Kaztemirtrans Restructuring Loan

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Translated version of this PSD: Russian The EBRD is considering providing a US$200 million senior loan with equity conversion option to Kaztemirtrans JSC (KTT), a subsidiary of Kazakhstan Temir Zholy, Kazakhstan’s National Railways Company (KTZ), to finance the acquisition of freight wagons. KTT would use the loan proceeds to purchase freight wagons continuing with its fleet modernisation programme. Purchase of new modern wagons would also allow the Company to capitalise on the productivity improvements from the new cars in terms of maintenance unit costs. Transition impact is expected to be derived from the following: (1) Corporate development and corporate governance improvement The transformation of KTT into the new freight company will require strengthening of its corporate functions. The Corporate Development Programme will help KTT develop an organisational structure which will ensure that: (i) operational decisions are made by management on the arm's length basis; (ii) profit-sharing and dividends allocation restriction principles are established; (iii) business planning and leverage policies are put in place; (iv) the Board composition changes in order to include independent directors and also has specific committees as is the best practise in the industry. These steps will build the essential foundation for the creation of a commercially viable freight carrier. (2) Freight market tariffs deregulation This transaction will focus on deregulation of freight tariffs to allow KTT to operate under market based tariffs, in line with private freight operators once open access is introduced. (3) Independent railway regulator An independent railway sector regulator would be established based on the best market practice. KTT is a 100% subsidiary of KTZ and is the holder of the entire freight wagon fleet of KTZ. KTT leases its fleet to KTZ and provides freight forwarding services on a commercial basis via subsidiaries. US$200 million equivalent of senior loan with equity conversion option to KTT for the acquisition of freight wagons. Up to 50 per cent of the loan is to be provided in Kazakh local currency, Tenge. The EBRD would hold a free option to convert the loan into a minority stake in KTT equity within a certain limited period of time and subject to fulfilment of certain pre-agreed conditions. US$270 million Categorised B. An independent environmental and social due diligence identified that the Company has Environmental and Occupational Health and Safety Management Systems, which cover the administrative premises of the Company but do not apply to operational facilities. KTT have an adequate risk assessment procedure document and employees of the Company are provided with the occupational health and safety induction and regular training courses. However, site visits to the selected depots identified a need for a number of health and safety improvements and better enforcement of the use of Personal Protection equipment. The Company is planning retrenchment of personnel to be implemented from 2010 to 2020. The Company will be required to prepare a retrenchment plan which will be reviewed by the Bank. A Project-specific Environmental and Social Action Plan (“ESAP”) has been developed to address identified issues The ESAP contains, inter alia, measures aimed at improving environmental, health and safety management procedures at depot levels, health and safety arrangements at depot levels as well as developing retrenchment plan and grievance mechanism for employees in line with the EBRD requirements. The following Technical Co-operation in connection with the Project is proposed: (1) Corporate Development Programme for the Company which has the objectives of: (2) Review of the freight sector regulation in Kazakhstan with a view of developing recommendations according to the best industry practice and establishing independent railway sector regulator.