Kazakhstan: Alternative Urban Infrastructure Financing Modalities

Sovereign Project | 46487-001

Summary

Using select priority projects in two or three intermediary cities as demonstration projects, the proposed policy and advisory technical assistance (TA) will help develop a well-documented and structured menu or range of private sector participation and financing options/modalities. The recommendations will suggest methods to utilize the country's large pool of capital held by local pension funds, the National Oil Fund and other investors more efficiently for urban infrastructure development. The related policy, legal and regulatory gaps arising from the assessments of these projects, but with wider sectorial implications, will also be identified. The TA will include two parts: suggested policy improvements to make urban infrastructure investments less risky and therefore more attractive to private sector participation, and initial assessments of alternative approaches and financing modalities for the select priority projects.

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Project Name Alternative Urban Infrastructure Financing Modalities
Project Number 46487-001
Country Kazakhstan
Project Status Approved
Project Type / Modality of Assistance Technical Assistance
Source of Funding / Amount
TA 8366-KAZ: Alternative Urban Infrastructure Financing Modalities
Urban Environmental Infrastructure Fund-UFPF Multi US$ 1.00 million
Strategic Agendas Inclusive economic growth
Drivers of Change Governance and capacity development
Partnerships
Private sector development
Sector / Subsector Finance - Infrastructure finance and investment funds - Money and capital markets
Water and other urban infrastructure and services - Urban solid waste management - Urban water supply
Gender Equity and Mainstreaming
Description Using select priority projects in two or three intermediary cities as demonstration projects, the proposed policy and advisory technical assistance (TA) will help develop a well-documented and structured menu or range of private sector participation and financing options/modalities. The recommendations will suggest methods to utilize the country's large pool of capital held by local pension funds, the National Oil Fund and other investors more efficiently for urban infrastructure development. The related policy, legal and regulatory gaps arising from the assessments of these projects, but with wider sectorial implications, will also be identified. The TA will include two parts: suggested policy improvements to make urban infrastructure investments less risky and therefore more attractive to private sector participation, and initial assessments of alternative approaches and financing modalities for the select priority projects. The objective is to change government's perception and understanding of how it can (i) strengthen investor confidence while tangibly minimizing risks in some of the main investment phases and components of the priority development projects; and (ii) create the conditions needed to effectively mobilize private sector participation through debt, equity and other means, for financially and economically sustainable urban and other public infrastructure development.
Project Rationale and Linkage to Country/Regional Strategy

Despite being a middle-income country, urban infrastructure investment requirements in Kazakhstan remain large and are estimated at over US$25 billion. The federal government devolved service delivery to local government units without adequate funding, apart from operational subsidies and urgent interventions to fund breakdowns. Currently there are insufficient institutional, regulatory and governance arrangements to ensure the financial and environmental sustainability of urban utilities. Local governments, except for those in Astana and Almaty, are not allowed to borrow and are dependent on federal government transfers for capital investments. Alternative sources of capital are available from local pension funds, the National Oil Fund and the Sovereign Wealth Fund (Samruk Kazyna), and potentially from local and foreign debt and equity markets. However, Kazakhstan has not yet found a strategy to effectively mobilize this capital for urban infrastructure development. The lack of a comprehensive strategy for the sector and weak policy and regulatory frameworks for urban infrastructure investment result in major unmitigated risks. Investment instruments and markets that enable capital from the private sector to be channeled efficiently into urban infrastructure with a more optimal risk structure are not yet available.

The result is rapidly deteriorating urban infrastructure and weakening services, particularly for the poor and for women. For example most of the water collection, treatment and distribution infrastructure inherited from the Soviet period is in physical disrepair. This has resulted in poor technical performance and quality of drinking water key factors that impact public health. At least 10% of households do not have running water and about 20% of the population has no access to a proper sewage system. Nonrevenue water supply arising from system losses ranges from 25% to 60%, but actual losses may be greater as it is not accurately measurable due to the lack of metering. A preliminary assessment suggests that all major cities have inefficient solid waste management systems which are unable to cope with rapid urbanization. Supply of heat to multi-apartment buildings (district heating) during the cold season is a basic human need, yet the distribution and piping network is outdated and inefficient and the technology is obsolete. Much of the heat produced is lost due to leakages, lack of proper thermal insulation, and inadequate energy efficiency infrastructure in the housing stock. Greenhouse gas (GHGs) emissions from the heating sector are estimated at 42-46 million tons of carbon dioxide per year, or almost 20% total emissions. Women in urban areas particularly note problems with heating distribution and water supply, and increasing tariffs combined with poor service.

Impact Improved enabling environment for private sector participation in selected priority urban infrastructure projects in intermediary cities in Kazakhstan
Project Outcome
Description of Outcome A range of alternative financing modalities developed to enhance the government's ability to reduce the risks for priority urban infrastructure projects
Progress Toward Outcome

Pilot studies /assessments of Zhetisu Vodokanal (Taldykorgan water), Taldykorgan Teploservis (Heating) and Karaganda Su (water) will be shared with the Government in the first week of April, 2015.

Review Mission fielded in November 2014; Government comments on draft TA report received and discussed; comments on Aide Memoire received with regard to continuation of ADB technical assistance support; specifically, regarding (i) the priority projects of the state program of infrastructure development ("Nurly Jol") for the years 2015-2019; (ii) the infrastructure financing fund (feasibility of establishing a fund to finance the infrastructure is currently under consideration by interested government agencies and organizations); and (iii)

developing standard documentation (concession proposals, competitive documentation, and concession agreement) in the sectors of heat and water supply.

Additionally, the Committee for Construction, Housing and Communal Services and Land Management Department is currently considering the possibility of cooperation with the ADB to elaborate the mechanism of financing the modernization of ZhKH networks under the state program "Nurly Jol (The project of the state program of infrastructure development "Nurly Jol" for the years 2015-2019 is awaiting PM approval (as of March 2015).

Draft final TA report reviewed by ADB; to be shared with the EA (now under the new Ministry of National Economy); draft report of pilot project 1 (Karaganda Su Water/sanitation) being reviewed by ADB; Draft reports of pilot projects 2, 3, 4 being prepared

Financial assessment of 21 Water, and 13 District Heating Utility companies completed

Cities and priority pilot projects being shortlisted to initiate analyses on alternative ownership and financing modalities

Karaganda and Taldykorgan confirmed by the Government as the pilot cities (Letter of confirmation dated: 24/01/2014). The utilities selected are: Karaganda Su (water/sanitation), Karaganda Teplotranzit (Heat), Zhetisu Vodokanal (Water / Sanitation) and Taldykorgan Teploservice (Heat).

Mission to Karaganda fielded to begin to work closely with the heating and water utility companies and start the preparation of the Prefeasibility Studies (PFS). The PFS' will summarize the observations regarding each city and utility entity, articulate its strengths and weaknesses and scope for improvement, and detail the new financing, governance, institutional arrangements, and de-risking mechanisms identified to improve their service delivery.

Mission to Taldykorgan scheduled in April 2014.

Implementation Progress
Description of Project Outputs

1. Updated diagnostic assessments as inputs to CPS, and advice on improving policy, regulatory and institutional frameworks for private sector participation in urban infrastructure

2. Dialogue mechanism established with various stakeholders

3. Priority projects identified, and government readiness established to test alternative development and financing modalities for these projects through a long-term action plan

4. Alternative ownership, management, and financing structures proposed as options for each priority project identified

5. Methods for effectively mobilizing commercial and official cofinancing established

Status of Implementation Progress (Outputs, Activities, and Issues)

1, 2 and 3 - completed (refer draft TA report).

4 - draft completed (refer draft pilot study reports for (i) LLP Karaganda Su (karaganda water co); (ii) Karaganda TeploTranzit LLP (karaganda district heating co); (iii) Zhetisu Vodokanal GKP (taldykorgan water co); and (iv) Taldykorgan Teploservis GKP (taldykorgan district heating co)).

5 - completed (refer draft TA report)

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Draft final TA report - recommending policy, institutional legal and regulatory changes to increase private sector participation in urban infrastructure - reviewed by ADB; being translated for sharing with the EA (now under the new Ministry of National Economy);

Draft report of pilot project 1 (Karaganda Su Water/sanitation), providing recommendations for alternative ownership, management, and financing structures, and effectively mobilizing commercial and official cofinancing being reviewed by ADB

Draft reports of pilot projects 2 (Karaganda Teplotranzit (Heat); 3 (Zhetisu Vodokanal (Water / Sanitation); 4 (Taldykorgan Teploservice (Heat) in the process of being prepared

and

-Draft report to be ready by end- April due to delay in hiring of legal specialist

- Inter-ministerial Working Group established; stakeholder mechanism being established

- Priority projects selected are: Karaganda Su (water/sanitation), Karaganda Teplotranzit (Heat), Zhetisu Vodokanal (Water / Sanitation) and Taldykorgan Teploservice (Heat).

- TA team to start preparation of PFS' to achieve outputs 4 and 5.

- Pilot studies for 3 utilities will be sent to the government for review on 2 April 2015.

Geographical Location
Summary of Environmental and Social Aspects
Environmental Aspects
Involuntary Resettlement
Indigenous Peoples
Stakeholder Communication, Participation, and Consultation
During Project Design Ministry of Economy and Budget Planning (MEBP), Kazakhstan Public-Private Partnership Center (PPP Center) and the Ministry of Finance (MOF) through regular in person meetings, email and telephone communication (with ADB team).
During Project Implementation

- Continuous consultation with key implementing agencies and the EA

- Ministry of Finance (MOF), Kazakhstan Public-Private Partnership Center (PPP Center) and the Ministry of Regional Development through regular in person meetings, email and telephone communication (with ADB team and consultant team).

-ZhKH (RK Center for utilities modernization & reform), Water Association (KazSu); ZhKH Palata (association of ZhKH operators and vendors)

- Inter-ministerial/Agency Working Group constituted based on mutually agreed TOR

Business Opportunities
Consulting Services The TA requires a team of five international (25 person-months) and six national specialists (18 person-months). International consultants comprise (i) Team leader, 5 person-months; (ii) Municipal Infrastructure Development Specialist, 4 person-months; (iii) Senior Urban Planning Specialist/Urban Economist, 6 person-months; (iv) PPP and Institutional Development Specialist, 5 person-months; and (v) Senior Finance and Capital Markets Specialist, 5 person-months. National consultants comprise (i) National Infrastructure Development Specialist, 4 person-months; (ii) National PPP Specialist, 4 person-months; (iii) National Urban Economy and Finance Specialist, 4 person-months; (iv) National Capital Markets Development Specialist, 3 person-months; and (v) National Institutional and Social Specialist, 3 person-months
Responsible ADB Officer Priyanka Sood
Responsible ADB Department Central and West Asia Department
Responsible ADB Division Public Management, Financial Sector and Trade Division, CWRD
Executing Agencies
Dept. for Budget Inv't &PPP Devt,Min of Nat'l Econ010000, Astana, Kazakhstan, 8, Orynbor
Street, Kazakhstan
Timetable
Concept Clearance 11 Feb 2013
Fact Finding -
MRM -
Approval 09 May 2013
Last Review Mission -
Last PDS Update 25 Mar 2015

TA 8366-KAZ

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
09 May 2013 12 Jun 2013 12 Jun 2013 31 May 2015 30 Sep 2015 -
Financing Plan/TA Utilization Cumulative Disbursements
ADB Cofinancing Counterpart Total Date Amount
Gov Beneficiaries Project Sponsor Others
0.00 1,000,000.00 0.00 0.00 0.00 0.00 1,000,000.00 09 May 2013 439,011.14
Title Document Type Document Date
Alternative Urban Infrastructure Financing Modalities Technical Assistance Reports May 2013

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