Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-79650) ON A LOAN KAZAKHSTAN ELECTRICITY GRID OPERATING COMPANY

Transcription

1 Public Disclosure Authorized Document of The World Bank Report No: ICR Public Disclosure Authorized IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-79650) ON A LOAN IN THE AMOUNT OF US$78 MILLION Public Disclosure Authorized TO THE KAZAKHSTAN ELECTRICITY GRID OPERATING COMPANY WITH THE GUARANTEE OF THE REPUBLIC OF KAZAKHSTAN FOR AN ALMA ELECTRICITY TRANSMISSION PROJECT November 4, 2015 Public Disclosure Authorized Energy and Extractives Global Practice Central Asia Country Unit Europe and Central Asia Region

2 CURRENCY EQUIVALENTS (Exchange Rate Effective September 22, 2015) Currency Unit=Kazakhstani Tenge (KZT) 1 KZT = US$ US$ 1.00 = KZT270 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS CPS CRNM EIRR EMP EPC ESO FIRR FM GA GDP GHG GOK GWh HV KEGOC kwh LA LAP Country Partnership Strategy Committee for Regulation of Natural Monopolies and Competition Protection Economic Internal Rate of Return Environmental Management Plan Engineering, Procurement, Construction Electricity Supply Organization Financial Internal Rate of Return Financial Management Guarantee Agreement Gross Domestic Product Greenhouse Gases Government of Kazakhstan Gigawatt Hours (million kilowatt hours) High voltage Kazakhstan Electricity Grid Operating Company Kilowatt Hours Loan Agreement Land Acquisition Plan LAPF M&E METP MHPP MVA MW NGO NPV N/S OHTL OSY PAD PDO PMU PP REK RF ROK SS TWh VAT Land Acquisition Policy Framework Monitoring and Evaluation Moinak Electricity Transmission Project Moinak Hydroelectric Power Plant Megavolt Ampere (1,000 KVA) Megawatts Non-government Organization Net Present Value North-South Overhead Transmission Line Outdoor Switchyard Project Appraisal Document Project Development Objective Project Management Unit Procurement Plan Regional Electricity Distribution Company Results Framework Republic of Kazakhstan Substation Terawatt hours (billion kilowatt hours) Value-added tax Senior Global Practice Director: Practice Manager: Project Team Leader: ICR Team Leader: ICR Author: Anita Marangoly George Ranjit J. Lamech Mirlan Aldayarov Yabei Zhang Margaret Wilson

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4 REPUBLIC OF KAZAKHSTAN Alma Electricity Transmission Project CONTENTS DATA SHEET... i 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... v 1. Project Context, Development Objectives and Design Context at Appraisal Original Project Development Objectives and Key Indicators Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification Main Beneficiaries Original Components Revised Components Other significant changes Key Factors Affecting Implementation and Outcomes Project Preparation, Design and Quality at Entry Implementation Monitoring and Evaluation (M&E) Design, Implementation and Utilization Safeguard and Fiduciary Compliance Post-completion Operation/Next Phase Assessment of Outcomes Relevance of Objectives, Design and Implementation Achievement of Project Development Objectives... 14

5 3.3 Efficiency Justification of Overall Outcome Rating Overarching Themes, Other Outcomes and Impacts Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Bank Performance 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... 42

6 A. Basic Information DATA SHEET Country: Republic of Kazakhstan Project Name: Alma Transmission Project Project ID: P L/C/TF Number(s): IBRD ICR Date: 09/28/2015 ICR Type: Core ICR Lending Instrument: SIL Borrower: KEGOC Original Total Commitment: USD 78.00M Disbursed Amount: USD 71.36M Revised Amount: USD 71.36M Environmental Category: B Implementing Agencies: Kazakhstan Electricity Transmission Grid Operating Company (KEGOC) Cofinanciers and Other External Partners: B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 08/21/2009 Effectiveness: 06/23/ /02/2011 Appraisal: 10/16/2009 Restructuring(s): 09/29/2014 Approval: 11/16/2010 Mid-term Review: 10/01/2012 Closing: 04/30/ /30/2015 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Satisfactory Moderate Moderately 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: Moderately Satisfactory Implementing Agency/Agencies: Satisfactory Overall Bank Overall Borrower Moderately Satisfactory Performance: Performance: Satisfactory i

7 C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Project at any time (Yes/No): Problem Project at any time (Yes/No): DO rating before Closing/Inactive status: No Yes 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) Transmission and Distribution of Electricity Theme Code (as % of total Bank financing) Environmental policies and institutions Infrastructure services for private sector development Other urban development Rural services and infrastructure E. Bank Staff Positions At ICR At Approval Vice President: Cyril Muller Philippe le Houérou Country Director: Saroj Kumar Jha Motoo Konishi Practice Manager: Ranjit J. Lamech Ranjit J. Lamech Project Team Leader: Mirlan Aldayarov Imtiaz Hizkil ICR Team Leader: ICR Primary Author: Yabei Zhang Margaret Wilson F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The objective is to improve the reliability and quality of electricity supply to consumers in the Almaty region in an environmentally responsible and financially sustainable manner. Revised Project Development Objectives (as approved by original approving authority) ii

8 (a) PDO Indicator(s) Indicator Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Increased reliability of supply measured by reductions in the number of outages Indicator 1 : in Almaty Branch of KEGOC, the total duration of outages, and the total resulting amount of unmet electricity demand Value 29 outages, 10 outages, 2 outages, 10 outages quantitative or hours, 40 hours, 1.25 hours, 140 GWh Qualitative) GWh GWh GWh Date achieved 12/30/ /30/ /30/ /31/2014 Comments (incl. % achievement) Indicator 2 : The targeted indicator is exceeded. The number of outages as well as the total duration are significantly better than the target. Total unserved energy is also below the targeted level. Increased capacity to supply Almaty Oblast measured by capacity of 500 kv transformers connected to the HV network Value quantitative or Qualitative) 1,000 MVA 2,000 MVA 2,000 MVA 2,000 MVA Date achieved 12/30/ /30/ /30/ /01/2014 Comments (incl. % The targeted indicator is fully achieved. achievement) Indicator 3 : Increased capacity to supply Almaty Oblast measured by reduced overloading of transformers in Almaty SS relative to design capacity Value quantitative or Qualitative) 109 % at Peak 70% at peak 70% at peak 60% at peak Date achieved 12/30/ /30/ /30/ /01/2014 Comments (incl. % The targeted indicator is exceeded. achievement) Indicator 4 : Increased transmission line capacity for Almaty Oblast Value quantitative or Qualitative) 650 MW in 1 line from YuKGRES SS 1300 MVA in 2 lines from YuKGRES SS 1,300 MW in 1,500 MW in 2 2 lines from lines from YuKGRES SS YuKGRES SS Date achieved 12/30/ /30/ /30/ /01/2014 Comments (incl. % The targeted indicator is exceeded. achievement) iii

9 (b) Intermediate Outcome Indicator(s) Indicator Original Target Values (from Baseline Value approval documents) Construction and commissioning of lines Formally Revised Target Values Actual Value Achieved at Completion or Target Years Indicator 1 : Value New lines New lines New lines (quantitative No Lines operational operational operational or Qualitative) Date achieved 12/30/ /30/ /30/ /01/2014 Comments (incl. % 100% achieved achievement) Indicator 2 : Construction of Alma SS Value (quantitative or Qualitative) No Substation Operational Operational Operational Date achieved 12/30/ /30/ /30/ /01/2014 Comments (incl. % 100% achieved achievement) Indicator 3 : Modernization of Almaty and YuKGRES SSs Substations exist but are Value in poor operating (quantitative condition and or Qualitative) rehabilitation is needed. Operational Operational Operational Date achieved 12/30/ /30/ /30/ /01/2014 Comments (incl. % 100% achieved achievement) G. Ratings of Project Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 06/27/2011 Satisfactory Satisfactory /25/2012 Satisfactory Satisfactory /03/2013 Satisfactory Satisfactory /03/2014 Satisfactory Moderately Unsatisfactory /07/2014 Satisfactory Satisfactory /19/2015 Satisfactory Satisfactory /10/2015 Satisfactory Satisfactory iv

10 H. Restructuring (if any) Restructuring Date(s) Board Approved PDO Change ISR Ratings at Restructuring DO Amount Disbursed at Restructuring in USD millions 09/29/2014 N S S IP Reason for Restructuring & Key Changes Made The Government of Kazakhstan submitted a request for cancellation of the undisbursed loan balance due to completion of the transmission line ahead of schedule and under budget. Minor corrections were made to the Results Framework to more comprehensively reflect the project results. I. Disbursement Profile v

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12 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal At appraisal in 2009, Kazakhstan had enjoyed a prolonged period of strong economic performance. Real Gross Domestic Product (GDP) had grown at an average rate of 10 percent between 2000 and 2007 due to a combination of rising mineral resource outputs, prices, and strong market orientation. Average real incomes more than doubled along with GDP, transforming Kazakhstan into an upper-middle income economy in a relatively short time. However, while the Government of Kazakhstan (GOK) had made diversification of the economy a development priority, economic performance continued to be highly dependent on the exploitation of natural resources, with minerals and petroleum accounting for 39 percent of GDP and 73 percent of exports in The world economic crisis of 2008 had a major impact on Kazakhstan's growth. Domestic demand which had been fueled by high revenues from oil and other resource exports, particularly between 2005 and 2007, had resulted in a high concentration of credits in nontradables (finance and construction) creating a real estate bubble that eventually burst in Sharp declines in commodity export prices beginning in late together with tighter financial markets prevented commercial banks from rolling over their sizeable debt repayment obligations. GDP growth slowed to 3.3 percent in 2008, and 1.2 percent in Pressures for devaluation led to an 18 percent devaluation of the national currency (the tenge or KZT) in February Looking ahead, however, most of the forecasts at the time, including those of the IMF, predicted 4.0 percent GDP growth in 2010 and mediumterm prospects remained favorable with an expected significant expansion in oil production. The large off-shore Kashagan Oil Project was seen as one of the means by which the country would virtually double oil production over the next years. Sector and Sector Institutions There were 63 power generation plants in Kazakhstan in 2009 with a total installed capacity of 19,128 MW, although only 14,821 MW was available for generation. In addition, the main equipment in many of the plants was in poor condition and it was expected that further decommissioning would be required in the next few years. Total generation in 2009 was 78.4 TWh and gross domestic consumption was 77.9 TWh. Coal-fired plants accounted for about 86 percent of supply, with hydro-power plants (9 percent), and gas-fired plants (5 percent) providing the balance. While Kazakhstan theoretically had sufficient generation capacity to meet domestic power demand, four-fifths of power generation came from the northern part of the country, predominantly from power plants located in the coalproducing regions and to a lesser extent from hydroelectric facilities. Generation facilities in the south were limited to small hydro, combined heat and power plants, and a high-cost 1 Crude oil prices fell from US$132/bbl in July of 2008 to US$42/bbl in December. However they had recovered to US$75/bbl by December

13 gas/oil-fired power plant. The 300 MW Moinak Hydroelectric Power Plant (MHPP) was the only new significant generation investment planned for the South, which meant that maintaining adequate transmission capacity was essential to ensuring reliable ongoing electricity supply to the economically important Southern Region. Moreover, the next new plant being discussed was a 1,320 MW coal-fired plant on the south-western shore of Lake Balkhash, which would add further to the need for north-south transmission capacity. The financial crisis had provided some relief to concerns about capacity constraints as national electricity consumption fell by 3.3 percent in 2009, after having grown at a steady annual rate of 5 percent since However, with anticipated economic recovery, electricity demand was expected to recover also. Demand in the Almaty region had been growing faster than the national average in prior years (7.6 percent per year); and the region was expected to continue to exceed national growth rates given the diversified economic base and strong growth potential. Kazakhstan s transmission network included 24,374 km of lines, ranging from 35kV to 1,150 kv. The 74 high voltage transmission substations (SS), with an aggregate capacity of 33,699 MVA, were located in nine regional power networks. By 1997, as part of the GOK's reform of the power sector, the largest generation plants had been separated from the former Kazakhstanenergo, a vertically integrated national utility. Concurrently, in 1997 the state-owned Kazakhstan Electricity Grid Operating Company (KEGOC) was created to operate the high voltage transmission network and the Regional Electricity Distribution Companies (REKs) were established. KEGOC operated all transmission assets at the 220, 500 and 1,150 kv levels of national and interregional significance and was responsible for national dispatch control and international cross-border connections. Its system consisted of: (i) (ii) (iii) the Northern grid connected to the Russian power system; the Southern grid connected to the Northern grid and to the Central Asian power grid through single circuit 500 kv lines; and the Western grid comprised of two largely isolated subsystems that imported power from Russia to supplement local generation. Sector Regulation The wholesale electricity market was fully liberalized and operated mainly on the basis of bilateral contracts between generators and wholesale consumers or ESOs (Electricity Supply Organizations), for direct sale of power. Under the previous World Bank-supported Electricity Transmission Rehabilitation Project, the GOK in 2002 established a wellfunctioning day-ahead spot market (KOREM), accounting for about 15 percent of total wholesale turnover. To complete the wholesale electricity market reforms, a real-time balancing market was established under the Bank-supported North-South (N/S) Electricity Transmission Project. This balancing market has been operated by KEGOC in simulation mode in the absence of sufficient flexible, lead-following generation capacity. At present, under 2004 legislation, it is supposed to begin live operation at the beginning of

14 KEGOC is regulated by the Committee (formerly Agency) for Regulation of Natural Monopolies and Competition Protection (CRNM) under the Law on Natural Monopolies. This law ensures full recovery of justifiable costs, including the cost of new investments. KEGOC s tariffs are approved by CRNM on a cost-plus basis and include a 10 percent regulated rate of return. There is a Grid Code in place with a set of rules governing nondiscriminatory third-party access to the transmission and distribution networks. At the national level, KEGOC has implemented these rules on its high voltage transmission system. At the regional level, the largely vertically integrated REKs have been more lax in the implementation of third-party access. Project Rationale The Alma Electricity Transmission Project (Alma Project) financed incremental transmission capacity at the Alma Substation (SS), a new bulk supply point for Almaty Oblast. The Alma SS was intended to help prevent power shortages caused by the lack of adequate transmission capacity and operational problems at the Almaty SS. In addition, the Alma Project interconnected Alma SS with Almaty SS to the west and YuKGRES SS to the north at 500 kv level, and other existing SS at 220 kv level, thus providing increased operational flexibility in the transmission networks serving Almaty and Zhambyl power regions. The Project was part of the development strategy of Kazakhstan s national power sector for The strategy included a list of seven projects aimed at reconstruction, reinforcement and modernization of the national power grid, which linked not only regions within the country, but also the electricity grids of neighboring Central Asian countries. It was also a necessary adjunct to the planned development of planned new power generation resources along the western shore of Lake Balkhash. The Project further strengthened the institutional capacity of KEGOC and thus helped improve the performance and quality of its transmission services. Closely linked with the N/S Transmission Project and the Moinak Electricity Transmission Project (METP), the projects altogether were key parts of the overall strategy to alleviate the power shortages in southern Kazakhstan. The Project was consistent with the objectives of the Country Partnership Strategy (CPS) of FY2005-FY2011, which were to support the development priorities of the GOK. One of the key pillars of the CPS, Pillar 3, involved building a foundation for future competitiveness by investing in human capital and basic infrastructure. The number one infrastructure constraint cited by nearly 45 percent of firms in Kazakhstan in 2009 was inadequate provisioning of electricity. Inadequate electricity supply can increase costs, disrupt production, and reduce profitability for businesses, severely impacting competitiveness. The Project supported this development priority by addressing growing constraints to reliable power supply in Almaty Oblast which was one of the high-growth regions of the country, and was expected to experience future power shortages. From the broader development perspective, continuing reliable and cost effective electricity supply was fundamental to both the social and economic development of Southern Kazakhstan. The Project was expected to enhance the well-being of the population in southern Kazakhstan by (i) providing relatively low cost and higher quality energy; (ii) removing a binding energy supply constraint to continued economic growth in 3

15 the region; and (iii) increasing the region s competitiveness in terms of industrial and commercial development with related employment and income benefits. 1.2 Original Project Development Objectives and Key Indicators The project development objective (PDO) as presented in the Project Appraisal Document (PAD) and Loan Agreement was to improve the reliability and quality of electricity supply to consumers in the Almaty region in an environmentally responsible and financially sustainable manner. Completion of the project was expected to have the following outcomes according to the PAD: Table 1. Original Project Outcome Indicators Project Outcome Indicators Baseline Target (2009) (FY2014) Increased reliability of supply measured by reduced outages in Almaty16 outages, 10 outages Branch of KEGOC 238 GWh 140 GWh Increased capacity to supply Almaty Oblast measured by capacity of 500 kv transformers which tie to the HV network 1,000 MVA 2,000 MVA Increased capacity to supply Almaty Oblast measured by overloading 10% at peak 70% at peak of transformers in Almaty SS Increased Transmission Line capacity for Almaty Oblast Construction and commissioning of transmission lines Construction of Alma SS Modernization of Almaty and YuKGRES SSs 650 MVA in 1 line from YuKGRES SS 1,300 MVA in 2 lines from YuKGRES SS New lines operational Operational Operational 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification The PDO was not revised; however, the results framework that was set up at appraisal was found to have some minor shortcomings. Accordingly as part of the September, 2014 restructuring, a number of revisions were made to the Key Indicators without changing their substance. The revisions were as follows: i) The key outcome indicator increased reliability of power supply in the Almaty power region was adjusted to make its monitoring more comprehensive by adding a new sub reliability indicator: total duration of outages. The outage frequency indicator was clearly separated into the number of outages per year and the associated amount of unserved energy. ii) Incorrect baseline figures for 2009 regarding the number of outages, the amount of unserved energy, and the overloading of transformers at Almaty substation were replaced by the correct numbers provided by KEGOC. 4

16 iii) The unit of measurement for the outcome indicator 'transmission line capacity' was amended since both baseline and target values were actually measured in MW rather than MVA. KEGOC also provided actual annual data for the period The revised Project Results Framework (RF) was as follows: Table 2. Revised Project Results Framework Project Outcome and Output Indicators Increased reliability of power supply measured by reduced outages in Almaty Branch of KEGOC in terms of: frequency of outages per year Baseline Actual and Target Values YR Actual 4 YR Target 10 - total duration of outages per year, in hours total amount of unserved energy from outages Increased capacity to supply Almaty Oblast measured by capacity of 500 kv transformers connected to HV network Increased capacity to supply Almaty Oblast measured by reduced overloading of transformers in Almaty SS relative to design capacity Increased Transmission Line Capacity for Almaty Oblast GWh GWh GWh 1,000 MVA 2,000 MVA 2,000 MVA 109% at peak 60% at peak 70% at peak 650 MW in 1 line from YuKGRES SS 1,500 MW in 2 lines from YuKGRES SS 1,300 MW in 2 lines from YuKGRES SS Construction and commissioning New lines complete and No lines of lines commissioned New lines operational Construction of Alma SS No lines Ongoing Operational Modernization of Almaty SS and YuKGRES SS 1.4 Main Beneficiaries Substations exist but are in poor operating condition and rehabilitation is needed YuKGRES SS Complete and commissioned Operational The PAD anticipated that the project would enhance the well-being of the population in southern Kazakhstan by (i) providing relatively low- cost and higher quality energy; (ii) removing a binding energy supply constraint to continued economic growth in the region; and (iii) increasing the region s competitiveness in terms of industrial and commercial development with related employment and income benefits. It also noted that reliable and cost-effective electricity supply is fundamental to both social and economic development, suggesting a wider ranging impact. As anticipated at the time of project preparation, electricity consumers in the Southern region are the main beneficiaries of the increased capacity to transmit electricity into the region. They are now receiving more reliable electricity supply made possible by the reduction in duration of outages and a reduction of

17 periodic supply interruptions from the occasional overloading of the transformers in Almaty SS. Indirectly, the Project will also benefit the users of public and private institutions such as schools, hospitals, health centers, public transit, and the like who will benefit from a higher quality of service owing to the greater reliability of electricity supply. In the longer term, the additional transmission capacity created will help to ensure the region's access to power from the new Balkhash coal-fired generating station, which is scheduled to begin operations in 2019 and which will help to meet continued deficits between regional electricity demand and local generation. In addition, the Project will benefit power consumers and suppliers in Kazakhstan and in neighboring Central Asian countries by facilitating inter-regional trade of seasonal power surpluses. 1.5 Original Components The Project was composed of the following three components: Part 1 - Construction of Transmission System Lines; Part 2 - Construction, Extension and Modernization of SSs; and Part 3 Consulting and Technical Services. A detailed description of the components and their subcomponents is presented below. Part 1 - Construction of Transmission System Lines a) Construction of a 500 kv overhead transmission line (OHTL) from YuKGRES SS to Alma SS (about 319 km); b) Construction of a 500 kv OHTL from Almaty SS to Alma SS (63.2 km); c) Construction of a 220 kv OHTL from Alma SS to Kensai SS (47.3 km); d) Construction of incoming cross connection lines of the 220 kv OHTL from Almaty CHP-3 to Robot SS for connection with Alma SS (6.1 km); and e) Construction of incoming cross connection lines of the 220 kv OHTL from Almaty CHP-3 to Shelek SS for connection with Alma SS (49.8 km). Part 2 - Construction, Extension and Modernization of SSs a) Construction of 500 kv Alma SS; b) Extension and modernization of 500 kv Almaty SS; and c) Extension and modernization of 500 kv YuKGRES SS. Part 3 Consulting and Technical Services a) Procurement and project management consulting services for the construction of 500 kv OHTL from YuKGRES SS to Alma SS, including preparation of bidding documents and technical specifications, site visits, quality control and monitoring of all executed work, and verification of contractors payments and reporting; b) Technical services for the selection and approval of the OHTL route, including support for selection of the transmission routes, conducting of engineering surveys and engineering supervision of contracts during construction. 6

18 The Bank financed two components of the Project: 1(a) construction of a 500 kv OHTL from YuKGRES SS to Alma SS: and 3(a) procurement and project management consulting services for the construction of 500 kv OHTL from YuKGRES SS to Alma SS. 1.6 Revised Components No components were revised during project implementation. 1.7 Other significant changes As part of a restructuring in September, 2014, an unutilized loan balance of US$6.64 million was cancelled at the request of the Borrower. The unutilized balance arose as a result of cost savings on the original turnkey contract for construction of the 500 kv OHTL. In addition, construction of the line was completed and the State Commission's completion certificate issued ahead of schedule. This allowed the Procurement and Project Management consultant's contract be amended reducing the duration by six months. Together these two factors accounted for the cost saving and balance cancellation. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry Overall, the Project was well prepared and Project design was well conceived. It was based on a thorough assessment of the Borrower's and implementing agency's capacity and reflected lessons learned from past Bank operations in the transmission sector. The Project indicators allowed for the capturing of Project benefits and achievement of the PDO although some of the indicators required further refinement during implementation.. Project Design was guided by in-depth analysis of options. A range of technical solutions were considered to increase the reliability and level of supply to the Almaty region including scenarios for the expansion of the existing Almaty SS and options for the construction and interconnection of the new Alma SS. The proposed technical solutions were based on well-established and proven standard technical concepts and technologies, which were being applied worldwide. The selection of transmission line routing encompassed technical, economic, social and environmental considerations. Routes were identified using route surveys, aerial photos and topographic maps. The selected alternative was considered to be most suitable since: (i) it provided immediate relief to the overloaded transmission system of the Almaty Oblast, (ii) it helped stabilize the supply to Almaty Oblast, and (iii) with growth in demand in Almaty Oblast, it would enable effective transmission of low-cost electricity from generating sources within Kazakhstan and from neighboring countries (Kyrgyz Republic and Tajikistan) depending on when and where new generating plants were constructed. The preparation team took care to coordinate the schedule of the transmission line completion with the Alma SS completion and the works on the other SSs and transmission lines. 7

19 Lessons learned from prior Bank work in Kazakhstan were taken into account during design and preparation of the Project, including (i) the need to coordinate among key GOK agencies in both the project processing plan and in the ultimate scope and design of the project; and (ii) the importance of competent and efficient national project management staff in ensuring the viability and sustainability of the project. Prior experience in the implementation of transmission projects had demonstrated that special attention needed to be paid to the analysis of alternative possible transmission line routes to minimize the adverse environmental and social impact and this was done. Close attention was paid to fiduciary and safeguard issues, and the outcomes of public discussions of route location were incorporated into the final project design. 2 Finally, previous projects with KEGOC had shown that Engineering, Procurement, Construction (EPC) contracts for the construction of transmission lines and rehabilitation of substations provide an efficient way of implementing projects in a cost-effective and efficient manner and these were incorporated into the Project's procurement plan. Careful Attention to Project Management was key in successful implementation of the project. KEGOC, the Borrower and implementing agency, had already gained substantial experience in implementing two previous World Bank-financed projects: the Electricity Transmission Rehabilitation Project, and the N/S Electricity Transmission Project, and was in the process of implementing a third, the METP. Its organization, staffing and reporting processes were well established and satisfactory and its procurement and financial management capacity had been shown to be satisfactory. In order to further support project management, the Bank financed a Procurement and Project Management consultancy to assist KEGOC in the tendering and bid evaluation process and in the management of construction of the OHTL from YuKGRES to Alma SS. In addition, it was agreed that construction of the OHTL would be handled through an EPC contract. As noted above, previous projects with KEGOC had demonstrated that turnkey contracts for the construction of transmission lines and rehabilitation of SSs provided an efficient way of implementing projects in a cost-effective manner without over-burdening the company s project supervision capabilities. Strong Government Commitment facilitated the smooth implementation of the project. The Project enjoyed strong support from the GOK, and had been approved as part of the development strategy of Kazakhstan s national power sector for The Bank team coordinated with key GOK agencies on the Project s design, processing schedule, and implementation plan. 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 Assessment of Risks identified and addressed the major risks likely to be faced and outlined a mitigation strategy for each. The overall risk rating was assessed as Moderate, 2 A public consultation was held on November 14, 2008 for both the METP and Alma projects. A second public consultation to discuss the EMP for Alma Project was held on October 15,

20 which proved to be the case. The only risk identified as Substantial related to adequacy of the transmission tariff, and that was mitigated by the provisions of the Guarantee Agreement (GA) that ensured that the transmission tariff would be maintained at levels sufficient to cover KEGOC s longer term cash flow requirements, and by financial performance covenants in the Loan Agreement (LA). Fiduciary risks were mitigated by the strengthening of the Project Management Unit (PMU) of KEGOC with an international consultant to assist in Project management, while the turnkey procurement arrangement was designed to prevent major Project implementation delays. Table 3. Project Risks and Risk Mitigation Risk Risk Rating Risk Mitigation Measures Realized? Inadequate transmission tariffs jeopardize the financial viability of KEGOC and hence its ability to properly maintain and operate the network. Inadequate cash/equity injections from Samruk-Kazyna could threaten KEGOC s ability to finance its large capital investments, service its debt and ensure proper O&M of the network. S Regulatory history Financial covenants in LA Funds adequacy provision in GA. Not yet although projected returns may be at risk M Pre-financing by Samruk- Kazyna to cover co-financing of Project. Funds adequacy provision in GA Not yet Declining economic growth reduces demand for electricity in the Southern region of Kazakhstan and Almaty Oblast, in particular. N Demand in the region already exceeds available peak supply. The additional transmission capacity is an operational requirement and would be needed to avoid peak period load shedding and provide for adequate network redundancy. Yes, but so far has only delayed benefits and reduced project returns. According to Transparency International s Corruption Perception Index (CPI) of 2007 and 2008, there is a perception of high corruption in Kazakhstan, with the country occupying No. 150 position (CPI score of 2.1) in M KEGOC is a well-managed company with strong corporate governance arrangements and no incidences of corruption have been flagged during implementation of the two Bankfinanced projects. No complaints received Project implementation delays due to lack of local financing. N Regulatory history Pre-financing by Samruk-Kazyna to cover co-financing of Project. No 9

21 Risk Risk Rating Risk Mitigation Measures Realized? Project implementation delays due to overloaded implementation capacity. M Procurement and Project Management Consultant EPC contract for transmission line. No Implementation risks associated with project cost overruns. M Costs estimates include both physical and price contingencies The cost of transmission equipment has fallen substantially as a result of the global financial downturn. No Implementation delays associated with delays in obtaining GOK approvals and permits. N GOK approval of the project feasibility study has already been obtained. GOK approval and ratification of legal agreements will be monitored by the Bank. No Risk Rating - H (High Risk), S (Substantial Risk), M (Moderate Risk), N (Negligible or Low Risk) One risk which was not identified or assessed at appraisal related to the timeliness of Bank approvals. This is discussed in Section 5.1 Bank Performance. 2.2 Implementation The project was implemented under budget and ahead of schedule, despite periodic delays in obtaining necessary clearances and approvals. Because KEGOC had requested some modifications to the standard Bank prequalification criteria (see Section 2.4 below), it required almost 8 months to obtain clearance for the pre-qualification documents for the EPC contractor. However, once the pre-qualification was cleared, KEGOC was able to move quickly to negotiate and sign a final contract. In mid-2013, KEGOC had responded to the Bank's initial comments on the Land Acquisition Plan (LAP) and submitted a revised version. With materials and equipment in the field and construction of the OHTL ready to start, they gave the go-ahead to begin construction. However, the Bank safeguards specialist had not yet formally cleared KEGOC's LAP (see also Section 2.4), and moreover turned the project over to another person in mid-september, with instructions to re-start the review process. As a result, the Project's Safeguards rating was downgraded to Moderately Unsatisfactory for a time. The situation was ultimately resolved, although it required an ex-post audit of the land acquisition process to ensure that all parties had been properly treated and adequately compensated. Construction of all components was substantively completed by mid-2014, well ahead of the scheduled April 2015 closing date. 10

22 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization M&E Design Generally, the M&E indicators included a good combination of indicators that would allow monitoring of implementation progress and of project outcomes. Outage frequency and unserved demand both provided a relevant measure of service quality, especially given that the region was subject to frequent forced outages as a result of inadequate SS capacity. In addition, reduced overloading of transformers at Almaty SS provided an additional predictive measure of the system's ability to avoid outages in the future. Measures of SS and line capacity both provided an indication of the system's ability to meet anticipated demand growth in the Almaty region. The implementation progress indicators also provided guidance with respect to milestones such as contract signing and progress towards completion of each of the major physical components of the Project. There are no indicators for environmental responsibility or financial sustainability. However, both issues are addressed as covenants in the Loan Agreement. M&E Implementation The data for M&E indicators were collected and reported regularly. The environmental responsibility and financial sustainability issues which are addressed as covenants in the Loan Agreement were also monitored on a regular basis. Some minor design shortcomings were recognized as the project progressed, and it was agreed as part of a September 2014 restructuring to adjust the key outcome indicator increased reliability of power supply in the Almaty power region to make its monitoring more broadly based by adding a new reliability indicator: duration of outages (System Average Interruption Duration Index). In addition, the outage frequency indicator was clearly separated into the number of outages per year and the associated amount of unserved energy and some of the indicators were restated (without changing substance) to make them clearer. The incorrect baseline figures for 2009 regarding the number of outages, the amount of unserved energy, and the overloading of transformers at Almaty SS were replaced by the correct actual numbers provided by KEGOC. The unit of measurement for the output indicator transmission line capacity was also amended. M&E Utilization In terms of utilization, the implementation progress indicators were useful in pointing out the seriousness of the delays both in signing initial contracts for construction of the YuKGRES- Alma transmission line, and in undertaking and completing line construction. Both KEGOC and the Bank supervision team worked diligently to address the obstacles that were hindering progress. As a result, the project was able to complete ahead of schedule. 2.4 Safeguard and Fiduciary Compliance There were no major issues relating to fiduciary compliance either during project preparation or implementation. KEGOC was an experienced Bank borrower and was fully 11

23 conversant with Bank requirements for procurement, financial management, and financial reporting. Procurement was rated as Satisfactory throughout, while Financial Management's initial Satisfactory rating was upgraded to Highly Satisfactory as the Project progressed. With respect to procurement, KEGOC requested an adjustment to the prequalification criteria for the EPC consultant, asking to be allowed to include prior international experience among the criteria, since this same issue was at the time causing it serious problems with the METP. The EPC consultant for METP had no prior experience outside their home country, and had failed to field a team to carry out the project in a timely manner. As a result, there were significant implementation delays, and KEGOC had themselves been forced to carry out several of the consultant's obligations in order to ensure that the deadlines for line completion were met. KEGOC s request for an adjustment to the pre-qualification criteria which was ultimately declined led to substantial delays in clearing the pre-qualification documents. In all it took more than eight months between the time the pre-qualification report was submitted for clearance and the time it was finally approved. The project triggered two Safeguards policies: Environmental Assessment (EA) and Involuntary Resettlement (IR). All requirements for prior disclosure and public discussion of the Environmental Management Plan (EMP) of the overall Project were met prior to Board approval. A condition in the Loan Agreement required that KEGOC prepare an EA and EMP for transmission line construction once the line route was established and prior to starting construction, which was done. Regular supervision missions also concluded that implementation of the EMP was satisfactory. In September 2014, when the Project was substantively completed, a Bank Environment Mission visited the Project sites and met with KEGOC specialists to review KEGOC's compliance with EMP requirements. Based on site visits and discussions the mission concluded that:(a) there are no outstanding environmental issues; (b) the project activities are being implemented taking into account the World Bank and national environmental requirements; and (c) the EMP was implemented successfully and there is no need for any corrective measures. With respect to Involuntary Resettlement, it was not possible to prepare a Land Acquisition Plan (LAP) prior to Board approval because the exact route of the transmission line had not yet been determined. KEGOC did, however, prepare and disclose a Land Acquisition Policy Framework (LAPF) satisfactory to the Bank, and the Loan Agreement included a condition that a satisfactory LAP would be prepared prior to starting construction of the transmission line. Once the route was finalized, KEGOC prepared and submitted their LAP and subsequently submitted an amended version responding to the comments of the safeguard specialist. However, owing in part to a change in staffing, five months elapsed between KEGOC's submission of their LAP and a Social Safeguards Specialist's mission to work with KEGOC to finalize the LAP. In the interim, KEGOC had moved forward with field works, triggering a Moderately Unsatisfactory rating for the Project with respect to both Safeguards compliance and Implementation Progress. Bank staff visited the field in late November of 2013 to observe and interview affected populations and found no adverse impacts. Owing to the fact that construction was carried out prior to formal approval of the LAP, an independent consultant was engaged to carry out a social safeguards audit in February-March The audit report concluded that the practices under the project had 12

24 followed the Bank guidelines with a few (minor) data inconsistencies; these were discussed with KEGOC and specific rectification actions agreed and implemented. 2.5 Post-completion Operation/Next Phase The investments financed by the Project form an integral part of KEGOC's transmission network and will be operated as such by the company. Company personnel have proven themselves fully competent at operating and maintaining an expansive and complex high voltage (HV) transmission network, and there is no concern about their technical capacity to operate and maintain the assets. KEGOC's financial capacity has not been a major cause for concern over the years either, despite the fact that its tariffs are controlled by the state regulatory agency. In the past, the CRNM has consistently approved annual adjustments to transmission and dispatch tariffs sufficient to allow full cost recovery plus a modest return on investments. The Loan Agreement also contains a clause that requires the Guarantor (i.e., the GOK) to ensure that KEGOC s tariffs are maintained at levels sufficient to fully cover the company s prudently incurred operating costs as well as a regulated rate of return on fixed assets employed. In addition, the state holding company, Samruk Kazyna, which holds most of KEGOC's assets, has shown itself willing to ensure that KEGOC has sufficient cash flow to finance its investment program, including debt service obligations. 3 Moreover, the CRNM has recently (October 22, 2015) approved new caps for KEGOC's tariffs for the period which include significant increases beyond forecast inflation and appear to be sufficient to ensure a satisfactory rate of return for the Project. While there is always a risk that KEGOC may find itself in financial difficulty at some point in the future and have problems with adequately maintaining the assets in spite of past history and government guarantees, this is not a major concern at the present time. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation Rating: High The relevance of objectives, design and implementation is rated high based on an assessment of the PDO's links to the development priorities of the GOK and on the links between the Project design and implementation to the achievement of the PDO. Relevance of Objectives: The Project's objective, as stated earlier, is "to improve the reliability and quality of electricity supply to consumers in the Almaty region in an environmentally responsible and financially sustainable manner". In the context of the 3 In 2008, Samruk Kazyna and the GOK together contributed the equivalent of US$60 million in equity to KEGOC to assist in the funding of their capital investment program. Following the devaluation in February of from 120 KZT/USD to 150 KZT/USD - Samruk Kazyna provided an additional US$153 million in equity support to the transmission company. 13

25 PDO, reliability is understood to mean not only the ability to satisfy the immediate demands of consumers but also the ability to meet future medium and long-term demand growth, while quality focuses on short-term measures such as the avoidance of forced outages. 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 in the FY05-11 CPS. The project remains consistent with the objectives of the World Bank for Kazakhstan and outlined in the Bank s CPS for FY12-17, which is designed to help the GOK implement its key development priorities, specifically competitiveness and jobs; strengthened governance in public administration and service delivery; and safeguarding the environment. The current FY12-17 CPS makes specific mention of improving competitiveness and fostering job creation through, inter alia, 'improving energy transmission to poor areas', as well as building world-class infrastructure. Environmental responsibility and financial sustainability both tie in with the GOKs development priorities of safeguarding the environment and strengthening governance. The project is therefore highly relevant to the Bank s strategy for Kazakhstan. Relevance of Design and Implementation: The Project's design was directly relevant to the achievement of the objectives at the time of appraisal and continues to fulfil a key role in overcoming transmission constraints within the Southern Region. At the time of appraisal, a new 1,320 MW coal fired power plant was being discussed, which would be located on the south-western shore of Lake Balkhash, just north of YuKGRES SS and would meet a significant part of the future power demands of the Almaty region. However, the timing and the financing for the Balkhash plant were uncertain, and the project preparation team did not include it in their assessment of the Project's impacts. Financing has now been secured, and construction is under way with completion expected in This circumstance has significantly increased the importance of the added transmission capacity that the Project will provide between YuKGRES SS and the Almaty Region. 3.2 Achievement of Project Development Objectives Rating: Substantial All components of the PDO have been achieved, including improving the reliability and quality of supply and satisfying the requirements for environmental responsibility and financial sustainability. The key indicators for reliability and quality have been met and in some instances exceeded, while the covenants relating to the EMP, Involuntary Resettlement, and Financial Performance were all satisfied. Financial sustainability remains a concern, but to date the PDO has been satisfied. The table below summarizes the (revised) baseline M&E indicators, the targets, and the actual values for The baselines and targets are both based on the RF as revised during the September 2014 restructuring. A split evaluation has not been provided since (i) the changes made were not substantive to the essence of the results expectations for the project 14