CPS Final Kazakhstan Review Country Partnership Strategy Final … · 2017. 5. 11. · Reference Number: FRV:KAZ 2017-05 Independent Evaluation: VR-25 Validation Report May 2017 Kazakhstan:

KazakhstanCountry Partnership Strategy Final Review Validation, 2 2–2 6

CPS Final Review

Validation

EvaluationIndependent

Raising development impact through evaluation

Reference Number: FRV:KAZ 2017-05

Independent Evaluation: VR-25

Validation Report May 2017

Kazakhstan: Country Partnership Strategy Final Review Validation, 2012–2016

This document is being disclosed to the public in accordance with ADB’s Public Communications Policy 2011.

NOTES

(i) The fiscal year (FY) of the Government of Kazakhstan ends on 31 December.

(ii) In this report, “$” refers to US dollars. (iii) For an explanation of rating descriptions used in ADB evaluation

reports, see: ADB. 2015. 2015 Guidelines for the Preparation of Country Assistance Program Evaluations and Country Partnership Strategy Final Review Validations. Manila.

Director General M. Taylor-Dormond, Independent Evaluation Department (IED) Deputy Director General V. Salze-Lozac'h, Independent Evaluation Department Director N. Subramaniam, Independent Evaluation Sector and Project

Division, IED Team leader B. Nguyen, Senior Evaluation Specialist, IED Team members R. Lumain, Senior Evaluation Officer, IED

M. Legal, Senior Evaluation Officer, IED C. Regodon, Evaluation Assistant, IED

The guidelines formally adopted by the Independent Evaluation Department (IED) on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. To the knowledge of IED management, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, the IED does not intend to make any judgments as to the legal or other status of any territory or area.

Abbreviations

ADB

CAREC COBP CPS CPSFR CSF CSP CWRD DAMU EBRD EIRR GDP IED JBIC KEEP km MFF MSME NSO PCR PFI PPP PSM SMEs TA vpd

– – – – – – – – – – – – – – – – – – – – – – – – – –

Asian Development Bank Central Asia Regional Economic Cooperation country operations business plan country partnership strategy country partnership strategy final review countercyclical support facility country strategy and program Central and West Asia Department Damu Entrepreneurship Development Fund European Bank for Reconstruction and Development economic internal rate of return gross domestic product Independent Evaluation Department Japan Bank for International Cooperation knowledge and experience exchange program kilometer multitranche financing facility micro, small, and medium-sized enterprise nonsovereign operations project completion report participating financial institution public–private partnership public sector management small and medium-sized enterprises technical assistance vehicle per day

Currency Equivalents (as of 3 August 2016)

Currency unit – tenge (T)

T1.00 = $0.002825 $1.00 = T354.01

Contents

Page

Acknowledgments vii

Executive Summary ix

Chapter 1: Introduction 1

A. Validation Purposes and Procedures 1 B. Country Development Context and Government Plans 1 C. Previous Country Program Evaluation 4

Chapter 2: ADB’s Country Partnership Strategy, 2012–2016 5

A. Country Strategy 5 B. Country Program 7 C. Development Coordination 9

Chapter 3: Validation of Country Partnership Strategy Final Review Assessments 11

A. Relevance 11 B. Effectiveness 15 C. Efficiency 23 D. Sustainability 25 E. Development Impact 27 F. Performance of Nonsovereign Operations 32 G. ADB and Borrower Performance 33 H. Quality of Country Partnership Strategy Final Review 34

Chapter 4: Conclusions 36

A. Overall Assessment 36 B. Issues 38 C. Recommendations 38

Appendixes

1. ADB Country Portfolio for Kazakhstan, 2012–2016 42 2. Development Partners Active in Key Sectors 45 3. List of Supplementary Linked Documents 46

Acknowledgments This report was prepared by a team from the Independent Evaluation Department (IED), Binh T. Nguyen, Renato Lumain, Mitzirose Legal, and Charina Regodon. Consultants Peter Choynowski, Clarence Dingcong, and Madi Umbetaliyev supported the country mission and provided preliminary inputs. Marvin Taylor-Dormond, Director General, IED; Véronique Salze-Lozac’h, Deputy Director General, IED; and Vinod Thomas (up to August 2016) provided overall guidance. Nathan Subramaniam, Director, Sector and Projects Division, provided guidance during the finalization. The team benefited from a review of the draft report by internal peer reviewer Hans Van Rijn and external peer reviewer Peter Darjes; and comments from Walter Kolkma and Jose Antonio Tan III. The Asian Development Bank’s Central and West Asia Department reviewed the draft report and provided additional data during the finalization. Michael Diza designed the cover. The Independent Evaluation Department retains full responsibility for this report.

Executive Summary

Country Context Economic Context: Kazakhstan is an upper middle-income country with an economy highly dependent on oil and vulnerable to external shocks. Except for the 2 years of the global financial crisis (2008–2009), Kazakhstan’s economy grew on an average of 8.8% per year during 2005–2011. The fall in world oil prices by more than 50% during 2013–2014 severely affected the economy. Economic growth fell from 6.0% in 2013 to 4.2% in 2014, 1.2% in 2015, and 1.0% in 2016. The per capita gross domestic product (GDP) decreased from $13,891 in 2013 to $12,807 in 2014 and $10,510 in 2015. Growth is forecast at 2.4% in 2017. Government plans: Government development strategies focused on increasing economic diversification and competitiveness through rapid industrialization. In 2010, the Government of Kazakhstan adopted a development plan, Kazakhstan 2020, focusing on post-crisis development and economic growth through infrastructure development, economic diversification, and industrialization. In 2012, the

government adopted the Kazakhstan 2050 strategy, aiming to make Kazakhstan one of the world’s 30 most-developed countries by 2050. The strategy focused on human capital, the institutional environment, the knowledge economy, and integration into the world and regional economies. Country Partnership Strategy, 2012–2016 Country strategy: ADB’s country strategy aimed to support Kazakhstan in accelerating economic diversification and increasing competitiveness for sustainable and inclusive growth. The country partnership strategy (CPS), 2012–2016 proposed to achieve these goals by (i) modernizing infrastructure and utilities; and (ii) improving access to finance for small and medium-sized enterprises (SMEs), trade, and investment in infrastructure through public-private partnerships. The thematic priorities of the CPS were

During the country partnership strategy (CPS), 2012–2016, Asian Development Bank (ADB) provided $3.34 billion. The program was to help Kazakhstan accelerate economic diversification and increase competitiveness for sustainable and inclusive growth. ADB’s operations focused on the transport and finance sectors, with a $1 billion countercyclical support loan added in 2015 in response to country’s economic situation. The validation assessed the program successful on the borderline, with the ratings of relevant, less than effective, efficient, likely sustainable, and less than satisfactory development impacts. At the sector level, transport sector and public sector management operations were assessed successful, while operations in the finance sector were assessed less than successful. ADB’s support for the six cross-sector thematic priorities was assessed relevant, but the development impact was assessed less than satisfactory for the limited actions and marginal results achieved in most thematic priorities. Private sector operations were considered satisfactory. Both ADB and borrower performance was assessed satisfactory. The validation provided four recommendations for consideration in preparing the next CPS: (i) prepare the CPS with a realistic operations program and a development results framework using practical performance indicators for accountability; (ii) broaden the scope and scale of the operations program to increase ADB’s impact; (iii) engage more proactively in public sector management with a sector strategy; and (iv) increase support for private sector development, private sector operations, and public-private partnerships.

x Kazakhstan: CPS Final Review Validation, 2012–2016

governance and institutional reforms, private sector development, regional cooperation, knowledge exchange, climate change and environmental sustainability, and gender equity.

Country program: ADB operations focused on the transport sector (roads) and small and medium-sized enterprise finance, with a countercyclical support loan added in 2015. The ongoing program during the CPS totaled $3.34 billion. It comprised 28 lending and non-lending operations—of which 25 were sovereign operations ($3.26 billion) and three were nonsovereign operations ($80.20 million). Road projects comprised about a half of the portfolio, followed by public sector management (PSM)—which was not originally planned but became the second-largest sector because of the $1.00 billion countercyclical support facility (CSF) loan approved in 2015—and finance sector operations. The majority of operations were financed using the multitranche financing facility modality.

Assessment Overall assessment: The ADB program was assessed successful on the borderline, with an overall score of 1.6. In comparison, the CPS final review (CPSFR) rated the program successful, with the overall score of 2.0.

Relevance: The program was assessed relevant. The CPS’s strategic objectives were valid given the issues and priorities set out in Kazakhstan 2020 and ADB’s corporate strategies and agenda. The sector focus on transport and access to finance responded to government priorities and requests for donor support, and positioned ADB well with other development partners in Kazakhstan. The program and projects delivered were broadly in line with CPS priorities, responding to government priorities and stakeholder inputs, and focusing on development constraints in each sector selected. The planned public sector lending of $110 million for the energy sector and $400 million for municipal services did not materialize. At the sector level, transport operations were assessed relevant. The sector objectives were justified and the program was designed based on detailed assessments and road maps. Finance sector operations were assessed less than relevant. The rationale of the SME Investment Program was

sound, but its design relying entirely on credit lines was less than optimal in achieving objectives of meeting long-term SME financing needs. PSM operations were assessed relevant. The CSF loan added in 2015 provided needed budget support to the government anti-crisis programs. The CPS identified six cross-sector thematic priorities: governance and institutional reforms, private sector development, regional cooperation, knowledge exchange, climate change and environmental sustainability, and gender equity. The validation finds these well aligned with government and ADB development priorities, and supportive of the country program’s overall objective. The validation considers them relevant. Overall, considering assessments at the sector level and for cross-sector aspects, the validation assesses the program relevant. Effectiveness: The program was assessed less than effective for the partial achievement of output and outcome targets in all three operation sectors. The transport sector was assessed less than effective because (i) the three sector-level outcome targets (transport cost, traffic volume, and travel time) were not met in 2016, (ii) traffic volumes in two of the three projects with a completion report were lower than expected (Central Asia Regional Economic Cooperation [CAREC] Corridor 1, Tranches 1–2), and (iii) outputs were delayed or partially achieved at completion in all major road projects (CAREC Corridor 1, Tranches 1–3; CAREC Corridor 2, Tranches 1–2; and CAREC Corridor 3). The finance sector was assessed less than effective. For the three sector-level outcomes (share of bank loans to SMEs, portion of loans to women entrepreneurs, and overall bank loans to GDP), the loans to SMEs indicator is unlikely to be met, the loans to women indicator is almost met, and the overall bank loans as a share of GDP indicator was met. The SME Investment Program made credit available during a period of credit crunch and high exchange volatility, but outreach was rather small ($500 million on lent to 1,536 SMEs, reaching 0.12% of active SMEs) and lending was towards larger borrowers (the average loan was over $300,000 and about half of the loans went to larger SMEs with assets from $500,000 to over $3 million).

Executive Summary xi

For PSM, the CSF loan was assessed likely effective. Of the loan’s two outcome indicators (budget deficit and non-oil deficit), the budget deficit indicator was met, as it was reduced to 1.6% compared to the target of 2.4% in 2016. Of the loan’s eight target outputs, six were met. Of the four anti-crisis actions in 2016, as agreed in the CSF results framework, the government showed progress in two, while the other two were not demonstrated (the government was to provide support to exporting enterprises in non-resources sector, and raise public awareness of employment-related activities). The technical assistance support under the knowledge exchange program was considered likely effective, and overall the PSM operations were assessed likely effective. Efficiency: The program was assessed efficient. Available project data suggested the program was implemented cost-effectively and the overall portfolio performance was efficient. Contract award and disbursement ratios performed well during the CPS and generally better than ADB-wide ratios. Discussions with the operation team and feedback from executive and implementing agencies confirmed there were no major implementation issues with the completed and ongoing operations. At the sector level, transport operations were assessed efficient. Completed CAREC Corridor 1 road projects were economically viable with recalculated economic internal rate of returns in the completion reports ranging from 14.8% to 23.3%. For projects without a completion report under CAREC Corridor 2 and CAREC Corridor 3, cost savings and feedback from executing agencies of no major implementation issues point to a likely efficient assessment of these projects. Finance sector operations were assessed efficient. The SME Investment Program tranches were largely disbursed on time and funds received by the participating financial institutions were efficiently utilized. The full credit line amount under Tranche 1 was disbursed, and the funds were recycled 3.4 times. Under Tranche 2, funds have been recycled 1.4 times. Under Tranche 3, 23% of the funds received from the loan have been disbursed by PFIs. PSM operations were assessed less than efficient for the lengthy processing and disbursement of

the CSF loan (almost 10 months, as compared to other ADB CSFs ranging from 3.1 to 6.6 months). The loan could have been disbursed to support government anti-crisis programs in 2015, when the economic effect of the crisis was strong. Instead, it was disbursed in December 2015 to help fund a budget deficit in 2016. Sustainability: The program was assessed likely sustainable. The transport sector was assessed likely sustainable. KazAvtoZhol’s capacity and the toll road’s feasibility are to be confirmed. However, given the progress being made in the sector— establishment of KazAvtoZhol as road development agency, implementation of automated weight control, and installation of road maintenance depots and road safety measures—the prospects of the proposed operations to promote performance-based road maintenance, and the government’s likelihood to supplement funds for road maintenance based on prior experience, ADB road operations were considered likely sustainable. The finance sector operations were assessed less likely sustainable. ADB’s program made credit available for SMEs during a credit crunch for banks. However, the sector’s operating environment remains difficult. Broader sector issues are yet to be addressed, and the dearth of SME long-term financing sources, including in non-bank finance subsectors, will less likely to sustain the limited credit line provided. The PSM operations were assessed likely sustainable. Outcomes of government anti-crisis programs are likely to be sustained. Public debt was assessed to be resilient, and the CSF loan did not affect debt sustainability levels. Development impact: The program’s development impact was assessed less than satisfactory. The CPS’s three country development goals (steady and balanced growth, increased labor productivity, and increased share of manufacturing in GDP) were not met. Given the program’s small size relative to Kazakhstan’s economy, ADB operations contributed marginally to GDP growth and economic diversification. While the business environment and competitiveness somewhat improved during the CPS period, the economy remains heavily dependent on oil, with no evidence it has become

xii Kazakhstan: CPS Final Review Validation, 2012–2016

more diversified and resilient. The targets for improved labor productivity and increased share of manufacturing in GDP were not achieved, and operations did not have any meaningful impact on these indicators. ADB contributed marginally to improving inclusive growth through the SME Investment Program. For the transport sector, the CPSFR assessed development impact of ADB operations as satisfactory. Both the CPSFR and project completion reports indicate benefits accrue mainly to the local population. International transit traffic needed more time to develop as envisaged. There were some unintended negative effects in the completed road projects such as safety issues and restoring forest cover. Future performance of the regional roads depends on progress made from current regional cooperation initiatives and further investments in enabling and complementary infrastructure, policies, and institutions, like link roads to Europe, the People’s Republic of China and the Russian Federation, developing economic corridors, and Kazakhstan’s regional economic integration programs. The prospect of a Kazakhstan economic recovery is a good sign for future traffic. Similarly, additional information from Central and West Asia Department in March 2017 show recent progress on regional economic integration between Kazakhstan and other economies under the CAREC Program. The Shanghai Cooperation Organization road transport agreement and International Roads Transport custom guarantee system became effective in January 2017. Taking these into account, net benefits of ADB support in the sector could prevail in the next few years. Overall, development impact from ADB transport sector operations’ is likely satisfactory. For the finance sector, the validation concurs with the CPSFR assessment of less than satisfactory. The SME Investment Program made credit available for SME loans. However, there is no evidence the project helped establish the supply of SME lending at market rates, as loans were provided at slightly lower interest rates than market SME loans and the government continues to provide interest subsidies to certain target groups, geographical locations, and sectors, potentially carry market distortions.

For the PSM operations, the validation agrees with the CPSFR that it is too early to assess, as the CSF loan was provided in December 2015 and many government anti-crisis programs are not completed. The validation assesses ADB support for the cross-sector thematic priorities less than satisfactory. Of the six priorities, one (knowledge exchange) was considered satisfactory, while the rest were considered less than satisfactory because of the limited actions taken and marginal results achieved. Combining the less than satisfactory rating for the sector-level impacts and the less than satisfactory rating for the cross-sector impacts, the validation assesses the overall program development impact less than satisfactory. Performance of nonsovereign operations: ADB’s nonsovereign operations were assessed satisfactory. While relatively small in size, the investments contributed to private sector development, and the clients are financially sound and performing well. The loans to Akmola Electricity Distribution Company and Central Asia Power Distribution Company made resources available to rehabilitate the outdated and dilapidated electric distribution network. The loan to RG Brands in agribusiness was critical for the company to strengthen its finance position and expand its production base and distribution networks. In the validation’s view, the CPSFR’s exchange rate and foreign currency concerns might have been overstated. After the devaluation in 2015, the tenge–dollar exchange dropped and stabilized at about T330 per $1 for most of 2016. Both the energy companies and RG Brands continue to perform well, are financially sound, and have little risk of non-repayment.

ADB performance: ADB performance was assessed satisfactory. ADB actively engaged with other development partners and regularly participated in donor coordination meetings. Staff provided useful guidance, advice, and support during project preparation and implementation. In some cases, ADB responded somewhat slowly to issues during implementation. The government would like to see more support for private sector operations. The resident mission contributed strongly to project management and is able to

Executive Summary xiii

handle more core operational responsibility. However, its role remains rather limited, and operations continue to be dominantly processed and managed by ADB headquarters. Borrower performance: Government performance was assessed satisfactory. The government showed strong ownership of the development priorities and led donor coordination. Executing and implementing agencies performed well, complied with ADB guidelines, and facilitated timely release of counterpart funds. The portfolio’s implementation status showed progress in most areas. However, project effectiveness took longer than the ADB average.

Issues

The validation identified several issues.

(i) Government’s move to direct borrowing can potentially reduce ADB public sector lending level. The government plans to limit government borrowing and shift the borrowing authority directly to operating entities. This new modality will have implications for ADB’s future public sector lending, mainly on the availability of operating entities with capacity to borrow from international sources. A few entities currently have this capacity.

(ii) Non-delivery of planned lending. A total pipelined lending of about $500 million in the energy and urban sectors has been continuously postponed, and the approvals remain uncertain. ADB needs to analyze the reasons and decide either to address them with a new program design or to not include these sectors in the new CPS, unless ADB strongly believes it is feasible.

(iii) Infrastructure sector operations were focused on the Central Asia Regional Economic Cooperation Corridor road construction, with limited efforts to support economic corridors development. ADB’s transport sector support focused on road construction, while efforts to help transform the road corridors to economic corridors, develop industrial and urban

development sites, and improve trade policy were limited.

(iv) Developed knowledge products are not widely shared. An innovative cost-sharing arrangement on a cash basis between ADB and the government reinforced the government’s ownership of the knowledge program and ensured that outputs meet the government’s needs and priorities. However, knowledge products are kept within the ministries that own them, and hence have limited benefits.

Recommendations In the validation’s view, Kazakhstan’s economy remains heavily dependent on oil revenues and neighboring trade partners, and this makes it vulnerable to external shocks. ADB’s program has focused almost exclusively on road rehabilitation, SME finance, and anti-crisis support. ADB should broaden its program in Kazakhstan for greater development impact through several approaches. (i) Prepare the new country partnership

strategy with a realistic operations program and a development results framework using practical performance indicators for accountability. ADB under delivered in its planned lending during the last two CPS periods. To avoid repeating this, the new CPS will need to have an operations program that ADB can realistically deliver. The new CPS will also need to have a development results framework with practical performance indicators to allow for timely progress monitoring and midcourse adjustments, as necessary.

(ii) Broaden the scope and scale of operations with wider sector coverage, and use more diverse lending and non-lending instruments to increase ADB’s impact. ADB should continue supporting Kazakhstan to diversify the economy and to move to a high-income country status under Kazakhstan 2050. For greater impact, ADB should increase its involvement beyond the current operational focus on CAREC roads

xiv Kazakhstan: CPS Final Review Validation, 2012–2016

rehabilitation and SME finance to encompass several additional areas. a. Infrastructure development. ADB’s

efforts should move beyond lending for CAREC roads rehabilitation to include supporting the development of economic growth centers, industrial sites, and trade facilitation programs, using ADB’s available lending and non-lending instruments, to help transform road corridors to economic corridors.

b. Finance sector. ADB should broaden

its involvement beyond providing credit lines to addressing supply- and demand-side constraints to SME development, including the enabling environment, sector issues, and capacity of PFIs and SMEs. ADB should make further efforts to support enterprises at the sector’s lower segment, particularly microbusinesses and women-led enterprises, to increase the scale and depth of outreach.

c. Energy and urban sectors. ADB should

leverage its technical assistance engagement in the energy and urban sectors to bolster its involvement to a higher level. In the urban sector, ADB may consider taking a cross-sector

development approach to include urban physical infrastructure as well as complementary supports in social sectors such as education and health.

(iii) Engage more proactively in public sector

management with a sector strategy for more systematic support of public institution reforms, including state-owned enterprise reforms. ADB’s PSM support has largely been responsive to crisis situations. Given the government’s fiscal challenges and the strategic priority of increasing public institutions’ efficiency under Kazakhstan 2050, ADB needs to consider more systematic support for PSM to add value to Kazakhstan’s development.

(iv) Increase support for private sector

development, private sector operations, and public-private partnerships. With the government’s preference for direct operating entity borrowing, ADB’s public sector lending will face financial and institutional capacity constraints from potential borrowing entities. To balance its program, ADB should increase its support for the private sector. Particularly, more efforts are needed to improve the enabling business environment and the public–private partnership legal and policy frameworks, and to increase ADB’s private sector operations.

CHAPTER 1

Introduction

A. Validation Purposes and Procedures 1. This report was prepared by the Independent Evaluation Department (IED) of the Asian Development Bank (ADB) to (i) validate the Country Partnership Strategy Final Review (CPSFR)1 prepared by ADB’s Central and West Asia Department (CWRD) for the Kazakhstan country partnership strategy (CPS), 2012–2016;2 (ii) assess ADB and borrower performance; (iii) assess the quality of the self-evaluation in the CPSFR; and (iv) identify issues and provide recommendations for the preparation of CPS, 2017–2021. In particular, the validation assessed the performance of ADB’s ongoing assistance program during CPS, 2012–2016, including operations (lending and non-lending) approved prior to but implemented during the CPS period and operations approved under the country operations business plans (COBPs) 2012–2014, 2014–2016, 2015–2017, and 2016–2018 that supported the CPS.3 2. The report was prepared following the IED’s 2015 Guidelines for the Preparation of Country Assistance Program Evaluations and Country Partnership Strategy Final Review Validations. 4 The validation used a mixed method of triangulating quantitative and qualitative information of various sources from the project to the sector and country level. The procedures undertaken included (i) desk reviewing country planning and programming documents, (ii) preparing an evaluation approach paper,5 (iii) fielding a country mission to collect stakeholders’ feedback and additional data, 6 and (iv) interviewing the country operations team in ADB headquarters.

B. Country Development Context and Government Plans

3. Economic context. Kazakhstan is an upper-middle-income country with abundant oil, gas, and mineral reserves and a vast arable area for agriculture. At the time of CPS preparation in 2011, its economic prospects were strong. It also had a forward-looking development strategy focusing on the economy’s industrialization and diversification. A young and educated population supported its economic future, and its strategic location provided a land bridge between Europe and West Asia. Except for the

1 ADB. 2016. Country Partnership Strategy Final Review: Kazakhstan, 2012–2016. Manila. 2 ADB. 2011. Country Partnership Strategy: Kazakhstan, 2012–2016. Manila. 3 ADB. 2012. Country Operations Business Plan: Kazakhstan, 2012–2014. Manila; ADB. 2013. Country

Operations Business Plan: Kazakhstan, 2014–2016. Manila; ADB. 2014. Country Operations Business Plan: Kazakhstan, 2015–2017. Manila; and ADB. 2015. Country Operations Business Plan: Kazakhstan, 2016–2018. Manila.

4 ADB. 2015. Guidelines for the Preparation of Country Assistance Program Evaluations and Country Partnership Strategy Final Review Validations. Manila.

5 IED. 2016. Evaluation Approach Paper. Validation of Kazakhstan Country Partnership Strategy Final Review, 2012–2016. ADB: Manila.

6 The country mission was fielded from 20 June–1 July 2016 and comprised of Binh T. Nguyen (Senior Evaluation Specialist, IED), Peter Choynowski (Country Evaluation Consultant), Clarence Dingcong (Small and Medium-sized Enterprises and Public Sector Management Consultant), and Madi Umbetaliyev (National Consultant).

2 Kazakhstan: CPS Final Review Validation, 2012–2016

2 years affected by the global financial crisis (2008 and 2009)—with growth rates of 3.3% and 1.2%—Kazakhstan’s real gross domestic product (GDP) grew at an average rate of 8.8% per year during 2005–2011 (Figure 1).

4. The 2008–2009 global financial crisis disrupted economic activity in Kazakhstan. Growth faltered, fiscal and external account surpluses turned into deficits, and the financial sector witnessed a sharp increase in nonperforming loans. The Government of Kazakhstan responded with an anti-crisis program of fiscal and monetary policy measures and a bailout package for the banking sector, which successfully revived the economy and restructured the banking sector.

5. In 2010 and 2011, the economy rebounded sharply to grow by more than 7%, propelled by oil, gas, mining, and a robust services sector. Oil revenues provided support for the fiscal and external account balances. These revenues significantly built up the National Fund of the Republic of Kazakhstan (the oil fund) and boosted foreign reserves. Together, these totaled more than $72 billion in 2011.

6. Following this rapid recovery, the economy slowed during 2012–2013. Real GDP growth slowed to 4.8% in 2012, reflecting declines in oil and agriculture outputs. External pressures on prices eased, and inflation remained within the targeted range of 6%–8%, while the overall fiscal deficit further increased to 2.8% of GDP in 2012 from 1.9% in 2011. Domestic demand primarily accounted for growth in real GDP of 5.8% in 2013, with household consumption growing at 9%. However, the external position weakened in 2013 with the current account turning into a small deficit from a surplus averaging over 2% of GDP in the preceding 3 years. The decline was mainly driven by a sharp fall in non-oil exports (metals and grains). This contributed to a fall in official reserves by $3.6 billion to $24.7 billion (about 4.5 months of imports).7

7 ADB. 2016. Asian Development Outlook 2016: Asia’s Potential Growth. Manila.

3.85.3

6.8

8.57.2

9.1

11.612.4

13.912.8

10.5

7.59.7

10.7

8.9

3.3

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4.8

6.0

4.2

1.21.0

2.4

0

2

4

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8

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14

16

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f

GDP per capita (current US$) GDP growth (annual %)

Figure 1: Gross Domestic Product Growth Rates and Per Capita, 2005–2017($'000/percent)

GDP = gross domestic product, f = forecast. Source: Asian Development Bank. 2017. Asian Development Outlook Report April 2017.

Introduction 3

7. The decline in world oil prices by more than 50% during 2013–2014 severely affected Kazakhstan’s economy. Real GDP growth fell from 6.0% in 2013 and 4.2% in 2014 to 1.2% in 2015 and 1.0% in 2016. Growth is forecast at 2.4% in 2017.8 The per capita GDP decreased from $13,891 in 2013 to $12,807 in 2014 and $10,510 in 2015 (footnote 8). The oil fund was extensively used to support government programs, and its assets dropped from $73.2 billion in December 2014 to $63.5 billion in December 2015, a 13% contraction on a year-on-year basis. 8. Poverty reduction and social development. Kazakhstan is ranked as “high human development” on the human development index. By 2010, the country had met its poverty reduction target under the Millennium Development Goals and achieved gender equality and primary education targets.9 The percentage of the population living below the poverty line fell from 31.8% in 2000 to 6.5% in 2010.10 The national poverty rate further dropped from 3.8% in 2012 to 2.9% in 2013, 2.8% in 2014, and 2.7% in 2015 (footnote 8). However, the poverty rate was twice as high in rural areas as in urban areas.11 Poverty reduction in Kazakhstan was largely driven by employment creation, especially in the service sector, and real wage increases. 9. Government plans. In 2010, the government adopted a national development plan until 2020 (Kazakhstan 2020).12 The plan focused on five development pillars: (i) post-crisis development; (ii) economic growth through infrastructure development, diversification, and industrialization; (iii) human capital improvement; (iv) social services provision; and (v) political stability. In 2012, the government adopted a long-term strategy, Kazakhstan 2050, aiming to make Kazakhstan one of the world’s 30 most developed countries by 2050.13 The strategy focused on developing human capital, improving the institutional environment, developing knowledge economy, and deepening integration into world and regional economies.

10. Economic diversification was a key aspect in both Kazakhstan 2020 and Kazakhstan 2050. It was to be implemented by a 2010–2014 program for accelerated industrial development that recognized the continuing role of the oil sector in the economy.14 It focused on developing non-traditional new industry and service sectors that provided the best possibilities for diversification. The program’s goals included an increased share of manufacturing in GDP and non-commodity exports in total exports, and reduced transportation costs and energy intensity. An estimated $50 billion was to be spent on infrastructure and industrial development during 2010–2014 to achieve these goals. 11. In response to the recent deceleration in economic growth, the President of Kazakhstan announced a domestic stimulus policy in November 2014 entitled Nurly Zhol (Bright Path) to drive state and foreign direct investment into critical infrastructure and priority sectors. Nurly Zhol was to have a budget of about $9 billion and shift productivity towards agribusiness, manufacturing, trade and logistics, tourism, information technology, and finance, and away from the oil sector.

8 ADB. 2017. Asian Development Outlook 2017: Transcending the Middle-Income Challenge. Manila. 9 United Nations Development Programme. 2010. Millennium Development Goals in Kazakhstan. Astana. 10 Government of Kazakhstan. Agency of Statistics. http://www.eng.stat.kz 11 World Bank. 2012. Country Partnership Strategy for the Republic of Kazakhstan for the Period FY2012–

FY2017. Washington, DC. 12 Government of Kazakhstan. 2010. Strategic Development Plan of the Republic of Kazakhstan till 2020.

Astana. 13 Government of Kazakhstan. 2012. Strategy Kazakhstan 2050. Astana. 14 Government of Kazakhstan. 2010. Government Program on the Accelerated Industrial-Innovative

Development of the Republic of Kazakhstan, 2010–2014. Astana.


12. In December 2015, the government issued the 2016–2018 Anti-Crisis Action Plan to ensure economic and social stability and the achievement of economic growth targets. The plan included measures to promote institutional reforms under the 100 Concrete Steps program, comprising (i) a new economic structure with five main directions (stabilization of the financial sector, optimization of fiscal policy, privatization and promotion of economic competition, a new investment policy, and a new social policy); and (ii) operational measures to stimulate economic growth (support for the real economy by temporarily decreasing tariffs for electricity and railways, implementation of infrastructure projects under the Nurly Zhol program, support to small and medium-sized enterprises [SMEs], improvement in accessibility to housing, accelerated implementation of agribusiness projects, implementation of Government Program on the Accelerated Industrial-Innovative Development projects, and support for social stability and employment).

C. Previous Country Program Evaluation

13. Prior to the CPS, 2012–2016, ADB operations in Kazakhstan followed the country strategy and program (CSP), 2004–2006 and CSP updates 2005–2007 and 2006–2008.15 There was no CSP for 2008–2011. In 2011, ADB prepared a final review for the CSP, 2004–2008.16 It rated the program partly successful, with the criteria ratings of satisfactory for strategic positioning, less relevant for program relevance, and less effective, efficient, likely sustainable, and partly satisfactory for development impact. IED subsequently validated the final review, and rated the program partly successful, but with the criteria ratings of satisfactory, less relevant, less effective, less efficient, less likely sustainable, and partly satisfactory.17

15 ADB. 2003. Country Strategy and Program: Kazakhstan, 2004–2006. Manila; ADB. 2004. Country Strategy

and Program Update: Kazakhstan, 2005–2007. Manila; and ADB. 2005. Country Strategy and Program Update: Kazakhstan, 2006–2008. Manila.

16 ADB. 2011. Country Strategy and Program Final Review: Kazakhstan, 2004–2006. Manila. 17 IED. 2011. Country Strategy and Program Final Review Validation Report: Kazakhstan, 2004–2006. Manila:

ADB.

CHAPTER 2

ADB’s Country Partnership Strategy, 2012–2016

A. Country Strategy

14. Objective. The goal of the CPS, 2012–2016 was to support Kazakhstan’s strategy for accelerating the economic diversification and increasing competitiveness for sustainable and inclusive growth. The CPS emphasized value addition to the government’s development priorities and implementation through capacity development, knowledge building, and policy dialogue with technical assistance (TA). Lending support to the public sector was to be selective, depending on demand, and focused on areas where private sector financing was not available. Sub-sovereign and nonsovereign finance were to become the main support modalities. 15. Operations focus. The CPS was to focus on two operations areas: (i) modernizing infrastructure and utilities while seeking innovative and flexible solutions to narrow investment gaps; and (ii) improving access to finance for SMEs, trade, and investment in infrastructure through public–private partnerships (PPPs). Governance and institutional reforms, private sector development, regional cooperation, knowledge exchange, climate change and environmental sustainability, and gender equity were identified as thematic priorities of the CPS.

16. Infrastructure and utilities. The CPS was to support rehabilitation and development of the transport, energy, and municipal services sectors. The objectives were to help infrastructure and utilities become operationally efficient and adopt a quality-of-service-delivery orientation, improve the business environment, and create opportunities for the private sector. In the transport sector, ADB was to support modernizing Kazakhstan’s transport and logistics system. Central Asia Regional Economic Cooperation (CAREC) road and rail corridors were priorities for investment. In the energy sector, ADB was to support modernizing the country’s aging energy infrastructure, especially generating plants and the transmission network. In the municipal services sector, ADB was to support developing Kazakhstan’s cities, building their competitiveness, and improving the environment.

17. Access to finance. Access to finance was among the top obstacles identified by firms to doing business in Kazakhstan in a 2009 enterprise survey.18 To improve access to finance for SMEs, ADB’s public sector lending assistance was to be channeled through an ongoing multitranche financing facility (MFF) that provided liquidity to financial institutions.19 ADB was also to provide TA projects to develop securities and municipal and project bond markets, and to strengthen the regulatory capacity of the pension and insurance subsectors. ADB’s private sector operations were to focus on trade finance and

18 IFC. 2009. Enterprise Surveys. Kazakhstan Country Profile. Washington, DC. 19 ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche

Financing Facility to the Republic of Kazakhstan for the Small and Medium Enterprise Program. Manila.


lending and securitization for high-impact sectors, including SMEs, energy efficiency, agribusiness, and mortgage lending. Selectively, ADB was also to consider equity investments in banks, as well as equity and debt financing of investment funds.

18. Governance and institutional reforms. ADB was to help strengthen (i) sector performance through improving efficiency, sustainability, and cost recovery and introducing innovative financing modalities (for transport, energy, and municipal services sectors); (ii) PPP and private sector development through deepening financial and bond markets and improving the regulatory and business environment (for access to finance and private sector development); and (iii) project management and portfolio performance through improving financial management, audits, and procurement (for ADB project operations).

19. Private sector development. ADB was to (i) work with development partners to support improvements in the business environment; and (ii) support private sector participation in infrastructure through upstream TA and advisory work to strengthen investor confidence and improve the PPP policy, legislative, regulatory, and institutional frameworks, and through downstream transaction advisory services and participation in selected PPP projects. ADB’s nonsovereign operations (NSO) were to support private infrastructure through loans to private sector entities and entities partly or fully owned by the government (without a government guarantee). NSO were to focus on electricity, transport, logistics, municipal services, and natural gas transmission and distribution. ADB support was also to include agribusiness and cement.

20. Regional cooperation. To leverage Kazakhstan’s strategic location between Asia and Europe, ADB was to support transforming Kazakhstan’s transport corridors into economic corridors to create new trade and business opportunities, develop industrial and urban development projects in selected cities, and improve cross-border infrastructure and customs control. The possibility of enhancing energy trade was also to be explored, as well as regional cooperation on common environmental challenges.

21. Knowledge exchange. The government and ADB were to initiate a joint knowledge and experience exchange program (KEEP) in 2012 to identify and finance studies on industrial policy and economic diversification, transformation of CAREC transport corridors into economic corridors, creation of subnational debt markets, and resource-revenue management. Knowledge products linked to ADB operations were to include developing innovative approaches to infrastructure financing and asset management, long-term strategic road maps for infrastructure sectors, and analyses to improve the business environment.

22. Climate change and environmental sustainability. ADB was to support climate change mitigation through improving energy efficiency to reduce carbon emissions and through improving water and wastewater services to support urban environmental improvements.

23. Gender equity. ADB was to support gender equity by mainstreaming gender in projects, pilot testing innovative approaches to promote gender equality, and building capacity to collect sex-disaggregated economic and social data.

ADB’s CPS, 2012–2016 7

B. Country Program

24. Kazakhstan has access to ADB’s ordinary capital resources only. Table 1 summarizes the ongoing ADB operations reviewed for this validation. Details are provided in Appendix 1. The program amounts to about $3.34 billion and comprises 28 operations, of which 18 ($1.93 billion) were approved during and 10 ($1.41 billion) were approved before the CPS. The program includes 25 sovereign operations ($3.26 billion) and three NSOs ($80.20 million). The validation does not cover recently approved operations in the transport and finance sectors.20

Table 1: Validation Portfolio by Sector

Sector

Approved During 2012–2016

Approved Before and

Implemented During 2012–2016

Total

Number (Loan |TA)

Amount ($ million)

Number (Loan |TA)

Amount ($ million)

Number (Loan |TA)

Amount ($ million)

Percent of Total

Sovereign Operations Transport 2 | 2 497.3 7 | 1 1,258.6 9 | 3 1,755.9 52.5 PSM 1 | 3 1,001.7 0 | 0 0 1 | 3 1,001.7 30.0 Finance 3 | 2 351.8 1 | 1 150.6 4 | 3 502.4 15.1 Energy 0 | 1 1.6 0 | 0 0 0 | 1 1.6 0.0 WUS 0 | 1 1.0 0 | 0 0 0 | 1 1.0 0.0 Subtotal 6 | 9 1,853.4 8 | 2 1,409.2 14 | 11 3,262.6 97.6 Nonsovereign Operations ANR 1 | 0 40.2 0 | 0 0 1 | 0 40.2 1.2 Energy 2 | 0 40.0 0 | 0 0 2 | 0 40.0 1.2 Subtotal 3 | 0 80.2 0 | 0 0 3 | 0 80.2 2.4 Total 9 | 9 1,933.6 8 | 2 1,409.2 17 | 11 3,342.8 100.0 ANR = agriculture and natural resources, PSM = public sector management, TA = technical assistance, WUS = water and other urban infrastructure and services. Sources: Asian Development Bank Independent Evaluation Department calculation based on Asian Development Bank databases and mainframe. Data as of 31 October 2016, excluding the recently approved loans and TA projects in the transport and finance sectors.

25. Transport sector. The transport sector dominated the program, accounting for more than half of the total country portfolio (52.5%). Transport operations included nine loans and five project preparatory TA projects.21 The loans were financed through two MFFs for CAREC Corridor 1, approved in 2008, and CAREC Corridor 2, approved in 2010; a loan project for CAREC Corridor 1 (Taraz Bypass), approved in 2011; a loan project for CAREC Corridor 3, approved in 2012; and a $68 million cofinancing from the Japan Bank for International Cooperation (JBIC) under CAREC Corridor 1, Tranche 3.22

20 These are (i) loan 3416-KAZ for the CAREC Corridors 1 and 6 Connector Road (Aktobe-Makat) Reconstruction

Project, approved on 26 August 2016; (ii) project preparatory TA 9134-KAZ for the Road Maintenance Sustainability, approved on 14 July 2016; and (iii) loan 3447-KAZ for Supporting Resilience of Micro, Small, and Medium-Sized Enterprises Finance Project and its attached capacity development TA 9214-KAZ, both approved on 27 October 2016.

21 Of the five TA projects, two were supplementary TA projects approved during 2012-2016. 22 ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche

Financing Facility and Administration of Loan to Kazakhstan for the CAREC Transport Corridor I (Zhambyl Oblast Section) [Western Europe–Western People’s Republic of China International Transit Corridor] Investment Program. Manila; ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility to Kazakhstan for the Central Asia Regional Economic Cooperation Corridor 2 (Mangystau Oblast Sections) Investment Program. Manila; ADB. 2011. Report and Recommendation of the President to the Board of Directors: Proposed Loan to Kazakhstan for the Central Asia Regional Economic Cooperation Corridor 1 (Taraz Bypass) Project. Manila; ADB. 2012. Report and Recommendation of the President to the Board of Directors: Proposed Loan to Kazakhstan for the CAREC Corridor 3 (Shymkent–Tashkent Section) [Link to the Western Europe–Western People’s Republic of China International Transit Corridor] Road Improvement Project (Kazakhstan). Manila.


26. Public sector management. Lending for public sector management (PSM) was not planned in the CPS, but the sector became the second largest at 30% of the program. It comprised a $1 billion countercyclical support facility (CSF) loan approved and disbursed in 2015, two policy advisory TA projects jointly financed by the government and ADB under the KEEP partnership, and a small-scale capacity development TA on managing for development results in the transport sector.23

27. Access to finance. Access to finance accounted for 15.1% of the program. It comprised three loans provided as an MFF for the SME Investment Program—with the first tranche approved in 2010 and the following tranches in 2013 and 2014, and additional funding approved in 2015—a policy advisory TA, a capacity development TA, and a project preparatory TA.24

28. Energy and municipal services. Under the four COBPs for CPS, 2012–2016 (footnote 3), a public sector lending of $114.0 million for the energy sector and $402.0 million for municipal services was planned. However, these pipelines have been continuously postponed and their approvals remain uncertain. In the energy sector, only a project preparatory TA of $1.6 million for Karaganda District Heating Network Rehabilitation was implemented.25 For municipal services, a policy advisory TA of $1.0 million is underway.26

29. Nonsovereign operations. NSO constituted 2.4% of the total portfolio. During 2012–2016, ADB provided a combination of a direct $25.0 million loan to Akmola Electricity Distribution Company and a $15.0 million loan to Central Asian Power Corporation, approved in 2013;27 and a $40.2 million corporate loan to RG Brands for an agribusiness project, approved in 2013.28

30. Regional technical assistance. In addition, Kazakhstan benefitted from 10 regional TA projects supporting CAREC member countries, promoting regional economic

23 ADB. 2015. Report and Recommendation of the President to the Board of Directors: Proposed Loan to

Kazakhstan for the Countercyclical Support. Manila; ADB. 2013. Technical Assistance to Kazakhstan for the Joint Government of Kazakhstan and the Asian Development Bank Knowledge and Experience Exchange Program, Phase 1. Manila; ADB. 2015. Technical Assistance to Kazakhstan for the Joint Government of Kazakhstan and the Asian Development Bank Knowledge and Experience Exchange Program, Phase 2. Manila; ADB. 2014. Technical Assistance to Kazakhstan for Managing for Development Results in the Transport Sector of Kazakhstan. Manila.

24 ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility to Kazakhstan for the Small and Medium Enterprise Investment Program. Manila; ADB. 2013. Periodic Financing Request Monthly Report for October 2013. Manila; ADB. 2014. Periodic Financing Request Monthly Report for October 2014. Manila; ADB. 2015. Periodic Financing Requests Monthly Report for March 2015. KAZ: Small and Medium Enterprise Investment Program (Additional Financing). Manila; ADB. 2010. Technical Assistance to Kazakhstan for Improving Capacity to Support SME Development. Manila; ADB. 2014. Technical Assistance to Kazakhstan for Enhancing Insurance Market Efficiency and Outreach. Manila; ADB. 2015. Quarterly Summary Report on Approved Project Preparatory Technical Assistance. Manila.

25 ADB. 2012. Technical Assistance to Kazakhstan for Karaganda District Heating Network Rehabilitation Project. Manila.

26 ADB. 2013. Technical Assistance to Kazakhstan for Alternative Urban Infrastructure Financing Modalities. Manila.

27 ADB. 2013. Report and Recommendation of the President to the Board of Directors: Proposed Loans to Akmola Electricity Distribution Company and Central-Asian Electric Power Corporation for the Akmola Electricity Distribution Network Modernization and Expansion Project in Kazakhstan. Manila.

28 ADB. 2013. LLP RG Brands Kazakhstan Project. Manila.

ADB’s CPS, 2012–2016 9

cooperation and trade facilitation,29 transport safety,30 climate change,31 and gender inclusive growth.32

C. Development Coordination

31. ADB is the third-largest development partner in Kazakhstan after the European Bank for Reconstruction and Development (EBRD) and the World Bank in terms of approved loan amounts during the CPS period. Appendix 2 lists development partners in key sectors.

32. Development coordination has improved through the Partnership Framework Arrangement.33 It is managed by the Coordination Council, a committee established by the government and chaired by the Prime Minister. The council identifies the strategic priorities for external borrowing, and invites international financial institutions, United Nations agencies, and bilateral donor agencies to quarterly meetings.

33. The World Bank has committed more than $9.1 billion, focusing on public sector reforms, the financial sector, social protection, agriculture and irrigation, technical and vocational education, transport, energy, and health care.34 The EBRD was to invest more than $6.7 billion in the energy, agriculture, water, waste management, transport, and banking and non-banking sectors, with more than half this amount through private sector projects.35 The Islamic Development Bank provided $446.7 million for transport, SME, and financial sector development, as well as for information and communication technology, education, and agriculture.36

34. ADB’s two focal areas are road rehabilitation and SME financing. Road rehabilitation is coordinated through regional cooperation initiatives under the CAREC Program. 37 ADB engaged in $125 million of parallel cofinancing with EBRD for the Shymkent-Tashkent Road Improvement project along CAREC Corridor 3 and in

29 ADB. 2012. Assisting the Central Asia Regional Economic Cooperation Institute Knowledge Program (Phase

1). Manila (RETA 8259); ADB. 2014. Enhancing Coordination of the Central Asia Regional Economic Cooperation Program, Almaty-Bishkek Corridor Initiative. Manila (RETA 8148); ADB. 2014. Technical Assistance for the Central Asia Regional Economic Cooperation: Working with the Private Sector in Trade Facilitation (Phase 2). Manila (RETA 8746); ADB. 2013. Technical Assistance for Coordinated Border Management for Results in Central Asia Regional Economic Cooperation. Manila (RETA 8584); ADB. 2013. Technical Assistance for Promoting Cooperation in Sanitary and Phytosanitary Measures Cooperation. Manila (RETA 8386); ADB. 2013. Technical Assistance for Regional Transit Trade in Central Asia Regional Economic Cooperation. Manila (RETA 8586); ADB. 2013. Technical Assistance for Aligning Customs Trade Facilitation Measures with Best Practices in Central Asia Regional Economic Cooperation. Manila (RETA 8585).

30 ADB. 2014. Enhancing Road Safety for Central Asia Regional Economic Cooperation Member Countries. Manila (RETA 8804).

31 ADB. 2009. Enabling Climate Change Interventions in Central and West Asia. Manila (RETA 7274); ADB. 2012. Economics of Climate Change in Central and West Asia. Manila (RETA 8119).

32 ADB. 2010. Technical Assistance for Promoting Gender-Inclusive Growth in Central and West Asia Developing Member Countries. Manila (TA 7563).

33 Kazakhstan signed partnership framework agreements with international finance institutions to implement the Nurly Zhol national development program in 2014 after external economic conditions worsened for Kazakhstan. The overall resource envelope totals $6.1 billion, not including EBRD’s unspecified commitment. Half of this amount was funded by the government directly and the other half by development partners.

34 World Bank. 2016. The World Bank in Kazakhstan: Country Snapshot. www.worldbank.org/kazakhstan 35 Data from http://www.ebrd.com/kazakhstan-data.html, using $US:€0.9 exchange rate. 36 Islamic Development Bank Group. 2012. Member Country Partnership Strategy for the Republic of

Kazakhstan (2012-2014): Strengthening Competitiveness for Growth & Diversification. Jeddah. 37 Kazakhstan is a member of the CAREC Program. By the end of 2015, almost $28.3 billion of CAREC-related

investments were to be made, of which $10.4 billion was financed by ADB, $10.8 billion by other donor organizations, and $7.1 billion by CAREC governments. As of 30 September 2015, the total CAREC portfolio in Kazakhstan was almost $8.3 billion, of which $1.6 billion was financed by ADB.

http://www.worldbank.org/kazakhstanhttp://www.ebrd.com/kazakhstan-data.html


$68 million of joint cofinancing with the JBIC for the Zhambyl Oblast Investment Program (Tranche 3) along CAREC Corridor 1.

35. SME financing is provided by several development partners. EBRD supported capacity building and training for SMEs and extended credit lines to commercial banks ($312.5 million and €12.5 million); the World Bank supported sustainable rural microfinance through an agricultural post-privatization project ($96.1 million); the International Finance Corporation promoted SME development through its debt and equity investments in banks; and the United States Agency for International Development provided training to mostly start-up businesses ($16.9 million).

36. The CPSFR stated that sanctions against the Russian Federation had led to a stronger concentration of development partner involvement in Central Asia in general, and Kazakhstan in particular. The CPSFR suggested strengthening development partner coordination on the sector and project level to avoid overlaps. The validation agrees, especially on coordination in SME finance, where several development partners provide assistance based largely on informal rather than institutionalized coordination, and in the education and health sectors, where donor support is rather infrequent.

CHAPTER 3

Validation of Country Partnership Strategy Final

Review Assessments 37. This chapter presents summary findings at the CPS and sector levels. Detailed sector and project assessments are provided in the supplementary linked documents listed in Appendix 3.

A. Relevance

38. The validation assesses the CPS’s relevance through three criteria: (i) the appropriateness of the CPS objectives against the country development context and priorities, at the time of CPS preparation and during its implementation in response to the country’s changing conditions; (ii) the strategic positioning, choice of sectors, composition of lending and nonlending activities, financing instruments, and changes made in the ongoing program; and (iii) the appropriateness of the program design to achieve the sector and CPS objectives.

1. Appropriateness of Country Partnership Strategy Objectives

39. Alignment with government’s development priorities. The validation agrees that the CPS was aligned with Kazakhstan’s overarching development strategy, as it aimed to support the country in accelerating economic diversification and increasing competitiveness for sustainable and inclusive growth. The CPS’s two core operation areas—modernizing infrastructure and utilities, and improving access to finance for SMEs—were to address major identified development impediments and directly support the first two pillars of the government’s Kazakhstan 2020 strategy: post-crisis development and economic growth through infrastructure development, diversification, and industrialization. 40. Alignment with ADB strategic agendas. The validation agrees that the CPS was consistent with ADB’s Strategy 2020 and its three strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration. 38 Selection of the transport, energy, and municipal services sectors corresponded to the strategy’s core areas 1 and 2, while finance corresponded to core area 4. The CPS was also consistent with priorities identified in the strategy’s midterm review of (i) poverty reduction and inclusive economic growth, (ii) regional cooperation and integration, (iii) infrastructure

38 ADB. 2008. Strategy 2020: Long-Term Strategic Framework of the Asian Development Bank, 2008–2020.

Manila. Strategy 2020 defines ADB’s five core areas as infrastructure, environment, regional cooperation and integration, finance sector development, and education.


development, (iv) private sector development and operations, and (v) financial resources and partnerships.39

2. Strategic Positioning and Sector Selectivity

41. Strategic positioning. The CPS emphasized the impact of the 2008–2009 global financial crisis on Kazakhstan and the need to sustain the country’s gains to improve its prospects. The European debt crisis and the strong possibility of a renewed global recession were threats that could adversely impact the economy. The CPS was therefore developed based on the need to diversify the economy, make it more competitive, strengthen institutions, and implement reforms in the financial and other sectors. 42. Sector selectivity. The CPS was to focus on four core operation areas: (i) infrastructure, (ii) energy, (iii) multisector (urban transport, water supply and sanitation, and other municipal services), and (iv) finance. The validation agrees with the CPS’s sector selection of infrastructure, as ADB is recognized as a critical development contributor to this area in Kazakhstan. The selection of the transport sector aligned with Kazakhstan 2020, which focuses on infrastructure development for economic growth, diversification, and industrialization. It also corresponded to the core areas of ADB’s Strategy 2020 and midterm review of infrastructure development and regional cooperation and integration. Improving Kazakhstan’s road system, especially along CAREC Corridors, 40 was a long-standing government priority to reduce the cost of transporting goods and people across the country’s vast and landlocked territory.

43. SMEs were crucial for an inclusive, diversified, and resilient economy but suffered from constrained access to finance. Constraints identified while formulating the SME Investment Program included the lack of domestically mobilized resources for medium-term lending to SMEs; the unmet needs of SMEs for lease financing because of the limited availability of such financing; and the high risks of lending to SMEs due to lack of profitable projects, inadequate collateral or clear titles to real estate, and insufficient availability of credit histories.41 Although the CPS recommended reform of the business environment and financial sector, access to finance, and financial inclusion, ADB’s SME support program focused on access to finance through credit lines, limiting the portfolio’s relevance for inclusive growth.

44. The CPS was to help improve PSM through knowledge products from TA projects under the KEEP. Otherwise, ADB assistance in this sector has largely been ad hoc in response to crises. The validation finds the $1 billion CSF loan approved and disbursed in 2015 a timely addition to the program. It provided the needed budgetary support in response to the increased fiscal deficits resulting from the fall in world oil prices and the economic slowdown in Kazakhstan’s major regional trading partners during 2013–2014. However, in the validation’s view, ADB support for PSM could have been more pragmatic given the government’s fiscal challenges and the Kazakhstan 2050 strategic priority to increase efficiency of public institutions.

45. Non-deliveries. Under the four COBPs covering 2012–2016 (footnote 3), the total public lending pipelines for the energy and urban sectors were adjusted to $110 million and $400 million. However, these pipelines have been continuously postponed, and their

39 ADB. 2014. Midterm Review of Strategy 2020: Meeting the Challenges of a Transforming Asia and Pacific.

Manila. 40 CAREC Corridors 1, 2, 3, and 6 pass through Kazakhstan. 41 Many SMEs could not meet the standard collateral requirements for bank loans, which can reach up to 250%

of loan value. (Source: World Bank. 2013. Enterprise Surveys. Kazakhstan.)

Validation of CPS Final Review Assessments 13

approvals remain uncertain. The CPSFR stated the postponements were due to new developments like EXPO 2017 award and changing government priorities. However, it did not elaborate how did these postponements affect the CPS in achieving its overarching objectives. Likewise, the CPSFR did not assess the size of the interventions delivered, and it is therefore unclear whether the program delivered was sufficient to achieve the CPS’s goal of supporting Kazakhstan in accelerating the economic diversification and increasing competitiveness for sustainable and inclusive growth.

3. Appropriateness of Program Design

46. Transport sector. The CAREC Corridor roads program design was based on detailed sector assessments and road maps, so the approach taken was justified. The MFFs for CAREC Corridors 1 and 2 were to contribute to improved transport connectivity in Kazakhstan and boost regional connectivity and international trade. CAREC Corridor 3 project and the stand-alone loan for the Taraz Bypass in CAREC Corridor 1 also seek similar outcomes in transport connectivity (Mangystau Oblast and Shymkent-Tashkent section), regional connectivity, and international trade. The validation noted the projects under CAREC Corridor 1 (Zhambyl Oblast) were designed using traffic forecasts from a 2007 feasibility study by the Ministry of Transport and Communication (now Ministry of Investment and Development). Similarly, the design of the MFF and the project under Tranche 1 of CAREC Corridor 2 (Mangystau Oblast) used 2007 traffic data and extrapolated it to 2010 based on the GDP growth rate. These designs reflected the quality of existing roads and little on the traffic demand, and this likely led to an overestimation of traffic volumes and an overinvestment in the road subsector.42 However, overall, the validation assesses the transport sector relevant. 47. Access to finance. The SME Investment Program provided liquidity to participating financial institutions (PFIs) facing a credit crunch after the 2008–2009 global financial crisis and the economic slowdown during 2014–2015. The program provided the funds in local currency to mitigate currency risks in the volatile foreign exchange markets. It could be argued that Tranche 1 provided the needed liquidity of PFIs when the financial system could not, because of problems in nonperforming loan resolution and instability in the financial markets, and because it was unreasonable to address broader sector issues at the time. However, the program was not designed to address constraints to meeting the long-term SME financing needs and achieving the envisaged sector outcome of strengthened access to finance for SMEs, as identified during its formulation. Constraints included the lack of domestically mobilized resources for medium-term lending to SMEs; limited availability of lease financing; and high risks of lending to SMEs because of inadequate collateral and a lack of credit history and good and profitable projects.43 The program was responsive to liquidity and currency risks facing banks but failed to address long-term sector issues. The validation considers this a major shortfall of the investment program. 48. In addition, the SME Investment Program had other design weaknesses. The MFF modality did not provide the operational flexibility intended. In practice, due diligence required by ADB for each tranche was similar to stand-alone projects, and the government’s extensive decision-making processes limited the operational flexibility expected from an MFF framework. The use of commercial banks as the sole channel for

42 The project completion report (PCR) for CAREC Corridor 1 Tranche 1 reported that one third of the original

loan amount was canceled because of an overestimation of the costs of civil works, consulting services, and contingencies.

43 These constraints were identified in the sector assessment of the report and recommendation of the President for the SME Investment Program.


onlending directed the lending focus to larger SMEs that could meet the collateral requirements, thus crowding out smaller SMEs. Microfinance organizations that cater to microenterprises in the lower market segment could have been included among the PFIs to support poverty reduction and inclusive economy. Despite the sound rationale for intervention in the SME finance subsector, the validation finds the design of the investment program as the key sector support less than optimal to achieve long-term sector objectives. On this basis, ADB support for access to finance is assessed less than relevant. 44 49. Public sector management. The CSF loan was designed as an emergency assistance to provide countercyclical support during the crisis period. It was approved in August and disbursed in full in December 2015. The CSF helped to ease the government’s budget constraints from revenue shortfalls and maintain priority social expenditures during the crisis period. The program design explicitly identified measures to promote non-oil and private sector development, increase employment, and priority expenditures. The $1 billion loan was planned in two equal tranches and was appropriate given the projected 2015 budget deficit of $6.8 billion and the government’s debt repayment capacity.45

50. The cost-sharing arrangement on a cash basis under the KEEP partnership was innovative. The TA projects reflected the program’s demand-driven nature, promoted knowledge solutions for more efficient PSM, and supported result-based management in the transport sector. The validation assesses ADB’s PSM support relevant.

51. Thematic priorities. Of the CPS’s six thematic priorities identified as the drivers of change, five were integral to the government’s strategy (governance and institutional reforms, private sector development, regional cooperation, knowledge exchange, and climate change and environmental sustainability), but gender equity was not reflected. The thematic priorities were well reflected in ADB’s corporate drivers of change: (i) private sector development and operations, (ii) good governance and capacity development, (iii) gender equity, (iv) knowledge solutions, and (v) partnerships. Overall, the validation considers the thematic priorities relevant.

4. Relevance Rating

52. The CPS strategic objectives were related to issues and priorities set out in the government’s Kazakhstan 2020 plan and to ADB’s sector and corporate strategies and agendas. The CPS positioned ADB well with other development partners. Except for the non-delivery of pipelined public sector lending in the energy and urban sectors, sectors identified for intervention were appropriate. For program design, operations in the transport sector and PSM were relevant. However, the SME Investment Program was found less than optimal in addressing identified sector constraints and hence assessed less than relevant. The six cross-sector thematic priorities were well aligned with

44 The new micro, small, and medium enterprise project (approved in October 2016, footnote 20) incorporated

the lessons from the MFF by (i) providing tenge through a repo agreement between the National Bank of Kazakhstan and ADB, (ii) covering microenterprises through the participation of microfinance organizations, and (iii) including a longer implementation period to accommodate demand fluctuation in a volatile environment. The TA is to address the institutional constraints of PFIs through capacity development, mitigate currency risk under a volatile environment, and broaden outreach by including microfinance organizations. However, this project is too new to see how its design intents will work. At the same time, many major sector constraints identified at MFF formulation remain.

45 The projected deficit is after the government transfer of $13.4 billion equivalent from National Fund of the Republic of Kazakhstan to the republican budget. Public debt was assessed to be sustainable and resilient to a range of shocks. (Source: ADB. 2015. Republic of Kazakhstan: Countercyclical Support, Debt Sustainability Assessment, List of Linked Documents. Manila.)


government and ADB development priorities, and the validation considers them relevant. Overall, the validation rates the CPS relevant.

B. Effectiveness

53. The validation assesses the CPS’s effectiveness based on the achievement of target outputs and outcomes specified in the CPS results framework. It first assesses the achievement of completed projects and the likely achievement of ongoing projects. Project assessments then are aggregated to sector level, to assess (i) the achievement of sector outputs and outcomes against the CPS targets; and (ii) the achievement of CPS’s overarching goal of accelerating economic diversification and increasing competitiveness for sustainable and inclusive growth.

1. Achievement of Sector Outcomes 54. Transport sector. According to the CPS results framework, the government’s transport sector goal was to develop an efficient transport and logistics system that was integrated and on par with international standards. Correspondingly, ADB’s sector outcome was an increased and more efficient movement of people and goods to domestic and international markets, based on three indicators: (i) transport cost in the final cost of goods reduced to 5% by 2016 (2011 baseline: 10%); (ii) traffic volume increased to 3,500 vehicles per day (vpd) in the Mangystau Oblast section of CAREC Corridor 2 by 2016 (2009 baseline: 1,000 vpd); and (iii) travel time between Aktau and Beineu reduced to 4 hours by 2016 (2009 baseline: 12 hours). 55. The CPSFR argued that the value of the first indicator was only casually estimated by the Ministry of Investment and Development’s Committee for Roads because it was vague and difficult to measure, and thus, excluded this target from the effectiveness rating. However, as the CPSFR pointed out, the COBP, 2016–2018 reported 9% for this indicator in 2014 (CPSFR, footnote 38), showing a slow trend unlikely to reach the 2016 target of 5%. Given the additional information in the project completion reports (PCRs) for the three completed projects under CAREC Corridor 1 (Zhambyl Oblast), 46 this validation assumes the target was unlikely met. The PCR for Tranche 1 reported that during 2010–2013, passenger fares and cargo charges increased along the project sections, and assessed the target unlikely achieved. The PCRs for tranches 2 and 3 showed a reduction in vehicle operating costs, but neither mentioned whether the target cost reduction was met.

56. For the second indicator, the CPSFR stated that traffic volume was 2,287 vpd in 2014—an improvement over the 2009 baseline value of 1,000 vpd but significantly lower than the 2012 level of 3,283 vpd. The CPSFR argued the target would be achieved after the construction of Tranche 2 roads is completed (scheduled for the end of 2017) and the economic recovery picks up. The validation finds this argument unconvincing, given that the 2014 traffic volume was far behind the 2016 target of 3,500 vpd. As road construction was delayed, the second target could be considered unmet by the CPS results framework.

46 ADB. 2014. Completion Report: CAREC Transport Corridor 1 (Zhambyl Oblast Section) [Western Europe-

Western People’s Republic of China International Transit Corridor] Investment Program (Project 1) in Kazakhstan. Manila; ADB. 2016. Completion Report: CAREC Transport Corridor 1 (Zhambyl Oblast Section) [Western Europe-Western People’s Republic of China International Transit Corridor] Investment Program (Tranche 2) in Kazakhstan. Manila; ADB. 2016. Completion Report: CAREC Transport Corridor 1 (Zhambyl Oblast Section) [Western Europe-Western People’s Republic of China International Transit Corridor] Investment Program (Tranche 3) in Kazakhstan. Manila.


57. Regarding the third indicator, the CPSFR stated the travel time between Aktau and Beineu was 7 hours in 2014 and was slightly over 10 hours as indicated in Google Maps in December 2015 (CPSFR, para.27). The CPSFR also stated that delayed construction would be ongoing throughout 2016 and, after completion the indicator is expected to further improve. In the validation’s view, even without the construction delay the target is unlikely to be met because it would require an average speed of 112 km per hour, which is unlikely given road conditions and the maximum allowable speed limit.47 58. At the project level, four tranches of the CAREC Corridor 1 (Zhambyl Oblast) program were financially closed by October 2015. Tranches 1–3 have PCRs (footnote 46), while the PCR for Tranche 4 is yet to be prepared. Tranche 1 project was rated effective by the PCR and less than effective by the PCR validation report because of the partial achievement of road operations and maintenance components at completion; shortfall in traffic volume (Tranche 1, PCR, Appendix 9, Table A9.1); and unmet outcome targets for travel time, transport cost, and accident rate.48 59. Tranches 2 and 3 were both rated effective by the PCR, but no validation has been prepared. In this validation’s view, Tranche 2 is likely less than effective because of significant delays and the partial completion of road maintenance depots. More importantly, traffic in the Merke–Blagoveschenka section was lower than expected. Traffic in 2014 was marginally higher than forecast at appraisal, but thereafter PCR forecasts were significantly lower than appraisal estimates (Tranche 2, PCR, Appendix 11, Table A11.1). The achievement in reduced transport cost for freight is not clear. Tranche 3 in the validation’s view is likely effective. The PCR reported delays in construction works and project completion of about 1.5 years, but at completion outputs were delivered as envisaged. The PCR claimed the project met the outcome targets for travel time, traffic volume, road accident rate, and local road users, although it is unclear whether the transport cost reduction target was met. In March 2017, CWRD provided additional traffic count data on CAREC Corridor 1. While the overall traffic on CAREC Corridor 1 is shown to have increased by 17%, traffic on several roads are below expectation (project 1 on Kulan-Taraz, and project 2). 60. For the CAREC Corridor 2 (Mangystau Oblast) MFF, Tranche 1 was financially closed in February 2016, while construction of Tranche 2 roads is ongoing. There are no data yet on both projects’ outcomes. For Tranche 1, the PCR is yet to be prepared, but this validation noticed that only 53.3% of the original loan amount was disbursed at completion. While it is not possible to rate the effectiveness of this MFF, the validation notes the target year was 2016 and, as the MFF is not completed, the outcome targets could be considered unmet. 61. For the two stand-alone projects along CAREC corridors 1 and 3, both were financially closed in October 2016. The 65 km road of the Taraz Bypass (Zhambyl Oblast) along CAREC Corridor 1 was completed and opened for operation in 2015. There was no available data on outcomes for this validation. However, the validation mission observed the very low traffic on the bypass and is of the view that this project’s targeted traffic outcome was likely not achieved. For CAREC Corridor 3, the validation mission found improvement; the 37 km of road section from Shymkent to Tashkent was about 80%

47 A check with Google Maps showed a travel time of 6 hours 5 minutes between Aktau and Beineu (accessed

10 February 2017). 48 IED. 2015. Validation Report: CAREC Transport Corridor 1 (Zhambyl Oblast Section) [Western Europe-Western

People’s Republic of China International Transit Corridor] Investment Program (Project 1) in Kazakhstan. ADB: Manila.


completed with 25.2 km of new concrete paved road and three of seven underpasses completed. In March 2017, CWRD provided one day traffic count on CAREC Corridor 3 roads and it is unclear if the traffic target was met. This validation also noted that only 64.5% of the loan amount was disbursed. The CWRD explained this low fund utilization was due to overestimates at the project formulation and low bidding prices during implementation. There was no data on outcomes to rate this project’s effectiveness, but, as implementation was delayed, outcomes were not met by 2015 as expected.

62. Given the sector outcome targets were not seen to have been met in 2016, the less than effective rating of the CAREC Corridor 1 Tranche 1 project, the likely less than effective rating of CAREC Corridor 1 Tranche 2 project, the partial completion and delays of target outputs of CAREC Corridor 2 projects, the validation considers the overall transport sector performance likely less than effective.

63. Access to finance. The finance sector goal in the CPS results framework was to strengthen access to finance for SMEs, trade, and investment in infrastructure. The sector outcome was greater access for SMEs to financial services and increased infrastructure investments by the private sector, as measured by: (i) the share of bank loans to SMEs increased to 20% of GDP in 2016 (2011 baseline: 15%), (ii) the proportion of loans going to women entrepreneurs under the Damu Entrepreneurship Development Fund (DAMU) programs increased to 23% by 2014 (2009 baseline: 16%), and (iii) overall bank loans increased to 50% of GDP by 2016 (2011 baseline: 39%).

64. The validation considers the sector outcome targets were, at best, partially met. For the first outcome indicator, 2016 data were not available. However, the COBP, 2016–2018 reported that the share of bank loans to SMEs was 13% of GDP in 2014, i.e., a 2% drop from the 2011 baseline. Given Kazakhstan’s economic conditions, it is unlikely SME loans would have reached 20% of GDP in 2016.49 The second outcome target for the proportion of loans to women entrepreneurs was almost achieved at 23% in 2014. For the third outcome target, the value of bank loans was 33% of GDP in 2013 and 35.1% as of 1 November 2015. These percentages are below the 2011 baseline identified in the CPS but slightly above the revised baseline of 32% in COBP, 2016–2018.

65. ADB’s major support for access to finance during the CPS period was the SME Investment Program.50 Tranche 1 of the program was completed and rated by its PCR as less than effective. The PCR noted all three expected outputs were achieved (number of SME loans, DAMU capacity, and loans to women). However, outcomes were partly achieved: loan accounts increased by about 2,300 in 3 years as opposed to the target of 28,693 in 2 years, and outstanding SME loan volume reported by DAMU decreased, rather than increased, by 24% between 2009 and 2011. The PCR validation report also rated it less than effective for the same reasons.51 66. DAMU data provided to the validation mission show the total outreach of the SME Investment Program was 1,536 SMEs, or about 0.12% of the country’s 1.3 million active SMEs in 2015 (Table 2). The average loan per borrower increased from $474,000

49 The ADB’s Central and West Asia Department’s data showed an improvement in the SME loans to GDP ratio

from 5.5% in 2011 to 11.9% as of H1 2016, and the share of SME loans to total bank loans from 15.0% in 2011 to 25.7% in 2015. However, the SME loans-to-GDP ratio is still far below the target of 20.0% by 2016.

50 The SME Investment Program was financed as an MFF in three tranches and an additional financing: Tranche 1 approved in 2010 ($150 million), Tranche 2 approved in 2013 ($122 million), Tranche 3 approved in 2014 ($130 million), and an additional fi