Report and Recommendation of the President to the Board of Directors Project Number: 51052-002 April 2019 Proposed Loan Republic of Uzbekistan: Railway Efficiency Improvement Project Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB's Access to Information Policy after excluding information that is subject to exceptions to disclosure set forth in the policy.
Transcript
Report and Recommendation of the President to the Board of Directors
Project Number: 51052-002 April 2019
Proposed Loan Republic of Uzbekistan: Railway Efficiency Improvement Project Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB's Access to Information Policy after excluding information that is subject to exceptions to disclosure set forth in the policy.
CURRENCY EQUIVALENTS (as of 17 April 2019)
Currency unit – sum (SUM)
SUM1.00 = $0.00011915 $1.00 = SUM8,392.49
ABBREVIATIONS ADB – Asian Development Bank CAREC – Central Asia Regional Economic Cooperation km – kilometer LIBOR – London interbank offered rate O&M – operation and maintenance PAM – project administration manual PIU-ET – Project Implementation Unit for Electrification and Renewal of
Rolling Stock UTY – O’zbekiston Temir Yo’llari (Uzbekistan Railways)
NOTE
In this report, “$” refers to the United States dollars. Vice-President Shixin Chen, Operations 1 Director General Werner Liepach, Central and West Asia Department (CWRD) Director Dong-Soo Pyo, Transport and Communications Division, CWRD Team leader Ko Sakamoto, Senior Transport Specialist, CWRD Team members Ana Paula Araujo, Environment Specialist, CWRD Didier Guynet, Senior Procurement Specialist, Procurement, Portfolio
and Financial Management Department Feruza Insavalieva, Associate Safeguards Officer, Uzbekistan Resident Mission (URM), CWRD
Shokhimardon Musaev, Senior Project Officer, URM, CWRD Lyailya Nazarbekova, Principal Counsel, Office of the General
Counsel Anna Liza Silverio, Senior Operations Assistant, CWRD Yukihiro Shibuya, Social Development Specialist (Safeguards), CWRD
Peer reviewer Takeshi Fukayama, Transport Specialist, Southeast Asia Department
In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.
CONTENTS
Page
PROJECT AT A GLANCE
MAP
I. THE PROPOSAL 1
II. THE PROJECT 1
A. Rationale 1
B. Impact and Outcome 4
C. Outputs 4
D. Summary Cost Estimates and Financing Plan 5
E. Implementation Arrangements 6
III. DUE DILIGENCE 8
A. Technical 8
B. Economic and Financial 8
C. Governance 8
D. Poverty, Social, and Gender 9
E. Safeguards 9
F. Summary of Risk Assessment and Risk Management Plan 10
IV. ASSURANCES 11
V. RECOMMENDATION 11
APPENDIXES
1. Design and Monitoring Framework 12
2. List of Linked Documents 13
Project Classification Information Status: Complete
PROJECT AT A GLANCE
Source: Asian Development BankThis document must only be generated in eOps. 12042019151812816653 Generated Date: 30-May-2019 16:53:37 PM
1. Basic Data Project Number: 51052-002Project Name Railway Efficiency Improvement Project Department
/DivisionCWRD/CWTC
Country Uzbekistan Executing Agency O'zbekiston Temir Yo'llariBorrower Uzbekistan
CO2 reduction (tons per annum) 900,000Climate Change impact on the Project
Medium
ADB Financing
Mitigation ($ million)
[This information was deemed confidential according to paragraph 2 (v) of ADB's Access to Information Policy (2018).]
4. Drivers of Change Components Gender Equity and MainstreamingGovernance and capacitydevelopment (GCD)
Institutional developmentOrganizational development
Knowledge solutions (KNS) Application and use of new knowledge solutions in key operational areasKnowledge sharing activitiesPilot-testing innovation and learning
This map was produced by the cartography unit of the Asian Development Bank. The boundaries, colors, denominations, and any other information shown on this map do not imply, on the part of the Asian Development Bank, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries, colors, denominations, or information.
I. THE PROPOSAL
1. I submit for your approval the following report and recommendation on a proposed loan to the Republic of Uzbekistan for the Railway Efficiency Improvement Project. 2. Directly complementing other projects in Uzbekistan for the electrification of its railway network, two of which are supported by the Asian Development Bank (ADB), the project will procure a new fleet of 24 electric locomotives, and offer cleaner, more reliable, and efficient passenger and freight transport services.
II. THE PROJECT
A. Rationale
3. Strategic location of Uzbekistan. Surrounded by Afghanistan to the south, Kazakhstan to the north and northwest, the Kyrgyz Republic to the northeast, Turkmenistan to the southwest, and Tajikistan to the southeast, Uzbekistan serves three of six Central Asia Regional Economic Cooperation (CAREC) corridors. With about 33 million people, Uzbekistan is the most populous country in Central Asia. It is doubly landlocked—requiring crossing at least two countries to reach a seaport—so transport plays an important role in sustaining its socioeconomic development. 4. Critical role of railways. Rail transport has a unique competitive advantage over road transport for moving goods in bulk over long distances, as well as for moving passengers between densely populated cities. The 4,669-kilometer (km) Uzbekistan rail network carries about 68 million tons of freight and 21 million passengers annually. In Uzbekistan’s land transport system, railways carry about 40% of the total freight volume, and about 4% of the total passenger volume.1 Since 2004, Uzbekistan’s gross domestic product has on average grown by more than 7% per year. This has contributed to strong demand for rail transport. Ongoing improvements in the relationship between Uzbekistan and its neighbors will further add to such demand. The vertically-integrated public railway company O’zbekiston Temir Yo’llari (UTY) expects demand for rail transport to steadily grow in line with economic activity in the country and in the subregion. 5. The recently approved CAREC Railway Strategy 2017–2030 notes railways’ role as an engine for economic growth in Central Asia, especially as they help countries to diversify trade patterns, attract foreign direct investment, increase participation in global production networks, increase related trade in manufactured products, and diversify exports.2 6. Consistency with national development objectives. The government’s Development Strategy for 2017–2021 pursues five priority areas: (i) improvement of the system of state and public construction; (ii) safeguarding of the rule of law and further reform of the judicial system; (iii) economic development and liberalization; (iv) development of the social sectors; and (v) security, inter-ethnic harmony and religious tolerance, and implementation of a balanced and mutually beneficial and constructive foreign policy.3 Transport and communication are seen as key in supporting priority areas (iii) and (iv), and the strategy specifically mentions the importance of improving transport services, raising passenger safety, and reducing harmful emissions.
1 United Nations Economic Commission for Europe. 2019. Transport Statistics Infocard – Uzbekistan. Geneva. 2 ADB. 2017. Unlocking the Potential of Railways: A Railway Strategy for CAREC, 2017–2030. Manila. 3 Government of Uzbekistan. 2017. Uzbekistan’s Development Strategy for 2017–2021. Tashkent.
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7. Consistency with ADB’s Strategy. The project is consistent with ADB’s Strategy 2030, and in particular its operational priorities in (i) tackling climate change, building climate and disaster resilience and ensuring environmental sustainability, (ii) strengthening governance and institutional capacity, and (iii) fostering regional cooperation and integration.4 The state-of-the-art electric locomotives to be procured under the project will cut greenhouse gases by 900,000 tons per annum and also reduce local air pollution. The improved efficiency of train services brought about by the project will help reduce journey time on Uzbekistan’s railway network, improve service quality and reliability on the CAREC transport network, and strengthen the conditions for the private sector to grow. The project will thereby contribute to the goals of the CAREC Railway Strategy 2030 (para. 5). The project is consistent with ADB’s country partnership strategy for Uzbekistan, 2012–2016, 5 which calls for investments in the transport sector and the modernization of railway infrastructure. Railways are expected to feature as a critical area for ADB’s support in its forthcoming country partnership strategy for Uzbekistan, 2019–2023. The project is included in the country operations business plan for Uzbekistan, 2019–2021.6 8. Major achievements by Uzbekistan to modernize railways. Since its foundation in 1994, UTY has gradually implemented a holistic railway modernization program, including the completion of a unified rail network, electrification and modernization of existing lines, and improvement of rolling stock.7 The government accorded particular importance to electrification, and 2,530 km—more than 50% of the network—are now electrified. These efforts were supported by ADB, the European Bank for Reconstruction and Development, the Japan International Cooperation Agency, German development cooperation through KfW, the Kuwait Fund for Arab Economic Development, the OPEC Fund for International Development, the People’s Republic of China, and the World Bank. 9. UTY has worked with development partners to undertake institutional reforms. With support from ADB, the government initiated UTY reforms in 1997, under which ancillary services such as health, recreation, and education were largely separated from core operations.8 The downsizing of staff and noncore assets improved the efficiency and sustainability of operations. Since 2015, the World Bank has been supporting the further modernization of business processes, including the accounting system. Even with these reforms, the nature of railways as a public good requires the continued support of the public sector. 10. Remaining challenges. Based on the above achievements, UTY has the scope to further shorten transport time, improve service quality, and reduce operating costs by upgrading its infrastructure, improving operational efficiency, and upgrading its locomotive fleet. This would allow railways to remain competitive against road transport, and help improve economic opportunities, boost regional trade, and reduce environmental impacts for the country. 11. In contrast to the advanced rate of electrification of the network (para. 8), the current locomotive fleet of UTY consists of 75% diesel and only 25% electric engines; this includes 37 electric locomotives which were procured within the last 10 years. Most locomotives have served more than 30 years, far beyond their service life. Limitations in the absolute number of
4 ADB. 2018. Strategy 2030. Achieving a Prosperous, Inclusive, Resilient and Sustainable Asia and the Pacific. Manila. 5 ADB. 2011. Country Partnership Strategy: Uzbekistan, 2012–2016. Manila. 6 ADB. 2018. Country Operations Business Plan: Uzbekistan, 2019–2021. Manila. 7 Government of Uzbekistan, Decree of the President of the Republic of Uzbekistan no. PP-993; 5 November 2008. 8 ADB. 1998. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical
Assistance Grant to the Republic of Uzbekistan for the Railway Rehabilitation Project. Manila; and ADB. 2000. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical Assistance Grant to the Republic of Uzbekistan for the Railway Modernization Project. Manila.
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electric locomotives caused by a lack of financial resources, and the fact that the existing fleet is already being used to its maximum potential, make it difficult to reliably expand freight and passenger train services and meet growing demand (para. 4). The slow acceleration rate and low top speeds of the diesel locomotives, as well as the switching required between diesel and electric engines, lengthen transport time and add to the fleet’s inefficiencies. Locomotive depots are tailored to the servicing of diesel vehicles and need to be upgraded to handle an increasingly electrified fleet. 12. Institutionally, UTY remains a financially robust organization with the ability to carry all operation and maintenance (O&M) costs, and the majority of capital works. However, similar to other railway organizations throughout the world, it faces heavy competition from road transport (passenger and freight) and, in the case of transit traffic, from other countries. The ability of UTY to maintain its financial sustainability depends on its ability to improve the attractiveness of its services to clients. This requires a combination of improved infrastructure and rolling stock, and refinements to its business planning process. 13. Envisaged benefits. The project tackles these challenges by reducing the bottleneck in the availability of electric locomotives, and allowing UTY to maximize the use of its increasingly electrified network (para. 8).9 It will also support UTY’s wider efforts to aggressively invest in necessary infrastructure and improve its business processes. Three distinct benefits from the project are foreseen. First, the procurement of 24 electric locomotives will help UTY to increase the level and reliability of train services for both passengers and freight. Second, the project will improve the environmental performance of the transport network of Uzbekistan by moving transport away from the roads and because electric trains generate less noise, vibration, local pollutants, and greenhouse gases than diesel trains. The locomotives will also have a climate-proof design, allowing for their operation in mountainous terrain under harsh weather conditions. Third, the project improves Uzbekistan’s connectivity with neighboring countries and to markets beyond, by expanding the frequency and quality of train services on CAREC corridors. 14. Lessons learned. ADB has provided four loans to Uzbekistan, two for the rehabilitation and modernization of the railway infrastructure (footnote 8), and two for the electrification of the Marakand–Karshi and Pap–Namangan–Andijan railway lines.10 ADB’s Independent Evaluation Department rated the rehabilitation and modernization projects successful and the government’s and UTY’s performance highly satisfactory. 11 The Marakand–Karshi project was completed successfully in 2018, ahead of schedule and on budget. The Pap–Namangan–Andijan project is largely on track, with major procurement activities completed by Quarter 1 of 2019. Lessons from the implementation of these projects include (i) scoping the project to focus on components that add most value to UTY, e.g., electrification as opposed to general track works; (ii) designing realistic capacity development components to avoid process reforms that cannot be completed within the project time frame; (iii) coordinating on challenges common across the subregion
9 Transaction technical assistance of $1,000,000, financed by ADB’s Technical Assistance Special Fund (TASF-other
sources) was approved in 2017 to prepare the project. 10 ADB. 2011. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Republic
of Uzbekistan for the Central Asia Regional Economic Cooperation Corridor 6 (Marakand–Karshi) Railway Electrification Project. Manila; and ADB. 2017. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Republic of Uzbekistan for the Central Asia Regional Economic Cooperation Corridor 2 (Pap–Namangan–Andijan) Railway Electrification Project. Manila.
through the CAREC program; and (iv) synchronizing project preparation and procurement actions with government procedures to avoid delays. B. Impact and Outcome
15. The impact of the project is aligned with the government’s development strategy, and in particular: implementation of targeted programs to build affordable housing, development and modernization of road and rail transport, engineering, communication, and social infrastructure achieved (footnote 3). The project will have the following outcome: efficiency of passenger and freight transport throughout Uzbekistan’s railway network improved.12 C. Outputs
16. Output 1: Electric locomotives commissioned. The project will provide 24 state-of-the-art electric locomotives, of which 16 are optimized for freight trains and 8 for passenger trains. These will be used throughout the growing network of electrified railway tracks in Uzbekistan, help mitigate the chronic shortage of locomotives, and cater to the increase in freight and passenger movements. Since it is cheaper to operate electric locomotives than diesel ones, this will help improve the cost efficiency of train operations. 17. Output 2: Locomotive depot upgraded. To effectively cater to the maintenance needs of the new electric fleet, the project will upgrade the locomotive depot in Tashkent, named “O’zbekiston”, so it can service electric locomotives as well. ADB has worked with UTY during project processing to ensure that this will be done in a gender-sensitive manner (para. 39). 18. Output 3: Long-term development strategy implemented. A key value addition of the project will be the implementation of a new long-term development strategy for UTY to improve its operational efficiency, optimize the use of its fleet, ensure timely adjustment of tariffs, optimize operating expenses and further promote gender equality (para 39). The long-term development strategy is planned for finalization by the third quarter of 2019 and ADB is actively supporting this process. It will update existing plans, and guide the future direction of UTY and help to maintain its position as a financially sustainable and technically robust organization in Uzbekistan as well as in the Central and West Asia subregion. It will define the future investment needs of UTY and support the sound rationalization and prioritization of projects by strengthening the project formulation process and the use of traffic demand and market analyses. It will also articulate how UTY can mobilize and structure resources efficiently and sustainably. Such resources may be sourced from UTY’s own revenue, government funds, international financing institutions, and commercial sources. The long-term development strategy will also benefit from the injection of knowledge through a newly-approved regional technical assistance being provided to CAREC member countries including Uzbekistan to tackle challenges common across the subregion.13 19. Value added by ADB assistance. The project is part of ADB’s comprehensive support to Uzbekistan’s railway subsector, and complements recent investments in the electrification of main railway lines (para. 14). ADB’s preparation and implementation support adds value to UTY in three ways. First, the electric locomotives to be procured under the project will have features to maximize their quality and reliability; particular attention was given to making the locomotives resilient to climate change and capable of operation in mountainous terrain and under harsh
12 The design and monitoring framework is in Appendix 1. 13 ADB. 2018. Technical Assistance Report. Railway Sector Development in Central Asia Regional Economic
Cooperation Countries. Manila.
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weather conditions. Second, UTY’s internal capacity to procure high-quality locomotives in the future will be improved by ongoing assistance to UTY staff in the procurement process, and in attracting financing from various sources. This will equip UTY with the in-house skills to further modernize its fleet, beyond the 24 locomotives to be procured under this project. Third, the implementation of its long-term development strategy will equip UTY for the future as described in para. 18. D. Summary Cost Estimates and Financing Plan
20. The project is expected to cost $218.3 million (Table 1). Detailed cost estimates by expenditure category and by financier are in the project administration manual (PAM).14
Table 1: Summary Cost Estimates
($ million) Item Amount
A. Base Costa 1. Electric locomotives commissioned [This information was deemed
confidential according to paragraph 2 (v) of ADB’s Access to
Information Policy (2018).]
2. Locomotive depot upgraded
3. Long-term development strategy implemented Subtotal (A) 156.70 B. Taxes and Dutiesb 21.91 C. Contingenciesc 15.33 D. Financial Charges During Implementationd 24.36 Total (A+B+C+D) 218.30
a In early-2019 prices as of 1 February 2019. b The government will finance taxes and duties of about $21.91 million through exemption. c Physical contingencies computed at 5% for foreign components and 6% for local components. Price
contingencies computed at an average of 5% on foreign exchange costs and 6% on local currency costs; includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate.
d Includes interest and commitment charges. Interest during the disbursement period for the ordinary capital resources loan was computed at the 5-year United States dollar fixed swap rate plus an effective contractual spread of 0.5% and maturity premium of 0.1%. Commitment charges for the ordinary capital resources loan are 0.15% per year to be charged on the undisbursed loan amount.
Sources: Asian Development Bank and O’zbekiston Temir Yo’llari estimates.
21. The government has requested a regular loan of $170 million from ADB’s ordinary capital resources to help finance the project. The loan will have a 25-year term, including a grace period of 5 years; an annual interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; a commitment charge of 0.15% per year and such other terms and conditions set forth in the draft loan and project agreements. Based on the straight-line method, the average maturity is 15.25 years, and the maturity premium payable to ADB is 0.10% per year. 22. Loan proceeds will be relent from the government to UTY in accordance with a subsidiary loan agreement. Except as ADB may otherwise agree, the terms of the subsidiary loan agreement shall include (i) interest at the rate applicable to the loan with foreign exchange risk being borne by UTY; and (ii) a term of up to 25 years, including a grace period of up to 5 years. 23. The summary financing plan is in Table 2. ADB will finance the expenditures in relation to the procurement of 24 locomotives. This includes [This information was deemed confidential
14 Project Administration Manual (accessible from the list of linked documents in Appendix 2).
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according to paragraph 2 (v) of ADB’s Access to Information Policy (2018).] of contingency. Counterpart financing from UTY and the government of [This information was deemed confidential according to paragraph 2 (v) of ADB’s Access to Information Policy (2018).] will be used for the upgrade of the locomotive depot, design and survey works, implementation of the long-term development strategy, as well as taxes and duties, and financial charges during implementation.
Table 2: Summary Financing Plan
Source Amount
($ million) Share of Total
(%) Asian Development Bank Ordinary capital resources (regular loan) 170.0 77.9 Government and O’zbekiston Temir Yo’llari 48.3 22.1 Total 218.3 100.0
Sources: Asian Development Bank and O’zbekiston Temir Yo’llari estimates.
24. Climate mitigation is estimated to cost [This information was deemed confidential according to paragraph 2 (v) of ADB’s Access to Information Policy (2018).] which is the amount expected for the procurement of electric locomotives, net of contingency. ADB will finance 100% of mitigation costs. Climate adaptation costs were not calculated because they were impossible to isolate. Details are in the PAM (footnote 14). 25. Subject to the project’s sound implementation progress, additional financing may be considered to allow a larger number of electric locomotives to be procured, so as to match the growing electrified railway network and to accelerate the retirement of aged diesel locomotives. Since ADB’s financial assistance to Uzbekistan is limited in size relative to such needs, ADB will proactively work with UTY and the government to mobilize alternative sources of financing, including commercial cofinancing wherever effective and efficient. UTY and the government’s capacity to leverage larger levels of investments will be strengthened through the implementation of UTY’s long-term development strategy. E. Implementation Arrangements
26. UTY will be the executing agency. It has a sound track record in executing projects financed by ADB and other international financial institutions. UTY also carries out sound O&M of electrified and non-electrified lines. The Project Implementation Unit for Electrification and Renewal of Rolling Stock (PIU-ET), with staff experienced in international financing institutions’ procedures and policies, will be responsible for implementing the project. The technical and administrative departments of UTY will also assist the PIU-ET during project implementation. For the implementation of the long-term development strategy, a working group under the supervision of UTY management will be maintained. To ensure continuity and consistency, consultants recruited under the transaction technical assistance will be retained to support UTY in procurement activities and in the early phases of the long-term development strategy’s implementation. The project will be implemented in close coordination with development partners, both at the country level and at subregional level. On the former, ADB will cooperate with the World Bank, who is supporting the government in the preparation of a transport sector strategy for Uzbekistan. On the latter, ADB will continue to actively engage development partners through the CAREC program.
27. All procurement financed under the ADB loan will follow open competitive bidding procedures pursuant to ADB’s Procurement Policy (2017, as amended from time to time) and Procurement Regulations for ADB Borrowers (2017, as amended from time to time). Procurement
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will consist of one goods package with a lot each for passenger and freight locomotives. The procurement method will be one-stage, one-envelope, without prequalification. 28. The primary suppliers for the locomotives to be procured will be from ADB member countries. However, the locomotives require certain integral parts—braking system, radio equipment, safety devices, wheels, and automatic couplings—that originate from non-ADB member countries such as Belarus, Czech Republic, Russian Federation, and Ukraine; these parts are estimated at about 6% of the procurement value. These parts are necessary for the locomotives to meet regulatory requirements set by the Government of Uzbekistan and the Council for Rail Transport of the Community of Independent States, to ensure interoperability of the locomotives with the existing infrastructure and other rolling stock in Uzbekistan. Procuring these parts separately and outside of the ADB-financed project is uneconomical, impractical and may lead to safety issues. A waiver of the country eligibility requirement is requested from the ADB Board of Directors, based on the strong technical, regulatory, safety, and economic rationale for the inclusion of such parts. The Board of Directors must approve the waiver by a vote representing not less than two-thirds of the total voting power of the members of the Board. With the exception of the above, civil works and the supply of materials and equipment from countries that are not members of ADB will be financed by UTY from its own resources and procured under existing government procedures consistent with the principles of economy and efficiency. 29. The implementation arrangements are summarized in Table 3 and described in detail in the PAM (footnote 14).
Implementation period July 2019–June 2025 Estimated completion date June 2025 Estimated financial closing date December 2025
Management (i) Oversight agency Ministry of Investments and Foreign Trade and Ministry of Finance
(ii) Executing agency UTY (iii) Implementation unit For the procurement of electric locomotives and the upgrade of the locomotive
depot: Project Implementation Unit for Electrification and Renewal of Rolling Stock of UTY. For the long-term development strategy: working group steered by UTY management
Procurement Open competitive bidding Electric locomotives (goods) [This information was deemed confidential according to paragraph 2 (v) of ADB’s Access to Information Policy (2018).]
Advance contracting action will be taken on the procurement of electric locomotives. Retroactive financing will be allowed up to 20% of the loan amount.
Disbursement The loan proceeds will be disbursed following ADB’s Loan Disbursement Handbook (2017, as amended from time to time) and detailed arrangements agreed between the government and ADB.
ADB = Asian Development Bank, UTY = O'zbekiston Temir Yo'llari. Source: Asian Development Bank.
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III. DUE DILIGENCE
A. Technical
30. UTY has the capacity and experience for the procurement and O&M of electric locomotives. It is experienced in operating electrified railways. Currently, it maintains 2,530 km of electrified lines. Its staff has been continuously trained in the maintenance of electrification and modernized signaling and telecommunication facilities, and in the safe operation of electric locomotives. The same measures will apply after the completion of the project to ensure efficient and safe O&M. 31. The technical specifications for the locomotives to be procured under the project are a product of collaboration between UTY staff, ADB staff, and consultants mobilized by ADB. The specifications incorporate considerations of energy efficiency and climate resilience, the latter given the harsh climatic conditions that the locomotives are facing. Further, UTY staff and ADB’s transaction technical assistance consultants conducted a life-cycle assessment to ensure that the locomotives provide reliable and efficient operations throughout their long life. B. Economic and Financial
32. Economic viability. An economic analysis of the project was carried out in accordance with ADB’s Guidelines for the Economic Analysis of Projects,15 comparing the incremental costs of the project with its incremental benefits. The main economic benefits are savings in (i) time for both passengers and freight, (ii) carbon dioxide emissions, (iii) energy costs, and (iv) locomotive maintenance costs. The analysis indicates that the project is highly economically viable, with an economic internal rate of return of 13.7%, compared with the 9% discount rate. 33. Financial sustainability. A financial analysis of the project was carried out in accordance with ADB’s Guidelines on Financial Management and Analysis of Projects16 to ascertain whether the project is financially viable. The analysis, done on highly conservative assumptions, shows that the financial internal rate of return is 9.4%, above the weighted average cost of capital calculated at 0.9%. Institutionally, UTY’s financial capacity is sufficient to implement the project, fund its contribution to the project costs, repay the ADB loan, and make the required payments on its existing debt. Previously, UTY needed to surrender to the government 50% of foreign currency revenue earned from transit traffic at a fixed exchange rate. This practice has now been abolished by the government and UTY is allowed to fully retain such earnings. This has allowed UTY to remain financially robust as an entity, despite macroeconomic reforms being undertaken in the country such as the floating of the sum. C. Governance
34. Financial management. The financial management risk is moderate. UTY has sufficient capacity to manage and maintain adequate accounting systems, financial controls, and audit arrangements required for the project. A low to moderate risk exists in the area of accounting system and reporting integration. UTY has developed an approach to manage this risk, and is currently implementing a new accounting software package that is expected to rectify the issue.
15 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila. 16 ADB. 2005. Financial Management and Analysis of Projects. Manila.
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35. Procurement. The overall procurement risk is moderate with mitigation measures. A project procurement risk assessment identified both advantages and shortfalls in the capacity of UTY to manage international procurement. Procurement staff have experience with open competitive bidding but require continued support. The transaction technical assistance strengthened UTY’s capacity for procurement and project management with training and support by an independent international procurement consultant. The same consultant will keep assisting UTY during critical procurement phases, up to the award of contracts. 36. To date, ADB-financed projects in Uzbekistan have been subject to lengthy delays in implementation, due to multiple review and approvals by government authorities for feasibility studies, bidding documents and contracts. In July 2018, the government passed a new resolution streamlining such procedures.17 In line with these new procedures, the executing agency and ADB have worked to secure the endorsement of the government’s feasibility study by Quarter 1 of 2019. Bidding documents have been fully prepared, and bidding has commenced in Quarter 1 of 2019. The project is highly procurement ready. 37. ADB’s Anticorruption Policy (1998, as amended from time to time) was explained to and discussed with the government and UTY. The specific policy requirements and supplementary measures are described in the PAM (footnote 14). D. Poverty, Social, and Gender
38. A social and poverty assessment ascertained that the project will help reduce transport costs and travel time; ensure safety; and increase access to jobs, markets, health care, and education facilities for the local population. The primary beneficiaries will be passengers, freight transporters, and agro-industrial producers. 39. The project is categorized as some gender elements. The project offers opportunities to improve the participation of women in the railway subsector, which traditionally has been dominated by men. UTY will take measures to recognize such opportunities and maximize the participation of women in locomotive O&M. Women employees of UTY will take part in the preparation and implementation of the long-term development strategy, which will define ways to make the railway system in Uzbekistan and human resource practices at UTY more friendly toward women, such as incentives to recruit, retain, and promote women; provision of in-service training; and zero tolerance for any form of discrimination, including sexual harassment in the workplace. The locomotive depot will be equipped with separate sanitary facilities (toilets, showers, changing rooms) for the 213 women currently employed. The gender action plan specifies the activities and targets.18 E. Safeguards
40. In compliance with ADB’s Safeguard Policy Statement (2009), the project’s safeguard categories are as follows.19 41. Environment (category C). The project will have minimal or no adverse environmental impacts. It supports the development of an environment-friendly mode of transport. Trains
17 Government of Uzbekistan. 2018. Presidential Resolution 3857: On Measures to Increase the Effectiveness of
Preparation and Implementation of Projects with Participation of International Financial Institutions and Foreign Governmental Financial Organizations. Tashkent.
18 Gender Action Plan (accessible from the list of linked documents in Appendix 2). 19 ADB. Safeguard Categories. https://www.adb.org/site/safeguards/safeguard-categories.
operating on electric traction generate less local air pollution, noise, and vibration than their diesel counterparts. Thus the switch from diesel to electric traction, and the modal shift from road to railway transport, is expected to bring a net reduction in carbon dioxide emissions of 900,000 tons per annum. Possible negative environmental impacts would be related to the upgrade of the locomotive depot, and may be limited to minor waste management and construction impacts. 42. Involuntary resettlement (category C). The project will not require any land acquisition and resettlement as per ADB’s Safeguard Policy Statement. ADB conducted social due diligence of the project, and the Social Due Diligence Report was posted on the ADB website for public disclosure in March 2018.20 In case any land acquisition and resettlement impacts occur during implementation, UTY shall prepare a land acquisition and resettlement plan to be submitted to ADB for approval prior to awarding a civil works contract. The land acquisition and resettlement plan will be implemented in accordance with ADB’s Safeguard Policy Statement and national legislation and regulations. 43. Indigenous peoples (category C). The country in general and the project area in particular do not have indigenous people communities as defined in ADB’s Safeguard Policy Statement for operational purposes. Therefore, no further action will be required. F. Summary of Risk Assessment and Risk Management Plan
44. Significant risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.21
Table 4: Summary of Risks and Mitigating Measures Risks Mitigation Measures Macroeconomic changes arising from the floating of the sum challenge UTY’s financial planning.
ADB will support UTY’s ongoing efforts to ensure stable financial performance through UTY’s long-term development strategy. The government has replaced the previous practice of UTY having to surrender 50% of its foreign currency revenue earned from transit traffic at a fixed exchange rate. The government will continue to allow UTY to retain transit revenue and provide sufficient financial resources as necessary.
Multiple layers of review and approving authorities may delay procurement and implementation.
ADB supported the government in the preparation and issuance of a new presidential resolution to streamline project preparation and implementation procedures.a Subsequently, ADB has worked closely with the government to agree on detailed measures to synchronize the government’s new due diligence and procurement procedures with those of ADB. ADB is utilizing the Technical Assistance for Strengthening the Capacity in Project Management to support the Ministry of Investments and Foreign Trade, and the National Agency for Project Management to this effect.b
Competition from road transport reduces uptake of railway services.
ADB will continue to engage in policy dialogue with the government to ensure coordination between transport modes as part of government policy. As part of implementing the UTY’s long-term development strategy, ADB will help further improve the competitiveness of UTY to retain both freight and passenger traffic.
ADB = Asian Development Bank, UTY = O’zbekiston Temir Yo’llari. a Government of Uzbekistan. 2018. Presidential Resolution 3857: On Measures to Increase the Effectiveness of
Preparation and Implementation of Projects with Participation of International Financial Institutions and Foreign Governmental Financial Organizations. Tashkent.
b ADB. 2017. Strengthening the Capacity in Project Management – Technical Assistance Report. Manila. Source: Asian Development Bank estimates.
20 ADB. 2018. Railway Efficiency Improvement Project: Social Due Diligence Report. Manila. 21 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).
11
IV. ASSURANCES
45. The government and UTY have assured ADB that implementation of the project shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and loan documents. 46. The government and UTY have agreed with ADB on certain covenants for the project, which are set forth in the draft loan agreement and project agreement.
V. RECOMMENDATION
47. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve
(i) the loan of $170,000,000 to the Republic of Uzbekistan for the Railway Efficiency Improvement Project, from ADB’s ordinary capital resources, in regular terms, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; for a term of 25 years, including a grace period of 5 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan and project agreements presented to the Board; and
(ii) the proposal in para. 28 of this report to permit procurement of certain integral parts from countries that are not members of ADB.
Takehiko Nakao President
24 April 2019
12 Appendix 1
DESIGN AND MONITORING FRAMEWORK
Impact the Project is Aligned with Implementation of targeted programs to build affordable housing, development and modernization of road and rail transport, engineering, communication, and social infrastructure achieved (Uzbekistan's Development Strategy for 2017–2021)a
Results Chain Performance Indicators with Targets and
Baselinesb Data Sources and
Reporting Risks
Outcome By 2026: Efficiency of passenger and freight transport throughout Uzbekistan’s railway network improved
a. Average speed of train operations increased by at least 4% for both freight and passenger trains (2018 baseline: 30 kph for freight and 62.5 kph for passengers)
a. UTY annual report Competition from road transport reduces uptake of railway services.
b. Carbon dioxide emissions mitigated by 900,000 tons per year (2018 baseline: none)
b. UTY annual report
Outputs By 2025: 1. Electric
locomotives commissioned
1a. 16 new electric locomotives for freight trains put into operation (2018 baseline: none)
1b. Eight new electric locomotives for passenger trains put into operation (2018 baseline: none)
1a–1b. UTY’s project progress reports and project completion report
Multiple layers of review and approving authorities may delay procurement and implementation
2. Locomotive depot upgraded
2a. Locomotive depot in Tashkent upgraded to handle electric locomotives, with separate sanitary facilities for women and men employees (2018 baseline: not applicable)
2b. At least 20 locomotive depot staff, including two out of eight women engineers employed at the depot, trained on the maintenance of electric locomotives (2018 baseline: none)
2a–2b. UTY’s project progress reports and project completion report
3. Long-term development strategy implemented
3a. Gender-responsiveb long-term development strategy is developed by 2019 and implemented by 2024 based on agreed milestones (2018 baseline: none)
3a. UTY’s project progress reports and project completion report
Key Activities with Milestones
1. Electric locomotives put into operation 1.1 Contracts for electric locomotives signed by Q1 2020. 1.2 Have 24 electric locomotives delivered by Q1 2023. 1.3 Complete testing of procured locomotives by Q3 2023.
2. Locomotive depot upgraded 2.1 Complete civil works contracts for upgrading one locomotive depot on UTY’s network by Q2 2021. 2.2 Conduct training of locomotive depot staff, including women, by Q3 2021.
3. Long-term development strategy implemented 3.1 Prepare an implementation action plan by Q3 2019. 3.2 Complete actions specified in the action plan by Q1 2024.
Project Management Activities Bid out major procurement packages by Q1 2019 and award contracts by Q1 2020.
Inputs Asian Development Bank: $170 million (regular ordinary capital resources loan) Government and UTY: $48.3 million
Assumptions for Partner Financing Not applicable
kph = kilometers per hour, Q = quarter, UTY = O’zbekiston Temir Yo’llari. a Government of Uzbekistan. 2017. Uzbekistan’s Development Strategy for 2017–2021. Tashkent. b The long-term development strategy shall strengthen human resource policies with regard to gender following international
best practices, including incentives to recruit, retain, and promote women; provision of in-service training; and zero tolerance for any form of discrimination, including sexual harassment in the workplace.
Source: Asian Development Bank.
Appendix 2 13
LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=51052-002-3
1. Loan Agreement
2. Project Agreement
3. Sector Assessment (Summary): Transport (Rail Transport [Nonurban])
4. Project Administration Manual
5. Contribution to the ADB Results Framework
6. Development Coordination
7. Financial Analysis
8. Economic Analysis
9. Country Economic Indicators
10. Summary Poverty Reduction and Social Strategy
11. Risk Assessment and Risk Management Plan
12. Gender Action Plan
Supplementary Documents 13. Financial Management Assessment 14. Social Due Diligence Report 15. O’zbekiston Temir Yo’llari Long-Term Development Strategy: Summary of Agreements
![Locomotives - Siemens Mobility gauge [mm] 1,435 Numbers built 60 In December 2006, Siemens won the first order for electric locomotives from the state-owned railway operator SNCB](https://static.documents.pub/doc/80x56/5b0a86227f8b9a99488c4cc3/locomotives-siemens-mobility-gauge-mm-1435-numbers-built-60-in-december-2006.jpg)
