Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-48050) ON A LOAN IN THE AMOUNT OF US$100 MILLION TO THE

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank Report No: ICR IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-48050) ON A LOAN IN THE AMOUNT OF US$100 MILLION TO THE KAZAKHSTAN ELECTRICITY GRID OPERATING COMPANY WITH THE GUARANTEE OF THE REPUBLIC OF KAZAKHSTAN FOR A NORTH-SOUTH ELECTRICITY TRANSMISSION PROJECT Sustainable Development Department Central Asia Country Unit Europe and Central Asia Region May 31, 2012

2 CURRENCY EQUIVALENTS (average rate for 2011) Currency Unit = Kazakh Tenge (KZT) 1.00 KZT = US$ 0.01 US$ 1.00 = KZT FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS AC ARNM CIS CPS DBK EBRD EIRR EMP FIRR FM FMR FY GOK GWh HV IBRD ICB ICR IPO ISR KEGOC kv kwh KZT MW NPV N/S OHL PLC PDO PMD REK Alternating Current Agency for Regulation of Natural Monopolies Commonwealth of Independent States Country Partnership Strategy Development Bank of Kazakhstan European Bank for Reconstruction and Development Economic Internal Rate of Return Environmental Management Plan Financial Internal Rate of Return Financial Management Financial Monitoring Report Fiscal Year Government of Kazakhstan Gigawatt hour (1,000,000 KWh) High Voltage International Bank for Reconstruction and Development International Competitive Bidding Implementation Completion and Results Report Initial Public Offering Implementation Status and Results Report Kazakhstan Electricity Grid Operating Company Kilovolt (1,000 volts) Kilowatt Hour (1,000 watt hours) Kazakhstan Tenge Megawatt (1,000 kw) Net Present Value North-South Overhead Line Power Line Carrier Project Development Objective Project Management Department Regional Electricity Distribution Company

3 SA SAPR SOE SS TA TWh VAT Special Account Substation Automation and Protective Relaying Statement of Expenditure Substation Technical Assistance Terawatt hour (1 billion kwh) Value Added Tax Vice President: Philippe Le Houerou Country Director: Saroj Kumar Jha Sector Manager: Ranjit J. Lamech Project Team Leader: Mirlan Aldayarov ICR Primary Author: Jann Masterson

4 KAZAKHSTAN North-South Electricity Transmission Project CONTENTS A. Basic Information... i B. Key Dates... i C. Ratings Summary... i D. Sector and Theme Codes... ii E. Bank Staff... ii F. Results Framework Analysis... ii G. Ratings of Project Performance in ISRs... iv H. Restructuring (if any)... v I. Disbursement Profile... vi 1. Project Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1. Project Costs and Financing Annex 2. Outputs by Component Annex 3. Economic and Financial Analysis Annex 4. Bank Lending and Implementation Support/Supervision Processes Annex 5. Beneficiary Survey Results Annex 6. Stakeholder Workshop Report and Results Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders Annex 9. List of Supporting Documents MAP IBRD 33971

5 A. Basic Information Country: Kazakhstan Project Name: North-South Electricity Transmission Project Project ID: P L/C/TF Number(s): IBRD ICR Date: 05/31/2012 ICR Type: Core ICR Lending Instrument: SIL Borrower: Original Total Commitment: Revised Amount: USD 98.08M Environmental Category: B Implementing Agencies: KEGOC Cofinanciers and Other External Partners: Development Bank of Kazakhstan B. Key Dates KAZAKHSTAN ELECTRICITY GRID OPERATING CO USD M Disbursed Amount: USD 98.08M Process Date Process Original Date Revised / Actual Date(s) Concept Review: 06/09/2005 Effectiveness: 12/22/2005 Appraisal: 07/25/2005 Restructuring(s): 06/20/ /22/ /29/2009 Approval: 10/27/2005 Mid-term Review: 10/30/ /30/2007 Closing: 12/31/ /30/2011 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Satisfactory Moderate Satisfactory Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Satisfactory Quality of Supervision: Satisfactory Implementing Agency/Agencies: Satisfactory i

6 Overall Bank Performance: Satisfactory Overall Borrower Performance: Satisfactory C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Project No at any time (Yes/No): Problem Project at any time (Yes/No): DO rating before Closing/Inactive status: No Satisfactory Quality at Entry (QEA): Quality of Supervision (QSA): None None Rating D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Power Theme Code (as % of total Bank financing) Infrastructure services for private sector development Other financial and private sector development Regional integration Regulation and competition policy E. Bank Staff Positions At ICR At Approval Vice President: Philippe H. Le Houerou Shigeo Katsu Country Director: Saroj Kumar Jha Dennis N. de Tray Sector Manager: Ranjit J. Lamech Sumter Lee Travers Project Team Leader: Mirlan Aldayarov Istvan Dobozi ICR Team Leader: ICR Primary Author: Mirlan Aldayarov Peggy Janice Masterson F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The primary development objective of the overall North-South Electricity Transmission Project is to ensure that business enterprises and households in southern Kazakhstan have access to adequate, reliable and cost effective supply of electricity. The Project also ii

7 supports regional integration with respect to optimizing the use of energy resources through international electricity trade. Revised Project Development Objectives (as approved by original approving authority) (a) PDO Indicator(s) Indicator Indicator 1 : Value quantitative or Qualitative) Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years PDO: Increased volume of electricity transfer from generating plants in northern Kazakhstan to markets in southern Kazakhstan through N/S interconnector. 7.5 TWh electricity transfer from 3.9 TWh electricity 7.5 TWh northern transfer from northern electricity transfer Kazakhstan to Kazakhstan to southern through the second southern Kazakhstan through the North-South Kazakhstan through second North-South interconnector. the second Northinterconnector. South interconnector Date achieved 12/31/ /31/ /30/2011 Comments (incl. % Target 100% achieved, beginning in achievement) (b) Intermediate Outcome Indicator(s) Indicator Indicator 1 : Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Maximum transmission capacity to southern Kazakhstan through N/S interconnector. Actual Value Achieved at Completion or Target Years Value (quantitative or Qualitative) 650 MW 1350 MW 1350 MW Date achieved 12/31/ /31/ /30/2011 Comments (incl. % Target 100% achieved, beginning in achievement) Indicator 2 : Reduction in the frequency of major outages on N/S interconnector. Value (quantitative or Qualitative) iii

8 Date achieved 12/31/ /31/ /30/2011 Comments (incl. % Target exceeded by 33%. achievement) Indicator 3 : Reduction in transmission losses on the N/S interconnector Value (quantitative or Qualitative) 8.8% 6.5% 7.6% Date achieved 12/31/ /31/ /30/2011 Comments Loss levels have been significantly reduced ard are expected to be reduced (incl. % further. achievement) Indicator 4 : Establishment of Balancing Market Value (quantitative or Qualitative) No Balancing Market Balancing Market established Balancing Market fully designed and operating in trial mode since January 1, Date achieved 12/31/ /31/ /30/2011 Comments (incl. % achievement) The current load following generation capacity is insufficient to launch the Balancing Market at this time. When additional generation comes into service later in 2012, it will be launched. 70% achievement. Indicator 5 : Introduction of zonal tariffs. Value (quantitative or Qualitative) Distortionary tariff structure that included a geographic distancebased component between sellers and buyers of electricity. Introduction of zonal tariffs by 2006 Zonal tariffs were adopted in 2006 and replaced in 2010 with a new, efficient tariff methodology based on a uniform national tariff. Date achieved 12/31/ /31/ /30/2011 Comments Target 100% achieved. The new uniform tariff is efficient, transparent and (incl. % covers justifiable costs and a regulated rate of return. achievement) G. Ratings of Project Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 06/09/2006 Satisfactory Satisfactory /01/2006 Satisfactory Satisfactory /28/2007 Satisfactory Satisfactory /08/2007 Satisfactory Satisfactory /24/2008 Satisfactory Satisfactory /05/2009 Satisfactory Satisfactory iv

9 7 06/22/2009 Satisfactory Satisfactory /21/2009 Satisfactory Highly Satisfactory /21/2010 Satisfactory Highly Satisfactory /04/2010 Satisfactory Highly Satisfactory /27/2011 Satisfactory Satisfactory H. Restructuring (if any) Restructuring Date(s) Board Approved PDO Change ISR Ratings at Restructuring DO IP Amount Disbursed at Restructuring in USD millions 06/20/2008 S S /22/2009 S S /29/2009 S S Reason for Restructuring & Key Changes Made KEGOC, given its substantial capital investment program, requested the Bank to amend the Loan Agreement to reduce its current ratio covenant from 1.4 to 1. To transfer the "Modernization of Substations Component" from the Electricity Transmission Rehabilitation Project to the N/S Electricity Transmission Project, using the savings from the N/S Project to cover a financing gap under the Electricity Transmission Rehabilitation Project. An additional component (US$16.4 million) was added to the N/S Project. Closing date extension was needed for the full completion of the "Modernization of Substations" component. The closing date was extended from December 31, 2009 to November 30, v

10 I. Disbursement Profile vi

11 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal At appraisal in 2005, Kazakhstan s economic performance had been impressive, and its reform record was among the best in the former Soviet Union. Economic growth had been buoyant at about 11 percent on average since 2000, with income per capita expected to exceed US$2,000 in Growth had been driven mainly by increased oil production and higher oil prices. Electricity consumption grew rapidly at 6 percent per year. There were about 70 power generation plants with a total installed capacity of 18,485 MW, much of it coal-fired, privatized and technically outdated. The high voltage transmission system had three voltage levels: 1,150 kv, 500 kv and 220 kv. The state-owned Kazakhstan Electricity Grid Operating Company (KEGOC) operated all transmission assets at 1,150 kv and 500 kv levels. KEGOC was responsible for dispatch control and operated international connections, principally with Russia, Kyrgyz Republic and Uzbekistan. KEGOC s transmission system consisted of three regional power grids: (i) the Northern grid connected to the Russian power system; (ii) the Southern grid connected to the Central Asian power system and the Northern grid with a single circuit 500 kv transmission line; and (iii) the Western grid, comprising of two subsystems, which were isolated from the other systems. There were 21 Regional Distribution Companies (REKs), most of them privatized and technically outdated. In the area of power sector reforms, Kazakhstan ranked among the most advanced countries in the Former Soviet Union. The Government of Kazakhstan (GOK) began reforms in 1996, with a view to introducing massive private participation and establishing a competitive power market. The wholesale electricity market was fully liberalized and operated mainly on the basis of bilateral contracts between generators and REKs for direct sale of power. Project Rationale. Vigorous economic growth and increasing diversification of the economic base had led to a sharp upswing in electricity demand in Kazakhstan. While Kazakhstan, overall, had sufficient generation capacity to meet domestic power demand, four-fifths of power generation came from the northern part of the country, predominantly from coal-based power plants located in the Ekibastuz region and, to a lesser extent, from hydroelectric plants located primarily along the Irtysh River. Generation facilities in the south were limited to small hydro, combined heat and power plants, and a high cost gas/oil-fired power plant at Zhambyl which was operated to meet winter peak demand. The existing KEGOC-operated North-South (N/S) electricity transmission lines of 500 kv and 220 kv, via which low-cost electricity was transmitted from the northern power stations to the south, had a limited transmission capacity of 650 MW, which was grossly insufficient to meet demand in the booming southern part of the country, especially in the industrial belt between Almaty and Shymkent. The power deficit in the south was about 1

12 900 MW (half of regional consumption). The deficit was met largely by transmitting power from the north and, in part, by importing electricity. Historically, the southern regions of Kazakhstan imported power from the Central Asia Power System (CAPS), but with the break-up of the Soviet Union, the amount of imported power had reduced. The limited available imports could not fully meet regional electricity demand in the winter period of maximum electric loads, which necessitated restrictions on consumption (load shedding) with an adverse impact on regional economic development. At the same time, because of the limited N/S transmission capacity, surplus electricity from the northern power grid was exported to Russia. Furthermore, reliability of the existing 500 kv interconnector was low because of its single circuit design. Disconnection or outage of even one of the five 500 kv line sections could stop power transmission to southern Kazakhstan and the interconnected parallel operation of the Kazakh power system with CAPS and Russia. Irregular power flows caused frequent activation of emergency control systems on the interconnector, thus causing load rejection, disconnection and voltage control switching of 500 kv reactors. Due to the increasing overload of the interconnector, the number of major emergency breakdowns increased sharply. The resulting economic damage and dislocation was considerable. Fully appreciating the approaching needs, the GOK had initiated a number of studies. Indepth feasibility studies established that the least-cost method of meeting current and prospective electricity demand in the south was to expand and strengthen the capacity of the existing N/S transmission line. A detailed feasibility study of strengthening the N/S n line resulted in a three-phase approach: Phase I (YukGRES-Shu, 250 km), Phase II (Ekibastuz-Agadyr, 475 km), and Phase III (Agadyr-YukGRES, 390 km). KEGOC requested the Bank s financing for Phase II of the entire N/S Project. In addition to providing financing, the Bank s involvement would facilitate the continuation of the sector reform dialogue with respect to the completion of the transmission system reforms which had been initiated under the earlier Bank-financed Electricity Transmission Rehabilitation Project (Ln KZ). Moreover, the financial savings to KEGOC associated with Bank participation were substantial and would allow more moderate increases in transmission tariffs than would otherwise be required, while considerably easing the cash flow pressure on KEGOC over the near and medium terms. The Bank also had a strong interest in the development of regional electricity markets and, through its involvement in the Project, could ensure that the regional electricity integration aspects were properly addressed (e.g., by providing non-discriminatory Third Party Access to the N/S line for export and international transit related transmission services). Completion of the new N/S line would also help to ensure the sustainability and full realization of the benefits of previous Bank initiatives in the power sector (including support for transmission system rehabilitation, Grid Code, transmission tariff rationalization and development of the electricity spot market). Higher Level Objectives to which the Project would contribute. Kazakhstan s development focus was on achieving international standards for public services and enterprises and increasing the competitiveness of its tradable non-oil sectors. Reliable and cost effective electricity was fundamental to both social and economic development. Strengthening the transmission grid would ensure wide-spread access to low-cost generation, while development of the physical and institutional framework for electricity 2

13 trade would facilitate the longer-term development of competitive national and regional electricity markets. 1.2 Original Project Development Objectives (PDO) and Key Indicators The primary development objective of the overall N/S project, as captured in the PAD, was to ensure that business enterprises and households in southern Kazakhstan have access to adequate, reliable and cost effective supply of electricity. The project also supported regional integration with respect to optimizing the use of energy resources through international electricity trade. 1 For the purposes of the ICR, the PDO statement from the PAD was used as this is the one that was used throughout project implementation. The key indicators were: PDO Indicator Increased volume of electricity transfer from generating plants in northern Kazakhstan to markets in southern Kazakhstan through the N/S interconnector Intermediate Outcome Indicators Maximum transmission capacity to southern Kazakhstan through the N/S interconnector; Reduction in the frequency of major outages on the N/S interconnector; Reduction in transmission losses on the N/S interconnector; Establishment of a Balancing Market; Introduction of zonal tariffs. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification The Project Development Objectives and the Key Indicators were not revised. 1.4 Main Beneficiaries, The main beneficiaries of the Project were business enterprises and households in southern Kazakhstan, whose well-being was expected to be enhanced by (i) providing access to adequate, reliable and cost effective supply of electricity; and (ii) continued economic growth in the region through removing a binding energy supply constraint; and (iii) increasing the region s competitiveness with related economic benefits in terms of employment and income. Expanding the N/S transmission line would offer numerous benefits in terms of system reliability, increased export/transit capacity and the ability to make more effective use of low-cost generating plants in northern Kazakhstan. The new line would also improve the reliability of parallel operation of the power systems of Russia, Kazakhstan and Central Asia, thus improving the quality of power supply across 1 The development objectives, as stated in the Loan Agreement, were: (i) to ensure that business enterprises and households in southern Kazakhstan have access to reliable, cost effective and high quality supply of electricity; and (ii) to support regional integration with respect to optimizing the use of energy resources through international electricity trade. 3

14 the region. KEGOC would also benefit by improving its financial standing due to increased transmission volumes. 1.5 Original Components The Bank-supported project, which financed Phase II of the three-phase overall N/S Electricity Transmission Line Project, 2 involved the construction of 475 km of overhead lines (OHL) between Ekibastuz and Agadyr SSs and modernization of 500 kv outdoor switchgear at both SSs. The total estimated cost of the Phase II Project was US$160.8 million. The Project consisted of the following components: Component A. Construction of 500 kv Overhead Single Circuit Transmission Line (estimated cost: US$113.8 million, of which the Bank would finance US$99.5 million). Construction of a new 475 km 500 kv single circuit OHL from the air-insulated SS Ekibastuz (1,150/500 kv) to the air insulated SS Agadyr (500 kv), including a Fiber Optic Communications Line. Component B. Extension/Modernization of 1,150/500 kv Ekibastuz Air- Insulated SS (estimated cost: US$13.2 million financed by DBK and KEGOC). This component would involve expanding the existing 1,150/500 kv SS at Ekibastuz by three bays and installing shunt reactors to accommodate the new 500 kv link with Agadyr SS. The work would include installation of SF6 circuit breakers, disconnect switches, current transformers, voltage transformers, three single-phase shunt reactors as well as SS automation and protective relaying and a Power Line Carrier (PLC). Installation of shunt reactors was expected to improve the stability of the power grid and regulate voltage conditions of the transmission system. Component C. Extension/Modernization of 500 kv Agadyr Air-Insulated SS (estimated cost: US$32.8 million financed by DBK and KEGOC. This component would involve expanding the existing 500 kv SS at Agadyr by six bays to accommodate the new 500 kv link with the Ekibastuz and YukGRES SSs. Three new shunt reactors would be installed with two shunt control reactors connected to the busbar and the third shunt reactor connected to the Agadyr- YukGRES line. The work would include installation of SF6 circuit breakers, disconnect switches, current and voltage transformers shunt reactors, and SS automation and protective relaying as well as PLC. Installation of shunt reactors was intended to improve the stability of the power grid and regulate voltage conditions of the transmission system. Component D. Technical Assistance (US$0.9 million). This component includes consulting services for (i) procurement and project management for the construction of the 500 kv OHL between Ekibastuz and Agadyr (estimated cost US$0.5 million financed by the Bank) and (ii) further reforms of the transmission sector (estimated at US$0.4 million), including transmission pricing (zonal tariffs) and establishment of a real time balancing market. 2 The three-phase overall N/S project included the construction of 1,115 km of overhead 500 kv, single circuit alternate current (AC) line and upgrades of four high voltage air-insulated substations (1150/500 kv Ekibastuz, 500 kv Agadyr, 500 kv YukGRES and 500 kv Shu). The project was to be carried out in three phases: Phase I (YukGRES-Shu, 250 km); Phase II (Ekibastuz-Agadyr, 475 km) and Phase III (Agadyr- YukGRES, 390 km). 4

15 1.6 Revised Components In January 2009, the N/S Transmission Project was restructured to add a fifth component - Component E: Modernization of Transmission SSs - following a request from the Borrower. Under the restructuring, an unfinished portion of the earlier Electricity Transmission Rehabilitation Project (Loan No KZ) was transferred to the N/S Transmission Project for full completion. This allowed full and satisfactory completion of the Electricity Transmission Rehabilitation Project without compromising in any way the successful implementation of the N/S Project. The two Bank-financed transmission projects were closely connected, with the same intended outcome of improved reliability and quality of electricity supply to businesses and households, and successful completion of the Rehabilitation Project was a key to the satisfactory outcomes of both projects. The main modifications to the N/S Project consisted of: (i) the inclusion of an additional IBRD loan-financed component of US$16.4 million to modernize 27 high voltage SSs which were originally included in the Rehabilitation Project, which experienced a financing gap due to the large depreciation of the US$ against the Euro; and (ii) reduction of the IBRD loan-financed portion of the existing Component A Construction of Transmission Line Agadyr-Ekibastuz by the same amount. KEGOC would finance from its own funds the VAT, which had originally been intended to be financed from the IBRD Loan. 1.7 Other significant changes EBRD co-financing (originally planned at US$13.14 million equivalent). In 2007, the winning bid for the N/S Transmission Line came in at about US$5.7 million lower than the original cost estimate; therefore, EBRD co-financing for the second phase was no longer needed and was applied to a subsequent transmission project of the Borrower. In June 2008, following a request from KEGOC, the Bank amended the Loan Agreement to reduce the current ratio (ratio of current assets to current liabilities) covenant in the Loan Agreement from 1.4 to 1. Reallocation of savings. In January 2009, the Loan and Guarantee Agreements were amended to add the new component E. The cost savings of US$5.7 million from the transmission line contract were reallocated to the new component E, and KEGOC used its own funds to finance the VAT component (US$10.7 million) that had originally been intended to be financed from the Bank Loan. Closing Date extension. In July 2009, after it became apparent that the Component E Modernization of Transmission SSs, which had been transferred from the Electricity Transmission Rehabilitation Project, could not be completed by the original Closing Date of December 31, 2009, the Closing Date was extended to November 30, 2011 so that the remaining 27 SSs could be completed and commissioned. Final cancellation. On September 15, 2011, the remaining undisbursed loan balance of US$1,918, (about 2% of the total loan amount) resulting from savings achieved under the IBRD loan was cancelled. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry 5

16 Soundness of the Background Analysis. Lessons learned from prior work in the region and the sub-sector were taken into account during design and preparation of the Project. The Bank team coordinated among key government agencies on both the project processing schedule, project implementation plan and on the ultimate scope and design of the project; the Bank team included from the beginning of project identification and preparation the competent and efficient national project management staff of KEGOC; and the Bank team closely coordinated with co-financiers from an early stage to ensure non-duplication of efforts, efficient procurement and implementation of components as well as compatibility of lending terms and conditions. Prior experience in the implementation of transmission projects had revealed areas that required special attention, including the need for thorough technical analyses so that facilities were designed and routed to minimize environmental and social impact and the importance of commitment by provincial governments and public participation to ensure successful environmental management. These were addressed satisfactorily in preparation of the Project. Previous projects had also shown that the implementation of physical components of the project could be expedited by paying close attention to the following factors: prompt government clearance, effective design management to ensure a timely delivery of drawings, and this was the case in this Project, which was completed under budget and ahead of schedule (except for the new component added towards the end of Project implementation). Assessment of the Project Design. The objectives, components and implementation arrangements were realistic. The design involved standard technology for high-voltage transmission line and SS construction. KEGOC, the Borrower and implementing agency, was a competent grid operating company and had already gained experience in implementing the earlier Bank-financed Electricity Transmission Rehabilitation Project. Both its procurement and financial management capacity were assessed during preparation and found to be satisfactory. In the original financing plan there were two international co-financiers, the Bank and the EBRD, plus the Borrower and DBK. Each co-financier had clearly assigned roles in financing the three phases of the transmission system development. There was a clear recognition of the importance of the social and environmental safeguards in the detailed route selection and environmental impact assessment. Two project alternatives were considered but rejected: increased generation capacity in southern Kazakhstan, which was rejected after a least cost assessment during the prefeasibility study determined that the N/S transmission line was the best economic alternative by a considerable margin; and increased imports into southern Kazakhstan, an alternative which was rejected as hydropower plants in the Kyrgyz Republic and Tajikistan also supply water for irrigation, making surplus electricity from these countries available mainly on a seasonal basis. Adequacy of Government Commitment and Participatory Process. The N/S Transmission Project as a nationally top priority operation, enjoyed strong support from the GOK, as evidenced by the provision of State Guarantee for KEGOC which, at the time, was given only to few high-priority operations. KEGOC obtained the approval of the State Expertise and the support of the relevant ministries in regard to the feasibility study, environmental impact assessment and project financing plan early on during project preparation. The GOK demonstrated its commitment during project preparation by quickly facilitating the approval of the feasibility study for the N/S electricity 6

17 transmission line, authorizing KEGOC to arrange loan financing and supporting KEGOC s request to ARNM (sector regulator) to adjust the transmission tariffs to ensure that KEGOC would be able to finance the project and repay the debts. The company s Development Plan also envisioned further increases in the transmission tariff and in the dispatch tariff. A satisfactory public consultation on the Environmental Management Plan (EMP) for the Phase II Project was conducted with affected stakeholders and NGOs on June 28, 2005 in Astana, and was verified by the Bank s environmental specialist. Assessment of Risks. The overall risk rating was assessed as Moderate, which indeed proved to be the case. Only two of the seven risks were originally rated as Substantial: (i) inadequate transmission tariffs and project implementation delays due to lack of local financing: and (ii) weak project management and overloaded implementation capacity of the Borrower. Both risks were mitigated through the following measures: the provisions of the Guarantee Agreement ensured that tariffs would be maintained at levels sufficient to cover KEGOC s longer term cash flow requirements; The Project Management Department (PMD) of KEGOC was strengthened with an international consultant to assist in project management. The turnkey procurement arrangement prevented excessive project implementation delays. 2.2 Implementation The overall three-phase transmission line project was implemented in cooperation with other donors and partners, with EBRD providing financing for phases I and III of the overall N/S transmission line, DBK and the Bank providing financing for phase II, and KEGOC providing financing for all three phases. All three phases were completed by 2009 as scheduled. Project implementation proceeded mostly on schedule, and the original components (A- D) of the project were completed by the original closing date of December 31, Under Component E, transferred from the Electricity Transmission Rehabilitation Project, 19 high voltage transmission SSs were rehabilitated and commissioned and 8 high voltage SSs were commissioned by November 30, The project was never at risk and was continuously rated Satisfactory or Highly Satisfactory throughout project implementation. In July 2010, KEGOC informed the Bank about ARNM s decision to phase out the zonal tariffs introduced in As a result of the large-scale network expansion investments (including the second N/S transmission line), the major transmission line bottlenecks (congestion) had been eliminated and the transmission situation had vastly improved, allowing Kazakhstan to return to a nationally uniform tariff methodology based on a single tariff. (Earlier, the large zonal differences in national network access provided the justification for zonal tariffs, which reflected energy deficits/surpluses among the major power regions.) Importantly, the underlying principle of the new tariff methodology is fully consistent with the relevant provision of the Guarantee Agreement by ensuring that the transmission tariffs are (i) not dependent on geographical distances between generators and consumers of electricity; and (ii) maintained at levels sufficient to fully cover KEGOC s prudently incurred operating and capital expenditures. 7

18 The Project has been a success in achieving its primary objective. The annual volume of electricity transferred from generation plants in the north to consumers in the south has increased from 3.9 TWh to 7.5 TWh (92 percent increase). The reliability and quality of transmission has significantly improved as evidenced by the decrease in frequency and duration of forced outages (reduction from 19 major outages in 2005 to 6 in 2011). The four key reform covenants of the Guarantee Agreement have been substantially achieved (see Section 3.2). The following key factors contributed to the successful implementation of the Project: Solid project design, incorporating lessons learned from best practice regional and international experience of similar Bank-supported projects; Continuous GOK commitment and compliance with the reform covenants of the Guarantee Agreement; Efficient and committed counterpart, with KEGOC being an efficient, and commercially oriented Grid Operator that had acquired experience in implementing a Bank-financed project through the previous Electricity Transmission Rehabilitation Project; The use of a turn-key contract for the supply and installation of Ekibastuz-Agadyr transmission line reduced the administrative burden on KEGOC and prevented implementation delays. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization The outcome and intermediate indicators developed for the Project were adequately designed and provided a good indication of progress towards achieving the PDO. KEGOC s PMD regularly collected the appropriate data on the outcome and intermediate indicators and ensured information quality, using data from KEGOC s annual operating statistics and Dispatch Center reports. The PMD provided Financial Monitoring Reports (FMRs) within 45 days of the end of each quarter. KEGOC prepared comprehensive, accurate and transparent Annual Reports, which were used for management decision making, and enhanced KEGOC s reputation as a reliable and financially stable partner, enabling the company to raise substantial financial resources from international financial institutions. Because the M&E indicators are routinely collected by KEGOC, it is likely that they will continue to be collected in the future. 2.4 Safeguard and Fiduciary Compliance Safeguard Policy Issues. KEGOC complied fully with the Bank s safeguard policies and Kazakhstan s environmental protection regulations. The Project was classified as Category B, indicating limited impacts that could be readily managed through sound engineering design and construction. The only safeguard policy identified during preparation was Environmental Assessment. KEGOC prepared an EMP in accordance with Bank requirements. A satisfactory public consultation on the EMP for the Project was conducted with affected stakeholders and NGOs on June 28, 2005 in Astana. The EMP was followed by KEGOC throughout project implementation, and the Bank s team regularly supervised EMP implementation and confirmed that KEGOC was implementing it satisfactorily. 8

19 Fiduciary Compliance. Financial Management. KEGOC complied with the Bank s fiduciary policies and financial management (FM) requirements and complied with the financial covenants of the Loan Agreement. KEGOC consistently received an unqualified audit opinion on its financial statements including the project accounts for the year ending December 31, Procurement. Procurement under the Project was implemented in accordance with the Bank s Procurement and Consultant Guidelines dated May 2004 and in accordance with the provisions stipulated in the Loan Agreement. KEGOC ran a tight procurement process and a well-administered tender for the main turnkey contract, which came in at about US$5.7 million below the original cost estimate. 2.5 Post-completion Operation/Next Phase The second N/S Transmission Line and the SSs modernized are now completely operational and have been fully integrated into KEGOC s national grid system. A legal basis has been established for the tariff-setting methodology and the Regulator continues to set transmission tariffs that fully reflect KEGOC s operating costs and investment needs. In addition, the state holding company (Samruk-Kazyna, the sole shareholder of KEGOC) pledged additional equity injections to cover any cash-flow shortfalls that might arise as a result of the ongoing investment program. As a result, there appears to be adequate provision to ensure the financial sustainability of the company. KEGOC has formally requested the Bank s support for the proposed Third North-South Electricity Transmission Project, and preparations for a feasibility study are underway. The proposed project is included in the FY12-FY17 Country Partnership Strategy. Follow-up investments to strengthen the power network and improve the reliability of the electricity supply in southern Kazakhstan, such as the Bank-financed Moinak Electricity Transmission Project and the Alma Electricity Transmission Project are currently under implementation and provide the basis for continuing to monitor KEGOC s financial performance as well as sustain the agreed program of sector reforms. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation The project objectives and design remain highly relevant in the context of Kazakhstan s development priorities. Kazakhstan has maintained an ongoing commitment to developing an infrastructure that meets international standards and is capable of supporting economic growth and social development. Establishment of an efficient and reliable power transmission network and the resultant improvements in the cost and reliability of power supply have been key in facilitating economic growth that has occurred during project implementation. Although the GOK has reduced its sovereignguaranteed borrowings in recent years, it continues to provide sovereign guarantees for KEGOC s program of transmission system expansion and upgrade, thereby 9

20 demonstrating the strategic importance that it assigns to these initiatives. This project was also part of the development strategy of Kazakhstan s national power grid for The strategy includes a list of seven projects aimed at reconstruction, reinforcement and modernization of the national power grid, which links not only regions within the country, but also aims at strengthening the energy interconnections with the neighboring Central Asian countries. The project remains consistent with the objectives of the IBRD and IFC CPS for FY12- FY17, which is designed to help the GOK implement its development priorities. The CPS was discussed by the Bank s Board of Executive Directors on May 1, A massive extension of the high voltage transmission system to integrate the currently poorly connected regions into the national network remains a top GOK priority. As stated in the FY05-11 CPS Completion Report, relieving the infrastructure constraints to growth was a key component of the GOK s competitiveness agenda, and the Bank has partially financed strategic investments in the transmission sector through four consecutive projects 3 that have made KEGOC one of the most technologically advanced grid companies among the CIS. The N/S Project was an investment project in a strategic, high-impact area of engagement of improving competitiveness and employment generation; it also responds to the country development goal to develop infrastructure connectivity to reduce economic distance by improving energy transmission to poor areas. The project also played a role in assisting the electricity grid operating company to enhance corporate governance and financial standards to international best practice and supporting regional electricity trade. 3.2 Achievement of Project Development Objectives All three phases of the overall North-South Transmission Line have been completed satisfactorily. With respect to the achievement of the PDO, the Project, and the whole line, has been a success. The annual volume of electricity transferred from generation plants in the north to consumers in the south has increased from 3.9 TWh to 7.5 TWh (92 percent increase). The reliability and quality of supply has significantly improved as evidenced by the decrease in frequency and duration of forced outages (reduction from nineteen major outages in 2005 to six in 2011). There are no longer quality of service issues (fluctuations of voltage and frequency) at the high voltage level. Transmission losses have been reduced from 8.5 percent in 2006 to 7.6 percent in Evolution of transmission losses Indicator * Transmission losses 8.5% 8.5% 9.2% 8.1% 7.8% 7.6% * - Year of commencement of operation of the line 3 Electricity Transmission Rehabilitation Project (FY99-09), North-South Electricity Transmission Project (FY06-11), Moinak Electricity Transmission Project (FY10-12) and Alma Electricity Transmission Project (FY11-15). 10

21 Customer losses due to outages on the N/S line have declined, and capacity has increased by about 700 MW. The Project provided substantial additional regional electricity transfer capacity to support electricity trade among Russia, Kazakhstan and other Central Asian countries. The Project allowed accessing the low-cost generation and was the leastcost method of meeting medium-term electricity demand in the south. The four key reform covenants of Section 3.01 of the Guarantee Agreement have been substantially achieved: maintain KEGOC s tariffs at levels sufficient to fully cover the company s cash flow requirements as well as a regulated rate of return on net fixed assets. An efficient tariff methodology has been established which is transparent and covers justifiable costs and a regulated rate of return. approve the implementation of a transmission tariff-setting methodology based on the concept of zonal tariffs. Zonal tariffs reflecting the existing power deficits/surpluses among the three regional power zones in Kazakhstan and the inter-zonal bottlenecks (congestion) in the transmission capacity were introduced in In 2010, ARNM decided to phase out the zonal tariffs introduced in 2006 because the major transmission line bottlenecks had been eliminated as a result of the large-scale network expansion investments, including the N/S line. As a result of these major network expansion investments, the transmission situation has vastly improved, allowing Kazakhstan to return to a nationally uniform tariff methodology based on a single tariff. cause KEGOC to ensure the implementation of non-discriminatory third party access to the N/S line, including access to export and international transit-related services, based on published tariffs, applicable to all customers and to be applied fairly and without discrimination between customers. Non-discriminatory third party access to the transmission grid is operational. The new tariff methodology is also consistent with the Guarantee Agreement by not including in the tariff structure a geographic distance-based component between sellers and buyers of electricity, which was highly distortionary. establish a real-time electricity balancing market to be operated by KEGOC based on transparent market rules. The Balancing Market has been fully designed and is operating in trial mode, producing invoices for electricity purchased on the Balancing Market and reconciliation statements of sold and purchased balancing electricity. The Balancing Market still operates in trial mode, primarily because the GOK considers the availability of flexible load following generation to be inadequate to launch the Balancing Market at this time. Once additional generation capacity is added in the near future, including the Moinak Hydropower Plant now close to full completion, the Balancing Market is expected to be launched live. 3.3 Efficiency Because the Bank-financed investment represented one segment of a three-phase overall transmission line project, the economic and financial analysis in the PAD examined the viability of these investments in the context of the viability of the N/S transmission line as a whole. This same approach has been adopted for the ex-post evaluation. At present, the outlook in terms of economic and financial efficiency is fully satisfactory. The second 11

22 N/S transmission line and SSs were completed on schedule, and while the economic costs were slightly higher than projected at the time of Board presentation, the financial costs were lower than projected owing to savings in taxes and efficiently administered procurement by KEGOC. This was achieved despite a 23 percent depreciation in the value of the KZT against the Euro and a 14 percent depreciation against the US$. Incremental transmission and dispatch on the new line has exceeded forecasts, and projections are that it will continue to do so as demand in the south continues to exceed local supply. In addition, transmission losses have dropped from over 8.8 percent to 7.6 percent and are likely to fall going forward. Tariffs have declined slightly in real terms since the start of the project. However, at current levels, they are sufficient to provide satisfactory financial returns. The expected financial and economic returns of the project are described in Annex 3. Based on current projections, the expected FIRR of the project is 7.2 percent, and the financial NPV (at KEGOC s WACC of 5.8 percent) is US$51 million. The expected EIRR of the project is 15.5%, and the economic NPV at a 10% discount rate is US$111 million. 3.4 Justification of Overall Outcome Rating Rating: Satisfactory The Project is considered to have been Satisfactory in terms of overall outcome. As discussed above, the PDO remains highly relevant to the priorities of both the GOK and the Bank/IFC CPS for FY12-FY17. The PDO outcome indicator target has been achieved, and most of the intermediate outcome indicator targets have also been achieved. The economic and financial benefits of the Project have been substantial, and the original Project was completed earlier than planned and with substantial cost savings. The only issue still to be addressed is that the Balancing Market has been operating since 2008 on a trial basis only. The Balancing Market has been fully designed and KEGOC is waiting for the GOK go-ahead to go live. It is expected that after sufficient new load following generation (including the Moinak HPP) comes on stream in 2012, GOK will give the green light to make the Balancing Market fully operational. 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development The project has enhanced the well-being of the population in southern Kazakhstan by (i) providing increased, reliable and low-cost supply of electricity from the north; (ii) removing a binding energy supply constraint to continued economic growth in the region; and (iii) increasing the region s competitiveness with related benefits in terms of employment and income. Although not solely attributable to the project, there have been significant reductions in poverty and unemployment in southern Kazakhstan. Poverty dropped, on average, by 61 percent, and extreme poverty dropped by 76 percent in the four regions of southern Kazakhstan. The unemployment rate in southern Kazakhstan was reduced on average by 25 percent. (See tables on poverty and unemployment in Annex 3.) (b) Institutional Change/Strengthening 12

23 The Bank s engagement with KEGOC and the GOK in the energy sector over many years beginning with the Electricity Transmission Rehabilitation Project in 1999 has significantly contributed to the operational and institutional capacity of KEGOC and the energy sector as a whole. Kazakhstan has become a model for other CIS countries, having created an efficient, profitable and commercially oriented Grid Operator, a reasonably effective sector Regulator and a competitive power market within the framework of an overall sound institutional and legal framework. Generally speaking, the country and its institutions have established a solid foundation under the N/S Transmission Project for expansion and development to meet the electricity needs of a rapidly growing economy. Under the N/S Project, KEGOC s PMD gained additional experience with Bank procedures for financial management, procurement and disbursement and introduced a new computerized accounting system to automate FMR reporting. KEGOC staff received extensive advanced training from the vendors and suppliers in installation, operation and maintenance of the sophisticated systems and equipment provided under the project. (c) Other Unintended Outcomes and Impacts (positive or negative) After its successful physical completion, the N/S Electricity Transmission Project, through the restructuring in 2009 that transferred the unfinished automation of SS component from the Electricity Transmission Rehabilitation Project, helped to satisfactorily complete the project, after it closed on June 15, The two transmission projects were closely linked and served the same key objective of improving the reliability and quality of electricity supply to businesses and households. Because the SSs are connected to the integrated national grid, the N/S line could not operate efficiently and reliably without modernizing all the SSs. 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops (Not applicable) 4. Assessment of Risk to Development Outcome Rating: Moderate The overall risk to development outcome is rated Moderate for the reasons given below: Technical risks: Negligible to Low. The technologies introduced under the project are well established, tested, and technically relatively simple. KEGOC s staff is fully trained. The companies suppliers of the equipment are present in the Kazakhstan market. Financial Risks: Moderate. The sector regulator has consistently granted tariff increases to cover KEGOC s full operating costs and the parent company, Samruk-Kazyna is committed to provide additional equity injections to cover any potential liquidity shortfalls associated with KEGOC s ambitious investment program. The company s overall financial position is solid, and there was no problem with KEGOC s own financing of the project. However, it cannot be totally excluded that KEGOC s future tariff request increases might not be approved. Environmental Risks: Negligible to Low. The EA rating of category B reflected appropriately the initial assessment that the environmental risks were of limited and manageable scope. KEGOC fully complied with the requirements. 13