticals and construction industry; (iii) non-raw material exports: agribusiness, light industry, tourism; and (iv) economies of the future: information and communication, biotechnology, alternative power engineering and space activity. 13 environment, including tariff setting policies, will be required. Moreover, a further massive extension of the high voltage transmission system to integrate the currently poorly connected regions into the national network is envisaged. The government is demonstrating a strong interest in participating in regional electricity projects in Central Asia and beyond. 43. Governance and public services. In the post-election January 2012 address to the parliament, the president called for the development of a comprehensive anti-corruption program. The Strategy places importance on bolstering the rule of law with measures for enhancing the transparency and independence of courts and raising the legal culture of the population. The restructuring of the judiciary and the introduction of modern international practices to raise standards in judicial services receive a high priority. Other governance reforms centre on the business climate and on improvements in the regulatory framework. The government intends to build on steady progress made with public financial management reforms and in customs and tax administrations. Public expenditure efficiency reviews are being conducted to inform sector strategies and budget management reforms. These centre on the improving result orientation of budget and definition of inter-government fiscal relations through clarity in revenue and expenditure responsibilities in practice, reforms in the authority of municipalities and cities to borrow for investment and to contract with the private sector, as well as strengthening the control environment, encompassing internal audits. Civil service reforms are aimed at raising professional standards, improving pay and grading system, and increasing transparency in public sector operations. 44. Social policies. Two key priorities are social policies (education, health, employment for youth, social protection); and equitable access to housing and utility services. Education reforms aim at rolling out universal pre-school learning, raising secondary school results to internationally comparable levels by 2020, while raising standards in tertiary education, and a greatly expanded vocational and training system. Health reforms focus on improvements in management and rationalization, strengthening preventive services and improving diagnostics, upgrading sanitary and epidemiological services and enhancing the quality and accessibility for pharmaceuticals. In social protection, emphasis is being placed on measures to link beneficiaries to jobs and auxiliary services (education, child care) to help graduation from social protection. The pension reform agenda includes measures to achieve a stable income replacement ratio and to widen the coverage among the self-employed and informal workers. The government is planning a major investment effort over the next decade in improving the housing stock and communal services, particularly water. Recent budget allocations for these investments total US$11 billion and the effectiveness of projects will depend on improvements in project design and implementation capacity. The role of the private sector has not yet been clearly defined. 45. Environment. Energy efficiency concerns are higher now on the government agenda. The government is legislating to reduce the environmental impact of growth. Increasing responsibility of the users of natural resources for reducing the environmental discharges and developing the integrated processing of waste are also among the priorities. The Strategy addresses global warming through the promotion of low-carbon techniques and greater energy saving. These objectives will require measures to attract private investment as well as a reform of permit regulations and their enforcement such that the appropriate incentives to industry are put in place. Two significant measures taken to reduce gas flaring— a ban on petroleum gas burning during the oil production operations and a requirement that oil producers develop and implement associated gas recovery programs—provide a basis for further progress in this area. 14 IV. WORLD BANK GROUP PARTNERSHIP STRATEGY A. Lessons Learned from Previous CPS and Stakeholder Feedback Lessons Learned During 2004-2011 CPS 46. A key finding of the CPS Completion Report is that the WBG increased its relevance in a middle income country based on global knowledge and experience. The strategy was designed to allow the Government and the Bank to adjust the program to changing government priorities and country circumstances and, thereby, to ensure strong government ownership while maximizing the Bank‘s contribution to Kazakhstan‘s development. It was built on the premise of cutting-edge knowledge transfer, bringing benefits that go well beyond funding. By delivering successful results under a growing program, this approach has demonstrated that the Bank can be vital to addressing development challenges of countries that enjoy commodity export windfalls and have low borrowing requirements. 47. The Bank Group has adroitly managed the program, ensuring that it remains demand-driven, maintains strategic focus and generates impact. Through JERP, the Bank provided answers to the ―what and why.‖ It provided policy analysis, strategic planning expertise, and good practice options. Questions about ―how and who‖ were addressed through selective, investment and budget support loans in strategic high-impact areas, and by brokering access to a global network of experts, and building implementation capacity. Bank support through investment operations has been successful in achieving intended outcomes, with all closing projects over the past seven years being rated ―satisfactory‖ by the Independent Evaluation Group (IEG). The Bank‘s crisis-mitigation support through DPL was timely and largely successful, with its policy framework under implementation. IFC‘s program was also responsive to the changing macroeconomic environment during the financial crisis, providing rapid counter-cyclical support to key private sector banks, and contributing to the stabilization of the banking sector and resumption of trade finance and funding for SMEs. IFC‘s strategically focused private sector investments were accompanied by advisory services, focusing on improving corporate governance standards and strengthening the country‘s leasing sector. 48. An important challenge in implementation arises from country processes which are evolving at a slower pace than dictated by the country’s development needs. Steps to simplify internal processes to speed up project approval and implementation have been gradual. Project preparation is rigidly bound to the annual budget preparation cycle, while signing and effectiveness are delayed by repetitive clearance procedures, thereby prolonging the project cycle to no purpose, while discouraging project restructurings. The progress to date in addressing these bottlenecks resulted in halving the time needed to take a project from concept approval to effectiveness (down to 24 months from 40 months), which gives some confidence for the attainability of further improvements. This CPS should help address the remaining agenda (see pages 27-28 for further discussion). 49. The CPS is informed by the CPS Completion Report, the Country Portfolio Performance Review, the assessments of IEG, as well as high-level dialogue with the government and the experiences of other development partners in the country. The following key lessons have influenced the design of the CPS:  On approach: The flexibility built-in into the previous CPS was critical to the emergence of a strong and relevant AAA agenda and a portfolio that grew in number and size of projects. It permitted a growing demand-led work agenda. The CPS program worked best when focused on core policies, linked with the government‘s timetable, supported by systemic analytical work, and structured within the long-term reform needs of the economy. The availability of analytical 15 work together with a well-designed pipeline permitted quick responses, especially during the global financial crisis.  On process: Periodic discussions of a brainstorming nature were organized between the highest levels of government (usually the prime minister) and Bank teams to set the strategic agenda and discuss in-depth key development issues, both highly topical (such as the impact of changing international economic prospects on the economy or financial sector responses to the effects of the crisis) and long-term. These discussions have proven to be vital to relevance, quality and timeliness of the Bank assistance as well as its impact.  On implementation: Maintaining the quality of the Bank portfolio requires, apart from simplification of internal process, constant learning from doing. Most IBRD investment operations, especially the new institution-building projects have been green-field, i.e. they require adoption of new approaches and procedures, and most implementing agencies are first time borrowers with all of the risks that entails in terms of the lack of familiarity with Bank procedures. Moreover, the implementation of strategies that require wide coordination runs the risk of failure or delays. Greater attention to keeping design simple, targeted and mindful of capacity constraints is important. Systematic approach to validate project readiness is also important to ensure adequate design and bidding features and avoid delays in implementation. Findings from Multi-stakeholder Consultations 50. The WBG held consultations about the new CPS for Kazakhstan with stakeholders across regions and received encouraging feedback for the preparation.24 This has influenced CPS and sown seeds for the future. Overall, stakeholders believed that improvements in governance and a stronger voice for civic society together with mechanisms for greater government accountability were essential to sustained development. They emphasized education quality, accessibility and skills (as key factors in increasing competitiveness and jobs); environmental protection and preservation; agricultural modernization; governance with emphasis on judicial reform and corporate governance (both private and public, latter with emphasis on transparency in SOE operations); quality of public services; financial literacy; attention to opportunities for young and disabled as key areas of development focus for the WBG‘s partnership with Kazakhstan. Concerning approach, they suggested that the WBG program put greater emphasis on capacity building; facilitating faster progress in key development priorities; development of strong M&E system to track impact of wide-ranging government initiatives with greater role for CSOs in this respect; and greater public access to JERP AAA. Finally stakeholders called for the WBG programs to leverage greater emphasis on the region specific development needs, and for local initiatives at the community level to be better supported in order to strengthen civil society. These choices are broadly consistent with this CPS, under which to further strengthen its partnership with Kazakhstan and ensure that work carried out becomes increasingly responsive to client demand, the WBG will continue to work with, and listen closely to broader range of stakeholders in Kazakhstan. B. Proposed World Bank Group Partnership Strategy Principles of the New CPS 51. The principal objective of this CPS is to help the government advance implementation of the core development priorities through a high impact program. The CPS concentrates on the central government priorities of competitiveness, improved governance notably through higher standards and 24 Stakeholder consultations involved CSOs from associations with special focus (environment, agriculture, health, transparency, gender, youth, vulnerability) and from business community and think thanks from six diverse regions of Kazakhstan (represented by Aktobe, Almaty, Astana, Kostanai, Shymkent, Ust-Kamenogorsk). 16 accountability in public service delivery, and safeguarding the environment. It has a programmatic character—in contrast to the past—by inter-linking knowledge interventions through sequenced products in a multi-year framework to maximize impact in consultation with the government. The CPS targets areas of lagging performance, as revealed by the Bank‘s assessment tools, country-grown strategies or the international comparative analysis. Accordingly, it indentifies the following principles of engagement to the Kazakhstan development strategy:  The CPS will continue on the well-tested tradition of a flexible architecture that responds to the client‘s medium term development agenda as well as the Bank‘s need to bring in and build up international experience and develop wider lessons of a public goods character. A large portion of the knowledge agenda will be client driven, subject to Bank policies and safeguards, with selected Bank-chosen work of high development interest, such as possibly on aspects of governance, poverty and growth strategy assessment. Knowledge transfer and capacity enhancement will be the dominant drivers in the choice of lending projects.  The bulk of the assistance will be given through knowledge activities funded through Joint Economic Research Program (JERP).25 A shift will occur towards multi-year programmatic work to address medium-term development processes and sequenced approaches, which has been initiated this fiscal year. This approach will strengthen strategic collaboration through improved coordination and increase impact. Finally, JERP effectiveness would be enhanced by making key publications available to the civil society at large in consultation with the government and engaging in broader stakeholder consultations in key issues.  Selectivity by focusing on interventions where the Bank has a comparative advantage drawing on its pool of knowledge from frontier development experiences. The CPS is informed both by the Country Policy and Institutional Assessment (CPIA) and other international comparative analysis (e.g. Global Competitiveness Index, BEEPs, Governance Indicators), which pinpoint the development lacunae that lie in governance and the quality of public management, apart from technical improvements towards best practice that can be made across a range of public policies.  Continued emphasis will be given to sustainability and impact of Bank‘s operations by retaining an appropriately diverse portfolio. Over the coming period needs in infrastructure sector are great (in particular in transport and energy efficiency). The same is the case with institution building and TA programs which are key to sustain benefits of investments over the long term. To ensure successful results from the infrastructure projects, emphasis will be put on governance and institutional arrangements that strengthen capacity and accountability for publicly-provided services and promote conducive environment for results.  The CPS will adopt a coherent approach to engaging on governance that mainstreams governance in knowledge and lending activities as a cross-cutting theme as noted above, while focusing on specific interventions (such as public finance management and civil service reform, improved level and targeting of social assistance to the poor and vulnerable). Greater attention to results as reflected in this CPS will also help bring out the governance dimension. This is in line with government‘s own strategy.  A stronger focus on monitoring, evaluation and results will include the identification jointly with the government of a set of early result indicators to be used to screen projects during periodic programming discussions. The result focus of the JERP will also be enhanced under the above- noted new programmatic structure introduced in FY12 with activities developed as multi-year and interconnected engagements. 25 JERP FY12 budget increased to over $4.38 million; the government contribution at 85 percent is at record high. The FY12 also marks transformation of the JERP program to a programmatic structure with activities developed as multi-year and interconnected engagements. This would help increase strategic focus of the program while consolidating the JERP (e.g. tasks are reduced from 31 in FY11 to 21 in FY12). 17  The CPS will accord importance to the role Kazakhstan can play as a provider of experience, expertise, and assistance in the Central Asia region and in a broader regional context. The Bank will continue to promote regional cooperation in energy, water, transport, trade and communicable diseases. Development Objectives and Activities 52. The strategic themes of the CPS reflect the continuity in the Development Strategy 2020. The CPS is aligned with the Strategy of the government and, hence, retains the overarching focus of the previous CPS on competitiveness. It will strengthen emphasis on progress in interconnected elements for higher impact. To this end, the following broad areas of engagement are proposed under the new CPS.  Improving competiveness and fostering job creation;  Strengthening governance and public services;  Ensuring development is environmentally sustainable. 53. The main instrument to support the government’s program will be the knowledge activities through the JERP, complemented by selective investment projects in strategic high-impact areas. Under the new CPS, the JERP budget is expected to amount to approximately US$4.4 million per fiscal year with the government contributing around 85 percent of the funding. In each of the strategic CPS theme, key JERP AAAs are underway mostly in a programmatic structure covering the next eighteen months, and new activities are envisaged to be prepared over the course of the CPS. An indicative lending program envelope for the first four years would be expected to total about US$2 billion (plus the mobilization of counterpart funds from the government) allocated to areas where the government considers the Bank‘s involvement in design and implementation to be of high value. In accordance with the Government‘s preferences, all IBRD lending is foreseen in the form of investment projects. The CPS holds out the possibility of extending program-for-results financing in view of capacity needs and strong results orientation of investment programs, or deploying development policy operations to counter external shocks, as was done in 2009, subject to IBRD‘s capital constraints and strong ownership by the government or to support a far-reaching reform (e.g., in banking sector and/or diversification policy) in the interests of bolstering macro-stability or adding to the overall reform thrust. The IBRD lending program for the first year of the CPS is reasonably defined, selective and puts the emphasis on scaling-up through repeater projects as shown in Table 2. This is expected to be followed by institutional reform projects, an area of emphasis by the government in cooperation with the Bank. Both the indicative and the ongoing program are well aligned with and support the strategic themes of the CPS. 54. The CPS covers the Bank Group in a thoroughly integrated manner. IFC will contribute to the CPS agenda by promoting the development of private sector through investment and advisory operations in support of economic diversification and growth agenda. IFC‘s strategy in Kazakhstan is fully consistent with IFC‘s overall strategic approach across the ECA region of focusing on access to infrastructure, strengthening the financial sector, and supporting diversification and competitiveness. In the short term, IFC is focusing on strengthening the financial sector, both in the context of the 2008-09 crisis response and as a prerequisite to pursue the diversification agenda. In the medium term, more efforts will be dedicated to supporting infrastructure development. IFC will also carry out investments to promote SME development, as well as investments in agribusiness, manufacturing, and services. Establishment of best practices in international banking, corporate governance and the regulatory environment will be targeted through IFC advisory work and investment projects with strong demonstration effect. IFC also aims at supporting the energy efficiency agenda as a cross-cutting theme in its activities. Total annual investments could potentially amount to US$200-300 million, provided suitable 18 Table 2. Indicative Work Program (IBRD, FY12-13) Areas of Engagement Current Portfolio JERP-Programatic Proposed Lending Technology Commercialization Project Development of MT Counter-Cyclical Macro-Economic East West Roads Project; US$1.2 Policy to Reduce Vulnerability to External Shocks billion (FY12) Technical and Vocational Education Improvement of Competitiveness through Reduction of Youth Corps Project Swiss TF; Modernization Project Trade Berriers US$20 million (FY12) Agriculture Competitiveness Project Enhancement of the Business Environment to Support Irrigation and Drainage Competitiveness and Economic Deversification Improvement Project (Phase II); US$105 (FY13) Agriculture Post Privatization Assistance Enhancing Productivity and Competitiveness through Electricty Transmission Project; Project (Phase II) Enterprise Modernization Support Mechanisms (FY14) South West Roads Project Improvement of the Insolvency System Improving Enhancement of the M&E System in the Roads IFRS Application for Small and Medium Enterprises. Phase II Competitiveness and Administration - IDF Grant (associated with Fostering Job Creation South West Roads Project) Moinak Electricity Transmission Project TA to Strengthen PPP Project Assessment Alma Electricity Transmission Project Education System Analysis towards Improving Quality Post-Graduate Education Development Strengthening Agricultural Strategy and Livestock Policy Brainstorming Roundtable on Global Economic and Social Prospects Customs Development Project Improvement of Approach to Result-Oriented Budgeting Institutional Reform Projects; (FY14-16) Tax Administration Reform Project Improvement of Intergovernmental Relations and Territorial Development Health Sector Technology Transfer Project Improvement of State Borrowing and Public Debt Management Statistical Capacity Building Project Improvement of Social Safety Net System Capacity Building for Public Sector Strengthening Pension System Accounting Reform - SAFE Grant Strengthening Public Sector Audit Capacity Building IDF Technical Assistance to Build Capacity of the Internal Audit Governance and Public Grant System in Kazakhstan Services Building Capacity in Procurement Audit Development of Public E-Procurement System Agency - IDF Grant (associated with South West Roads Project) Further Improvement of the Financial Monitoring System (AML/CFT) Technical Assistance to the Civil Service Agency in Civil Service Reform Supporting the Extractive Industries Transparency Initiative Forest Protection and Reforestation Project Economic Costs of Pollution and Potential Cleaner and Energy Efficiency Project Swiss Greener Industrial Production TF; US$20 million (FY12) Forest Protection and Reforestation Grant Syr Darya Control and North Aral Ensuring Development (GEF) Project (Phase II); (FY13) is Environmentally Sustainable Ust-Kamenogorsk Environment Remediation Persistent Organic Pollutants Project (POPs) Management GEF Grant (FY12) and Project (FY13-14) Note: JERP activities are expected to be expanded over the CPS period; lending figures are tentative and lending program shows initial composition. 19 projects that meet IFC criteria for financial reporting, transparency, and commercial viability can be identified. MIGA will continue to support financial and manufacturing sectors.26 55. Expected outcomes of the CPS adjusted to the AAA intensive and evolving nature of the program. In these circumstances, the outcomes of the JERP-AAA are hard to specify and directly link with the final country development outcomes since the progress on the latter is heavily dependent on the timing and scope of the Government efforts. In addition, JERP-AAA involves large amount of capacity building at the institutional level which makes results inherently hard to measure. The CPS results framework recognizes these challenges and addresses them by identifying the expected outcome (intermediate indicators) of each confirmed activity and the link with the corresponding government development goals. Overall, the results framework is intended to provide an accountability framework for the lending in the pipeline for FY12-13 and the confirmed JERP AAA program. The following section presents the areas of engagement, instruments and expected outcomes. Area of Engagement 1: Improving Competitiveness and Fostering Job Creation 56. Building on the Bank Group’s experience and intensive dialogue under the previous CPS, Bank Group activities would support the objective of sharpened competitiveness and creation of private sector jobs. The government targets an improvement from 72nd place (out of 139 economies) today in the Global Competitiveness Index to 50th place by the end of this decade. The CPS program focuses on improvements in lagging areas of the competitiveness index (institutions, business/investment enabling environment, finance, infrastructure,) through knowledge and lending. The initial JERP program covers public/private institutional development (e.g., reporting standards and corporate governance), the regulatory environment, enterprise modernization, financial market development (insolvency reform, resolution of corporate financial sector distress), agro growth and modernization agenda, trade barriers, educational quality and availability of skilled male and female workforce, and PPP schemes. The Bank will finance investments in critical public sector infrastructure with an emphasis on strengthening governance of public sector providers. Country Development Goal: Achieve competitiveness gains through macro-stability and international integration 57. Outcome 1: Strengthening fiscal discipline and trade openness. The rule governing domestic absorption of oil earnings can be refined to sharpen its counter-cyclical impact on the economy; a JERP product will present options. A country economic memorandum (funded by the Bank budget only) would link developments in poverty and gender equality to economic policies necessary to maximize competitiveness, and conduct due diligence analysis. Regional trade integration through the customs union with Belarus and Russia and prospective membership of the WTO will require policies to enable the private sector to take advantage of changing opportunities, including non-tariff measures and cost of trade facilitation. A recent JERP study analyzed the impact of membership of the customs union and how benefits could be maximized; an ongoing comprehensive JERP product expands this work to develop the analytical basis for trade competitiveness through joint research, familiarizing policy makers with good practices and applying new tools and techniques. 58. Outcome 2: Expanding non-oil sector exports and employment. A series of linked Bank activities have promoted knowledge transfer in designing output diversification strategies. A notable JERP product 26 MIGA‘s portfolio in Kazakhstan consists of four projects, sponsored by Austrian and Dutch investors, in support of the country‘s financial and manufacturing sectors. The combined gross exposure from these investments (as of end February 2012) is US$399.3 million. 20 led to a development of wide-ranging reform framework and initial changes in the law for corporate insolvency. Programmatic work on insolvency reform and developing an insolvency system for individuals is in progress. The ongoing Technology Commercialization Project supports the marketing of promising technology developed by enterprises. Key JERP products assist with help in improving lagging ―Doing Business‖ indicators (e.g. access to financing, construction permits, cross-border procedures), and in advancing deregulation efforts (e.g. reform of licensing and permitting systems, including through introduction of a risk-based approach to regulation). This work will address gender dimensions given the different access men and women may experience. Complementary JERP products help design sector- and firm-specific strategies to assist competitiveness, and identify improvements to approaches in official industry support initiatives. A framework will be developed for evaluating the impact of business environment reforms to strengthen evidence based reform agenda (gender analysis will be an integral element of this work). JERP assistance to strengthen the institutional framework underpinning corporate financial reporting in Kazakhstan and to guide reforms of SME financial reporting will continue. IFC intends to expand its real sector investments, particularly in agribusiness, construction materials, and the retail sectors. Complementary support for the development of infrastructure and logistics sector in particular will also be required for these sectors to develop successfully. In agribusiness, IFC is exploring opportunities to support food processing and food retail companies, where opportunities may arise for the provision of supplier finance and for advisory services in the area of food safety. Advisory work on resource use efficiency will accompany these investments where appropriate. 59. Outcome 3: Re-invigorating the financial sector. The Bank Group has provided analytical assistance in handling crisis impacts and designing work-out schemes for the banking sector through formal products as well as quick, informal consultations. It envisages continued close dialogue with the objectives of restoring normal bank credit operations and attracting foreign capital and credit lines. The Bank and IFC will focus on strategies for resolution of non-performing loans in banks, the development of non-bank financial intermediaries in the context of improving access to credit, the management and exit strategies for intervened banks, including re-privatization, and consumer protection in financial services. IFC‘s efforts will also be facilitating the development of private distressed assets recovery activities (subject to regulatory framework), and deepening the financial sector through investments in insurance and asset management. Investment in distressed corporate assets will help companies with liquidity needs, but strong fundamentals, to recover from the crisis and allow the companies‘ creditors clean up their balance sheet. IFC is aiming to expand its Global Trade Finance Program by adding new banks in Kazakhstan. It plans to resume financing for the real sector through targeted credit lines for SMEs and energy efficiency. Energy efficiency lending may be accompanied by advisory work on secondary legislation to put in place appropriate incentives and mechanisms for this product. IFC may provide loans to microfinance companies, especially those that operate in the underserved regions, subject to expected adoption of a new Microfinance Law. IFC‘s regional Azerbaijan and Central Asia Financial Infrastructure Advisory Project may expand to include Kazakhstan in its next phase to support credit information sharing systems. Country Development Goal: Bolster human capital 60. Outcome 4: Building skills for employment. JERP activities have developed policies to raise the quality of graduate education. In view of the centrality of the quality of human capital to competitiveness, and in particular to reduce the skills shortages in the labor force, JERP will initially concentrate on (i) an analysis of the PISA-2009 results; and (ii) an international policy benchmarking exercise in three critical areas of education quality: teachers, student assessments and school autonomy and accountability. The results of these exercises would be used to inform the education policy reform discussion and further assistance modalities for design and implementation support. The ongoing Technical and Vocational Education Modernization Project is directed at strengthening policies and institutions that will help align technical and vocational education with the skills needs of the market. A 21 Swiss TF-funded Youth Corps Project is under preparation with a view to help provide service learning opportunities for youth in Kazakhstan that serve the community while helping youth development in non- cognitive skills, which is a factor in facilitating entrance into labor market. The analysis carried out in these various activities will involve gender dimension. Country Development Goal: Boost employment in agriculture 61. Outcome 5: Strengthening knowledge for sustained growth in agriculture. Through a series of knowledge products and lending for drainage and irrigation, post-privatization support and enhancing competiveness by information acquisition, the Bank has supported growth in employment in agriculture. A notable JERP product was devoted to proposing reforms in the complex system of agricultural subsidies that distorted incentives and production patterns. It informed a government decision to simplify and restructure subsidies and reduce their impact. Agricultural production is expected to move towards comparative advantage, with a shift away from grains and towards livestock (a government priority), eventually permitting exports. The CPS will assist the government in achieving improved agricultural competitiveness and food security, through diversification, and address rural-urban income disparities. This will be achieved through knowledge and investments in irrigation, agricultural diversification and livestock development complemented with other cross-cutting activities in strengthening business enabling environment and trade competitiveness. Programmatic JERP products, built upon the recommendations of earlier JERP-funded public expenditure and institutional review, will assess the effectiveness of current agricultural programs, including subsidies, and develop a roadmap to identify market opportunities and constraints, including gaps in public services and infrastructure. Consultation with communities on the effectiveness of public services will include gender dimension. The CPS will continue lending for investments in irrigation and water management through the Irrigation and Drainage Improvement Project (IDIP II) and Syr Darya Control and Northern Aral Sea Project (SYNAS II). The Bank will continue dialogue on diversification, including transformation of the use of marginal arable land and development of livestock, using its knowledge base on control of animal disease and related public health risks, improving pasture productivity and building competitive supply chains from farm to processor. As discussed under Outcome 2, IFC will complement these efforts with direct investments along the agribusiness supply chain and advisory work to promote resource use efficiency and improve food safety standards. Country Development Goal: Develop infrastructure connectivity to reduce economic distance 62. Outcome 6: Improving energy transmission to poor areas. Bank assistance through knowledge and large-scale lending for transmission lines has led to the development of a modern grid, transmission tariff rationalization and the establishment of a spot market for electricity. The CPS will build on investments in transmission, focusing on the development and integration of the county‘s vast renewable energy resources (in particular wind and hydro power) into the national grid, and strengthening key regional power interconnections to alleviate severe network bottlenecks (especially between Kazakhstan and Kyrgyzstan). The indicative program envisages a possibility of a third north-south electricity transmission line project. The Bank will continue to assist the electricity grid operating company to enhance corporate governance and financial standards to international best practice and to play a greater role in regionally coordinated planning and operation of the central Asia power system. 63. Outcome 7: Building transport connectivity, lowering costs. The Bank is heavily engaged in assisting with improving the competitiveness of transport corridors, road and rail. Overall economic efficiency depends on lowered transport costs, greater volumes of freight and passengers, and expansion of trade to the benefit of regional integration. Spending on much-needed maintenance has increased annually by 10 percent in real terms—the portion of the main road network in ―poor‖ condition has fallen from 40 percent to 25 percent over the past seven years. The ongoing South-West road project supports 22 implementation of a 2,840 km portion of the government investment program on upgrading and rehabilitation of 8,300 km of roads along the six major CAREC corridors (Western Europe-Western Chin International Transit Corridor) with a total cost of US$7.5 billion. The CPS will focus on supporting the completion of the works on this Corridor thorough the East West Roads Project (305km), which will also help introduce performance standards for operations and maintenance of selected road sections as a pilot. The Government strategy also calls for non-discriminatory access to the rail network and a clear separation between operation and management of the infrastructure, together with the elimination of government-imposed price regulation. Half of the 1,400 km of new lines would be financed by the private sector. A Bank study under way will assess the operational performance of selected rail corridors and identify ways for increasing transit traffic, especially from China. 64. As part of the partnership program along the Corridor, the Bank also assists with the implementation of institutional reforms which will eventually transform the major state-owned enterprise in road planning and maintenance into a commercially oriented entity. This step would pave the way for the introduction of tolling mechanisms and the contracting out of operation and maintenance on a performance based method as well as the creation of a motorway management agency to be in charge of all management, monitoring and planning of the investment along the Corridor. Besides all road users, the road projects would benefit local and international shippers, manufactures, farmers and traders, and the oil related industries. A notable category of beneficiaries would be the low income population living in the area served by the road and needing markets for their products and access to social facilities. The main institutional reform on railways seeks to raise competitiveness and the participation of the private sector. 65. IFC intends to facilitate infrastructure development through PPP advisory work and direct investments with both private sector and sub-national sponsors. Specific focus areas include logistics and transport sectors to improve connectivity and trade, with early leads including Almaty Ring Road and investments in rail car leasing. In addition, IFC will also support infrastructure investments for Kazakhstan‘s oil and gas sector to encourage development and greater efficiency of services to the sector. Area of Engagement 2: Strengthening Governance and Improving Efficiency in Public Services Delivery 66. The CPS will assist in developing an efficient and accountable public sector. It will initially focus on assisting improvements in budget management, intergovernmental financial management, and SOE debt management along with modernization of the audit system. In addition, JERP assistance to support the evolving reforms to improve level and coverage of social protection programs, and sustainability of Kazakh pension system will continue. The Bank is also expected to maintain its support to the government for improved transparency and institution building through facilitating successful completion of the ongoing EITI validation process, development of anti-money laundering system and development of e-procurement. Country Development Goal: Improve public financial management and fight corruption 67. Outcome 8: Improving governance. The Bank will seek to engage in the development of the government‘s comprehensive anti-corruption program. The CPS will continue assisting improvements in revenue management institutions, and transparency and reporting of revenues from natural resources, while supporting heightened efforts to advance civil service reforms. In revenue management a series of JERP studies have provided policy and institutional advice on reforms in customs and tax administrations which led to deep reforms in tax policy such that Kazakhstan is close to international best practice though distortions in SME taxation remain a blemish. Through the ongoing Tax Administration Reform Project, business process reforms will be undertaken and modern risk-based methods introduced within a sharper 23 focus on large taxpayers, this will lead to reduced discretion on the part of tax inspectors. Customs service remains a critical weakness; through the ongoing Customs Development project, e-declaration and single window will be introduced, risk-based methods used, but a shift in mindset away from excessive reliance on controls will be necessary if corruption is to be reduced. The Bank will continue to facilitate efforts towards attaining compliance with EITI norms by mid-2013. Improved reporting and tracking of extractive industry revenues, with civil society participation, is a key contributor to strengthening governance. Kazakhstan has recently become a party to international conventions on money laundering and terrorist financing and has strengthened its anti-money laundering and countering terrorist financing systems based on past JERP advice, but is not yet fully in compliance with the Financial Action Task Force recommendations and standards of other international bodies. The JERP assistance in this area will continue focusing on conducting money laundering national risk assessment and necessary refinements to laws and practices towards adoption of international best practice norms by end-2013. In addition, the World Bank will provide assistance to the National Bank of Kazakhstan in preparing their Money Laundering Inspection Manual. Further JERP activity will provide advisory assistance to the Civil Service Agency in the ongoing design of amendments to the civil service law, guide high priority goals of anti-corruption and performance based pay system, and provide capacity building support. 68. Outcome 9: Strengthening budget and accounting institutions. A series of JERP products have supported systematic reforms in public financial management. The government places importance on the Bank‘s continued engagement in creating a modern, efficient, effective and accountable public sector. To this end, the CPS would assist improvements in the results-focus of budget management (with a view to strengthen the link between budget resources and policy goals, and support capacity-building for sustainable implementation of this system), in intergovernmental financial management (initially with a focus on improvement of targeted development transfers to housing and communal services, transport, education and health—a key area in public service delivery given that over 60 percent of total revenues of local budgets were transfers from higher level), and in debt management within state owned enterprises (assisting in development of a framework for monitoring and oversight of their non-guaranteed quasi- public debt towards strengthening strategic long-term debt planning in Kazakhstan, and development of domestic government debt market). Support to the Accounts Committee is envisaged to help key international benchmarks on external audit and parliamentary oversight met over time. JERP will assist the transition to international public sector accounting standards. An ongoing JERP product assists with development of e-procurement with a focus on design of electronic auction system. A Statistical Capacity Building Project-2011 introduces modern methods and sharpened skills in government statistics. A several grant financed capacity-building projects—in audit and in procurement—help strengthen public management. This entire agenda has a strong governance dimension, as is also the case with improvements in business climate. Country Development Goal: Raise efficiency in delivering critical public services 69. Outcome 10: Reforming social protection system. JERP assistance to support the evolving reforms in improving the level and coverage of social protection programs will continue. The main thrust of the reform is the inclusion within the targeted social assistance program of ―activation elements‖ that promote graduation of prime-aged, able-bodied recipients from reliance on assistance to employment. The Bank will assist in the design of complementary conditional cash transfer type programs linking receipt of social assistance to a set of comprehensive services that promote self-sufficiency. An ongoing JERP product continues advisory assistance on pension reforms. The multi-pillar system includes one linked to private savings; concerns exist as to its financial sustainability and reliability. Hence, regulatory and operational rules for the private pension industry are being revisited. Work on pensions addresses an important gender issue, as, on average, elderly women have fewer working years during which they accumulated pension contributions, and they also outnumber elderly men. As part of its efforts to 24 strengthen the domestic financial sector, IFC may invest in life insurance and private asset management (including pension management) companies. 70. Outcome 11: Sharpening strategic approach to health reforms. Several JERP studies on the design of a comprehensive health strategy and ongoing Health Sector Technology Transfer and Institutional Reform Project have underpinned a close intellectual and policy engagement with the government. The policy dialogue transformed from analysis of selected policy issues to a comprehensive assistance to implementation of a comprehensive health reform strategy. The health project focuses on health financing and management, health management information system, pharmaceutical policy, health care quality improvement, medical education and science, and food safety. It introduces international standards in these areas and builds institutional capacity through learning by doing. The agenda for deepening reforms encompasses primary health care and the evaluation of health sector performance. Area of Engagement 3: Ensuring Development is Environmentally Sustainable 71. Environmental protection, improved energy efficiency and low carbon strategy are ranked as high priorities in Kazakhstan and essential to sustain growth. To support government‘s efforts in these areas, the WBG assistance would initially focus on supporting efforts to pilot benchmarking technologies in selected industries with best available practices and provide recommendations on reform of environmental permit systems and monitoring and enforcement systems. Bank assistance will further focus on rehabilitation of selected industrial contaminated sites while facilitating efforts to broaden and deepen the implementation of Energy Efficiency agenda and water resource management. The Bank will also continue the advisory assistance to Kazakhstan on reducing gas flaring to broaden and deepen the benefits of the existing gas utilization program. Country Development Goal: Fight climate change with a cleaner environment 72. Outcome 12: Safeguarding the environment. JERP will assist design industrial environmental benchmark pilots to reduce the environmental impact and energy intensity of production. Reform of environmental permits and monitoring and enforcement systems would be supported. Export competitiveness in markets that demand low environmental-impact and products would be enhanced. The Bank has provided knowledge in the rehabilitation of industrial contaminated sites. Pollution remediation has been pursued through the ongoing Nura River Clean-Up Project and the Ust-Kamenogorsk Environmental Remediation Project. The proposed Persistent Organic Pollutants (POPs) Management Project would support the remediation of contaminated sites with Polychlorinated Biphenyls (PCBs) that pose a serious risk to public health and the environment, and the removal and incineration of stockpiles PCBs waste and obsolete pesticides. In addition, the Bank will help government scale up mechanisms introduced under earlier lending operations for improvement of water resource management through irrigation and drainage service delivery, and by improving the availability of water for productive purposes in the Kazakh part of the Syr Darya basin. 73. Outcome 13: Raising energy efficiency. JERP assisted with analysis of options for raising energy efficiency (EE) from current low levels (Kazakhstan ranks among the top ten of the most energy intensive economies in the world). Encouragingly, this agenda has recently been set by the Government among top development goals (with a targeted 25 percent reduction in energy inefficiency by 2020) and a new legislation is under discussion in parliament. The Bank will provide technical assistance for the establishment of a dedicated energy efficiency finance facility to support the development of viable projects as part of a Swiss TF-funded Energy Efficiency Project of which the primary objective is implementation of EE demonstration projects in selected sectors with high social impact, and quantified energy savings. The Bank will initiate a dialogue with the authorities on the potential for adopting clean coal technologies for electricity generation, given the abundance of low cost coal in the country. Private 25 sector interest in establishing thermal generation plants is strong and could be leveraged into clean coal technologies provided the frameworks for tariff setting and PPPs are put in place. The Bank will also continue the advisory assistance to Kazakhstan on reducing gas flaring and developing the existing gas utilization program, while IFC may support power generation projects based on associated gas. The Bank- led Global Gas Flaring Reduction Partnership will provide technical assistance and help draft further changes to oil and gas sector legislation. IFC considers improving energy efficiency to be a cross-cutting priority across all of it operations in Kazakhstan. To this end, it will focus on real sector investments where resource use efficiency and energy efficiency can be increased, provide targeted credit lines to banks for on-lending to industrial enterprises, and carry out advisory work, if needed, to facilitate energy efficiency lending in the private sector. In the infrastructure sector, IFC may explore opportunities in improving efficiency in the utilities sector, especially focusing on the distribution part of the district heating. Investments in the waste management sector at the municipal sector will be considered by engaging private investors directly or through PPP structures. Gender Mainstreaming 74. The WBG emphasis on mainstreaming gender considerations into CPS program will continue. In addition to above-discussed examples of CPS program elements that have a strong basis on gender considerations, the following projects exhibit high gender dimension:27  South-West and East-West Road Project. The Strategy for Development of Road User Services under these projects envisages that road development will have positive impact on income growth, job creation and transformation of local economies. This is particularly the case for the South West Road project large segments of which crosses the oblasts predominantly populated by unemployed rural population; this will likely to affect women, living in villages along the corridor, and representing the significant share of unemployed people.  The Health Sector Technology Transfer Project. This project supports the new State Health Care Development Program, which targets a reduction in maternal mortality rate as a key performance indicator. Clinical practice guidelines in primary care will focus on maternal health. The Program also supports health promotion and disease prevention, resulting in gender-related benefits such as a reduction of tobacco- and alcohol-related diseases and injuries, which is expected to raise male life expectancy. V. IMPLEMENTING THE STRATEGY A. Managing Program Implementation 75. The CPS envisages a strong AAA program supplemented by selective lending linked to core development priorities. As noted, the engagement will be mainly through the JERP with the government currently funding 85 percent of the US$4.4 million annual program.28 The JERP will be negotiated annually with a mid-year review. In order to ensure adequate quality and compliance with Bank policies, JERP AAA will continue to follow the same cycle as the Bank AAA activities. Investment lending will continue to be selective and upon demand by the government. As noted, half of the indicative 27 The Banks Small Grants program to support CSO capacity-building had a strong gender dimension in Kazakhstan, while it was in place until this year (the program is currently being repurposed as part of the planned introduction of a new Global Partnership Facility for Enhanced Social Accountability). Out of 64 CSOs, whose projects were supported under the program in 2004-2011, 18 represented women and gender associations and 43 were headed by women. The grant funds were used, in particular, to support social and civic engagement and improve income generating skills of women in rural area, enhancing also their role in local self-governance. 28 The Bank funding under the program reflects the learning involved by staff through the JERP policy dialogue and the potential spillover benefits from Kazakhstan‘s development experience into other client countries. 26 envelope of US$2 billion for the CPS period will be allocated to the new East West Roads Project for the fiscal year 2012, and the rest is expected to be financing projects in areas in which the government considers the Bank can add value through involvement in design and implementation. 76. The ongoing WBG lending portfolio is well aligned with the CPS strategic themes and can help maximize the impact of the WBG and Government resources through timely implementation. The IBRD portfolio consists of 12 projects with a net IBRD commitment of US$2.6 billion, supporting projects costing US$3.5 billion, reflecting high government co-financing. IFC has a committed portfolio in the amount of US$404 million with 11 clients in the banking, manufacturing, agribusiness, and services sectors that is performing well. The IBRD portfolio is based on high quality knowledge, fits well with national priorities, with projects enjoying high degree of ownership (project are prepared only when the authorizing environment is keenly supportive), and are increasingly directed at institutional reform and embedding of international best practice. However, even adjusted for its youth (average age is 3.9 years) and the recent significant improvement in its performance,29 the portfolio is relatively slow- disbursing30 with mixed performance across projects. The recent CPPR (2011) highlights the principal causes for this performance as:  Government procedures resulting in lengthy preparation and effectiveness, taking two years on average with preparation half a year longer that the Bank average.  Variable readiness of new projects for implementation despite the long preparation. Internal procedures within partner agencies make it difficult in some cases to timely establish necessary project structures and approve key documents, required to start implementation.  Weaknesses in the system of monitoring and evaluation prevents timely identification and response to project specific and the cross-cutting issues across the portfolio despite overall good project supervision. Table 3. Alignment of Existing Bank Portfolio with CPS Areas of Engagement Areas of Engagement Nr of Projects Amount Grants (New CPS) projects (in $ in mln) current portfolio Improving 6 Technology Commercialization 2,308.3 1 IDF Competitiveness and Technical and Vocational Education Modernization Employment Agricultural Competitiveness Generation South West Roads Construction Moinak Electricity Transmission Alma Electricity Transmission Strengthening Public 4 Customs Development 173.2 2 IDF, Finance and Public Tax Administration Reform 1 SAFE Sector for Efficient Statistical Capacity Building Service Delivery Health Sector Technology Transfer Ensuring 2 Forest Protection and Reforestation 54.3 1 GEF Development is Ust Kamenogorsk Remediation Sustainable 29 Portfolio monitoring has been strengthened through closer implementation support particularly for complex and slow 16 disbursing projects as well as proactive use of cancelations in case of a poor performing project. These efforts continue. 30 Portfolio disbursement ratio as of end February 2012 is 22.1 percent with the South-West Road Project (SWRP), which accounts for 83.8 percent of the total portfolio, and is 10.5 percent excluding SWRP. 27 77. The authorities and the Bank share the view that a joint approach to addressing these three weaknesses would be the most effective. The government has requested the Bank to draw lessons from closing projects and best practice, and provide support for project-based institutional assessments. It also requested Bank assistance in bringing more detailed performance assessment to the portfolio, including improving information flows to and from line ministries, and application of safeguards and procedures. This process is now being complemented through establishment of a Joint Portfolio Monitoring Team (JPMT) that would concentrate on monitoring portfolio performance against key performance indicators (riskiness, disbursements, outcome of completed projects, and key systemic, implementation, and policy issues), and on problem projects that will lead to important decisions. The government is also at an advance stage of preparing a proposal to streamline its external borrowing approval procedures for IFI loans by aligning them with the annual budget approval process, which would be instrumental in eliminating long project start up delays. Joint work will also focus on:  Improving quality at entry through ensuring fuller readiness for implementation by applying jointly developed readiness guidelines, and through incorporation of lessons learnt from previous operations particularly for complex and institution building projects;  Improving quality of implementation based on greater focus on joint monitoring and management of the risks, establishing strong and sound M&E system, raising procurement and financial management capacities of PIUs and state agencies.  Expanding ongoing high frequency training and consultations on procurement to areas of financial management, and monitoring, and evaluation, particularly to track performance of impact indicators and financial management. B. Measuring Performance 78. The Bank will strengthen its results based monitoring and evaluation to assess the progress of program and react effectively to challenges. The JPMT platform will be used for quality review and as an instrument to track progress in implementing milestones and outputs, jointly with the counterparts. The JERP AAA will maintain its quality at entry review system, while programmatic approach providing a monitoring tool in itself through annual programming and mid-term review cycles to indentify progress and calibrate follow-up work accordingly. The annual reviews of the CPS program, based on results framework as a monitoring tool, will be implemented jointly with the Government. In addition, a Progress Report will be prepared and submitted mid-way through this CPS period. 79. The results matrix will be expanded in the CPS progress report. As noted previously, the result matrix is a living document. It reflects the ongoing JERP-AAA, current portfolio and lending operations pipeline for the next two years. The CPS Progress Report will expand the results framework to reflect Bank activities in the outer years of the CPS. C. Deepening Engagement with Civil Society and Development Partners 80. Kazakhstan has an emerging civil society (but one concentrated in the large metropolis) that wishes to engage on the development agenda. Most active CSOs focus on environment, business enabling environment, gender, transparency, and vulnerability issues. The Bank‘s current program exhibits constructive relations with CSOs where they play a role as a valuable partner in identification of policy and institutional development issues or in design and M&E of project implementation in key areas. The Bank has been engaged in establishment of the BOTA foundation to carry out educational and social service work and provides implementation support to its operations. The EITI program has relied on participation of Coalition of CSOs in the work of EITI multi-stakeholders group and the National Stakeholders Council in which the Bank is an observer, providing assistance in the process of EITI 28 validation and for CSO capacity building. The South-West roads project benefits from public consultations in design and implementation, a process that is currently in the process of being systematized and strengthened through establishment of a multi-stakeholder group for monitoring both the Bank projects and the projects funded by the other IFIs along the Western Europe-Western Chin International Transit Corridor. The Youth Corps project will work through CSOs for its implementation of grants to sponsor community service activities. This CPS aims at continuing to work with, and listen closely to a broader range of CSOs in Kazakhstan. 81. Close collaboration with other multilateral institutions and development partners will continue. In the area of improving competitiveness and fostering job creation, partners provide support on expanding the role of the private sector and trade integration (EC, USAID), financial sector reforms (IMF), building skills (EC, GIZ), agriculture (GIZ), SME development (ADB), electricity markets and investments (EBRD, USAID), roads (ADB, EBRD). In broad governance agenda, partners provide advice on local public administration reform, public sector implementation capacity (EC), civil service reform (EC, UNDP), customs reforms (USAID), judicial sector reforms (EC, GIZ, USAID), social protection (EC, UNICEF), and in health ((EC, USAID). In the area of environment, partners‘ focus is on sustainability (EC, GIZ, UNDP), and in energy efficiency (EBRD). VI. RISKS 82. Political Risks. Political stability and predictability will be important, especially stability in the application of the rule of law. Critically, the pace of improvement in governance will need to be stepped up. A greater role for political debate and accountability of the executive will bolster the prospects of sustaining growth. Confidence will have to be established that improvements in the business climate will endure and the country will remain open to playing its geo-political role in energy and trade. Social stability will require improved public services, multi-faceted approaches matching rural youth, especially in the south, with productive jobs, and voice through public participation in decision-making and oversight processes. It will also require greater attention to the regions, especially those lagging, and to foster SME development. 83. Managing Natural Resources and Economic Risks. Growth prospects depend on deepened trade integration for productivity growth through imports of advanced technology, and, hence, on significant volumes of foreign investment. Productivity growth will require greater freedom for resource allocation by the private sector in a competitive environment of incentive neutrality and fair access to opportunities. The government‘s emphasis on diversification provides opportunities for collaboration and dialogue. The rules based oil fund has been robust. Diversification will require discipline on the absorption of oil revenues and a fiscal stance that targets a faster adjustment in the non-oil deficit. Sheltering the economy from oil price and volume volatility as well as the potential adverse impact of NPLs on the banking sector will remain important. 84. External Risks. These arise from a continuation of the turmoil in the core Eurozone economies, protracted adjustment in international banking markets, or a slow upturn in international output and trade. Most immediate is the euro area debt crisis. A disorderly resolution of EU debt problems would lead to broad-based risk-aversion in financial markets. This could lead to a sharp reversal in flows and portfolio investment in particular, which if prolonged, may lead to weakening financial flows to Kazakhstan and lower growth. The government recognizes these risks and considering contingency crisis-mitigation plans to address the implications of a new round of global financial crisis. The country has large net external assets which give the authorities considerable room for maneuver. 29 85. Risks to the CPS Approach and Mitigation. These mirror the above-outlined risks. The CPS is predicated on continuity and stability in the relationship with the World Bank Group, and on more results- oriented reform approach of the government. It aims to foster a faster pace in governance reforms and a re-thinking of the role of the state in diversification policies. Success will depend on the quality of the knowledge products and the skill with which the dialogue is conducted, but also on the willingness of the Kazakh partners to continue drawing from international experience. In the event of adverse external shocks, rapid policy advisory work as well as possible IBRD development policy operations to counter external shocks subject to IBRDs capital constraints, and IFC assistance could be considered as instruments of the WBG assistance, which collectively proved effective during the 2007-2009 crisis. The proposed deepening of the work on governance as a cross-cutting theme in all three proposed areas of engagement in the CPS will forearm the WBG to deal with risks to the program and to the portfolio as they arise. Moreover, greater attention to implementation constraints and to a results focus will help to improve the implementation of knowledge and lending activities. 30 VII. ANNEXES Annex 1. FY05-11 Country Partnership Completion Report KAZAKHSTAN CPS COMPLETION REPORT FOR FY05-11 Document title Document issue date Report No. CPS August 10, 2004 29412-KZ CPSPR May 1, 2008 43393-KZ I. Introduction and Overview 1. The 2004 Country Partnership Strategy (CPS) reflected a flexible approach responding to Kazakhstan’s development objectives and to its rapidly changing economic and social conditions. The strategy was designed to ensure strong government ownership of the Bank‘s program, to allow the Government and the Bank to adjust that program to changing government priorities and country circumstances, and thereby to maximize the Bank‘s contribution to Kazakhstan‘s development. It was built on the premise of cutting-edge knowledge transfer driven by the country needs and priorities. By delivering successful results under a growing program, this approach has demonstrated that the Bank can remain relevant in addressing development challenges of countries that enjoy commodity export windfalls and have low borrowing requirements.31 2. This Completion Report rates the World Bank Group supported program and World Bank Group performance as satisfactory. The satisfactory rating for the former reflects significant progress on several major development issues summarized in this completion report, and the latter is based on continued generation of dialogue and debate around high quality AAA, responsiveness, CPS outcomes (value added that Bank interventions brought to Kazakhstan‘s development agenda), innovation, and strong, strategic partnership formed under the CPS. The Completion Report had been developed based on consultations with the Government counterparts and the self-assessment by the Kazakhstan team.32 II. Progress Toward Country Development Goals 3. Kazakhstan grew rapidly over the past decade and made considerable progress in poverty reduction. GDP per head rose, in terms of constant 2011 dollars, from US$5,982 in 2001 to US$11,245 in 2011, as the economy reaped efficiency gains from increasing market orientation, and hydrocarbon output expanded amidst rising price. The poverty incidence fell from over 46.7 per cent to 6.5 percent, although rapid growth, which was concentrated in large cities and resource-rich western regions, resulted in some income disparity with the poverty rate 2.7 times higher in rural as compared to urban areas. Most of the MDGs will be met. 4. Both the pre- and post-crisis national strategy aimed at laying the legislative and institutional foundations for improved competitiveness and economic diversification. The country progressed 31 The CPS was designed to serve as a basis for cooperation between the Bank and Kazakhstan for as long as it remained relevant in the overall economic and political environment. "Relevance" was to be assessed against three criteria: the demand for the Bank's services; the Bank's value-added to the development process; and, Kazakhstan's overall policy environment. 32 It draws from reviews of Aide-Memoires and ISRs of the projects active during the period under review, ICRs of projects completed during the CPS period, Independent Evaluation Group reviews of ICRs, CPPRs and the 2008 CPS Progress Report. 31 towards developing a rules-driven fiscal framework, privatized small and medium enterprises and housing, retained liberal trade regime, embarked on an ambitious public management and the business climate reforms, and allocated resources for improved social services and critical infrastructure to sustain growth. In parallel, large inflows of foreign direct investment were attracted in particular to the extractive sectors. 5. These achievements were made possible by the authorities’ focus on a consistent strategic vision for economic development, based on integration into the global economy. Kazakhstan‘s development progress reflects an openness to new ideas in economic management and the eagerness of the government to learn from cutting-edge international experience and to embrace innovative approaches. The CPS was instrumental in generating policy analyses and ideas; and the government actively engaged intellectually with the Bank. 6. Responsible fiscal management led to a substantial accumulation of resources in the National Fund before the 2007 crisis hit. Total government spending averaged 22 percent of GDP for the pre- crisis period and the non-oil deficit averaged about 3 percent of GDP, despite rising oil prices and revenues—an indication of fiscal restraint. Accumulated savings in the National Fund (NF) rose to US$51 billion (about 30 percent of GDP) between 2001 (when the flows started) and end-2011. 7. However, large capital inflows to the banks, encouraged by soaring commodity and real estate prices coupled with foreign investment inflows, overheated the economy, led to currency appreciation and planted the seeds of financial instability. Finance and construction became the major drivers of economic growth. A sudden stop in foreign loans to the banking sector in August 2007 triggered a liquidity crisis and speculative runs; the global financial crisis in 2008 and the associated sharp decline in commodity prices led to an economic slowdown and hence a deterioration in the quality of bank assets. 8. Kazakhstan withstood the effects of the global financial crisis well through a dexterous response combining fiscal relaxation with bank stabilization measures. The authorities supported output with stimulus programs directed at agriculture, small business, infrastructure and construction. The three major problem banks were recapitalized and, through negotiation, external debt of banks was reduced by more than US$10 billion. Total official fiscal and banking support amounted to US$17 billion, largely drawing on savings in the oil fund on an exceptional basis to finance both budget and off- budget transactions. Meanwhile, the central bank extended liquidity support, and deposit insurance was greatly bolstered resulting in renewed confidence in banks. 9. The decisive approach to macroeconomic and financial sector management contributed to a quick recovery in output: GDP growth was 7.3 percent in 2010 and 7.5 percent in 2011. The economic expectation is becoming more broad-based since 2011, with growth returning to agriculture (after the contraction in 2010 due to drought), and construction. Inflationary pressures resulting from commodity price shocks and an accommodating fiscal stance have been contained by the end of 2011. 10. A considerable improvement in the fiscal position has taken place since the crisis. The non-oil balance improved from over 10 percent of GDP33 in 2008-09 to below 8.3 percent of GDP in 2011. The 33 Increase in the deficit reflects partly the 2008 tax reform which aimed at lowering the tax burden on the non-resource sectors of the economy while increasing the tax burden on the extractive industries: the statutory rate of corporate income tax was cut from 30 percent to 20 percent for all sectors; in parallel, additional tax levies (i.e. severance tax and customs duty on oil exports) were introduced for the extractive industries, resulting in an estimated 30 percent increase in the tax burden on extractive industries compared to the levels before the tax reform. 32 state budget deficit that determines the level of borrowing of the central government improved notably 34 and is estimated at 2.1 percent of GDP in 2011. With the removal of crisis spending, budget outlays returned to pre-crisis levels at around 22 percent of GDP (down from 27 percent during 2008-09). The authorities aim to lower the broader non-oil fiscal deficit to 3 percent of GDP by 2020, which would require resolute measures on both revenue and expenditures. 11. The progress made in reducing the external indebtedness of the banking sector needs to be supported by a comprehensive debt-work out for banks and affected parties. The level of non- performing loans (NPLs) remains high, limiting the capacity of the banking sector to finance productive activities.35 Credit extension to the non-oil sector (which relies almost solely on domestic bank credit) remains below levels needed to sustain high growth and most banks operate with substantial liquidity. 12. Emphasis on improving social services over the past decade gained a new impetus during the crisis, but outcomes lag Kazakhstan’s level of income. The share of the budgetary expenses allocated to social sectors reached all time highs at about 60 percent in 2010-11. The expenditures on social security, health care, education and housing and utilities were higher in 2011 than their pre-crisis (2008) levels spending. Despite improvements in services, outcomes are not yet at par with comparable countries especially in adult mortality and secondary school results. A major management reform in health systems is underway to address outdated norms and practices, and oversized network of publicly-owned facilities, while establishing regulatory framework and incentive mechanisms for achieving greater access, efficiency and quality. In education, focus is on improving access, equity and quality at all levels. The government also recognizes the need to confront skills shortages by modernizing technical and vocational training. These efforts are being complemented by introduction of activation measures in social protection system to help low-skilled workers, the unemployed, youth, and social assistance beneficiaries access jobs and graduate from reliance on safety nets. 13. The business climate has improved but output diversification progressed slowly. Significant legislative changes—investor protection, insolvency procedures, concessions and the competition laws— as well as the licensing and inspection requirements both led to a rise in the Doing Business (DB) rating (to 47th position in 2012) and improvement in the overall enabling environment. Kazakhstan enjoys the advantage of a flexible labor market in the non-oil sector. Ownership of land is private and urban land markets are active, but land use planning and approval is cumbersome and non-transparent. The state dominates the provision of services and finance. Along with an improved environment for domestic competition, important reforms for agricultural SME development, rural credit and agricultural insurance will help unlock the rich potential of agriculture. 14. Public financial management (PFM) improved during the CPS period. The Budget Code, setting the framework for integration of planning and budgeting processes, is being implemented performance-based budgeting advanced, and auditing and accounting systems enhanced. These reforms build on existing strengths of the system with a well developed Treasury system, high budget credibility, and a budget that is linked to policy priorities. 15. Relieving the infrastructure constraints to growth is a key component of government’s competitiveness agenda. Large capital investments to upgrade the major east-west and north-south road and rail corridors linking China, Central Asia and Russia with Western Europe have been made. A shift 34 The ―state budget deficit‖ is defined as that part of the total non-oil deficit not covered by oil revenue and is therefore equal to net government borrowing. 35 Non-performing loans (NPLs) amount to 32.6 percent of total loans (11 percent of GDP) and the ratio of credits in areas more than 90 days is 23.8 percent (8 percent of GDP). The official NPLs appear well provisioned with an amount equal to 31.9 percent of the credit portfolio set aside to cover the losses. NPLs are concentrated with 25 large borrowers accounting for about one third; the construction sector accounts for one-third of the NPLs. 33 in expenditures towards road maintenance (as transport networks are in poor condition) would both raise efficiency in spending and help reduce the high costs of road transport. A focus on improved facilitation, smooth functioning of border crossing points to reduce costs of business is necessary if the country is to realize its potential as a regional logistics hub. Kazakhstan has also advanced greatly in power sector reforms. With efficient tariffs, the transmission sector is technologically highly advanced. Improving cost-recovery and modernization in the distribution and generation sector and strong regulation will help bring needed foreign investments towards increasing the reliability of supply, especially in winter. 16. Efforts to safeguard the environment are evolving with greater government emphasis on energy efficiency agenda. Substantial progress in modernization of regulatory and institutional framework for environmental management has been achieved. Issues of extreme inefficiency in energy use, carbon dioxide intensity, the legacy of pollution and health burden of industries are gaining more emphasis, and along with continued reduction in the flaring of gas associated with hydrocarbon operations, remain of high environmental importance. 17. Kazakhstan has taken impressive steps towards regional integration. It became member of the Eurasian Economic Community and a contributor to a regional development instrument, the Anti-Crisis Fund. It pursues dialogue on regional cooperation through bodies such as CAREC and the Shanghai Cooperation. It is making sound progress towards membership of the World Trade Organization while now operating in a newly established Common Economic Space with Russia and Belarus. It became a donor to IDA in 2010. Apart from investments through regional institutions, Kazakhstan provides bilateral investment assistance in Georgia, Kyrgyz Republic and Tajikistan. A continued emphasis on strengthening institutional structures and the analytical and technical expertise will also help Kazakhstan play an enhanced regional leadership role. III. Outcomes Delivered with the Support of the CPS Program 18. The 2004 CPS builds on a framework for cooperation around cross-cutting areas on the competitiveness agenda, including management of the oil windfall and increased public sector efficiency; building capacity to improve business enabling environment; investment in human capital and basic infrastructure; and mitigation of environmental concerns. In retrospect, these areas of engagement were appropriate to the key development priorities and challenges of the country. The CPS was prepared before the results-based approach became mandatory. Hence, this CPS Completion Report assesses the Bank‘s performance based on the contribution made to the implementation of the Government‘s core development goals. Such goals have been selected among the key areas that the Bank intended to support through the CPS. Pillar 1: Reducing losses in competitiveness through prudent management of the oil-windfall and increased public sector efficiency Country Development Goal: Maintain Prudent Macro and Inter-temporal Economic Management 19. A disciplined approach to fiscal management in the face of windfalls, the adoption of a fiscal rule and the institutionalization of the National Fund are all critical government achievements that have led to stable macroeconomic outcomes (as measured by growth, inflation, fiscal and debt sustainability) supported by the CPS. The Joint Economic Research Program (JERP) provided extensive advisory and analytical services (AAA) to the Government on the institutional design and implementation of the National Fund (NF). These AAA services intensified during the recent crisis, when the resources of the NF were used on an exceptional basis to bail out ailing banks and carry out successful countercyclical fiscal policy. More recently, JERP advisory services helped the Government to avoid fiscally risky banks‘ bailout strategies in the wake of a financial sector crisis and to balance 34 macroeconomic and monetary stability with sustainable growth objectives. JERP supported the formulation of medium-term macroeconomic forecasts and government staff training in this area. JERP AAAs on financial sector risks have spurred important amendments to the regulatory and supervision framework for commercial banks and capital markets. The Development Policy Loan (2010) for US$1 billion supported the Government‘s efforts to set clear, binding rules on access to the NF resources, 36 enabling the Government to limit the use of NF resources and to withdraw the economic stimulus as the economy recovered. Recent advisory work has focused on refinements to the fiscal rule taking international experience into account (e.g. adoption of a countercyclical approach in the management of oil revenues). Bank AAA under the JERP on all these elements were made highly effective by the Government‘s approach of sponsoring a series of high-level brainstorming engagements with the Bank (co-chaired by the Prime Minister), which helped clarify and internalize the policy advice and recommendations. 37 20. The Bank has supported a shift in public spending towards more equitable public resource use and improved delivery of key social services. From a low base, social spending rose slowly over the pre-crisis era. The 2010 DPL supported the Government program to reallocate resources from non- priority administrative expenditures and state-owned enterprise (SOE) transfers to social sectors (eventually the latter increased from 52 percent in 2008 to almost 60 percent in 2010). The increased allocations for social expenditure aim at supporting the ongoing institutional reforms to improve the quality and efficacy of social assistance programs as well as social service delivery in health and education. Efforts are also underway to better target spending on infrastructure and agriculture to foster non-oil growth (supported by past and ongoing JERP advisory services). 21. The CPS program has supported the Government in strengthening fiscal and debt management by better monitoring and analyzing fiscal risks, including those related to the SOE sector. A fiscal risk arises from the indebtedness of the state-owned enterprises, with inadequate information on debt and a weak framework for controlling debt. A high-level brainstorming session focused on this issue in 2010 followed by policy recommendations and ongoing technical assistance towards integrating SOE debt monitoring into fiscal policy. More broadly, these efforts aim to assist in developing a medium term Debt Management Strategy drawing from the recommendations of the 2011 Debt Management Performance Assessment (DeMPA). Country Development Goal: Enhance Public Sector Efficiency and Transparency 22. The Bank support through the CPS has contributed to establishing gradually the building blocks of a modern PFM system. The support provided by the Bank through advisory work, the PEFA and the 2010 DPL towards implementation of a revised budget code culminated in the introduction of a three-year budgeting on a rolling basis at the national and regional levels, more autonomy for budget administrators allowing reallocation of resources between the budget line items during budget execution, and the introduction of internal audit units in budgetary organizations. As the local level of Government accounts for 40 percent of expenditures and provides the lion‘s share of social services to the population, these changes are important for effective public expenditure outcomes. Progress in the implementation of performance-based budgeting has gained pace with support from ongoing multi-year JERP AAA, which is expected to facilitate stronger alignment of national strategies with budgetary resources throughout the 36 The fiscal rule adopted in April 2010 set a ceiling for the transfer from the NF to the budget at US$8 billion and mandated no off-budget transfers to the state enterprise sector. 37 For instance the initial session focused on Building Blocks for Diversifying the Economy (FY04) during the preparation of the Country Economic Memorandum (FY05). A further series discussed policy options on structural transformation, exchange rate policy, industrial policy, and trade. In subsequent years the Bank organized, among others, two high level brainstorming sessions upon request of the Government to address strategic macroeconomic policy questions - Managing Economic Crises (FY09) and Discussion of draft Strategy of Kazakhstan Development Until 2020 (FY10). 35 next CPS. The Bank has also supported the design of an institutional framework for government agencies that separates policy-making from policy implementation—advisory support started with recommendations on improving public investment planning and then expanded to a full assessment of financial management systems. 23. The Bank supported a successful reform of the tax system that reduced the taxation burden for the non-oil sector. JERP AAA towards improving neutrality in taxation of non-oil sectors assisted with the design and the implementation thereafter of a new 2008 Tax Code that introduced flat tax regimes for personal and corporate income, set a higher tax burden for the resource and oil industries (a key government policy measure in support of output diversification) and adopted a special tax regime that lowers the tax burden on the small and medium enterprise sector. Kazakhstan has one of the lowest tax burdens (outside of the oil sector) in the region. The 2012 Doing Business report rated Kazakhstan 13th out of 183 countries in terms of ease of paying taxes, which makes it the top-ranked country not only in Central Asia, but also in ECA region.38 The effective tax burden on oil sector almost doubled from 16-17 percent in 2003-2004 to over 30 percent in 2010. 24. The Bank, in addition, has been supporting improvements in revenue administration institutions. Analytical work on the efficiency of Kazakhstan tax and customs administrations informed modernization strategies for each institution, envisaging change management, smart procedures and improved capacity. The Bank is assisting with implementation of these strategies through two projects39 which are expected to improve administrative practices and governance environment under the next CPS. 25. The signing in December 2006 of a Memorandum of Understanding (MOU) on the Extractive Industries Transparency Initiative (EITI) between the Government and the Bank accelerated the pace of EITI implementation. Amendments to the Law on sub-soil use were passed, mandating commitment to EITI for all new license holders. EITI now covers not just the oil and gas sector but mining as well, with 136 companies participating including TengizChevrOil, the largest oil producer in Kazakhstan (this level of participation exceeds reporting in any other EITI implementing country). The share of companies that have signed the EITI memorandum represents over 95 percent of the total extractive revenues generated in the country, improving significantly transparency in flows. An important last step in consolidating these impressive efforts is achieving an EITI complaint status in 2013. 26. To strengthen anti-corruption efforts the Government has eliminated many administrative barriers. Licensed activities had been reduced, and a strict order was established for inspections of private entrepreneurs by state agencies. The country has ratified the UN Convention against Corruption in 2008, confirming its willingness to follow international standards in the field of preventing and combating corruption, an area were there remains an unfinished agenda to be followed through under the next CPS. The Bank also provided advisory assistance through the JERP towards establishment of a Committee for Financial Monitoring under the Ministry of Finance to lead efforts in Anti-Money Laundering and Combating Terrorism Financing (AML/CFT). The Committee was established in April 2008 and in July 2011 was accepted as new member of the Egmont Group—International Association of Financial Intelligence Units. 38 In terms of total number of tax payments, Kazakhstan is ahead of ECA (37) and OECD (13) countries with only 7 annual payments. Time spent by taxpayers has also improved – 188 hours per year and close to OECD similar indicator (186). Profit tax with an effective rate of 15.9 percent is very close to OECD countries (15.4 percent effective rate), and total tax rate is equal to only 28.6 percent (ECA – 40.4 percent, and OECD – 42.7 percent). 39 Customs Development Project (FY08-12) and Tax Administration Reform Project (FY10-14). 36 Pillar 2: Promoting competitiveness by strengthening government’s capacity to identify and reduce barriers to business and private investors Country Development Goal: Improve Business/Investment Environment 27. With CPS support, business environment reforms have resulted in reduced transaction costs, requirements and time for businesses to comply with the law. Efforts continue to sustain significant improvements in the business environment as measured by the Doing Business (DB) indicators, where Kazakhstan moved from position 86 in 2005 to 47 in 2011. Close Bank collaboration with the interagency working groups help guide steady improvements in numerous regulatory requirements making easier to open businesses, pay taxes and protect investors‘ rights. Currently, the emphasis is on improving lagging areas further (e.g. construction permits, access to financing, cross-border procedures) and enforcement. 28. The reach of business environment reforms extends beyond the areas directly measured by DB rankings. The Bank has worked closely with the Ministry of Finance on overhauling the legal framework governing bankruptcy and insolvency. As part of these efforts a new legal framework is currently being developed to address important drawbacks that impede efficient resolution of problems faced by highly indebted firms—this will provide an essential foundation for resolution of NPLs that currently hold back the development of the financial sector. The ongoing joint efforts cover streamlining of the licensing and permits framework, through which over 30 percent of the licenses and permits (originally estimated around 1200) were eliminated to date and a further 30 percent is expected to be eliminated in 2012. The Bank also collaborated with authorities to strengthen competition, through enhancement of the legal framework and the institutional capacity of the Competition Protection Agency (CPA). However, this is an area where a large unfinished agenda remains to be tackled through a compressive approach that includes the CPA and other relevant institutions. Multi-ranging government support programs for local enterprises (import substitution, local content requirements, and government support schemes) create unfair competitive advantages at the firm level, opportunities for rent-seeking behavior, and reduce the appeal of Kazakhstan as an FDI destination. The Bank advisory work involved assessment of other mechanisms (e.g. supplier development programs and value chain analysis) as alternatives to the normative industrial policy instruments to sharpen competitiveness and foster job creation over the coming period. 29. IFC supports improvement of the investment climate in Kazakhstan, working at the enterprise level. Despite obstacles from the lack of transparency regarding the ownership of enterprises and financial intermediaries, and remaining weaknesses in corporate governance, IFC has been expanding its private sector investment program in agribusiness, construction materials, and retail sectors (IFC commitments in the real sector during the CPS period total US$214 million in ten projects). IFC client companies provide employment to nearly 3,000 people, including 1,300 women. They generate about US$100 million per year in purchases from local suppliers, stimulating economic activity along the supply chain. Further developments in the areas of corporate governance and business transparency should attract more private investors and bring greater efficiency as businesses mature and seek greater access to international sources of financing. To support this process, IFC started a Corporate Governance Advisory Services project in 2005 focusing on regulatory improvements, increasing general awareness of corporate governance issues, and providing customized advice to private companies. More recently, IFC expanded it is advisory support to help strengthen transparency of tax system (thorough increased compliance and formalization) as part of a larger Central Asia focused initiative results from which are expected under the next CPS. 30. Innovation promotion and enterprise modernization are among the top objectives of the Government’s diversification agenda. The Bank advisory assistance in this area facilitated the transfer 37 of best-practice international experience to improve technological sophistication of local firms including through the Technology Commercialization Project (FY08-12). The Project is facilitating the establishment of strong linkages between universities, researchers and industry through commercialization of technologies developed in Kazakhstan‘s research institutes. It also helps Government implement initiatives such as scientific peer review mechanisms, financing instruments for technical assistance and innovation, and enterprise sector monitoring on innovation. In parallel, the Bank is providing policy and institutional capacity-building assistance through JERP to the National Innovation Fund (the agency leading innovation in the industry in Kazakhstan) as well as other implementing agencies that support enterprises, such as Kazakhstan Industrial Development Institute and the Investment and Export Promotion Agency (Kaznex Invest). 31. The Bank’s analytical work has also contributed to trade policy agenda and formulation of a national strategy for embracing the benefits of regional and global integration. Initially trade policy support started as a high-level advisory service on the dual agendas of accession to WTO, and regional integration, expanding more recently to support trade competitiveness agenda. A series of AAA work have highlighted the importance of reducing trade facilitation costs and eliminating non-tariff barriers (primarily standards and technical regulation barriers) in this regard. The on-going multi-year JERP advisory on trade policy builds on this body of work, aiming at strengthening the country‘s trade competitiveness through an integrated approach to needed policy and institutional reforms in the trade policy and facilitation agenda as well as in the evolving trade integration agenda (the WTO accession process is expected to reach the final stage of admission by the end of 2012). Country Development Goal: Promote Financial Sector Development 32. The Bank supported authorities in their efforts to manage significant pressures on the banking sector since mid-2007 and maintain the functioning of the financial sector. The joint Bank- IMF stocktaking through a Financial Sector Assessment Program (FSAP) and its Update pointed to risks including: (i) the pre-crisis rapid credit growth concentration in real estate; (ii) the reliance on international wholesale borrowing to fund the credit growth; and (iii) weaknesses in the regulatory frameworks and the supervision practices. The increasing financial distress in 2008 intensified the dialogue (including through brainstorming session), which initially centered on curbing fiscal costs and moral hazard by ensuring that unsecured creditors participated in the recapitalization of the large weak banks. The 2010 DPL supported improvements to the legal framework that facilitated a court supervised restructuring of the banks, which was eventually used to restructure liabilities of major troubled banks. In addition, the DPL supported better bank resolution tools (providing a credible alternative to the restructuring and enhancing authorities‘ ability to manage bank failures should resolution be needed). The DPL-supported measures led to a significant improvement in the solvency ratios of the banking sector through restructuring of two major banks; however, lack of progress in collecting revenues, and high cost of funding prevent their full recovery. 33. The high level of NPLs remains a major problem for the banking sector, calling for a comprehensive response. The Government developed a strategy to reduce the burden of the NPLs on the banking system.40 Supported by the JERP advisory assistance from the Bank on the insolvency system, tax code amendments to facilitate debt write offs for loans to qualified individuals are helpful; and efforts are underway to facilitate debt workouts. In addition, the authorities strengthened the regulatory 40 The Council for Financial Stability has approved a strategy to improve the quality of banks assets, aiming to remove NPLs with an approximate face value of $6 billion (about 37 percent of the total) from banks‘ main balance sheets in order to facilitate a resumption of lending, while limiting costs and mitigating moral hazard. If successful, the plan would be expanded, drawing the participation of both domestic and foreign investors. The strategy proposes the creation of a national asset management company (the Second Distressed Asset Fund or DAF-2) and private (bank specific) asset management companies that would operate as special purpose vehicles (SPV) through which banks would separate the non-performing assets. 38 framework through measures to discourage foreign currency lending and to increase the minimum capital requirement. Over the coming period, these efforts will need to be broadened to ensure proper loan valuation and provisioning in all banks along with decisive actions to reduce bad loans and to replenish bank capital where needed. 34. During the crisis, IFC focused on supporting efforts to help stabilize the financial sector and increase access to finance in the priority sectors in the economy. Over the past four years, IFC provided US$680 million in equity, quasi-equity, senior debt, and trade finance to several banks in Kazakhstan. During the CPS period, IFC investment clients in the banking sector provided over 350,000 Micro and Small/Medium Enterprise Finance loans (MSME); and at the end of 2010 held outstanding MSME portfolios of over US$2.7 billion. In addition, IFC provided advisory support to a working group designing regulations to deal with non-performing loans in the banking sector through its existing Financial Market Crisis Response advisory project in Ukraine. These activities broadened IFC‘s pre-crisis advisory services in the financial sector which supported development of leasing (project closed in 2005) and mortgage finance (project closed in 2009), which jointly are estimated to have facilitated over US$130 million of financing. Country Development Goal: Promote Agriculture Competitiveness 35. Agriculture has excellent prospects and a number of policies have been developed to strengthen this sector. JERP focused on key policy issues to promote the agriculture sector as an important source of economic growth. The Government has sought the Bank‘s advice on the role of the State as a facilitator to strengthen the sector‘s competitiveness. This includes establishing a level playing field for all producers and maintaining quality in production. The Bank has provided perspectives through two complementary agricultural policy and expenditure reviews and brainstorming events on this theme, facilitating debate on gaps in public service provision and options on agricultural financing schemes. The debate on effectiveness of subsidy programs in particular (most recently in 2010 brainstorming) translated into more detailed socio-economic assessment of selected spending programs. Among the Government‘s current sector plans are streamlining the subsidy programs and unleashing the potential of livestock sector in a larger market which the common economic space with Russia and Belarus now provides. 36. The Bank supported rehabilitation of irrigation infrastructure when this was needed most, and assisted with application of innovative approaches in land management and agricultural production and services. The Irrigation and Drainage Improvement Project (FY96-04) helped rehabilitate more than 32,000 ha of lands, which resulted in crop yield increases up to 200 percent. With the increase in capacity and own-funding means over time, the Bank assistance under the Project shifted to focus on small scale pilots and innovative arrangements for the Government to scale-up. The Drylands Management Project (FY03-10) helped demonstrate and promote sustainable land use practices in marginal dry-land areas by testing environmental, social and economic viability of shifting from (unsustainable) cereal-based production systems to pasture/rangeland-based livestock production systems with results exceeding expectations (farmers participating in the project saw their cattle herd more than doubled). The Government is currently planning wide-scale application of DMP lessons in consultation with the Bank. The Agricultural Competitiveness Project (FY04-12) facilitated access to knowledge by establishing an innovative competitive grants program to increase funding for the relevant applied agricultural research, modernize veterinary facilities, and facilitate adoption of improved technologies among small scale producers. Under the Second Agricultural Post-Privatization Assistance Project (FY04-12) the Bank assisted with enhancing access to commercial financial services by farmers and small/medium size rural enterprises along with reviewing the effectiveness of the mandatory crop insurance program. The crisis and slow banking sector recovery undercut the prospects for this project to fully achieve its objectives, but its training and technical assistance services provided beneficiaries and policy makers with valuable experience. 39 37. IFC has carried out its first investments in the agribusiness sector during the CPS period. The first agribusiness investment (FY10) was made in poultry company (in Ust-Kamenogorsk in eastern Kazakhstan) and also involved advisory support on food safety to the company. This was followed by an investment in a grain trader Soufflet Kazakhstan, as part of a multi-country facility, to help expand its grain origination, trading, and processing operations. IFC efforts to identify suitable opportunities for supporting private sector companies in primary agriculture has not yet brought results. Pillar 3: Building the foundation for future competitiveness by investing in human capital and basic infrastructure Country Development Goal: Improve Quality of Human Capital 38. Public spending on human capital has grown and human development indicators have improved over the CPS period (UNDP’s human development index improved from 80th in 2005 to 68th in 2011). Still, much remains to be done and human development indicators are inferior to those of many countries at comparable levels of income per capita. The Government is aware of the need to improve human development outcomes. Over the CPS period, number of high-level brainstorms addressed key policy challenges facing health and education and helped the Government prioritize its actions in these vital areas of social policy. The policy dialogue transformed from selected analysis of policy issues to a comprehensive assistance under the Health Sector Technology Transfer and Institutional Reform Project (FY09-13), which covers information system reform, health financing reform, and health care quality improvement with full results are expected under the next CPS. Similarly, analytical JERP work on education (ranging from the diagnostics and improving student assessment of secondary education to the higher education reform), labor markets and competitiveness informed the preparation of the Technical and Vocational Education Modernization Project (FY11-13), which aims at improving the quality and relevance of skills and workforce development and alignment of the supply of skills to market demands through close partnership with industries and employers. The project will also strengthen governance, management, and financing of the system. Results from the project will come during the next CPS. Prior work on higher education reform jointly with the Organization for Economic Co-operation and Development (OECD) in 2008 had fed into the strategy for the Ministry of Education and Science. 39. The Bank has supported Kazakhstan’s social protection agenda through the JERP program in several areas. At the Government‘s request, the Bank prepared a series of assessment reports on improving the long-term sustainability of the Kazakh pension system with the last update is currently near completion. It will be informing the planned amendments to the pension system‘s legal and institutional framework under the next CPS. The Bank input for the 2020 Employment Strategy of the Government was discussed in a brainstorming session last year and thereafter adopted. The Strategy builds on social safety net (SSN) reform that balances the protection function—extent, reach and level of benefits—and the promotion function by linking beneficiaries to jobs and auxiliary services (thus providing incentives for work). Technical Assistance under JERP has supported these reforms, including through surveys that identified the characteristics of those out of work and best practice international experience. Country Development Goal: Maintain Adequate Basic Infrastructure 40. Relieving the infrastructure constraints to growth is a key component of Government’s competitiveness agenda. Large capital investments to upgrade the major east-west and north-south road and rail corridors linking China, Central Asia and Russia with Western Europe have been the highest priority in transport, recognizing that diversified growth requires reduction in economic distances and greatly improved connectivity between cities. As envisaged under the joint Bank and Government South- 40 West Road Project (FY09-13), a shift in expenditures towards road maintenance would both raise efficiency in spending and help reduce the high costs of road transport. Kazakhstan has also advanced greatly in power sector reforms: the vertically integrated monopolistic sector was unbundled, most of the generation plants and regional distribution companies were privatized, and a competitive wholesale market developed, with a modern grid code. With efficient tariffs, the transmission sector is highly technologically advanced. Besides supporting key institutional reforms (tariff rationalization, modern Grid Code, organized spot market, strengthening state-owned Kazakhstan Electricity Grid Operating Company), the Bank has partially financed strategic investments in the transmission sector through four consecutive projects41 that make it the most technologically advanced among the CIS. 41. IFC’s involvement in infrastructure has been limited reflecting the challenges of finding suitable opportunities. IFC is currently undertaking infrastructure projects in Kazakhstan in the context of regional investments. One such investment entailed a US$17.5 million loan to a subsidiary of Gulf Agency Company, a global provider of marine related services, to purchase shipping vessels. IFC has also involved in extensive advisory work in the area of Private Public Partnerships (PPPs), to support PPPs in toll roads, solid waste, and urban transport solutions with limited results so far due to country‘s reliance on sovereign-funded solutions. Pillar 4: Ensuring future growth will not harm the environment as past liabilities are mitigated Country Development Goal: Promote Environmentally Sustainable Growth 42. The impact of Bank-supported work addressing environmental concerns is tangible. The Government is strongly committed to addressing key environmental legacy issues and is undertaking substantial investments in the environment sector. Over the CPS period, Bank provided extensive technical assistance to Kazakhstan on reducing gas flaring, which culminated in amendments to Kazakhstan‘s Law on Oil, obliging extractive companies to reduce gas flaring through the gas utilization program. Through the Nura River Clean-up Project (FY03-11), the Bank assisted with bringing the river water in line with international standards for mercury concentration in surface waters which is an important step in improving its suitability for drinking water preparation, though ongoing water pollution of other industries in operation remains a problem. The Ust-Kamenogorsk Environmental Remediation Project (FY07-13) is supporting prevention of the groundwater contamination plume's further migration towards the residential areas and the city's sources of drinking water supply. Implementation so far has contributed to strengthening the capacity of the laboratories in Ust-Kamenogorsk through training and the purchase of modern laboratory equipment for measuring heavy metals and organic chemicals in drinking and surface water, soils and groundwater; full results are expected under the next CPS. 43. The CPS program has made a major contribution to the recuperation of the Northern Aral Sea (NAS). The outcomes of the Syr Darya Control and Northern Aral Sea Project (FY01-10) exceeded expectations in terms of increase in fish production and livestock production by a large margin. The increasing levels of water have also improved fauna and flora in the region. A follow-up project is under preparation with a view to increase the irrigation water supply to agricultural areas while enhancing human safety and the environment around NAS. 44. The Government recognizes the environmental regulatory framework and enforcement practices need strengthening. Air and water pollution is significant and since the environmental monitoring systems are not adequately funded, environmental statistics do not reflect the current pollution load on the environment. Hazardous and non-hazardous water dumpsites and landfills often do not meet 41 Electricity Transmission Rehabilitation Project (FY99-09); North-South Electricity Transmission Project (FY06-11); Moinak Electricity Transmission Project (FY10-12); and Alma Electricity Transmission Project (FY11-15). 41 international sanitary design standards for safe disposal of waste. Environmental regulations need to be modernized to provide incentives to industries to apply best available techniques at reasonable costs in abatement measures. IV. World Bank Group Performance 45. The 2004 CPS constituted a flexible response to Kazakhstan’s development objectives. The strategy was designed to ensure strong government ownership of the Bank‘s program, to allow the Government and the Bank to adjust that program to changing government priorities and country circumstances, and thereby to maximize the Bank‘s contribution to Kazakhstan‘s development. At the heart of the strategy lay a program of knowledge transfer across the range of development policy issues, driven by country priorities. Selective investment and budget support loans in strategic high-impact areas were also provided. 46. The knowledge-transfer program saw a substantial increase in the range, and amount of government financing of analytical and technical assistance services. The JERP program grew from US$1.3 million in 2004 (of which 40 percent was government-financed) to US$4.3 million in 2012 (85 percent government-financed). At the Government‘s request the Bank organized fifteen high-level brainstorming sessions over the CPS period—all have been co-chaired by the Prime Minister. Among the latest are global lessons for entrepreneurship, SME development and foreign investments; SOE debt management; pro-active social safety net programs and policies to increase formality; intergovernmental fiscal relations; and global economic prospects, reflecting growing focus on enterprise modernization, fiscal risk management, and more even regional development. The importance and effectiveness of high- level brainstorms to support the JERP-based policy dialogue on key development issues is valued by Government, which in itself underlines the credibility of this dialogue. JERP effectiveness is being further enhanced by making it more programmatic in nature starting with the current 4 th three-year cycle. As a result, advisory products will be planned through multi-year or interconnected engagements in addition to quick response activities. 47. Knowledge transfer was complemented by selective project-based assistance, where investment-related capacity building needs and support for sophisticated structural reforms were required. Analytical surveys of international good practice on key topics—the World Trade Organization accession work, tax administration, utilities‘ tariff reform, technology commercialization, health and education sector reforms—have often led to adapting best-practice to the Kazakhstan context. This was followed in selected cases by government request to build on the analytical work through project lending to support reforms as in the Customs and Tax Administration Development Projects, the Health Sector Technology Transfer and Institutional Reform project, reflecting the view that Bank projects provide knowledge and skill transfer beyond what is possible through analytical work alone. In particular, over the past four years, there has been an increase in Bank‘s institution building and TA projects which potentially have a large pay off both for the Bank and the Government in terms of increasing sustainability of results that are being generated under joint programs. 48. An important challenge for the Bank arises from country processes which are evolving at a slower pace than dictated by the country’s development needs. Under the 2004 CPS, the Government had indicated its preference to see Bank projects designed for quick delivery (preparation held to 12 months and implementation to 3 years whenever possible)—an objective that required simplification of government project-related processes. Such steps to simplify internal processes to speed up project approval and implementation have been gradual. Project preparation is rigidly bound to the annual budget preparation cycle, while signing and effectiveness are delayed by repetitive clearance procedures, thereby prolonging the project cycle to no purpose. 42 49. The Bank jointly with the Government has formulated an action plan to improve portfolio performance. Internal process issues were at the heart of the 2008 CPPR, and have been an important part of the portfolio dialogue with the Government since then. The progress to date in addressing them resulted in halving the time needed to take a project from concept approval to effectiveness (down to 24 months from 40 months), which gives some confidence for the attainability of further improvements. To address the remaining agenda, the Government is currently reviewing ―envelope ratification‖ procedures developed by a multi-agency working group which, once adopted, will radically simplify internal country process. In addition, as part of the action plan from the participatory 2011CPPR, Bank and the Government established a Joint Portfolio Monitoring Team to facilitate further improvements in the project implementation performance, including through cross-project fertilization. 50. IFC operations in Kazakhstan expanded rapidly as a result of the Special Initiative for Central Asia and Azerbaijan. The Special Initiative was launched in FY08 to increase investments in the sub-region, with a particular focus on supporting MSME growth, strengthening the financial sector, and providing direct financing for the real sectors and infrastructure. The initiative entailed an establishment of a sub-regional hub in Almaty, a substantial increase of IFC staff in the country offices, and reallocation of resources from other regional offices. Having the initiative launch roughly coincide with the beginning of the financial crisis positioned IFC well to provide timely response, especially to the financial sector of Kazakhstan. 51. IFC actively supported Government’s diversification agenda. Kazakhstan currently represents IFC‘s sixth largest exposure in the ECA region with outstanding portfolio of US$382 million as of the end of 2011. This constitutes a three-fold increase in the size of portfolio during the CPS period. Total investments in Kazakhstan during the CPS period amounted to over US$1 billion in 27 projects, of which US$950 million was for IFC‘s own account and US$110 million was raised through a syndication. Prior to the crisis, IFC focused on SME development, investments in sectors of comparative advantage for Kazakhstan (such as agri-business, oil-gas, general manufacturing, infrastructure, and services) and developing leasing and mortgage finance. During the crisis, IFC rapidly expanded its focus to support stabilization in the financial sector and increasing access to finance in the priority sectors in the economy. Over the past four years primary component of IFC assistance (US$680 million) focused on equity, quasi- equity, senior debt, and trade finance to several systemic private sector banks in Kazakhstan. IFC investment portfolio in Kazakhstan is nearly fully disbursed (98 percent) and performing well, with no NPLs as of the end of 2011. In addition, IFC has been actively providing advisory assistance in the areas of corporate governance and business transparency, to address the key constraints to expansion of private sector investment programs in Kazakhstan. 52. The Bank Group has done well in managing a growing program, ensuring that it remains demand-driven, maintains strategic focus and generates impact. The group has been responsive to Kazakhstan‘s evolving development priorities (working closely with partners such as IMF, EU, ADB), and rapid pace of demand for high quality JERP-AAA in general, and to crisis-mitigation needs in particular. Through JERP, the Bank provided assistance in answering questions about ―what and why‖ by providing policy analysis, strategic planning expertise, and good practice options. Bank support through investment operations has been largely successful in achieving their intended outcomes with all closing projects over the past seven years were rated ―satisfactory‖ by the Independent Evaluation Group (IEG). The Bank‘s crisis-mitigation support through DPL, was timely and has been largely successful, with its policy framework is under implementation now and, more broadly, the economic recovery is fully underway. Questions about ―how and who‖ were addressed through ongoing implementation support of the portfolio, while brokering access to a global network of experts, and direct contact with practitioners. Implementation experience has been particularly useful where the project and policies are innovative or complex. Thus, the Tax Administration Project benefited from experience gained under the Customs Administration Project, and applied lessons about institutional change and incentives. Likewise, 43 consecutive energy sector projects draw successfully on experience, and knowledge gained, as well as institutional capacity built by the counterpart agency—state-owned Kazakhstan Electricity Grid Operating Company. 53. Both IFC’s performance and program were successful. IFC‘s program outcome rating is supported by the strong results of IFC investments as evidenced by IEG‘s development outcome ratings and the reach indicators.42 IFC operations have contributed to the CPS outcomes focusing on improving business environment, strengthening the financial sector, including in the context of the financial crisis, and supporting agribusiness. IFC‘s performance rating is supported by a rapid expansion of IFC‘s investments, whereby over US$1 billion was provided to the private sector with a focus on the country‘s strategic development priorities. IFC rapidly adapted to the changing macroeconomic environment during the financial crisis, providing counter-cyclical support to key private sector banks in Kazakhstan, and thereby contributing to the stabilization of the banking sector and resumption of trade finance and funding for SMEs. Accompanying advisory services focused on improving the business environment by improving corporate governance standards and tax transparency and strengthening the country‘s leasing sector. All projects evaluated by IEG are rated highly on work quality and IFC role and additionality. 54. Overall realization of the program and the Bank Group’s performance was successful. The satisfactory rating for the former reflects significant progress on several major development issues summarized in this completion report and, the latter is based on continued generation of high quality AAA, responsiveness, CPS outcomes (including value added that Bank interventions brought to Kazakhstan‘s development agenda), innovation, and strong, strategic partnership formed under the CPS. There remain multiple areas where international knowledge can bring Kazakhstan economic and efficiency gains in the next CPS. Private sector development in an environment of greater domestic competition and innovation policies are prime examples in this respect. V. Lessons and Recommendations 55. Flexibility in the CPS worked well in allowing emergence of a strong AAA agenda and a selective portfolio that focused on core policy actions, linked with government’s timetable, and supported by systemic analytical work. By delivering successful results under a growing program, this approach has demonstrated that the Bank can remain relevant in addressing development challenges of countries that enjoy commodity export windfalls and have low borrowing requirements. 56. The JERP approach requires constant attention to the client whose priorities shift frequently. In extreme cases, this priority setting can become volatile which may lower the impact of Bank work. The lesson learned is to balance responsiveness while keeping the strategic perspective on long term reform needs of the economy. The Bank has achieved some success in this area. While not every Bank report was accepted, there were many examples where they became wholly adopted and used to frame the Government‘s strategic planning (e.g., health, WTO accession, tax administration, budget management, insolvency procedures). In some other cases, when the timing was not right for implementing the recommendations, the Government appreciated their value at a later point and relied on them to inform policy choices (e.g., overheating and macroeconomic management). In parallel, the pressure of a discerning client has helped improve the quality and responsiveness of the Bank‘s interventions. 57. High-level brainstorming events with the government to set the strategic agenda and discuss in depth key development issues has proven to be vital to relevance, quality and timeliness of the Bank assistance as well as its impact. The Bank has supported the Government‘s ambitious reform 42 Four IFC investments in Kazakhstan have been evaluated by IEG to date, of which two during the CPS period, both of them with positive ratings. Not enough IFC investments have reached operating maturity to have a DOTS rating. 44 agenda through a series of brainstorming events which focus on learning from international experience as counterparts build their capacity in reform formulation and implementation. The most recent brainstorming in December 2011 addressed global economic prospects to inform the Government‘s evaluation of policy priorities in the face of euro area debt crisis. The new Government appointed in January 2012 has reconfirmed its desire to retain the brainstorming as a channel of dialogue which is an important mechanism for consensus building activities and debates on important policy issues. 58. To maintain the quality of the Bank portfolio, learning from doing should be a constant process. Most IBRD investment operations, especially the new institution-building projects in Kazakhstan have been green-field, i.e. they require adoption of new approaches and procedures, and most implementing agencies are first time borrowers with all of the risks that entails in terms of the lack of familiarity with Bank procedures. Therefore, ensuring that implementation agency has legitimacy with adequate mandate during implementation, and close monitoring and supervision are essential elements of implementation. Strategies that require wide coordination run the risk of delays in implementation; hence, program design must be kept simple along with continued efforts to facilitate improved coordination. The Bank could also play a steering role in cross-project fertilization, facilitating learning form both positive and negative lessons (which are equally important for successful implementation of projects). For instance, the Bank procurement team based in the field conducts, on a weekly basis, procurement workshops/training for all implementing units, which proved to be an effective learning platform. 59. The main drivers of the quality of the Bank portfolio affect also the Government’s own investment program. Excessive centralization of decision-making and budgetary controls are factors in slowing down project preparation and implementation. Through the JERP and the CPPRs, the Bank had drawn the attention of the Government to key issues, requiring response. In addition, these issues are being more systematically addressed under the new Budget Code which introduced medium-term performance-focused budgeting, and more flexible and accountable financial management and procurement mechanisms. Their implementation is being supported under the JERP and the next CPS. 45 CPS CR Annex Table 1. Kazakhstan: Planned Lending Program and Actual Deliveries (FY05-11) FY Project Plans US$ millions Project Status US$ millions IBRD TF IBRD TF CPS of August 10, 2004 FY05 Agricultural Post-Privatization 35.0 Actual (US$15.4 million, after 35.00 0.68 Assistance – Phase 2 partial cancellation) Agriculture Competitiveness 24.0 Actual (US$14.7 million, after 24.00 0.62 partial cancellation) Subtotal 59.0 Subtotal 59.00 1.30 FY06 Forest Protection and 30.0 Actual 30.00 5.41 Reforestation Irrigation and Drainage – 189.0 Still in the pipeline - 0.60 Phase 2 Additional actual projects: North-South Electricity 100.00 Transmission Subtotal 219.0 Subtotal 130.00 6.01 FY07 Ust-Kamenogorsk 35.0 Actual 24.29 4.29 Environmental Remediation Subtotal 35.0 Subtotal 24.29 4.29 FY08 Customs Development 22.0 Actual 18.50 Technology 17.0 Actual 13.40 Commercialization Additional actual projects: Health Sector Technology Transfer 117.70 and Institutional Reform Subtotal 39.0 Subtotal 149.60 - Subtotal FY05-08 352.0 Subtotal FY05-08 362.89 11.60 CPS Progress Report of May 1, 2008 FY09 Syr Darya and N.Aral Sea – 165.8 Still in the pipeline - 2.70 Phase 2 Territorial Development 250.0 Dropped - South-West Roads 2,255.0 Actual 2,125.00 0.86 Subtotal 2,670.8 Subtotal 2,125.00 3.56 FY10 Irrigation and Drainage – 131.0 Still in the pipeline - Phase 2 Additional actual projects: Tax Administration Reform 17.00 Public Sector Audit Capacity Bldg 0.46 Development Policy Operation 1,000.00 Moinak Electricity Transmission 48.00 Subtotal 131.0 Subtotal 1,065.00 0.46 FY11 Technical and Vocational 92.2 Actual 29.23 Education Additional actual projects: Alma Electricity Transmission 78.00 Strengthening Statistical System 20.00 Subtotal 92.2 Subtotal 127.23 - Subtotal FY09-11 2,894.0 Subtotal FY09-11 3,317.23 4.02 TOTAL FY05-11 3,246.0 TOTAL FY05-11 3,680.12 15.62 46 CPS CR Annex Table 2. Kazakhstan: Joint Economic Research Program and Actual Deliveries (FY05-11) FY JERP Plans Status FY05 Reforming the Public Sector Wage System Actual CEM: The Challenge of Managing Kazakhstan's Oil Boom Actual Note on Harmonizing Infrastructure Tariffs for Railways Actual Case Study on Efficiency of State Procurement System in Health Sector Delivered in FY06 Case Study of Intergovernmental Health Finance Partially completed Review of Current System of Information Provision in Education Actual Review of Current System of National Examination and Quality Assessment Systems Actual Report on Education Financing System at Local Level Partially completed Environmental Impact of Industrial Growth: The Case of Petrochemical Industry Actual Review of the Water and Energy Legislation of the CA Countries from the Point of View of Facilitating the Set-up of a the Water Energy Consortium Actual Report on International Experience in Managing International Trans- boundary River Basins Actual Transport Sector Strategy Development Actual FY06 Follow-Up work on PEIR 2004 Actual ROSC Actual Telecom Sector Reform and Information Society Development (e- government) Actual Development of Financial Instruments to Attract Domestic Investments in Infrastructure Actual PPP in Infrastructure: Options for Kazakhstan Actual Macroeconomic Modeling Actual Consequences of WTO accession for Kazakhstan: Quantitative Assessment Actual Tariff Formulation and Regulation in Infrastructure Delivered in FY07 Strategic Plan to Improve Neutrality in Taxation of Non-oil Sector Actual (published in FY08) TA for Improvement Healthcare Quality System Actual Strategic Note on Integration of the Graduate Education and Science Systems Delivered in FY07 Evaluation of Agriculture and Food Program: Agriculture Policy Assessment Delivered in FY07 Elaboration of Regional Programs of Territorial Development Actual FY07 Tax Administration Report Forwarded to FY08 Customs Administration: Customs Modernization Project Preparation Actual Improvement of Planning, Implementation, M&E, and Auditing Processes for Budget Investments Actual Introduction of e-Government and Digital Inclusion Delivered in FY08 PFMR in Agriculture, Health, Education Delivered in FY08 Public-Private Partnerships Actual Macroeconomic Modeling Actual WTO Accession: Legal Advice Actual Socio-Entrepreneurial Corporations Actual 47 FY JERP Plans Status Comparative Analysis of the Legislation and Practices in the Area of Competition Protection Actual EITI Support: Introduction and Capacity Building Actual TA for Improvement of Healthcare Quality System Actual Health Sector Technology Transfer and Institutional Reform: Project Preparation Actual Higher Education in Kazakhstan as Factor of Innovation Development Actual Development of Vocational Education and Training: Project Preparation Actual Improvement of Multi-tiered Pension System Actual Energy Efficiency and Renewable Energy Fund Actual Territorial Development: Project Preparation Actual Brainstorming Event: Achieving Competitiveness through Better Governance Actual FY08 Tax Administration Report Actual Support to the Administrative Reform Actual Build-up of a Training Basis for State Financial Institutions‘ Staff as well as Accountants and Auditors of the Real Sector Partially completed Public Finance Management Review: PEFA Delivered in FY09 Development Program of the Agency for Statistics up to 2015 Actual Analytical and Advisory Assistance for Comprehensive Modernization of Communal Services Actual Technical Assistance for Implementation of PPP Program and Concession Mechanisms Actual Developing Mechanism of Development and Support to Local Suppliers (SME) for Large Transnational Companies Delivered in FY09 Markets Analysis to Enhance Competition and Detection and Elimination of Impediments to Market Access Actual Facilitation of Regional Innovative Entrepreneurship on the Bases of Techno Parks and Establishment of Technology Transfer System Actual EITI Support: Raising Public Awareness Actual Vocational Education and Training: Project Preparation Actual Development and Implementation of Activities on Increasing Sustainability of Pension System Actual Support to Development of the Social Protection Actual Territorial Development: Project Preparation Actual Brainstorming Event: Administrative Reform Issues Actual Brainstorming Event: Human Development Agenda Actual Brainstorming Event: Food Price Increases and Agricultural Policies Actual 48 FY JERP Plans Status FY09 Tax Administration: Project Preparation Actual Administrative Reform Partially completed Survey on the Quality of Public Services Actual Development of the System of Internal Audit Services Actual E-government Diagnostics Actual Public Finance Management Review: PEIRs in Agriculture and Health Delivered in FY10 Establishment of the Financial Monitoring System (AML/CFT) Actual Analysis of Methodology of General Budgetary Transfers Actual Financial Stability and FSAP follow-up Delivered in FY10 International Economy Forum In Astana Actual Concept for the PPP Development and Fiscal Risk Management Forwarded to FY10 Macroeconomic Forecasting and Modeling: Kazakhstan Economic Reports ##1&2 Actual Improvement of Doing Business Indicators Actual Enterprise Survey (ICA) Delivered in FY10 Markets with Imperfect Competition Actual EITI Support: Preparing for EITI validation Actual Strategy for the Development of Higher and Intermediate Education Delivered in FY10 Development of Vocational Education: Project Preparation Actual Support for Transition to a Multilevel Pension System Actual Poverty Assessment Delivered in FY10 Brainstorming Event: Impact of Global Financial Crisis on Kazakhstan Actual Brainstorming Event: Managing Economic Crises Actual FY10 Assessment of the Quality of Implementation of the State Planning System in Pilot State Bodies Actual Public Finance Management Review: Review of Intergovernmental Relations and Management of Local Budget Expenditures Delivered in FY11 Development of the Statistical Capacity: Master Plan Update Actual Establishment of the Financial Monitoring System Actual Further Improvement of the National Fund Management Actual International Economy Forum in Astana Actual Development of a Financial Model for the Management of Fiscal Risks and Monitoring of Contingent Liabilities Associated with Public-Private Partnerships Actual Macro-Economic Research: Kazakhstan Economic Report #3 Actual Improvement of Doing Business Indicators Actual Improved Methodology of Tariff Setting in Water Supply and Sanitation Sector Delivered in FY10 Antimonopoly Policy Actual EITI Support: EITI Validation - addressing corrective actions Actual Higher Education Development Strategy Actual Secondary Education Development Strategy Actual PROST Training: Pension Reform Operation Simulation Toolkit Actual Development of a New Sample for HBS Actual Improvement of the Social Protection System: Towards Further Improvements in the Efficiency and Effectiveness of the Social Safety Net Forwarded to FY11 Brainstorming Event: Draft Kazakhstan Strategy 2020 Actual Brainstorming Event: Regional Development Actual Brainstorming Event: Entrepreneurship Development Actual 49 FY JERP Plans Status Additional Products: International Consultancy in the Area of Tax Systems: SME Taxation Delivered Issues FY11 Improvement of the Insolvency System Actual Advisory Assistance on Top-Level Civil Service Pay Reform Actual TA in Application of International Financial Reporting Standards for SMB in the Republic of Kazakhstan. Phase I Actual Development of Public e-Procurement System Forwarded to FY12 Development of the Statistical Capacity of the RK. Phase II: Project Preparation Actual Further Improvement of the Financial Monitoring System Actual Establishment of Financing Mechanisms to Support Housing and Utilities Services Sector based on International Experience Actual Advisory Assistance on Introduction of the New Financial Initiative Forwarded to FY12 Improvement of Doing Business Indicators Actual Enhancement of the Competition Protection and Creation of Enabling Conditions for the Goods Market Development Actual Development of Fair Competition in the Financial Services Market Actual TA in Development of Technological Innovations Competitiveness as Part of Implementation of the SPAIID 2010-2014 Actual EITI Support: EITI Transition and Expansion Actual Study of International Practice of Integration Unions: Assessment of Costs and Benefits of the Customs Union for Kazakhstan Actual TA on Expanding the Ability of Kazakh Enterprises to Participate in the Global Value Added Chain Actual TA in Development of Strategy of Technological Modernization and Restructuring of Enterprises and Local Content Development Actual Technical Assistance on Mining Sector Strategy Actual Improvement of Postgraduate Education System Forwarded to FY12 TA to Support Modernization of National Testing System Actual Development of the Endowment Fund for the New University and Intellectual Schools Actual Identifying Options for Formalization of Self-employed Population Actual Improvement of the Social Protection System: Towards Further Improvements in the Efficiency and Effectiveness of the Social Safety Net Actual Brainstorming Event: State-owned Enterprise Debt Monitoring and Management in Kazakhstan Actual Brainstorming Event: Comparative Analysis and Good Practice Lessons in Designing Pro-Active Social Safety Net Programs and Policies to Increase Formality Actual Brainstorming Event: Assignment of Revenues and Expenditures to Subnational Units of Administration Actual Additional Products: Economic Development Update: Kazakhstan Economic Report #4 Delivered Macro Analysis on the National Fund: The Fiscal Management of Kazakhstan‘s Oil Revenues Delivered Advisory Assistance on PROST Pension Model Delivered E-Government Program Assessment Delivered 50 Annex 2. KAZAKHSTAN: Country Partnership Strategy, FY12-17 Results Framework: Ongoing and Confirmed Program Institutional Outcomes in the Government Strategy to Milestones and Outputs CPS Outcomes Instruments and Partners be supported by the CPS AREA OF ENGAGEMENT 1: IMPROVING COMPETITIVENESS AND FOSTERING JOB CREATION Country Development Goal: Achieve competitiveness gains through macro-stability and international integration Strengthening fiscal  A medium term debt management  Prudent management of oil revenue is Bank JERP: Fiscal Policy for Growth; discipline and trade strategy based on a cost-risk maintained with the government net Improvement of Public Debt Management, openness/integration analysis adopted and gradually financial worth (as measured by the including Mechanisms of Monitoring Debt of broadened to include fiscal risks difference between stock of National SOE Sector; from SOE activities. Fund assets and sovereign debt) is Improvement of Competitiveness Through  National services-trade statistics above its 2012 level of 20 percent of Reduction of Trade Barriers aligned with Manual on Statistics GDP by 2017. in International Trade in Services Bank Study: Country Economic Memorandum (OECD). on Growth Agenda  A regulatory impact assessment for non-tariff measures adopted and Partners: IMF, EC, USAID conducted on a regular basis. Expanding non-oil sector  A new Law on Permits System  Improved regulatory environment as Bank JERP: Enhancement of the Business exports and employment adopted, setting framework for measured by Doing Business ratings Environment; risk-based, streamlined inspections (up from 46 in 2011 to below 30 in Enhancing Productivity and Competitiveness and technical regulations. 2017), and Business Environment and through Enterprise Modernization Support  Institutional framework for Enterprise Performance (BEEPs; Mechanisms; corporate financial reporting percent of firms identifying business Corporate Financial Reporting: IFRS for SMEs (CFR) strengthened, as measured licensing and permits as a major adoption and implementation; by improvement in A&A ROSC constraint down from 25.2 percent in indicators, showing higher degree 2009 to below 15 percent by 2017). Bank Study: Accounting and Auditing Reports of: (i) alignment of the  Share of firms with female on the Observance of Standards and Codes forthcoming new CFR legislation participation in ownership increased (A&A and ROSC) with the international standards; from 34.3 percent in 2009 to above 40 (ii) compliance of financial percent by 2017 and with a female top Bank Lending: Technology Commercialization information of corporate entities manager increased from 24.7 percent in Project (FY08-12) with international standards 2009 to above 30 percent by 2017 (International Financial Reporting (BEEPs). IFC Investments: Real sector investments Standards, and Standards on  Technology Commercialization Office (manufacturing, agribusiness, and services) Audit). established, awarding annually not less 51 Institutional Outcomes in the Government Strategy to Milestones and Outputs CPS Outcomes Instruments and Partners be supported by the CPS than 10 small technology Partners: USAID, ADB, EBRD commercialization grants (pre- commercialization, joint research with industry, international patenting, industrial internship for scientists) and facilitating above 15 groups of scientists to perform high quality research. Re-invigorating the  A new Law on Insolvency  Share of non-performing loans in total Bank JERP: Improvement of the Insolvency financial sector introduced and institutional loans (32.6 percent in 2012) are at least System capacity of the insolvency and halved by 2017 and remained well financial rehabilitation system provisioned. IFC Investments: Financial sector investments; improved, facilitating faster trade finance lines and credit lines for SMEs resolution of non-performing loans. Partners: IMF Country Development Goal: Bolster human capital Building skills for  Post graduate education standards  Share of technical vocational education Bank JERP: Education System Analysis employment are updated towards better programs revised in accordance with towards Improving Quality; alignment with the Bologna the new competency standards (to be Post-Graduate Education Development Process. introduced from 2013) is at least 20  An innovative program of service percent by 2017, better equipping Bank Lending: Technical and Vocational learning and life skills training graduates with skills demanded in the Education Modernization Project (FY11-13) initiated in 2013, benefiting 5,000 labor market. Kazakhstani youth. Swiss TF: Youth Corps Project Partners: EC, GIZ Country Development Goal: Boost employment in agriculture Strengthening knowledge  Weather/area indexed insurance  New applied technologies in farming Bank JERP: Strengthening Agricultural for sustained growth in system introduced on a pilot basis (e.g. conservation agriculture, new Strategy and Livestock Policy agriculture to strengthen the crop insurance methods of vet diseases testing), regime. resulted in increase in crop/fodder Bank Lending: Agricultural Post-Privatization  Input subsidies in the total production, supporting 50 percent Productivity Assistance Project II (FY04-11); government spending on increase in meat production (0.94 Agriculture Competitiveness Proj. (FY04-12); agriculture reduced with increased million/tons in 2010) by 2017. Irrigation and Drainage Project II (FY12-19) spending on alternative forms of IFC Investments: Lending to agribusiness 52 Institutional Outcomes in the Government Strategy to Milestones and Outputs CPS Outcomes Instruments and Partners be supported by the CPS agricultural support schemes such companies (food processing, food retail) as irrigation during 2012-17. IFC Advisory: Food Safety Advisory, Resource Use Efficiency JSDF Grant: Community Based Aral Sea Fisheries Management and Sustainable Livelihoods Partners: GIZ Country Development Goal: Develop infrastructure connectivity to reduce economic distance Improving energy  Power transmission capacity (KEGOC) Bank Lending: Moinak Electricity transmission to poor areas increased from 34,000 MVA by 5 Transmission Project (FY10-12); percent between 2012 and 2017 to Alma Electricity Transmission Prj (FY11-15); alleviate the existing and projected North-South Electri. Transm. Prj III (FY13-16) power deficiencies in the Southern and Eastern part of the country. Partners: EBRD, USAID Building transport  Road users survey introduced to  Increased transport efficiency through Bank Study: Rail Trade Logistics Study connectivity, lowering costs assess the service satisfaction reduction in road user costs and the rate levels along the 1,062 km section of road crash fatalities along the same Bank Lending: South-West Roads Project of the Western Europe-Western 1,062 km section of the WE-WC Road (FY09-13); China (WE-WC) Road Corridor Corridor by at least 10 percent, East-West Roads Project (FY12-15) (between Shymkent and the border respectively, by 2013 (road users cost of Kyzylorda Oblast with Aktobe is US$ 0.26 per vehicle-km in 2007; Bank-IDF Grant (SWRP): Enhancement of the Oblast), with the number of users and road crash fatalities are 11 per 100 Monitoring and Evaluation System in the Road interviewed by the Committee for million vehicle-km in 2007). Administration Roads (nil in 2012) increasing gradually to reach 500 by 2017. IFC Investments: Private and sub-national infrastructure projects IFC Advisory: Transaction Advisory Project Partners: ADB, EBRD 53 Institutional Outcomes in the Government Strategy to Milestones and Outputs CPS Outcomes Instruments and Partners be supported by the CPS AREA OF ENGAGEMENT 2: STRENGTHENING GOVERNANCE AND IMPROVING EFFICIENCY IN PUBLIC SERVICES DELIVERY Country Development Goal: Improve public financial management and fight corruption Improving governance  Civil Service ethics/code of  Physical inspections of import Bank JERP: Civil Service Reform; conduct provisions strengthened in declarations by customs reduced from Supporting the Extractive Industries the Civil Service Law. 70 percent in 2007 to 20 percent by Transparency Initiative (EITI);  Law on Combating Legalization of 2017; and average customs processing Improvement of Financial Monitoring System Illegally Gained Income and time at border posts (2 hours in 2010) (AML/CTF) Financing of Terrorism amended in reduced by 75 percent by 2017 as accordance with international evidenced from client surveys. Bank Lending: Customs Devel. Prj (FY08-12); standards. Tax Administration Reform Project (FY10-14) Partners: EC, UNDP, USAID, GIZ Strengthening budget and  Links between ministry budgets  E-procurement transactions (25,000 in Bank JERP: Improved Approach to Results- accounting institutions and the medium term strategic and 2012) increased by 20 percent by 2017, Oriented Budgeting; policy objectives of government and efficiency of the e-procurement Improvement in Intergovern. Fiscal Relations; improved by introduction of non- system enhanced by introduction of an Development of Public e-Procurement System; financial results indicators to electronic reverse auction system by Expenditure Efficiency reviews assess budget proposals and 2014. monitor performance; roll out of  Quality and efficiency of public Bank Lending: Statistical Capacity Building the new system to sub-national spending improved through Project (FY12-17) governments initiated. introduction of targeted reviews of  International Public Sector selected areas of public on a rolling Bank-SAFE Grant: Capacity Building for Accounting Standards (IPSAS) basis, with at least first 4 reviews Public Sector Accounting Reform adopted. completed during 2013-16.  Audit system strengthened to  International standard user satisfaction Bank-IDF Grants: Public Sector Audit perform financial and performance survey on quality and reliability of Capacity Building; audits in accordance with good statistical data introduced in 2012 with Building Capacity in Procurement Audit practice norms. satisfaction rates reaching 80 percent Agency (linked with SWRP) by 2017. Partners: EC, UNDP, USAID, GIZ Country Development Goal: Raise efficiency in delivering critical public services Reforming social protection  Regulations governing mandatory  Conditional cash transfers are piloted in Bank JERP: Improvement of Social Safety Net system defined contribution to the pension at least two regions of the country; and System; fund are revised to improve depending on need, gender parity is Strengthening Pension System sustainability of the system. targeted in activation support services utilization. Partners: UNICEF 54 Institutional Outcomes in the Government Strategy to Milestones and Outputs CPS Outcomes Instruments and Partners be supported by the CPS Sharpening strategic  Food safety regulation and norms  Population's out-of-pocket health Bank Lending: Health Sector Technology approach to health reforms aligned with WTO requirements. payments in total health expenditures Transfer and Institutional Reform Project  Interventions with proven success (32.9 percent in 2010) declined by 10 (FY09-13) to positively affect male life percent by 2016. expectancy are piloted. Partners: WHO, USAID, UNICEF, EC AREA OF ENGAGEMENT 3: ENSURING DEVELOPMENT IS ENVIRONMENTALLY SUSTAINABLE Country Development Goal: Fight climate change with a cleaner environment Safeguarding the  The built-up of hazardous  Reforestation works on 44,000 ha Bank JERP: Improving Industrial environment pollutants from prioritized sources completed; and damage (9 ha per 1 Competitiveness through Greener Production in the Ust-Kamenogorsk city‘s case of fire on average during 2009-11) groundwater (outside the industrial from forest fire in Irtysh Pine Forest Bank Lending: Forest Protection and zone) stopped, and rehabilitation of reduced by 50 percent by 2017. Reforestation Project (FY05-14); PCB contaminated sites underway.  Water supply systems rehabilitated in Ust-Kamen. Environ. Remediat. Prj (FY07-13);  Clustering-based gas utilization 113,000 ha covering 4 southern SyrDarya II (FY13-18); approach introduced in Kyzylorda Oblasts, bringing water distribution by Persistent Organ. Pollut. Manag. Prj (FY13-14) oblast leading to gas flaring service providers to levels demanded reduction, and reliable supply of by farmers. GEF Grants: Forest Protect. and Reforest. Prj; processed gas for local household Persistent Organic Pollutants Management Prj and industrial needs. Partners: EC, GIZ, UNDP, GEF Raising energy efficiency  Comparative energy consumption Swiss TF: Energy Efficiency Proj. (FY12-16) in targeted public and residential sectors reduced by at least 10 IFC Investments: Credit lines to banks for percent between 2012 and 2017 Energy Efficiency loans (baseline will be established as part of the project preparation). IFC Advisory: Resource Use Efficiency Partners: EBRD 55 Annex 3. KAZAKHSTAN - Anti-Crisis Response 1. Kazakhstan’s economy withstood two waves of financial crisis which hit the country in 2007 and in 2008-09 thanks to considerable fiscal and international exchange buffers accumulated during the commodity price boom and timely actions taken by the Government of Kazakhstan. Government‘s anti-crisis actions included a one-off 20 percent devaluation of the tenge, large fiscal stimulus package (equivalent of 7-8 percent of GDP), and measures to restore financial stability. The latter included liquidity support (equivalent of 3 percent of GDP), increase in household deposit insurance, solvency support (equivalent of 4 percent of GDP and debt swaps and unsecured support to the banks equivalent to 7 percent of GDP), bank nationalizations, debt restructuring (equivalent of 10 percent of GDP in cost to foreign creditors), and measures to strengthen bank resolution, regulatory and supervisory framework. Bank regulatory framework measures included increase in the minimum capital requirements of banks and modifications in prudential requirements particularly those relating to external borrowing and lending to entities with parents in select off-shore centers, and institution of special funds to refinance loans to select sectors. Measures to strengthen bank supervisory framework included introduction of an early response mechanism, introduction of a system of on-site dedicated supervision, enhancement of off-site monitoring and on-site examinations of banks. In addition, the authorities strengthened financial monitoring system, which suffered from fragmentation at the outset of the Global financial crisis. The chronology of the anti-crisis response measures and their estimated costs is presented in Table 1. 2. Government anti-crisis measures proved to be effective in averting prolonged recession, increase in unemployment and decline in real incomes of the households, which already suffered from the negative effect related to 20 percent devaluation of national currency. Positive growth in 2009 might not have been achieved in the absence of the stimulus programs. Increases in public salaries contributed directly to the continuation of positive growth in real average incomes in 2009, even though a number of sectors did experience real declines. Kazakhstan did not experience major increases in unemployment that was seen in many other countries during the crisis, partly due to effective public jobs program financed through anti-crisis stimulus package. The official unemployment rate (ILO definition) crept up to 7 percent but was brought down to 6.3 percent by the end of 2009. 3. Strengthening banking restructuring and resolution framework was introduced to handle troubled banks. The framework was introduced in a law of July 11, 2009 (185-IV), which stipulated two major provisions for the medium and longer term:  Allowing creation of bridge banks and purchase and assumption agreements. Purchase and assumption allows for healthy parts of a failing banks assets and liabilities to be transferred to a healthy bank thereby preserving key parts of the failing bank. If another healthy bank is not available, the assets and liabilities can be transferred to a bridge bank, which is a temporary institution managed by the authorities. The bridge bank would subsequently be merged or sold.  Introducing a specialized financial court for bank restructurings. The bank restructuring process has been created, requiring a specialized court process in which creditors must agree to a plan of repayment, which is then submitted for court approval after endorsement by the regulatory authorities. The main purpose of this change in the law was to allow for the protection of Kazakhstani assets from claims of creditors abroad when a bank is in restructuring proceedings. This law strengthens incentives in commercial banks for responsible risk taking. It provided the Government with a credible alternative for the resolution of two large problem banks, BTA and Alliance, while the banks remained open. 56 Table 1: Timeline of Major Events, Response Measures and Associated Costs, 2007-2009 1/Channeled half through budget and half through S-K ($1 billion);2/ Channeled half through S-K; 3/ Channeled through KazAgro. 4. Steps were taken to strengthen financial sector regulatory and supervision framework. The Law on Financial Stability (October 2008) and a number of supporting regulations issued by the Financial 57 Supervision Agency43 (FSA) stipulated important provisions which enhanced means for due-diligence in bank supervision and intervening in a problem banks:  The Early Warning System which is based on a set of key indicators corresponding to the liquidity position, risk profile, and capital of the bank or pension fund. These indicators are monitored on a monthly basis. If the performance of a bank deteriorates, placing it on track to violate prudential norms (but has not actually violated them), the FSA is given the authority to take actions to begin to rectify the situation. The FSA is taking a number of measures to improve the calculation of various norms in closer correspondence to best international practice. This will strengthen the effectiveness of the system while protecting banks from arbitrary interventions.  The enhanced scope for external control by the FSA and Government. The FSA can now take actions against large shareholders whose actions are perceived to possibly harm a bank. The Law also provides conditions whereby the Government can purchase shares and take virtual control of a problem bank even without the permission of shareholders.  Measures discouraging banks’ foreign borrowing and lending. Given that the Kazakhstan financial crisis was rooted in excessive borrowing and lending in foreign currency, a number of recent regulatory changes have targeted this area. In 2009, the FSA introduced a new requirement of 20 percent provisions for all loans issued in foreign currency to unhedged borrowers. In 2010, the FSA tighten other prudential norms to limit the expansion of credit financed through foreign borrowing, including a restriction that foreign loans cannot exceed 30 percent of liabilities. Finally, the regulation of loans granted to persons incorporated in off-shore zones was made much stricter.  The FSA has swiftly stepped up its supervisory and due diligence activities. It has increased on- site examinations, and placed a permanent regulatory specialist in each of the seven largest banks with more frequent detailed inspections. As of March 2009, these largest banks were also required to draw up detailed contingency plans in the case of financial distress, subject to approval by the FSA. Going forward, these steps could be further strengthened by move towards more risk-based supervision, more flexible and sophisticated monitoring, while further enhancing offsite and onsite supervision capacity. 5. Efforts were also made to strengthen requirements for transparency in bank operations and ownership, and to work-out the current large stock of non-performing loans. With more limited opportunities for expanding attracted resources from foreign sources, the expansion of the banking sector will depend critically on increasing the domestic deposit base, which requires improving the reputation of Kazakhstani banks among the population. While banks will need to work primarily themselves to re- establish their reputations, the National Bank and FSA plan to facilitate this process through changes in banking regulation. This includes extending regulation beyond prudential norms to a comprehensive assessment of internal systems of risk management, making the results of regular stress testing of individual banks public, and increasing the role of independent members of boards of directors. 43 Financial Supervision Agency was merged with the National Bank of the Republic of Kazakhstan and reorganized into the Committee for Financial Supervision of in April 2011. 58 Annex 4. KAZAKHSTAN – Government’s Road Map Program (2009-10) and Road Map for Business 2020 1. The government’s first “Road Map� Program was designed to contain a sudden rise in unemployment during the crisis through creation of public works in the regions. The key objectives of the Program were: (i) to contain the increase in unemployment through provision of short-term employment and job creation in public works and other social programs; and (ii) to rehabilitate social infrastructure and facilities as a necessary condition for post-crisis sustainable development. The program covered additional financing of projects in housing and utilities; construction and maintenance of local roads; maintenance of social infrastructure (schools and hospitals); maintenance of social infrastructure outside of main cities (libraries, movie theaters, etc.); creation of social jobs (including through 50 percent co-financing of salaries for selected target groups); youth internships and vocational training and retraining. 2. The implementation of the Program was phased-in over two stages. During the first stage, total allocations for each region were determined on the basis of an assessment of regional risk level, under an ―Employment Map,‖ assessing probabilities of layoffs. At the next stage, potential local infrastructure projects/public works were submitted by the regional authorities for consideration under the Program. According to the official report on the Program implementation over 2009-10, the Road Map allocated 343 billion tenge (about US$2.3 billion) in co-financing contributions from the republican and regional budgets, and created an estimated 392,000 temporary and permanent work places. In addition, 113,500 workers received training under the program, following which 70 percent found employment. The Road Map also gave special attention to employment opportunities for workers laid off following the completion of public projects. To address youth unemployment, the state employment authority arranged internships for 90,000 of new graduates. 3. Results-monitoring of the Road Map implementation received a very high priority. The Road Map Program was coordinated and monitored by an Inter-Agency Commission (IAC) headed by the Prime Minister. The Commission included representatives of the Parliament, various associations, and the mass media. The functions of the IAC included: (i) determining employment risk levels on a regional basis, (ii) setting regional finance limits, (iii) developing appropriate performance indicators for evaluation, (iv) monitoring of implementation of the program on a weekly basis, (v) approval of reports submitted from the local level, and (vi) reviewing monthly reports on implementation with participation of the mass media. Parallel commissions have been set up at the regional level under the leadership of the regional akims (governors). The Ministry of Labor and Social Protection was responsible for the day-to- day monitoring of the Road Map. A website has been created, http://dorkarta.enbek.gov.kz/, that provided detailed information on specific projects, administers, and oblasts, including financing, jobs created, and number of people trained. 4. The implementation of the Road Map Program was completed in 2010, with its key lessons informing design of a new post-crisis support mechanism for small and medium enterprises, namely the “Road Map for Bussiness-2020.� This follow-up program aims at providing support to export-oriented small and medium enterprises by facilitating their access to finance (through interest rate subsidies) and by employment support measures in the form of training and internships. The employment support component of the Program is focused on the following key areas: (i) training of specialists required for implementation of projects that are part of the industrialization strategy; (ii) training of technical specialists to fill the existing vacancies; (iii) replacement of foreign labor with local personnel by using capacity of technical and vocational education; (iv) arranging internships; and (v) creating jobs for public works. The monitoring and evaluation of the Program remains as its key feature to measure the impact and fine-tune the Program as necessary. In its first year of implementation, the program has seen significant increase in the number of SMEs (about 100) that developed capacity to export. 59 Annex 5. KAZAKHSTAN CPS – CSO Consultations Background 1. As part of the CPS preparation process, consultations between the WBG and local Civil Society Organizations (CSOs) were held in Astana on February 29, 2012. To engage with as many CSOs from different regions as possible, a video-conference was organized with five other major cities of Kazakhstan, namely Almaty, Shymkent, Ust-Kamenogorsk, Kostanay and Aktobe. Among the participants were representatives of the most active civil society organizations from business community, think tanks, and associations, focusing on environmental protection, gender, transparency and governance, agricultural development, healthcare, disabled, and youth. The information about the event and background material were made available on the website of the Bank prior the consultations. Objectives of the Consultations 2. The consultations aimed at:  Soliciting the views of CSOs on Kazakhstan‘s development priorities;  Seeking feedback on the proposed CPS areas of engagement, approaches and instruments to help the country implement those priorities;  Informing CSOs on the World Bank‘s ongoing operations and opportunities for closer engagement. Feedback from the Consultations 3. The WBG received encouraging feedback for the preparation. Overall, CSOs believed that improvements in governance and a stronger voice for civil society together with mechanisms for greater government accountability were essential to sustained development. They emphasized the following as key areas of development focus for the WBG‘s partnership with Kazakhstan:  Education quality, accessibility and skills (as key factors in increasing competitiveness and jobs) were highlighted as areas deserving greater attention. Participants suggested that low competency results under PISA 2009 along with high unemployment rate among the educated young and women in local economy reflect low quality and relevance both at secondary, and technical and vocational education system. Among the top areas requiring attention, diagnosis of underlying reasons for these poor results, lowering informality in labor market, providing assistance to disabled youths in secondary schools in rural areas were highlighted.  Inefficient business regulatory framework, difficulties in access to finance, and slow pace of agricultural modernization were highlighted as reasons for low competitiveness. The participants suggested that the competitiveness and jobs agenda should accord greater attention to region and sector specific barriers especially in lagging rayons and small towns, and relying more on feedback from business associations with sector specific knowledge.  Participants emphasized lagging performance in governance and transparency agenda as a key factor undercutting the country‘s development prospects. Judicial reform, increasing standards in public administration and in delivery of public services (including through a streamlined service provision procedures) were highlighted as areas of priority in the reform agenda. The need for strengthened monitoring and increased transparency in the operations of SOEs along with improved capacity in anti-money laundering through certification of anti-money laundering specialists were also highlighted.  Safeguarding environment was highlighted as a key element of sustainable development agenda. Water and land degradation, deforestation, low energy efficiency, water contamination and air 60 pollution in the industrial regions were of particular concern to CSOs. Participants emphasized the need for promotion of green growth strategy and better public outreach in this endeavor including through environmental literacy programs. They also emphasized the need for mainstreaming environmental measures better in infrastructure projects. 4. Concerning the CPS approach, participants suggested the WBG to put greater emphasis on capacity building; facilitating faster progress in key development priorities; development of strong M&E system to track impact of wide-ranging government initiatives with greater role for CSOs in this respect; and greater public access to JERP AAA. They also called for the WBG programs to leverage greater emphasis on the region specific development needs, and for local initiatives at the community level to be better supported in order to strengthen civil society. These choices are broadly consistent with this CPS, under which to further strengthen its partnership with Kazakhstan and ensure that work carried out becomes increasingly responsive to client demand, the WBG will continue to work with, and listen closely to broader range of stakeholders in Kazakhstan. 61 Annex A2: KAZAKHSTAN – Country at a Glance Euro pe & Upper Ke y D e v e lo pm e nt Indic a t o rs Central middle Kazakhstan A sia inco me Age distribution, 2009 •2 0 10 ) ( Male Female P o pulatio n, mid-year (millio ns) 16.3 404 1,002 75-79 Surface area (tho usand sq. km) 2,725 23,549 48,659 60-64 P o pulatio n gro wth (%) 1.4 0.3 0.9 Urban po pulatio n (% o f to tal po pulatio n) 59 64 75 45-49 30-34 GNI (A tlas metho d, US$ billio ns) 122.4 2,746 7,515 15-19 GNI per capita (A tlas metho d, US$ ) 7,500 6,793 7,502 GNI per capita (P P P , internatio nal $ ) 10,320 12,609 12,440 0-4 10 5 0 5 10 GDP gro wth (%) 7.3 -5.8 -2.6 percent of total population GDP per capita gro wth (%) 5.8 -6.1 -3.4 ( m o s t re c e nt e s t im a t e , 2 0 0 4 – 2 0 10 ) .25 P o verty headco unt ratio at $ 1 a day (P P P , %) <2 4 .. Under-5 mortality rate (per 1,000) P o verty headco unt ratio at $ 2.00 a day (P P P , %) <2 9 .. Life expectancy at birth (years) 68 70 72 70 Infant mo rtality (per 1,000 live births) 29 19 19 Child malnutritio n (% o f children under 5) 5 .. .. 60 50 5 A dult literacy, male (% o f ages 1 and o lder) 100 99 94 40 5 A dult literacy, female (% o f ages 1 and o lder) 100 97 91 30 Gro ss primary enro llment, male (% o f age gro up) 109 100 1 11 20 Gro ss primary enro llment, female (% o f age gro up) A ccess to an impro ved water so urce (% o f po pulatio n) A ccess to impro ved sanitatio n facilities (% o f po pulatio n) 109 95 97 98 95 89 10 1 95 84 10 0 1990 1995 2000 2009 1 - - - - _ .. Kazakhstan Europe & Central Asia a N e t A id F lo ws 19 8 0 19 9 0 2000 2 0 10 (US$ millio ns) Net ODA and o fficial aid .. 12 1 189 298 Growth of GDP and GDP per capita (%) To p 3 do no rs (in 2008): United States .. 0 58 97 20 Japan .. 0 83 37 15 Germany .. 1 12 10 18 10 5 A id (% o f GNI) .. 0.1 1.1 0.3 0 A id per capita (US$ ) .. 7 13 19 -5 -10 Lo ng- T e rm E c o no m ic T re nds -15 95 05 Co nsumer prices (annual % change) GDP implicit deflato r (annual % change) Exchange rate (annual average, lo cal per US$ ) Terms o f trade index (2000 = 100) .. .. .. .. 90.9 01 1 .5 1 0.0 81 1 1 1 3.2 7.4 42.1 100 1 1 7.1 9.5 47.4 122 - GDP - GDP per capita 19 8 0 – 9 0 19 9 0 – 2 0 0 0 2 0 0 0 – 10 (average annual gro wth %) P o pulatio n, mid-year (millio ns) 14.9 16.3 14.9 16.3 0.9 -0.9 0.9 GDP (US$ millio ns) .. .. 18,292 148,052 .. -4.1 8.3 (% o f GDP ) A griculture .. 33.9 8.7 4.8 .. -8.0 3.8 Industry .. 32.5 40.5 42.4 .. -7.1 9.0 M anufacturing .. .. 17.7 13.1 .. .. 6.3 Services .. 33.6 50.8 52.8 .. -5.2 8.3 Ho useho ld final co nsumptio n expenditure .. 67.1 61.9 49.3 .. -5.2 9.2 General go v't final co nsumptio n expenditure .. 12.4 12.1 10.8 .. -7.1 7.1 Gro ss capital fo rmatio n .. 43.2 18.5 25.1 .. -19.0 15.2 Expo rts o f go o ds and services .. 7.8 56.6 44.0 .. -1.9 4.7 Impo rts o f go o ds and services .. 30.5 49.1 29.2 .. -12.7 4.4 Gro ss savings .. 15.6 21.2 27.1 No te: Figures in italics are fo r years o ther than tho se specified. Gro up data are fo r 2009. .. indicates data are no t available. • A id data are fo r 2009. a. Develo pment Eco no mics, Develo pment Data Gro up (DECDG). 62 Kazakhstan "I B a la nc e o f P a ym e nt s a nd T ra de 2000 2 0 10 Governance indicators, 2000 and 2009 (US$ millio ns) To tal merchandise expo rts (fo b) 9,288 60,838 To tal merchandise impo rts (cif) Net trade in go o ds and services 7,1 1 20 ,371 31,956 21 8 ,81 Voice and accountability ~I Political stability Current acco unt balance 366 3,013 Regulatory quality as a % o f GDP 2.0 2.0 Rule of law ;JI Wo rkers' remittances and co mpensatio n o f emplo yees (receipts) 122 124 Control of corruption Reserves, including go ld 2,096 28,275 0 25 50 75 100 a 2009 Country's percentile rank (0-100) C e nt ra l G o v e rnm e nt F ina nc e higher values imply better ratings a 2000 (% o f GDP ) Source: Kaufmann-Kraay-Mastruzzi, World Bank Current revenue (including grants) 21.9 25.0 Tax revenue 20.0 23.8 Current expenditure 20.3 15.0 T e c hno lo gy a nd Inf ra s t ruc t ure 2000 2009 Overall surplus/deficit -0.1 2.9 P aved ro ads (% o f to tal) 86.5 89.9 Highest marginal tax rate (%) Fixed line and mo bile pho ne Individual 30 10 subscribers (per 1 peo ple) 00 14 1 18 Co rpo rate 30 20 High techno lo gy expo rts (% o f manufactured expo rts) 3.6 30.0 E xt e rna l D e bt a nd R e s o urc e F lo ws E nv iro nm e nt (US$ millio ns) To tal debt o utstanding and disbursed 12,433 1 51 1 8,1 A gricultural land (% o f land area) 77 77 To tal debt service 3,371 35,770 Fo rest area (% o f land area) 1.2 1.2 Debt relief (HIP C, M DRI) – – Terrestrial pro tected areas (% o f land area) .. .. To tal debt (% o f GDP ) 68.0 79.8 Freshwater reso urces per capita (cu. meters) 5,076 4,871 To tal debt service (% o f expo rts) 32.0 53.3 Freshwater withdrawal (billio n cubic meters) 31.7 .. Fo reign direct investment (net inflo ws) 1,283 12,601 CO2 emissio ns per capita (mt) 8.6 14.7 P o rtfo lio equity (net inflo ws) 19 131 GDP per unit o f energy use (2005 P P P $ per kg o f o il equivalent) 2.0 2.3 Composition of total external debt, 2010 Energy use per capita (kg o f o il equivalent) 2,709 4,525 Wo rld B a nk G ro up po rt f o lio 2000 2009 L'v Short-term, (US$ millio ns) Private, 9,084 ~ 104,985 IBRD, 1,830 IB RD Other multi- To tal debt o utstanding and disbursed 1,057 547 "'= lateral, 1,257 Bilateral, 995 Disbursements P rincipal repayments Interest payments 50 20 62 15 1 32 1 7 US$ millions IDA To tal debt o utstanding and disbursed 0 0 Disbursements 0 0 P riv a t e S e c t o r D e v e lo pm e nt 2000 2 0 10 To tal debt service 0 0 Time required to start a business (days) – 1 9 IFC (fiscal year) Co st to start a business (% o f GNI per capita) – 1.0 To tal disbursed and o utstanding po rtfo lio 89 335 Time required to register pro perty (days) – 40 o f which IFC o wn acco unt 89 267 Disbursements fo r IFC o wn acco unt 29 1 16 Ranked as a majo r co nstraint to business 2000 2 0 10 P o rtfo lio sales, prepayments and (% o f managers surveyed who agreed) repayments fo r IFC o wn acco unt 3 10 " A ccess to /co st o f financing .. 20.1 " Tax rates .. 15.4 M IGA Gro ss expo sure 22 222 Sto ck market capitalizatio n (% o f GDP ) 7.3 41.0 New guarantees 0 190 B ank capital to asset ratio (%) 13.6 -8.7 No te: Figures in italics are fo r years o ther than tho se specified. 3/20/12 .. indicates data are no t available. – indicates o bservatio n is no t applicable. Develo pment Eco no mics, Develo pment Data Gro up (DECDG). 63 Millennium Development Goals Kazakhstan "I With selected targets to achieve b etween 1990 and 2015 (estimate clo sest to date sho wn, +/- 2 years) Ka za k hs t a n G o a l 1: ha lv e t he ra t e s f o r e xt re m e po v e rt y a nd m a lnut rit io n 19 9 0 19 9 5 2000 2009 .25 P o verty headco unt ratio at $ 1 a day (P P P , % o f po pulatio n) <2 5.0 <2 <2 P o verty headco unt ratio at natio nal po verty line (% o f po pulatio n) .. 34.6 46.7 12.1 Share o f inco me o r co nsumptio n to the po o rest qunitile (%) 9.5 6.7 8.1 8.7 P revalence o f malnutritio n (% o f children under 5) .. 6.7 3.8 4.9 G o a l 2 : e ns ure t ha t c hildre n a re a ble t o c o m ple t e prim a ry s c ho o ling P rimary scho o l enro llment (net, %) .. .. 87 89 P rimary co mpletio n rate (% o f relevant age gro up) .. 103 94 106 Seco ndary scho o l enro llment (gro ss, %) 100 94 93 99 Yo uth literacy rate (% o f peo ple ages 1 5-24) 100 .. 100 100 G o a l 3 : e lim ina t e ge nde r dis pa rit y in e duc a t io n a nd e m po we r wo m e n Ratio o f girls to bo ys in primary and seco ndary educatio n (%) .. 107 102 99 Wo men emplo yed in the no nagricultural secto r (% o f no nagricultural emplo yment) .. .. 49 50 P ro po rtio n o f seats held by wo men in natio nal parliament (%) .. 13 10 18 G o a l 4 : re duc e unde r- 5 m o rt a lit y by t wo - t hirds -- - -- Under-5 mo rtality rate (per 1 ,000) - - -- - -- - - -- 57 50 44 33 Infant mo rtality rate (per 1,000 live births) 48 43 38 29 M easles immunizatio n (pro po rtio n o f o ne-year o lds immunized, %) 89 95 99 99 G o a l 5 : re duc e m a t e rna l m o rt a lit y by t hre e - f o urt hs M aternal mo rtality ratio (mo deled estimate, per 1 00,000 live births) 78 76 59 45 B irths attended by skilled health staff (% o f to tal) .. 100 99 100 Co ntraceptive prevalence (% o f wo men ages 1 5-49) .. 59 66 51 G o a l 6 : ha lt a nd be gin t o re v e rs e t he s pre a d o f H IV / A ID S a nd o t he r m a jo r dis e a s e s P revalence o f HIV (% o f po pulatio n ages 1 5-49) 0.1 0.1 0.1 0.1 Incidence o f tuberculo sis (per 100,000 peo ple) 139 139 196 163 Tuberculo sis case detectio n rate (%, all fo rms) 48 51 88 80 G o a l 7 : ha lv e t he pro po rt io n o f pe o ple wit ho ut s us t a ina ble a c c e s s t o ba s ic ne e ds A ccess to an impro ved water so urce (% o f po pulatio n) 96 96 96 95 A ccess to impro ved sanitatio n facilities (% o f po pulatio n) 96 96 97 97 Fo rest area (% o f land area) 1.3 .. 1.2 1.2 Terrestrial pro tected areas (% o f land area) .. .. .. .. CO2 emissio ns (metric to ns per capita) 15.9 10.5 8.6 14.7 GDP per unit o f energy use (co nstant 2005 P P P $ per kg o f o il equivalent) 1.6 1.4 2.0 2.3 G o a l 8 : de v e lo p a glo ba l pa rt ne rs hip f o r de v e lo pm e nt 00 Telepho ne mainlines (per 1 peo ple) 8.2 12.4 12.3 23.7 00 M o bile pho ne subscribers (per 1 peo ple) 0.0 0.0 1.3 94.4 00 Internet users (per 1 peo ple) 0.0 0.0 0.7 33.4 00 P erso nal co mputers (per 1 peo ple) .. .. .. .. Education indicators (%) Measles immunization (% of 1-year ICT indicators (per 100 people) olds) 125 100 140 r- t- 120 ~ r=tpp t\fVl!'1l 100 75 100 75 80 50 50 60 25 40 25 0 20 --.n. n n"-"- rr n -- 2000 2005 2009 0 0 1990 1995 2000 2009 2000 2005 2009 Primary net enrollment ratio -a- Ratio of girls to boys in primary & secondary • • • Fixed + mobile subscribers education Kazakhstan Europe & Central Asia • Internet users No te: Figures in italics are fo r years o ther than tho se specified. .. indicates data are no t available. 3/20/12 Develo pment Eco no mics, Develo pment Data Gro up (DECDG). 64 Annex B2: KAZAKHSTAN – Selected Indicators* of Bank Portfolio Performance and Management As of Date 03/04/2012 Indicator 2009 2010 2011 2012 Portfolio Assessment a Number of Projects Under Implementation 11 14 14 12 b Average Implementation Period (years) 3.7 3.9 3.7 4.0 a, c Percent of Problem Projects by Number 27.3 14.3 21.4 25.0 a, c Percent of Problem Projects by Amount 3.2 1.3 2.5 2.9 a, d Percent of Projects at Risk by Number 27.3 14.3 21.4 25.0 a, d Percent of Projects at Risk by Amount 3.2 1.3 2.5 2.9 e Disbursement Ratio (%) 19.9 7.0 13.3 20.7 Portfolio Management CPPR during the year (yes/no) no no yes no Supervision Resources (total US$) 1264 1569 1862 1706 Average Supervision (US$/project) 115 112 133 142 Last Five Memorandum Item Since FY 80 FYs Proj Eval by OED by Number 23 4 Proj Eval by OED by Amt (US$ millions) 1,625.3 280.4 % of OED Projects Rated U or HU by Number 13.0 0.0 % of OED Projects Rated U or HU by Amt 1.7 0.0 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 65 Annex B3: KAZAKHSTAN – IFC Investment Operations Program 2007 2008 2009 2010 2011 Commitments (US$m) IFC and Participants 60.5 110.4 352.8 353.5 102.5 IFC's Own Account* 60.5 110.4 242.8 353.5 102.5 Net Commitments by Sector (%) Financial Markets 17 90 43 94 82 Manufacturing 83 10 27 - 5 Agribusiness - - - 1 13 Consumer & Social Services - - 26 - - Infrastructure - - 5 5 - .. Total ! 100 100 100 100 100 Net Commitments by Investment Instrument (%) Loan 50 78 50 5 15 Equity 50 - 16 28 6 Quasi-Loan - 5 14 42 - .. Quasi-Equity Guarantee - - - 18 - 19 - 25 - 79 Total 1 100 1 100 1 100 1 100 1 100 j 66 Annex B5: KAZAKHSTAN – Key Social Indicators Latest single year Same region/income group Europe & Upper- Central m iddle- 1980-85 1990-95 2004-10 Asia incom e POPULATION Total population, mid-year (millions) 15.8 15.8 16.3 404.2 1,001.7 Grow th rate (% annual average for period) 1.1 -0.7 1.4 0.2 0.9 Urban population (% of population) 56.0 55.9 54.3 64.0 74.9 Total fertility rate (births per woman) 3.1 2.3 2.6 1.8 2.0 POVERTY (% of population) National headcount index .. .. 6.5 .. .. Urban headcount index .. .. 3.7 .. .. Rural headcount index .. .. 10.1 .. .. INCOME GNI per capita (US$) .. 1,280 7,500 6,793 7,502 Consumer price index (2005=100) .. 47 227 141 127 INCOME/CONSUMPTION DISTRIBUTION Gini index .. 32.7 27.8 .. .. Low est quintile (% of income or consumption) .. 7.5 8.7 .. .. Highest quintile (% of income or consumption) .. 40.4 39.9 .. .. SOCIAL INDICATORS Public expenditure Health (% of GDP) .. 3.0 2.5 3.9 3.8 Education (% of GNI) .. .. 4.1 4.1 4.3 Net prim ary school enrollm ent rate (% of age group) Total .. .. 89 92 93 Male .. .. 90 93 93 Female .. .. 89 92 92 Access to an im proved w ater source (% of population) Total .. 96 95 96 95 Urban .. 99 99 98 98 Rural .. 92 90 89 86 Im m unization rate (% of children ages 12-23 months) Measles .. 95 99 96 93 DPT .. 93 98 95 93 Child malnutrition (% under 5 years) .. 7 5 .. .. Life expectancy at birth (years) Total 69 65 68 70 72 Male 64 60 64 66 69 Female 73 70 73 75 75 Mortality Infant (per 1,000 live births) 53 43 29 19 19 Under 5 (per 1,000) 63 50 33 21 23 Adult (15-59) Male (per 1,000 population) 312 306 370 286 201 Female (per 1,000 population) 140 136 147 123 123 Maternal (per 100,000 live births) .. 76 45 32 82 Births attended by skilled health staff (%) .. 100 100 97 96 CAS Annex B5. This table w as produced from the CMU LDB system. 03/27/12 Note: 0 or 0.0 means zero or less than half the unit show n. Net enrollment rate: break in series betw een 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months w ho received vaccinations before one year of age or at any time before the survey. 67 Annex B6: KAZAKHSTAN – Key Economic Indicators Actual Estimate Projected 2008 • 2009 • 2010 2011 • 2012 • 2013 • 2014 2015 • 2016 National accounts (as % of GDP) Gross domestic product a 100 100 100 100 100 100 100 100 100 Agriculture 6 6 5 6 4 3 3 3 3 Industry and construction 43 40 42 40 39 38 37 36 35 Services 51 53 53 54 57 59 60 61 62 Total consumption 52 62 60 54 59 60 60 60 61 Total investment 28 29 25 25 25 26 26 26 26 Government investment 6 6 5 5 5 4 4 4 4 Private investment 22 24 20 20 20 21 22 22 22 Exports (GNFS)b 57 42 44 50 39 37 35 33 31 Imports (GNFS)b 37 34 29 28 24 23 22 20 18 Gross domestic savings 28 29 25 25 25 26 26 26 26 Gross national savings c 32 26 27 32 29 29 29 29 29 GNI per capita (US$, Atlas method) 6,140 6,790 7,500 8,200 10,160 11,640 12,790 14,090 15,570 Real GDP growth rates (%) 3.3 1.2 7.3 7.5 6.0 5.8 5.8 5.9 6.0 Real GDP per capita growth rates (%) 2.0 -1.4 5.8 6.0 4.9 4.7 4.7 4.8 5.1 Balance of payments (US$ million) Exports (GNFS)b 76,396 48,167 65,086 93,311 81,103 84,720 88,669 92,420 95,947 b Imports (GNFS) 49,571 39,001 43,268 52,596 49,051 51,852 54,019 56,059 56,677 Current account balance 6,326 -4,068 3,013 13,606 7,851 7,282 7,557 7,793 9,308 Net foreign direct investment 13,118 10,082 2,857 8,772 11,638 11,427 10,018 8,587 5,863 Net portfolio investment -9,378 3,053 8,528 -12,561 -18,569 -15,810 -16,522 -17,685 -18,804 Net long-term loans 1,376 -3,778 -8,166 -521 -470 -339 42 749 861 Change in reserves d -2,189 -2,462 -4,719 -200 549 -1,560 -96 1,556 3,772 e Fiscal accounts (as % of GDP at market prices) Non-oil revenue 16.8 14.1 14.1 13.5 13.5 13.5 13.5 13.5 13.5 Expenditures and net lending 27.2 23.5 22.1 21.8 21.7 20.5 20.5 20.1 20.0 Non-oil deficit -10.5 -9.4 -8.0 -8.3 -8.2 -7.0 -7.0 -6.6 -6.6 Oil revenue 12.9 8.6 10.9 14.5 12.4 12.2 11.8 11.3 11.0 Consolidated budget balance 2.5 -0.8 2.9 6.3 4.2 5.2 4.8 4.7 4.5 Foreign financing 0.0 0.5 1.0 0.6 0.7 0.3 0.1 0.0 -0.1 Domestic financing 2.1 2.4 1.5 1.5 1.9 1.2 1.4 1.5 1.6 NFRK revenue (-) -4.6 -2.1 -5.3 -8.3 -6.8 -6.7 -6.3 -6.2 -6.0 NFRK assets (stock) 20.6 26.5 26.1 29.1 33.2 36.7 39.5 41.8 43.7 Government debt (stock) 6.8 10.2 10.6 10.5 12.1 12.5 12.9 13.2 13.4 Price indices Terms of trade index (2000=100) 130.3 108.0 116.5 124.6 122.5 122.0 121.6 121.1 120.6 Consumer price index (% change) 17.2 7.3 7.1 8.3 7.3 5.9 5.9 5.9 5.9 GDP deflator (% change) 20.9 4.7 19.5 16.4 4.6 4.1 4.6 4.6 4.6 a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources. Negative value means an increase in reserves. e. Consolidated general government. Includes savings in the National Fund (NFRK). f. "LCU" denotes "local currency units." A decrease in US$/LCU denotes appreciation. 2000 is base year. 68 Annex B7: KAZAKHSTAN – Key Exposure Indicators Actual Estimate Projected Indicator 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total debt outstanding and 107,933 112,782 118,151 124,907 135,051 145,121 154,095 162,191 167,360 disbursed (TDO) (US$m)a Net disbursements (US$m)a 11,040 4,849 5,369 6,756 10,144 10,070 8,973 8,096 5,169 Total debt service (TDS) (US$m)a 31,830 30,427 21,831 24,231 23,930 25,463 27,023 28,446 30,071 Debt and debt service indicators (%) TDO/XGSb 141.3 234.1 181.5 133.9 166.5 171.3 173.8 175.5 174.4 TDO/GDP 80.9 97.8 79.8 67.1 65.8 64.0 61.4 58.3 54.3 TDS/XGS 41.7 63.2 33.5 26.0 29.5 30.1 30.5 30.8 31.3 Concessional/TDO .. .. .. .. .. .. .. .. .. IBRD exposure indicators (%) IBRD DS/public DS 42.4 43.9 77.0 95.3 113.5 42.5 59.8 112.0 108.9 Preferred creditor DS/public DS (%)c 16.2 15.0 14.5 IBRD DS/XGS 0.1 0.1 0.1 0.1 0.2 0.2 0.3 0.5 0.6 d IBRD TDO (US$m) 463 547 1,830 2,612 3,671 4,553 5,170 5,360 5,096 Of which present value of guarantees (US$m) Share of IBRD portfolio (%) 0.5 0.5 1.4 1.8 2.4 2.7 3.0 2.9 2.7 IDA TDO (US$m)d 0.0 0.0 0.0 0.0 0.0 1.0 2.0 3.0 4.0 IFC (US$m) 141 267 417 426 Loans 120 235 311 330 e Equity and quasi-equity 21 31 106 96 MIGA MIGA guarantees (US$m) 39 225 410 a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short-term capital. b. "XGS" denotes exports of goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. d. Includes present value of guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments. 69 Annex B8: KAZAKHSTAN – Operations Portfolio (IBRD/IDA and Grants) As of Date 03/04/2012 Closed Projects 27 IBRD/IDA * Total Disbursed (Active) 893.24 of w hich has been repaid 4.25 Total Disbursed (Closed) 1,447.54 of w hich has been repaid 1,261.36 Total Disbursed (Active + Closed) 2,340.78 of w hich has been repaid 1,265.61 Total Undisbursed (Active) 1,662.16 Total Undisbursed (Closed) 0.00 Total Undisbursed (Active + Closed) 1,662.16 Active Projects Difference Between Last PSR Expected and Actual Supervision Rating Original Amount in US$ Millions Disbursements a/ Development Implementation IBRD, Project ID Project Name Fiscal Year IBRD GRANT Cancel. Undisb. Orig. Frm Rev'd Objectives Progress revised P049721 AGRIC COMPETITIVENESS MS MS • 2005 24 14.7 9.3 0.3 9.6 P116919 ALMA TRANSMISSION PROJECT S S • 2011 78 78 77.5 29.4 P096998 CUSTOMS DEVT S MS • 2008 18.5 18.5 16.9 16.9 1.8 P078301 FORESTRY MU MU • 2006 30 30 9.0 1.8 P087485 FORESTRY (GEF) - KZ MU MU • 2006 5 2.2 1.2 P101928 HLTH SEC TECH (JERP) MS MS • 2008 117.7 117.7 88.3 78.4 78.4 P120985 KAZSTAT S S • 2011 20 20 20.0 P090695 KZ Tech Commercialization Proj MU MS • 2008 13.4 13.4 12.9 12.7 P114766 MOINAK ELECTRICITY TRANS PROJECT S S • 2010 48 48 16.7 10.3 P099270 SOUTH WEST ROADS S MS • 2009 2125 2125 1352.1 842.4 67.1 P116696 Tax Administration Reform Project MS S • 2010 17 17 16.2 0.5 P102177 TVEM MS S • 2011 29.23 29.23 28.0 -1.2 P078342 UST-KAMENOGORSK ENV REMED MU MU • 2007 24.29 24.29 24.3 7.5 7.5 Overall Result 2545.12 2535.8 5 9.3 1664.4 1009.6 154.9 70 Annex B8(b): KAZAKHSTAN – IFC Committed and Outstanding Investment Portfolio As of Date 03/04/2012 (in US$ millions) Committed Portfolio Outstanding Portfolio QL + QL + Sector Institution LN ET GT Total PART LN ET GT Total PART QE QE Financial Markets ATF Bank - - 60 - - - - 60 - - 60 60 Financial Markets Archimedes - - - 3 - - - - 3 - 3 3 Financial Markets BCC 85 - 85 - 22 33 58 198 22 33 58 198 Financial Markets MSME Resource - - - 0 - - - - 0 - 0 0 Financial Markets RBS Kazakhstan - - - - - - - - 15 15 15 15 Financial Markets SK Leasing - - - 0 - - - - 0 - 0 0 Manufacturing Altyn-IMS 2 - - - 2 - - - - - - - Manufacturing Jambyl Cement - - - - 46 18 64 77 46 13 59 77 Agribusiness Soufflet Finance - - - - - - - - 14 14 14 14 Agribusiness UKPF - - 2 - 2 - - - 1 - 1 - Services Home Mart - 25 - - - 25 - - 20 45 20 45 Total Portfolio 172 171 105 69 58 404 77 103 64 58 396 77 *Excluding regional projects. 71 55°N 50°E 55°E 60°E 65°E To 70°E 75°E To 80°E 85°E Tyumen‘ Novosibirsk To Kurgan To Chelyabinsk To R U S S I A N NORTH Petropavlovsk Novosibirsk F E D E R A T I O N Toby KAZAKHSTAN l a To lg Er Vo To rti r Samara Ufa Kostanai (Irt To Barnaul s s s Kokshetau ysh Ural To ) To Orenburg O Saratov b‘ Pavlodar To r g h a y AKMOLA PAVLODAR Plateau Ekibastuz 50°N Ural'sk 50°N KOSTANAI (Ishim) ASTANA Esil Chapaevo Öskemen skemen Z Zhaiy Semipalatinsk (Ust-Kamenogorsk) WEST k k Aktobe (Ural) KAZAKHSTAN hai Arkalyk Karagandy EAST Lake Yrgh Torg r yz Zaisan Turgay Ka za k h KAZAKHSTAN Vo lg Ayakos ATYRAU Embi a hem Z AKTOBE Shalkar U pl an ds To Astrakhan‘ Atyrau Zhezkazgan Balkhash KARAGHANDY Leps To Urumqi Aral i Lake 45vN su 45°N Lake Alakol ry Saryshaghan ar K K Balkash Sa ata l To Urumqi Beineu Aral Baikonur C Ile Sea ALMATY Taldykorgan CHINA as MANGYSTAU ZHAMBYL pi Kyzyl-Orda Shu (Ch Aktau KYZYLORDA u) To Korla an Ustyurt Tal Sy da as r ri y a Shu Almaty To Nukus Plateau Turkistan Pik Khan-Tengri (6995 m) Sea 2001 LEVEL OF ARAL SEA Taraz 1990 LEVEL OF ARAL SEA 1960 LEVEL OF ARAL SEA SOUTH To Naryn AZERBAIJAN KAZAKHSTAN Shymkent KYRGYZ 80°E UZBEK ISTA UZBEKISTA N 40°N R E P. K AZAK H STAN 40°N SELECTED CITIES AND TOWNS OBLAST CAPITALS KM ENISTAN TU R K M ENISTA N To Bukhoro To Dushanbe GALASY (CITIES WITH TA J I K I S TA N REGIONAL STATUS) This map was produced by NATIONAL CAPITAL KAZAKHSTAN the Map Design Unit of The RIVERS World Bank. The boundaries, 0 100 200 300 Kilometers colors, denominations and MAIN ROADS IBRD 33425R1 any other information shown on this map do not imply, on JANUARY 2007 the part of The World Bank RAILROADS 0 100 200 Miles Group, any judgment on the OBLAST BOUNDARIES FGHANI STAN A FGHA NISTA N legal status of any territory, or any endorsement or INTERNATIONAL BOUNDARIES acceptance of such 50°E 55°E 60°E 65°E 70°E boundaries.