Document of The World Bank FOR OFFICIAL USE ONLY Report No. 108396-KZ INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION MULTILATERAL INVESTMENT GUARANTEE AGENCY PERFORMANCE AND LEARNING REVIEW OF THE COUNTRY PARTNERSHIP STRATEGY FOR THE REPUBLIC OF KAZAKHSTAN FOR THE PERIOD FY12–17 September 26, 2016 Central Asia Country Management Unit Europe and Central Asia Region The International Finance Corporation Eastern Europe and Central Asia Region The Multilateral Investment Guarantee Agency This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank Group authorization. The last Country Partnership Strategy was discussed by Executive Directors on May 1, 2012. GOVERNMENT FISCAL YEAR January 1 to December 31 CURRENCY EQUIVALENTS Currency Unit = Kazakhstani Tenge (KZT) US$1 = KZT 337.52 (as of September 26, 2016) WEIGHTS AND MEASURES Metric system ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank AIFC Astana International Finance Center AIIB Asia Infrastructure Investment Bank AML/CFT Anti-money Laundering and Combating Financing of Terrorists BAKAD Big Almaty Ring Road BEEPS Business Environment and Enterprise Performance Survey CAR Central Asia Road CAEWDP Central Asia Energy and Water Development Program CAMP4ASB Climate Change and Mitigation for the Aral Sea Basin CE Citizen Engagement CFR Corporate Financial Reporting CLR Completion and Learning Review CPE Country Program Evaluation CPF Country Partnership Framework CPI Consumer Price Index CPPR Country Portfolio Performance Review CPS Country Partnership Strategy CSO Civil Society Organization DPL Development Policy Loan EEU Eurasian Economic Union EBRD European Bank for Reconstruction and Development EC European Commission EITI Extractive Industries Transparency Initiative EU European Union FDI Foreign Direct Investment GDP Gross Domestic Product GEF Global Environment Facility GIZ German Agency for International Cooperation (Deutsche Gesellschaft für Internationale Zusammenarbeit) GRM Grievance Redress Mechanism HBS Household Budget Survey ICR Implementation Completion and Results Report IDF Institutional Development Fund IFC International Finance Corporation IFI International Financial Institution IFRS International Financial Reporting Standards IMF International Monetary Fund iNDC intended Nationally Determined Contribution IPSAS International Public Sector Accounting Standards IsDB Islamic Development Bank JERP Joint Economic Research Program KEGOC Kazakhstan Electricity Grid Operating Company MFTP Microfinance Transformation Advisory Services NFRK National Fund of the Republic of Kazakhstan NGO Nongovernmental Organization NPL Non-performing Loan OECD Organization for Economic Co-operation and Development PCB Polychlorinated Biphenyls PFA Partnership Framework Arrangement PLR Performance and Learning Review PMR Partnership for Market Readiness POPs Persistent Organic Pollutants PPP Public-Private Partnership RAS Reimbursable Advisory Services ROSC Report on Observance of Standards and Codes SCD Systematic Country Diagnostic SME Small and Medium Enterprise SOE State-owned Enterprise TA Technical Assistance TCO Technology Commercialization Office UNDP United Nations Development Programme UNICEF United Nations Children’s Fund USAID U.S. Agency for International Development WE-WC Western Europe-Western China WHO World Health Organization WTO World Trade Organization World Bank IFC MIGA Vice President: Cyril Muller Dimitris Tsitsiragos Karin Finkelston Director: Lilia Burunciuc Tomasz Telma Dan Biller and Yasser Country Manager: Francis Ato Brown Moazzam A. Mekan Mohamed Ibrahim (Co- Task Team Leader: Rakhymzhan Assangaziyev Miguel A. Rebolledo acting Directors) Dellepiane Persephone Economou REPUBLIC OF KAZAKHSTAN Performance and Learning Review of the FY12–17 Country Partnership Strategy TABLE OF CONTENTS I. INTRODUCTION II. CHANGES IN COUNTRY CONTEXT III. SUMMARY OF PROGRAM IMPLEMENTATION IV. EMERGING LESSONS V. ADJUSTMENTS TO PROGRAM VI. RISKS TO PROGRAM BOXES Box 1: Gender Box 2: Country Portfolio Performance Review Action Plan TABLES Table 1: Key Macroeconomic Indicators, 2013–18 Table 2: Systematic Operations Risk-Rating Tool ANNEXES Annex 1: Kazakhstan: FY12-17 Country Partnership Strategy, Updated Results Matrix Annex 2: Kazakhstan: FY12-17 Country Partnership Strategy, Changes to Original Results Matrix Annex 3: Kazakhstan: FY12-17 Country Partnership Strategy, Results Matrix Status as of 06/30/2016 Annex 4A: Joint Economic Research Program – Planned and Actual Deliveries, FY12-13 Annex 4B: Joint Economic Research Program – Ongoing Activities, FY14-FY17 Annex 5: Planned Lending and Actual Deliveries, FY12–13 and FY14-17 Annex 6: Kazakhstan: IFC Advisory and Investment Services Annex 7: Kazakhstan: Citizen Engagement I. INTRODUCTION 1. This Performance and Learning Review (PLR) assesses and updates progress in implementing the FY12–17 World Bank Group Country Partnership Strategy (CPS) for the Republic of Kazakhstan. The CPS’ three main areas of engagement—improving competitiveness and fostering job creation, strengthening governance and public services, and ensuring development is environmentally sustainable—are aligned with the Government’s medium- and long-term strategies—Development Strategy 2020 and Kazakhstan 2050—and are consistent with the World Bank Group’s twin goals of ending extreme poverty and boosting shared prosperity. 2. Overall, implementation of the CPS to date has been broadly satisfactory and the Kazakhstan-World Bank Group partnership has strengthened. The Government reacted to the adverse impact of large shocks to Kazakhstan’s economy commencing 2014 with a set of fiscal, monetary, and exchange rate measures designed to facilitate macroeconomic adjustment. The demands of the latter also triggered additional World Bank Group policy advisory and lending support. 3. While the program’s three focus areas remain highly relevant, two adjustments to its choice and mix of instruments were necessary to enable the World Bank Group to respond appropriately to the country’s significantly changed macroeconomic stance and outlook. The first was the transition from a reliance on knowledge products as the main instrument in FY12–13 toward a more balanced mix of analytics, lending, and technical assistance (TA) that characterized World Bank Group activities in FY14–16, and is planned for FY17. The second is the large increase in planned Bank lending—from the US$2 billion over six years (FY12–17) originally envisaged to the US$4.2 billion now anticipated, including a US$1 billion development policy loan (DPL). At the same time, the erstwhile Joint Economic Research Program (JERP) has evolved gradually into a Reimbursable Advisory Services (RAS) program. 4. With less than a year remaining, no extension of the original CPS period is proposed. Instead, a Systematic Country Diagnostic (SCD) and a Completion and Learning Review (CLR) are planned for FY17 as input for the next CPF commencing FY18. II. CHANGES IN COUNTRY CONTEXT A. External Environment 5. During the last 3–4 years, several regional trends that were already part of the country context at the outset of the CPS have come into sharper focus—and may in due course influence the nature and scope of future Kazakhstan-World Bank Group engagement. First is the emergence of China as a leading development partner in Central Asia, including in Kazakhstan. Its One Belt, One Road program to build road and rail routes, gas and oil pipelines, and other communications infrastructure, once fully defined, could mean significant new investment in Central Asia, as could its Silk Road Fund and the recently established multilateral Asia Infrastructure Investment Bank (AIIB). Second, effective January 1, 2015, the customs union that Belarus, Kazakhstan, and the Russian Federation formed in 2010 became the Eurasian Economic Union (EEU). Later in that year, Kazakhstan signed an Enhanced 1 Partnership and Cooperation Agreement with the European Union (EU), which should help boost trade and foster foreign direct investment (FDI). Third, effective November 30, 2015, Kazakhstan became the 162nd member of the World Trade Organization (WTO), which commits it to a liberal tariff regime. The accession to WTO is expected to improve the country’s investment climate and further open its goods and services markets to foreign investors. Meanwhile, the Astana International Finance Center (AIFC), a special economic zone offering tax incentives to investors, was launched in early 2016. Finally, together with its immediate neighbors, Kazakhstan has become an active participant in three World Bank Group-supported Central Asia regional initiatives in climate change, connectivity, and energy and water.1 In addition, since 2013, it has been a technical partner to the Partnership for Market Readiness (PMR) in support of its Carbon Emissions Trading Scheme. The most important and unexpected changes in the country context, compared to 2012 at the launch of the CPS, were the large shocks affecting Kazakhstan’s macroeconomic environment and outlook that are discussed below. B. Recent Economic Developments 6. Commencing 2014, a deteriorating external environment and exchange rate adjustments led to an economic slowdown and higher inflation. Gross domestic product (GDP) growth declined from 5.8 percent in 2013 to 4.1 percent in 2014 and 1.2 percent in 2015 (Table 1). Private domestic demand was negatively affected by the 19 percent devaluation of the tenge in relation to the U.S. dollar in February 2014, declining industrial exports to China and Russia, the sharp drop in international oil prices starting mid-2014, and the move to a floating exchange rate régime in August 2015. The latter led to a further sharp depreciation of the tenge, fueling inflation which, according to the consumer price index (CPI), rose from 5.8 percent in 2013 to an estimated 6.6 percent in 2015 and a projected 14.2 percent in 2016. While both exports and imports contracted in 2014–15, net exports contributed positively to growth in 2015. Industrial output growth fell from 2.3 percent in 2013 to 0.2 percent in 2014 and −1.6 percent in 2015, affecting related transport and transit activities―both major contributors to the services sector which slowed from 6.9 percent in 2013 to 2.4 percent in 2015―and spreading through the non-oil economy. Meanwhile, credit and payment risks remain high and vulnerable to deterioration as firms’ cash flow comes under increasing strain due to lower profitability, rising interest rates, and weak credit conditions. Although agriculture grew by an estimated 1.3 percent in 2014 and 4.1 percent in 2015, its contribution to GDP growth remained small. 7. The drop in oil prices led to large terms of trade shock and external deficit. Given the economy’s reliance on oil, accounting for about 60–65 percent of total exports, the fall in prices led to a huge deterioration in the balance of payments―from a surplus of US$6.7 billion in 2014 to a deficit of US$10.5 billion in 2015. Meanwhile, capital outflows accelerated in response to perceived higher risks related to lower oil prices and the slowing economy, the Government and the private sector both took on foreign debt, and central bank interventions in the market led to foreign exchange losses. 1 Climate Change and Mitigation for the Aral Sea Basin (CAMP4ASB), Central Asia Roads (CARs), and Central Asia Energy and Water Development Program (CAEWDP). 2 8. Against this background, the authorities launched two short-term economic support programs in 2014. The first was a two-year (2014–15) US$5.5 billion equivalent program to provide subsidized credit to small and medium enterprises (SMEs) and to settle long-standing non-performing loans (NPLs) in the banking system. The second (Nurly Zhol or Bright Path) is a five-year (2015–20) US$15 billion equivalent program intended to (a) modernize physical and social infrastructure; (b) promote non-oil enterprises, including in agribusiness and manufacturing; and (c) improve the business environment, including access to credit. 9. In 2015, with lower oil prices persisting and budget revenues falling, the authorities revised their fiscal policy response to adjust to the new economic normal. With oil and total revenues having fallen between 2014–15 by an estimated 5.4 and 5.6 percentage points of GDP, respectively, in March 2015, the authorities (a) revised downward the 2015 budget based on an oil price of US$50 per barrel, compared to the US$80 per barrel assumed originally; (b) cut or delayed lower-priority capital expenditures, offsetting funding allocated for the economic support programs; (c) reduced transfers to state-owned enterprises (SOEs); and (d) postponed some public sector salary increases, while protecting social expenditures and vulnerable groups. While these efforts helped adjust on-budget expenditures promptly, the Government spent additionally US$2.7 billion off-budget to support the ailing national oil company. As a result, the non-oil deficit widened from 8 percent of GDP in 2013 to 10.1 percent in 2014 and to an estimated 12.5 percent in 2015. 10. While the ongoing fiscal consolidation relies heavily on cutting public investment, the authorities also plan to enhance its effectiveness and improve revenue collection through various reforms. These include (a) reviewing budget programs to increase their efficiency; (b) adopting new cost norms; (c) enacting a revised law on public-private partnerships (PPPs); and (d) implementing a variety of customs and tax administration and policy measures (including those seeking to close loopholes). The Government also announced a large privatization program in 2014–15 designed to attract private investment, increase revenues, and reduce the public sector’s role in the economy, in particular a number of large SOEs under the control of the large Samruk-Kazyna holding company (with assets around 40 percent of GDP). Meanwhile, the authorities launched a new targeted social safety net program (Orleu) in 2015 to help protect the most vulnerable. All these policies are also intended to help reduce the country’s reliance on oil, diversify its economy, and strengthen the competitiveness and productivity of other sectors such as agriculture and manufacturing. As such, they are building blocks with the potential to help the economy adjust to lower oil prices and to a different set of relative prices that should encourage non-oil exports. 11. In mid-August 2015, the authorities floated the tenge, leading to a further sharp depreciation, and anchored monetary policy to inflation targeting. While the depreciation was needed to align the currency to lower oil prices and new economic conditions, it also led to a spike in inflation, which is expected to subside by end-2016. Vulnerable households are expected to be affected mostly by higher inflation, as the prices of clothing, household appliances, health care, and medicine increased the most. The depreciation and the economy’s high level of dollarization exacerbates financial institutions’ balance sheet risk (currency risks) and curtails private sector credit growth. It also renews concerns about the stability of the banking system, which is still grappling with the aftermath of the 2008–09 financial crisis. Rating agencies have downgraded several large banks to junk status, based on their sizable foreign exchange exposures 3 and/or limited capital buffers. The state exhibits an overbearing presence in the banking sector, deterring private sector participation, wider foreign involvement, and greater competition. To some extent, this excessive state intervention in the banking sector is a result of the impact of the global financial crisis, which resulted in the nationalization or recapitalization of failing banks by the Government. Table 1: Key Macroeconomic Indicators, 2013 –18 2013 2014 2015 2016p 2017p 2018p National Accounts and Prices (In percent, unless otherwise indicated) GDP growth 5.8 4.1 1.2 0.1 1.9 3.7 Oil sector growth −4.8 −1.0 1.1 −1.9 2.3 3.5 Non-oil sector growth 9.6 5.4 1.6 0.8 1.9 3.8 GDP per capita (US$)* 14,310 13,155 10,508 7,765 8,625 9,442 Private consumption growth 12.6 1.8 1.0 0.0 1.5 4.5 Government consumption growth 1.7 9.8 3.0 −10.7 1.6 1.6 Gross investment (percent of GDP) 22.8 24.1 26.4 27.0 27.3 27.2 Consumer price inflation, year-end 4.8 7.4 13.6 6.9 4.3 4.5 Consumer price inflation, period average 5.8 6.7 6.6 14.2 4.8 4.4 Consolidated Fiscal Accounts (In percent of GDP, unless otherwise indicated Revenues 23.4 21.3 15.7 16.2 17.5 18.6 Oil revenue 11.6 10.1 4.7 5.2 6.7 7.5 Non-oil revenue 11.8 11.2 10.9 11.0 10.9 11.1 Expenditures 19.8 21.3 23.5 21.3 19.8 19.8 Current expenditures 14.7 15.0 16.6 17.0 16.6 16.5 Capital expenditures and net lending 5.1 6.3 6.9 4.2 3.2 3.3 Overall fiscal balance 3.6 0.0 −7.8 −5.1 −2.2 −1.2 Non-oil fiscal deficit −8.0 −10.1 −12.5 −10.3 −8.9 −8.7 External Accounts (In current US$, billions, unless otherwise indicated) Merchandise exports, of which: 85.6 80.2 46.3 40.5 47.1 50.3 Oil exports 57.2 53.6 28.0 22.0 27.6 30.2 Merchandise imports −50.8 −43.5 −33.6 −28.3 −29.6 −31.2 Current account balance 1.2 6.4 −5.8 −4.1 −0.3 0.5 Financial and capital accounts** 9.3 0.3 −4.7 4.4 2.6 3.4 Overall balance 10.5 6.7 −10.5 0.4 2.3 3.9 Total official international reserves 95.5 102.5 91.4 86.3 86.2 92.5 FX reserves in the Oil Fund 70.8 73.2 63.5 57.3 54.3 54.8 FX reserves at the Central Bank 19.2 21.8 20.3 20.7 24.5 30.5 External debt, total 150.0 157.4 153.5 162.4 168.1 173.6 External debt, excl. intra-company loans 75.9 78.0 71.6 76.5 78.7 81.7 as percent of GDP 31.1 34.3 38.8 55.3 50.6 47.4 Multilateral debt (percent of external debt) 2.8 2.9 3.6 5.0 5.5 6.4 Debt service ratio (percent of exports) 21.3 20.6 49.8 37.4 32.1 31.0 Social Indicators Population, total (millions) 17.0 17.3 17.5 17.8 18.0 18.2 Population growth (percent) 1.5 1.5 1.5 1.4 1.3 1.2 Unemployment rate (percent of labor force) 5.2 5.0 5.0 — — — Poverty rate, national (percent of population) 2.9 2.8 2.7 — — — Poverty rate, US$5/day PPP terms 15.2 13.8 13.8 14.0 — — Source: World Bank staff estimates based on official data. Note: p = projection. * The decrease of GDP per capita in 2013-16 reflects the depreciation of the tenge in February 2014 and August 2015. 4 ** Excluding investments of the Oil Fund. 12. Going forward, GDP growth is expected to recover gradually over the next three years. The prolonged slump in oil prices and other adverse developments have exposed the vulnerability of the country’s economy, which is expected to grow more slowly than in the CPS’ initial baseline scenario, which anticipated Kazakhstan to achieve high-income status by 2018. After falling to 1.2 percent in 2015 and an estimated 0.1 percent in 2016, GDP growth is projected to increase to 1.9 percent in 2017 and 3.7 percent in 2018. This scenario assumes that international oil prices start to recover and that oil output remains flat until the end of 2016 when the Kashagan offshore oil field is expected to come on stream.2 The current account balance is expected to become positive but remain close to zero in 2017 and 2018. The authorities’ medium-term fiscal consolidation agenda―comprising a combination of revenue increases and expenditure cuts―aims to lower the non-oil deficit to about 7 percent of GDP by 2020. Revenue increases will result partly from higher oil prices and partly from tax policy and administration reforms. 13. Meanwhile, President Nazarbayev, following his re-election on April 26, 2015, announced a new wave of structural reforms. A 100 Concrete Steps, Modern State for All program aims to implement five major pillars of the institutional reform agenda comprising professionalizing public administration; enforcing the rule of law; improving public accountability and transparency; promoting economic diversification and growth; and uniting the multiethnic nation. Strengthening institutions (through the 100 Steps program), improving physical infrastructure (through the Nurly Zhol stimulus program), and enhancing the quality of human capital are three key components of the Kazakhstan 2050 long-term development strategy, whose central goal is to transform the country into a modern society with a knowledge- based, diversified, and private sector-driven economy. C. Trends in Poverty, Shared Prosperity, Gender3 14. Since the early 2000s, burgeoning oil revenues have enabled significant progress toward ending extreme poverty and boosting shared prosperity. Using the Europe and Central Asia regional rate of US$5/day (2005 purchasing power parity terms), poverty declined from 54 percent in 2006 to 13.5 percent in 2014 and the middle class increased from 8 percent to 28 percent—albeit mainly in Almaty and Astana, the country’s two largest cities. During the same 2006–14 period, the incomes of the bottom 40 percent grew faster than average GDP, reflected partly in the Gini coefficient which decreased from 0.31 to 0.28. Despite these advances, regional disparities persist, with the poorest, mainly rural areas, experiencing smaller declines. 2 According to the forecasts of the Government of Kazakhstan, commercial oil production at the Kashagan oil field will be launched in October 2016 and allow producing 500,000 tons of crude oil by the end of 2016, increasing the oil production in Kazakhstan to 75.5 million tons. Additional oil production, implementation of the Nurly Zhol, and other anti-crisis measures are expected to increase GDP growth to 0.5 percent. Further production at Kashagan will result in a 4 million ton increase in the volume of crude oil production (up to 79.5 million tons) in 2017. The increase in oil production will have a positive effect on GDP growth, adding 0.49 percentage points to the GDP growth rate (up to 1.9 percent in 2017) at an average oil price of US$35 per barrel. 3 The primary sources of data cited in paragraphs 14–16 are Kazakhstan Household Budget Surveys (HBSs) for the years 2006–13. 5 15. While growth in most sectors of the economy contributed to poverty reduction and shared prosperity, services are the main drivers of job creation and increased incomes. In 2014, 77 percent of men and 65 percent of women were economically active. According to official data, overall unemployment fell from 10.5 percent in 2001 to 5 percent in 2014 and that of youth from 19 percent to 4 percent. Real wages doubled during 2003–13, and wage income was the largest contributor to poverty reduction. While a growing middle class should boost opportunities in the services- and consumer-oriented sectors over the medium term, an increasing proportion of aging population will place a burden on public finances.4 16. More recently, with poverty reduction largely stalled since mid-2014 due to slower growth and a weak labor market, the authorities softened the impact by protecting social spending and increasing pensions. However, pro-poor transfer programs remain relatively undeveloped, leaving low-income families vulnerable to rising food prices, falling wages, and reduced employment. Going forward, poverty is expected to increase slightly in 2016, before declining moderately in 2017–18 as the economy recovers. But, with renewed growth likely to be narrowly based, mainly in the oil sector, wages will likely remain under downward pressure through 2017, with job creation improving only slightly. Targeted social assistance programs may need to be strengthened to help protect the poor. Box 1: Gender In 2014, Kazakhstan ranked 41 out of 108 countries on the Social Institutions and Gender Index and 52 out of 188 countries on the Gender Inequality Index of the United Nations Development Programme (UNDP), by far the highest in Central Asia. Life expectancy at birth is 75.9 years for females and 67.1 years for males. The ratio of girls to boys in primary and secondary education is 100 percent, and 57.2 percent of tertiary-level students are women. Labor force participation is high compared to Europe and Central Asian countries—75 percent for women compared to 82 percent for men—but the wage gap has increased since the early 1990s, with women’s salaries only 73 percent of men’s. In 2015, female unemployment (5.9 percent) was slightly higher than male unemployment (4.6 percent), but was the lowest since 1991. Gender differences in retirement age are being narrowed gradually and will be equal by 2027. Kazakhstan ranks above the Europe and Central Asia average for female participation in the ownership and management of firms: 28 percent are owned partly by women and 19 percent managed by women. While there are about 150 female-oriented nongovernmental organizations (NGOs) and crisis centers across the country, the political arena remains the domain of men: in the current national legislature, for example, women comprise 27 percent of the House of Representatives and 6 percent of the Senate. According to NGOs, despite significant progress, including legislative protection, violence against women remains a problem due to lack of effective mechanisms for implementation. Some estimates suggest that one in four families experiences domestic violence. D. Emerging Development Issues 17. Kazakhstan’s main short-term economic policy challenge is to adjust to the new reality of slower growth and lower income for the near future. This will entail effective implementation of measures to strengthen the sustainability of the macroeconomic framework— including reducing the consolidated non-oil deficit, cutting and prioritizing public investment, and strengthening budgetary and monetary policy institutions as well as their transparency— while at the same time taking action to protect the vulnerable. The latter includes the phased rollout of the new Orleu targeted social assistance program through 2018. 4 Especially in relation to the pension system and health care. 6 18. Kazakhstan’s longer-term development policy challenge is to transform its growth model away from reliance on natural resource extraction toward a more diversified, competitive economy. While successive development strategies including Kazakhstan 2050 have all embraced this goal, economic diversification has in fact proved elusive, especially until mid-2014, in the face of high oil prices. Despite progress toward a more transparent, less regulated, and more market-driven business environment, constraints remain related to governance, infrastructure, institutions, investment climate, the rule of law, and low incentives for investment in physical capital and new technologies. Indeed, the economy’s reliance on the state and in particular on oil revenues has actually increased over the past decade. Looking ahead, the prospect of perhaps several years of slower growth and lower income offers the Government—with support from development partners including the World Bank Group—a unique new opportunity to create a more diversified, private sector-led, competitive economy. However, achieving this will require that the Government supported by the World Bank Group tackle the structural reform agenda more vigorously by (a) reducing the role of the state in the economy through accelerated implementation of the privatization program; (b) strengthening the efficiency and transparency of the competition policy, investment, and regulatory régimes; (c) addressing long-standing financial sector issues, such as the legal framework for insolvency, prudential norms, local currency financing, and the deteriorating portfolios and weakening capital of banks; and (d) further developing the country’s logistics and physical infrastructure. 19. A third issue potentially constraining rapid progress on both these short- and long- term challenges is the country’s limited institution-building capacity. Kazakhstan moved very rapidly to a higher income status. However, its institutions have not caught up with the rapid pace of the country’s movement up the ladder. Despite a young, energetic, and well- educated labor force, further progress is needed in institution building, the implementation of institutional reforms, the rule of law, and combating corruption.5 Weaknesses are most apparent in areas such as human resource development, public procurement, and the public financial management system, which still relies overly on control and punishment rather than development of a culture of managerial accountability. Improvements in overall results management and reporting, monitoring indicators and outcomes, and analyzing the effectiveness of policy measures are also needed. Coping with these challenges will not be straightforward, given the gradual longer-term nature of solutions, and this needs to be taken into account in designing policies, programs, and projects. III. SUMMARY OF PROGRAM IMPLEMENTATION 20. The CPS program’s main areas of engagement are aligned with the Government’s medium-term Development Strategy 2020 and long-term Kazakhstan 2050 strategy, approved in early 2014. Thus, World Bank Group knowledge and financial resources focus on the following three themes:  Improving competitiveness and fostering job creation, with seven planned outcomes: (a) strengthening fiscal discipline and trade integration; (b) expanding non-oil exports and employment; (c) reinvigorating the financial sector; (d) building skills for employment; (e) strengthening knowledge for sustained growth in agriculture; (f) 5 Transparency International’s 2015 Corruption Perception Index ranks Kazakhstan 123 out of 168 economies. 7 improving energy transmission in poor areas; and (g) building transport connectivity and lowering costs;  Strengthening governance and public services, with four planned outcomes: (a) improving governance; (b) strengthening budget and accountability institutions; (c) reforming the social protection system; and (d) sharpening strategic approaches to health reforms; and  Ensuring development is environmentally sustainable, with two planned outcomes: (a) safeguarding the environment and (b) raising energy efficiency. Program and Portfolio Delivery and Performance 21. The World Bank’s loan portfolio as of July 2016 comprised 13 operations totaling US$4,812 million, of which eight totaling US$2,515 million have been committed during the current CPS to date. This compares to a portfolio comprising 12 operations totaling US$3,589.1 million as of July 1, 2012. The portfolio includes three very large operations— South-West Roads (US$2,125 million), East-West Roads (US$1,068 million), and a US$1 billion DPL. 22. Investment project financing operations continue to be aligned with the CPS’ main pillars. 12 operations totaling about US$1.6 billion, or 65 percent6 of the combined legacy (pre- FY12) and current (FY13–16) portfolios, support the competitiveness and job creation area of engagement. Five operations and almost 30 percent of commitments are focused on governance and public services delivery and the remaining three operations and 5 percent of commitments on environmentally sustainable development.7 23. The performance of the portfolio is mixed. By December 31, 2015, nine completed projects had exited the portfolio that was in place in June 2012. Out of the six for which Implementation Completion and Results Reports (ICRs) are available, outcomes for three were rated Satisfactory, two Moderately Satisfactory, and one Unsatisfactory. As for the current portfolio, one of the eight operations approved during FY13–16 is rated Satisfactory for implementation progress, two Moderately Satisfactory, four Moderately Unsatisfactory, and one Unsatisfactory. Implementation as measured by loan disbursements is lagging, with only US$207 million or 12 percent of the US$1,725 million balance disbursed in FY16. 24. The last full Country Portfolio Performance Review (CPPR) was held in early FY14 and an update took place in April 2016. The core implementation issue noted in FY14—that government and World Bank processes and procedures are not well aligned, especially upstream in the project cycle—persists. The main visible symptoms are continued delays in loan signing and effectiveness, protracted project implementation, slow loan disbursements, and the frequency and length of extensions to closing dates. While remedial actions envisaged under the FY14 CPPR were partly implemented, they did not generate the needed changes in legislative and government internal procedures for loan signing and ratification. These long-standing issues were addressed in the 12-point action plan agreed as part of the April 2016 CPPR update. It 6 The two large highway projects were excluded from the portfolio share calculation so that they do not distort the picture. 7 For purposes of this analysis, half the US$1 billion Macroeconomic Management and Competitiveness DPL is allocated to the first area of engagement and half to the second. 8 covered loan processing, project staffing, procurement, and capacity building. This action plan, outlined in Box 2 below, is now the basis for more intensive periodic monitoring and more proactive portfolio management and supervision by the authorities (together with the World Bank), which aims to improve overall performance by end-FY17. In this connection, the World Bank’s increased use of country systems, such as the transfer of projects’ designated accounts to the treasury, is expected to ensure the seamless flow of project funds. Particular attention will be paid to the five operations currently rated Moderately Unsatisfactory or Unsatisfactory, which, absent significant improvement in implementation during FY17, may need to be restructured. Box 2: Kazakhstan - 2016 CPPR Action Plan* Preparation and approval of program documents for institutional loans 1 Establishing a working group to develop requirements for content and processing timetable for review of program documents for institutional loans Streamlining procedures for processing sovereign loans 2 Submission of a proposal to amend legislation, including government and parliamentary procedures, designed to reduce time required to process loans from international financial institutions (IFIs) 3 Submission of a proposal to amend Law On International Treaties with regard to the translation of agreements into English Streamlining procurement and contract implementation procedures 4 Implementing agencies to limit time for preparation of bidding documents (including technical specifications and terms of reference) (to no more than 30 calendar days) 5 Implementing agencies to limit time for evaluation of bids, preparation of bid evaluation reports, and approval (to no more than 45 calendar days) 6 The World Bank to limit time for review of bidding documents and bid evaluation reports to 5 and 10 business days, respectively 7 The World Bank to apply increased thresholds for National Competitive Bidding (NCB) (up to US$20 million for works, up to US$2 million for goods) and for national consultants (US$500,000 for short-listed) for all projects under preparation 8 The World Bank to assess readiness of national e-procurement system for use in NCB and national Shopping 9 The World Bank to pilot checklist for detecting errors by bidders regarding price adjustment and excessive requirements for foreign currency before contract award 10 The World Bank to assess possibility of using national court of arbitration for cases related to consultants’ contracts and goods’ contracts in projects Capacity building in public institutions 11 Implementing agencies to provide opportunity for officials responsible for project preparation and implementation to attend annual IBRD training courses organized with the Public Administration Academy Projects completion 12 Submission of the amendments to the legislation allowing to finance from the state budget concluding project activities after projects’ closing dates *All activities are scheduled for completion by December 2016 except for activity 9, which is expected to be concluded in December 2017. 25. The JERP expanded significantly during the CPS period and in FY16 evolved into a RAS program. This was prompted partly by increased client demand for policy advice and TA during the World Bank Group’s response to the macroeconomic crisis and partly by the new Kazakhstan-World Bank Group Partnership Framework Arrangement (PFA) signed in May 2014 (see paragraph 27 below). Compared to the FY12–13 US$4.4 million annual JERP, the FY14–16 JERP/RAS program increased to an annual average of US$6.5 million, almost entirely financed 9 by Kazakhstan. JERP activities through FY14–15 were organized along the CPS’ three areas of engagement. Starting from FY15–16 the PFA/RAS program is organized according to seven thematic areas stipulated in the PFA, namely: (a) attracting investment and developing PPPs; (b) environmentally sustainable development; (c) private sector, SMEs, business climate, and regional development; (d) implementation support for institutional reforms; (e) developing job skills for the labor market; (f) regional cooperation; and (g) financial sector development. The impact of JERP activities on government policies and strategies are noted in paragraphs 29–33 below. 26. The International Finance Corporation (IFC) has committed US$276 million in 26 investments in finance and microfinance (including local currency financing), manufacturing, agribusiness, and transport during the CPS period to date. These commitments include trade finance guarantees totaling US$87 million provided to two financial institutions. Overall, IFC’s outstanding portfolio amounts to US$110 million including 14 investments in the financial, manufacturing, real estate, transport, and agribusiness sectors. IFC advisory programs focus on (a) building capacity of financial intermediaries, in particular in microfinance with a focus on rural areas; (b) enhancing the investment climate and tax administration; (c) improving corporate governance in local companies; (d) providing advice on renewable energy and energy efficiency to open up new markets, by removing regulatory barriers and providing targeted assistance to first-mover companies; (e) assisting food companies in implementing food safety practices, developing local capacity to promote suppliers’ food safety standards, and raising awareness of agribusiness standards; and (f) developing PPP projects, currently in the transport sector. Partnerships and Leveraging 27. The main significant development with regard to partnerships and leveraging was the signing on May 1, 2014 of a PFA with the Government. The Government also entered into similar PFAs with three other IFIs active in the country (Asian Development Bank [ADB], European Bank for Reconstruction and Development [EBRD], and Islamic Development Bank [IsDB]). Anchored in the CPS and valid through December 31, 2017, the PFA’s stated goal is ‘. . . to facilitate a more diversified economy with improved competitiveness . . .’ by (a) attracting investments into non-extractive sectors; (b) developing private entrepreneurship and innovation; (c) fostering the growth of SMEs; (d) promoting human capital and institutional development; and (e) improving access to and the quality of public services, as well as sustainable regional development. To this end, the PFA coordinates and oversees implementation of several nationwide programs for which the authorities have allocated KZT500 billion and plan to borrow up to US$2 billion from the World Bank during the three years from FY15 to FY17. The PFA provides for a high-level Coordination Council comprising senior government and IFI, including World Bank Group representatives, which meets bimonthly to review implementation of PFA programs and to ensure prompt attention to ongoing or emerging issues. This Government-led initiative has enabled closer interagency coordination, ensured complementarity between World Bank Group interventions and those of other IFIs, and thus leveraged their respective contributions to and impact on the country’s development. 28. The portfolio is aligned with the Strategic Framework for Mainstreaming Citizen Engagement in World Bank operations, with 100 percent compliance for citizen-oriented 10 design and 67–100 percent for citizen engagement (CE) outcomes/processes during FY14– 16. Several projects incorporated good practice frameworks for CE, including Education Modernization, Social Health Insurance, and Climate Change and Mitigation for the Aral Sea Basin. Each includes a national CE platform promoting disclosure, awareness building, dialogue and accountability mechanisms to engage civil society, as well as more direct CE in community- level planning and decision making, representing some of the most significant progress in Central Asia. Meanwhile, the Government has taken measures to inform the public about its reform agenda, including the creation of a new Ministry of Information and Communications to improve policy outreach. Nevertheless, the operating environment for independent civil society organizations (CSOs) and for issues of inclusion, especially of vulnerable groups, remains a challenge. Recognizing the need to focus on the quality of CE to ensure and enhance project impact, an assessment of beneficiary feedback was recently completed and a CE country road map developed to articulate objectives, clarify priority areas, define responsibilities, and specify steps to meet country targets. Further detail about CE is provided in Annex 7. Progress toward Achieving CPS Objectives 29. Progress toward achieving the CPS’ intended outcomes is satisfactory, with seven already completed and six on track for completion by end-FY17 out of 198. Seven objectives were achieved in the reporting period. Four of these seven objectives were measurable physical targets of respective projects. On the other hand, six outcomes, or one-third, are currently off- track, though one is simply the consequence of a proposed operation that did not materialize and two were affected by the delays in effectiveness of respective operations. In summary, three outcomes need to be revised and four dropped. Annex 3 records the status of all intended CPS outcomes as of June 30, 2016. Meanwhile, the highlights of progress in each of the areas of engagement are summarized below. 30. Area of Engagement 1—improving competitiveness and fostering job creation. CPS activities in this area are aligned with four country development goals, namely: achieving competitiveness through macro-stability and international integration; bolstering human capital; boosting employment in agriculture; and developing infrastructure connectivity to reduce economic distance. The World Bank Group lending operations and JERP/RAS/advisory products are designed, among others, to help achieve nine CPS outcomes. Three outcomes were achieved: technology commercialization and innovation; a 50 percent reduction in the ratio of NPLs to total loans; and a 5 per cent increase in electricity transmission capacity in the south and east of the country. Four outcomes are on track: prudent management of oil revenues (with government net financial worth above its 2012 level of 20 percent of GDP by 2017); improved regulatory environment (as measured by the country’s Doing Business rating, up to 41 in 2016, and its Business Environment and Enterprise Performance Survey (BEEPS) target for a reduction in the share of firms citing business licensing and permits as a major constraint down from 25.2 percent in 2009 to 4.7 percent in 2013); building skills for employment (as measured by the share of technical vocational education programs revised in line with new competency standards by at least 20 percent by 2017); and building transport connectivity and reducing costs (as measured by the 66 percent reduction in crash fatalities in the South Kazakhstan and Kyzylorda 8 The original 17 outcomes were updated to 19 to reflect specific outcomes for two operations (Ust Kamenogorsk Environmental Remediation and Energy Efficiency) included in the CPS Results Framework as shown in Annex 2. 11 regions and the 72 percent reduction in road-user costs as of December 2015). Two outcomes are off-track: the share of firms with female ownership and top managers, which fell during the period, and the application of new technologies in agriculture, as measured by the output of meat, due to a delay in the processing of a planned livestock project. 31. IFC has been making the planned investments, and MIGA is exploring opportunities to support on-lending to priority sectors. As planned, IFC invested in rail transport, manufacturing, agribusiness, real estate, microfinance, and financial institutions including trade finance in particular those focused on SMEs. IFC is also advising companies on corporate governance and food safety standards and financial institutions on building their capacity to increase their SMEs portfolio. Moreover, IFC is advising the Government on implementation of a PPP project for the Big Almaty Ring Motor Road, tax transparency, and regulatory reform. Owing to the difficulty in assessing the impact of Bank interventions, the gender-related outcome has been dropped from the CPS. MIGA, jointly with the CMU, is exploring opportunities of providing non-honoring of financial obligations coverage in support of financial sector SOEs for on-lending to priority sectors and projects. MIGA is also exploring opportunities in respect of public and private infrastructure projects and renewable energy. 32. Area of Engagement 2—strengthening governance and improving the efficiency of public services delivery. CPS activities in this area covered six outcomes and focused on two country development goals: i) improving public financial management and combatting corruption; and ii) raising the efficiency of essential public services. These activities included two CPS outcomes that are already achieved: the design and piloting of conditional cash transfer programs and enhanced statistical capacity. Of the four remaining outcomes, as of mid- 2016, two remain on track: relating to the number of physical inspections of import declarations by customs, and e-procurement of public goods and services. Two outcomes were off-track: one relating to strengthening of budgetary and accounting institutions, as measured by the introduction of targeted reviews of public expenditure, and the other to strategic health reforms, as measured by the population's out-of-pocket health expenditures. Both outcomes are nonetheless retained for the balance of the CPS. 33. Area of Engagement 3—ensuring development is environmentally sustainable. This area of engagement supports the long-term country development goal to combat climate change, with two broad-based outcomes: safeguarding the environment and raising energy efficiency. Knowledge products for the former included designing benchmark pilots to measure and reduce the environmental impact and energy intensity of selected industries. Ust-Kamenogorsk Environmental Remediation Project (a Bank loan, approved during the last CPS) completed the remediation of five contaminated industrial sites and established a groundwater quality monitoring system leading to a reduction in heavy metal pollution―one of the CPS outcomes achieved. A second outcome achieved under the Forest Protection and Reforestation Project was the replanting of 46,000 ha in the Irtysh Pine Forest, the covering of 61,000 ha of the dry Aral seabed with vegetation, and improved fire management of 650,000 ha of forest. Meanwhile, ongoing TA through the PMR supports implementation of Kazakhstan’s Emissions Trading Scheme and strategic planning around its intended Nationally Determined Contribution (iNDC) declared in the Paris climate change agreement. The third intended outcome in this area―rehabilitation of water supply systems in 113,000 ha covering four southern oblasts, bringing water distribution to levels demanded by farmers―remains off-track, due to the 12 delayed effectiveness of the 2nd Irrigation and Drainage Project; and the fourth outcome―reduction in comparative energy consumption in targeted public and residential sectors by at least 10 percent―is similarly off-track, due to the delayed effectiveness of the Energy Efficiency Project. IV. EMERGING LESSONS Lessons from Program and Portfolio Implementation and Performance 34. A recent Independent Evaluation Group (IEG) country program evaluation (CPE)9 reviewed the World Bank’s experience in Kazakhstan during FY04–14, including the first three years (FY12–14) of this CPS. It recommended, among others, that the Bank should (a) strengthen the enabling environment for its policy advice by linking key JERP outputs to specific, large-scale investments; (b) employ monitoring and evaluation tools to track the effectiveness of the program, the JERP in particular; (c) disclose publicly its main policy recommendations to broaden general understanding of the policies it promotes and strengthen reform ownership within the Government and civil society; (d) engage local partners more proactively, making their participation an integral part and good practice feature of joint preparation of agreed analytical products; (e) consider reintroducing standard pieces of country diagnostics, such as public expenditure reviews and poverty assessments; and (f) be more selective and strategic in efforts to promote economic diversification as well as in its own sectoral engagement, based on its comparative advantage and the depth of dialogue and strategic convergence with the Government’s programs. 35. With the JERP having evolved since FY15–16 into a wholly client-funded RAS program, some of these recommendations may be difficult to carry out in full. For example, the World Bank can encourage but not require that its policy recommendations be disclosed publicly in some but not all circumstances. In fact, experience has shown that there is value in its ability to provide candid advice on a confidential basis. Likewise, while there are examples of knowledge products being linked to subsequent World Bank-financed investments—the proposed Social Health Insurance Project being the most recent—the creation of such links needs to be client-driven. The authorities are also interested in the World Bank Group’s global advice and experience to enhance the involvement of local partners. Nonetheless, the CPE’s recommendations will inform the CLR and help frame the preparation of the upcoming SCD and the next CPF. 36. Meanwhile, as noted earlier, the main lesson emerging from the last CPPR and the recent update remains relevant—that government and Bank processes and procedures at all stages of the project cycle, in particular upstream, need to be better aligned. Apart from the implementation of the CPPR action plan (see Box 2), greater coordination with other IFIs will be pursued to resolve systemic cross-cutting issues affecting the implementation of the program (for example, preparation by Government of additional feasibility studies and detailed designs). The same general lesson also applies to knowledge activities, and RAS program in particular. For example, arrangements for shaping the RAS agenda a priori, including linkages to Kazakhstan’s macroeconomic and structural reform challenges, need to be improved; and procedures for 9 Kazakhstan: Country Program Evaluation (CPE), FY04–14, Overview, pp xx–xxii. 13 approving RAS budgets, terms of reference need to be simplified and speeded up. Going forward, greater selectivity, that is, fewer but larger, more comprehensive activities with longer multiyear engagements may be a more appropriate RAS program strategy that would amplify its potential impact. The World Bank will regularly follow up on the impact of its policy recommendations on actual policy changes, including through the analysis of standard satisfaction survey results of the RAS recipients. This issue will be explored in greater depth during the upcoming CLR as background for the SCD and next CPF. Finally, the main lessons cited in the ICRs for seven operations that have closed since FY1310 are project- and/or sector- specific, with no particular systemic relevance to the overall portfolio or ongoing CPS implementation. V. ADJUSTMENTS TO PROGRAM 37. Overall, World Bank Group activities in Kazakhstan enjoy strong government ownership, exemplified, among others, by the authorities’ request for significantly increased analytical and lending support following the 2014 shocks to the economy—and illustrated most recently by the first of two planned DPLs approved last November.11 The DPL series responds to the Government’s request for financing, underpinned by a strong set of policy measures that are expected to support the World Bank’s twin goals of ending extreme poverty and boosting shared prosperity. It aims to strengthen the sustainability of the macroeconomic framework while protecting the vulnerable, which would support the goal of poverty reduction. Policies to enhance the competitiveness of the non-oil economy would support job creation, thus boosting shared prosperity and growth of the middle class. The frequency, level, and quality of periodic policy advisory ‘brainstorming’ sessions—over 20 since 2003 and all co-chaired by the prime minister—and their contribution to the Government’s structural reform agenda are also evidence of the authorities’ commitment to the World Bank Group relationship, which will mark 25 years in 2017. 38. Against this background, the program’s three main areas of engagement remain highly relevant and thus no change in content is required. On the other hand, two significant adjustments to the choice and mix of instruments became necessary to enable the World Bank to respond appropriately to the country’s significantly changed macroeconomic stance and outlook. The first was the transition from reliance on knowledge products as the main instrument in FY12–13 toward a more balanced mix of analytics, lending, and TA that characterized Bank activities in FY14–16, and is planned for FY17. The second is the large increase in planned World Bank lending—from the US$2 billion over the six years (FY12–17) originally envisaged to the US$4.2 billion now anticipated. Large investments in the transport sector reflects the fact that the country is vast and landlocked with natural resources unevenly distributed. The investments in the transport sector have also a strong regional dimension, contributing to improved regional connectivity in Central Asia. In addition to transport corridor development, the World Bank is well positioned to support the sustainability of road maintenance and national road safety policies. At the same time, through the ongoing and planned operations, the World 10 Agricultural Competitiveness, 2nd Agricultural Post-Privatization, North-South Electricity Transmission, Forest Protection and Reforestation, Nura River Clean-Up, Moinak Electricity Transmission, and Alma Electricity Transmission. 11 Report No. 99451-KZ: First Macroeconomic Management and Competitiveness Programmatic Development Policy Loan, October 9, 2015. 14 Bank Group is aiming to deliver on job creation, SME development, connectivity, and regional development. Finally, as mentioned before, the JERP has evolved into a RAS program. Annex 4 lists the JERP/RAS activities delivered and planned for FY17 and Annex 5 summarizes Bank commitments from FY12–16 totaling about US$3.5 billion as well as proposed lending during FY17 totaling about US$0.7 billion. 39. Several objectives and indicators (outputs and outcomes) have been revised or updated to reflect implementation experience and changed circumstances. These are reflected in the updated CPS Results Matrix (Annex 1) and a matrix of changes to the original CPS Results Matrix (Annex 2). These revisions or updates are self-explanatory and remain entirely consistent with the CPS framework. VI. RISKS TO PROGRAM 40. Two of three risks identified in the original CPS—the external environment and macroeconomic management—materialized, albeit not exactly as anticipated. The euro zone debt crisis and a slow upturn in global growth and trade were seen as potential risks to Kazakhstan’s economy in the CPS program in mid-2012. However, the risks manifested themselves in the sharp drop in international oil prices two years later, exacerbated by the recession in Russia and lower growth in China. The large oil price shock necessitated major adjustments in fiscal and subsequently in monetary and exchange rate policies. As anticipated in the CPS, this adverse external shock led to a US$1 billion DPL, the first of two planned operations in a programmatic series. Given the uncertainties surrounding Kazakhstan’s short- and medium-term outlook—low oil prices and no significant improvement in external conditions—the macroeconomic risk for the remaining of the CPS period is rated as Substantial. In these circumstances, World Bank Group advisory and lending support to help mitigate this risk is likely to extend through FY17 at least. 41. Though partly foreseen in the original CPS, institutional capacity for implementation and sustainability is rated Substantial for the remaining of the CPS period, as it has emerged as a potentially serious risk following the oil price shock. This risk has two dimensions, both strongly influenced by political will. The first one is related to the timely completion of a complex and multisectoral reform and investment climate agenda, in support of diversification, the privatization of SOEs, and revisions to the regulatory framework. It also relates to an effective coordination of macroeconomic policies and structural reforms affecting the business environment, quality of growth, and job creation. The second one is related more narrowly to the performance of the World Bank portfolio, which continues to experience significant delays and slow disbursements, especially in operations approved since FY13. It is imperative that line ministries assign full-time staff responsible for project implementation and project management related indicators, which are included into their performance targets. Capacity building through the RAS may help ease some of the risks to reform implementation, as will the Government’s resolve—motivated by the weakened macroeconomic outlook—to remove structural obstacles to accelerated development. As for the portfolio, the action plan agreed during the recent CPPR is designed to mitigate, if not fully resolve by end-FY17, the long-standing systemic issues impeding the timely signing, effectiveness, and initial implementation of loans. Both types of risk will receive greater attention from both the Government and the World Bank through FY17 and beyond. 15 42. Notwithstanding these two substantial risks, the overall risk to the program—taking into account the low or moderate ratings for remaining categories—is rated as Moderate for the balance of the period—as reflected in the Systematic Operations Risk-Rating Tool (SORT) below. Table 2: Systematic Operations Risk-Rating Tool Risk Category Rating (H, S, M or L) Political and governance Moderate Macroeconomic Substantial Sector strategies and policies Moderate Technical design of project or program Moderate Institutional capacity for implementation and sustainability Substantial Fiduciary Moderate Environment and social Low Stakeholders Moderate Overall Moderate 16 ANNEX 1: Kazakhstan - FY12–17 Country Partnership Strategy Updated Results Matrix Kazakhstan Development Strategy Outcomes supported CPS Outcomes Main Instruments by CPS Strengthening fiscal discipline  Prudent management of oil revenue maintained, with JERP/RAS: Fiscal Policy for Growth; Improvement of and trade openness/integration government net financial worth (as measured by Public Debt Management, including Mechanisms for difference between stock of National Fund of the Monitoring SOE Debt; Improvement of Competitiveness Republic of Kazakhstan (NFRK) assets and sovereign through Reduction of Trade Barriers debt) above its 2012 level of 20% of GDP by 2017. Lending: DPL Partners: International Monetary Fund (IMF), European Commission (EC), U.S. Agency for International Development (USAID) Expanding non-oil sector  Improved regulatory environment, as measured by JERP/RAS: Enhancement of Business Environment; exports and employment Doing Business ranking (up from 46 in 2011 to 35 by Enhancing Productivity and Competitiveness through 2017). Enterprise Modernization Support Mechanisms;  Technology Commercialization Office (TCO) Corporate Financial Reporting established, awarding at least 10 small technology Lending: Technology Commercialization commercialization grants (pre-commercialization, joint IFC: Real sector investments (manufacturing, agribusiness, research with industry, international patenting, industrial internship for scientists) and enabling at least and services) 15 groups of scientists to perform high-quality Partners: USAID, ADB, EBRD research.  IFC invested in manufacturing (paper packaging, cement), agribusiness (food and beverages, agriculture commodities), and real estate.  IFC provided advisory services on corporate governance to Government and over 100 companies and conducted studies on tax transparency and regulatory reform. Reinvigorating financial sector  Ratio of NPLs to total loans (32.6% in 2012) at least JERP/RAS: Improvement of insolvency system halved by 2017 and well provisioned. IFC: Financial sector investments; trade finance lines and  IFC invested in financial institutions, including credit lines for SMEs microfinance and universal banking, also provided trade Partner: IMF guarantees. Sector portfolio serving 15,200 17 Kazakhstan Development Strategy Outcomes supported CPS Outcomes Main Instruments by CPS microfinance and 10,000 SME clients.  IFC providing advisory services to microfinance institution to improve its lending operations, serving more clients in rural area and thus supporting rural development. Building skills for employment  Share of technical vocational education programs JERP/RAS: Education System Analysis toward Improving revised in line with new (2013) competency standards Quality; Post-Graduate Education Development by at least 20% by 2017—better equipping graduates Lending: Technical and Vocational Education with skills demanded in labor market. Modernization; Youth Corps (Swiss Trust Fund); Education System Modernization Partners: EC, German Agency for International Cooperation (Deutsche Gesellschaft für Internationale Zusammenarbeit; GIZ) Strengthening knowledge for  New applied technologies in farming (for example, JERP/RAS: Strengthening Agricultural Strategy and sustained growth in agriculture conservation agriculture, new methods of veterinary Livestock Policy diseases testing) result in increased crop/fodder output, Lending: Irrigation and Drainage II supporting 50% increase in meat production (0.84 IFC Investments (INV): Lending to agribusiness million tons in 2010) by 2017. companies (food processing, food retail)  IFC invested in agribusiness (food and beverages, IFC Advisory Service (AS): Food Safety Advisory, agriculture commodities). Resource Use Efficiency  IFC Food Safety Program focuses on (a) assisting one food company in implementing food safety practices; Partners: GIZ (b) stimulating development of local institutional capacity for promotion and implementation of suppliers’ food safety standards; and (c) promoting sectorwide demand by raising awareness about agribusiness standards and developing client pipeline.  IFC providing advisory services on energy efficiency at two levels as explained in Area of Engagement 3, Outcome 13 (Raising Energy Efficiency). Improving energy transmission  Kazakhstan Electricity Grid Operating Company’s Lending: Moinak Electricity Transmission; Alma to poor areas (KEGOC) transmission capacity increased by 5% Electricity Transmission; North-South Electricity between 2012 (34,000 MVA) and 2017 to alleviate Transmission existing and projected power shortages in South and Partners: EBRD, USAID East Kazakhstan. 18 Kazakhstan Development Strategy Outcomes supported CPS Outcomes Main Instruments by CPS Building transport connectivity  Increased transport efficiency through reduction in JERP/RAS: Rail Trade Logistics Study and lowering costs road-user costs and rate of road crash fatalities along Lending: South-West Roads and East-West Roads 1,062 km section of Western Europe-Western China IFC INV: Private infrastructure projects (WE-WC) Road Corridor by at least 10% by 2017 (in IFC AS: PPP Transaction Advisory Project 2007: road users’ cost was US$0.26 per vehicle-km Partners: ADB, EBRD and road crash fatalities were 11/100 million vehicle- km).  IFC invested in a rail leasing company.  IFC advises Government on structure and implementation of international tender for Big Almaty Ring Road (BAKAD). Improving governance  Physical inspections of import declarations by customs JERP/RAS: Civil Service Reform; Improvement of reduced from 70% in 2007 to 20% by 2017; and Financial Monitoring System (Anti-money Laundering and average customs processing time at border posts (24 Combating Financing of Terrorists [AML/CTF]) hours in 2010) reduced by 75% by 2017 as evidenced Lending: Customs Development; Tax Administration from client surveys. Reform Partners: EC, UNDP, USAID, GIZ Strengthening budget and  Increase in e-procurement transactions (25,000 in JERP/RAS: Improved Approach to Results-Oriented accounting institutions 2012) by 20% by 2017, and efficiency of e- Budgeting; Improvement in Intergovernmental Fiscal procurement system enhanced by introduction by 2014 Relations; Development of e-Procurement System; of electronic reverse auction system. Expenditure Efficiency Reviews  Quality and efficiency of public spending improved Lending: Statistical Capacity Building; Capacity Building through introduction of targeted reviews of selected for Public Sector Accounting Reform areas on rolling basis, with at least four reviews completed during 2013–16. Institutional Development Fund (IDF) Grants: Public  International standard user satisfaction survey on Sector Audit Capacity Building; quality and reliability of statistical data introduced in Building Capacity in Procurement Audit Agency 2012 with 80% satisfaction rates by 2017. Partners: EC, UNDP, USAID, GIZ Reforming social protection  Conditional cash transfers piloted in at least two JERP/RAS: Improvement of Social Safety Net System; system regions. Strengthening Pension System Sharpening strategic approach  By 2016, 10% reduction in population's out-of-pocket Lending: Health Sector Technology Transfer and to health reforms health expenditures as share of total health Institutional Reform; Social Insurance expenditures (32.9% in 2010). Partners: World Health Organization (WHO), USAID, United Nations Children’s Fund (UNICEF), EC 19 Kazakhstan Development Strategy Outcomes supported CPS Outcomes Main Instruments by CPS Safeguarding the environment  Remediation of the high-priority industrial waste JERP/RAS: (a) Improving Industrial Competitiveness dumps polluting the air and groundwater in Ust- through Greener Production; (b) Towards Cleaner Industry Kamenogorsk and establishment of groundwater and Improved Air Quality Monitoring in Kazakhstan; (c) monitoring system. Towards a Strategy for Industrial Hazardous Waste  Reforestation of 44,000 ha completed; and damage Management in Kazakhstan; (d) Legal, Institutional, from forest fire in Irtysh Pine Forest reduced by 50% Financial Arrangements and Practices of the Solid Waste by 2017 (9 ha per case of fire on average during 2009– Management Sector in Kazakhstan; and (e) Review and 11). Analysis of Norms and Standards Applicable to Industrial  Water supply systems rehabilitated in 113,000 ha Hazardous Wastes in Kazakhstan covering four southern oblasts, bringing water Lending: Forest Protection and Reforestation; Ust- distribution by service providers to levels demanded by Kamenogorsk Environmental Remediation; Second farmers. Irrigation and Drainage Project Global Environment Facility (GEF): Forest Protection and Reforestation; Persistent Organic Pollutants Management PMR TA: Tranche I: (a) Identifying Barriers in Emissions Trading Scheme of Kazakhstan and Development of Appropriate Recommendations on How to Address and Mitigate them; (b) Adaptation of Benchmarks for Allowances Allocation for Specific Sectors in Kazakhstan; and (c) Development of Policy Options for Mid- and Long-term Emissions Pathways and Role of Carbon Pricing (iNDC support) PMR TA: Tranche II: (a) Stakeholder Consultation Process on Developed Benchmarks; (b) Development of E- Reporting and Supporting Institutional and Legal Frameworks; and (c) Support to Enhancement of Transaction Registry Partners: EC, GIZ, UNDP, GEF, PMR Raising energy efficiency  Cumulative energy savings in targeted public facilities Lending: Energy Efficiency (Swiss Trust Fund) will increase from 0 to 825 GWh by 2017. IFC AS: Resource Use Efficiency  IFC providing advisory services on renewable energy Partners: EBRD and energy efficiency at two levels: (a) policy level, to open up new markets by removing legal and regulatory barriers to private investments and (b) company level, to provide targeted assistance to first-mover private 20 Kazakhstan Development Strategy Outcomes supported CPS Outcomes Main Instruments by CPS sector and utility efficiency projects. ANNEX 2: Kazakhstan - FY12–17 Country Partnership Strategy Changes to Original Results Matrix Kazakhstan Development Strategy Outcomes supported Outcomes in original results matrix Outcomes in revised results matrix by CPS Strengthening fiscal discipline  Prudent management of oil revenue is maintained, with  No change and trade openness/integration government net financial worth (as measured by difference between stock of NFRK assets and sovereign debt) above its 2012 level of 20% of GDP by 2017 Expanding non-oil sector  Improved regulatory environment as measured by  Doing Business ranking target reduced from 30 to 35 by exports and employment Doing Business ranking—from 46 in 2011 to 30 by 2017. 2017).  Share of firms with female participation in ownership  Dropped since there are difficulties in the assessment of up from 34.3% in 2009 to above 40% by 2017 and with the Bank interventions’ impact on the results. female top managers up from 24.7% in 2009 to above 30% by 2017.  TCO established, awarding at least 10 small  No change technology commercialization grants (pre- commercialization, joint research with industry, international patenting, industrial internship for scientists) and enabling at least 15 groups of scientists to perform high-quality research. Reinvigorating financial sector  Ratio of NPLs to total loans (32.6% in 2012) halved by  No change. Ratio maintained to monitor loan 2017, and remain well provisioned provisioning, which may be inadequate.  IFC efforts did not materialize in the following areas:  Dropped (a) development of private distressed assets recovery, owing to the Government’s Bank TuranAlem (BTA) special purpose vehicle intervention; (b) investments in asset management, owing to lack of government interest. 21 Kazakhstan Development Strategy Outcomes supported Outcomes in original results matrix Outcomes in revised results matrix by CPS Building skills for employment  Share of technical vocational education programs  No change revised in accordance with new competency standards by at least 20% by 2017. Strengthening knowledge for  New applied technologies in farming result in  No change sustained growth in agriculture increased crop/fodder output, supporting 50% increase in meat production (0.84 million/tons in 2010) by 2017 Improving energy transmission  KEGOC transmission capacity increased from 34,000  No change to poor areas MVA by 5% between 2012 and 2017 Building transport connectivity  Increased transport efficiency through reduction in  No change and lowering costs road-user costs and rate of road crash fatalities along same 1,062 km section of the WE-WC Road Corridor by at least 10%, respectively, by 2013 (road users cost is US$0.26 per vehicle-km in 2007 and road crash fatalities are 11 per 100 million vehicle-km in 2007).  Due to lack of government interest, IFC efforts did not  Dropped materialize in the following areas: (a) direct investments with subnational sponsors and (b) investments in infrastructure for oil and gas sector. Improving governance  Physical inspections of import declarations reduced  No change from 70% in 2007 to 20% by 2017; and average customs processing time at border posts (24 hours in 2010) reduced by 75% by 2017 Strengthening budget and  E-procurement transactions (25,000 in 2012) increased  No change accounting institutions by 20% by 2017, and efficiency of e-procurement enhanced by introduction of electronic reverse auction system by 2014  Quality and efficiency of public spending improved  No change through introduction of targeted reviews of selected areas on rolling basis, with at least first four reviews completed during 2013–16.  International standard user satisfaction survey on quality and reliability of statistical data introduced in  No change 2012 with satisfaction rates reaching 80% by 2017. 22 Kazakhstan Development Strategy Outcomes supported Outcomes in original results matrix Outcomes in revised results matrix by CPS Reforming social protection  Conditional cash transfers are piloted in at least two  Gender parity criteria dropped. Gender parity index was system regions of the country. not monitored since Orleu (pilot) program is focused on assistance to families in need and was not targeting women. Sharpening strategic approach  Population's out-of-pocket health payments in total  No change to health reforms health expenditures (32.9% in 2010) declined by 10% by 2016. Safeguarding the environment  Remediation of the high-priority industrial waste dumps polluting the air and groundwater in Ust-Kamenogorsk and establishment of groundwater monitoring system (added to align with the originally included outputs for Ust-Kamenogorsk Environmental Remediation Project).  Reforestation works on 44,000 ha completed; and  No change damage (9 ha per 1 case of fire on average during 2009-11) from forest fire in Irtysh Pine Forest reduced by 50% by 2017.  Water supply systems rehabilitated in 113,000 ha  No change covering four southern oblasts, bringing water distribution by service providers to levels demanded by farmers. Raising energy efficiency  Comparative energy consumption in targeted public  Cumulative energy savings in targeted public facilities and residential sectors reduced by at least 10 percent will increase from 0 to 825 GWh by 2017. Added to between 2012 and 2017. align with the originally included output.  IFC efforts did not materialize in the following areas:  Dropped (a) power generation projects, due to lack of government interest; (b) real sector investments and targeted credit lines to banks with focus on resource use efficiency and energy efficiency, due to lack of suitable partners; and (c) improving efficiency of utilities and investments in municipal waste management, due to lack of government interest. 23 ANNEX 3: Kazakhstan - FY12–17 Country Partnership Strategy Results Matrix Status as of June 30, 2016 Kazakhstan Development Strategy Outcomes Milestones and Outputs CPS Outcomes Progress Supported by CPS AREA OF ENGAGEMENT 1: IMPROVING COMPETITIVENESS AND FOSTERING JOB CREATION Country Development Goal: Achieve competitiveness gains through macro-stability and international integration Strengthening fiscal  Medium-term debt management  Prudent management of oil revenue  On track (based on revised baseline)— discipline and trade strategy based on cost-risk analysis maintained, with government net government net financial worth above its openness/integration adopted and broadened to include financial worth (measured by 2012 level of 15.5% of GDP by 2017— fiscal risks from SOE activities. difference between stock of NFRK currently projected at 19%.  National services-trade statistics assets and sovereign debt) above its aligned with Manual on Statistics 2012 level of 20% of GDP by 2017. in International Trade in Services (Organisation for Economic Co- operation and Development [OECD]).  Regulatory impact assessment for non-tariff measures adopted and conducted on regular basis. Expanding non-oil sector  New Law on Permits System  Improved regulatory environment as  On track—Doing Business rating up to 41 exports and employment adopted, setting framework for measured by Doing Business ranking in 2016. However, achieving 30 by 2017 risk-based, streamlined inspections (up from 46 in 2011 to below 30 in may be challenging, due to high global and technical regulations. 2017); and BEEPS share of firms citing competition, and 35 may be more realistic;  Institutional framework for business licensing and permits as major BEEPS target achieved—share of firms corporate financial reporting constraint down from 25.2% in 2009 to citing business licensing and permits as (CFR) strengthened, as measured below 15% by 2017. major constraint down from 25.2% in 2009 by improvement in A&A Report  Share of firms with female to 4.7% in 2013. on Observance of Standards and participation in ownership increased  Off track—share of firms with female Codes (ROSC) indicators, showing from 34.3% in 2009 to above 40% by ownership and top managers fell to 28.3% higher degree of (a) alignment of 2017 and with female top managers and 18.9%, respectively. new CFR legislation with increased from 24.7 % in 2009 to above international standards; (b) 24 Kazakhstan Development Strategy Outcomes Milestones and Outputs CPS Outcomes Progress Supported by CPS compliance of financial 30% by 2017.  Completed. TCO merged with Science information of corporate entities  TCO established, awarding at least 10 Fund and is expected to continue grant with international standards small technology commercialization programs of Ministry of Education (International Financial Reporting grants (pre-commercialization, joint adapting TCO experience and involved in Standards and Standards on Audit). research with industry, international implementation of Fostering Productive patenting, industrial internship for Innovations Project by providing technical scientists) and enabling at least 15 inputs. In addition, the Association of groups of scientists to perform high- Technology Commercialization is quality research. established and fully functional, ensuring sustainability of project results.  IFC invested in manufacturing (paper packaging, cement), agribusiness (food and beverages, agriculture commodities), and real estate.  IFC provided advisory services on corporate governance to Government and over 100 companies and conducted studies on tax transparency and regulatory reform. Reinvigorating the financial  New Law on Insolvency  Ratio of NPLs to total loans (32.6% in  Completed—ratio of NPLs fell to 8.3% sector introduced and institutional 2012) at least halved by 2017 and well by early 2016. However, this was due capacity of insolvency and provisioned. mainly to assumption by financial rehabilitation system  IFC invested in financial institutions, KazKommerzbank of BTA’s NPLs; loan improved, facilitating faster including microfinance and universal provisioning declined to only 5.6% and resolution of NPLs. banking. It also provided trade remains a concern. guarantees. Sector portfolio is serving 15,200 microfinance and 10,000 SME clients.  IFC provided advisory services to microfinance institution on corporate governance, branch management, and loan officer development―to improve its lending operations and serve more rural and thus support rural development. 25 Kazakhstan Development Strategy Outcomes Milestones and Outputs CPS Outcomes Progress Supported by CPS Country Development Goal: Bolster human capital Building skills for  Postgraduate education standards  Share of technical vocational education  On track—authorities currently plan to employment updated to align better with programs revised in line with new revise 22% of programs by 2018 and Bologna Process. (2013) competency standards by at 58% by 2020.  Innovative program of service least 20% by 2017—better equipping learning and life skills training graduates with skills demanded in labor initiated in 2013, benefiting 5,000 market. Kazakhstani youth. Country Development Goal: Boost employment in agriculture Strengthening knowledge  Weather/area indexed insurance  New applied technologies in farming  Off track—meat production only 0.9 for sustained growth in system introduced on pilot basis to (for example, conservation agriculture, million tons in 2014 (compared to revised agriculture strengthen crop insurance regime. new methods of veterinary diseases 2017 outcome of 1.3 million tons), due to  Public spending on agricultural testing) result in increased crop/fodder delay in applying new technologies (and input subsidies reduced and public output, supporting 50% increase in processing of planned livestock World spending on alternative forms of meat production (0.84 million/tons in Bank project). agricultural support schemes such 2010) by 2017. as irrigation increased.  IFC invested in agribusiness (food and beverages, agriculture commodities).  IFC Food Safety Program focuses on (a) assisting food company to implement food safety practices; (b) stimulate development of local institutional capacity for promotion and implementation of suppliers’ food safety standards; and (c) promote sectorwide demand by raising awareness of agribusiness standards and developing client pipeline among industry and stakeholders.  IFC providing advisory services on energy efficiency at two levels as explained in Area of Engagement 3, Outcome 13 (Raising Energy Efficiency). 26 Kazakhstan Development Strategy Outcomes Milestones and Outputs CPS Outcomes Progress Supported by CPS Country Development Goal: Develop infrastructure connectivity to reduce economic distance Improving energy  KEGOC’s transmission capacity  Completed—as of end-2014 (KEGOC transmission to poor areas increased by 5% between 2012 (34,000 Annual Report 2014), KEGOC power MVA) and 2017 to alleviate existing transmission capacity was 36,245 MVA and projected power shortages in southern and eastern part of country. 27 Kazakhstan Development Strategy Outcomes Milestones and Outputs CPS Outcomes Progress Supported by CPS Building transport  Road users survey introduced to  Increased transport efficiency through  On track—as of December 2015, connectivity and lowering assess service satisfaction levels reduction in road-user costs and rate of government data shows 66% reduction in costs along 1,062 km section of WE-WC road crash fatalities along 1,062 km crash fatalities in Southern Kazakhstan and Road Corridor (between Shymkent section of WE-WC Road Corridor by at Kyzylorda regions and 72% reduction in and border of Kyzylorda/Aktobe least 10% by 2017 (in 2007: road users’ road-user costs. Oblast), with number of users cost was US$0.26 per vehicle-km and interviewed by Committee for road crash fatalities were 11/100 Roads increasing from zero in million vehicle-km). 2012 to 500 by 2017.  IFC invested in rail leasing company.  IFC advises Government to structure and implement an international tender for the BAKAD. AREA OF ENGAGEMENT 2: STRENGTHENING GOVERNANCE AND IMPROVING EFFICIENCY IN PUBLIC SERVICES DELIVERY Country Development Goal: Improve public financial management and fight corruption Improving governance  Civil service ethics/code of  Physical inspections of import  On track—physical inspections down to conduct provisions strengthened in declarations by customs reduced from 18% by 2014, compared to 70% in 2007; the Civil Service Law. 70% in 2007 to 20% by 2017; and and average customs processing time at  Law on Combating Legalization of average customs processing time at border posts down to 7 hours by 2014, Illegally Gained Income and border posts (24 hours in 2010) reduced compared to 24 hours in 2010, based on Financing of Terrorism amended in by 75% by 2017 as evidenced from client surveys. accordance with international client surveys. standards. Strengthening budget and  Links between ministry budgets  Increase in e-procurement transactions  On track—as of December 2015, all accounting institutions and medium-term strategic and (25,000 in 2012) by 20% by 2017, and public procurement undertaken through e- policy objectives of Government efficiency of e-procurement system procurement. Reverse auction system improved by introduction of non- enhanced by introduction by 2014 of functional since June 2014. Shopping and financial results indicators to electronic reverse auction system. NCB consistent with World Bank assess budget proposals and procurement guidelines. E-reverse auction monitor performance; rollout of system eligible for procurement of simple new system to subnational goods under Shopping. governments initiated.  Quality and efficiency of public  Off track—no reviews undertaken since  IPSAS adopted. spending improved through FY12, but one review tentatively planned 28 Kazakhstan Development Strategy Outcomes Milestones and Outputs CPS Outcomes Progress Supported by CPS  Audit system strengthened to introduction of targeted reviews of for FY17. perform financial and performance selected areas on rolling basis, with at audits in accordance with good least four reviews completed during practice norms. 2013–16.  Completed—2014 user satisfaction survey  International standard user satisfaction showed 95% satisfaction with statistical survey on quality and reliability of data. Ongoing 2016 survey will assess statistical data introduced in 2012 with whether this level of satisfaction has been 80% satisfaction rates by 2017. maintained. Country Development Goal: Raise efficiency in delivering critical public services Reforming social protection  Regulations governing mandatory  Conditional cash transfers piloted in at  Completed—Conditional cash transfers system defined contribution to pension least two regions; and, depending on piloted in three regions in 2013 and pilot fund are revised to improve need, gender parity targeted in stage continues. However, they did not sustainability of system. activation support services utilization. include gender parity data. Sharpening strategic  Food safety regulations and norms  By 2016, 10% reduction in population's  Off track—in 2014, population's out-of- approach to health reforms aligned with WTO requirements. out-of-pocket health expenditures as pocket health expenditures increased to  Interventions with proven success share of total health expenditures 45% of total health expenditures. to positively affect male life (32.9% in 2010). expectancy are piloted. AREA OF ENGAGEMENT 3: ENSURING DEVELOPMENT IS ENVIRONMENTALLY SUSTAINABLE Country Development Goal: Fight climate change with a cleaner environment Safeguarding the  Build-up of hazardous pollutants  Completed - Remediation of five environment from prioritized sources in Ust- industrial waste dump polluting the air and Kamenogorsk’s groundwater groundwater completed, with 26 ha of (outside industrial zone) stopped, highly contaminated land managed, and rehabilitation of including the PCB contaminated site; polychlorinated biphenyls (PCB) groundwater quality monitoring system contaminated sites underway. established; and levels of heavy metal  Cluster-based gas utilization pollution in the groundwater near the city approach introduced in Kyzylorda, drinking water well-field below leading to reduced gas flaring and international limits. reliable supply of processed gas for local household and industrial  Reforestation of 44,000 ha completed;  Completed—reforestation of 46,000 ha 29 Kazakhstan Development Strategy Outcomes Milestones and Outputs CPS Outcomes Progress Supported by CPS needs. and damage from forest fire in Irtysh completed and fire damage in Irtysh Pine Pine Forest reduced by 50% by 2017 (9 Forest reduced by 70%; 61,000 ha of the ha per case of fire on average during dry Aral seabed covered with vegetation; 2009–11). 650,000 ha of forest under improved fire management.  Water supply systems rehabilitated in  Off-track—owing to delay in 113,000 ha covering four southern effectiveness of the Second Irrigation and oblasts, bringing water distribution by Drainage Project. service providers to levels demanded by farmers. Raising energy efficiency  Comparative energy consumption  IFC providing advisory services on  Off track—owing, among others, to delay in targeted public and residential renewable energy and energy efficiency in effectiveness of the World Bank Energy sectors reduced by at least 10%. at two levels: (a) policy level, to open Efficiency Project. up new markets through removing legal and regulatory barriers to private investments; and (b) company level, to provide targeted assistance to first- mover private sector renewable energy and utility efficiency projects. 30 ANNEX 4A: Joint Economic Research Program (JERP) - Planned and Actual Deliveries, FY12–1312 (as of June 30, 2016, by Area of Engagement) CPS PLANS STATUS (as of 06/30/16)  Reducing vulnerability to external shocks Completed FY13  Improving competitiveness through lower trade barriers Completed—multiyear activities FY12–14  Improving conditions for doing business to increase competitiveness and Completed—multiyear activities FY12–14 Area 1: facilitate economic diversification Competitive-  Enhancing productivity and competitiveness Completed—two-year activities FY12–13 ness and Job  Improving the insolvency system  International Financial Reporting Standards (IFRS) application for SMEs Completed—multi-year activities FY12–16 Creation Completed FY12 [12] (Phase 2)  TA to strengthen PPP development Completed FY13  Education system analysis to improve quality Ongoing—multiyear activities FY12–17  Postgraduate education development Completed FY12  Strengthening agricultural strategy and livestock policy Completed FY12  Roundtable on global economic and social prospects Completed FY12  Improved approach to agricultural strategy, policy, and budget formulation Completed—two-year activities FY13–14  Improving approaches to results-based budgeting Completed—multiyear activities FY12–13 Area 2:  Intergovernmental relations and territorial development Completed FY13 Governance and  Enhancing state borrowing and public debt management Completed—multiyear activities FY12–14 Public Services  Modernizing social sphere Completed FY13 [10]  Strengthening pension system Completed FY12  TA to build capacity of Kazakhstan’s internal audit system Completed FY13  Developing public e-procurement system Completed FY13  Further improving financial monitoring system (AML/CFT) Completed—multiyear activities FY12–13  TA to civil service agency for civil service reform Completed—multiyear activities FY12–13  EITI Completed—multiyear activities FY12–14 Area 3:  Economic costs of pollution and potential for cleaner and greener industrial Completed—multiyear activities FY12–14 Environmentally production Sustainable Development 12 See Report No. 67876-KZ, March 30, 2012, Table 2 (page 19)—plans for FY12–13. 31 ANNEX 4B: Joint Economic Research Program (JERP) - Ongoing Activities, FY14–17 CPS PLANS STATUS (as of 06/30/16)  Identifying potential barriers to new and emerging industries Initiated and completed FY14  Implementation support for transparent selection, monitoring and evaluation of Initiated and completed FY15 innovation grants  Attracting investment through policy and institutional mechanisms for PPPs Initiated FY15, completed FY16  Investment promotion in high-value food supply chains and retailing Initiated FY13, completed FY14 Area 1:  Priorities for sustainable development of animal nutrition Initiated and completed FY14 Competitiveness  Improvement and further development of Kazakhstan logistical system Initiated and completed FY13 and Job  TA in mining sector (three annual tasks) Initiated and completed FY13–14, FY14-15 Creation  Improved policy for competition protection and regulation of natural monopolies Initiated and completed FY14  Development of economy-wide, sector-specific policy and institutional framework to Initiated FY15—ongoing FY17 [12] attract and retain investors  Services sector gap analysis and action plan for industrial development Initiated and completed FY15  Implementation of entrepreneurship regulation concept, including through analysis of Initiated FY15—ongoing FY17 Regulatory Impact Assessment  Establishment of policy and institutional road map for urban agglomerations Initiated FY15—ongoing FY17  Subnational Doing Business Initiated FY16—ongoing FY17  Social policy for growth Initiated FY13, completed FY14 Area 2:  Migration policy Initiated and completed FY14 Governance and  TA in selected tax areas Initiated FY14, completed FY15 Public Services  TA regarding integration of fiscal agencies Initiated and completed FY15 [12]  Improving performance orientation of budget management through streamlined Initiated FY15, completed FY16 strategic planning and budgeting  Improving legal framework for housing and communal services Initiated and completed FY15  Jobs—analysis of sector-specific barriers and opportunities Initiated and completed FY15  Strategy to support functioning of labor market institutions Initiated and completed FY15  Developing social health insurance system Initiated FY15, completed FY16  Improvement of social safety net system Initiated FY14—ongoing FY17  Analysis of current measures supporting agriculture and of alternative measures Initiated FY15, completed FY16 consistent with WTO  TA to strengthen financial sector stability Initiated FY15, completed FY16  Implementation support for reforms to strengthen public accountability and Initiated FY15, partly completed FY16 transparency Initiated FY16—ongoing FY17  Advisory support for the Revenue Code development Initiated and completed FY16  Advisory support for the new Budget Code development Initiated and completed FY15 32 CPS PLANS STATUS (as of 06/30/16)  Reforming housing and communal services—district heating Initiated FY15—ongoing FY17  Strengthening public sector internal audit Initiated and completed FY16  Review of international practices to improve the SOE structure Initiated and completed FY15 and FY16  TA in macroeconomics (annual tasks) Initiated and completed FY16  TA in drafting Kazakhstan 2025 Strategic Development Plan Initiated FY16—ongoing FY17  Analytical support to Digital Kazakhstan 2020 Program  Improving framework for efficient integrated solid waste management Initiated and completed FY15 Area 3:  Probabilistic disaster risk assessment and risk financing strategy Initiated FY14, completed FY15 Environmentally  Road map for strengthening water management for improved efficiency and security Initiated, completed FY15 Sustainable  TA/implementation support for modernizing and strengthening irrigation and drainage Initiated FY15, completed FY16 Development efficiency [6]  Developing renewable energy market, including through support to SMEs Initiated FY15, completed FY16 (jointly  National assessment of climate-change-related risks and formulation of mitigation with IFC) strategy Initiated and completed FY15 33 ANNEX 5: Planned Lending and Actual Deliveries, FY12–13 and FY14–17 CPS PLANS (at entry 03/30/12)13 STATUS (as of 06/30/16) 2012 East-West Roads 1,200.0 Approved 05/01/12 1,068.0 Energy Efficiency (Swiss Trust Fund) 20.0 Forwarded to FY13 0.0 Youth Corps (Swiss Trust Fund) 20.0 Forwarded to FY14 0.0 Hazardous and POPs Waste Management 34.0 Forwarded to FY18 0.0 Subtotal: 1,274.0 Subtotal: 1,068.0 2013 Energy Efficiency (Swiss Trust Fund) 0.0 Approved 05/22/13 21.8 2nd Irrigation and Drainage Improvement 105.0 Approved 06/27/13 102.9 Syr Darya Control and North Aral (Phase II) 106.0 Forwarded to FY18 0.0 Subtotal: 211.0 Subtotal: 124.7 CPS PLANS, FY14-17 STATUS (as of 06/30/16) 2014 Youth Corps (Swiss Trust Fund) 0.0 Approved 03/26/14 21.8 Electricity Transmission 0.0 Dropped 0.0 Justice Sector Institutional Strengthening 36.0 Approved 03/19/14 36.0 Public Sector Accounting Reform 0.2 Approved 06/12/14 0.2 Subtotal: 36.2 Subtotal: 58.0 2015 Fostering Productive Innovation 88.0 Approved 12/22/14 88.0 SME Competitiveness 40.0 Approved 03/02/15 40.0 Skills and Jobs 100.0 Approved 03/30/15 100.0 Subtotal: 228.0 Subtotal: 228.0 2016 Macroeconomic Management and Competitiveness DPL 1,000.0 Approved 11/03/15 1,000.0 Social Health Insurance 80.0 Approved 04/27/16 80.0 Center-West Regional Development Corridor 978.0 Approved 06/09/16 978.0 Subtotal: 2,058.0 Subtotal: 2,058.0 201714 Education System Modernization 80.0 Planned 2nd quarter 80.0 Climate Change and Mitigation 10.0 Planned 3rd quarter 10.0 Center-South Regional Development Corridor 645.0 Planned 2nd quarter 645.0 Subtotal: 735.0 Subtotal: 735.0 Total FY12–13: 1,485.0 Total FY12–13: 1,192.7 Total FY14–17: 3,057.2 Total FY14–17: 3,079.0 13 See Report No. 67876-KZ, March 30, 2012, Table 2 (page 19)—plans for FY12–13. 14 FY17 lending scenarios may be subject to change. 34 ANNEX 6: Kazakhstan - IFC Advisory and Investment Services CPS Areas of Engagement 1 2 3 IFC Advisory Services Central Asia Corporate Governance Project - Kazakhstan √ Tax Transparency and Industry-Specific Regulatory Reform Product √ Development in Central KZ_Microfinance Asia Transformation Advisory Services (MFTP) (Building √ microfinance capacity in rural areas) Agribusiness Standard Advisory Program in Europe and Central Asia √ Almaty Ring Road √ Central Asia and Caucasus Energy Infrastructure Program √ √ IFC’s Outstanding Investment Portfolio as of March 31, 2016 Global Industry Group Project Committed Balance Financial Institutions KMF Swap I 2,500,000 141,829 KMF Swap 1,000,000 280,000 Arnur_Swap#6 750,000 60,260 KMF 2,683,319 2,683,319 Arnur_Swap#5 187,226 184,143 Sberbank KZ 22,209,826 22,209,826 BCC Equity 7,792,273 7,792,273 Manufacturing, Agribusiness, Soufflet 2 MSK 8,895,377 8,895,377 and Services RG Brands 24,688,484 8,718,761 Jambyl Cement RI 2,242,436 2,242,436 Jambyl RI 1,018,466 1,018,466 Altyn-IMS IV 965,000 965,000 Jambyl Cement 22,603,950 22,603,950 Infrastructure and Natural ECT 32,927,816 32,927,816 Resources TOTAL 130,464,173 110,723,456 35 ANNEX 7: Kazakhstan - Citizen Engagement Overview 1. The context for effective CE in Kazakhstan is still emerging. Voice and accountability indicators are in the lowest quintile worldwide, showing little change since 2000. While they correlate with corruption indicators, they contrast sharply with gradual improvements in government effectiveness and the rule of law (World Governance Indicators 2015). Although less than 10 percent of the population are estimated to be active civil society participants, Kazakhstan, unlike some other Central Asian neighbors, allows western-funded NGOs mostly focused on social projects and technical reform to operate in the country. Consistent with this, actions to mainstream CE according to Bank corporate requirements have improved noticeably, especially in investment projects, and with government support in key sectors. This annex summarizes recent progress toward mainstreaming CE in the country portfolio as well as remaining challenges and the way forward. Country Portfolio 2. In FY16, CE was ramped up both in terms of compliance and intensity in projects moving toward appraisal. In FY14–16, 75 percent of projects included some form of public consultation and beneficiary feedback surveys and 62 percent provided for grievance redress mechanisms (GRMs) as well as stronger forms of engagement such as participatory/third-party monitoring. Table 7.1: Compliance with Corporate Requirements for CE at Appraisal % Compliance % Compliance Beneficiary Citizen-oriented Feedback Design Indicator Pre-FY14 50% 62% FY14 100% 100% FY15 75% 100% FY16 100% 100% Number of projects in portfolio currently 11 compliant/ 13 compliant/ compliant/not compliant 5 not compliant 3 not compliant 3. All projects approved in FY16 were compliant for both indicators, up from 50–62 percent in FY14, and there has been significant improvement in the types of engagement integrated into project design. Several included substantive CE platforms:  The Education Modernization Project includes a CE framework comprising both national- and local-level actions. At the national level, three mechanisms will feed into national action plans: (a) a public consultation forum, with awareness building campaigns and commitment to public feedback and disclosure, will be held annually to enable broad stakeholder engagement in key policy and reforms; (b) third-party monitoring will provide an independent mechanism for compiling and channeling feedback on a rolling basis; and (c) a GRM will be institutionalized in the Ministry of Education and Science and include awareness building and public annual reporting. At the local level, community planning and monitoring will be supported in schools to improve performance through feedback and dialogue with teachers and school management and support community awareness raising on the benefits of 36 education, rights, roles and the national strategy and targets to improve education. Each of these components includes CE indicators in the results framework.  In the Social Health Insurance Project, three areas of engagement have been designed to develop transparency and access to information, citizen, and civil society feedback on processes and services, as well as the multi-stakeholder dialogue that is needed to implement a challenging reform. First, a community monitoring mechanism aims to obtain direct feedback from health clinic and hospital patients concerning their experience in using these facilities. A complaints handling system is being reorganized to strengthen accountability, allowing issues such as staff misconduct, misuse of funds, abuse of power, sexual harassment, and other improper behavior to be communicated and thus addressed. The Ministry of Health and Social Development will organize a national multi-stakeholder review forum to disclose annual reports, ensure that community monitoring processes are complete, and that the annual GRM report is available. The forum will provide the ministry with the opportunity to provide open, candid information about the year’s activities and provide a platform for open stakeholder dialogue, questions, and feedback.  In the Climate Change Project, efforts to ensure the engagement of citizens in the planning and decision making of investments are supported by national-level activities to strengthen the Central Asia climate change network through an information and exchange platform, including targeted information campaigns for civil society, mechanisms for complaints and suggestions at various stages of project implementation, and annual third-party monitoring of program activities to check, inform, and disseminate lessons. 4. Nevertheless, challenges remain. The level of uptake of several CE instruments has been limited and more effort is needed to ensure efficacy and depth of engagement. The Central Asia GRM review indicated that the functionality and use of beneficiary feedback instruments, in particular the GRM, was limited. Of projects committing to include a GRM at appraisal, only half went on to fully or partially operationalize the mechanism for beneficiary feedback. As a result, in FY17, an action plan detailing remedial actions will help ensure that (a) projects are fully documenting complaints made and resolved through a broader set of channels; (b) high risk projects are supported and monitored to ensure a fully functioning GRM; and (c) where appropriate, in medium-risk projects, options for feedback are expanded. 5. Looking ahead, Kazakhstan has developed a country CE road map to cover the remainder of the CPS. Articulating country objectives, it specifies priority areas of focus, defines responsibilities, and sets out concrete steps and a time frame. It also includes country- level actions, sector/project-level actions, as well as country standards for reporting and monitoring. The matrix below summarizes the country CE road map, illustrating key elements and the targets proposed for the remainder of the CPS. 37 Table 2: Kazakhstan CE Road Map WBG Corporate Proposed Action/Target Requirement Deepen and clarify consultation process for CPF and DPLs. CPF By the end of the current CPS (FY17):  The World Bank will participate in public councils established in each ministry to enhance dialogue with civil society.  The scope and content of CE is described and agreed in the next CPF. Establishing CE in nationwide sector reforms:  Education. By FY19, CE systems that enhance voice and accountability are established in schools and at the national level Investment Project Financing  Health. By FY19, CE is established at three levels of dialogue (primary health care, hospitals, as well as dialogue forums for health reforms) Stepping Up CE in High-risk Projects  Roads. By FY19, two projects have ramped up CE to ensure consistency and continuity and to build an open and trusted approach to engagement with communities in Bank-financed roads projects Improvements to quality and utilization of beneficiary feedback:  Beneficiary feedback. By FY18, Kazakhstan will ensure it meets the 100% corporate target for Beneficiary Feedback Indicator and CE in all projects with direct beneficiaries, while ensuring quality through a set of Beneficiary Feedback agreed country standards (that is, Beneficiary Feedback instruments are conducted, at minimum, annually (not end of project), women’s feedback is disaggregated in all reporting, a mechanism is established to discuss and act on results, results are published and discussed in an open forum, and indictors measure the perception of beneficiaries with regard to the CE process.  GRMs. Efforts to improve the functionality of GRMs are being implemented, including in all high- and medium-risk projects a commitment to allow feedback on all project issues (not just resettlement-related issues); where possible, project GRMs will strengthen government systems, report complaints data in Aide Memoires and Implementation Status and Results Reports, and discuss results in annual portfolio reviews. 38