Regions and Countries

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p. 2 of 4 BACK | NEXT I. Current Development Trends and Issues II. Implementation of the Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Assistance Levels

Country Strategy and Program Update 2006-2008: Kazakhstan

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II. Implementation of the Country Strategy and Program

A. Progress in Poverty Reduction

8. Kazakhstan made significant progress in poverty reduction during 2004. According to official statistics, the percentage of population living below the subsistence minimum fell to 15% in 2004. Furthermore, the United Nations Development Programme’s latest update of the Human Development Report for Kazakhstan 2004 indicates that expenditures on health and education increased during 2004 and that the country is on course to meet the MDG target on income poverty by 2015 as well as several nonpoverty MDG targets (Appendix 1). A noteworthy achievement is the attainment of the MDG target on promoting gender equality and empowerment of women.

B. Progress in the Country Strategy and Program Focus Areas

9. The CSP focal areas continue to be private sector development for inclusive growth, human development, environmentally sustainable development, and regional cooperation. The recent commencement of private sector operations means that future ADB efforts are focusing more on developing this area with public sector operations playing an important supporting role. The rapid development of this oil-rich export economy led to this inevitable shift in its development priorities.

10. In view of the Government’s medium-term targets for 2010, the development of a vibrant and competitive private sector is vital to ensure economic diversification as well as balanced and equitable development. The Government has put in place a business-friendly policy environment based on the following key elements: (i) macroeconomic stability with relatively low inflation and responsible fiscal policy as indicated by the expansionary medium-term fiscal policy for 2006–2008; (ii) plans for streamlining procedures for SME start-up and operation in 2004–2005; (iii) emphasis on financial sector deepening and development, including setting up a financial supervision agency and plans to develop Almaty as an international financial center in 2004–2005; and (iv) establishing new state bodies to support private sector development in 2003, including investment vehicles (investment fund and innovation fund) and complementary facilities (export insurance corporation, technology transfer center, and marketing research center). The ADB program on private sector development seeks to complement the Government’s efforts through activities in two key areas: (i) private sector operations and (ii) development of an enabling environment for the private sector.

11. In October 2004, the Government signed the Framework Agreement signaling the start of ADB private sector operations in Kazakhstan. ADB’s Private Sector Operations Department is analyzing potential investments in financial institutions and infrastructure sector. Given the department’s late start in Kazakhstan vis-à-vis other multilateral development institutions, such as the European Bank for Reconstruction and Development (EBRD), ADB must either collaborate closely with such institutions, or provide financial support in areas where current exposure limits have been reached.

12. Bolstering financial markets and supporting infrastructure development are principal objectives of ADB private sector operations in Central Asia. This will play a critical role in helping Central Asia members achieve CSP strategic objectives and accords with the governments’ emphasis on nonsovereign borrowing by the private sector and certain stateowned enterprises.

13. ADB private sector operations in financial markets will focus on projects where government ownership is limited or nonexistent; and may offer a combination of equity, debt, and/or partial credit or political risk guarantees. In the near term, ADB’s private sector operations will focus on establishing a private equity fund as well as providing trade finance partial credit guarantees in collaboration with EBRD’s Trade Finance Facilitation Program. In Kazakhstan, two banks have already undergone due diligence. Furthermore, its efforts to work with private groups in Azerbaijan, Kazakhstan, and Uzbekistan to establish a private equity fund should see progress at the end of 2005 or early 2006. The fund’s focus is likely to be equity or quasi-equity investments in small and medium-sized infrastructure projects and service companies whose activities support Central Asia’s natural resource industries. Kazakhstan currently has the best enabling environment and attracts the greatest amount of private sector investment.

14. Other indicative financial sector projects that ADB might consider include (i) equity investments in one or more local banks, as well as loans in the form of tier 2 capital or designated credit lines; (ii) equity investments or provision of credit lines to leasing companies or other nonbank financial institutions; (iii) credit enhancement for securitization of mortgages and leases or other capital markets transactions; and (iv) equity in investment funds.

15. The Government policy emphasizes SME development to create jobs. The Government needs to implement the policy and develop institutional capacity. ADB could assist by providing credit to SMEs via domestic banks. ADB can also help domestic banks enlarge credit portfolios and strengthen their capacities for credit appraisal and risk management. A proposed local currency swap will help develop alternative financing for the private sector

16. ADB’s private sector operations in infrastructure will focus on water, wastewater, solid waste, power, airports, toll roads, rail, ports, and oil and gas operations. The power sector has already been unbundled. Ownership of power generation and distribution is now in the private sector. A new concession law under development for private road and other urban infrastructure projects is intended to bring the legal framework for private infrastructure investment in line with international standards and to allow new forms of private sector participation such as operating concessions and build-operate-transfer. Should such legislation finally be adopted in line with international standards, ADB would support pilot projects to test the adequacy of such laws. ADB also recognizes the need to improve the quality and effectiveness of companies involved in infrastructure development and would support firms with requisite commercial and technical expertise in relevant infrastructure sectors. ADB will explore means of supporting subsovereign infrastructure companies with demonstrated ability to act in a commercially viable manner. To raise effective long-term finance for infrastructure projects, ADB recognizes the importance of developing the market for infrastructure bonds and other similar bond instruments. For this market to develop effectively, major pension funds must be able to purchase long-term maturity bonds. ADB is willing to consider risk sharing with pension funds through its partial credit guarantee programs.

17. In 2003, the Government started to explore a holistic and integrated transport development strategy. The strategic importance of international transit corridors (north–south and east–west) to address regional linkages remains unchanged. Railroads have emerged as a key modality, along with road transport. For road transport, rural roads have become a priority development need as feeder links from rural areas to trunk routes. ADB has supported this planning process through a small-scale TA.⁶ Following the cessation of processing in 2004 for two proposed road rehabilitation projects due to the Government’s decision to finance them from their own resources, ADB activities in the transport sector will focus on knowledge transfer and the exploration of possibilities for private sector investment.

18. Economic growth in the non-oil and gas sectors in the western provinces requires considerable improvement in the power supply for new industry to develop electrification of the major railway routes to lower transportation costs. The existing power supply is unreliable and dependent on ad hoc arrangements with the Russian utility. Strengthening transmission interconnections will address these problems in the medium term, and over the long term will create new opportunities for private sector power plants to be located in the gas-rich western region, which could sell power to the national power grid.

19. Rural development remains a key Government priority program. In 2003, the Government developed the State Rural Development Program for 2004–2010. ADB helped prepare the program by developing a methodology to assess the growth potential of rural districts. In 2003, ADB provided a follow-on TA to help develop a regional rural development project to explore appropriate ways of planning to maximize the value of investments and the potential growth of rural areas by pilot-testing an approach to regional planning and development in one or two oblasts. The investment project is now scheduled for ADB approval in 2006. ADB's operational focus is on rural poverty reduction and activities with regional impact. Rural poverty reduction will be supported with rural water supply, rural development, natural resource management, SME support, and rural education. Timely delivery of program results is of particular importance for its development impact on rural poverty reduction in the medium term: (i) rural unemployment reduction; (ii) SME development; (iii) diversification of the economy; and (iv) social infrastructure investments, such as water, power, education, and health.

20. With the policy emphasis on developing Almaty as a financial center, support for financial sector development remains important. The first phase of a regional TA for financial sector development will introduce international accounting standards, international principles for corporate governance, and international standards for risk management in the banking system. The three financial sector TAs phased over 2004–2006 will provide complementary assistance. These efforts will enhance the potential for ADB private sector operations in infrastructure projects in sectors such as water, wastewater, transportation, power, and oil- and gas-related services.

21. The Government continued implementation of the 2002–2010 program for drinking water and expanded the coverage of the population (particularly in rural areas) with access to safe drinking water. ADB assistance will help the Government to that end. In its program, one followup loan on rural water supply and sanitation was added for 2006. The proposed schedule will allow sharing of lessons learned from the first project to help implement the follow-on project.

22. The Government continued to make progress in education in 2004. It approved the state program for education sector development in 2004. The Government’s major priorities under the planned education reform include (i) providing 1 year of compulsory preschool education to better prepare students, especially disadvantaged ones, for formal schooling; (ii) improving education standards; (iii) providing equal access to education at all levels; (iv) developing information and communication technologies to support the education system; (v) extending school education from 11 years to 12 years; (vi) modernizing education management; and (vii) rationalizing the vocational and technical education system through partnership with the private sector to cater to the needs of SMEs. The Government has restated its interest in ADB TA for (i) rural education through distance learning, (ii) special vocational and technical training, and (iii) learning international best practices in education. The Government will finance education projects from its own resources. The CSP update includes a staff study on rural education through distance learning for 2005.

23. ADB continues to focus on supporting sector institutions and improving financial sector governance (including building capacity for integrated financial sector supervision, strengthening banking supervision to protect depositors, regulation and management of official reserves, and risk management). ADB provided support for implementation of the poverty reduction strategy by introducing effective monitoring and evaluation of poverty interventions; and is supporting local government reforms and strengthening government and sector program performance.

24. Mainstreaming environmental considerations has been a major strategic focus of the Government’s efforts toward environmentally sustainable development. The Government document, Concept of Ecological Security 2004–2015,⁷ recognizes the need for an intersectoral approach to implementing policies and programs aimed at, among others, curbing environmental degradation. Land degradation (desertification) is seen as one of the most significant, responsible for total annual economic loss of T93 billion ($6.2 billion). Excessive development of irrigation networks, poor management and use of water resources, and inadequate drainage are the main causes of serious and rapid degradation of the dryland ecosystem, which comprises nearly two thirds of the country’s physical area. The Central Asia Countries Initiative on Land Management (CACILM), being supported through ADB TA 5941– REG⁸ and TA 6236–REG⁹ with cofinancing from the Global Environment Facility, is helping Kazakhstan develop a comprehensive national programming framework to combat desertification and land degradation, by mainstreaming sustainable land management with a more comprehensive and integrated development framework, and creating synergies with other environmental concerns.

25. Kazakhstan continues to be a strong proponent of regional cooperation, and is intensifying its efforts to promote regional cooperation through various groups including the Shanghai Cooperation Organization, Central Asia Cooperation Organization, Commonwealth of Independent States, Special Programme for the Economies of Central Asia (a joint program of the United Nations Economic Commission for Europe and United Nations Economic and Social Commission for Asia and the Pacific), and Eurasian Economic Community.¹⁰ Kazakhstan, an active participant in the Central Asia Regional Economic Cooperation, hosted the 3rd Ministerial Conference in Astana in November 2004 and is actively involved in sector coordinating committees and working groups on transport, trade policy, customs cooperation, and energy. Kazakhstan is also an active participant in the Central Asia Regional Economic Cooperation’s Electricity Regulators Forum, which provides a venue for sharing experience and ideas on electricity sector reform and improved regulation. In addition, a number of ongoing and scheduled regional TAs promote regional cooperation in financial sector reform, management of natural resources and the environment, education management and information and communication technology, and private sector development.

C. Highlights in Coordination of External Funding and Partnership Arrangements

26. ADB continues to coordinate and undertake activities with Kazakhstan’s other development partners. The CSP is based on a shared diagnostic analysis with the World Bank. Monthly development partner consultations help establish a common understanding of the country’s development needs, and ensure coordinated and complementary assistance. Ongoing and proposed loan projects are either cofinanced with other development banks, ¹¹ or implemented in conjunction with complementary projects financed by these banks. ¹² Furthermore, ADB plans to collaborate with the Islamic Development Bank on the Second Rural Water Supply and Sanitation Sector Project. ADB will also work with the World Bank and United Nations Development Programme on the development of a joint information center. The activities of the major funding agencies are updated in Table A1.5. ADB will continue to pursue cofinancing for important thematic priorities for Kazakhstan and maintain its dialogue with the Government.

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